8 questions with multifamily investor and author J Scott
In 2008, J Scott and his fiancée, Carol, quit their high-pressure Silicon Valley tech jobs and moved to the East Coast with plans to build new careers that would let them prioritize starting a family. Inspired by HGTV, Carol suggested they try flipping a house while they figured out what came next.
“I could barely swing a hammer, but we were about to get married and I wasn’t going to say no to my future wife,” Scott says.
Over the next eight years, the couple flipped more than 300 homes. Then Scott changed tracks again to focus on multifamily real estate. Today, he invests in large apartment complexes in the Houston area as general partner at Bar Down Investments. He also operates a portfolio of small multifamily and single-family homes in Maryland, Georgia, Florida and North Carolina. Scott has also written several books, including “Recession-Proof Real Estate Investing” and “The Book on Estimating Rehab Costs.”
Scott spoke with Story about why he went from flipping to retaining investment properties, how he keeps up with market trends and the two critical questions he asks before buying a property.
Story: Why did you decide to move into multifamily investing?
JS: I was burned out on single-family. It’s hard to flip 30, 40, 50 houses a year.
The thing I love about multifamily is that it’s a team sport. There are things in this business that I’m really good at, and multifamily gives me the opportunity to focus on those things, while letting our other team members focus on the things they’re really good at. I can put my talents to use and I don’t have to stress out over the stuff I’m not good at.
Story: Did you have a mentor in real estate guiding you through the transition?
JS: When I was looking to move into multifamily, I reached out to a friend of mine named Ashley Wilson who was buying and syndicating large apartment complexes in Texas and Ohio.
I basically said, “I’ll come work for you for a year for free. You’ll have access to my knowledge, my time, my effort, my network, my cash. In return, I’d love for you to mentor me and teach me the business.”
It was a good deal for her and a good deal for me.
Over that year, we became even better friends and we realized we worked really well together. We’re now partners in that business, Bar Down Investments.
Story: Tell us about a mistake you learned from.
JS: A lot of us like to focus on transactional deals in real estate. It’s great to buy something and sell it at a higher price. But at the end of the day, you become financially free through cash flow, by buying stuff and holding it long-term.
A couple years ago my wife and I sat down and did the math. If we had kept every house we’d ever flipped, we would have about $50 million more in equity than we currently have. Now financially, we couldn’t have afforded to have held every property, but even if we kept, say, one out of five, we’d have $10 million more in equity than we currently do. Real estate goes up in value over time. It might not go up next week or next year, but it’s going to go up. And when you sell something, you pay taxes on it and you’re not generating cash flow.
If you need the cash, fine, sell some houses. But for every one, or two, or three you sell, keep one. It might sound easier said than done, but if you’re in this business, it shouldn’t be too hard to figure out how to keep one house per year.
Story: You hear about a new real estate investment opportunity. What’s your first question for the broker or seller?
JS: In the multifamily space, we like to know why someone’s selling. But when you’re talking about properties with 100 units and above, the sellers are pretty sophisticated, which means they know the right answer to give even if it’s not the truthful answer.
The two bigger questions we ask are:
- Where’s the trailing 12-month expense statement?
- Where’s your rent roll?
It’s more difficult for a seller to lie about those numbers. And with those two documents, we can figure out what a property’s worth without any additional input from the seller.
Story: Do you have any favorite strategies for cutting operational costs at a property?
JS: Constantly shop insurance and appeal your taxes. Find a company that will do it for free and take a percentage of the savings, because their interests are now aligned with yours.
Also, one reason we love multifamily is because of the economies of scale. If we have to buy countertops for 200 units, it’s a lot cheaper than buying countertops for two units. If you’re going to buy multiple properties, buy them all in one area so you have economies of scale for labor and materials.
Story: You wrote a book on investing through economic cycles. How do you stay on top of what’s going on in the market?
JS: I’m constantly reading. I like to look at The Economist and the Federal Reserve website, and I skim the Wall Street Journal every day. But honestly, I don’t have the time to look everywhere all the time.
I have a couple good friends in Silicon Valley who are in touch with the venture capital, angel investing and tech worlds. I have friends who are into crypto, or equities and the stock market. We have a WhatsApp group, where if something interesting happens, we post something. I’m the guy posting the real estate data. Between us, we all have a really well-rounded view of what’s going on economically.
Find other people in your network, even if they’re not close friends, who are focusing on parts of the economy you’re not, and share information.
Story: Who’s your sounding board? Is there anyone in your life you make big decisions with?
JS: My wife is number one. She and I have tremendously complementary skills.
Both she and my business partner Ashley tend to be more aggressive, whereas I tend to be pretty conservative. When I hear about a deal for the first time, my reaction is to pick it apart and figure out why something won’t work, whereas their first reaction is “How can we make it work?” They push me out of my comfort zone and force me to see the optimistic side of things, and at the same time, I pull them back into reality. It’s a good balance.
Story: If you could give a younger version of yourself one piece of advice, what would it be?
JS: We all do this, where it’s all about the destination: “If I get to this much money, my life will be great.” Then you get there and now it’s “If I get to this much money, I’ll have the car I want,” and “If I get to this much, I’ll have the vacations I want.”
You’re never going to get there. There are always going to be future goals. So every day, just appreciate what you have accomplished, be grateful for what you have and do your best to enjoy it.
By Lauren Zumbach from Story by J.P. Morgan