LMSM 107 | Recession


The Let Me Speak To A Manger podcast predicted this recession months ago, and now the only question left is how deep it will get. In this episode, we talk about steps we are taking in our businesses and with our investments as we head into a highly uncertain 2023.

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10 Steps You Should Take Before A Recession


Ian, you son of a bitch.

How’s it going? You got some bags under your eyes. You look tired.

The things that are worrying Ian and me these days are baseball cards and the oncoming recession. If you are curious about what we talk about behind the scenes, it’s a lot about baseball, trading cards, and what’s going on in the market. We came up with a new segment. We call it News vs. Noise, which is something I have been talking to my team about. I love that name.

Did you like it?

I love it.

I stole it from you. You didn’t know you came up with it but I stole it from you.

I wouldn’t have thought that we should name it that but during a segment, we are going to call it News versus Noise. There’s a lot of noise and a lot of bullshit. There are a lot of things that are going on but what’s the news associated with it? As for the recession talk, we are in the middle of it. I’m in the home building sector, and the home building sector was frothy for a long time. It was irrational for a while. I know it was a huge run-up.

Interest rates have changed drastically, so your buyer base is changing. The market is different. What we look at in our business is how we can sell things. It is not as easy as it was. Are we doing anything irrational? No. I’ve grown a business from being just me many years ago to having over 50 people. There are different pressures and things you have to pay attention to. Those are the things that I’m thinking about. It’s like, “Where’s the market? What’s going on with the market? More importantly, how are we going to make it through and thrive?” Those are not easy things to do but they force you to get focused and make some changes.

Frankie was telling me that he got up at 3:00 in the morning and came down. Part of that is because he drank a lot of wine, and he hasn’t slept well for a couple of nights. He’s got a lot on his mind. He’s got a big payroll. He’s got a big company. He moved into a brand new office, which is beautiful, in Richmond. I’m a part owner and very proud of that. That’s all well and good.

You look at it from the outside and think, “It is an American success store. It’s fantastic,” but that’s a big-ass payroll. That’s a lot of expenses. To own the number of assets that Frank owns that’s a lot of debt. That’s a lot of interest he has to pay. It’s not like Frank can sit back and chill. With those expenses, you got to keep hustling. You got to keep bringing in revenue or something has to change.

2022 is winding down. We’ve talked about this several times, and with the recession, we are probably in it but the real estate market hasn’t felt it hard yet. You are starting to see cracks everywhere in the real estate market. I would say the real estate market is in the early 1st or 2nd inning of a little downturn here that we are going to see. As you look at your business and going into 2023, as you plan, what’s got you most nervous?

What To Do In A Recession?

What you can rely on is what makes me the most nervous. What I mean by that is we’ve got a business. We are fourteen years in. We know we can dispose of properties in a certain way or a value of a property. It is easy to be in a rising market because if you buy something during a period of speculation or value add, the market goes up. If material prices go up or you hold it for longer, you’ve got an opportunity to not lose money or maybe even make more. The market is rising faster than your screw-ups are costing you. When the market shifts, you’ve got to be mindful of where you are buying and going to sell it.

In my business, we buy property. We add value to it through a renovation in most instances, and then we sell it. You’ve seen the TV shows and pictures. That’s what we do. There are three ways that you can get it wrong. You can buy it at the wrong price. You can spend more on the house by either holding it for too long or construction costs costing more than you anticipated. You can guess that what you are going to sell it for is higher than what you sell it for.

Number three has been out of the picture for years. It was either you are flat or you are going up for the last couple of years. You are selling into a market where you don’t know where the price is going to be. What you have to look at in a lot of instances is what certainty is. Certainty comes with speed. What we are doing is we are selling some stuff that’s in inventory that we have been carrying for a year. You must go back to the city, get a permit, and renovate it.

When selling in a market where you don't know the price, you need certainty. And certainty comes with speed. Click To Tweet

What we are looking at is inventory that we can move much faster. It’s not going to take a year or whether I can pre-sell it. You’ve got to be looking at what you are saying yes to. It’s critical. That’s a big thing. What will the market buy it for? It’s also a moving target. You’ve got to adjust to that. What you used to take for granted in a different market, you’ve got to spend a lot of time thinking about.

Let’s compare this a little bit to the stock market. I imagine most people that tune in to this show pay attention to the stock market if not owning 401(k) in stocks themselves. About everyone is down some 30%. When a recession is coming, there’s what you hear as the flight to quality. That means people make fewer speculative bets. They are not betting on companies that aren’t making a profit. They are not betting on companies that have high earnings-to-price ratios or price-to-earnings ratios. They normally go to more stable company consumer goods. You think about Nestle or Procter & Gamble, the things people need and necessities.

I only spend money on necessities. What you normally see too is that a lot of money goes into companies that pay a dividend because I’m getting cash a little bit. What that’s saying is, “I don’t care if my stock goes up much. I don’t want to go down a lot and want to get a little bit of cashback.” You see people change. When you are in a go-go economy, you are buying high-tech stuff where the earnings might not happen for five years. All the money has been sucked out of that. I’ve seen that change in the equity market.

