Successfully investing in any asset class with J Scott

J Scott (he goes by "J") is an entrepreneur, investor, and the co-host of The BiggerPockets Business Podcast. In the past ten years, J and his wife have bought, built, rehabbed, sold, lent-on and held over $70M in property all around the country. J holds advisory roles in several companies and is the author of four books on real estate investing, including the best-selling, The Book on Flipping Houses. He can be reached at j@jscott.com.

www.ConnectWithJScott.com

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Transcript

Josh: What is up everybody, Josh Tapp here again and welcome back to the lucky Titan podcast and today we're here with J Scott, super excited to have him here because he's in an industry that I really don't know a lot about but it's one I do want to know a lot about, hence why he's on the show. So I'm excited to have him here because if you've been in the real estate investing space, you've heard a J’s name. I mean, this guy, he's on one of the top podcasts in the world right now in real estate investing it's the Bigger Pockets business podcast, I had to look at it, I almost forgot but also, he's got a portfolio of $70 million in real estate I mean, this guy knows what he's doing when it comes to scaling through acquisitions and through investments. So J, say what's up to everybody and then we'll hop in man.

J: Hey, everybody, appreciate you. I appreciate being here. Thanks for having me, Josh.

Josh: Yeah, it'll be awesome. I'm really excited. So I want to ask you this, because we were talking about this right at the beginning. How did you end up getting into the Bigger Pockets community, I mean, like you said, there's like four podcasts and somehow I have never heard of it. I don't know what my deal is.

J: it’s Okay, so for those in the real estate, investing space, they probably heard of bigger pockets. If you're not in the real estate, investing space, you may not have but if you're interested in real estate investing, that's a great place to start biggerpockets.com so I started out, I'm a business corporate guy, I have an engineering degree and an MBA, I did the corporate thing for a long time so I spent most of my career doing business development and product at Microsoft and in 2008, my wife and I decided to get married and start a family at the time, we were both working 100 hours a week, she was traveling three and a half weeks a month for her job, I was traveling a couple weeks a month for my job and so we realized that just wasn't sustainable given that we wanted to start a family and really be able to focus on our family so 2008, when we got engaged, it was about a five minute conversation for us to decide, hey, let's, let's quit our jobs let's move someplace that's more conducive to starting a family we were in Silicon Valley, the hustle bustle of San Francisco at the time, so we move back to the east coast and we said let's find a quote unquote, lifestyle business, something that we can make our own hours, we can make our own decisions, we could kind of put family first business second, but we could still continue to earn a living and grow our net worth and so summer of 2008, we moved to Atlanta, Georgia, we were trying to figure out what that next thing was and one day we were literally sitting on the couch in our basement watching TV and my wife turned on HGTV flipping houses TV show and she said let's flip the house while we while we sit here and try and figure out what it is we ultimately want to be doing let's have some fun. Let's flip a house and personally real estate never interested me I'm not a hands on kind of guy, I'm having an electrical engineering degree and I can barely change a light bulb but I said okay, if the woman I'm about to marry wants to flip a house, I better flip a house because I don't want to have second thoughts on the wedding so we decided to flip a house and I needed to learn about flipping houses and so I jumped on to the internet and on first sight I found was this site called biggerpockets.com which was a real estate investing community started to get involved ask questions, network with people learned about how to flip a house and a few months later, we flipped our first house and then our second and our fifth and our 10th and our 50th and here we are 12 years later, and we've flipped about 450 houses I've written four books on the topic and at some point we went from Hey, we're gonna flip houses as kind of a fun thing to do to we're now officially real estate investors.

Josh: See, and I love that I mean, 450 houses is absolute insanity that's a ton of homes. So I want to ask you this, because most people who are listening to this being in the business space, I think all of us know at some point, we have to kind of put some money in real estate one way in one way or another so for you, what's kind of your basic framework for launching into this sector into flipping homes.

