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Ep.18 Data is King: Invest Smarter with J. Scott



Short Summary


Warmly welcome J Scott, a remarkable entrepreneur, investor, and real estate veteran who has made waves in the industry over the past decade. Beyond navigating the acquisition and sale of over $160,000,000 in property nationwide, J also co-hosted the popular Bigger Pockets Business podcast.



In this episode, you will be able to:


  • Grasp the cruciality of data assessment and primary source utilization in making smart property investing decisions.

  • Discover the long-term financial stability obtained through retaining properties for regular cash inflow.

  • Learn the benefits and drawbacks of house flipping as a business.

  • Gain insight on the vital role of prioritizing family while delving into real estate investments.

  • Appreciate the significance of acquainting children with the world of entrepreneurship early on.


Currently, J Scott engrosses listeners with his insightful new project, the Drunk Real Estate podcast. As an author, his real estate investment books provide theoretical insights drawn from his hands-on experience. The combination of his analytical background and penchant for in-depth research make him a sterling resource for investors focused on long-term wealth building. J Scott also shares his unconventional journey of prioritizing family over work, challenging the status quo of flipping houses, and unlocking the long-term wealth-building potential of holding properties for cash flow.


“Family is always more important than anything for work. No exceptions.” - J Scott


Action steps mentioned in this episode are:

  • Follow the Bureau of Labor Statistics (BLS) for accurate and reliable data on the economy, including inflation rates and job numbers.

  • Consider investing in short-term rentals in vacation destinations or areas with high tourist demand for potential profit opportunities.

  • When underwriting short-term rental investments, take into account conservative projections and potential market fluctuations.

  • Prioritize family and work-life balance in your real estate investing journey, making decisions based on what is best for you and your loved ones.

Prioritizing Family in Real Estate Putting the family first in your real estate journey is invaluable. By incorporating your family into your work-life balance, you can ensure that you're not compromising on important moments just for business success. Moreover, this approach inspires kids to think entrepreneurially, exposing them to different ways of creating wealth and opening up myriad opportunities for them in the future.


Long-Term Financial Stability The long-term financial stability that comes from holding onto properties and turning them into sources of steady cash flow cannot be overemphasized. This strategy contrasts with the short-term gains from flipping houses, which might provide instant gratification but lacks in benefits such as steady income, tax advantages, and principal paydown. Therefore, focusing on property investment for the long term will enable you to achieve sustained wealth growth and financial

stability.


Early Entrepreneurship for Children By immersing children in an entrepreneurial environment from a young age, they become comfortable with this mindset. This approach paves the way for them to think beyond the traditional nine-to-five job framework. Such early exposure to entrepreneurship empowers children with the capability to seize opportunities in the future, regardless of which career path they eventually choose.


Link and Resources


Subscribe for free episode bonus materials: https://www.thestrinsiders.c


Join the conversation with Tracie on Facebook: https://www.fb.com/groups/strcentral


Follow Jacquie on Instagram: https://www.instagram.com/5starbnb/


Connect with J Scott

Instagram: https://www.instagram.com/jscottinvestor/?hl=en

Linktree: https://linktr.ee/jscottinvestor




Transcription

00:04 Tracie Fowler Welcome to The STR Insiders Podcast. We share tips for achieving your STR goals, AHA Moments, funny stories, and all the latest gossip of this STR life. Listen in as we keep it real and maybe a little sassy. Celebrate successes and own all the mistakes we've made along the way. Whether you're new to real estate investing, new to short term rentals, or a seasoned pro, there's something here for you. Jackie is an STR property manager who consults with individuals looking to grow their own property management firm. Tracy owns STR consulting and media firms that provide education to investors who want to learn all about STR investing. For more information, please visit www.thestrinsiders.com.

00:54 Jacquie Mosher Okay, so we have Jay Scott on the STR insiders today. He's a successful entrepreneur and investor, and in the past decade, he's bought, built, rehabbed, sold, lent on, and held over $160,000,000 in property all over the country. With his partner at Bar Down Investments. He was previously a cohost to The Bigger Pockets Business podcast. And he just launched a new podcast, Drunk Real Estate, which I just listened to, and I have to say I highly recommend it. Jay runs the popular website One, Two, Three Flip, and he's an author of five books on real estate investing, including his bestselling books on flipping houses. So, we're really excited to have Jay on. He's such an inspiration to so many in Real Estate.

01:40 J Scott Oh, thank you so much. I really appreciate that.