It doesn’t change how I invest. I invest in companies that generate a ton of cash and reinvest that cash into their stock. I haven’t repositioned a lot of my stock. Maybe I got rid of a few other things that were more speculative of bets. In your world, it’s interesting. You are going from a real estate market where all of it worked. Fix and flips, retail, wholesale, buy and hold, and collecting rent worked. There’s not an aspect of real estate that didn’t work for 5 years, and that’s what 0 rates from the Fed do. It had lots of stimuli. In the world you are going into in ‘23, I have to imagine there’s going to be a flight to quality. I wonder what you consider quality to be in a world like 2023.

This is going to get a little bit granular but Ian does a good job of taking it more macro after I make it granular. In the last downturn, people lost their jobs in mass, and they needed to find things to do. I’ve said this before but cable television played a huge role in creating the gig worker or the gig economy. It goes further than driving an Uber.

LMSM 107 | Recession

Recession: Cable television played a huge role in creating the gig worker or gig economy. Your passion project could become your full-time job. If you have an eye for real estate, you can buy houses and renovate them.


It’s because of Anthony Bourdain. Everyone thinks they are a foodie. You can have a small little restaurant that you can get for almost no rent in a recession and try out all kinds of crazy food. That could become your passion project and a full-time job. We saw that. Shitty little places like Richmond, Virginia, have awesome food but so does every other place in America because America and cable TV wanted to be more exploratory with what they ate. These little businesses became thriving businesses, and there was great food everywhere because of it. That’s an example.

How does that relate to real estate? Cable television said fix or flip, flip or sell, or Fixer Upper. There are hundreds of TV shows. The bad rapper from the ‘90s, Vanilla Ice, has two different shows on how to flip real estate. That shows you were at a peak market. The point is this. A bunch of people that had jobs they didn’t like that got fired, figured, “I’ve always had an eye for interior decorating or I spent a summer on a carpentry crew,” so they buy houses and renovate them.

What I do is I find houses that they want to renovate and sell them to them. What I need to understand is how good business people were these people. Were they a carpenter that was good with math or that sucks at math and were getting lucky? I’ve got to figure out, “Can I still rely on that person to buy my stuff or do I need to figure out another way to sell it?”

What we are doing in real-time is trying to sell it to the person that had the job and for ten years has flipped houses. If it doesn’t work, what’s the pivot point to a different way to dispose of it? Our overhead is significant, and we need to make revenue every single month. We’ve got some of it in the can already through the rentals that we collect, property management fees, and other things that are a little longer-term. You’ve got to have active money coming in the door and have uncertainty around that. That’s what you have. That was my best way of explaining it.

If you look at all of your assets, are you looking to shed any percentage of them to try to lighten the number of assets that you go into 2023 with?

Take What The Market Gives You

One of the things I preach at the company is to take what the market gives you. I’ve talked about it here. We did a huge refinance. It was 200 doors. We refinanced all of it under 3.75% interest on 30-year fixed terms. What does that mean in English? The debt is super cheap and fixed until I’m 76 years old. I’m in my 40s.

How much debt did you refi at 3.75%?

Almost $40 million.

Think about that. If you wanted to go out and get a $600,000 home loan, one home with a lot less risk than that, you would be at 7%. For the average person, if they tried to get $40 million of debt, they couldn’t because they don’t have Frank’s track record. They would be playing closer to 10% hard money rates to get that kind of debt. For you, what was your average handle on that debt before it was 3.75%? Was it 6% or 7%?

It was somewhere between 6% and 7%.

What does that save you per month in interest cost?

I haven’t modeled it at 7% but from where I used to be to where I am now, changed it by about $350 per house per month. To multiply $350 times $200 times 12, it’s significant. It is well over $1 million.

Is it $70,000 a month? $350 times $200 is $70,000 a month. That is $840,000 a year. That is a massive amount of real cashflow accretive expenses by making that change.

You did nothing different. It’s not like you have to operate differently. It is who you mailed the check to. We’ve got that locked. I’m going to hold onto those forever because that is really low debt.

What’s interesting is that debt instrument has become an asset. It is almost more valuable than houses. Let’s say rates kept going up to 7%, 8%, or 9%. With someone that wants to compete with Frank, why would Frank sell those where taking on any new houses would double his interest payments? He wouldn’t.

Debt instruments have now become an asset almost more valuable than houses. Click To Tweet

It is not a time to acquire rentals. It is time to generate cash. What Ian said is, how am I going to lighten up my balance sheet? The things that are locked in and fixed aren’t going anywhere but the stuff that has variable rate debt is not locked for 30 years.

It means your expenses have been increasing every month for the last couple of months.

They could be locked temporarily. I’ve got a 5-year lock on a bunch of stuff but we are 18 months in.

You probably have some stuff at 12 or 6 months. You have some probably monthly variable stuff.

Everything else that I have as a rental is either on short-term debt that needs to be refinanced or it’s financed with a local bank, and the local bank has five-year resets. I did most of this a few years ago. I’ve got 36 months to 48 months left before it resets. The opposite of saving $350 a month does reset. I have to spend $300, $400 or $500 more, depending on how high it goes, or to simply carry the home. What I’m doing as to how I’m lightning it off and how I’m going to generate cash is I’m going to sell that.

That’s interesting. You are making a decision to shed some assets based on the type of debt it has and not so much ZIP code, age of the property, or whether it’s a rental or a fix.

