In this episode Tim and Greg discuss the possibility of a recession and the impact it may have on real estate investing – and whether it will be a hard or soft landing. While they don’t claim to have a crystal ball, they do have some valuable perspectives based on their conversations with investors and operators.
How will with the gathering storm clouds affect your investment strategies?
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WHAT TO LISTEN FOR
3:47 Prepare your portfolio for an uncertain future
10:22 Real estate as an inflation hedge
15:43 Fix and flip has risks
22:56 Passive investing provides financial freedom
24:07 Alternative investments outside of stocks
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Greg Lyons (00:10):
Welcome to the Passive Income Brothers podcast.
Tim Lyons (00:13):
Here we take the fear out of real estate investing using real life stories of everyday successful investors. Let’s go. Welcome to another episode of the Passive Income Brothers podcast. My name’s Tim Lyons, and today I’m joined by my brother Greg. How are you doing today, buddy?
Greg Lyons (00:28):
Tim, doing fantastic. We have a lot to get to, not a lot of time or we have plenty of time, but I don’t know if anyone’s going to listen. However we going to talk recession active versus passive investing. It’s going to be a great show today.
Tim Lyons (00:43):
So Greg and I just had the opportunity to be at a wedding this weekend. I finally had some Greg time, some FaceTime to myself, and a lot of our family and friends were kind of asking us about we we’re doing and how’s it going and recession. Are we going to have one? Are we not going to have one? Soft landing, hard landing? And then there was a lot of other conversations too, but we’ll leave that out on the podcast, Greg. But this is the thing. Greg and I are obsessed with this topic. I mean, I’m always listening to podcasts and YouTubes and having conversations and talking to investors and talking to other operators. Hey, what are you hearing? What are you seeing on the ground? And listen, none of us have a crystal ball and I’m not going to give you any earth shattering information today that you need to go act upon, but in my humble opinion, Greg, we are going to have a harder lending versus a software lending.
I know the Fed is trying to engineer that soft lending of having higher for longer on the interest rates, right? Thereby decreasing the amount of demand in the aggregate economy. So that would hopefully slow down sales, slow down consumption. If that happens, then some of the industries out there, the people who make decisions say, listen, demand is down. I don’t need as many workers. So they let go of some of the workers. They start with the temporary workers first and the part-times and the full-times. And you can see how this process plays out over a number of months or a number of quarters. You can’t turn this mammoth, mammoth economy around overnight.
Greg Lyons (02:26):
Yeah, Tim, you’re still right about that. And I listen to a ton of podcasts. We listen to a ton of different things. And the interesting thing is the question always comes, what do you think the next 12 to 18 months is going to bring? And someone, oh, recession, everything’s going to be fine. You hear everything in between, but nobody knows. You said earlier, nobody knows. And I think one of the toughest things to really understand are the numbers. So take the employment numbers. You have to really, really dig into the employment numbers when they come out, hard time versus full-time. Who’s losing jobs, what sectors and stuff like that. And until you can really understand that or take the time to understand that, you only get probably about 50 to 60% of the picture anyway. So we’re kind of at the mercy of what the Fed is doing now, and we always hear about employment numbers. We hear about interest rates, the housing market, is there going to be a housing crash? All these different experiences that people are having, they all kind of get jumbled up right now. And I think we’re just on this treadmill of nothingness right now. A hard versus soft landing. Nobody knows. Nobody has any idea. But it’s one of those things like how do you prepare yourself? How do you prepare your portfolio for what’s to come? And I think that’s the best question we could be asking ourselves,
Tim Lyons (03:58):
Greg, during this whole process, we live in a very interest rate sensitive environment being in rental real estate, but a lot of people aren’t feeling that pitch, which is kind of why the economy is still humming along and people are talking about a resilient economy and the resilient consumer. And just so people understand, student loan payments were stopped, I don’t know, 18, 24 months ago, and they’re just about to start going into effect again, I believe at the end of this month. So they were suspended, so that was putting more money in people’s pockets for them to be able to spend. There was P P P loans, there was helicopter money from the CARES Act and the CARES Act part two. So everybody had a little direct infusion of cash, whether it was deserved or not. That’s a podcast for another day, I guess. But at the end of the day, the M two, what’s called the M two money supply increased dramatically or during the COVID era. And while that happened, the supply chains, nobody was able to go to work unless you were a essential worker. So we stopped the means of production.