01:43 Tracie Fowler Jay, you're amazing. The first time I saw you was at BPCON in New Orleans, I guess it's been almost three years ago now, two and a half. And the sessions are great, but yours was actually my favorite because I felt like you were giving the real answers. It didn't feel like a pitch, I guess. Nothing to take away from anybody else. It resonated with me in a different way. I'm very much a give you the answers kind of personality myself, and so I am attracted to that type of communication as well. I immediately think I added you on Facebook, and I've been watching the stuff that you've put out. I've read your rehabbing book, your estimating book. So, I buy short term rentals that I hold, but I still need to look, if I'm going to do a value add, I still need to know, are my numbers going to work? I'm still doing underwriting. It's just slightly different than slipping, and it's just so clear. And so are the posts that you make when you post things about the economy. And that's kind of one of the things that we wanted to dig into a little bit today, if you're willing to share your background, is as an engineer. Is that right?

02:46 J Scott It is.

02:47 Tracie Fowler You have this very analytical approach and like, numbers focused when you communicate, educate, which we appreciate, at least I do. Thank you for that. So, the information that you put out is so detailed and in depth. It's not this surface level information. I can tell you've really dug in and crafted your theories and opinions based on sources. And so, we're curious a little bit about who your sources are. Like you're one of my trusted sources, but who are your trusted sources?

03:18 J Scott I appreciate that. I'm a big fan of primary sources so I like to go right to the data and certainly I like to hear other people's takes on the data and get their opinions. But I found too often if we don't go to the primary sources then we fall prey to this idea of confirmation bias where we come up with some idea in our head and then we find sources that support our ideas and ignore those that don't. We listen to people that say they think the things we believe and then we stop listening to the people that disagree with us. And so, I'm a big fan of I like to see the data first. I like to go to the primary sources first and form my opinions. And then I like to listen to other really smart people to then either reinforce that opinion that I already came up with or determine that hey, I don't like my previously formed opinion and then revise it based on the information I have. And that allows me to do a couple of things. One, it forces me to come up with my own opinion to begin with. And too often we never come up with our own opinions. Like we don't think about a subject and then we go listen to somebody and we go, oh, that makes a lot of sense and that becomes our opinion. Being able to form an opinion is a skill and I think a lot of people don't think of it that way. They think, well I have plenty of opinions, but it turns out that a lot of your opinions or our opinions have never come from sitting down and really thinking from the zero point to forming that opinion. So, I'm a big fan of I try and form my own opinions in terms of where I find that data. A lot of good economic sites.

04:50 J Scott So number one, a lot of information is coming out from the Federal Reserve, from the government, from the treasury, and so I'm a big fan of follow the Bureau of Labor Statistics. So BLS, that's where we'll see a lot of this primary data that comes out. If you hear that inflation is going one direction or another, go look at the actual data because often what you'll find is that headlines like to give us a single number. They like to tell us the inflation now is 4%. So after this past month inflation is 4%. Well, what does that 4% mean? Turns out that 4% is basically the average of the last twelve months worth of data. Doesn't tell us what last month was. Last month was actually much lower than that. But you average the past twelve months and it's 4%. But if you look at a short term view, it's actually a lot lower. But then you look at the data and you see that certain things in the economy, so for example, housing and food is actually still really expensive and we're still seeing superinflation in those areas. We're seeing the opposite in areas like transportation and energy and gas prices. And so, when we say that inflation was really low last month doesn't mean inflation on everything was low, it just means certain areas were super low, other areas were pretty high, but the average was low. If you look at the data, you can actually have a more informed perspective and say, well, housing and shelter is actually still relatively high, food is actually still prices are going up at a considerable clip. It's just that this overall bucket of everything is down, and it's down over the last twelve months. And so looking at the data again helps you form those opinions. For anybody that wants to go and listen to the first episode. I think that we did, maybe it was the second episode of Drunk Real Estate. We dug into the jobs numbers, and I find a lot of people look at this headline jobs number and they see, okay, unemployment is at 3.4% or now 3.7% or they look at the secondary number, which was we added 400,000 or 339,000 jobs last month. And if you look at those two numbers, everything looks great. But you don't realize that when you really dig into all the data, those are the only two numbers that look good. And there are reasons those numbers look good, but if you look at all the other numbers, they're actually all pretty bad. And so is it that the media is trying to manipulate us? Maybe a little bit. But I think the bigger issue is just that the media is always focused on these two numbers.

