May 5, 2023

JF3165: Why a Recession Could Be Good for Investors ft. J Scott



J Scott is co-owner of Bar Down Investments, which offers passive investment opportunities to individuals and companies looking to build wealth and diversify their retirement strategy. In this episode, J discusses why the commercial real estate industry is unlikely to suffer in the next few years, why the past few years of economic expansion has actually hurt investors, and what he’s doing to pivot his investment strategy during economic uncertainty.


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J Scott | Real Estate Background

  • Co-Owner of Bar Down Investments
  • Portfolio:
    • About 750 multifamily units
    • About 80 single-family units
    • LP investments
  • Based in: Sarasota, FL
  • Say hi to him at: 
  • Best Ever Book: Best Ever Apartment Syndication Book by Joe Fairless and The Goal by Eliyahu M. Goldratt
  • Greatest Lesson: Transactional real estate is not the best way to go - holding is better than selling and is usually the best way to build wealth.


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Deal Maker Live


Ash Patel: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I'm Ash Patel, and I'm with today's guest, Jay Scott. Jay is joining us from Sarasota, Florida. He is a general partner at Bar Down Investments, a multifamily investment firm. J.'s portfolio consists of 750 multifamily units, and roughly 80 single family units, plus LP investments. J., thank you so much for joining us, and how are you today?

Jay Scott: Ash, thanks for having me. I am thrilled to be here.

Ash Patel: It's a pleasure. You're a legend in this industry, so thanks for taking the time out of your day. J., before we get started, can you give the Best Ever listeners a little bit more about your background and what you're focused on now?

Jay Scott: Yeah, I am a reformed engineer and business guy. I spent my previous career in Silicon Valley during the tech thing. 2008, my wife and I left our tech jobs, moved to the East Coast, fell into real estate. Between 2008 and 2016 we flipped about 450 houses, and since 2017-2018-ish I've been focused on multifamily investing in South, Southeast, and as you mentioned, we have about 750 units right now; I still have a bunch of single family units. I've done some writing and some speaking, and that's the quick version of me.

Ash Patel: J., the glaring question is going to be why do you still have 80 single family units? Because once you transition into multifamily people can't wait to dump those.

Jay Scott: We've held these for a long time. They are almost completely passive. We've found a great little niche in a couple of cities that we really like, and we've got a great property management company. A lot of these properties we've had for a long time... So at this point, selling and taking the tax hit just doesn't sound appealing. Trying to 1031 a whole bunch of single families doesn't sound appealing. So as long as they remain relatively passive for us, and generating good income as they are, we see no reason to sell them. So at some point, we'll trade up, we'll do the monopoly and we'll trade the single families for some multifamily, but for now we're just gonna hold on to them.

Ash Patel: When was the last time you calculated the equity that you have in those 80 houses?

Jay Scott: I have a personal financial statement that I update pretty much every week. Now, obviously, I don't get new values for all of my properties every week, but anytime we do a refinance, and we get a new appraisal, I will recalculate. Once a year I'll try and estimate the value of our properties. So probably the last few months we've recalculated.

Ash Patel: And you haven't been tempted to just take the tax hit and get all that cash out.

Jay Scott: We haven't. I learned a long time ago that transactional real estate is a nice little quick thrill. It's a nice rush to get a big check. But it's not the best way to build wealth in this business. And the thing that probably hurt me the most over the last 15 years in real estate, the thing that's impacted my net worth the most over the last 15 years has been paying taxes. So we've sold a lot of properties. Again, we flipped about 450 houses. So it's not like we never sell. I actually like to sell a little bit too much. But luckily, I learned at some point - a little bit too late, but I learned at some point the value of not selling and holding long-term. So I'm pretty comfortable holding long term, at least until I can figure out a strategy to sell them tax-deferred and 1031, or some other method.

Ash Patel: Good for you. J., in my experience, some of the best syndicators come from an engineering background. You've also got a deep understanding of financial markets. We are in April of 2023. There's a lot of speculation on what the Fed is going to do, we've had some banking issues, liquidity issues... Investor sentiment is not at an all-time high right now. What are your thoughts on the overall market?

