Jason Hartman hosts returning guests, Dan Amerman, to look at Federal Reserve politics and interest rates. They discuss how this impacts savers and those with fixed incomes. The conversation goes into inflation and how artificially low-interest rates don’t work and lead to increased inflation. Jason and Dan introduce the concept of arbitrage and tie it into inflation and real estate investing specifically rental properties.
Announcer 0:00
This show is produced by the Hartman media company. For more information and links to all our great podcasts visit Hartman media.com. Welcome to this week’s edition of flashback Friday, your opportunity to get some good review by listening to episodes from the past that Jason is hand picked to help you today in the present, and propel you into the future. Enjoy.
Announcer 0:26
Welcome to creating wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine self made multi millionaire who not only talks the talk but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to find out Freedom, you really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 1:18
Hey, welcome to the creating wealth show. This is your host, Jason Hartman and this is episode number 259. Today, we’ve got a somewhat becoming frequent guest on the show Dan Ammerman back. And I think you’re gonna find this to be his most interesting appearance on our show, because we’re going to talk about something near and dear to everybody’s heart and it’s gonna be about rental income, cash flows and just a whole bunch of ways to profit from what’s going on nowadays. But boy, before we get into that, I’ve got just, it is amazing. You’ve probably noticed, by the way, if you’ve been listening to the show for any length of time in the last 258 episodes, that lately there’s all this talk of recovery, and I’ve been somewhat, I guess walking the fine line on that. Because I think what we’re in is what looks to most of the uninformed people like a recovery. And to me, I don’t really call it a recovery. And here’s why all the surveys will call it a recovery. All the real estate investors will love it. And you know, in that sense, yes, it’s a recovery for us. But a recovery to me means that everybody wins. And I’m not sounding like a collectivist or a socialist when I say that. But what it means is that housing affordability, of course, is very high. Now I’m going to talk about that in a moment. In fact, the highest it’s been in decades, and things are looking quite rosy prices are going up in different markets all over the country. And remember, these stats that you’re seeing are three to five months behind in almost every case. So the market is really quite a bit better than they’re actually telling you because they they don’t have the report on that now, and we’ve talked about that on prior shows too, but here’s what I mean long time ago during the financial crisis at its at its really ugly low point, and I’m going to say two and a half years ago, maybe maybe even three years ago, I was talking about how we are in this first phase of the financial crisis. So the first part of the financial crisis was a depression airy deflationary phase. But the second part of the phase, if you look at it, like a W is an inflationary phase. But for many people, that inflationary phase in the so called recovery, okay, will be really actually quite painful. And those are the people who haven’t accumulated commodities, which are not indexed to the dollar. Those are people who haven’t denominated their assets in the things because remember, things matter, symbols of things, those are called currency. By the way. dollars or symbols of things, they’re not really things. Those don’t matter as much they do matter a bit, but not nearly as much they’ve denominated their assets in real things that people need that that are not just indexed to one particular currency. And they’ve denominated their liabilities in dollars, or at least in some depreciating fiat currency. I trademark the term the ultimate investing equation. Okay, that’s part of my ultimate investing equation where we help you do that. And as we see this inflationary side of the cycle coming because now we’re in that that second part of the W we will see a lot of people make huge, huge fortunes. That’s you, by the way. So congratulations, because you are listening to the show. Hopefully you’re following our advice. As you’re listening, and you’re taking advantage of this. You’re following the ultimate investing equation. You’re buying real things and Assets below the cost of replacement below the cost of construction, you’re hopefully attaching a lot of long term investment grade fixed rate debt to those commodities that everybody needs those resources. And you’re going to profit very, very handsomely. Now, remember fortunes throughout history, you know, they can really be boiled down to about four things, four pillars of extreme wealth, we’ll call them and I’ve talked about this before on the show, and on my holistic survival show as well. What are the four pillars? Well, the first one is really my favorite. It’s real estate and resources. Okay, real estate and resources. So what I mean by that, of course, you get real estate. That’s what the show is largely about. But resources are things that come out of real estate. Remember when I had a guest on about three and a half years ago, and he was running for Congress, and he talked about and you know, he was he’s kind of a simple guy, really, not as slick politician type, but he talked about how all wealth comes from the land. And you know, if you think about it, that’s mighty true. When you look at mining, you look at precious metals, you look at agriculture, you look at resources like oil and natural gas. All wealth comes from the land. Well, that’s pretty simplistic, but those real estate and resources, whether they be water resources, oil resources, natural gas resources, mineral rights, resources, whether they be rare earth minerals, or they be precious metals, all of these things come from the land. So those are part of