07:20 J Scott And the media isn't typically smart enough to dig in and come up with opinions that are any different than what those two numbers indicate. But for somebody that's willing to spend the time and effort to dig in, what you realize is, well, we've got a lot of issues in the economy when it comes to employment and jobs. We still have issues related to inflation, even though that number looks like it's coming down quickly. And so when you dig in and you look at these primary sources, a lot of times you're going to find information that contradicts what you're seeing in the mainstream media or any media. I hate that term, mainstream media. All media is mainstream, whether it's right wing or left wing. It's pretty much all mainstream these days because we have the Internet and everybody has access to it. And so, a lot of times what we're going to find is the data doesn't support the narrative. And I don't necessarily believe people are latching onto a narrative just because they want to put a political spin or a social spin on something. I think people just aren't smart enough to figure out what the data is really saying. So don't listen to other people, listen to the data itself.

08:18 Jacquie Mosher Now you've been emphasizing the significance of being recession proof in real estate investing through your podcasts and platforms. How does that apply to short term rental investing?

08:29 J Scott So I'm going to start by saying I am not an expert on short term rentals. In fact, I currently don't own any short term rentals. I own a bunch of property here in Florida that I purchased with the intent of one day being short term rentals. The county that I live in, they basically don't have laws that are very favorable for short term rentals. It's minimum 30 days. And then we also have a lot of HOAs around here. I have a couple of condos and condo associations where the minimum rental period is four months or six months or even twelve months. So it can be pretty difficult to do short term rentals where I live. That said, I am hopeful that over the next couple of years that those laws are going to loosen up and that the governments, the local governments are going to recognize that there's a lot of benefits to allowing short term rentals.

09:16 J Scott And so what we've focused on over the past few years is buying properties that would make fantastic short-term rentals but also work for us as regular long term rentals, one year rentals or even midterm. So, traveling nurses, four-to-six-month type rentals. And so, we do some of those. But we kind of focus on holding everything long term for now in the hopes that when the market changes or the government changes their mind, that we can roll all of these long-term rentals into short term rentals and start making a whole lot of money. In terms of where I think the economy is, I think things have changed over the last couple of years. I think what we saw up until around COVID time was that short term rentals were great. Any place, anytime, any type of property. People were basically moving away from hotels completely going to Airbnb or VRBO, basically short term rentals because they didn't like this idea of a hotel.

10:12 J Scott What I've seen since COVID is that there's kind of been a lot of people that have been moving back towards hotels. We're seeing occupancies for hotels go up, we're seeing price per night, average price per night for hotels rebound a good bit since COVID and even pre COVID. But what we're seeing is that in the places where you would typically think of short-term rentals so places where people go on vacation, places where people go to see sporting events at certain times of the year, places where people go for touristy reasons. It seems that short-term rentals are still doing very well. And I think this was a natural evolution. I think the pendulum swung all the way towards everybody's doing short-term rentals and airbnbs, nobody's going to hotels. I think that pendulum swung way too far, and now we're kind of swinging back towards the middle where short term rentals have a very important purpose, and a lot of people recognize that purpose. And if you're buying rentals in areas where you can satisfy that need and that purpose, you're going to do really well.

11:12 Tracie Fowler Jackie and I were both in short-term rental before COVID so we saw the spike and just the demand between people moving away from hotels and closed spaces and also the restrictions on international travel. So, you have this crazy pent up demand that spiked short-term rentals. I see a lot of hosts these days worrying because they bought in the last year and they ran their numbers based off 2021, and I run my numbers based off 2019, which is great. I mean, we're doing better than 2019, but I'm not doing better than 2021. But that was fully expected. Again, to your point earlier about paying attention to the data and not getting caught up in kind of the narrative of what people are pushing. And there's lots of us out there, and I would say us included at some level that are saying like, short term rental and investing is awesome. And it is, and it still is. But when we talk about underwriting, we look at it very conservatively and we expect this to continue to level out. And there are certain areas that got demand that aren't now because people don't necessarily need to be out in the middle of the woods with no one around for 20 minutes because they don't want to get a virus a little harder to rent that property out than it was two years ago.

12:33 Tracie Fowler Yes, one of the things that Jackie and I both do, and another reason that you really resonate with me is you talk about investing from a family first, value-oriented perspective. And in my experience, investors, typically it's more of a reactive thing. It's like, okay, I'm going to start doing all this stuff and wait a minute, my home life is in chaos. I don't see my kids, my wife, whatever. What prompted it for you and also what that looks like in practice for you now?