The government put a ton of money by adding zeros and ones into people’s bank accounts, direct depositing. So people went crazy on Amazon and online shopping, they were locked up in their homes. And that put an incredible amount of demand onto the industrial complex, which raised prices because if you have a supply and demand imbalance, as demand goes up, then supply is low. The prices have to be the great equalizer. Well, we’ve kind of come out of this COVID period saying, all right, supply chains are coming back online, people are back to work. The means of production are doing its thing, interest rates. They’re not at the highest level they’ve ever been, but the rate of change has been the fastest in history. So all of that is kind of getting baked into the cake as they say. So inflation has come down. Last June, Greg, I think we hit our high of 9.1% in the United States of not the core C P I, just the C P I. And now we’re down to what, 3.8% I believe was the last month’s reading. So we’re down significantly. And now the question is, are we going to stay higher for longer? Does that mean anything? And from a lot of people I talk to, the last thing we’re waiting for is the E, right? The employment.
So traditional macro economic theory and the Fed, they rely on something called the Phillips Curve. And the Phillips Curve is a macroeconomic policy that came to light in the 20th century, was kind of questioned in the 1970s during that stagflationary period. But basically what it says is there’s an inverse relationship between employment and inflation. So people have written tons of white papers, and I’ve read them about how the Phillips curve is no longer applicable to our economy, but the Fed is waiting for that, right? And we’re starting to see some cracks in the employment picture with the last month’s unemployment rate going from 3.5% to 3.8%. What I’ve learned over the last, say, 12 to 18 months, Greg, is that the H one, the H two, the H three numbers for employment, there’s all different sorts of reports, there’s all different ways they can manipulate reports.
Specifically this latest report, they added more people, not that they have evidence for it, but they’re assuming that more people are looking for work these days, which made the unemployment pool bigger. So that’s one of the reasons why the number jumped up. So listen, I spend a lot of time going through this kind of stuff, and it’s hard for me to always wrap my head around. So it’s got to be incredibly hard for the listeners if you’re not spending time listening to macroeconomic podcasts and reading books about the Fed and economic history and stuff like that. So Greg and I just want to kind of call that out because if you’re feeling like you don’t understand why everybody seems to look at the stock market as that gauge, that barometer, how come it hasn’t rolled over? Raise your hand if you feel like things are really good out there and I’m just not one of them. I feel like something’s wrong, something’s off. I feel like the numbers aren’t matching what I’m seeing out there on Main Street. I think that I do pretty well for myself, but I still am cheap, Greg, you know that. But I still kind of cringe at some of the prices at the restaurants and certainly walking out of the supermarket with three little kids, I feel the pinch, right? I see it in real time.
Greg Lyons (09:08):
Well, Tim, that’s because your dollar doesn’t go as far anymore, and that is the issue. So when a lot of people say, oh, I’m not really affected by interest rates, it doesn’t really matter to me, I’m fine. But in the environment we’re in, our dollar is not going as far, it’s not purchasing as much. And that’s the hidden tax on the American people is inflation and printing money. And while you don’t pay it directly to Uncle Sam, you’re paying it every day. You’re at the pump, you’re at the grocery store and things like that. And that hidden tax right there is really, really hard on the wallet without you writing a check for it. And that’s the tough part. So when you think about how do you combat inflation, how do you use inflation to your advantage? A lot of people go towards real estate, say, and with active or passive investing, using real estate can help offset a little bit of inflation. And we say, Hey, I want to get into real estate. I want to be an active investor. What does that mean to you, Tim? When say, I’m going to be an active investor, I’m going to go out there and make it happen.
Tim Lyons (10:22):
People, if you look at any 1 0 1 book, Greg or you Google rental real estate for beginners, it might say something about rental real estate being an inflation hedge. And that sounds great, but what does that exactly mean? So let’s unpack that real quick. If you buy a, just call it a single family home, I don’t know, for 250,000 and I don’t know, just say you hit the 1% rule and you’re able to rent it out for 2,500 a month and say your all in costs are 2000 a month, mortgage interest, taxes, insurance, just putting some in a reserve fund, you’re walking away with $500, say cashflow per month. Now, in a year from now, if inflation remains high and your costs remain high, then you can justify raising that rent to say maybe 26, 27, 50. I don’t know, whatever the case might be. But if you have a fixed rate mortgage, and if you were lucky enough to get a low rate fixed rate mortgage several years ago, say a 3% or four, even 4%, that’s not changing. You’re nut, your biggest expense, which is your debt service, doesn’t really change all that much. Now, is there escrow payments for taxes that are going to go up? But nominally? So as you can see, inflation will erode some of the debt the same way it’s eroding the purchasing power of your renter.