Jay Scott: So we're recording this April 2023, so for anybody that might be listening far into the future, things have probably changed... But right now, things are pretty up in the air. I don't think anybody really knows where we are in the market. We have these things called economic cycles, and there are some very clear and well-defined parts of the economic cycle. But this whole cycle, this whole situation that we're experiencing right now is a little bit different than what we've seen the last several economic cycles. Typically, what we see is high inflation leading into the government saying, "Hey, we need to do something about that high inflation." So they raise interest rates, and they put us into a recession.

This one's a little bit different. This one, we actually started with a recession, if you want to call it that; there's conflicting viewpoints on whether we were in a recession last summer or not. But it was clear that the economy wasn't perfect. There were things that were cracking in the economy last summer. And typically, what we see when we head into a recession is at that point, there's lower interest rates. The Fed's dropped interest rates to get the economy going again. But what we saw last summer was - we were headed into this recession, but we also had really high inflation. And recession with high inflation is a very bad combination. Because when you have inflation, you need to raise interest rates, but raising interest rates is only going to get you into a deeper recession. So we're in a situation where the Federal Reserve, the US government really needs to make some hard choices. Do they want to fight inflation, which could make the upcoming or current recession - again, depending on how you look at it - a lot worse, or do they want to focus on keeping us out of a recession, or making sure the recession isn't too bad, which could risk inflation running away and getting worse than it's been?

So right now, a lot of what we're likely to see over the next 6, 12, 24 months is related to what we see with inflation, because if inflation subsides, there's a good chance that the Fed is going to start dropping rates at some point to keep us from getting into too deep of a recession. But if inflation keeps going, if inflation stays high, there's a good chance that the Fed is going to have to keep raising rates to fight that inflation, which could make an upcoming recession a lot worse. So it's unclear where we're headed at this point, but I have a feeling in the next six months we're going to take a fork in that road and we're gonna go one of those two directions, depending on what inflation tells us.

Ash Patel: Something that nobody talks about is in the dotcom bubble of '99, the recession of 2007, there was a tremendous amount of wealth wiped away, either through capital markets, or real estate valuations. Today, there's a tremendous amount of money on the sidelines. How does that play into this?

Jay Scott: Part of the issue is that in the last 15 years - and it's been exacerbated a lot in the last three years with all the stimulus and money that's gone out to consumers the last few years - is that we've seen a greater divide in the wealth gap. The middle class has, for the most part, gone away. If you look back to the recession of 1999, 2000, 2001, the tech recession, or the 9/11 recession, whatever you want to call it, there was a much larger middle class. And they were the ones that suffered. A good percentage of the US suffered when we hit that recession. Likewise in 2008, the middle class was a little bit smaller, but what we saw was that when we hit the 2008 recession, it was that middle class that suffered. Here we are in 2023, and that middle class is largely gone. A small percentage of people have moved up into the highest of the socio-economic classes, and then a whole bunch of people have moved down and are struggling with their finances. And I think what we're seeing now is that those at the bottom, those in the lower part of the socio-economic tiers are struggling a lot, whereas those at the top have done tremendously well over the last couple of years. The top 1%, 2%, 3% have made a tremendous amount of money over the last few years just through soaring asset prices; the stock market's gone up, real estate values have gone up, a lot of people made money in crypto... So there's a lot of money in that top 1%, 2% or 3%, and those people aren't getting affected, at least not yet, by this current downturn in the economy, and they're looking to place that capital.
So what we're seeing is in several asset classes there is a lot of money that's looking to be deployed. If you look in the venture capital space; there's about $300 billion in the venture capital space on dry powder. Basically, people who are saying "I want to invest, I want to invest", but the venture capitalists don't have enough deals to invest that money. I've heard about $100 billion in commercial real estate that people are looking to place, which is a tremendous amount of money for pent-up demand in the commercial real estate space that can't be placed, which means as deals or if deals start to come online, there's going to be a lot of demand for those deals. So I think that's going to prop up the commercial real estate market for the most part, at least for the foreseeable future. I think if we see some economic challenges, and we see some deals start to struggle, and we see some banks start to take back deals, and we see some sellers start to fire-sell their properties, there's enough pent up demand, there's enough dry powder out there that I don't think we're gonna see a crash in the commercial real estate space anytime soon, because there's enough demand out there to keep the industry propped up.

Ash Patel: And that indicates a softer landing.

