CW 474 – Jason Hartman – How Investors Profit When Homeownership Drops & Washington Post Op-Ed Analysis

Today on the Creating Wealth show, Jason talks about some of the latest things he is up to as well as talks about an interesting opinion article published by the Washington Post. He does not have a guest for today’s show, so he does a deep dive into the real estate market and talks about why central planning never works for the home ownership market. He also gives his comments in between reading out loud the article published by Washington Post in this quick 30 minute Creating Wealth episode.

Key Takeaways:

1:30 – Jason loves Arizona weather.

6:00 – Jason talks about the Venture Alliance and welcomes two of the first members.

8:10 – Jason talks about what a general and limited partner means.

14:30 – High ownership rates are not good for society.

17:30 – Central planning does not work.

23:45 – Rental market is incredibly hot right now.

24:00 – Jason shares tips on how you can rent your property if you are having trouble.

26:50 – This kind of income property investing only works in the United States.

28:50 – Lots of new properties on JasonHartman.com right now. Check it out!

30:25 – The physical product of the Meet the Masters home study course is still on sale for half the price of the digital version.

Tweetables:

Central planning does not work. There is no “right” level of home ownership.

There are nearly 400 distinct real estate markets in the United States of America.

Remember, your home is an expense, it’s not an investment. Anything that costs you money and does not produce income is an expense.

Mentioned In This Episode:

http://www.washingtonpost.com/opinions/charles-lane-the-diminishing-returns-of-todays-homeownership-policies/2015/02/04/fe49e388-ac95-11e4-9c91-e9d2f9fde644_story.html

JasonHartman.com

Transcript

Jason Hartman:

Welcome to the Creating Wealth show. This is your host Jason Hartman and this is episode 474. Thank you so much for joining me today. Wow, what’s going on? A lot is going on. It’s a beautiful Sunday afternoon here in Phoenix, Arizona where I really submit to you, this place has the best weather in the world. I mean, it’s just, 8 months of the year it’s spectacular. Believe it or not, some people even like the really hot summers here. I don’t completely dislike them like I did when I first moved here. You kinda do get a little bit used to it, but I am off to the cold. Yes, tomorrow I’m headed to Whistler, Canada. I’m going to go meet with one of my mastermind groups there.

That’s going to be a neat trip. We’re going to do some impact work, we’re gonna do some business brain storming and we’re going to do some heli-skiing. Yes, I hope this is not my last broadcast. I hope I live through that, because it’s, gosh, I don’t know, can I handle that? We’ll see, we’ll see. First time ever helicopter skiing so it’s got its own set of risk and dangers in it, but you gotta push it a little bit. You gotta live on the edge a little bit because that’s where all the juice, that’s where all the joy of life comes from. I have become much more conservative at my older age in terms of investing, in terms of activities like this. I rarely do things like this. I’ll let you know how it is, of course. I will report back to you.

No guest today. Just yours truly. We’ve got a few thing to talk about that are really interesting, so let’s dive in, but first, before we do that at the last Meet the Masters event that we had last month I announced the Venture Alliance, also known as the Adventure Alliance, because we’re going to do some really fun stuff with it. We have our first two officials members. So, I’m very glad to say our first two members have joined and I gotta compliment these two, because they don’t really know what to expect and you know what, honestly, I don’t either. We’re going to build this thing together with our first 10 core members. I’m really looking forward to this and I think it’s just going to be phenomenal.

You know, Napoleon Hill talked many years ago in his very famous book, Think and Grow Rich. He talked about the power of masterminding and how masterminding is so valuable and you know, I never really did it very seriously until the last two years of my life and I so wished I would have done it earlier, because it is really amazing. I’m just driving into Peter Diamandis new book, Bold, which is all about exponential technologies and you know I talked about, I had Steven Kotler, his co-author who is also the co-author of this book, I should have said both names. Peter Diamandis and Steven Kotler.