Greg Lyons (11:56):
And Tim, that is fantastic, but what you’re doing is you’re giving up your time to manage that rental. And there’s a lot of risks in any sort of real estate you do. But when you’re an active investor, whether you have one home, one investment property, 10 or 20 investment properties, you’re usually giving up your time. But there are also some other risks that go into owning properties. And what are some of those in your mind?
Tim Lyons (12:25):
Absolutely. I’m going to take that one second. I just want to stack one more thing on top, Greg, while you’re raising the rent on that one single family home and you’re asking for more money the following year and the following year, and you have that fixed rate debt, well, you’re now paying the bank back with more dollars from your renter and you’re paying the bank back with inflated dollars. So just think it’s a hard concept to always wrap your head around for the first time, but money is just a means of exchange. And if the dollars are going to inflate, you’re able to command the higher rents while locking in your fixed costs. So it’s an oversimplification. I understand that, but just that’s just how it’s an inflation hedge. If you’re going to be, we talked to so many people even this weekend, Greg, talking to some of our cousins and our friends and family and everyone’s kind of like, oh, I see you on social media.
You guys got a podcast and tell us more about what you do. And you know what I’m thinking about doing some real estate too. And I’m thinking to myself, man, I know you’ve got a couple of kids, you and your wife both work, how would you, and I like to have those conversations just to kind see what they’re thinking. But a lot of people, Greg, just want to do it for themselves. They want to be able to drive past the property. I want to own the property. I want see it. I want to touch it. I want to feel it. I want to be the landlord because I have those limiting beliefs about getting other people involved and delegating tasks. And nobody cares about your kids as much as you care about your kids. Same thing with your real estate. I mean, I used to feel that way before I went down this journey.
So some of the risks right now, people think, so just take the person, Greg, that maybe has a good job when their partner has a good job and they’re living a nice little life, but they want to stack some capital to put some capital together to start investing into bigger deals or passive deals. A lot of people make that pivot right into, I’m going to do a fix and flip where I’m going to wholesale, I hear about this thing called wholesaling where you can get these properties and you can sign the contract and then you can flip the contract and you can make 10, 20,000 per deal. It sounds incredibly awesome if you can just make it happen like that, but reality is it’s going to be a time suck. Wholesaling, you’re going to spend a lot of money on marketing and systems and outreach and SS m s and direct mailers and following up with phone and getting somebody across the finish line.
I mean, it’s a lot of work. I mean, I’m just going to tell you, I’ve talked to so many people, and the same thing is for doing a fix and flip. I remember 10 years ago, Greg, maybe even 15 years ago, I mean, I knew a lot of people who were doing fix and flips and they were making some good money right after the G F C. They were picking up properties they were doing because they were handy and I wasn’t. So I wasn’t really paying that much attention, but they’d make 40, 50, sometimes a hundred thousand dollars. And at the time, 15 years ago, I’m like, wow, that’s incredible. There was some TV shows highlighting the fixed and flip life and stuff like that. But let’s be honest, if you’re going to do a fix and flip, if you’re married, if you have kids, you both have jobs or whatever, there’s a whole bunch of risks in my opinion, which is why I’ve never done it.
First of all, I have handyman risk because I’m certainly not handy. But listen, there’s something called execution risk. You have to time everything. You have to buy the property, buy the materials, have it delivered on the time they have to have the contractors in place, and they don’t want to come and wait around for materials. So you got to have the materials there so they can open up the box, start working, right, the materials, there’re they’re going to go to the next job. And now I don’t know when you’re going to get them back. So that’s called the execution risk. There’s financing risks. So right back a couple of years ago when I was exploring some of this, Greg, you can get a short-term lender and at the time it was 10% and two points and first position on that property for them to give you what’s called a fix and flip loan or something like that. But the longer you held onto the property, the more interest expense you had and you were delaying the process of either cashing out and getting that money back or by putting a renter in it and doing the, what’s called the burr method, the buy, rehab, refinance. What’s the other one, Greg?
Rent out and repeat. How about that? You
Greg Lyons (16:53):
Made fun of me. You made fun of me about 50 episodes ago about this one.
