Feb 23, 2022
“When is the right time to sell my properties?”
There is actually no definite answer, but J Scott will tell you to hold on to your properties for as long as you can because of the cash flow, appreciation, and tax benefits that come with them. These are the benefits he enjoys currently by investing in multifamily real estate.
J is an entrepreneur, investor, author, and speaker currently working as General Partner at Bar Down Investments. He jumped to the multifamily real estate scene after 10 years as a single family investor.
He drops by in our podcast to tell us why he made the jump, the advantages of multifamily over single family, and the reasons aspiring investors should choose real estate over any other investment ventures.
[00:01 - 03:01] Opening Segment
- J Scott walks us through his journey to multifamily
- The reason he left the single family real estate space
[03:02 - 08:31] General Partner or Limited Partner
- There are investors who choose to be either a general or a limited partner
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- J is working as both, and here’s why
- How J turned a mentorship into a business partnership
- The other things to consider when building a business, real estate or not
[08:32 - 13:34] The Behind-The-Scenes of Growing a Business
- J tells us why business partners should divide and agree on their responsibilities
- Many entrepreneurs will benefit from doing this activity according to J
- How technology can keep a business from growing
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- Listen to our takes
[13:35 - 18:15] Why Multifamily Real Estate?
- J reveals some of their secrets in finding deals
- The big advantage of investing in multifamily real estate
- Why real estate, in general, is a better investment than other investment vehicles
[18:16 - 22:26] Final Four Segment
- A tool or resource you can’t live without
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- Microsoft Excel and Word and their Google versions
- QuickBooks
- A real estate mistake you want to help investors avoid
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- Selling too many of your properties
- You can get as many benefits as possible by holding properties long-term
- Your way to make the world a better place
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- Getting involved with the communities around their properties
- Reach out to J
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- See links below
- Final words
Tweetable Quotes
“In any good business, it's difficult when there's not a clear division of responsibilities.” - J Scott
“The nice thing about multifamily, because the cycles are much longer…it's unlikely that we're going to see a downturn that lasts 5, 8, 10 years.” - J Scott
“There's this allure to doing transactions to buying and selling but at the end of the day, you make money over time through cash flow, appreciation, the tax benefits of holding long term. You don't get tax benefits from flipping houses.” - J Scott
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Email j@jscott.com to connect with J or follow him on LinkedIn. Learn more about J’s investments and his books by visiting his personal website.
Find J on his other online accounts and pages here.
Connect with me:
I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.
Like, subscribe, and leave us a review on Apple Podcasts, Spotify, Google Podcasts, or whatever platform you listen on. Thank you for tuning in!
Email me → sam@brickeninvestmentgroup.com
Want to read the full show notes of the episode? Check it out below:
J Scott 00:00
If there's some macroeconomic event that hurts us, yeah, exactly what you said, we may not hit our IRR targets because IRR is very sensitive on time periods. For longer time period IRR drops. But I always say, you're still going to do better in a real estate investment over 10 years than if you were in the stock market during that same period, or if you were in some other asset class during that period. So yeah, I can't guarantee you that this is going to be a home run deal. But what I can say is, it's if there's something bad that happens macroeconomically, it's still probably going to be a better investment than whatever your alternatives were.
Intro 00:34
Welcome to the How to Scale Commercial Real Estate Show. Whether you are an active or passive investor, we will teach you how to scale your real estate investing business into something big.
Sam Wilson 00:46
J Scott, he goes by J, probably many of you know him. He's an entrepreneur and investor, advisor, author and partner at Bard on investments. He's focused on buying and repositioning large multifamily properties now, J, welcome to the show.
J Scott 01:01
Thanks, Sam. Appreciate you having me.
Sam Wilson 01:02
Hey, man, the pleasure is mine. same three questions I ask every guest on the show. Can you tell me in 90 seconds or less where did you start? Where are you now? And how did you get there?