You know, Steven Kotler was on the show before talking about Abundance and exponential technologies and as I’ve talked about so many times over the years on the show, the government is doing so many bad things, bad management, big debt, etc, etc inflation looms on the horizon, but the thing that may save us all, like I’ve said, is technology. Where is that exponential thinking come from? Where does exponential technology comes from? It’s really interesting how in the book they’re profile Lockheed Martin’s Skunk Works operation, which you’ve probably heard of Skunk Works. When they created this division of Lockheed years ago, the Skunk Works division, they’d come up with incredible innovations for really some of the world’s most famous aircraft. They would do it very quickly, like the first place that they’d delivered for the military, I think it was delivered in like a 173 days or some record time like that, but he talked about in the book.

All of this exponential stuff it comes from one place. Number one, it comes from our minds, right, it comes from that incredibly power entity between our ears the one that we all own free and clear, but the exponential leverage of that mind, of that brain power, comes from getting really interesting creative and intelligent people together at events, in the same rooms. Sometimes doing things that are kind of formal where you’re sitting around a board room table and you’re masterminding and you’ve got the white board out and you’re doing that kind of stuff, but sometimes it really just comes out of a very casual things, activities and shared experiences and fun things and adventurous things that you do together and I think that’s why number one masterminding is so important, but masterminding not just in that formal way, masterminding in a fun way, doing things that push our limits a little bit.

I did get a little bit of native feedback when I announced this at the Meet the Masters event. One, of course, was kind of obvious it says, well, you know, Jason, this sounds really interesting, but you know, you didn’t really give us enough of an outline of what it is. Well! That’s because I don’t know! How do you like that? I don’t know. It really is something that will be created by the core group of people that join. So, our first two members are Neil and Elizabeth. Neil and Elizabeth, welcome to the Venture Alliance. You’re the firs two, so we appreciate having you and I hope we’re going to create something really, really phenomenal together. So, more to come on that.

The second feedback I got at the Meet the Masters event after I announced this and this is something I wanted to do this for years and the second piece of feedback that I thought was negative is, well, I don’t want to do these things that Jason’s talking about. I don’t care about that stuff, you know, I just want to invest in real estate. Well, that’s fine, but my contention is that, look, here’s one of my core beliefs about this idea here. I’ve talked many times about commandment number three – Thou Shalt Maintain Control and commandment number three, you know, you might be investing with a crook, you might be investing with an idiot, if they’re honest and competent they take a huge management fee off the top for managing the deal.

That’s the problem with Wall Street. That’s the problem with funds and investing your money into some kind of fund or pool of investment, but there’s a problem of being a direct investor too and the problem of being a direct investor, you know, just getting this out of the way before we talk home ownership rates and the rental market, I’ll get there in just a moment okay; but the problem with being a direct investor is you can’t do big things by yourself, so you need other people, you need other investors.

So, I thought long and hard about this. What do I want this mastermind group to be? Well, there’s an old saying, I’ve said it before on the show, is that when a general partner meets a limited partner, now this is the way deals are usually setup and it doesn’t have to be the exact legal standard, the concept is the same. On Wall Street, you could call the general partner the company, the corporation, the management, the CEO, the CFO, the board of directors, okay. Call it who ever is promoting the deal. The investment banker, the financial adviser. That in this case would kind of be like the general partner.

Now, general partner in that deal that maybe has an apartment building or a hotel that they want you to invest in, right. They, even if it’s not the exact legal structure don’t get lost in that. The concept is the same and the limited partner, that’s you, that’s the investor that’s putting in the money to get into the deal.

So, the old saying is, at the beginning of the relationship, the general partner at the beginning, they have the experience and the knowledge and the know how and maybe they have the deal, but they don’t have the money and the limited partners, they have the money, but they don’t have the experience, okay. That’s the beginning of a relationship and then at the end of the relationship, they trade places, because at the end of the relationship, the limited powers have all the experience and they don’t have any more money, because the general partner basically took it from them.

You know, so, this is the problem with not being a direct investor, but what if you could do bigger deals and do more creative things and do things that will allow you access to create higher investment returns, more leverage, and less management potentially, less time involved and engaged in the deal. Well, to do that, you need, I believe, a mastermind group. A group of people that you know, like, and trust that’s a fairly small group of people that have resources, that have connections, they have money, and they have knowledge and these people come together and they do deals together.