If it’s a fix and flip or a rental, that’s differentiated by the pricing box. If it’s a flip, it’s still a flip. I’m looking at my balance sheet based on where the bank is and what the debt instrument looks like. If it doesn’t have a longer-term debt instrument, those are the things I’m moving.

LMSM 107 | Recession

Recession: Look at your balance sheet based on where the bank is and what the debt instrument looks like. If it doesn’t have a longer-term debt instrument, move those things.


I got it. In an expanding market, you expand your criteria. You widen out the radius of where you will buy. You will buy on the fringe because there’s so much competition in the center of town. Are you going to look to maybe tighten that radius a little bit closer to where your office is?

Analyze What You’re Buying

I refer to this as the lasso. Almost everybody has seen a map and knows where Washington, DC is. It is the Washington, DC lasso. An hour in every direction will take you into Virginia, Maryland or maybe even up into Pennsylvania in some instances. I don’t think you hit West Virginia in an hour but if you took it out two hours, you at West Virginia and Pennsylvania. You go into deeper parts of Virginia. An hour versus two hours matters for this reason.

When the last recession happened, the lasso around Washington, DC where Ian and I both lived during in, tightened. People would drive for two hours. No one wants to drive two hours to and from work. It’s miserable but they were willing to because that’s where they could afford it and where their kids could have a yard. What happens is that in a recession, people that are talented are still employed and have better choices.

The lasso tightens. The market at two hours out goes away or greatly diminishes, so the price goes way down. You could buy something in the last recession 30 minutes from Washington, DC, that was the same price as what was two hours from Washington, DC. The lasso around the cities tightens. What we do in this part of the market is not speculate on anything other than the absolute best parts of town. We go after the best neighborhoods, best schools, and best of the best. We will speculate in about a 5-mile radius in Richmond, and that is it.

It is the flight to quality.

It is the same thing as trading in speculative stock with Costco or Apple. I don’t know if either of those pays a dividend but they both have tons of cash and are market dominant. That’s exactly what we do in this segment of the market. The other thing we do that is interesting is I want to buy houses that do not require a permit. I don’t want to break the rules. I want to follow the rules and do what the city and municipalities require.

What I will do is I will pay a lot of attention to what kind of work is needed. Is it a lipstick job? That doesn’t require a permit. If I take out the cabinets, put new cabinets in, and paint them, you don’t need a permit for that. You get to keep going. Speed drastically changes. Real estate moves much slower than the stock market. As we are recording this, the stock market went up 1,500 points in 2 days. What percentage was that? What was the percent move in the market when it went up 1,500 points in 2 days?

It was maybe 1% in a quarter.

The market is trading at what? Is it 30%?

We didn’t go up 1,500 in 2 days, though. It was up and down during the middle of the day but at the actual close, it didn’t. It may be moved a few points in a couple of days. That’s right after it went down 4%.

When we are recording this, it went up by 7% and 8%. I was watching Cramer at 4:00 in the morning. It is a plus 1,500 in 3 days, which, when the market is trading at 30,000, that’s a 5% move in a couple of days. It has been a downward slide before the move. The point of the matter is that the stock market is liquid. It can move 5% in two days. Real estate doesn’t. Real estate might move 5% or 10% over 6 to 12 months. If you can get in and out of an asset in 90 days, which is a quarter, and you don’t need a permit, you can do that. What you have is the ability to know what your downside is. That becomes insanely critical.

If you buy a $100,000 house and you know, “This can drop 10% in the period of time,” you can then build your numbers around that. Ian is better with the stock market than me. This is the news that I watched. That’s what you have to factor in. You are like, “Here’s where my profit is. Here’s where it’s going to sell for. This is my profit number. My profit number needs to be big enough to also allocate for a potential down.”

I have been doing this for several years. My average profit is 17% on a flip. That includes my losses and everything. My absolute best houses are 30% to 40% profit but those are super rare. Seventeen percent is the number. If I can get in and out at 17% and can drop to 10%, I’m getting my money back and I’m still going to have a little bit of profit. I need to find houses where I can do that quickly. That’s how we are analyzing what we are selling or buying.

I’m going to press you on this. In 2021, you would look at a house that you might have to put $200,000 into and going to build into a luxury home. Is that off your plate when you are going into a recession and saying, “I’m not sure I’m doing that with mortgage rates where they are at and a messy supply chain?”

The way that I would summarize this is, am I going to change who I build a house for? The answer to that is hell yes. I’m building for a discretionary 2nd or 3rd time move-up or a luxury move-up buyer. I’m selling houses that are $7,000, $50,000 to $1.3 million. If you include personal residences, I sold three houses for over $900,000 up until 2020. Since 2020, I have probably sold a dozen that are over $900,000.

We are not going to live in the $900,000 bucket anymore. We are going to live in the $500,000 to $800,000 bucket. That constitutes a product that we know how to build well but it opens up the market. There are huge profit rips at these big numbers, up to $1.3 million. If you make 17% on $1.3 million, it’s a hell of a lot more than making 17% on $100,000. We are going to lower down the affordability box to be able to attract a wider audience. We are going to do it in the absolute best neighborhoods because they are still desirable in any economy.

Is there a market that gets so scary that you don’t want to build at all? Do you just want to buy only rentals and hold?