the real estate and resources. Okay, that’s one pillar. The next pillar is banking. So being in the banking business can be very, very powerful. And in banking, you know, there’s a lot of subsets of all these categories. These are just the four major pillars, but in the banking pillar, I would almost throw into that insurance. And that doesn’t mean having an insurance policy being one of those I’ll say it I don’t believe in it, those suckers who views life insurance as an investment, because I don’t believe it is an investment. I just think it’s insurance. So if you need life insurance, like I’ve said before, get yourself a cheap, economical term life insurance policy and leave it at that. Don’t be investing quote unquote in life insurance does not qualify as an investment in my eyes. Because those insurance companies they do not want you to understand the constant devaluation of your dollars through inflation. They’re banking on the fact that you don’t get it that you’re unaware and uninformed. Same with annuities, same lame deal. I don’t like bonds. I don’t like annuities. I don’t like life insurance, okay, but we’ll kind of call that the banking pillar. Okay. Now, the banking I love is I love being a borrower. First of all, that’s my favorite thing. Being a three decade fixed rate, lowest rates in history, borrower. I love that. By the way, if you were a citizen in Greece right now. The country who has borrowed way too much, and all those lazy folks over there, no fence migration friends, I’m just jealous. Okay. But all those people who want to retire at 49, they are in too much debt, right? And look at the debt, the mess their debt has gotten them into. If you’re a borrower in Greece, you know what you’re gonna pay to borrow about 25% annually? Wow, ouch. That is loan shark. Those are loan shark interest rates, okay, loan shark rates. And so the bond vigilantes and the bankers, they exploited a lot of these opportunities, and they they can do really well with it. But right now, in the United States, you have the opportunity to borrow at such incredibly low rates. That’s really being in the banking business, in my opinion. Now, most people, they don’t view it that way. But I think you’re being a banker, when you borrow like that, and you attached commodities or resources to those long term fixed rate investment grade debts, so you didn’t Your liabilities in dollars in depreciating currencies. So you have inflation induced debt destruction, my other little, say at 10 times faster phrase that I’ve made up inflation and do step destruction. Now, what’s the other pillar? Well, media, I think media is a big, big pillar of wealth. And we see this everywhere from celebrity culture, okay, which, you know, is relatively disgusting In my opinion, when it comes to Paris Hilton who’s just famous for being famous, no other reason. It’s just kind of a funny, funny thing. And you look at these terrible examples of citizenry out there who are struggling with their own things. I hate to almost say that about them, but I’m sure that they are definitely struggling. But yeah, these people have overindulged in life and acted like complete heathens most of the time and they’re out there and they’re making fortunes you know, you look at like Lindsay Lohan right. And just like what’s next and that soap opera ridiculous, but the other part of the media business has been You know, Ted Turner and rupert murdoch, and maybe just Jason Hartman, maybe just being a podcaster. And by the way, one of our clients tab had a consultation with me last week and asked about what I mentioned on the show before my product that is coming out that’s almost finished. And it is the $10 million podcast system. So if you’re interested in starting a podcast and making money with it, and monetizing it as I have, and I’m very grateful for I’ve really been quite fortunate, but it’s not just luck. It’s also by design. A lot of people have asked me about it. So I put together I’ve been putting together a little product on that. So more to come on that when it’s finished. I’ll announce it. And you’ll have the opportunity to learn more about that. So media, that’s obviously a place where people have made fortunes. And then the next pillar the fourth pillar is technology technology. So Silicon Valley, certainly Facebook is going to have their IPO here in a couple of days. You know, we’ve seen these incredible, initial public offerings of technology companies and usually the people that make the most money in any kind of public offering or stock deal are the founders of the company, right? They’re the insiders, the people that have the opportunity to get inside first, you know, those things that we don’t have the opportunity to not open to the general public, really only to the elite class. And that’s why I love income property because it is open to all of us. It’s very, very egalitarian, isn’t it? Any of us can do it. You just need a little tiny bit of money not even that much. Hey, look, if you wanted to buy a property and start out in St. Louis, you can buy for as low as $5,000 down. Now I bet anybody listening can rustle up 5000 bucks, and maybe friends, families and fools just the same way I started in my real estate investing career. And I have made millions of dollars with my investments since then. Okay. And so you can get together 5000 bucks and buy a property in St. Louis. We’ve had that deal in other markets from time to time. But certainly, the opportunity is there to get into this business. But let’s talk about technology back to that for a moment. So technology now, no one asked me this. I just asked myself this question. And what I said to myself recently was, I said, How about healthcare? People have certainly made fortunes in healthcare, right? Well, in the healthcare industry, that’s really several industries. And one of course, isn’t it? Its resources, its technology, and I’m putting science under the technology banner, it’s also insurance. I mean, health insurance is obviously the thing that runs our whole system here in the