You know, I’ll give you an example right now. One of my apartment buildings, we’re on the verge of selling it, it’s not  a building, it’s an apartment complex, okay, and I’m talking to my partner the other day and he says, you know, I don’t want to get into another deal with a general partner like we’ve got in this deal. There have been many complaints he’s had over the years in this deal and I can’t say I’m arguing with him, because I agree with him most of the time, okay. The general partner is just, they’re just skimming the profits off the top. They’re just not leaving enough money for us, the limited partners.

Now, I’m not saying that’s the exact structure again, I’m just illustrating that concept of general and limited partner. If we do end up selling this property, we’re going to do a new deal together where we’re not going to have them involved. We’re going to find our deal, we’re going to come together as partners and fund. So, we can do a bigger deal and we can hirer really high quality management for a lot less money than we’re paying to, you know, in this analogy I gave you or this metaphor.

Analogy and metaphors, those always mix me up. I actually looked at that the other day and I’m still not clear on the difference, but the example was, I showered them with gifts. That’s a metaphor, because you didn’t really shower them with gifts, right. The analogy is the relationship between the two. So, what is this one? This is a metaphor, I guess, right? Anyway, I digress again.

Okay, so, we can do it ourselves and hire really high quality people for a lot less than the general partner example is getting. For a lot, a lot less and we won’t have them skimming all the profits off the top. So anyway, that’s the idea of the Venture Alliance. That’s the idea of that, okay. Congratulations and welcome to Neil and Elizabeth. Looking forward to creating something great with you and our other core members that join us in the Venture Alliance.

So, home ownership rates, interesting Washington Post article in the opinion section recently, just a couple of days ago, it says, the diminishing returns of today’s home ownership policies and this basically talks about how central planning and government intervention doesn’t work well. We all know that, right. Hopefully we know that. Hopefully all of my listeners are intelligent enough to know that big government with all their lobbyist are being lobbied by all these special interest groups, central planners, it doesn’t work. I mean it’s never worked, right. It doesn’t work in home ownership rates.

So, I have long said that I would love to see the home ownership rate decline just intuitively my sense tells me and, you know, I have no stats to back this up whatsoever. It’s just kind of my guess, my guesstimate, if you will. In intuitively tells me that the home ownership rate should be somewhere around 50-55%. It’s much higher than that now, okay, and it was much higher than that a few years back. This is something I’ve talked about before and maybe on a flashback Friday episode and, by the way, I hope you’re loving those. We’ve only done, what, 2 of them so far? Last Friday on episode 473 our flashback Friday was the free lunch metric.

It was David Porter from years ago talking about the free lunch metric and also talking about the regression to replacement costs concept that I’ve talked about for a long time, which is how you could, you still can a little bit, but it’s much harder to do now, buy below the cost of construction and how regression to replacement cost is not the same thing as appreciation, okay. Appreciation is when prices go out, right, simple definition, but regression to replacement costs is when the ingredient, the ingredients of that house or apartment complex when those actually come back to their market price. Most people just call that appreciation, but it’s not the same thing. Those are different, okay.

I think I’m probably the first thinker and real estate guru out there to talk about that in its fundamental component parts. Regression to replacement costs being vastly, in my opinion, different from appreciation. That’s really what that last flashback Friday, episode 473 was about. He talked about it on there, so make sure you listen to that one if you haven’t done so already, okay.

We’ll probably do a flashback Friday coming up soon on the three dimensions of real estate. Now, I call it the three dimensions of real estate just because it’s sort of a catchy name. There are really more than three dimensions and that’s one of the wonderful things about income property as an investment. It’s a multidimensional asset class and as such, there are so many different ways you can earn a great return from your investment.

So in this Washington Post article, it’s talking about how the government trying to juice the home ownership rate. It just doesn’t work. Well, fine. That’s great. I would love to see the home ownership rate decline. I don’t think and I know coming from a real estate person probably any of my peers would say they hate me for saying this, but I don’t necessarily think good home ownership rates are good for society. It’s sort of this kinda primitive idea, okay, and George Bush talked about it, Bill Clinton talked about it, etc, etc and it lead to a lot of bad decisions that lead to the financial crisis. The sub prime mortgage meltdown, etc.