Jay Scott: That indicates a softer landing in that asset class. And when I say commercial real estate, we have to remember, commercial real estate is actually multiple asset classes as well. So I'm focused on the multifamily space. So typically, when I'm talking about this, I'm more speaking from the multifamily standpoint. But I think it's the same way in self-storage, it's the same way in mobile homes, it's the same way in anchor retail... But then there are some commercial asset classes that are probably facing some really big struggles over the next few months or next few years; office space is a big one. And then parts of retail, if you look at malls and other non-anchor retail - that's likely to struggle as well.

So I think commercial real estate in general is going to be a mixed bag, but I think the asset classes that tend to be most popular - multifamily, self-storage, mobile home parks will likely do well, because there's so much money that's looking to be placed in those assets.

Ash Patel: J., I hear a lot from real estate people and finance people - nobody saw these interest rate hikes coming. And I'm a retail, office, industrial investor... We all saw it coming. We knew this was coming. Timing was way off, because I thought it was coming in 2015. I was wrong. I got out of the market, got back in... Did you anticipate rates going up? And if so, did you prepare for that?

Jay Scott: Anticipate is a weird word. We didn't expect rates to go where they were, but every time that we do a deal, we do a risk analysis. We ask ourselves the question, "What are the things that are possible that can happen?" Not necessarily likely, but what are the things that are possible? What's the likelihood? So is there a 1% chance, a 5% chance, a 10% chance? And for each of those, we basically have a set of risk mitigation techniques, things that we would do if those things were to happen.

So going back -- we bought a property in 2020, and I remember very specifically buying that property and going through our risks scenarios... And at the time, interest rates were at about 0%, and I remember having a discussion with my partners where the idea of interest rates going high was just crazy. We didn't expect it in the next couple of years. But when you do a multifamily deal, we do value-add multifamily syndications, in our business, typically deals are held for 3, 5, 7, even 10 years. So while it seemed very unlikely that interest rates were going to spike sometime in the next year, or two, or three, which we actually did see, we didn't think it was out of the realm of possibility that we could see that five or seven or 10 years down the road. So we did prepare for that possibility, and we did have some risk mitigation plans, and then we had some higher reserves, and we made sure to buy a rate cap for our loan; it was a 10-year loan. So yeah, there are things that we didn't foresee coming, but I'd like to think that most good investors out there are going to prepare for those things that they don't think are likely, but are still possible.

Ash Patel: That being said, we've raised a whole generation of people that have only seen the arrow go up and to the right. And if you told them that multifamily prices were going to come down, cap rates are going to decompress, you would think you're talking a foreign language to them. So knowing that, and we just had this front page of the Wall Street Journal real estate section was the 4-property portfolio in Houston, Texas. $230 million worth of loans that all the LPs lost money on, GPs got their property taken away... What are your thoughts on a lot of the people that didn't anticipate this happening, and the outcome of that?

Jay Scott: I know there are a lot of people that started investing three or five or seven years ago, who are probably thinking what we've seen over the last five or seven years has been the greatest thing they could have asked for; the best presidents they could have asked for. But in reality, I think it's just the opposite. I think what we've seen over the last several years has actually even hurt a lot of investors. It used to be -- if you go back through the history of the economy in the US, we've seen 35 recessions in the past 160 years. So you do the quick math, that means we've seen a recession on average every four to five years. Now, in reality, that timing has gotten a little bit longer over the last few decades, so it's been every six or seven years... But that means that a typical investor, they'll start their career, and within six or seven years, they're going to go through a recession. So they're going to have to course-correct pretty quickly; they're not going to get to set in their ways, because they're going to start investing and they're quickly going to get knocked around a little bit, and they're gonna have to learn that it isn't always roses and...

Ash Patel: Unicorns.

Jay Scott: Unicorns and roses. Thank you. So that was a good thing, because it made investors more resilient. It really taught investors those tough lessons sooner rather than later. And then here we are, we had 2008, and it's now been 15 years since 2008. It's the longest period of economic expansion in history without a recession. And we have a lot of investors who have been investing for a long time, who have no experience with a down market, who have no experience with a recession, who have no experience with expanding cap rates; no experience with rents dropping. So all those things that make us good investors, that built that fortitude, that allows us to learn from our mistakes - a lot of investors have not had the benefit of that experience. So I think we're going to see during the upcoming recession - and I expect that there will be a worsening recession over the next six to 12 months - is that there are going to be a lot of investors who got in over their heads, who got too far out over their skis, whatever metaphor you want to use, but that were able to accumulate way too much property because this last piece of the cycle was so much longer than it normally was.

