JF2305: How To Prepare For Economic Recession | Actively Passive Investing Show With Theo Hicks & Travis Watts

December 24, 2020 | Joe Fairless | 00:28:22

JF2305: How To Prepare For Economic Recession | Actively Passive Investing Show With Theo Hicks & Travis Watts

Today Theo and Travis will share information about economic recessions and how to avoid the negative impact they often cause. Since the Articles of Confederation signing, there have been 47 recessions in the USA. And while there are ways to lessen the blow, there is no way to prevent recessions from happening altogether.

Travis applies the philosophy of stoicism to real estate, offering to focus on what we can control. Theo shares three main real estate laws that help investors stay afloat no matter what happens with the economy.

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We also have a Syndication School series about the “How To’s” of apartment syndications, and be sure to download your FREE document by visiting SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow. 


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome back to another edition of the Actively Passive Investing Show. I’m Theo Hicks and as always, we’ll be speaking with Travis watts.

Travis, how are you doing today?

Travis Watts: Theo, doing great. Happy to be here. Thanks, everyone for tuning in.

Theo Hicks: Absolutely. Thanks for tuning in as well and thank you for joining me, Travis. Looking forward to our conversation today. We’re going to talk about recessions. So this will be based off of a blog post that Travis wrote, entitled 47 Recessions and Counting – Are you Prepared? So we’re going to, as always, talk about why Travis wrote this blog post and then dive into the body of the blog post and go over it in some detail, and I’ll get my thoughts on it as well. So Travis, why did you write this blog post?

Travis Watts: Most of the time, I would say, when I write a blog post, it’s because I read a snippet or a headline or I learned some new fact that just kind of blew my mind, and that was the case with this one. I had learned that we’ve had 47 recessions in the United States since the Articles of Confederation. I thought, “Oh my God.” To me, that’s shocking. I don’t know. Because it seems like every few years, when we have a recession, everyone’s so caught off guard and it’s so unbelievable, and nobody can believe this is happening… And to look back at just a short history from 1800s, 1900s and today, it’s like, “Hey, this stuff happens about every 10 years.”

So it was interesting to do just a quick study on the subject. We used to have recessions in the United States about every three or four years. So imagine that; you can hardly get a breather. By the time you recover, it’s happening again. So in 1913, the Federal Reserve was implemented, they started experimenting with, “Can we stop recessions from happening?”

And now today, we know about the easing of money and the printing of money, things like this. But the fact is, yeah, we can lessen the blow here and there, but we cannot prevent cycles from happening, and recessions and depressions and all that kind of stuff. So they do happen.

The good news is, if you want to look at the silver lining, they’re now about every 10 years; that’s not an exact science, obviously. We’re about 12 years in right now from the great recession of 2008. So not 10, but close enough. Sometimes they’re eight, which would be like the Dot-com crash of 2000 and then 2008, Great Recession, there’s an eight year example. So the fact is, we have to expect this stuff to happen.

So what it made me think of actually was the episode that we did not too long ago, a few episodes back, of stoicism, the ancient philosophy. And the core of that I won’t ruin it if any of the listeners haven’t seen that episode, but the core of Stoicism is to focus on the things that you can control, and to basically, not forget about, but put out of your center circle the things that you can’t control, which would be the Federal Reserve, are they going to print money? Are they going to switch interest rates? What’s the government going to do? What’s the stock market going to do? These things  are largely out of our control. So forget about them and focus on your behavior, your portfolio, your investments, things that are directly in your control. So that was kind of my general takeaway. And for anyone that hasn’t seen that episode, it’s called Stoicism and Real Estate – How To Be A Stoic Investor; again, a few episodes ago. So that was kind of the long-winded backstory of why I wrote it. Any thoughts before I go rambling on?

Theo Hicks: Yeah, I couldn’t agree more with what you talked about when it comes to relating this to our episode on stoicism, and making sure you focus on what you can control, and always thinking about how well what I’m doing be impacted by a recession. So that’s why I talked about this and probably literally, a million times, the Three Immutable Laws of Real Estate Investing, which is making sure you’re buying for cash flow and not appreciation is number one. Number two is about debt. So low-leveraged long-term debt; long term being twice as long as whatever your renovation period is going to be. And then the third one is making sure you have adequate cash reserves. Because if you follow that, you’re going to do really, really well when the market is doing really, really well. But when the market is not doing well, or if there’s some crazy crash, then at best, you continue to perform well. But worst-case scenario is that you’re not losing all of your money; you’re at least maintaining your money, or your cash flowing, but you don’t have to give away the asset. So that’s why I’m glad we’re going to talk about how to prepare for these types of events.