Finding The Buyer

For sure. With the way my business is built, we need to be able to buy things. This is what will happen. I’m going to ask you these questions because you are a former mortgage guy. What type of loans typically come about in a downturn?

More government. You will see more FHA. You will see more VA loans that come in. You are going to see people squeeze deals. You are going to see the market shift from a 30-year fixed market to 5 or 3-year ARMs. You are going to see buy-downs coming in. What happens is builders and sellers will press the buyers to get more creative with the financing they use before they drop their price. They will try to do anything they can through the mortgage instrument not to have to drop their price, and that will be more creative.

It has been a pretty vanilla 30-year fixed market for a long time because rates have been so low. At a 7% 30-year fixed, people can’t afford the same price as they had. That’s why you are seeing sales have stopped. You will see the mortgages get more creative until the sellers figure out, “You can’t get more creative. We have to drop the price.” Those that have to sell will drop their price. Those that don’t have to sell will continue to live in their house.

A fundamental thing happened. You said they will go to government loans. When executive-level people get a mortgage, they get a mortgage of what’s called a conventional mortgage. It’s somewhat securitized by Freddie and Fannie but it is mostly banks that do it. It’s a higher dollar. It’s a higher ticket value-type of price.

Ian and I have covered this before but what happens in recessions is that the loan mix of government loans goes up. It goes up significantly because the government wants to keep the market moving, and they don’t want housing a major component of the market. The government will take on riskier loans or they will stimulate a little bit so more people will buy. What that means is that the people who can afford $1 million become way less than the people who can afford an affordable product.

LMSM 107 | Recession

Recession: What happens in recessions is the loan mix of government loans goes up. The government wants to keep the market moving, so they’ll take on riskier loans so more people will buy.


Every market is different. If you look at FHA limits, FHA limits are pretty high. In Richmond, there are over 600,000 as an FHA limit. That still means as nuts as that sounds. If you live in a $300,000 house, that’s not affordable. It still is affordable according to the government. The government will stimulate it. What we will do is continue to do flips but will do it in that market.

You asked a question about, “Is there a market where we will stop buying?” Perhaps, but most likely not. What we need to do is we going to get more creative about finding the buyer who wants to live there, not find the buyer who wants to turn into a profit center. We’ve got to think through how we acquire in a way where someone can get an FHA loan on a property that we found below market. This gets complicated but that’s where I’m spending my effort. How do we put a deal together with a seller who’s motivated or connect the dots directly to a buyer who needs a government loan?

Why wouldn’t you go all in? Why even focus on the $500,000 to $800,000 range, which is going to be in trouble in the next couple of years? Why wouldn’t you go all in on $150,000 to $350,000 and try to find tenants, which are the people that even in an ugly recession, keep their jobs? Why don’t you try to find more of that Section 8 Housing, find more in that world, and invest heavily there?

The answer to that is that we are going to keep doing that. If you are crushing it on a Section 8 House, you are making a net of $300 or $400 a month. When you have the overhead that we have, you can’t do that at scale.

You would need a lot more debt to go heavily into that because the payments don’t come back fast enough.

It’s too small. You are throwing a pebble into the ocean. It’s a combination of those things. You continue to collect rent.

That move-up buyer is going to get buried in the next twelve months. When I hear you say $500,000 to $800,000, you clearly know your business more than I do. I feel like that customer in Richmond is going to completely dry up for twelve months. They are like you. They are not going to move and give up a 3% mortgage to get a 7% rent. That’s who a $500,000 to $800,000 is. That’s someone who’s selling. They bought a house for $400,000, sold it for $500,000, and moved up to get $700,000 or $750,000. They are not going to do that because their payment is going to double with the bigger loan amount and the mortgage rate changing.

What I can tell you is there’s safety in a $500,000 to $800,000. Will that change if the stock market goes down 2,000 points? It could. Maybe that goes lower but that’s why I pay attention to the news and look at what’s happening in the market. I look at inventory and mortgage rates. I was talking to somebody about mortgages. She’s married to a mortgage broker. They were like, “We are doing a 2-1 buy-down.” I’m like, “Are they doing a 3-2-1 buy-down?” She’s like, “No. I’ve never heard of one of those.” I’m like, “You will. You will hear about a 5-4-3-2-1 or a 3-2-1 buy-down. How many interest-only ARMs?” She’s like, “No.” I’m like, “They are coming.” To Ian’s point, this stuff is starting to come.

Builders are going to be paying points to buy rates down. You are going to see permanent buy-downs, and it’s going to get expensive for home builders with the concessions. They are going to want to keep the price where it is. They will buy people’s rates down to get them to qualify. You are going to see that big time. Builders have been spending on good seller help. You are going to see the seller help go from half a point or a point on a deal to 3, 4 or 5 points to the point where you are going to be hitting limits all the time. It’s going to make it hard to qualify for the mortgage.

Knowing Your Market

This is where I want to be positioned. The stuff where I buy and flip is in better locations than where builders are. I can buy and build in established neighborhoods around incredibly great schools that are either walkable or shortly drivable to places of work or entertainment. Builders are typically on the fringes, and then malls and other things get built later because that’s where the land is.

That’s what’s unique about me. What I do is look for one-off opportunities in insanely well-established neighborhoods where people want to be. $500,000 to $800,000 is still in the upper tier of the market but it’s safe. You asked the question with $175,000 to $350,000. That’s where we lived before. If we need to get down there again, we will do it.