So I think there are going to be a lot of people that are going to be in trouble, and that means there's gonna be a lot of LPs that are in trouble... And all I can hope for is that those investors take the opportunity to really learn from their mistakes, so hopefully the next time around they do things a little bit differently.

Ash Patel: J., I'm not going to ask you to predict the future, but again, going back to finance people and real estate people, I also hear, "Don't worry, by Q4 they'll start dropping rates." It's like, I know you think that, and you want to think that, and you want to believe that, but there's no basis behind that. What is your advice to all the real estate folks and finance folks that are in the mindset of "Rates will be back down by the end of the year. We'll be good."

Jay Scott: I 100% agree, we can't predict that. The nice thing though, again, is we have 100-150 years of economic history that has shown us what is likely to happen. And again, it doesn't mean it's going to happen. It's always possible this time is different. I think a lot of people would looked leading into 2008 never expecting that to happen, because it had been 100 years since something like that had happened. So I'm not saying that bad things can't happen, or worse thing than historically average can't happen. But let's look at the history of rate cycles. So if you go back over the last 60 years or so, we've seen 10 rate cycles. And a rate cycle is basically where the Fed starts to raise rates, we end up in a recession, and because we're in a recession, the Fed decides to pivot and start to lower rates to get the economy moving again. So we've seen 10 of those cycles.

In each of those 10 cycles, on average, the time it takes from the time the Fed first raises rates to the time they first drop rates, or they start to drop rates, is 2.1 years. So that's the average. The longest that we've seen between the Fed raising rates and then the Fed starting to drop rates is three and a half years. And then the shortest is somewhere about 1.1 years. So if you look at the historical averages, the last 10 rate cycles, what we've seen is you can expect that rates from the time they start increasing, to start decreasing within between one and three and a half years, on average 2.1 years. So how long has it been since rate hikes started? It was last March. So it was just over a year. So the shortest period of time that we typically could expect would be rate decreases sometime around now.

I remember a year ago having this discussion with people and saying "Absolutely don't expect it before spring of 2023, because we've just never seen it that quick." But what's the worst case? And again, worst case could be worse than the historical average, but if you go by the historical numbers, the worst case we can expect is probably somewhere around the middle of 2025. What's the average case? The average case is a little over two years. It's been about a year, so the average case puts us about a year from now.

So again, I don't know what's going to happen, and this time absolutely could be different. But if you want to base your projections on historical averages, then it's probably safe to say that somewhere between the beginning of 2024 and the end of 2024, or the beginning of 2025, we should see rates start to drop.

Ash Patel: J., you raise capital for your deals. What are you seeing with investors' sentiment today?

Jay Scott: We're definitely seeing investors getting concerned. We actually recently launched what's called a preferred equity fund, which is basically a lower-risk fund that invests in a very specific type of equity, that's lower risk than typical syndication equity. And we did that because we've had a lot of investors who have come to us and said, "What can you provide that's going to be lower risk than what we've typically seen?" So we know that our investors and probably a lot of investors out there are a little bit weary right now. That said, we also have a lot of investors who are looking for traditional syndication equity. They're looking for the same deals that we've done -- obviously, they want good deals, but the same deals that we've done over the last several years; they're looking to deploy capital in those types of deals as well.

So I think there's a range of sentiment out there; some investors are a little bit weary, looking for safer investments, but plenty of investors out there who feel like at least multifamily should do pretty well over the next few years, and aren't too concerned about deploying capital in more traditional investments.

Ash Patel: What are those lower-risk investments?

Jay Scott: Yeah. So again, preferred equity is one that we really like. Not to get too technical, but if you think about a capital stack, you think about the money going into the deal, at the bottom of that capital stack we have debt. And debt is the money that lenders typically put in, and that gets the lowest return. The reason why a loan gets the lowest return - typically, we're paying 6, 7, 8 percent interest these days, as opposed to what you can get as an equity investor - is because the lender always gets paid first. If there's not enough money to pay everybody in the deal, their money back with a profit, the lenders always gonna get first shot at all that money. They're gonna get all the money until they get paid off. The people at the top of the capital stack, the regular investors, they only get paid once the lender has been paid off, and then there's extra money hopefully for them to get their money back plus their profits.