Tim Lyons (16:57):
I did, yeah, listen, I had an injury back. I had a head injury back in November, so sometimes I can’t think of my words, but anyway, the BRRRR method, you can go look it up. So look, we got finance, risk and economic and recession risk. I mean, let’s be honest right now, people depending on who you watch, who you listen to, they’re talking about the real estate market crashing. They’re talking about a hard landing recession. People might be losing jobs. I mean, is that where you want to be on your first fix and flip? And now you’re trying to sell into a declining market? And look, there’s multiple exit strategies. We just talked about two of them selling your property and just taking the gain. If you have enough equity in the property, you could refinance most or all of your original capital out and have no money in the, and no skin in the game and then rent it out. You could do the bur method. So that mean there’s multiple exit plans, and that’s what you need to have, Greg, on top of that, the reason why we do this right buddy, is to have time freedom to do things when we want to do them with who we want to do them. And when you’re the active seat, I don’t know that you have that,
Greg Lyons (18:11):
And especially when you try to scale, you can’t have that. I’m a mentality. I’m going to do this, I’m going to do that because it just can become absolutely overwhelming. So that’s why whether you are going to scale as an active investor or if you’re going to be a passive investor, you have to build teams, professional property management, asset management, which are two different things by the way. But you have to start building out a team if you want to scale. And a lot of times that’s not only scaling as an active investor, but that could be scaling as a passive investor as well. Because a lot of people that invest with us have wonderful W two jobs make a lot of money. They’re real estate people themselves. When you talk about lifestyle and not having to fix the tenants, the termites and the toilets all the time because you want a certain lifestyle, you want to be in a certain place in life where you could rely on some cashflow and having your money work for you. So passive investing could be a really good place for a lot of investors.
Tim Lyons (19:18):
That’s Greg. Greg. And I want to stack on top of two things. You said property management versus asset management. Property management. When I did my first three unit property, Greg, they were charging 10% of your gross potential rent. So at the time, I think my gross potential rent was 33 or $3,400 a month. And off the top, they want call it 3,400. They want 10%. That’s three 40 a month off the top right before they even do anything. Now, if they had to come in and fix a hot water heater, yes, they’d buy it for you and they’d have it transported to your property and they didn’t install it, but then they’re going to add, that’s going to be a labor charges, it’s going to be time, it’s going to be, and then the hot water heater, instead of being 400 or 500 bucks, it’s going to be marked up by 20%, and now you’re paying $600 for a $500 heater. So at the end of the day, if you don’t buy it right, and you don’t finance it right, then your cashflow could not be right. So when I looked at that, I was said to myself, well, I want to have some education. I want to be a landlord. I want to understand what this is all about. But yes, that was another job for me.
Greg Lyons (20:30):
And I think what you did is you got a great experience in what it’s like to be an active investor, and it’s not always pretty right out there. It wasn’t always pretty mowing the lawn, shoveling snow. I mean, just amazing. Raking the leaves. Yeah, raking the leaves because you’re in charge. I mean, that was your property. But I think what you learn there is the experience of being an active investor. And I think when people think of passive investing, they just think of, I’m giving up all my rights. I have no say in the property, but what you’re really investing in is the experience of the operator. There’s the jockey and the horse. The horse could be the multifamily property, the horse can be the self-storage property, but what you’re really investing in is the jockey, the person that’s financing the property, the team that’s managing the property, the team that is taking care of everything that’s going on there, property management, all sort of things, renting units out. You are investing in that jockey and you’re really investing in the experience of the jockey.
Tim Lyons (21:43):
That’s just it. Because Greg, I mean, I got in trouble for raking the leaves at my rental property by my lovely wife, Christina, because I hadn’t done the leaves at my own house yet. And she’s like, dude, what’s going on? But yes, you’re a hundred percent right. And listen, that’s why my thesis had changed quite rapidly from going from the active route to the passive route. The problem for me was that I was going to run out of money quickly. So that’s why we decided to build Cityside capital and to really supercharge other people’s financial lives as well. The way that I saw that my life was going to go right, because listen, my goals and my lifestyle, I’m not looking to hit home runs. I’m not looking to have a Maserati in the driveway. I’m looking for optionality. I’m looking for my time back.
My kids are only, they’re 12, nine and four at the moment, but time goes fast and I want to be a part of that, and I want to be able to drive them to school and pick ’em up and coach your team, just like I’m sure the listeners can really feel that transference about being a part of your life instead of just clocking in and clocking out and hitting deadlines. So passive investing made a lot for us. And Greg, how many times do we have to maybe elevator pitch people this weekend about what it is that we do and how does it work? And it really comes down to this, if you have capital and you are, say, an accredited investor, or even if you’re not accredited, but there’s ways to participate, it’s getting clear about what it is that you want your money to do for you.