You are good at that market. You can play in that market because of your infrastructure, where most people don’t want to mess with collecting payments from those folks or trying to get the subsidies out of the government in the City of Richmond. You are good at that.

That’s what we will continue to do. That’s the rental model. There’s a retail model at that price point as well. We know how to do that, too. There’s a more creative way that we didn’t know how to do before, where we have to take less risk. There’s a way that we can motivate a seller to let us piggyback on their mortgage, so we don’t physically take ownership.

We have an option contract against theirs, and we can sell that to a retail buyer. What we’ve gotten better and way more sophisticated at is how to add a great service for the market and help people that need to sell while mitigating and lowering our risk. That’s what we are going to continue to do. That’s what we are working very hard on. It’s about how you open up those channels.

If you see that revenue is going to be dropping, you have to think about $680,000 of overhead a month, including interest.

That was before we were recording but I did say that. My overhead number is over $600,000 a month, which is a big number. That does not include the mortgages that we pay on the houses that we own as rentals. This is fixed debt. It’s the debt we have against other properties.

If you are thinking, “It would be great to be in Frank’s shoes and own this big real estate empire,” that number has got a way on you. You probably don’t go a day without thinking about your overhead, monthly pay, and expenses. If you are wondering about the motivation of a business owner in the real estate market to find new deals and avenues of revenue, look no further than that number. It’s grown.

It’s like the frog getting boiled over time. When you first started, your debt was almost nothing because you were trying to start a business. You were working off your assets. You built that over ten years to that point where you’ve gotten used to and comfortable with that payroll. It is natural to wake up at 3:00 AM when that’s your monthly overhead, and you are in the real estate business with a looming recession that could get ugly.

Managing Your Overhead

Let’s pivot into how you can make sure that your overhead doesn’t choke you. There are two ways to make money. You make more or spend less. Are we sophisticated as a publicly traded company? Hell no. Are we more sophisticated than someone with a $20,000-a-month overhead? Yeah, significantly so. I’ve got seven people in the accounting department. I’ve got ten people who touch taxes. We are pretty sophisticated for a small company. What do we do? We immediately rip out the P&L and start looking at expenses. I can tell you where all of our expenses are.

There are two ways to make money: you make more or spend less. Click To Tweet

I can also tell you that in a market like this, I used to pay a ton of money for a certain type of advertising that’s on the MLS. We are going to go there to get it, and we are not going to pay for it. There are little things you can start to do to take your overhead number down. It was a tight inventory market to buy, so we had to spend a ton more which required less money and more effort.

Those are the things that you have to look at. You have to look at, “How do we get this certain number of revenue? Where can we get our revenue to be consistent? How much do we need to spend on a regular basis to do that and still have enough left to pay all the bills and make a profit?” It’s a constant juggling effort.

What happens is this. It is the period of discovery where we have been talking about recession for a while. The market was still pretty strong. We had a good Q3 in 2022. We have a good Q4. We got to look at, “The housing market is shifting. What does it look like for us? What are the things we need to do to be ahead? How do we be ahead?” We are using Q4 of 2022 to say what is 1-1 of 2023 looks like, and how do we make sure we are properly positioned?

Do you know how every once in a while, you will go into your phone, look in subscriptions, scroll down, and notice that there are 4 or 5 apps in there that you are paying $20 a month for that you don’t even remember downloading and never used it? Is that just me? Am I the only idiot that, every once in a while, finds subscriptions I didn’t even know I had?

No, you are not.

I do this every 12 to 18 months. I will get an email saying, “This is renewing.” I will say, “What even is that? I’ve never used that.” It’s like, “You will be charged $130 on the 1st of this month.” I will look at my subscriptions and say, “I got seven of those.” I will cancel all of them and tighten my belt. I found it’s the same way. I’ve managed through three pretty ugly recessions. Every time with a business, you look at your expenses. I’m a fan of, “Simplify it. Go look at your top ten expenses and try to take 10% out of them.” There’s another end, which is the tail end of it. It is to find the stuff that used to make sense in a strong market and get rid of it.

You got to scrutinize as a business owner. If you are owning a business or running a business, pull out that P&L and look at everything that’s not giving a return. What made sense in 2020, 2021 or 2019 and has become a monthly expense? You look at it and say, “Is that still serving us?” If it’s not, you start cutting it. You start getting rid of expenses. Unfortunately, that also means people.

If you are running a business, you have to ask yourself, “With every employee and contractor I have, am I getting a maximum return out of them? If I’m not and I’m going into a world where revenue is uncertain, I can’t have uncertain expenses. If that’s a person, then they’ve got to go.” That could be anything. It could be publications or software that you pay for.

I’ve always found that you go up, and no one looks at expenses. All you think about is more revenue. The tide comes out, and revenue drops. You go look at your expense items on the P&L and say, “Look at all this money we are wasting.” There’s normally a ton of low-hanging fruit when the market shifts. You go from being bullish to bearish, which is what has happened in the last couple of months.