US. So those are the four pillars of wealth creation. Well, now let’s look at how many pillars in AI in how many pillars are you in of these four. Right? Well, I’m glad to say that I’m certainly in real estate and resources you know, I love resources. And I love real estate, I love things, commodities, things that have you Universal need. I’m in banking because I’m a hard money lender, many of you are as well. And if you’re looking for referrals to sources, by the way, we’ve all mentioned that about the private lending or the hard money lending. We’ve had a really, really tough time with that lately, in the sense that we haven’t had deals to fund because the inventory has been so darn scarce. And you know, when your money’s sitting on the sidelines in the bank, you’re getting destroyed through taxes and inflation, right? It’s a terrible deal. Many people think, well, I’ll just keep my money on the side for safety. I’ll just park it for now. Listen, money is never parked in this environment that we have. Ever since 1971. It’s virtually impossible to park money. Since we went off the gold standard. Parking money does not exist. As a safety bat. You have to keep the money working at all times. So be a hard money lender if you want to earn 12 and a quarter percent or maybe even more depending on the length of the loan, you can do that with hard money lending phenomenal opportunity there. So email me if you’re interested Jason at Jason hartman.com. And the good news is one of our local market specialists just emailed me a few minutes before I started recording this, saying that they just took down 16 new properties. So they have lots of funding opportunities available. Okay. Now I know 16 that will be gobbled up by by like three days from now. But we are starting to see a little bit of a break in the dam in the inventory. Why is this happening? Well, we’ve had it we’ve suffered from a terrible inventory shortage the past few months, because investors are coming out of the woodwork and buying stuff like crazy, but we have a couple of special connections and one of them is through one of our local market specialists a Fannie Mae connection where we have got an opportunity to get about 90 properties all together, but not all of these properties. will work for our investors. Some of them will just be properties that will be resold to traditional homebuyers not good enough for you and investor and then in a couple of other markets, we’ve been able to get a couple of good inside track deals as well. One of the reasons we’re able to do this and our local market specialists are able to do this is because of our long established record, and because of our volume and our credibility in the business, okay, so use that to your advantage. So if you’re interested in taking advantage of that banking pillar, that’s the second pillar banking, be a borrower long term fixed rate debt, of course, but also be a lender of short term high interest rate debt, and who can you loan to you can loan to our local market specialists who have very high inventory costs, because Heck, properties are a high ticket item, so you can finance their deals, and you can earn over 12% doing it. And they’re very short term loans. So you have very, very little inflation risk. So I love that on one side of the equation, you borrow it four and a half percent, maybe even 6% for three decades. And on the other side of the equation, you lend out money for four to six months at a time, and you get net with fees included maybe 12 and a half percent maybe even higher. So email me Jason at Jason Hartman comm if you want to get into the banking business, okay, if you want to take advantage of that pillar, and I use technology in my business in my life, so do you of course, but Gosh, I don’t own any proprietary technology. I’m sad to say I’ve wanted to, I tried to buy property tracker, the software company that we like so much that we recommend all of our investors use and you can get a special deal on that we we make no money on it. We just like it. One of our clients invented it and then the owner decided he was going to do something else with it and go into the business of doing apps and he didn’t want to sell it to me anymore. Okay, you You heard him on the show as well, a great guy. And so I’m not in the technology business, I would love to be in the technology business, because then I would have all four pillars, but I am in the media business, and that is my podcast network. My my other company, the Hartman media company publishes 15 podcasts and publishes educational products, newsletters, things like that. So I am in the inbox, of course, don’t forget 11 books now. And so I’m in the media business, the publishing business. So I would like to be in technology someday, but boy, for simplicity, accessibility, and just general ease of use and conservative stuff. my very favorite thing is, heck, keep it simple. And just buy yourself a couple properties and manage them and wait. It’s so easy. It’s the most historically proven wealth creator and folks how much evidence do you really need if I haven’t convinced you on the last 258 episodes, that income property is the place to be. Look at some of the recent headlines. Okay, top 20 metros, that’s, of course the Case Shiller index, right, which is misleading because it’s only 5% of the market. You’ve heard me talk about that with biggest jumps in affordability. It says the US housing affordability index, compiled by the National Association of Realtors reached a record high in the first quarter of this year. And this is a great index By the way, you know, I have my qualms with Anna NAR National Association of Realtors, but boy, I tell you, I love this index, the housing affordability index, because I think it is one of the very, very best indicators of where the market is going to go. And it’s obvious because if more people can afford to buy what are they going to do? They’re going to push prices up. Remember, you’re listening to flashback Friday. New episodes are published every Monday and Wednesday.