Preferred equity is a piece right in the middle. They sit between the lender and the equity investors, so they get paid second. So the lender gets paid first, preferred equity gets paid second, and then all the rest of the investors get paid third. Because they get paid second, they're more protected than the rest of the investors who get paid third. Obviously, the lender has to get all their money back first, but once the lender gets their money back, that preferred equity piece in the middle gets all of their money back plus all of their profits before the other investors get anything.

So they kind of sit in a middle position, so they're a little bit more protected. The returns are a little bit lower, but again, they have a lot less likelihood of losing their money. So preferred equity is a great place to be investing if you're concerned about the market and you're looking for a lower risk investment.

A lot of funds these days are starting to do what are called debt funds. So I see a lot of former syndicators who are raising equity and doing syndications who are now starting to raise funds to actually be a lender, to put money in as debt. So their returns are a lot lower, again, 7, 8, 9 percent, but they're always gonna get paid first, so their investors have a lot less risk than typical equity investments into real estate.

So basically, the best ways to protect yourself is to go with what we refer to as down the capital stack, and make investments either in debt or preferred equity, as opposed to being at the top of the capital stack and being those investors that get paid last.

Break: [00:21:44.22]

Ash Patel: J., with those preferred equity investors - do they get a lesser return because they have reduced risk?

Jay Scott: Yes, typically; it can be done any way, and different operators are going to do it differently. But typically, preferred equity returns are a combination of cash flow plus returns on the backend. But those returns are typically fixed. So a very common structure for those types of deals is investors may get a 6% annual return, or a half percent a month annual return, and then they'll get another 6% per year of invested capital on the back end, when the property sells. So if somebody were to invest $100,000, they might get $6,000 per year in cash flow, and then if the property is held for five years, they'll get 6000 times five or $30,000 additional on the back end. So it's basically a 12% annual fixed return. And again, that's more than the lender's getting; the lender's getting 6, 7, 8 percent, but it's less than what the common equity, the regular investors could potentially be getting. Typically they're looking at 18% or 20% if all the projections are met on the deal. So they have less risk than the regular investors, they're getting less return, they have more risk than the lender, but they're getting more returns. So they're right in the middle for both return and for risk.

Ash Patel: J., I mentioned earlier that engineers seem to make the best syndicators, real estate investors. What are some attributes from your engineering background that you apply to investing?

Jay Scott: I like to think I'm a good investor because I am a bad investor. [laughs] I know that's a weird thing to say. Let me think of a better way to phrase that. I am good at running a real estate business because I'm not good at the real estate part of the real estate business. I came in in 2008, I knew nothing about real estate. My wife and I had just purchased our first home. I could barely change a light bulb. My wife likes to joke that I'm probably the only electrical engineer on the planet that can't change a light bulb. But because I knew so little about real estate, because I didn't know how to swing a hammer, because I didn't know how to manage contractors, I didn't know how to put together a scope of work, it forced me to focus on the business side of my real estate investing. It forced me to be the CEO, and to bring in people who were really good at all of those things. It forced me to bring in a project manager, and to bring in great contractors, and to bring in appraisers, inspectors and agents. I didn't try to do those things myself, because I knew I couldn't.

So for me, I'd say one of the secrets to my success is I've never pretended to really be great at the on-the-ground nuts and bolts pieces of real estate. Instead, I'm really good at running a business and bringing in people and managing teams and doing the business side of real estate. And when it comes to the business side of things, all businesses are basically the same. You know how to manage people, you have to manage inventories, cash flows, you know how to deal with sales, and marketing, and all those things. Those are the things that I'm good at, as opposed to the real estate. And because I recognize that, it forces me, again, to bring in people that are really good at the real estate piece.

And what I've seen is that a lot of engineers, a lot of business people that come into this industry, because they don't have a contractor background, because they've never swung a hammer, because they've never bought real estate before, they don't conclude that they're great at real estate investing because they understand what it takes to renovate a house. Instead, they recognize that they might not be good at it, and it forces them to bring in other people who are really good. And so we surround ourselves by the people that are good at the things that we can easily admit that we're not good at.