And then one other thing I quickly wanted to mention is that the Federal Reserve has a really interesting resource, it’s Federal Reserve Economic Data; I’m not sure if you’ve gone to that website or not, but they have a really cool interactive graph function where you can select different metrics, like homeownership or renter occupancy or whatever – they have hundreds of metrics – [unintelligible [00:08:00].17] interest rates, and then they’ll put it in a graph and the graph will go back, as far back as it was tracked. On the graph, it’ll have little grayed out areas for each of the recessions. So you can see how did median rents perform between recessions, during the recessions,  immediately after a recession, immediately leading up to a recession…  It can give you an idea of what to expect during a recession. You can see how it acted differently, depending on what recession it was.

And then, obviously, FRED — I think it was FRED; I can’t remember exactly who decides when the recession start, but I think it’s the Federal Reserve. So at least on that FRED website, either they or there’s a link to a really nice detailed article on how they decide when a recession has started. And then after a recession has started and it has ended, and maybe six months later — because they don’t know when recession has ended until later; it’s kind of like, they look back and say, “Okay, I think it ended here.” But  they’ll write really good articles explaining why they think the recession happened, what happened during the recession, and then why it ended, for all recessions. I don’t think going back until the 1800s, but definitely for the recent ones, for sure. So it is an interesting thing. Again, just google Federal Reserve Economic Data. The website is actually https://fred.stlouisfed.org/.

Travis Watts: That’s a great resource. I actually did not know about that. So I’m going to check that out after we’re done. But that’s really cool. Thanks for pointing that out.

So to your point of preparation – so there’s really two types of ways to prepare. We have personal preparation for a recession, and then we have financial preparation. And the fact is, most Americans, and I would say this is probably true globally, most human beings are great at the personal preparation and not so great at the financial preparation. Just kind of another reason why I wanted to write this blog post, to bring a little awareness to it.

So what I mean by that is, we back up to the Great Recession, right? 6 million people plus lost their homes, their jobs, their 401(k)’s were cut in half… But in terms of personal preparation, people seem to have a plan B or come up with that fairly quickly, right? Moving in with relatives or friends, doubling up, downsizing quickly, switching from homeownership to renting. That was a rather rapid movement that happened. And we’re always as human beings in survival mode, going to find the roof over our head and the food to put on the table – we’re going to find a way to do that. And that’s where most people’s attention seems to go in large part.

So when we think back to March 2020, this is where COVID-19 and Coronavirus really hit the financial markets. And so the first thing that we saw was the stock market plummets. I think the S&P was 30%, maybe more down by the end of March, nearly overnight. But what did people do during that time? People were rushing out to buy toilet paper, to buy canned food, to buy gasoline, to buy bottled water… That’s personal preparation. But what’s interesting about that is stocks went on sale 30%. Who rushed out to go buy stocks? Obviously a few, but definitely not the majority.

So I just found that really interesting that there’s just not enough education out there on the financial side of things, and I just found that to be really interesting. That’s the case almost every time in a recession too is, we’re all good on the personal, not so good on the financial. And any thoughts on that, Theo?

Theo Hicks: Yeah, it’s funny, first of all, how all those people ran out to get the toilet paper for the [unintelligible  [00:11:27] recession. I thought that was just a Coronavirus recession thing. So I guess that’s something —

Travis Watts: Well, they may not have been exactly toilet paper then. But it probably was paper towels and household items, I don’t know.

Theo Hicks: Yeah, I saw that and I was like, “Wow. Really?” I don’t know. But that’s interesting. I mean, the way I kind of think about this is that for the personal preparation, it’s really something that you can obviously over prepare; there’s a lot of TV shows about people about their bunkers and Doomsday stuff, making sure you have ample food. But on the personal side, at least it seems to me that once the recession hits, it’s kind of like, if you didn’t prepare, you can still survive, basically. As you mentioned, if you weren’t personally prepared, then you can go live with relatives, or instead of owning your house, you can rent, or there’s still going to be food at the grocery store…

Whereas from a financial perspective, it seems like – again, looking at it from the perspective of the Three Immutable Laws of Real Estate Investing – it really is preparing. It’s kind of like once the recession hits, from a real estate perspective, at least, correct me if I’m wrong… It’s like, well [unintelligible [00:12:30].07] going to happen from both a Three Immutable Laws of Real Estate Investing perspective, but also from maybe a mindset, or more of a — I don’t know, just how you approach things, right?