J Scott 01:09
Yeah, I started as a corporate guy. I was in tech for a long time in Silicon Valley. 2008. I met my wife and we decided to get married quickly. 80 hour weeks and go off on our own. We ended up doing more than the 80 hour weeks for a long time as anybody in real estate can probably tell you but at least we were doing it for ourselves instead somebody else. 2008 to 2017 did a lot of single family flips, several 100 houses about 400 houses, bought a bunch of rentals got completely burned out from single family and 2018 jumped into multifamily with my now partner Ashley Wilson Bar Down investments and for the last couple years, I've been focused on buying and repositioning large multifamily real estate assets.
Sam Wilson 01:51
That's absolutely fantastic. Yeah, you said you did 400 houses? Was that or 200?
J Scott 01:55
Somewhere we lost track at like 300. But we did somewhere over 400.
Sam Wilson 01:59
That's a lot of houses. That's a lot of moving pieces. What were some of the problems you ran into that you finally just said, “Man, this is this is not for me anymore.”
J Scott 02:06
The single family is tough because you get into this mindset that you can do it all yourself and to some extent you can I mean, single family, it's not rocket science. There are a lot of moving parts. But I mean, it's basically its acquisitions, its rehab, its disbursement, and obviously, the raising money piece. And for most of us, we can do all of those pieces ourselves. Problem is we probably shouldn't be. And so I started building a team, but it's very hard to scale single family simply because just the nature of the business, you're turning a lot of inventory, and it's very hands-on and acquisitions and disbursements are pretty difficult. So we figured out how to scale it. But it was never fully automatable like a lot of businesses. And so we just got burned out after about 10 years, and I was looking for some new challenges. And the thing I love about multifamily is that it really is a team sport. So it allowed me to focus on what I'm really good at, and then surround myself with people who are really good at it all the stuff I'm not.
Sam Wilson 03:02
That's interesting. You know, you said you've forged a new partnership with Ashley, how did that come about? And then what are you doing? I know you said you want to kind of augment your surroundings and put your people who are better at things around you than what maybe what you are so you can play to your strengths. So have you done that?
J Scott 03:16
Yeah. So when I left single family in 2017, I wasn't quite sure what I was going to do. I was looking at doing some other business stuff, I do some advisory work. And so I thought maybe I go back to tech and do some advising there. But I had all this cash sitting around that I really needed to deploy. And I'm a control freak. I trust a lot of other syndicators. But I don't really like turning my money over passively to other people just because of my personality. I like to control my investments. And so in 2017, I said, I got all this cash, what can I do with it? And the obvious choice because I know real estate, I love real estate, I thought real estate had a good trajectory for the next decade was multifamily. But again, I didn't like the idea of turning my money over to somebody else. I thought, well, what if I go into multifamily myself, I can operate the deals, I can raise money from others to do these large deals. But I can also invest alongside them. So basically, I'm both on the GP side and the LP side. And so when I decided to do that, my first thought was, well, I'm going to be doing these big deals, I'm going to be taking money from people and they're gonna trust me with very large amounts of money. And I was doing that in the single family world, but I trusted my skills and single family. And I said, “I'm not really confident taking other people's money until I really know the business.” So I reached out to Ashley who somebody I've known for several years, she'd been doing multifamily for a long time she's by far one of the best asset managers I've ever met. And I said, “Look, give me a year teach me I'll give you a year of my time year of my effort a year you can have access to my network, you have access to my money, you can have access to everything. I have just spent a year mentoring me and teaching me the business and I'll give you that in return.” And she said absolutely. And so we kind of set up this one year mentorship slash partnership and a year in we got our first big deal that was kind of a junior partner on the deal. It went really well. And what we realized was we had a lot of complementary skills, there's things she was really good at. And then other stuff, she hated doing their stuff, I was really good at stuff I hated doing. And there was very little overlap in the stuff we were good at. And there's very little overlap in the stuff we hated doing. And so at that point, she said, “Hey, how would you feel about coming on as a partner?” And I was thrilled. So we kind of relaunched the business 50-50 partners, and now we're often away. I'm property.