Where do you want to put it? Do you want to put it in a savings account yielding four and a half, say 4, 7, 5 right now. Do you want to put it in short term treasuries? I don’t really know a ton of people that are just so savvy about treasuries and rolling them over month to month or every three months. It’s usually people have their money just dying in a checking account or a low yield savings account, and maybe they have a 4 0 1 K or 4 57, or maybe they have a Ameritrade or a Schwab account. Maybe they even have more money than that. They have it in what’s called a managed account and somebody manages their capital for them. But look, if you’re looking for cashflow, if you’re looking for izing a way to ize your money to make it work while you’re sleeping at night, there are what are called alternative investments.
And alternative investments seem to be a lot of things these days. Crypto real estate, NFTs, all sorts of stuff that I don’t even get into. Gold, silver, copper, gas stations, car washes, so many things. But they’re alternative to Wall Street in that they’re not stocks, bonds, ETFs, and the like. Right? So here’s the thing here at Cityside Capital, Greg and I work with experienced operators. We vet them, we vet their deals. We have in-house underwriters, we have third party due diligence firms checking our issuer or operators out. We want to work with people that we know I can trust. And when we’re dealing with not only our own capital and our dad’s capital and our friends and our families, but other investors as well, we want to make sure this is a good and solid investment. And that’s what Greg and I do. And so we want to make sure that the market dynamics support investing in that area.
Are we on the right side of the tracks, the wrong side of the tracks? What’s the prospects for new job growth and population growth? And is that neighborhood dying or is it thriving? Because I don’t know, I like to go right down the fairway, Greg. I don’t want to be the pioneer in a lot of neighborhoods and I don’t want to be the last person out either. But that’s what we do here at Cityside Capital. And if that makes sense to you and you’d like to find out more about what Greg and I do on a day-to-day basis and who we serve and markets that we’re in, excuse me, asset classes that we participate in. I mean, that’s why we are here and we talk every day with investors telling them about our investment thesis. Why do we like self-storage versus industrial? Why do we like industrial versus multifamily? Why do we like all three? And how does that fit within your own investing thesis going forward?
Greg Lyons (26:02):
Yeah, Tim, it’s about building the balanced portfolio. We never come to people and say, Hey, you got to put everything in to this next deal. That’s not the way we want it to be done. We want to have people have some money in Wall Street, have some money in real estate to give yourself a really nice balanced portfolio. And with us, I think you hit the nail on the head, Tim, the bleeding edge versus the leading edge. You always want to strike that balance of, like you said, you don’t always want to be the first one. You always want to be the last one. So we try to strike that balance with our due diligence. One last thing that you said is people have cash sitting around, but not only could they invest cash in these different offerings that we have, but they could also use their self-directed IRAs or their retirement accounts, their rollover retirement accounts are a great thing to do.
And then also 10 31 exchanges. If you do have a 10 31 exchange, we typically have a menu of properties to choose from if that would kind of fit into your portfolio. But I think it’s just a conversation. And when you have a conversation, it may not necessarily mean investing with Cityside Capital. It may be something better for you to do, but you could learn about passive investing. And that’s the biggest thing. Cityside Capital was built because we needed to solve our own problem, and that’s what we did. And then after we solved our own problem, we started bringing it to different investors, and that has been a really, really great part of our growth story.
Tim Lyons (27:37):
Love it. And Greg, let’s be honest, at the end of the day, I never thought we were going to be licensed capital raisers for deals, but I just want to make sure everybody’s clear. We don’t make recommendations for where to allocate your capital as far as stocks and bonds and do something real estate. That’s where your registered investment advisor, totally different kind of channel, if you will,
Greg Lyons (28:00):
Tim Lyons (28:02):
Different licensing. But if you are committed to real estate and you want to learn more about what we do and how you can participate, that’s where Greg and I can really take it to the next level. So Greg, it has been a pleasure to be with you for another edition of the Passive Income Brothers podcast. Do you have anything you want to add to the listeners before we take it out?
Greg Lyons (28:23):
Well, no, I’m just, I’m happy we got to spend some time this weekend. I mean, not everyone starts a podcast by saying, I got to spend time with Greg Lyons. Most people are typically heading for the exits when something like that is availed to them. So no, it was great to see you. It was great to see the whole family. And you know what? We talk real estate every day, whether it’s to family, friends, or future investors. So reach out. Let’s have a conversation.
Tim Lyons (28:49):
Love it. That’s going to do it for this week’s edition of The Passive Income Brothers podcast. We look forward to serving you again next week. Thank you for listening to another episode of The Passive Income Brothers podcast. We would be grateful for your support of our podcast by giving our show a five star rating and review and subscribing to our show on your favorite podcast platform. Don’t forget to take inspired action after listening to this show so that you can start building out your passive income streams. Finally, head on over to cityside cap.com to connect with us and find out more information about how to get started passively investing in real estate.