Ash Patel: So rocket fuel on steroids. You're surrounding yourself with integrators.

Jay Scott: Exactly. Who, Not How.

Ash Patel: Yeah. J., with the changes in the market, what are you doing to pivot? Anything different?

Jay Scott: I mentioned that we're looking a little bit more lower down the capital stack, preferred equity type investments, both as a GP - so we have a fund that does that - but also as an LP. So I invest in other deals myself. I'm looking for lower-risk investments, preferred equity investments, debt investments... So certainly, that's the big thing that I'm doing. I'm making sure that anything, again, whether it's something we're investing in on the GP side, and we have our own investors, or I'm investing as an LP, I'm making sure that the underwriting is super-conservative. I want to know that for the next three years -- because I do believe that in three or four years we're going to be on the other side of this recession, things are gonna start to get better... But things could be bad for the next year, or two, or three or four. So I want to know that the underwriting for the next couple of years is tremendously conservative. I want to know that any debt that's in place isn't going to have an expiration date or termination sometime in the next few years. I want to know that if it does, that there's some backup plan for how we can refinance, or replace that debt. If interest rates continue to go up, or if we see lending tightening and DSCR drop, or LTVs drop, I want to know that we always have a plan for the next few years. Because again, I'm not worried about 5 or 10 years from now, but I am worried about two to three years from now. So I do want to see that super conservative underwriting.

And then the other thing is simply I want to make sure that I'm investing with the best operators. The deal is important, the location is important, the property is important, but at the end of the day, great operators are going to figure out how to make a good deal work in the face of issues and in the face of troubles. Bad operators, no matter how great a deal is, if something happens, they're not gonna be able to get back on track. So as far as I'm concerned, pedigree of the operator is of utmost importance at this point in the economic cycle.

Ash Patel: Having you as an investor to me would be like cooking for a Michelin-starred chef. What are things that you look for in GPs when you're placing your investment dollars into?

Jay Scott: I'm a geeky engineer, so I look for the same things that I provide to my LPs. And a lot of that is the geeky engineer numbers underwriting transparency. I want to go in and I want the operator who's willing to give me all the numbers. Because I recognize that when I invest in somebody else's deal - we talk about these deals being passive. Well, the minute I turn over my capital, the deal becomes passive. I will never pick up the phone to call an operator that I've invested with after I've turned over capital. But I make sure to do my due diligence and thorough due diligence upfront. So what I want to see is operators who are perfectly comfortable providing me transparent information about the deal leading up to it. If I looking at doing a deal and I have trouble getting in touch with the operator, if I have trouble getting answers to questions, that's a red flag for me. Because again, I'm not going to bother that operator after my money has been turned over. But beforehand, that's my responsibility and my opportunity to do my due diligence. So I really am going to take that seriously. And so I want an operator who's really willing to be transparent leading up to the deal.

Ash Patel: Why is that a hard rule, you won't pick up the phone and call them? What if there's a cash call? What if things are going south? Is that a hard rule, you won't make that call?

Jay Scott: I shouldn't say that's a hard rule that I will never call them. I guess I'm more saying I will never be one of those investors who is going to pick up the phone every time I have a question. Typically, what I like to do is I like to vet the operator in the deal prior to putting my money in, at which point I recognize that I can ask all the questions I want, but most likely I'm not going to have any control over the deal. So me bothering the operator is going to do nothing except maybe help me sleep a little bit better at night.

But most of the operators that I do business with, they are good at communication. And that's actually one of the questions that I ask when I'm doing due diligence, is what is your communication plan? And if they don't have a good answer to what that communication plan is, that's going to be a big red flag for me, because I do like to know what's going on. I don't want to bother the operator, but I want the operator to feel some responsibility to communicate what's going on.

So all of the operators that I work with, I know I can expect at least monthly communications. I generally can get quarterly financials, sometimes we have Zoom calls... The larger operators, obviously, aren't going to communicate as much as the smaller operators. I'm a smaller operator, so we probably over-communicate a little bit, because we don't have as many investors or as many deals, and I recognize that. But even the large operators that we invest with are really good about at least monthly providing very detailed breakdowns of what's going on in the properties, what to expect. So I go in with the expectation that I'm only going to do business with operators that I believe can communicate with me well enough that I don't feel the need to pick up the phone.