J: So I am not again, I'm not a real estate guy I'm not somebody that can swing a hammer I don't want to swing a hammer you don't want to live in a house that I renovated and it wasn't my skill set my wife and I were both business people so, so I ran businesses for Microsoft she ran large organizations and eBay and so what we were good at was managing teams and managing businesses and creating business models and so from day one as we started to scale this business, our priority was always to run our real estate business as a business so I didn't want to be spending my In houses, I didn't want to be spending my day painting houses or even managing contractors I wanted to focus on the business tasks, the things that were generating the not the $20 or $50 an hour, I wanted to be focused on the things that were going to generate me 100 or 500 or $1,000 an hour and that not only is that good is to grow a business, but it's also what I was good at so for me, it was really easy from day one to say, Hey, I'm not going to get down in the weeds, I'm going to focus on building this just like any other business, I mean, a lot of people get into real estate and, and think, okay, I can do this, I have a contractor background, or I know real estate I've bought and fixed up houses before most people don't get into it and say, hey, I'm gonna grow a business and scale it like a business because they don't think of flipping houses or rental real estate, or whatever the real estate model is, as a real business but at the end of the day, it's no different than opening up a retail store, or an internet business or a restaurant or a car dealership at the end of the day it's just a business, and you have the same components, any other business, have your houses or your inventory, and you have your employees and you have your operations and you have your supply chain and you have to be able to build a good P&L and so at the end of the day, a real estate business is no different than any other business even though a lot of people that get into it, don't think of it that way.

Josh: Well, and I think that lesson is one that translates across the board, because it's it's the difference between working in and working on the business and I love that you differentiate that because especially in the real estate industry, people think that they have to lift the hammers and you know, as Oh, well, this house isn't done, I've got to get over there and fix it, you know, and do it myself and you've somehow built a model around not needing to do that yourself so the initial question for somebody like me would be where do you initially look to get these homes? and because you said you're not even doing the real estate yourself? Do you hire on real estate agents and people to do this for you? Or how do you how do you structure it?

J: Yeah, absolutely. So again, when I was starting this business, I said, I'm building this like a business and I modeled it, after all the other successful businesses I'd seen if you walk into a big business, whether it's technology, or whatever it is, you walk into the headquarters, and what are you gonna see, you're gonna see different divisions, different parts of the business, you're gonna see a marketing team, you're gonna see a sales team, and you're gonna see an operations team, and you're gonna see an acquisitions team, and you're gonna see a supply chain, team, and a branding team and all of these different teams and I said, so if I'm gonna start my business, like a real business, what are the teams I'm going to need to build out so that I can run it like a business again, too many people get into real estate and say, Okay, I'm going to do everything myself and they find themselves running around doing a million different tasks, I wanted to kind of structure it like a real business at first and so what I found was doing some research, and after flipping those first few houses, I mean, I didn't come up with this at the very beginning but after flipping the first few houses, what I realized was my to do list every day, had hundreds of things on it, but those hundreds of things basically boiled down to four key areas it was every task was either an acquisitions task, so it helped me buy houses so get inventory, helped me renovate or fix up or put that inventory in, create inventory that I can resell so basically, rehab renovation third bucket was marketing and sales, basically being able to take that inventory that I've now renovated, and actually sell it for top dollar, or raising capital so the fourth bucket was, how am I going to fund all of this because if I'm going to flip 10 houses or 15 houses at a time, I don't have $5 million at that time to go and flip 15 houses at a time with my own cash, even if I did have the cash is that the best use of my cash so raising capital raising funds, was the fourth bucket and so once I realized that basically every task on my to do list fit into one of these four buckets then I said, How do I now start to optimize each of these buckets? What are the things I can do to build out, optimize, make more efficient each of these areas so that I can have other people running it, but that I can still maintain control and so you asked about the acquisition side. So on the acquisition side, so when it came to buying houses, yeah, one thing I needed to do was I needed to hire people on the acquisition side, there's things like sourcing deals so where am I going to find those houses? I'm putting together rehab estimates. So I have to analyze deals and determine is this deal going to make me money, breakeven or lose money and to do that, I need to do rehab estimates and I need To find out how much it's gonna cost me to actually take this inventory from where it is the day I buy it, to turn it into something people I can sell, I need somebody that can make offers for me, I need somebody that can negotiate offers for me, I need somebody that can help me do the due diligence, I need a team that can help me, just closing deals so a lot of back end work, once you buy a house is actually getting it to the closing table so I built a team that can help me do that some of these people were contractors, so 10 99, some of these people were full time employees, some of these people were somewhere in between part time people so I had wholesalers, so wholesalers are people that go out and find deals, get them under contract, and then sell them for a markup basically a middleman in the real estate world, I had a project manager, somebody whose job it was to go look at these houses and say, here's the list of things that need to be done to get this house into resale shape and here's how much it's going to cost I needed to have an inspector somebody that could go and do inspections and could find the things that could potentially go wrong during the renovation, I need an appraiser, somebody that can tell me how much the house would be worth. After it was renovated I needed a real estate agents, somebody that can help me actually close the house and write up the contracts and then at the end of the day, I needed a closing attorney or a title company so somebody who could actually get the deal closed. So just from the acquisition side, I needed a team of about 10 people just to handle everything so that I wouldn't be working in the business day to day and again, most of those people were contractors 10 99. In fact, on the acquisition side, I don't think I ever had anybody that was a full-time employee because it wasn't necessary. But yeah, you didn't need those people.