Sam Wilson 05:28
That's really intriguing. I mean, that's a long, I'm gonna use the word dating period in business. I mean, to go an entire year, it took you a year to get a deal closed, right? Yep. I mean, that's one that's a long runway, what do you say to that to people who are out there trying to get their foot in the space, I mean, that's a lot of work and very little reward?
J Scott 05:45
Well, here's the thing. I mean, there's different ways of doing this business. I know operators out there that are doing 5, 10, 15 deals a year, we're not opposed to doing five or 10 deals a year. But because one of the tenants of our businesses, we typically do large investments within our deals. So last deal, the one we have one closing literally today, where the operating team has $2 million invested in the deal. So we make probably almost as much if not more money on the passive side as we do as operators. And so for us, scale is less important than doing great deals. And I'm not saying that's true for everybody, there are some operators out there that can do scale, because they've got a great pipeline, and they've built relationships over a long years, and, and whatever. So I'm not saying ours is the only way to do it. But for us, we'd rather do fewer deals that are solid deals, because we're putting our own money in there, and then do more deals and scale. And so if we do one deal a year, like 2020, we did one deal. 2021, we did none. This year, we've got one closing, it's now February 1, we've got one closing today, one closing next month. So we could do three or five or 10 this year. But we really just let the market kind of tell us, dictate to us how many deals we do. And we're comfortable with whatever that number is.
Sam Wilson 07:01
Right? That's fantastic. Was there any desire, I guess, earlier on to speed up the formalization of your business where it was like, “Man, we've been going out this six, eight months? And where are we going with this?”
J Scott 07:13
So when I came when I joined, Ashley, so actually had a team, she had a functioning company. And so she was in the middle of several deals, it just so happened that it took about eight to 10 months before we got to the point where she had a brand new deal in the pipeline that I could kind of be involved in from scratch. So I was involved. In other deals, she had 1000 some units prior to me joining. And I kind of jumped in and helped but I didn't see the process all the way through until about eight or 10 months. So we really did have a functioning business before I joined. But once I joined, we kind of formalized the partnership. And we said, okay, let's think about how are we going to structure this business, not just for today, but for five or 10 years from now, what's our hiring plan gonna look like? What's our marketing plan gonna look like? What's our capital raising plan going to look like? How are we going to deal with HR and legal and accounting and all those other things that every other business, I mean, real estate, whether you're doing single family, or multifamily, or whatever you're doing commercial, it's a business, and you need to structure it like any other business, and you need an acquisition pipeline, and you have inventory. And you need to deal with HR and accounting and all of these other things. And so we really, we sat down and we said, what is the business going to look like in five and 10 years? And how do we start growing it now so that we can naturally evolve to that point? Without major growing pains?
Sam Wilson 08:32
That's intriguing. I mean, it takes a lot of forecasting and a lot of imagination, if you will to go okay, what's this going to look like in three years? So what were some of the things you did what was I mean, besides just saying, What could this look like? Were there some concrete things or some resources used to say, Hey, this is how we're going to plan for that?