Ash Patel: And that's the key. So I totally get that. I should have asked this question a lot earlier, but can you give us the evolution of starting out flipping hundreds of homes to becoming a multifamily syndicator?

Jay Scott: Yeah, so we fell into flipping houses. It wasn't something that we thought about and said, "This is the business for us." Not accidentally, but we flipped a couple houses, and that kind of led to flipping a couple more, and a couple more... And one day we looked back and we said, "Okay, I guess we're house flippers now."

But eight years into that I started to get a little bit burned out. And I realized that I just didn't want to be doing that for much longer. I also recognized that I was losing a lot of money by doing so many transactional deals, paying taxes and not keeping anything long-term. I remember in 2016 we looked back and my wife and I calculated how much extra money we would have had if we never would have sold any of those single family rentals. Or even if we would have sold half of them. Or even if we would have only kept a quarter of them, how much more money we would have had. It made us realize the power of long-term buy and hold.

So one, I was burned out. Two, I regretted doing so many transactional deals. But 2016-2017 we started to consider things outside of real estate. So we stopped flipping houses, and about two or three months after we stopped flipping houses, or as we were finishing up flipping houses, what I realized was we were selling off the bulk of our inventory, and all this cash was coming in, and I realized for the first time in eight years I had all this cash that I never really thought about, because we would always just redeploy it into our flips, and so I never had to think about what am I going to do with this cash. Well, 2017 I'm sitting on all this cash, and I have to figure out what to do with it.

So the natural thought was I invested passively in real estate. I started investing with a couple operators... But I didn't sleep well doing that. I didn't sleep well knowing that all of my capital was basically in the hands of somebody else, being controlled by somebody else. I'm a control freak. I like to have providence over my own destiny, especially my own financial destiny. So I said, "I love the idea of investing in these multifamily syndications. I'm happy with the operators I'm investing with, but I do want more control." So that led me to the idea of maybe I should become a multifamily syndicator myself, so that way I could invest alongside my investors, in my own deals, that would give me my own control. And then as diversification, I could continue investing as an LP.

And so in 2017-2018 I reached out to a good friend of mine, Ashley Wilson; she was a multifamily syndicator that I respected a lot - and I basically said to her, "I have a proposal. How about if I come work for you for a year? You'll have access to me, my time, my network, my money, my knowledge... Anything you want for a year. All I ask in return is let me shadow you and learn the business." She loved that idea, and so for a year, we worked together. And by the end of that year we realized we had some tremendously complementary skills. All the things that she was good at, I wasn't. All the things that I was good at, she hated doing. Between us, we were like some superhuman investor. So 2019-ish, 2020, we said, "Hey, let's team up and partner." And so we've been partners for the last few years. It's how I got into multifamily, and the evolution.

Ash Patel: J., you've had a tremendous amount of success. Is there a deal that went south, and you look back and you're kicking yourself, because you should have known better? Is there a lesson learned that you can share?

Jay Scott: Yeah. I've only lost money on one deal I've ever done, and most people when I say that think I'm bragging. But let me tell you something - that is actually, as far as I'm concerned, a really, really bad thing. It says that I've been way too conservative over the last 15 years. I'm not saying that you should play fast and loose with other people's money, but again, for eight years I was flipping houses with my own money, and to only lose money on one deal basically says that I wasn't doing enough deals. I was too conservative. So this isn't a good thing. I'm not bragging about that. But I did lose money on one deal, and there have been a whole bunch of deals where I may not have lost money, but I felt like the deals weren't worth it, for some reason or another. And the one big thing that all of those deals had in common was a bad partner.

So in my experience, the thing that has hindered me the most or has led to the most stressful situations, the deals where I've come closest to losing money, or that one deal that I did lose money, was all the result of a bad partnership. So for me, what I've realized over the last 15 years is how important it is to ensure that if you're going to partner, that you find the right person. I like to say a partnership is like a marriage, but a whole lot more important. If I get divorced, I'm probably going to lose half my stuff. If a partnership goes South, it's possible both people can lose everything. So I actually take my partnerships -- I don't let my wife hear this, but I take my partnerships as seriously as I take my marriage, and I think a lot more people would be better served if they were doing the same thing.

Ash Patel: Good advice. Now, you're very analytical. What are you doing to lose more money? What are you doing to push yourself and to taking higher risks?