Josh: So you're basically saying you went out and you bought companies have with these things already in place and created kind of like a conglomerate that that solved one need is that what am I interpreting that correctly? 

J: No, I more I built that within my company so I had somebody that basically ran my acquisitions. And the resources that they used to run our acquisitions team was mostly 10 99 contractors. So everything from virtual assistants to middlemen to project managers, we had some part time, full time and 10 99 people we didn't there are no companies out there that basically focus on each of these areas so we had to build it internally and so we had one person whose job it was to manage it all and they brought in the right people as necessary.

Josh: That's awesome. I love that and you mentioned, you know, you didn't have the 5 million cash up front yourself so how did how did you get the funding to launch that so quickly?

J: Yeah, so it wasn't quick and just like in any business, it requires time it requires legwork, it requires a network, it requires building relationships, building trust, gaining credibility basically, on my first deal, I went to a bank and I got a loan actually, no, that's not true the first deal, I paid cash, I use my own cash for the first deal and then after that, I realized, okay, I'm not going to be able to do a whole lot more of these deals, if I have to put out a couple $100,000 in cash for each deal so the second deal, I went to a bank, and I said, Hey, I'd love to get a conventional loan. What I didn't realize then was that conventional loans, the type of loans that you use to buy houses, those aren't typically used for renovations, and I actually pissed off my banker, because I said I was I was buying this house, I was planning to rent because I actually thought I was gonna rent it at the time, I ended up renovating and selling and a couple months later, banker got really upset and said, You know, I know you didn't do it on purpose, but you essentially just committed mortgage fraud you went from, you're gonna rent the house to sell it, I certainly didn't do it on purpose but I realized, okay, that's not the right thing to do so third deal, I went out, and I found what's called a hard money lender these are people in the industry, who lend at relatively exorbitant rates compared to banks but they lend they don't care how much experience you have, they don't care what your credit is, they don't care what your income is, as long as it's a really good deal they'll lend on it because they know worst case, if you fail, they take back the property so my second deal, I went out and I found a hard money lender, and he lent on my third deal, I went to a small local bank, and I learned that there are some small banks that will do investment loans on my fourth deal, I found a friend who had capital in his in his IRA, who was looking to do something with the IRA and I said, Hey, let me figure out how I can like, use your the money in your IRA to flip my house and so I figured that out and then my next deal I found somebody who, who just had savings and was looking for something better to do with it, than put it in the stock market because this was back in 2008 when the stock market had collapsed next deal, I actually found an equity partner, somebody that came in and I said you put up all the money I'll give you 50% of the profits and then after that, I realized that there a lot of different ways to finance deals in this business and my job was to go down each of these avenues and figure out for each deal, what's the right way to do this, at the end of the day, I found the one way that worked best for me and after a year or two, I just I did everything that way but it was an investigative process for a couple years and like anybody that's looking to buy and scale real estate business, this can be the hardest part of the business. But at the end of the day, if you do the legwork, if you build the relationships, if you are true to your word, what you'll find is, the more deals you do, the more credibility you build and the easier it is to raise capital, it's one of those, those horrible realizations that you come to is that capital is always available when you don't need it and the less you need it, the more easily it is to get it and that's where everybody starts but but it's just it's a lot of work.