So as you mentioned, once the recession hits, having the Three Immutable Laws of Real Estate Investing in place is good, but then do you know what to do once the recession hits? Do you sell everything? Do you buy? Do you do nothing? Right? And so that’s something too that you also need to be prepared for prior to the recession hitting, so that once it actually happens — during the economic expansion, everything is sitting great, you think about, “Okay, once that recession hits, what exactly is my plan? What exactly am I going to do? Am I going to buy a bunch of properties at a massive discount? Where am I going to buy these properties from? Who am I going to go to to get these properties from?” Things like that.

And so I guess, long story short, from a personal preparation standpoint, preparing beforehand is great. But once it happens, there’s still things you can do after it actually hit. Whereas for the financial side, I think it’s kind of like the flip, where what you’ve done leading up to it is going to determine how you perform during it.

Travis Watts: 100%. What’s that saying,” Hope for the best and prepare for the worst”, more or less, is kind of the philosophy behind that. So you don’t want to be a pessimist and always call in for Doomsday, and everything’s going to be bad, and things fall apart non-stop. And a lot of gurus out there that do that make a lot of money off fear. But that’s not my approach to it. It’s just accepting what it is. “Hey, we’re in 2020 and we’re in a recession. In 2030, we might have another recession.”

So to your point, prepare ahead of time, think about — when I switched over to investing in multifamily in 2015, a large part of what gave me certainty to move forward with that asset class was case studies and looking back at previous recessions, and seeing how multifamily held up. And that data supporting my case really gave me a lot of confidence. So if nothing else, do that kind of stuff, if you’re unsure of how whatever it is you’re investing in is going to perform. If you’re all in stocks, just look at what stocks do during recessions. 2000-2008, even back to the 80s, everything else; Black Monday… And just be prepared if you’re going to be in stocks.

But to that point, by the way, I know we’ve talked about the F.I.R.E Movement quite a bit and I’m an advocate for the most part of that… And I listened to some podcasts and things like that, and it was really interesting in March to listen to people speaking out in the F.I.R.E Movement. These are folks primarily in index funds. And they’re all basically saying, “Hey, it’s easy to prepare on paper for the next recession, knowing it’s going to happen. But when it’s here and you watched your million-dollar portfolio just fall to 700 K,” it’s a different deal. It feels a lot more real. It’s really difficult to sit with that. But you got to stick the path, right? If you had been an index funds, you’re almost recovered as of today.

Theo Hicks: Exactly.

Travis Watts:  So that’s the whole lesson – don’t sell out at the bottom, no matter what you’re in. So to that point, statistically speaking, when a recession hits, the folks that tend to be hit the hardest are people with one source of income. And this was kind of a key point to my blog. So I thought about that, and I thought, as important as money is, in our system – I don’t mean the love of money, or collecting money, or getting rich… What I’m talking about is how money is required to live, to exchange for food and gas and living in shelter. So it is important. I don’t care what you say, it’s important. But I thought about that, “What if we had only one source of water, and that’s it?” And then for whatever reason, that source was shut off or was contaminated. Well, then what? We’re hosed, we’re screwed. This gets back to kind of that personal preparation, versus financial.

So we’ve learned and we know that is a possibility if we had one source of water. We have hundreds of sources of water, and rivers, and aqueducts, and rainfall and underground springs, imported bottled water, on and on and on, so that we’re diversified; we have more than one source of something that we need and rely on, right? So again, that was kind of a key component here. So why not relate that analogy or that example, to your financial portfolio?

If all you have is a W-2 job, or a 1099 job, or whatever; or just one investment, or whatever it is you live on, and that’s your only source, why not start building multiple income sources?  And by the way, I’m not just advocating for the passive income, which is something that we talk about a lot, I’m just saying different income sources; have a side business,  have a side hobby. Even if you fix and flip houses or you wholesale, that counts. If you have a primary job, and you’re doing that on the side, and you lose that job in the recession, well, hopefully you can switch over to your side hobbies and at least have some supplemental income rolling in.

So something to think about. And it’s just always shocking to me, the lack of financial diversification, so to speak. So many people with one income source. So thoughts on that, Theo.