J Scott 08:50
Yeah, absolutely. So the first thing we did was we kind of divided and conquered. In any good business, it's difficult when there's not a clear division of responsibilities. So I've seen partners go in where everybody kind of tries to do everything. And people step on each other's toes. There's a lot of infighting because people disagree on who makes the decisions ultimately, or who the expert is. We started out by basically saying Ashley was going to do the stuff. She was absolutely amazing at, asset management, acquisitions, networking, I was going to do the stuff I was great at, which was fundraising and then all the analysis pieces market analysis, underwriting basically all the geeky spreadsheet stuff. And so once we decided that kind of she had her role, and I had my role that made things easy, because at that point, she could then go and kind of do all the business planning to grow her areas of the business, I could go and do planning to grow my areas of the business. So what did that involved? That involved thinking about who the key hires were going to be? So in a year, who did we need on the team to basically be able to keep the pipeline filled and stay above water. In five years, what was that team it'll look like? What was the organizational structure going to look like? In 10 years? Maybe we didn't really think that far out, we tried to stay three to five years. But we had an idea of what does this business fully evolved in mature look like in 10 years. So at least we knew we were on the right path, then we started documenting our processes. And this is something that I think a lot of entrepreneurs and investors could be really benefited from doing. Every time we did something, whether I sent an email to investors, whether I set up a marketing plan, whether actually went out and contacted a broker, we basically systematized it. And we set up a set of documentation for each of these things we do. So that way, if I'm going to be dealing with investors for the next year, and then I'm going to hire an investor relations person, I can basically hand off this documentation to the investor relations person says, “Here's what my emails look like, here's what the branding looks like, here's what the type of voice I use when I talk to investors, here's our communication plan, here's all these other things.” They can take over for me seamlessly. investors don't necessarily even recognize that I've handed off this responsibility because the person coming on board has all my documentation of exactly how I do things when I do things where I do things. And so it's a seamless transition, not just for us on the team, but it's a seamless transition for our investors, our vendors, our customers, our brokers, everybody else that we relate to. And so we've been really big on making sure that we document our processes so that we stay consistent, and everybody that we work with what to expect from us.
Sam Wilson 11:24
That's amazing. I mean, it's a tough slow grind early on, right to say, “Okay, I'm going to document this,” was there a software or a resource that you use that kind of helped you? I mean, it's one thing to say, “Okay, this is the email that I send on this day.” But where did you stick that data to make it then repeatable?
J Scott 11:41
Yeah, there's a lot of tools out there that and I don't want to throw out any names because everybody has their favorites. I'm one of those people that I don't like tools, I come from technology, I worked for Microsoft for a long time, people think that I'm like, I'm the biggest advocate of technology. But what I found is, a lot of times, especially in non-technology businesses like ours is that you can get bogged down in technology, you get these tools that have a billion features, and you feel like you're supposed to use every one of them. And so you spend half your day like putting information in a tool that you're never going to look at, again or organizing data in a way that just doesn't make sense. Because “Oh, the tool does it, I've got to use it.” And so for me, it's always I start at the very beginning. And that's essentially Microsoft Word and Microsoft Excel. And these days, I guess we use a lot of Google tools instead of just so we can share. But at the end of the day, it's a spreadsheet, and it's a Word document. And that handles 90% of what we do in our business because that's what other people are used to. I mean, again, you can use complicated tools. And if you've got a big business, and you're comfortable with the tool, great. But I've always found that I'll pick a tool, and it'll do half of what I need. And then I'm doing the other half in Word or Excel anyway. So I'd prefer to just do everything.
Sam Wilson 12:54
Yeah. And I think that's great. Because you're absolutely right, there's so many of these software's are designed for, they're gonna serve everybody in the world, and they're gonna have all these bells and whistles. And I found that to be so true. So often, you're like, I'm so bogged down in the minutiae of using the software, that it's not even serving the purpose for which I actually originally intended on using it. And that is nothing but frustrating.
J Scott 13:15
I was just gonna say I had worked for some really big companies. I've worked for some Fortune 50 companies where most of their tools and data are not revolutionary. I mean, they're using basic tools, because that's what works and that's what people are used to. And I'm not saying there's not a time and a place for a good tool, but don't feel like you have to use something because that's what makes you have a real business.