Josh: Well, and I have to highlight a couple things there that you said, because I mean, even just reading between the lines, how many different iterations it took you and going from, like, you could be put in jail for something or have huge fines and you're like, well, at least he was he was gracious about it, right? But regardless, right, you had you went from there to where you are giving 50% of the profits to people and is that the model you still employ is is giving a 50% profits to the investors?

J: No. So actually, well, these days, I mostly I'm the guy that's investing with other flippers, so most of my flips, now I have somebody else that's doing all the work, I'm putting in the money and taking a percentage of the profits but for a long time, what I did was just private money and private money means people, whether they're professionals, family members, friends, people that have money, whether it's sitting in their IRA or their bank account, they don't have anything good to do with it, because they aren't too many great investments these days basically, they loan me the money, they take the piece of real estate as collateral, and I pay them somewhere in eight to 10% interest so they have essentially a guaranteed eight to 10% interest on their money, which is something that's difficult to get these days. And what I found was, once you've built up some credibility, once you have a few deals under your belt, once people know you and trust you, it's pretty easy to find as much money as you need going that route because there are a lot of people out there that would love to be able to make eight or 10% of their money without much risk.

Josh: Yeah. And that's, that's really cool to see that the way that you're running that I didn't realize you were on the opposite side of the billionaire these days and that's, that's cool I really love that part of your story and for those of you who are paying attention, I mean, your business is 12 years old, you said, 

J: Yep. 

Josh: So you started this right, at probably the worst time to start a real estate business, right, right in the crash.

J: So it's funny because a lot of people got out of the business at that point and so to a lot of people, this is the worst time in history to start a business but what I've realized over the last 12 years is there's no perfect time, and there's no horrible time at any given point in the market cycle it's either a good time to be buying a house, or it's a good time to be selling a house back then, it was really difficult to sell houses, there were very few buyers who were qualified, there were very few buyers who were looking because a lot of people were unemployed, a lot of people didn't have good credit a lot of people didn't have income or cash reserves. So it was really, really hard to find buyers for our properties, which is just the opposite of today, today, you list a house and you've got 30 people who are competing over the first weekend but back then it was really easy to buy a house really inexpensively we were buying houses for 40 - 50% of what they had sold for just a couple years earlier and so at any point in the market cycle in real estate, you're going to find it's either really easy to buy and hard to sell, or it's really easy to sell and hard to buy and so back then it wasn't any more difficult than it is now it just the difficulty was located in a different part of the process.

Josh: So yeah, and I absolutely love your mentality on that that is so cool because it's I mean, if it was any other business outside of real estate, you, you wouldn't be freaking out if your inventory costs grew really high, right? Because you're like, Well, I mean, it's it's just a cost it's part of what happens that part of the process so I love that and I think that mentality is where like your MBA and your business experience kicks in, instead of focusing on like, the home the real estate side because people panic and try and sell and do all these things and you're just saying, straight like a business.

J: And that's the thing when you understand and and and run your business like a business it's a lot easier to pivot when something happens I know a lot of people who are investing these days and for them, it's very formulaic. You do ABCD and that's great as long as external or even internal forces don't conspire against you but when the market changes, or your local economy changes, or the price of labor or materials changes, everything goes out the window because you have this formula, and now your formula is broken but the people that actually know how to look at their business and, and modulate things as necessary as things change, then external forces don't really matter I just last year, I published a book all about economic cycles and how it affects real estate investors and the big takeaway from the book is, there's no wrong time in the economic cycle to invest, you just need to modify your strategies, you need to modify your tactics because there are certain strategies, there's certain real estate strategies that work better in certain parts of the market cycle there are other strategies that work better in other parts of the market cycle. When you understand economics, when you understand investing, when you understand businesses, when you understand all of these things, it's not too difficult to twist in turn, and zig and zag. as things change and the best business owners are the ones that really understand the economy they understand the market, and they understand their business all at the same time.

Josh: Yeah, not Yeah, I hope people will look at that I mean, J’s written four different books on these topics. So if you want a deeper dive in these things, go check out his books, for sure and I mean, obviously, this gets covered a lot on your podcast as well but I want to ask you this question because I feel like your story is so interesting in the in the progression, right, you went from you know, flipping houses your sales rank as a as a company, but then you change your business model, you've become what people would call like an influencer, right? You've sold 250,000 copies of your book and become a speaker and everything. Can you kind of walk us through why and how you decided to pivot to those different models as well to scale your own business?

J: Yeah. So it's funny, I think I'm a little bit maybe a lot different than most people that get go the influencer route for me, it wasn't a choice I didn't say, hey, I want to become a brand, I want to build a brand for me, I originally wrote the book because I am an introvert and I was starting to gain some some popularity in the space because I was flipping a lot of houses I was writing about it I had a popular blog back in 2008 9,10,11,12 and so I started getting a lot of emails and phone calls and texts, people that said, Hey, can I take you to lunch? Can I, can I take you to get a coffee? Can I talk to you on the phone for 15 minutes? Can we email Can I get some advice and as an introvert, I didn't want to do those things like I love people but I hate talking to strangers it's just not my personality. I'm not good at it. And but I love helping people so my wife said, Look, there's, there's a middle ground, you don't have to feel obligated to take everybody to lunch or let them take you to lunch, you don't have to feel obligated to talk on the phone eight hours a day to people you can communicate, you can teach other people in other ways that are more comfortable for you and she was right I've always been a big fan of writing and I've always been a big fan of speaking to groups so I said, Okay, I'm going to write a book and I'm going to take all this information that I have and I'm just going to put it down on paper and that way when somebody calls me and says, Hey, I'd love to take you to lunch, or I'd love to hire you to consult, I can say no, just go buy the book and I didn't do it as an opportunity to make money, I basically just did it as an opportunity to free up some of my time and not have to do those things that I really didn't like and so I sat down to write this book, ultimately titled The book on flipping houses one of the chapters on estimating costs of renovation, ended up being like 250 pages in this book and so I said, Okay, I'm gonna break that out into a separate book so I became a second book snd so back in 2013, I launched these first two books, again, sole goal was, was just to just to get people to stop asking me to launch and here we are seven years later, and it has become the best selling two books in the real estate industry and we've sold a few 100,000 copies and it those two books kind of propelled my brand and so I started to get asked to speak more and to write more books and so for me, it was very much an organic type growth, both the brand and and the business and not something that I set out to achieve that at the beginning.

Josh: Yeah, and that's, that's cool, because the progression was like, You almost were just filling needs for other people right and, and that's, that's been, I think one of the big lessons, even for us at this early stage in business is knowing that you kind of have to figure out what people need and then just give it to them and in some cases, you know, it's you have to highly leverage your time I know for us, we had to pretty quickly say, you know, I only take one or two appointments a week of just kind of pick your brain calls, right? Because there's just there's not enough time in the day so I'm Michael, here's all my free stuff, here's the podcasts, there's his books, there's everything right and I think that's how you've structured yours, too is saying, instead of feeling like you need me look at look at what I have, right? Because I'm going to tell you exactly what this book says.

J: Yeah, and for me, it's always been great business owners provide more value than they take if you want to be if you want to be successful, your goal should be to add value to as many people's lives as possible, the more value you add, the more successful you're going to be I've always kind of lived by that philosophy and so for a very long time, I mean, again, I, I ran a popular blog for several years, I wrote a lot of articles for various real estate websites, I did a lot of speaking, I talked to a lot of people over lunch and coffee and the phone and email and texts and never did, I asked for a penny so for me, it was like, I never wanted to monetize it for a couple reasons. One, I always loved the idea of providing value, because I knew eventually it'll come back to me, I always loved the idea of not asking for money, because money obligates you to certain things, I never wanted to owe anybody a favor, I never wanted to, for somebody to say, Hey, I'll pay you $10,000 to coach me and now suddenly, they call me one night and I'm at my kids piano recital and they say, Hey, I paid you $10,000, you better leave that piano recital, because I paid you and I never wanted that obligation so for me, it was always give, give, give, give, give but the nice thing is you build up a whole lot of social capital doing that you build up a whole lot of goodwill from a community of people because they see that you're freely given. When I released the first two books in 2013, I had a pretty large email list and again, I had never asked that email list to pay a single penny for anything and I sent out an email to my email list. The week I released the two books and we sold something like 20,000 copies that week, which ended up being something like 150 or $200,000 in my pocket and this wasn't me begging people to buy the book. This was basically an email that said, Hey, I just released these two books. It's basically everything I know on the topic, if you're interested, feel free to go pick them up and the number of people that wrote for, I don't even need the books, I've done 50 flips already but you've done so much for me, I'm going to go buy them and I'm going to recommend them to all my friends and so I got a lot of emails to that point and what I realized was all the all the value that I had put out there for years was starting to come back to me and the number of people that started reaching out to me, Hey, I see you're starting to do more flips, I've got capital, I'd love to loan you capital, hey, I'm working on this this deal and I'd love to have you as a partner, companies that came to me and said, Hey, we're building a prop tech company you're an influencer in the industry, and you're highly respected, we'd love to have you on our advisory board and so for me that whole growing my brand, and monetizing it, again, wasn't something that that I initially set out to do but the fact that I was willing to give so freely for such a long time has come back to me many, many times over.

Josh: Yeah, and I love that. I mean, and honestly, like as a final note to the audience, I think that's really kind of the big lesson from this interview, you know, is, is it's about providing that value to people treating your business as a business you know, working, working with the different, like you said, the different departments and you should be building a company, instead of focusing so much on just being the brand, right and I, I love that.

J: yeah, treat your business think of your business as your job isn't to sell product, your job is to impact people's lives and selling product to them selling great product to them at a good value is one way to do that but there are other ways you can impact people's lives at the same time that you're selling them product and that builds goodwill, and that builds social capital, and that helps build your brand so at the end of the day, you've now not just sold them a product, but you you've, you've garnered their loyalty and their respect and, and they'll buy your next product and the one after that, and the one after that. 

Josh: Yeah, I love I think that's such a cool lesson and I hope people will pay attention to that and I want to give you a quick shout out for the podcast as well. If you guys want to learn more about this stuff, kind of really get into J's world here, go check out the Bigger Pockets business podcast, going to be a great place for you to really delve into that I know if you're listening to this, you are a podcast listener and so that would be the fastest way to get into J's world and the most comfortable way so go check that out and then reach out to J as well, and J, before we sign off, though, I have one final question for you. You know, we've covered a lot of different topics and I really would like to know what's just the one final lesson you'd like to share with our audience before we sign off.

J: Yeah. So take action and so I always say this in the real estate space, but it really applies to everything we do in the real estate space, we like to talk about the fact that most people never take action never do anything 99% of the people out there that I've met in the real estate space have never done a real estate deal they, they don't buy their first house, whether it's a rental or a flip, or whatever it is, they never do their first deal that's 99% of the people the other 1% of the people that I meet, have done five or 10, or 50, or 100 deals the one type of person I rarely ever meet in the real estate space as somebody who's done one deal and the reason is, if you do that first deal, if you're the type of person that doesn't give up until you get that first deal, you're going to find that the second one is so much easier and the third one's easier than that and the fifth and the 10th and the 15th are so much easier and so my biggest piece of advice to anybody is get that first big win because after you get that first big win, you're going to find that the second is so much easier, and the third and it all starts to snowball, and we all talk about not giving up and all the platitudes around working hard but, but the reality is, don't give up to get that first big win because if you can get the first you'll get the 5th and the 10th and 15th and the 100th