Theo Hicks: [unintelligible [00:17:33].17] Remind me to ask you. But yeah, a lot of the people that I’ve talked to on the podcast, as well as some of the older episodes that Joe has done, the people who were investors pre-2007, it’s really kind of the same story every single time. It’s like, “I was doing this one thing, it was going great, I was a millionaire… And then, because I had all my eggs in one basket, and these eggs were all crushed by the recession, then I went back to zero and I had to start over again, and then here’s a lesson that I learned. Now, I’m making sure that I’m focusing on asset classes that are— I don’t want to say “recession-proof”, but can maintain during recessions.” So I couldn’t agree more.

And as you mentioned, it’s really just—again, from my perspective, from listening to people, it’s kind of just like making sure you’re in different asset classes that are affected differently by recessions and expansions; they are not all connected to the exact same thing.

Here’s an example. When you’re selecting a target market as an active investor, you want to take a look at job diversity and say, “Okay, what percentage of the population is in each of the industries?” and whatever the highest one is, you want to make sure that it’s at most 30% of the people are in the industry. Because if you’re in a place like Detroit back in mid-2000s, or maybe somewhere like Las Vegas, where it’s all hospitality, if something happens to that one industry, then everything in that market is going to be affected.

And so when you think of diversification – it’s market diversification, it’s asset class, it’s all these different thing, active versus passive, it’s all the different things, so that unless something completely catastrophic happens, not every single one of those businesses are going to collapse. And that’s what I thought about when you were talking about different sources of income. And I was talking to real estate investors – you’re in an industry where there’s an infinite number of paths you can take. And so make sure you’re just kind of selecting a few of them, and not just going all-in on to one forever, right? It’s good to start that way, but eventually might want to consider doing a little something different as well, just in case something were to happen to your main source of income.

Travis Watts: Lots of ways to diversify. What came to mind as you were just speaking… Great points. I’m listening to —Tony Robbins just came out with a new book a few weeks ago; it’s called The Path, and it’s about the path to financial freedom, basically. And I’m not far into this book; I’m like on chapter three, I think. But he’s sharing — I think it was one of his clients or one of his friends, and this guy had created a business, put everything in, sold it… It was like a $125 million sale, something to this point, right? Well, this guy gets a huge ego, a huge head on his shoulders, “I’m a guru and the world is my oyster“, so he takes all his profits and he puts it into this Las Vegas luxury condo development. It was like a couple different buildings, or something. And this was pre-2008.

And Tony is saying — he’s talking to him and he’s trying to talk him into a little bit of diversification, like we’re talking about. “That’s great that you’re doing that condo development; you might consider also having a little bit here, a little bit there,” just trying to help him as a friend, right? Not a financial advisor. And the guy’s like not having it. “Nope, no. This is the next big thing. You ought to buy one of these yourself, Tony, etc.” And then we know the rest, right? 2008 rolls around and Las Vegas was probably the toughest hit market out there in the United States… And the guy lost everything. He went from having more than 125 actually net worth at the time, at the pinnacle of 2008, to – I think it was like owing $50 million or something to banks, you know. he went below zero.

And Trump way back when he had the same experience, back when he was developing, and whatever it was, in the 80s. He went from mega-multimillionaire to owing millions and millions and in the hole. So that can happen. And to your point, that’s when you’re a one-trick pony.

I have an uncle, by the way, that used to flip homes, and every time he’d flip a house, he would take 100% of the profits, 100%, and he’d go into a bigger home, and a nicer home, and in a better neighborhood, right? And seriously, real story… 2008 – boom, lost it all. It’s just tough stuff.

So even if you’re going to be in real estate, primarily or exclusively, there’s still ways to diversify: mobile home parks, self-storage, multifamily, single-family, active, passive… To your point, things that you can do to be diversified. But you may still consider some stocks, bonds, mutual funds, other things on the side, or alternative assets or businesses. So with that, great points by the way.

The takeaways here in this episode are – we will have more recessions in our lifetime. Let’s just call it now every 10 years or so. Let’s try to be prepared, both personally, which is important obviously, for survival, and financially as well. So how do you do that? Diversify your income streams, again, actively or passively. Have different outlets in case one is taken away in the next recession that will happen.

If you listen to some people — I was listening to Robert Kiyosaki the other day speak on the podcast or something. He thinks we’re in 1928 today as far as right before the next great depression. That’s his new prediction. Now, notorious by the way, if you’re not familiar, for predicting these huge downfalls in the economy… Maybe he’s right, maybe he’s wrong, but pay attention, because whether we are or we’re not, we’re going to have more ups and downs and cycles moving forward.