Sam Wilson 13:35
Right and that's the other thing I think, is when people think of scale, they commonly say, “Okay, well, I'm gonna build a program or build something that will then allow me to scale and relieve the burden of X, Y, or Z.” But I think especially early out or early starting out as you are scaling the contrary to popular opinion, maybe I think if to do things that are not scalable, okay, well, you know, this is how we're doing it for now because it gets the job done in the most efficient, time-efficient manner. Let's go even though it may not be repeatable completely. So that's really intriguing. Talk to us about how you're finding opportunity. You guys said, “Hey, 2017, we're doing multifamily housing.” I mean, even in 2017, there was the, the fear of the rumbling of like, “Man, are we gonna have a correction?” Right? So we've got we're going on a five year, man, we're gonna have a correction talk. How are you guys finding opportunity? And I know you said since you guys are placing large amounts of capital in your own deals, like how are you getting? How are you finding stuff that works for you?
J Scott 14:25
Everybody's always concerned about market cycles. I've written a book on economic cycles in real estate. So I'm certainly cognizant of the fact that the markets not always going up. But one of the nice things about multifamily especially compared to single family, typical single family project is gonna last three months or six months or if you're doing a big project, it might be 12 or 18 months if you're doing like ground-up construction in three months, or 12 months or 18 months. The market can crush you market can turn and basically, if you don't have cash flow coming in because you're doing a flip or you're doing new construction project development project. Basically the market can crash you. The nice thing about multifamily because the cycles are much longer, we typically hold our projects for at least three to five years and a lot of times we model that out to eight to 10 years, it's unlikely that we're going to see a downturn that lasts five, 8, 10 years. I mean, even 2008, which was a horrendous downturn. By 2013, the market had mostly recovered. And by 2018, 10 years later, we were hitting new highs. And so we model out these projects. One, we say, “Yeah, our primary exit strategy may be three years or five years,” but we will always model out eight to 10 years thinking, “Okay, if there's a downturn, literally, it starts the day we buy the property, where are we going to be five or eight or 10 years down the road?” Most likely we’ll be well recovered. If we modeled it correctly, we're generating cash flow throughout that time period. So unlike single family where literally a market downturn can crush you, and wipe you out, in multifamily and other commercial if you're generating decent cash flow. And obviously, if you have a project that has a huge amount of capex or is mostly vacant or needs tremendous turnover, you do run some risk, because there may be some point of time where you're not generating a lot of cash flow. But if you have a plan to generate cash flow, even during a downturn, and we can talk about like why real estate tends to be less risky than other businesses in the downturn, if you have that cash flow, you can whether three or five or eight years. And so for us, yeah, worst case, we invest and then a year later, the market turns down and interest rates go up and cap rates go up and values go down. Well, we're generating cash flow during that period, and in five or six or eight years, we expect the market will return. So basically, we have that mitigation plan kind of built into every project we do.
Sam Wilson 16:47
Yeah, I love that. That's something that I love the fact that you pointed out the difference between single family and multifamily in this case that has a generate cash flow over that period. Who cares what the valuation of it is? Right. Okay, exactly. It's still projected income. I don't care like yeah, maybe we're not going to hit our IRR upon exit, maybe but as far as our risk removal strategy, I think that's really sound.
J Scott 17:09
I mean, what we tell our investors is if there's an economic shift or if there's some macroeconomic event that hurts us. Yeah, exactly what you said, we may not hit our IRR targets because IRR is very sensitive on time periods. For longer time periods IRR drops. But I always say you're still going to do better in a real estate investment over 10 years than if you were in the stock market during that same period, or if you were in some other asset class during that period. So yeah, I can't guarantee you that this is going to be a home run deal. But what I can say is it's if there's something bad that happens macroeconomically, it's still probably going to be a better investment than whatever your alternatives were.
Sam Wilson 17:48
Right, yeah, absolutely. And especially in these inflationary environments, where the things that we've talked about a lot on this show is buying assets that produce an income that can be repriced over time. It's like, okay, well, in a family multifamily every 12 months, you're rewriting leases. Absolutely. So I mean, your Mac's you're probably exposed to a 12-month window of an inflationary environment that then you can reprice, you know, into the future. So absolutely. That's really intriguing. J, thank you for your time today. This has been a blast. Appreciate you coming on today. Let's jump here into the final four questions. And you said earlier, maybe you didn't want to name any, so maybe I won't ask you to. But maybe you'll come with a different answer, the microphone’s yours. What is one tool or resource thing, digital software, something along those lines you find you can't live without?