Dan Amerman 19:06
But there’s a big pardon the pun a big butt in there, and what is the big but it’s in that way? Can they get alone is financing accessible? Yes, it would be an awesome deal. But a lot of them can’t get loans. 10s of millions of Americans have destroyed their credit for the next couple of years or several years. Because they’ve done strategic defaults. They’ve had foreclosures. And I tell you, that’s a great opportunity for us as landlords but get this the NAR us housing affordability index is at a record level and here you go the index okay. Basically what it does is it measures can they median families, the median household income afford the median price existing single family home in that market based on 20% down In an 80% mortgage, so that’s how it works. Basically, that’s the basics of the index. And how it’s calculated now in index value with 100 means that the median family has exactly enough income to qualify for a mortgage, or they may have the income but not the credit. Remember, they may not, they may not have the credit. And that’s the real dichotomy that’s going on in this market that represents big opportunity for us as real estate investors. But if it were 100, that means that family could exactly afford that home, and that would be great. That’s a good index. 100 level right? Well guess what the index is now it’s at a record high last quarter. It hit an all time record high since the index was invented in 1970. How many years ago was 1970? That was 42 years ago for 4.2 decades. This index has never hit this record. It is the best it’s ever been right now, folks, and the number is not 100, which would mean it was at like at parity. That’s the way you could look at that at parity. It’s now 205 point nine, the first time on record, the index has risen above the 200. Mark, since they began tracking it in 1970. Wow. Here’s another headline for you build her confidence is at its highest level in five years. Washington DC confidence among us homebuilders rose to the highest level in five years in May, a hopeful sign that the modest improvement in the housing market will pick up. Well, folks, it’s not as modest as you think. Because remember, they’re tracking numbers that are five are well three to five months behind the curve and our numbers are better Cuz we’re in the investment price segment of that market. Okay, so it’s even better for us as investors than any of these articles say. And then here’s a couple more headlines for you, Fannie Mae, more Americans expressing confidence in economy and home values. Next article, buying a home won’t get much cheaper, according to AOL real estate. Next article, home prices rise and half of US cities as market stabilized bloomberg.com. Now, combine that with this that I’ve been talking about over and over, here’s another headline for you. And it’s a sad one, but it represents opportunities for us as investors, as I’ve talked about so many times on prior episodes, recent prior episodes, and what is it? It’s the student loan issue. It says student loans cripple an entire generation. This is from Newser wannabe college students have a lot to prepare for all night study binges, grueling exams, and the three jobs. They will need to pay off their crippling student debt. What’s worse, the financial burden is only growing the New York Times reports today, just 38% of the nation’s $1 trillion in student loan debt is being paid off. And the default rate has recently doubled. I’ll be paying forever says a 24 year old dropout with $70,000 in student loans. For me to finish, it would mean borrowing more money. It makes me puke, to think about borrowing more money, folks. This is sad. It really is. But the reality of it is, is that these these students, the gen wires, the largest demographic cohort in American history, larger than the baby boomers by 4 million, they need rental housing, because God knows it’s gonna be a long time before they can afford to buy a home. And that is a sad commentary, but it’s the way it is. So you know what, I’m gonna do them a favor and you should To provide rental housing for them expand the choices and the inventory of good quality rental housing. So you can serve those people because a lot of them are coming right at the rental housing market in their prime renting and household formation years, right now. Okay. That’s it for my commentary, my little monologue, well, three more things. If you want to do the hard money lending, we really need a minimum of about $75,000. Okay, several of you have expressed interest, and I’m glad you have, I appreciate that. And it really takes about $75,000 or so to get started. Because remember, you’re not pooling your money with anybody. You are in complete control, you’re a direct investor. So that’s what it’s going to take to buy a whole property about $75,000. So that’s about the minimum for private lending or hard money lending. The other thing is, make sure you talk with one of our investment counselors. You can reach them through the website at Jason Hartman calm because they can help you with a free portfolio makeover, a free portfolio review, I recommend at least one time every single year you should have a portfolio review. Take advantage of these free services from us. Okay, portfolio makeover portfolio review, ask for it by name and also ask them about something that has become extremely important. Many of you are buying a lot of property and buy a lot. I mean, many of you are buying 1520 3040 properties from us right now. And by golly, it’s been a great business for us. So thank you so much for putting your trust in us. But one of the important things that really, really comes up when you’re working out your plan of buying properties, and we’ll talk more about this on future shows. But it is the issue of mortgage sequencing how you borrow, where you borrow, what type of lenders you’re borrowing from, and in what order you close those properties to sequence your mortgages properly? And in what areas? If you’re a cash buyer, should you buy cash? And what areas should you finance? So our investment counselors can help you out with all of this stuff. You can reach them through Jason hartman.com, the website, and of course, look at some great properties there, like this one. We’ve got our St. Louis tour coming up starting this Friday, and it’s going to be great. If you’re not there, and you want to get in last minute, you know, you’re going to pay 50 100 extra bucks for your airfare if you have to fly. But I tell you, it’s going to be a great tour, and a whole bunch of you’re coming so we’re looking forward to seeing you Friday night at the welcome reception. But check out this property Now this one’s sold but we’re going to see more stuff like this this weekend because at Jason Hartman calm slash properties our vendor is holding our local market specialists is holding properties exclusively for the participants in the tour. So if they don’t sell this weekend on the tour, then they will go up on the website sometime next week at Jason Hartman comm slash properties. So here is a four Plex a four unit property 3500 square feet $99,000. That’s only $28 a square foot. This is fully rehabbed and rent ready gross rents projected at 1800 dollars per month. And let me just go through a couple key projections here for you on the Performa positive cash flow of over $10,000 annually. Over $800 a month positive cash flow and that’s with financing 25% down you saw massive positive cash flow. Your cap rate on this property is 14.7%. Your cash on cash return projected at 32% annually overall return on investment projected at 46%. And let’s compare this to a commercial property. That is a Walgreens that only fool would buy, but it might not be a fool. It might be a really smart, sophisticated guy with an MBA who went to Wharton, or Harvard, or some great school like that, who is running a fund that you are investing in? And hopefully you’re not investing in funds because here’s the kind of crappy deals they buy. This is a Walgreens and this property has a 25 year triple net ground lease. It’s $3,241,000. And Walgreen is rated as as a by s&p and, boy, you know, you can trust their ratings, can’t you? s&p and Moody’s. And all these ratings companies have had huge criticism after the financial crisis. And it’s a fast growing Houston suburb, guess what the cap rate is, it’s only a rotten, measly, crummy, crappy 5.4% compared to the little property you can buy. That’s got a cap rate of 14.7% Yep, don’t buy those big commercial properties that all those really cool sophisticated people buy because the return they’re getting is a heck of a lot lower than the return our investors are getting. So who’s really more sophisticated? That is my question for you. Alright, without further ado, let’s get to the interview with Dan, you’re going to love this interview, he talks about some really, really interesting stuff. And I read one of his emails, and I asked him to come on specifically to talk about this. So we’ll be back with that in just less than 60 seconds. Hope to see you Friday in St. Louis and in St. Robert this weekend.