So, I’ll just read you a little bit of this and I hope you can distinguish what I’m actually reading, which I am a terrible reader of this, especially live on tape and my little snaky commentary that I always throw in, okay. So, this is a Charles Lane, Washington Post opinion section, the diminishing returns of today’s home ownership policy.

It’s official: Over the past couple of decades, the United States spent vast amounts of time, energy and, above all, money — both private and public — to raise the national rate of home ownership, with exactly nothing to show for it. The Wall Street Journal reports that 63.9 percent of U.S. households owned their residences in the fourth quarter of 2014, precisely the same percentage as in the third quarter of 1994.

So, folks, that’s 20 years, okay. we are comparing 20 years. 2014 way back to 1994 and the article goes on, in fact, the current home ownership rate is a mere 1 percentage point higher than it was 50 years ago, census data shows. 5 decades ago the home ownership now after all of this massive government intervention and government stupidity and probably lobbying by the national association of realtors, which most of my peers will be mad that I disagree with them a lot of times. I sure do, okay, and you’ve heard me talk about it before, I’m the unconventional real estate guy here. After all of that, 5 decades pass and we’re only 1% above in the home ownership rate, right? Okay, the article, I’m skipping ahead here.

With successive administrations from both parties pushing federal agencies so hard in the same direction, it’s not surprising that the home ownership rate did, indeed, hit an all-time high of 69.1 percent in early 2005. Given the financial corners that were cut to pump up the rate. Okay, that’s sub prime lending, etc, okay, juicing Fannie Mae and Freddie Mac with tax payer money. All of this stuff, right. It’s also no surprise that the figure has retraced its statistical steps since the housing market began to tank in 2007.

Whether you blame Wall Street, Washington or some combination of the two, the simple fact is that government and business sold millions of people an American Dream; American dream in capitals by the way, like it’s a title of something; that could not survive a sour economy, with nightmarish results for them and for the country. The big lesson here is equally straightforward: Central planning does not work. There is no “right” level of home ownership. I couldn’t agree more! I couldn’t agree more! And it’s folly to pursue one, much less to pretend that boosting home ownership represents a risk-free way for government to achieve various social goals without directly paying for them.

Yet that is precisely what Clinton and Bush did. Now, see folks, we got two sides of the political aisle here. We got Slick Willy and George Bush who’s a democrat who happened to believe in God. There you go. My analysis of those two Presidents. Exactly what Clinton and Bush did. Arguing that home ownership would be a path to wealth for individual families, particularly minorities long denied a piece of the American rock, as well as a kind of bonding agent for the neighborhoods and local communities upon which a strong democracy supposedly rests.

In truth, the low-down-payment loans. Now, this is interesting folks. In Truth, the low-down-payment loans many people were encouraged to take during the boom were not much different from leases, in economic terms. That’s a really interesting statement. The low-down-payment loans were not much different from leases in economic terms. Think about it. On a lease, you put down a small security deposit and you pay the monthly rent, when the down payment on the mortgage gets really stupid and low, it’s basically like a lease in economic terms. The article goes on, they were wealth-building tools only in the speculative sense that, yes, you could convert a tiny equity stake into massive gains — if housing prices never ceased rising, but of course we know that’s not the way it works, right folks.

Okay, on the article here, far from being a no-downside investment, a typical 30-year, fixed-rate mortgage places a highly leveraged, illiquid bet on a single asset class, real estate — in violation of the first principle of investing, which is to diversify risk. Hmm, let’s turn the table here and suppose, my commentary, that we’re not talking about home owners. Now we’re talking about ourselves, we’re talking about investors, right. One of my ten commandments of successful investing is take the most historical proven assets class, but diversify geographically, because what, why is that important? Because all real estate is local. All real estate is local.