So, again, 6 million people lost their homes, their jobs, their 401(k)’s got cut in half in the last recession. It hadn’t been that bad so far to a point with the Coronavirus recession, but you never know. Like the old saying that, “History doesn’t repeat itself, but it rhymes”, classic example right there. So that’s kind of the key takeaways.

And then again, stoicism – focus on what you can control… Your decisions, your behaviors, your preparation, your portfolio, your investment choices, what you decide to educate on,  who you decide to listen to… All these things are in your control. Can’t control the government, the Fed, the policy, the interest rates. So unfortunately, we have to just sort of let it happen and roll with the tide.

And interesting fact  we talked about – I downloaded this research study from the Dave Ramsey Foundation (or his companies) about millionaires, and the average millionaire has seven sources of income. Think about that. My nephew, who’s 19 years old – I helped him open up a brokerage account, I taught him about a real estate investment trust, high yield dividend stocks… He’s probably got four or five income sources at 19 years old, with relatively little money. But that’s not the point. It’s the concept, right? He’s going to hopefully grow that over his lifetime, and be in good shape for what’s to be expected in the future. So with that, that’s really all I got, and those are some of the takeaways from my blog.

Theo Hicks: Thank you so much, Travis. I did have one question for you. I think you can answer it really quickly, but [unintelligible [00:24:35].03] from what you do, or you think people should do, or what you’ve heard other people do, but do you have savings account? Like, completely liquid, that has a certain number of months of this cash is sitting in there? Like, is that something you do or not? I’m just curious.

Travis Watts:  Yeah, it is. And I’m happy to share that. So you’ll hear different things, like “You should have 6 months of living expenses in your bank account”, or maybe it’s 12, or maybe it’s 3. I don’t know. You hear all kinds of different things. Here’s the thing, though – I have a very diversified portfolio of investments; numerous passive income streams. And my personal perspective on that is the more passive income that you have predictably coming in in a very diversified way, the less you may need in reserves. So yeah, I still have that six to 12 months living expenses, it’s kind of an old school thing. I still loosely follow that. But at the same time, I recognize that every month, I’ve got a lot of different income sources rolling in as well. So even if I had $0 in the bank, hopefully, some of those investments, if all hell broke loose, some would still pay out and I’d have enough to pay my living expenses. I keep a very modest overhead. I recommend people do that. I am a fan of trying to reduce debt and things like that first, before going heavy into investing. But anyway, to answer your question, yes. Yes, I do.

Theo Hicks:  Perfect. And then last thing before we wrap up – because you were talking about the Tony Robbins book and the example of someone making that money and then investing it in Vegas and the crash happening – there was a really good documentary that [unintelligible [00:26:05].22] in my mind from a long time ago. I’d never heard it before and I watched it. It’s kind of like weird at first, but it’s actually really good. It’s called Queen of Versailles or something like that. Have you heard of that?

Travis Watts:  I haven’t, no.

Theo Hicks:  Basically, it’s about this couple who are trying to essentially create this billion-dollar house, or something crazy like that, based off of the house of The Queen  in Versailles. And the husband is in real estate and I think they do timeshares, or something. So they documented it and you’re supposed to be following them constructing this house, but in the middle of it, the crash happens. And so instead, it turns into this complete nightmare scenario where the husband is trying to scramble to figure out what to do with his real estate business, because it’s his one source of income, and he’d been a billionaire on it, and now it’s completely collapsing and he owes these banks all this money, all this stuff. And then at the end it’s kind of crazy, too… So I recommend if you want to see firsthand documentary person; it’s pretty short, I think an hour and 45 minutes. I don’t think I’m even pronouncing it right, but is Queen of Versailles or something like that?

Travis Watts: Yeah, I’ll check it out.

Theo Hicks: Check it out.

Travis Watts: Thanks for the recommendation. I’m into that stuff .

Theo Hicks: It’s definitely a good watch, and [unintelligible [00:27:06].24] the whole time, like, “Oh, no…” So I’d definitely check that out if you want to see what we’re talking about in a documentary. So anyways, thanks, Travis, for going over this blog posts today. Again, make sure you check out the blog post. It’s called 47 Recessions and Counting – Are You Prepared? That should be in Travis’ BiggerPockets profile, and I’d imagine it be on our blog as well by the time this airs. So Travis, again, thanks for joining me today.

Best Ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

Travis Watts: Thanks, Theo. Thanks, everybody.

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