J Scott 18:29
I'm going to throw out the two I did. So Microsoft Excel, Microsoft Word or the Google version, Google Docs and Google Sheets and QuickBooks. I'm a big fan, basically, your business is can be summed up by your numbers, your balance sheet, yourP&L. And so I tell every investor out there, look, you may not be an accountant, you may not be a numbers guy, or girl. But if you're not, hire somebody either full time or part-time, that can put all of your numbers all of your financial data into whether it's QuickBooks, or Quicken or whatever it is, so that you can see how your business is performing not just today, but today compared to last year and next month compared to last month because at the end of the day, it's just like going and getting blood work done at the doctor, the numbers that come back is an indication of your health. Right, your financial numbers are an indication of your business health.
Sam Wilson 19:20
Yeah, and the cost to do that. So I mean, to get a qualified bookkeeper anywhere in the country, it's gonna cost you 25 to 45 bucks an hour to get somebody that knows their stuff inside and out. So if you don't know like me, I absolutely hire that out. It's like…
J Scott 19:32
and if you have investors, let me tell you something, when you can rattle off like all your financial information about your projects and your company that builds trust, because they want to know that you know that information and you know that information cold. So have it at your fingertips.
Sam Wilson 19:46
Love it. What's one mistake you can help our listeners avoid and how would you avoid it?
J Scott 19:51
Yeah, so biggest mistake I've made in this business was selling too much. So I remember sitting down in 2009 when I first started flipping houses with an investor in my area. And I said to him, he was pretty successful. I said to him, what was the biggest mistake you made so I can avoid it. And he said, biggest mistake I ever made was every property I've ever sold. And I kind of laughed, I was flipping houses at the time, I was making a lot of money flipping houses at the time and so I kind of ignored him. 10 years later, I look back and those 400 flips, I did a rough estimate in 2018. Had I held every one of those. Now, obviously, I couldn't have held everyone. But let's say I held every one of those flips I did, that would have been another $35 million in my pocket. And so I look back, and I thought, well, what if I would just would have kept half or a quarter of or a fifth of them. I mean, that's literally millions or 10s of millions of dollars. And so basically what I tell everybody that's starting out in this business, there's this allure to doing transactions to buying and selling but at the end of the day, you make money over time through cash flow, appreciation, the tax benefits of holding long term. You don't get tax benefits from flipping houses. And so I would recommend to everybody out there don't make the mistake I did, which was I sold everything I ever bought and thought that that pot of cash was going to be good.
Sam Wilson 21:03
Right, man, that's a painful lesson. Thanks for sharing that with us. When it comes to investing in the world, what's one thing you're doing right now to make the world a better place?
J Scott 21:10
We do everything we can to get involved in our communities where we are, where we're investing. So whether it be donating money to public parks around where we're investing or holding community activities on our property, barbecues and things like that, we try to integrate our business with the surrounding community. Part of it is because we'd like to do good for the community. But part of it's just pure selfishness because when we're integrated into the community that's good for our business as well and what's good for our business is good for our investors.
Sam Wilson 21:40
I love it. J, if our listeners want to get in touch with you or learn more about you, what is the best way to do that?
J Scott 21:44
Yeah, they can go to www dot connect with JScott, just letter J dot com. Www.connectwithJScott.com, and that'll link you out to everything you need to know about me and also my email.
Sam Wilson 21:57
Awesome. Thank you, J, for your time today. I do appreciate it.
J Scott 22:00
Thanks, Sam. Appreciate it.
Sam Wilson 22:01
Hey, thanks for listening to the How to Scale Commercial Real Estate Podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is you use to listen, if you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners, as well as rank higher on those directories. So I appreciate you listening. Thanks so much and hope to catch you on the next episode.