When a city’s skyline is peppered with construction cranes and high-rise apartment buildings, most people view that metro area as one that’s booming, because a lot of money obviously is being poured into its economy. But is that area also one in which it’s wise to invest in real estate property? What’s the economic state like?
Not really, because many such markets can be cyclical in nature when it comes to the history of their real-estate prices, says Jason Hartman, founder of the Platinum Properties Investors Network. Hartman and a Platinum colleague, Gary Pinkerton, recently addressed a report about cranes and skylines on a “Creating Wealth” podcast produced by the Platinum Properties network.
During the podcast, Hartman and Pinkerton discuss other recent real estate issues facing today’s investors, including: The high cost of rent affordability in some U.S. markets; how “creative destruction,” such as Uber competing against taxis in transportation and Airbnb challenging hotels in accommodations, are welcome competition; and, how, in Hartman’s view, a newer book, “The New Human Rights Movement” by Peter Joseph, “doesn’t look at the whole picture.”
Pinkerton also offers a portfolio tip by telling investors how they can borrow money from their life insurance policies to buy income properties or make repairs.
First, About Those Cranes That Can Dominate a City’s Skyline
Hartman, who began working in real estate while still in college and is now a multi-millionaire, says that when cranes dominate a city’s skyline, it doesn’t mean its good times will last forever. The cranes may foretell, instead, that the city merely is in a bubble in which high real estate values will not last and could one day burst, he says.
He and Pinkerton were addressing a recent report about the number of large construction cranes alongside high-rises in U.S. markets. Seattle topped the list at the time of that report at 58 cranes rising above its infrastructure. Other cities and their numbers of cranes that Hartman and Pinkerton cited from the report were: Los Angeles with 36, Chicago with 34, Portland “surprisingly” with 32, San Francisco with 22, Washington, D.C., with 20, and, Boston and Phoenix with but seven and five, respectively.
Hartman remembers when his mother took a trip to mainland China and saw “these incredibly giant cities with amazing numbers of people” as the p;lane carrying her descended from the air. Then, when her plane got on the ground, “it’s like the national bird of China was the crane”—as in construction crane, he joked.
“I’m not sure what it means,” Hartman said about cranes, “but some people have postulated that really, really tall, record-breaking skyscrapers are the sign of a bubble. When people are initiating these giant high-rise projects all around the world, that’s a sign there’s too much money flowing into the market.”
Most of the cities that topped the U.S. cranes list are markets in which Hartman and his Platinum network choose not to invest, he noted.
Hartman and his Platinum Properties Investors Network favor linear market investments over cyclical market investments for real estate investments, “because I think it’s just a much more reliable and a much more conservative approach,” he says.
Linear real estate markets are those whose prices stay steady over a period of years, while cyclical real estate markets are those that can fluctuate widely up and down in price. Cyclical markets leave investors too susceptible to heavy losses when there are sharp market downturns, as there were in the real estate fallout of 2007 and the financial crisis of 2008, Hartman says.
There also are hybrid markets, in which investors can combine the strategy of flipping (forcing appreciation through rehabs) with the benefits of buy and hold (a loan pay down, appreciation and cash flow) and combine them into a secure investing method, according to the Bigger Pockets real estate blog. Characteristics of hybrid investing in a market, Bigger Pockets says, are to buy homes in good neighborhoods that need help, rehab the home into rentable condition, hold the property and “ride the market wave,” and then sell for gain when the market peaks and reinvest your profits.
“That’s the common thread” for the U.S. cranes and cities list, “because they’re almost exclusively cyclical markets.” Hartman says. “There are three hybrid markets—Phoenix, Denver and Austin—in there, and all the rest of them are very much cyclical markets.”
Pinkerton agrees with Hartman that a bunch of cranes on a city skyline may actually mean it’s a “frothy” market, as Hartman describes it, the economic state possibly not being exactly as it seems.
“It’s the market, but I think it’s also the money bubble, the credit bubble that is out there sloshing around the entire economy, not just those markets,” Pinkerton says.
“I think it’s a combination. When there are millions and millions of dollars looking for a place to be put to work, similar to China where they built all the concrete cities, they’re just trying to put money to work there. Here, it’s probably the same and it’s much easier to do it.
“It’s expensive, I’m sure, these giant skyscraper cranes building these massive buildings. I’m sure the market has overheated in these cities. Whenever we have a correction … we’ll have a bubble in many markets.”
Hartman adds: “Now, if the shadow demand comes out of the market, meaning the Gen Y millennials that live with their parents and they’re 28 to 30 … when that starts to get out into the housing market, then that’s what a lot of these apartment builders have banked on. And they’ve been right so far. But, Gary, you are right, they probably will see a correction cycle.”
Hartman, Pinkerton Banter on Income and Rent Affordability in LA
Hartman and Pinkerton in the “Creating Wealth” podcast also discuss a report about the income one needs to afford an apartment in Los Angeles. Or, “the unaffordability,” as Pinkerton puts it, of renting just a one- or even two-bedroom apartment in the City of Angels.
The report said $109,000 is the income someone would need to afford a two-bedroom in LA. A client of Pinkerton’s has a daughter who just found “a good job” in Los Angeles, but she cannot find an affordable place to live, he says.
“That’s a problem for these cities,” Pinkerton says. “I know Google is challenged with that and the tech sector in San Francisco. They’re asking ‘how can we still keep our businesses here?’ They’re considering moving businesses because people can’t afford to live there—even making a quarter million a year as a software engineer.”