13:02 J Scott So my wife and I both started in an industry that demanded a whole lot more time than even the most busy real estate investors. She worked for Ebay, I was at Microsoft. So, two big companies that really had this ideal that you're working all the time, even when you're not working, you're on call. So ,when we decided to get married in 2008, were both in our mid thirty s, and we realized that we wanted to have a family, we wanted to have kids. But this lifestyle of working twenty four, seven and traveling just wasn't conducive to starting a family. We both wanted to be able to raise a family again. Part of it was that were both a little bit older, but we'd have both been in that industry for about 15 years and were a little tired and burned out. And so we decided relatively quickly that we'd both quit our jobs. We'd both kind of raise a family and we'd figure out something that allowed us to have a lifestyle that was more life over work. And so, in 2008 we quit our jobs. We moved from the west coast to the east coast. We ended up falling into real estate. We just basically had this goal from the beginning that we would never make a decision based on work or financial. Every decision we made would be based on family and doing what was right for us and our kids. And so, we had our first baby in 2009. We decided early on, neither of us have to give up anything. And so our first son, he went everywhere with us. Two weeks old, he went to his first closing and he would be on job site with us. If I went to a conference or spoke at a conference, he would be right there with us.

14:35 J Scott If he couldn't go, for some reason none of us went. And that was just kind of the way it was in our house. We had our second baby in 2011, and he followed the same pattern, for the first seven years of their lives, everywhere went, they went. If they couldn't go, we didn't go. Did we miss some opportunities? Probably. I always said I'd never miss a piano recital. I'd never miss a soccer game or a basketball game. And I'm proud to say that for the most part that has been the case. But it's difficult. Anybody in this business knows that it's really easy to be on call twenty-four seven and to say, well, this one thing, whether it's a closing or whether it's a showing or whether it's looking at a new deal, it's always easy to say, well, this is really important, so I have to take this. But it's a slippery slope and we can easily find ourselves saying that about everything. At the end of the day, you just need to make that decision. That family is always more important than anything for work. No exceptions.

15:33 Jacquie Mosher Yeah, it resonates with me a lot and this has been more of a journey for me to prioritize my family. I've really prioritized my business at first and I've made a lot of sacrifices personally and it's kind of shifted towards exactly what you're saying. If Milo can't come with me, I don't want to go anymore. Milo's probably been on a plane more than any other five-year-old. What a great experience for him. And we get to experience it together and we continue to kind of shift to that direction where we're always prioritizing our family first. Now I find a lot of happiness in that.

16:06 J Scott Yeah. And it's also going to help them grow up surrounded by people that are doing things differently than a lot of people in this world. I don't know if my kids are going to end up going the regular nine to five route and they're going to get a job or if they're going to be business owners or if they're going to be investors or whatever they want to do is great, but it's nice to know that they get to experience both sides of it. They get to see what it's like to be self-employed and to hang out with other investors and to go to conferences. And there have been plenty of times where we want to go to a conference and literally we'll take the kids out of school and for the note they'll ask, why are they out for three days? And we'll just say, taking them to an investing conference. And we don't care if the teachers like that or not, but it's the truth. We think that's actually just as valuable as anything they're going to be learning in school. And there's nothing cooler than to let our kids who are now twelve and thirteen kind of let them loose at a conference. We're walking down the hall and I see my twelve year old just having a conversation with somebody about investing. Just walking up to somebody and saying, so what kind of properties do you own and where do you invest and why do you do that? And just having these seemingly adult conversations with other investors and having people come up to me and say, yeah, I just spent 20 minutes talking to your 13 year old about my rental properties and he's asking amazing questions. And I love that because again, maybe they will or won't go into real estate, I don't care. But just knowing that they understand it, they can have these conversations and they're comfortable around the types of people that are entrepreneurial and think differently than the typical nine to fiver means they're going to grow up having a lot more opportunities open to them than they would if they were never around.

17:50 Tracie Fowler

Agreed. So, we need to launch properties quickly in short term rental. I mean, in all real estate, launch fast means more money, but in short term rental, it really equates to every day you don't launch is lost revenue, hundreds or thousands of dollars. And so, Flips are really attractive because they're turnkey and so you don't have that downtime to get the property ready. But I'm really leery about buying Flips because I've seen so many bad ones and would love any tips or insights you have that we could apply to filter or to evaluate one Flip versus another so we could expand our acquisition opportunities and get launches faster.

18:36 J Scott Yeah. Don't buy Flips.

18:38 Tracie Fowler All right.