You and I were talking about it before most were. I’m starting to run into a lot of people that are talking about this a lot. It is the prevailing wisdom that we are in a recession, and it could get a lot uglier. When that happens, you go and tighten up on expenses. These are reasons why Google stocks are better than Facebook because people will advertise less. They are doing what you are doing. I’m going to go look to see, “How I spend my advertising dollars on only the best returning stuff and cut it in other places.” That’s a natural reaction to sentiment changing to a recession.

There’s a scary place to be, which is where you don’t have access to any numbers, and there is the empowered place to be, which is where my company is. We have everything in a metric accounted for. We know where it is. What we are doing instead of haphazardly having gut decisions is we are making good, strong decisions.

Making Good Decisions

I’m going to give you a couple of quick examples. These are some stories that you will find interesting. I remember the last recession. During it, gas prices also spiked. Things were going over $5 a gallon for gas. This was years ago. Everyone was losing their minds. All these people were like, “I’m going to sell our company vehicles and we are going to buy Priuses.”

There was a shrewd businessman that I knew. He goes, “I’m not doing that.” I’m like, “What are you going to do?” He goes, “I’m going to buy that old shitty van. I will get new tires, get an oil change, and I’m going to drive it into the ground.” I was like, “Why? Gas is $5 a gallon.” He goes, “I’m going to spend a hell of a lot less on gas than I am on a fleet of new Priuses.” That is a smart decision. We were sitting on breakfast. Someone looked at that guy and went, “I won’t worry about him in a recession.” This is how he thinks.

It’s because he valued cash. What he’s saying there is, “I would rather pay a little more monthly and have a big cash balance than to go out, suck up a whole bunch of cash, and hope to get a return on it over a 4 to 5-year period.” By the time you get the return on that, the recession’s gone. You might not survive getting a return on a bunch of Priuses if you outlay that cash out front.

As I look at this, I’m conserving as much cash as I can because I want to be able to buy assets on the cheap. I want to be able to get things for pennies on the dollar. I would rather have cash and put debt on things. I would rather pay in monthly installments, knowing that next year might be a good opportunity to spend. It also might be scary, so I want a cushion to be able to get through the year with no problem.

LMSM 107 | Recession

Recession: You want to have cash now, put debt on things, and pay in monthly installments. Next year might be a good opportunity to spend, but it also might be scary. So you want a cushion to be able to get through the year.


I will tell you two funny anecdotes that fit perfectly with this. It was either December 2019 or January 2020. I bought a Peloton. It was a Peloton treadmill. It costs $5,000. There were two options. There was, “Pay $5,000 right this minute or pay $5,000 over 60 payments with no extra fees.” I’m not the smartest guy in the world but I’m like, “If you will take it over 60 payments, I would rather keep that money in my checking account,” and I did. A couple of years later, I still pay $147 a month for my Peloton tread. Think of what’s happened in that timeframe. We’ve gone through insane amounts of inflation. What did I pay for that treadmill? It was $2,800.

Here’s an even cleaner example. I have braces. I have Invisalign. I’m the oldest thirteen-year-old girl you know. When I was sitting down in the orthodontics office, they said, “You have two payment options. You can pay for this in one lump sum or pay for it over sixteen months, and it’s the same price.” I asked the lady who was filling out the form. I was like, “Seriously?” She goes, “Yeah.” I said, “Have you heard of inflation?” She goes, “What?” I said, “Where do I sign?” It’s an expense I decided to make but to me, it’s way less expensive to pay for it in chunks. There are still places where you can get deals like that where it doesn’t make any sense. There’s inefficiency. Don’t miss those chances when they are handed to you. Say, “Thank you,” and sign quickly.

If I’ve got the chance to spread some of my cash outlay over a few years where the economy is going to be scary rather than dwindle all of my cash down, I sleep better at night when I have a big old chunk of cash sitting in the bank. This is not the time to be 100% invested in anything. You can have a little bit of cash. It will help you. There are good decisions business-wise. There are risky decisions but there’s also the quality of living when it comes to investing and quality of life. If I’m not sleeping at night, I’m probably overly invested in going into a recession. It doesn’t mean I’m in the wrong things. I don’t think stocks are the wrong things. I don’t think real estate is the wrong thing.

You need a level of safety and cushion that makes you not worry about whether the stock market goes up or down. When you asked me what percent it was, whether it was up or down, it was up-down every day. If you sit and watch CNBC all day, you will think the world is coming to a freaking end. Warren Buffett doesn’t watch CNBC. He doesn’t look at the stock market on a daily basis. He looks at it quarterly. He checks to see what’s happening and kicks everyone’s ass because everyone else is worrying, buying, and selling based on the news. That’s stupid.

Stop buying and selling based on today's news. Click To Tweet

In the long-term, what I know is that Richmond real estate is going to be more valuable than it is. In five years, it will be. In ten years, it will 100% be higher than it is now, especially in a lot of the areas where Frank plays. You can’t run your business based on where you think real estate prices are going next year. You have to pay attention. You can’t do stupid things, especially if they have a quick exit. You got to take a longer-term approach.

The 10 Steps To Take Before A Recession

What I like to do is this. I have ten steps that I follow when money gets tight when we go into a recession. I’m going to go through all ten, and we can talk about them. We can do it quickly.

We’ve talked enough about it. Go through your ten and make it quick. Try to do it in a speed round. Go through your ten because we’ve hit most of them already.