Hartman is from the Los Angeles area originally. “The article says is you need to make $109,000 per year to afford a two-bedroom apartment in Los Angeles and I’m sure that’s not in a great area of LA,” he says. Everything in Los Angeles is so high. LA rent now averages $2,566 per month for a two-bedroom apartment, and the properties there are old, they’re crowded, there’s no parking, everything’s expensive—it’s just super high in the hassle factor.”
Bring on the Ubers and the Airbnbs, the Platinum Properties Experts Say
Hartman and Pinkerton in the podcast also discuss “creative destruction,” such as Uber challenging taxis in transportation and Airbnb challenging hotels in accommodations, are welcome competition. They specifically cite a report from Bloomberg called “What a London Cabbie Taught Me About Uber.”
“The article is really good,” Pinkerton says. “It talks about how industries oppose change, when you think of Uber and the taxi world, and you think of Airbnb and all the hotels. It was interesting that the taxi industry, or profession, at least in England, has really modernized in having to keep up with Uber.
“I remember here in the United States in major cities when you didn’t have great taxi service—the cabbies smelled, the cabs smelled, and they would show up late and give you a rough ride and overcharge you if they could get away with it.
“In this article, it talks about how Uber’s not that way. It’s extremely convenient, you can call the individual (driving you) and get updates from them and pay with credit card, and it has caused these cab companies to provide comparable service.
“I really loved the last comment in the article. It says, ‘and once again, the consumer benefits.'”
“I want to talk about how Zillow and Amazon are attempting to disrupt real estate,” Hartman says, referring to a recent report that Amazon may expand into the real estate business.
“This is what the economist Joseph Schumpeter called ‘the creative destruction,’ and it’s really a wonderful thing. This is why you should never believe in or vote for big government, and regulation, and this and that. Just let the market do its thing.”
Hartman contrasts Schumpeter’s theory with a newer book, “The New Human Rights Movement: Reinventing the Economy to End Oppression,” by Peter Joseph, whose premise is something with which Hartman disagrees. Joseph argues in his book that the reason the U.S. suffered the real estate and the financial crises in 2007 and 2008 was because “there wasn’t enough regulation, and that’s why all these companies did these scummy things,” as Hartman describes Joseph’s book.
“He’s right, but that’s not the whole picture,” Hartman says. “There’s way more to the picture than that, because the question (Joseph) never asks is how those companies ever got into the position to be able to do that in the first place? And what i mean by that, is how did those companies ever get so big? Regulation made them big, because regulation helps entrenched players hold onto monopolistic positions. That’s what happens every time.”
Hartman says “in this time of massive creative destruction,” with such challengers as Uber and Airbnb, “there’s just all of this sharing-economy stuff, and it’s just brilliant.”
“But why do we have all of this creative destruction, this wonderful creative destruction, where the consumer is benefiting, and we don’t have that on Wall Street?: Hartman asks.
“Why not? Because Wall Street is highly regulated. There is no new competitor rising up anywhere to compete with Goldman Sachs, Merrill Lynch, JP Morgan or anybody. Why? Because of the regulation. You can’t get through the regulation. It’s so insane. Why is it so hard to take your company public and go to the public markets?”
Using Life Insurance to Borrow Money for a Down Payment or Home Repairs
Pinkerton offers in the “Creating Wealth” podcast a portfolio tip by telling investors how they can borrow money from their life insurance policies to buy income properties or make repairs.
He says in 2011, when there was a “flash crash” in the stock market, he decided to take a couple hundred thousand dollars from his stock market and mutual fund investments and move the money into life-insurance policies—”and that became available collateral for investing in properties.”
“I put my money in the policy, it gets protected, and it’s growing tax-free,” Pinkerton says. “But then I can turn to the insurance company and say, ‘Listen, I have $100,000 in my policy, I need to borrow 50,000 or 100,000 from you’ … they’ll loan me up to as much money as is sitting in my policy as cash collateral for them. They’ll loan me their dollars.”
Pinkerton calls the life-insurance strategy “an unstructured loan,” meaning there’s no loan terms.
“There’s no qualification for it. It’s a couple-minute phone call or a piece of paper. The money gets deposited into my account and then I use it as if it was my own cash, and I’m signing up to pay an interest rate that is floating on the Moody’s bond index.” His rate hasn’t changed in over 10 years and has stayed at 4.7 percent, he said.
More Investment Strategies From Hartman, Pinkerton, et al.
Pinkerton learned his life-insurance strategy from another associate of his and Hartman’s, Pat Donohoe.
Hartman and Company have teamed with Donohoe to develop what’s called The Perpetual Wealth Strategy™, in fact.
“You’ve heard my rants about how our financial system is rigged,” Hartman says. “And I’ve interviewed hundreds of experts (on podcasts) to back up those claims and help you align your investments with the most powerful forces in the world: governments and central banks.
“I’m also using a Perpetual Wealth Strategy with my income property investments that you should check out. It has enhanced the security of my liquid assets, boosted overall ROI and shifted money away from the banksters. My friend Pat Donohoe, who’s one of our venture alliance members, runs Paradigm Life, and he has a free report you can download at beyourbank.com.”
And, of course, you can also visit jasonhartman.com, which is rife with tips and comments about real estate investing—much like all of those cranes that fill the skies of Seattle and other major cities in parts of the USA.