18:39 Jacquie Mosher I love that you just said that.

18:41 J Scott I probably just screwed up sales of that book right there. I've done about 450 of them myself, so I probably just called myself out. But the reality was all the regrets I have in this business relate to properties that I've sold. I wish I wouldn't have sold anything. Literally, I can think of 500 properties that I regret how I exited them. Now, I'm not saying that you shouldn't ever flip. There are good reasons to do so. Obviously, if you have an opportunity that's too good to pass up, flip it. Obviously, if you can't afford to hold a property and you can make money or get money back to use somewhere that's better invested, then flip. But I'm not a fan of going in and saying I'm going to flip houses as my primary business because it really is no different than working a w two job, a really difficult W2 job that's really stressful and is a really horrible tax shelter. You actually pay more money to flip houses than you would in a w two job. You'll pay ordinary income taxes, plus you'll pay the self-employment taxes and you'll pay both sides of the self-employment taxes if you don't do things right. So, nothing wrong with flipping if it makes sense for a particular deal. But I'm not a fan of flipping as a business because I think you're missing out on a lot of value in real estate. In real estate, you make money four ways. You make money on the appreciation. So, either natural appreciation, value of the property goes up over time, or forced appreciation, you do a renovation or something and you increase the value of the property. That's what the flip gets you, that gets you that appreciation. You buy low, you sell high, you make a pot of cash. But then there are three other ways to make money in real estate that the flip doesn't get you.

20:25 J Scott Number one, cash flow. And that's the thing that we live off of. That's the thing that you put in place once and you enjoy for the rest of your life. Hopefully you don't get that with flipping. Number two is the tax benefits. And so with flips, you don't get tax benefits. But when you start to get a few properties or you buy a big property, you get some really nice tax benefits.


20:48

J Scott

I had a Facebook post this week and I'm not a big fan, I'm not one of those flashy people that shows off like cars or planes or big checks or whatever. But I did post something this week on Facebook, which was a K1 I got from one of syndications that I ran last year that showed a $1.4 million loss. And most people are like, oh, do you really want to brag about a $1.4 million loss? Well, yeah, because it was a paper loss. We didn't really lose the money. It was a depreciation that basically the government says, we're going to allow you to write off $1.4 million against your income. And so that's something that I never got from Flipping. But basically, any income I made last year is now going to be offset by this and other depreciation that I've gotten. The third is what we call amortization, or principal pay down on loans. When you buy a rental property, oftentimes you'll get a loan, and every month you're paying down part of the principal. Actually, better than that, your tenants are paying down part of the principal every month, and so they pay $150 of the principal next month. Well, that's just as good as $150 of cash flow or $150 of appreciation. You just put $150 in your pocket.

21:56 J Scott With Flips, yeah, you get nice buckets of cash that you pay a lot of taxes on, but you don't get the cash flow, you don't get the real tax benefits, and you don't get that principal pay down. And that's the holy grail of investing. And so, what I would tell anybody is, yeah, Flip if you have to, but make sure you're using that money that you're making from the Flips to buy stuff that you're holding long term.

22:17 Tracie Fowler Totally agree. I have consulting clients that are Flippers or LTR, typically my clientele flippers are the toughest because they're used to these big chunks of cash. It's almost like a junkie getting it.

22:29 J Scott It is. It's dopamine.

22:33 Tracie Fowler So I have to condition them to like, we want consistent long term cash flow.

22:38 J Scott I used to say with the Flip, it's generally like 89 really bad days followed by one good day. There are 89 days that you're spending money, and then there's one day that you actually make money. Nice thing with rental properties is every day you're making money. You may not get a check every day, but every day you're making money.

22:57 Jacquie Mosher What is your primary focus today?

22:59 J Scott We are buying and holding midterm. So, five to seven years large multifamily so we're syndicating large multifamily deals.

23:08 Jacquie Mosher And where can people find out more about you and connect?

23:12 J Scott So if you go to www.connectwithjscot.com, that'll link you out to everything you need to know.

23:19 Jacquie Mosher Awesome.

23:20 Tracie Fowler Jay, thank you so much for coming and hanging out with us. We're really grateful for you!

23:26 J Scott Absolutely. This was fun.

23:30 Jacquie Mosher If you enjoyed this episode, we'd be so grateful if you rated and reviewed it. Also subscribe for more insider knowledge. We can help you get the edge in the STR world. You can find additional resources for your journey, as well as our social media handles at thestrinsiders.com.


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