The first thing is to determine the amount needed monthly to breakeven. It’s critical to know. If you are a household or a business, you need to know, “What are my expenses every month? What’s that number?” I don’t think we need to talk about that. Number two is to generate cash. You can generate cash in two ways. That is through earnings or through what Ian and I talked about, which is to not buy the Peloton in one lump sum. If you don’t need the Peloton, don’t buy it. If you need it, mitigate. Keep the cash in the bank. That’s number two.

Number three, know when it is happening and get ahead. What we talked about is that a $1.2 million house sale is not the right number for me. $500,000 to $800,000 is the number. That’s where we are going to be. If that changes, stay in the know. Understand it, and don’t fall in love with your losers. When COVID happened, we had a bunch of houses that we were going to put $200,000, $300,000 or $400,000 in. I stopped construction immediately and said, “Let’s get these things to market as soon as possible,” and we did.

Ultimately, what happened is that the government printed $3 trillion worth of money and handed it out to everybody. The market went nuts. We didn’t make as much money as everybody else. The lady who does my books looked at me and said, “The next time there’s a recession, I want to work here.” It was because of how fast we moved. You take the data and use it. If there’s falling-out-of-the-sky money, that’s an anomaly but you have to have the right disciplines. You need to move fast. That’s number three.

All those companies that made more than Frank during that time got bailed out by the government. If the government had not bailed them out, Frank would have still been fine as he was. He had a lot fewer competitors to work with. The next time this happens, Frank will do the same goddamn thing. He will do the conservative approach. If the government doesn’t come in, he will have fewer competitors.

That’s what we are doing. Rightsize your business. Ian talked about the staff. You have to rightsize your business in two ways. It is through staff and through spend. If you got seven different internet music accounts, go down to one. I don’t think there’s anything there. Renegotiate and then flourish. Ian and I learned this from the best company to learn this from. Go into your land deals and say, “I was going to pay you this. I can’t pay this now. Take my penalty or let’s work together.”

Start doing it aggressively. If you do it aggressively, what happens is you get early. If you get early and the market bounces back quickly, you make more. If the market doesn’t bounce back quickly, you make it through. You got to be fair. You need to be in a way that you are forthright and honest. If you do it that way, you prepare yourself for what’s coming. You can get ahead of it.

Focus on sales. Sales fix everything. Everything else is irrelevant. Sales immediately lead to revenue. Revenue fixes every freaking problem. At home, think about, “How do we make money? How do I stay employed? How do I continue to get a check coming in every month?” Sales are different if you are running your household. Stay employed. You might have a shitty job that you want to quit. This is probably not the time because unemployment is going up. Those are things that you can focus on. You can tell when we started getting into this. I got more excited. My pace of talking went way up. Have urgency. It’s not exciting. It’s not fun but when you have a plan, it’s easier to move quickly. Having urgency is critical during this time.

LMSM 107 | Recession

Recession: Focus on sales. Sales fix everything. Everything else is irrelevant. Sales immediately lead to revenue, and revenue fixes every problem at home.


The only thing I will add to that is that I can hear the passion in your voice when you talk about this. That’s incredibly important if you lead a team. A team needs to see the urgency on your face. It’s okay to tell your team, “I’m a little nervous. I’m a little scared.” The status quo is undefeated with humans. They don’t want to change. They don’t want to break out of their status quo.

Frank’s employees don’t have $600,000 of overhead to keep them up in the middle of the night. Frank does but they do have a responsibility to keep Cava Companies thriving and alive. They have to feel his sense of urgency that this is not 2021. This is a different world we are walking into. We are tightening our belts.

We talked about the Google CEO. He told people, “We are bringing the parties down. We are bringing the travel down. Discretionary spending is getting cut.” They have to feel that urgency out of the leader of the organization or they are going to fight you all along the way. You want to get advocates behind you saying, “We got you. You are right. We must hunker down and figure out how to get through this next year.”

You brought up something. This is not on my list but I want to talk about it. I was going to do it at the end. I’m going to do it now. Urgency is part of it but transparency is important. I’m going to tell a story. I had to fire somebody. I was shaking while I was doing it. I didn’t want to do it. I didn’t want to be there. As a human being, I freaking hated it. It felt awful but I had to do it.

When I shared with my team why I let the person go, I told them, “While I’m having this conversation with you, I’m almost ill. My body is shaking. I don’t want to be here. I don’t like it. I don’t want to have to but you work here because I’m willing to. I’m going to do the little things ahead because I’m a good leader. I want to stay ahead of the market but I have to go through the whole human experience as you do. I got to think about it. It’s hard. We make good decisions because we are willing to make the hard decisions.”

I have two young kids. We have a babysitter who was over at the house. My oldest son was being a complete and total shit. I got in his face and reprimanded him. I made him apologize. A few minutes went by and the babysitter said to me, “That was nice. Thank you for doing that. Why did you do that?” My response to her is, “I’m not here to make friends. I’m here to raise men, and he was acting like a shit.” That’s where it starts at three. You discipline them.

That’s what happens in business. You have to take those things. You have to do those disciplines. “I can’t guarantee what’s going to happen but what I can tell you is I’m going to work as hard as humanly possible to be ahead of it.” If you have that level of honesty, it goes a long way with the people that you work with. They are scared too and don’t know what’s happening. It’s your job to try and synthesize it and share it.