Remember, there are about 400, not quite, depending on how you slice it, I’m doing it the MSA way, the Metropolitan Statistical Area way. There are nearly 400 distinct real estate markets in the United States of America. Here what you’re doing is you’re getting these people who are essentially renters, this is how bad the government policy is when they make these loans too easy to get; you’re getting people who are essentially renters, okay, in economic terms like he talks about, okay, placing all this leverage on a home, not being diversified, because they can’t even afford one home, okay, they shouldn’t even be buyers at all, right, and then they’re highly leveraged and, remember, your home is an expense, it’s not an investment, it’s not an investment. It is an expense.

Anything that costs you money and does not produce income is an expense. It is not an investment. Investments, guess what they do, they produce income, okay. You know, one of my cardinal rules by the way is that if it does not produce income, it is not an investment, but rather a speculation or a gamble. Alright? That’s it. It does not produce income. Then it is a spectacular or a gamble, not an investment, okay.

So, you see here what’s happening and how bad this policy is, right? Well, why am I even talking about this? Why does this matter to us as investors? Well, of course it matters, because one of the talks we had just about, what was it, two years ago, three years ago at Meet the Masters was 6 years, 6 million new renters and, by the way, we’re on track! You know, it’s looking like that’s going to happen, because every 1% drop, this is all my commentary, this is not in the article; every 1% in drop in the home ownership rate equates to approximately 1 million new renters. Wow. Wow. Are you getting greedy? Are you foaming at the month there listeners? I hope so, because that’s really good news for investors and this is another reason the home ownership rate should decline.

It does not make sense for the government to try to increase it from any free market, Austrian school of economics-type of perspective. This is just the Keynesian-idiot school perspective, but also, as I’ve talked about many times, what does it do? Well, the best thing you can have on a resume is mobility, okay. It makes people immobile. It just does not make sense from any perspective. It’s not the social bonding agent they think it is. It just doesn’t really work, okay.

So, let me just finish up with this article here. It’s almost done. Even now, after the housing market has largely healed, a tenth of America’s 50 illion mortgaged residential properties have negative equity. So, that means 5 million mortgaged residential properties still have negative equity. Now, where can you guess those are? Well, you know where they are, okay. I don’t even need to tell you. You’ve been listening long enough, they are spread all over and sprinkled all over, obviously, but you know where most of them are, right, because you are a regular listener! According to the latest survey by CoreLogic. Another 19 percent lack the recommended 20 percent equity cushion.

Well, I don’t know who recommends that or where that came from, but you know, I think 20% is the sort of logical down payment that someone should need to have to buy a home, okay, and if you had to put 20% down and you had to truly qualify for a mortgage, which you kind of do nowadays and that’s what’s making the rental markets so good for us. I mean, the rental market is on fire, en fuego, right. It is en fuego. The rental market is booming and if you don’t believe me just put one of your houses up for rent, okay. I mean, it is booming.

If you are having any trouble renting one of your houses, just look at rent to value ratio, right. Is your rent to value ratio 1%? Is it higher than 1%? I mean, if you go down to a 0.8% rent to value ratio, in other words, the $100,000 house that rents for $800 per month, you’re still going to get a pretty awesome return on that property, but you will be about double to almost triple what a typical investor and I’m saying that investor in quotes, okay, because they’re not really an investor, at least not a very good one.

They’re really a gambler or a speculator and any of the high priced real estate markets is getting, because they are only getting like 0.3% or 0.4% as a rent to value ratio. You’re doing twice or maybe depending on the property and so forth, maybe almost 3 times as good as they are. That’s 200-300% better than that guy in South Florida with the over priced Miami condo. That guy in Los Angeles with his ridiculously priced investment property that he thinks is a good deal, because he just doesn’t know any better. He doesn’t know how to do simple math and examine simple ratios, right?

Okay, let’s get back to the article, I get off on too many tangents. You know, I just gotta tell ya, I always think when I start these shows that I’m going to do by myself just a monologue type show that I’m going to talk about this, this, and that. I got another article stacked up here that I’m of course not going have time to get to. This takes so much longer than you think it does when you start. Note to self.

Okay, it was never really the case that the quality of our democracy hinged on a particular rate of home ownership, as long as people are generally free to own their own homes, of course. Germany, Denmark and the Netherlands are all strong democracies; all have lower rates of home ownership than the United States, according to data compiled by San Diego State University economist Michael Lea.

For all its professed free-market principles, the United States is unique in the industrialized world in the degree to which its national ethos stigmatizes renting and its national government subsidizes mortgages, through the tax deduction for mortgage interest and Fannie Mae and Freddie Mac guarantees for securities backed by 30-year mortgages. So, there again is one of the beauties of being an income property investor in the United States. It is unique in all the world.

You can can’t do this kind of stuff as an investor in Australia, New Zealand, both gorgeous countries I’ve been to and I tell ya, I would totally live in either of those place, they’re beautiful places, really friendly people too. You can’t do it in Europe, great place. I was born in Europe, okay, you can’t do it there. It doesn’t work. You can’t do it in Asia, it doesn’t work there. You can’t do it in the Middle East. It just doesn’t work anywhere in the world like it does in the United States. This real estate market is unique in all the world, because ever since the great depression income property and home ownership has been subsidized by the government, so if you want your share of the government bailout, be a real estate investor and own as many properties as you can, because you are basically getting your government bailout!

Well, I wanted to talk about how I get off on this little kicks with gold and Bitcoin and commandment three and oil, I’m out of time, okay. So, I can’t do that. What else do I want to talk about before we wrap up today. We talked about the three dimensions of real estate thing and, by the way, we’ll do a flashback Friday on that coming up, but basically what that talks about is really what I was talking about here with the home ownership rate article and that is the concept that as the housing market becomes less interesting to people and home ownership rate declines for whatever reason, it could be high interest rates, could be that Fannie Mae or Freddie Mac are go out of business, as they should in my opinion by the way. It could be whatever, right.

The rental market actually strengths, because those are non-collocating or they’re…they are collocating actually, they’re just inverse collocations, okay. So, the rental market strengths as the home ownership rate declines and as the home ownership rate strengths usually that causes real estate prices to go up, but it actually has the effect of softening the rental market. So, that’s in a nutshell. There’s more to it than that, but that’s sort of the nutshell version.

Now, before we go, a couple more things, number one, we’ve got better, I mean, we have struggled with this for a couple of years now, folks, we have really got some pretty darn good inventory on our website finally, so check out JasonHartman.com look at the properties section. There’s some good deals there. I mean, it’s really quite a good inventory right now. It’s not as good as it was, but it’s better than it has been. How’s that? Does that make sense? It’s not as good as it was, meaning a long time ago, but it’s better than it has been recently, okay.

So, check out the inventory there at JasonHartman.com and by the way, thank you so much for reviewing the show. Thank you so much for subscribing to the show. Make sure you are actually a subscriber. Sometimes your subscription lapses and you gotta go back into iTunes or whatever platform you’re listening on, re-subscribe, so be sure you don’t miss anything by being a subscriber and please go and review the show. We would very much appreciate your reviews on whatever platform you’re using, iTunes, Stitcher, SoundCloud, whatever it is, please review the show.

I am off on a couple of trips here. Like I said, I’m going to the cold. I’m going to Whistler tomorrow, mastermind meeting and then one day of skiing while we’re there, then I come back I got a conference in San Diego to attend and then I am coming back home for one night I will sleep, I will do my laundry, re-pack my suitcase and go off to Florida to meet with my other mastermind group. That’s what’s going on and I’ll be talking to you from all of those places. I guess that’s it for today. So, happy investing to everybody. Check out the properties at JasonHartman.com.

Oh, you know, there is one more thing, I did ship a whole bunch of the Meet the Masters home study courses, the physical product. I shipped those just two days ago, so they are on the way to you. Thank you everybody for ordering them and those are on the way to you. We have very few of those left, so place your orders for those at JasonHartman.com while supplies last. They’re almost gone. That’s our Meet the Masters home study course physical product at the blowout price of, what is it, $197. It’s cheaper than the digital product, less than half the cost. So, check that out as well and thank you for listening. Happy investing. I’ll talk to you in a couple of days.