Jay Scott: I am allowing my partners and the people I trust to have more say in the deals that we do. So a good example was for those eight years that I was flipping houses, my wife was my business partner. And for eight years, she was saying "We need to take more chances. We need to do more deals. These are good deals; you're overlooking them because you're being too conservative", and I didn't listen to her. And in retrospect, she was right 99% of the time. So I've recognized that I'm tremendously conservative, and I've accepted that. And it's led me to be a lot more open to when my partners or people that I'm working with or people that I trust say to me, "This is a good deal, you should be a bit more open-minded" that I am. So I think the big thing that I've done is just embrace the fact that I'm conservative to a fault.

Ash Patel: Is that painful for you?

Jay Scott: It is because again, I'm a control freak. And anytime that I'm asked to do something that I feel like is out of my control, it's tough. But it's just like anything else, like public speaking or anything you do - the more you do it, the more comfortable you get. And again, it goes back to great partnerships. And again, I've had two serious partners or three serious partners in this business - my wife, Ashley, and another gentleman that I partnered with for the last 10 years... And the common thing amongst all three of those partners is they're people that I would trust with my life. So when you find somebody that you can trust with your life and with your wallet, those are people that when they say something, you should listen, even if it makes you uncomfortable.

Ash Patel: J., what is your best real estate investing advice ever?

Jay Scott: Best piece of advice ever... This goes out to anybody that hasn't done a deal yet. So I tend to find that I meet two types of people in real estate investing. Number one, I meet people who have never done a deal. And that's probably 97% of the people that I meet, they have never done a deal. The other type of people I meet are people that have done 5, 10, 15, 50, 100, 500 deals. There's one type of person I never ever meet in real estate, and that's somebody who's done one deal. Because nobody does one deal. A lot of people do no deals, a lot of people do a lot of deals, nobody does one deal. If you can do one deal, you're going to realize that there's a formula, there's a methodology, there are ways to get deals done a lot faster than that first deal took you. That second deal is gonna be so much easier. The third deal is going to be so much easier. So for anybody out there that hasn't done a deal, just remember - all you need to do is one deal. Because if and when you get that one deal, you're going to do a whole lot of deals.

Ash Patel: Amazing advice. J., are you ready for the Best Ever lightning round?

Jay Scott: Let's do it.

Ash Patel: Alright. J., what's the Best Ever book you recently read?

Jay Scott: So it's funny, Joe Fairless' Best Ever Apartment Syndication Book. I don't know if I got that title right. It's one that I literally just read again, and I remember reading the manuscript when he first wrote it, and then I read it again about two weeks ago, because I've been recommending it so many times over the last couple months that I decided to reread it. So that's number one.

The best book that I think nobody's ever heard of - or not nobody's ever heard of, but it's not as popular - is a book called "The goal." It's written by -- I forget his name; an Israeli guy, written back in the '80s... But it's called "The goal", the subtitle is "The theory of constraints". And it's basically all about how you can make your business more efficient by focusing on whatever it is that's the biggest issue in your business. And it's a great book; I can't do it justice, but go out and buy The Goal.

Ash Patel: J., what's the best ever way you like to give back?

Jay Scott: About 20 minutes before this interview I got done volunteering. So I volunteer at a local food shelter about once a week, and I try and be very involved in a lot of local organizations and charities. It's something that I unfortunately didn't make a lot of time for the first decade that I was investing, and I've realized over the last couple of years how lucky and how fortunate I am to be in the position I'm in. And so just staying involved with local charities for me has been the biggest way and the best way.

Ash Patel: And J., how can the Best Ever listeners reach out to you?

Jay Scott: And that'll link you up to everything.

Ash Patel: And it's the letter J followed by Scott.

Jay Scott: Yep. If you do J., you'll still get there.

Ash Patel: Oh, okay, look at you. There's the engineering, the analytical person coming back out. J., I've got to thank you so much for your time. You've been a legendary investor, I've followed you on social media for so long. It was an absolute pleasure to sit down and spend 45 minutes with you. So thank you for your time today.

Jay Scott: Thanks, Ash.

Ash Patel: Best Ever listeners, thank you so much for joining us. If you enjoyed this episode, please leave us a five star review. Share this podcast with somebody you think can benefit from it. Also, follow, subscribe and have a Best Ever day.

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