Announcer 29:37
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Jason Hartman 30:08
My pleasure to welcome back I believe it’s a fourth time guests now Dan Ammerman favorite, who is the creator of a course entitled, turning inflation into wealth, and he has a great reading series. And again, you’ve heard him on the show before, and it’s great to have him back. Dan, how are you? Good, Jason. Sir. Thank you for having me back. Great to be here again. Well, of course, my pleasure. You did a recent article that I found to be very interesting entitled, arbitrage and fed policies with rental housing, cash flows. Tell us about that.
Dan Amerman 30:40
Well, it really ties together several different things. The one I start with talking about fed policies, is something that I think all too many people are very familiar with these days, and that is, you just can’t get paid any money. Not anything you have in the bank or money market. Ain’t that the truth? I tell you,
Jason Hartman 30:59
so I mean, these rates are so ridiculously low. It is just, I mean, it’s just killing people on fixed incomes, senior citizens who save I mean, the savers are really getting the short end of the stick, aren’t they? It’s really unfortunate, and it’s entirely artificial. The Federal Reserve, of course, has pretty much total control over interest rates these days. And they’re using that to keep interest rates as low as possible. And this helps the federal government a great deal. I did an article last fall I looked at we looked at approximately market rates, what the federal government deficit might be it It might be another $500 billion a year, if the Treasury was not paying such low rates on that approximately 15 trillion and has borrowed and this is also really beneficial for the Wall Street firms. It’s very beneficial for banks in general, but the people that it really hurts, are the average people, particularly people who have been, they’ve been saving for retirement and why have their financial planners been showing them for years, if then strategies based upon getting a reasonable bit of interest in common, and that’s particularly true if you’re older, because you’re supposed to be shifting out from stocks into bonds over time, and there’s all these millions of schedules have been run for people that assume interest rates of four or 567 percent or whatever, depending on the year and when it was wrong. And now we’re below 1%. That’s just not working. It’s not working at all. And Dan, the picture actually gets much worse than we’ve talked about so far. Because these incredibly artificially low interest rates create what they create higher prices, ultimately through inflation, where you’ve got this this increase in in money supply that has been extraordinary. And so not only are they getting just killed on on the fact that they’re their money that they’ve worked so hard to save all their lives doing the right thing, saving money saving for a rainy day. But but then You add to it insult to injury is that the money is further debased, because of this monetary policy, right?
Dan Amerman 33:07
We’re in this fascinating and unfortunate situation, and that this is unprecedented. in our lifetime, we have the Federal Reserve that has absolutely abandoned its long term goal to be a steward of the value of the currency. Okay, it never get back to the job of it, you know that the dollar has always steadily lost value over time, but that was their attempt to maintain the value of the dollar. But we know they are creating literally trillions of dollars out of the nothingness to support a federal government that can’t pay its own bills, and to pass through money on a privileged basis to financial insiders. And in many ways, this is the most inflationary potential situation that we’ve seen in our lifetimes. There’s more than potential return. Anytime you go to the grocery store. You can see what’s really going on with inflation. And so if you take like a textbook and economics perspective, what they would tell you is that interest rates right now should be in excess of 10%, at least 5% or above, just because people should have inflationary expectations. The central bank, the Federal Reserve is openly monetizing. But instead, we’re being cheated out of all of that. The interest rates simply aren’t there, as long as we do what we’re supposed to do, and don’t try to find the opportunities that are created at the same time.
Jason Hartman 34:34
Yeah, no, that’s interesting what you just said, Dan, because, okay, so what you’re saying is the textbook scenario would be that interest rates would be somewhere close to the inflationary pressures so that people wouldn’t be completely devastated. You know, now we’ve got sort of both friends working in opposition. I mean, the interest rates, I mean, Take, for example, during the Jimmy Carter era, you know, I remember My mother saying to me that she had a Dean Witter money market account that was paying like 1718, maybe even 19%? I can’t remember for sure. But the problem was that the value of the money was going down faster, potentially. But still, you had this in the spread wasn’t that devastating? In the old days as it is now? Right? Because, and I don’t know even what your thoughts are on this. But you know, I’ve read a lot of articles. And my thinking is kind of the true inflation rate. Of course, it depends who you are and how you live and how you spend is somewhere between nine and 10%. Right now, as we speak.
Dan Amerman 35:38
I’d love your opinion on that, by the way. Well, the interesting part about inflation is, as you just alluded to, there is no true national rate of inflation. It’s different for each one of us, depending on our lifestyle, depending on where we live, and it’s different depending on what stage in life that we’re at. So what that comes down to then is that we Have this incredibly complicated calculation that requires a huge number of assumptions in terms of how inflation rates are calculated, and what group we’re really looking to and what expense categories we include for inflation rates. And the other fascinating part is the only look at things like say the rate of economic growth and so forth. These are always done on an adjusted for inflation basis. So the rosier the inflation statistics look, and this is something I’ve been writing about and teaching workshops for years. The lower the inflation rate is, the better the economy looks. And the less money has to be paid out to people who have cost of living adjustments or social security or things like that. So basically, the lower the inflation rate works, the better off incumbent politicians are, and the politicians have known this for decades. And the way that we calculate inflation has changed a great deal. Over the last 40 years, it’s been a moving target. Now, when I look at the rate of inflation, I look at how much I pay for dinner. I look at groceries, I look at health care. I look at different categories like that I look at my utility bills. And I will say that for me personally, when I look at healthcare when I look at food, and when I look at utility bills, those are all climbing at 10% per year currently, even while the government tells me there’s no inflation here, it’s fine. It’s almost insulting. It’s insulting anytime you walk into a grocery store, or you pay your electric bill, or you go to a restaurant, and you you know, I want to mention to Dan never in my life till about a year and a half ago, maybe two years ago, did I even pay attention to my utility bills. I mean, I just put them on auto pay on my online banking account and just send them a check for a flat amount that was usually an overpayment. So I was had credit and and I never had to think about him but utility bills have been
Jason Hartman 37:58
skyrocketing. I mean, it’s unbelievable. And same with the grocery store and it’s in, they hide inflation to the manufacturers of products of course, because the products keep getting smaller. So that bag of potato chips, it may be the same size bag, but there are fewer chips in it. And if you look at the net weight and the cost per ounce of anything you buy, it’s it’s skyrocketed. It really has
Dan Amerman 38:22
got to say the dinner that I just took my wife out to. We went to our favorite restaurant. We ordered our favorite special meal we don’t get all that often. And it was up 33% year on year
Jason Hartman 38:36
now you must be a really romantic date man. I gotta I can imagine you the the Chartered Financial Analyst sitting at dinner with a with your wife, and you’ve got your calculator out,
Dan Amerman 38:48
maybe a spreadsheet even figuring out right of inflation. Whereas with me long enough at this point, you know the kid and so forth and so on that now she’s forgiving and understanding what Do rates of inflation at the dinner table
Jason Hartman 39:02
and you say, Honey, we can get our favorite meal but just understand that it’s up 33% year over year. We got to find a little humor in this tragedy that’s going on indeed.
Dan Amerman 39:12
And then we got to find a way to turn it around to our advantage. We do we do
Jason Hartman 39:17
well in turning it around to our advantage. There’s a couple subheads in your your fantastic article about arbitrage being fed policies with rental housing, cash flows. So the first subhead is understanding cash flow investing. You’ve got an interesting chart there that looks at operating expenses, mortgage payments, investor, cash flow, and vacancies. And then you you bring this into the larger picture. Tell us about that.
Dan Amerman 39:41
Well, let me place this in context just a little bit because I like what you said about your your mother and Dean Witter and the money market, right. So used to get and so forth. I got out of graduate school in 1983, which was the worst year for newly minted MBAs getting employed that we promised in our lifetime. And the problem was that we were still dealing with the lingering after effects of stagflation. And within a couple months after getting out of graduate school, I closed my first multifamily deal working as a financial analyst. And I think the interest rate on that we actually had as a tax exempt financing was something like 13 and a half
Jason Hartman 40:21
percent. So that was a an apartment building that you were a consultant on. Someone was buying it and you’re consulting on the deal. Looking at the
Dan Amerman 40:29
new Yeah, typically on larger transactions. There’ll be other parties involved between just besides you in your local bank. And you know, where I worked for many years, was in the multimillion dollar transactions and trying to come up with optimal financing structures for people so they would pay less money when they’re doing a larger deal.
Jason Hartman 40:51
Yeah, good. Okay. So what was the interest rate? Again, you just said
Dan Amerman 40:54
it was a tax exempt deal in this case, and I think it was something around 1313 and a half percent, which was great because the taxable rate was more like 15%. And in fact, if you go back, I’ve got this up on the screen somewhere. If you look at peak annual average interest rate, it was in 1981. And the average mortgage rate was 16.63%. And this made a huge impression on me. Because it is very difficult to make housing cash flows work when you’re paying a high rate of interest. And that’s part of what I illustrate, in the article which is available at my website. That is that if you have the gross amount of money that’s coming in, you take out for vacancies. Obviously, you don’t make any money on the unit sitting there empty, you have to assume it’s gonna be some transition times where it will be empty. You look at your operating expenses. And often your biggest payment is going to be the principal and interest on that mortgage payment. And I think what People don’t understand is they look at the headlines, and they’re totally focused on price. And I think this was something that was really reinforced in the real estate bubble of the last decade, people were looking for the quick flip, they were gonna come in, they’re gonna hold property for maybe a year, and they’re gonna sell it for a lot more money. So they weren’t as worried about the payment side of things. But if you’re looking at real estate, really as an investment, there’s nothing more important in establishing both your cash flow and your safety margin than the size of that Kanye payment, you know, assuming that you’re borrowing to buy the property. And then what is so amazing right now, just as a little aside here is that unbelievably for the first time in, in my many, many your career longer than I care to admit,
Jason Hartman 42:47
we’re actually seeing where private lending for single family homes actually works now for both parties. And maybe you know, I said that on one of my recent shows, and maybe that’s because we are in this precedent a time where you can actually borrow from a private lender, a hard money lender. And the deal will make sense as the borrower That has never happened before that I can ever remember. Because mortgages have always really been subsidized by the government since the depression. So Fannie and Freddie have, and now private lending actually, you can buy a deal on a I mean, long term for private lending is five years on a five year private loan, and the deal works, I can’t believe it. And it also works for the lender reasonably well, too.
Dan Amerman 43:32
Well, the amazing part, and that is something that has been opened up by the government, because the overall payment structure is so low that you can come above that a bit for a private lender, and it still works for you. You’re still cash flowing and the private lender is getting a substantially better interest rate. They’re gonna be able to get on a five year paper anywhere else.
Jason Hartman 43:54
Oh, my gosh, I mean, they’re, they’re, they’re getting an interest rate. That is maybe 2000 In times better than the bank is going to pay them. It’s insanity. how much better it is, you know,
Dan Amerman 44:06
part of the reason I wrote the article after having worked all those years and done all those many thousands of rental units, in the financings and so forth, is that I think a misunderstanding that people have, if you take a very short term perspective is I think that the price that you pay is the most important thing. Because that determines the profit you sell it. Now, if you are a cash flow investor, that is simply not true. I mean, obviously, you want the price to go up. And really all real estate transactions, you have both sides in play, eventually there’s the capital gain, and then the interim there’s the operating cash flow and so forth. But if you’re looking at what really matters, right, how much money do I have coming in? How much money do I have going out? What kind of return Am I getting on that equity investment I made in the first place? And how much safety margin do I have? Well, the fact of the matter is that interest rate is more important than price. Sure,
Jason Hartman 45:09
it is, it’s all about the effect of cost. And in that interest rate, that mortgage is a huge asset. You know, most people consider the property, the asset and the mortgage, the liability, but really, the mortgage can be a huge asset.
Dan Amerman 45:22
It can it can and it’s really where the money is made. And the question is, how much leverage you do you know, the old strategy was to go as high as you could I think there’s a case for coming in significantly lower leverage ratio. Now people have different perspectives on that. And I think you used to have a different perspective on the one you have now. But the the key factor there is that that Federal Reserve has accidentally because they’re not really looking out for small investors in any way. But in the process of creating non free market interest rates, for banks and for the federal government and so forth. We essentially have subsidized mortgage rates that are there. If you can get the London you know if you can get the Fannie or Freddie loans, whatever the case is, and that goes directly to your bottom line as the investor, we’re seeing much fatter cash flows than we would be able to see if it were free market.
Jason Hartman 46:19
Just a reminder, you’re listening to flashback Friday, our new episodes are published every Monday and every Wednesday. Well, the amazing thing is that when we look at our performances that are on my website, Jason Hartman calm for in the property section, the debt coverage ratios on financed properties now down there like 2.3 2.4, even even three times I mean, it is so unlikely that anyone would ever be faced with a default scenario. When you have debt coverage ratio is so good. It makes the investments so conservative But part of the reason of course is because property is so much cheaper. The properties are far below the cost of construction if you’re buying them in the right market, but of course, that mortgage is so much less expensive.
Dan Amerman 47:09
And this is something I illustrate. And again, this isn’t Daniel ammerman.com, just look under the real estate tab is you have two factors coming together simultaneously. One of them is that we do have a sharp decline in prices. And of course, as you know very well, everything was local. It’s much sharper decline in some markets and others on a national basis were well off, but you know, we’re still not as far down as it were in the 80s and 90s. But what is absolute on an inflation adjusted basis? What is absolutely unprecedented is the interest rate levels. But when we put those two together, we get that third graph that I’ve got, I’ve got a graph that tracks home prices and inflation adjusted terms on a national basis. I’ve got a graph that tracks interest rates, and you put the two together and it’s like the floor draw SAP, we’ve never seen mortgage payments so low, which means we’ve never seen such ample opportunities to enter into a property with a substantial positive cash flow with substantial safety margins. And then we’re locked in and we still got that irresponsible federal government and the Federal Reserve out there destroying the value of our money, which when they do that they destroy the value of our mortgage.
Jason Hartman 48:24
That’s, that’s a great thing. And that debt becomes a huge asset because inflation pays it off for you. So which graph are you talking about? Now? these graphs are really great. I you know, I love your graphs. Okay, so you’ve got one entitled, average price of US single family home inflation adjusted from 1992 to 2011. Okay, and that’s the Freddie Mac house price index. And then another graph that’s quite interesting is inflation adjusted mortgage payments from 1992 to 2012. And that’s
Dan Amerman 48:54
actually a 20 year history of financing costs. There are three graphs in a row and when you put These three together, you’re really good to see what’s going on here. One is 30 year fixed mortgage rates 1992 to 2012. And you know, there’s a little big up and down, but it’s almost straight down. And we are at record low interest rates right now. Then I have the average price of the US single family home, which is inflation adjusted. And if I want to use the Freddie Mac house price index, as opposed to the better known Case Shiller just because the Case Shiller is is heavily skewed towards major metropolitan, I couldn’t
Jason Hartman 49:29
agree more. It’s only 20 markets. It only represents 5% of us. It’s just crazy that people review the Case Shiller index is
Dan Amerman 49:37
it’s almost worthless for most of the country. I couldn’t agree with you more.
Jason Hartman 49:40
Yeah, I only read and, by the way, I only like six of the markets in the Case Shiller index six out of 20.
Dan Amerman 49:47
Okay. Yeah. Okay. But the Freddie Mac index is truly national. And it also uses comparable properties, which is, you know, the claim to fame of the case. Sure. So you’re tracking accomplished sighs house over time, as opposed to, you know, the other distortions we have in which has happened getting bigger and so forth. No, I think it’s a better index. So we put those two together. And we get the third graph, which has the orange line. And that’s inflation adjusted mortgage payments. And what you can see there is that basically between 1992 in the start of the bubble, we were bouncing around up and down at a little less than $900 a month 70% LTV if you’re financing an average home, add to the prevailing mortgage rate. And then you see this big spike up to a little over 1100 for the real estate. So this very peak of the real estate bubble, right and so that’s just to tell the listeners that’s 2005 2006 2007 is where you’ve got that big spike and now you fall in way below that line. I mean, floor has dropped out. We have never in our lifetimes seen this relationship. And we’re seeing it solely because the Federal Reserve is so aggressively intervening in the marketplace to keep interest rates below market levels and most particularly to keep mortgage interest rates below market level in the process of doing so they open this tremendous backdoor for us.
Jason Hartman 51:11
Yeah, they really have. So here you went from $900 in 1992, up to over 1100 dollars in that looks like about 2007 2006 2007. And then now you’re down at like $570 when adjusted for inflation. So do you see how much cheaper that mortgage has become when you adjust it? Now? I’ve got to ask you, even while that floor has been dropping out, rents, I know it’s up vacancies are down.
Dan Amerman 51:45
Incredible for real estate investors. And that was my motivation in writing this article saying look, I started doing this in 1983. I’ve never seen this before. And I’ve seen all these headlines in the paper. They’re worried about prices this price is that and What they’re missing. In the meantime, though, it’s always good. I’m a strong believer if you are buying low and selling high. But this is an amazing environment, we have so many positive factors working with the same time even so many people are selling real estate, I’d never touch it. Let me take a brief pause. We’ll
Jason Hartman 52:16
be back in just a minute.
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Jason Hartman 53:07
Well, what I wanted to ask you about this index is, which inflation index did you use? Are these the, quote, official unquote numbers? Or are owning now real inflation index?
Dan Amerman 53:18
I kind of take a combined approach here. I’ve been writing articles for years about how you can’t trust the official inflation, right? It’s actually higher than that. But in this particular case, I don’t want to have to take someone who’s never seen one of my articles before is looking at financial education and first explain to them what’s wrong with inflation statistics, and then get to the bottom on results because then everything is dependent on their accepting what I’m saying about inflation rates, I use the straight up CPI you from the US government,
Jason Hartman 53:49
the consumer price index, or you,
Dan Amerman 53:50
yeah, the urban component of the consumer price index. And these numbers look way better if we use a more realistic inflation.
Jason Hartman 54:00
Yeah, I suppose if I suppose if you put in a realistic inflation rate rather than the official numbers, this mortgage payment inflation adjusted would actually be below $300. I bet something like that, you know, I mean, I’m just sort of guessing here, very anecdotal. But, wow. It’s it’s, that’s the great thing is it’s even better than what you show in your chart. One of one of the things that the premise that you started off with today is how we have this artificially low interest rate environment. That is, it’s not exactly a Ponzi scheme, but it’s, it’s a bit of one, I guess, in the way. It’s a redistribution of
Dan Amerman 54:42
wealth. Well, yeah,
Jason Hartman 54:43
I wasn’t referring to that, though. That’s sort of the result of this scheme. And what I was referring to is, is the way the Federal Reserve and the Treasury operate in so I mean, they can’t keep rates artificially low forever. I mean, first of all, maybe explain to the listeners a little how they’re doing that. I mean, how, you know, they have market pressures to the US the dollar is not the only currency. The Federal Reserve is not the only central bank in the world. I mean, you know, we have to trade with the rest of the world. And certainly we throw our weight around. But it’s some point, don’t the Chinese and the Japanese and the rest of the world just say, we’re not gonna buy your T bills anymore. You know, screw you guys.
Dan Amerman 55:23
You know, the subjects you just went over, we could sit down for two or three days, I believe in and have a conversation. And I’m not sure where to start on that. But the first of all, the reason the US dollar is maintaining its value is because we’re being played for suckers when it comes for employment. Other nations don’t want the reserve currency status, because then their workers become too expensive. I want to talk about China and currency manipulation. They love us having a reserve currency. They love the US Dollar being overpriced governments around the world and their central banks are very happy to participate in this illusion where the US is financially the strongest in the world. