Measuring Risk and Reward In Today’s Market With Josh DeShong

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The real estate market is shifting, which could mean different things for different asset classes. How do you measure risk and reward for your investments? Here to help guide you is Josh DeShong, the Founder/Investor/Chief Problem Solver at Josh DeShong Real Estate. Josh joins Tim Herriage to share why it’s essential to understand the risk and rewards of every investment as we approach a change in the market. Some will do better, and some won’t. Don’t miss this episode so you can ready yourself with valuable expert tips and insight.

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Measuring Risk and Reward In Today’s Market With Josh DeShong

In this episode, I have an industry legend, Josh DeShong. Josh, thanks for being here.

Thanks for having me, Tim.

Josh, if you want, take a couple of minutes and just say a little bit about yourself.

I am Josh DeShong. I started in the real estate space at the ripe age of seventeen. I got licensed immediately after turning eighteen. I joined Keller Williams Realty and became one of the top ten agents in the country underneath them. I was a Wall Street Journal ranked real estate agent back in 2012. I decided to invest in real estate, but mind you, I had gone through the worst housing recession in history, and I did not know anything. I started investing in 2012. I did well in 2013. In ‘12, I bought two houses. In ‘13, I bought over 30, and then in ‘14, I bought over 100. The story goes from there.

I started buying, fixing and flipping, holding for rent, and then I started wholesaling. I came at the wholesale business in the opposite direction. I think most people start with wholesaling and then they get into the fix and flip. I went the opposite. I went fix and flip into wholesaling. We built a platform for wholesalers and investors to give them a safe to transact. The high level is me.

You are a bored person that never does anything.

I bite off more than I can chew most days.

I like to start each week with what I call the Bottom Line Upfront. When I was in the Marine Corps, we would brief the general and we were always taught, “Never bury the lead because the general may have to get up and it may be combat or there may be mortars coming in. You have got to make sure that the general knows the most important thing.” I start each week with two minutes to talk about things they should be looking at in the market and things you think they should be doing if there is anything you think they should not be doing. It is just two minutes, you and the audience.

This is a perfect piece of the segment. I have been thinking about what I would share, what I think is important, everybody should know and be paying attention to. I was reminded of a conversation I had. I was talking to an investor and he said, “I only care that I make $20,000 per deal.” I thought that was an interesting statement. This particular investor buys 20, 30, or 40 houses a year. He is a very experienced investor, but I was reminded that in times of expansion, opulence, and everybody is doing well, we tend to lose sight of what matters and forget the basics. With that statement, what matters?

I challenged that person. I said, “Would you be willing to make $20,000 on a $100,000 deal?” The answer was yes. “Would you be willing to make $20,000 on a $3 million deal?” The answer was no. Clearly, it is not, “I need to make a $20,000 minimum.” We have increased risk. You should size the returns you expected against the risk you are willing to take and understand that for every property you buy, you are taking risks. Whether you are buying in a high-end area or a low-end area, it does not matter. Everything has risk associated with it, and make sure your return expectations are properly aligned.

Risk versus reward. I will tell you a funny story. I was in Vail and my wife texted my twelve-year-old. She says, “What are you eating for breakfast?” He says, “I am making cinnamon rolls.” I am like, “What?” She says, “Who is helping you with that?” He writes back, “I read the constructions.” He still calls instructions constructions because his entire life, he wanted to know how to build something. I would say, “Let’s get the instructions.” In his mind, he was saying construction. I grabbed the phone. I call and I was like, “Stop.” He was like, “Dad, I am hungry.” I was like, “Your grandmother is there. Get her to do it.” To him, he just wanted the reward. He was not worried about the risk. Here in the DFW market and in every market, we have not had to worry about risk.

That is something that has been thrown to the wayside. We are talking to many investors. I think it is a national thing.

What type of risks are we looking at?

If you look at the economic makeup of communities, different classes are going to be affected differently in the future. Property values could come up or down. Rents are going to go up or down. That is going to happen differently based on the price point that a home is in. I think the biggest risk that investors face is not properly understanding an area and what they should be making relative to the inherent risk that area possesses. For instance, a rent-heavy market could absolutely affect home prices. You have a high degree of quite a few tenants.

What is controlling housing prices in that market might be more tied to the property values than somewhere like Plano, where a lot of people want to move in and live. If yields get compressed with rates increasing, you are going to see a lot of people pulling out a Lewisville. You are going to see a lot of investors pulling out, which could cause some price instability.

One of the biggest themes that I have found with the guests on this show is 1) I am not as smart as I thought I was. 2) They monitor data in little unique points of information that I had not even thought of. That was one of them. We are going to talk about the market makeup or the saturation later. What are some other potential risks or things that you see happening in the market?

There are a lot of people that have used debt improperly. You have got a lot of people who have not used debt properly at all. The people that use debt improperly are going to face some compression. Their yields are going to get tight and it depends on what they are going to do next. Are they going to deed in lieu or sell off to an institution? That will be interesting to see. There has also been this other weird component where people have done cash-out refinances and bought cryptocurrency. There are a lot of investors who have done that. What is going to happen? I do not know. I do not think anyone does, but those are risks. Those are outlying risks that we need to be aware of because they could cause a domino effect.

When we look at JP Morgan, Wells Fargo, and Citibank reports, we see all of this money people have in their savings accounts. You look at the trillions that have been generated, the rise and fall of Coinbase and Robinhood, and some of these altcoins. I will not go into the basic fundamentals of cryptocurrency because we will get some haters there. “This coin is not backed on anything. Let’s buy 5 million of them and hope it goes up 0.001% of a cent so I can make some money.” I am talking about Shiba. It was down 90%. If you did take a cash-out refi, you stuck it in there January 1st, and you held the line, the line has almost evaporated. That brings on another value store inflation. How are you ingesting your real estate business or businesses to deal with rising rates and inflation?

Since 2020 started, my plan has been effectively the same and I have not changed it. I am trying to stay pretty from cash to debt, to trapped equity, to assets. I am trying to stay even across. That way, if the markets continue to grow or we continue to see inflation, I have real estate assets. Inflation is a natural debt reduction strategy. If the value goes up, the debt does not change. I am also hedged in a way that if the markets go down, I am in a good buying position. I have not been all real estate or all equities. I have been cash, real estate, or commodities. I am pretty even in debt. I am thinking of debt almost like gold.

In 2021, my wife and I did dozens of loans with RCN Capital. Some of our rates were below 3.5%. For some of them, we even paid prepayment penalties on the previous debt just to go ahead and do it. I think our portfolio is levered at 67%, right under 70%. I told my wife, “That debt is almost an additional intrinsic asset that is attached to the property.” It is funny to hear you call it trapped equity. I have seen a lot of people talk about this and say debt equity, trapped equity, or unrealized equity. It is an interesting line of thought. I liked the ideology, but I have never heard it positioned that way, Josh. It is a tool to harness inflation.

I am getting geeky on you here. I like to think and learn to think the way other people think. One of those people who talked about debt equity was talking about getting rid of their debt equity and getting into multifamily. I know that you and I have both studied a lot of history. We look at units coming online, available housing inventory, and cost per square foot. You can quickly find things that are out of line. What are your thoughts on multifamily?

The definition of a bubble is something not everyone can see or most people cannot see. I think that if there is a bubble in the housing market, it is more on the multifamily side than anywhere else.

Josh, I want to stay on multifamily because I like people to send me hate mail. I have seen a lot of balloons, adjustable rate mortgages, and 2% and 4% cap rates. I am comparing a lot of what is happening in the housing market to the early ‘80s. In the early ‘80s, inflation and interest rates were at all-time highs, more than 2X what we are at. Yet, single-family values continued to go up. Housing units sold per capita were at a nearly all-time low. We are below that, but multifamily construction and deliveries were chugging along.

In the late ‘80s, the bust of the savings and loans in the DFW area was not single-family. It was multifamily. If you drive along Garland, Texas, there are still concrete pads along the highway that never got built. We will not talk about the guy’s name Faulkner. Long introduction, what were your thoughts on multifamily?

I agree with you in many respects. I could make that picture even scarier. If you think about what happened in the housing crash, it was not that people got loans they should not get. It was also that those people were bundled into mortgage-backed securities that were improperly rated. There wasn’t alignment and understanding of what type of borrowers should go into which bucket. It is the same thing we talked about earlier in the segment, risk to reward. What happens is you take somebody who is truly a BB borrower, you put them in a AAA bond, and you are selling that AAA bond at a AAA return, but you are not factoring in that new risk on that BB buyer.

One of the big problems that led to the housing crash was the misallocation of how we were bucketing risk. Banks then took bets on that risk and how it would perform. Private equity took bets on that risk. Everybody was betting on something that they did not understand the makeup of. What would you say, Tim? Was it 2014 when all the syndication started going nuts?

It was ‘14, ‘15, and ’16. Everybody was a syndicator at that point.

What they were doing is they realized, “There is upside on yield. Let’s go find a C-class property. Let’s slap some lipstick on it. Let’s call it a B-class property now. Let’s get a bunch of C-class tenants that were willing to pay B-class rents so we can now sell this property as a B-class property,” but it is not. To the mortgage piece, if a certain percentage, just like with the mortgage-backed securities, of those tenants fail or those certain percentage of those borrowers fail, the whole thing comes crashing down.

Interest rates are going up, meaning access to capital for these owners is not going to be something that is easy to acquire. If their tenants start falling out there, we are going to have some problems. I see that as a big issue. It is hard to get all the data centrally located. There is definitely something there that we all should pay attention to.

I remember in 2006 and 2007 when I was flying around on American. Back then, in first class, they had a magazine. We do not do magazines anymore. I remember right before the crash how every page had a different condo high rise that was not built yet, but if you are willing to wire them $500,000, you can go ahead and get yourself a spot. There is a lot of that. I was in Miami and there are a lot of cranes, but I do not want to belabor this point, but you did say crashing. We are going to talk about that later. What are some things that have been some challenges for you in this business or industry?

Sizing risk, since we are talking about that, I would say that is a big one. I would say not getting longer-term debt. When I got into real estate, everybody was preaching 15 years and not 30s. Knowing what I know, 30s are better and you pay down with your additional cashflow, but 30s allow you to be more flexible. For your 10, you got to get your Fannie Mae 10 allotted. After that, build strong relationships with banks. I would say that would be number one. The biggest mess-up I have made is not keeping a lot of the houses we bought and sold over the years.

It has been a difficult number of years of driving around neighborhoods, and it is like, “It is sold for $250,000. We used to buy that for $40,000.” I bought a lot on Canada over by Trinity Groves one time for $3,000. The lot is worth $200,000. If I built a house on it, it would be worth $500,000. There is a lot of that. The biggest piece of advice to investors has been, “One more.” They will say, “One more, what?” “Just keep one more, whatever it is.”

If you plan to do 11, do 12. If you plan to do 20, do 21. After 22 years in the business, it would be well over $5 million in net worth. We are not talking about asset value. It would be over $10 million in assets value and $5 million of net worth. A small correction on the 30-year loans, once you have got your Fannie Mae 10, you can come to talk to our side.

It is a huge advantage. That was not a thing years ago. You could not get long-term debt.

Before the crash, we were paying 9.25% at the bank. It was a 2:1 adjustable. We were happy. That was a good race.

They had massive equity requirements, and they still had all those things. That is insane.

That is another thing that is going to hurt investors. The people that did not listen to me were screaming from the rooftops to leave the banks. I remember April 2008, like no tomorrow, when First Bank of Canyon Creek in Richardson, Texas called my line up. It was a dark time for me and my wife. Thank God, we had enough relationships and a big enough network where we were able to get that line cleared off.

All in, I found out the reason my line got called was they knew I could pay. The people that they did not think could pay anymore got workouts. Their lines did not get called. They got reduced interest and a sweet deal. If someone is out there reading, they just need to understand. You may be thinking, “I am bulletproof.” If you are bulletproof, you are the one they are going to ask for $1 million because they are like, “He has got it. We want that.” On that topic, that was the worst thing I ever went through. Talk about your biggest loss or negative thing in the business.

This is one of those things we talked about. There are two dozen answers here. I can tell you we made a $500,000 mistake once because we tried to get too smart. We knew what we were doing. We started using advanced email systems and lead routing. A lot of our leads were going into La La Land. We backed in. This was in the brokerage space. We were able to quantify what our loss was over a twelve-month timeframe and it was $500,000. Thinking you know what you are doing, always check to make sure you would still do. That was a big one. There have been so many.

Let’s be positive. What about a big win, something that went your way?

I got one that is good. It is a loss that we turned into a win. Years ago, when we were running our brokerage team, JT, who is a head of sales at our organization, was managing some of our agents. He is making sure they were hitting their leads and calling everybody they were supposed to. We get a lead that almost looks like spam. It comes in and we cannot tell what they are asking for, but they are asking to buy property.

The agent who had the lead had been sitting on it for three weeks. Our sales manager, JT, at that time, saw it and said, “What happened to this? Let’s call them and see if we can get them in the office.” It turned out that one client was the biggest relationship in our company’s history. It generated $10 million plus in revenue for us, all from a lost lead. That is how we turn a negative into a positive.

All too often, it is still a numbers game and a people business, whether it is on the retail, wholesale or property management side. The math is the math and the percentages are the percentages. If you are not dotting your I’s and crossing your T’s, the percentages in the math will go against you pretty quick. It is time for The Money Minute. Imagine there is an entrepreneur, an investor, or someone reading out there and they are only going to get 60 seconds of advice all month. This is it. The volume is shut off after this. Pour into them in 60 seconds.

Sixty seconds to tell you, build a freaking plan. Often, people say, “I am going to build a plan. I am going to plan all this stuff out.” A plan is very simple. It has two things. Number one is what is your objective? What objectives are you going to hit in six months or twelve months? Put the number up. You do not have to come up with a lot of thinking, “I am going to flip 5 houses in the next 6 months. I am going to do 10 over the next 12.” Come up with a number.

The second thing is to come up with the criteria for which you are going to buy. That is your buy box. “I need to generate a 20% or 40% cash-on-cash return.” Come up with your investment buy box, tie that in with your plan, and then start to execute. You will figure out the how over time. You do not need to figure out the how now.

You do not need to figure out the how today. The how confuses a lot of people. What is your why? This is rapid-fire.

My why, my driver, and what I learned a long time ago was when I started in real estate, I had nothing. I started with $500. I was hustling things off Craigslist. I was going out and buying a PlayStation, marking it up $50, and selling it to somebody else while making cold calls in a real estate office. Originally, my why was all about money. I liked the game of making money. It was not that money made me happy. I just really liked the game. What I realized in 2012 and 2013 was my passion is for helping others and seeing others win. I will always win as long as I focus on making others successful. My wins come with that. The more I focused on other people, the more I won.

That is fine. That is money because it is very common when you look around. Successful people, by large, are people that lift other people up.

The game goes from, “I need to make money” to “How do I make money through people? How do I make them more money? How do I make my customers more money?” It is leveling up.

Are there any risks that are a red line for you that you will not do in your investing business?

Every risk we have is combined with a return. There is nothing I will not buy if the return is great enough. What I mean by that is if you called me and said, “Josh, I have a hangar out in Tyler, Texas.” I am going to be only offering pennies because I am not going to be able to generate the same return that maybe a pilot could. I will buy anything as long as the return is properly sized.

Saturation in certain markets like Lewisville, the example we used earlier, and then we were also talking about 50% of home sales in Tarrant County in, where it is institutional. Do you think that is a big problem nationwide? Is it localized, or is it not a problem at all?

There are two things. It is sad because the American Dream is not quite what it was at one time. That stinks. Aside from that look, in the future, there is going to be a subset of the single-family inventory that is institutional or mom-and-pop investor owned. The majority of Americans will rent their house until they hit a certain age, and then maybe they decide to settle down and plant roots somewhere, but maybe they do not. Maybe Americans in the future will be more transient.

When I look at the United Kingdom and have talked to some people, I feel like we are heading that way. If you live in a major Metro, you do not own, and if you live in the country, you own. When I look at my nieces and nephews that are in their late twenties, I can absolutely see most of them never owning a house. They have no desire. One of my nieces makes damn near $100,000 a year and would rather rent. They’re not sure about things. They also watched the foreclosure crisis wipe out their friends, families, and houses. Maybe the next generation will really want to own a home. You used the word crashing earlier. I think you were talking about multifamily. Do you feel like there is going to be a housing crash?

No, not even close.

Do you feel there will be further equities, bonds, and stock market crash?

I am not a trader, but I would say that there should be in certain sectors. If it was a SPAC deal, probably. If it made its way to the public markets via an acquisition, then there is still more room to fall. Looking at other parts of the market, there are definitely sectors that are very healthy. Healthcare is not going to slow down in the future. I think it depends. That sucks to give you that answer.

I am invested in crypto. I believe in blockchain technology. I think there is a bigger crypto crash coming and it is going to get worse. I would tell your readers to think that back in 1903, there were 3,000 auto manufacturers. Three of them made it out Chrysler, GM, and Ford. The odds that they are going to pick the right altcoin or Bitcoin is the one that makes it are slim. Just understand. You better be expecting a high return.

I will never forget the US digital dollar comes out in 2023. You talked about bond buyers. As you know, as we secure ties, so it is all about the bond buyer. Now that the Fed is not the largest AAA bond buyer, I think we could get to a point where we have a liquidity squeeze on the bond market. It is the risk-reward. The yield has got to go higher if you want to take risks with your capital. Do you think we have topped out on interest? What do you think we top out at on single-family, FHA purchase, and 30-year mortgage interest rates?

7.5% to 8.5%. I think there are two trains of thought here. 1) We may be in a post-interest rate world. The Fed just has not realized it yet, or 2) The interest rates are going to rise and incomes are going to rise justifying that.

Personally, I feel like we had a hard reset and we just have not acknowledged it yet. When I look at my hometown McDonald’s, they are paying $15 an hour for people to show up. In what world do we get to where a McDonald’s can get that wage back to $10, $8, or $9. That is a 50% decrease. When I look at it, Amazon’s $18 an hour was their starting wage in 2021. Before that, it was $12. Everywhere I look, hourly wages of production employees, maybe not people that work their brains and remote from home, only got a 5% or 10% increase, but the core of the products, services, delivery, fulfillment, and creation got significant raises.

It is such a long conversation. I am going to stop saying it, but I do want to give you a chance to talk about with regards to your trapped equity. That will be the nice bow we put on it. Are you thinking you are going to go get more of that equity out? Are you thinking you leave it the way it is? In the future, how are you viewing that trapped equity in our inflation situation?

I am holding. I am being very cautious. When I start doing stuff, I will be a buyer. I will use my cash first then I will start tapping my equity.

I want to give you a chance for parting shots, parting thoughts.

Two things. You only fail when you give up, and rich people buy time and poor people sell it. Think about that.

If someone wants to get ahold of Josh, where do they go? Who do they call? What website?

Add me on LinkedIn, Josh DeShong. Feel free to shoot me an email, Josh@Trelly.com. My cell phone number, text me, (214) 679-4155.

Brave man, the second person to give out their cell phone. Hopefully, we will do a good job and get you thousands and thousands of personal phone calls. Josh, it has been a pleasure to sit down with you. Thank you for coming in. Thank you for joining the show. That is it for this episode. We will see you next time. Remember, your network is your net worth, and now, you have been growing both. We will see you around.

Important Links

• Josh DeShong – LinkedIn
• Josh@Trelly.com

The following podcast program is furnished by RCN Capital LLC.  The information provided is for general educational purposes only and does not constitute any legal, tax, financial, investment or other professional advice. The views, thoughts, and opinions expressed of any speaker are the speaker’s own opinion and do not represent the views, thoughts, and opinions of RCN Capital LLC.   No information contained in this episode should be construed as financial, investment or legal advice from RCN or any individual, author, host or guest. You should always consult a financial advisor before investing.

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