A lot of managers are not transparent because they don’t know the answer. By being transparent, what Frank doesn’t mean is to give them all the answers. It’s okay. Transparency sometimes is saying, “I don’t know. I’m pretty nervous about next year. This could get hairy. If rates go to 8% or 9%, throw out all the bets and all the strategies that worked in the past. We got stuff to figure out.”

That is okay to say but it’s also important to tell your staff, “Sitting around and worrying about it isn’t going to make us safer. What we need to do is focus on what we control in nowaday’s market.” I’m going to go back to something you said that I loved. We learn that from our former employer, too. “We don’t make the market. We serve it.” We serve today’s market, not yesterday’s market or the market we wish it were, which means we face reality.

We don't make the market; we serve it. Click To Tweet

You talk it through. That’s it. Number eight is on my list. Know your resources. This is critical. When I typed this up, Ian and I didn’t have a show. He still had a job but he was one of my resources. The other people that I talked to, a lot of them are my resources. Mt attorneys are my resources. What I did was I came up with a plan with my entire team that got me out of my email.

I said, “I may shut email off and not have one anymore because I can’t run this business effectively sitting behind a fucking computer. I need to be on the phone talking to people or in the field doing things. I need to be in, feel, touch, and understand it. I need to be going to lunches, not expensive lunches but lunches with people so I can understand, “What are you seeing? What are you feeling? What are you hearing?” That is how you lead through a recession. It’s because you know your resources and talks to your resources. You gain information, synthesize it quickly, and take action. That is a critical thing.

The only thing I will add there, and I love this one, is to broaden your network. What you don’t want is a bunch of people getting together with confirmation bias. If your whole network is your company, they are experiencing the same stuff that you are. They have the same worries you have. Broaden your network to people that are outside of your industry.

Maybe they’re in your industry but work for a different company in a different market. Get as many different viewpoints as you can so you are not overly influenced by 1 group, 1 individual or 1 person. Talk to as many people as you can in as many industries as you can to formulate your opinions. Your gut, at some point, will start to understand, “This is the way the wind is blowing. Here’s what I should do.”

That is very much so. We’ve talked about this before but having friends is critical. It’s hard to go out and make friends. It’s easier to find masterminds, networking groups or places where there are people that are similarly minded but are potentially looking at things from a different perspective. I went to a conference in May, and everybody was insanely bullish. Ian and I talked about it. “This sounds like everybody is drinking the same Kool-Aid.” Be skeptical. If you can’t find anybody else that’s got your voice, keep looking until you find people who think as you do.

Michael Lewis wrote a book called The Big Short. In The Big Short, he chronicles a guy by the name of Michael Burry. It’s fascinating. Michael Burry has not become a cult hero but Michael Burry has 1 real eye and 1 glass eye. What’s ironic about what Michael Lewis did is that he found the one-eyed man and was the only person who could see what was happening. It’s fascinating. That’s what we are talking about knowing your resources and being broad.

Avoid stupidity. Don’t go for the home run at this time of the market. Go for the safe, secure bet. If you think you can knock it out of the park but it’s going to take every bit of what you have in you to swing, there’s a chance you strike out. Don’t. Get on base. Do the smart thing that you couldn’t look back and go, “That was dumb.”

A different way of saying, “Avoid stupidity,” I would say to look for high-floor investments of your capital and not so much a high ceiling. When a market changes to a recession, the floor should be more important to you. Warren Buffett’s rule is, “Number 1) Rule of my business is to do no harm. Number 2) Don’t forget rule number one.” Do no harm. Look for the high floor even though the return’s not as good.

Number ten is survival of the fittest. It’s an unforgiving game. With your house, family, and household, you got to be in charge of it. If you don’t pay your mortgage, the bank is going to eventually come for you. There are real consequences in business. You got to be mindful of the fact that there are real consequences, and not everyone gets out of this thing alive. You got to take this seriously, and you need to do the right things to get through it. Sometimes, survival is what it needs to be, not necessarily luxury. You’ve got to get through it in a way that you can make it to the other side.

Lower Expectations

The only thing I would add to your number ten is to embrace this market for what it is. Expect that you are going to be asked to do some tough things. Expect that you are going to work a little harder for the same amount of money. Expect that people are going to ask you to cut your fees, bills, and revenue. People are going to expect that you are going to lose a few customers. Expect these things are going to happen. Don’t think you are going to be the one person who gets through this in the next eighteen months unscathed. Everyone is going to feel a little bit of pain. Expect and plan for it. Go into this with your eyes wide open, ready to pivot and change.

The other thing that you can expect is that whenever we decide the record an episode, someone around here has to get out a hacksaw or a gun. The last time we recorded, there was someone walking on the roof. There’s someone behind me with. I’m not even sure what type of human carnage is going on back there.

Along those lines, we can expect that you, as our audience, are going to continue to tune in. We are one of the few free resources where you can get this hard-hitting journalism into the minds of a brilliant CEO like Frank. You did a great job. For our subscribers, if you liked this, please give us a five-star review on Apple Podcasts. If you are new, click that subscribe button and tune in for more brilliant insight into careers, economies, and investing. Frank, do you have anything else to add? You son of a bitch.

Ian, it’s always a pleasure.

It’s good to see you.


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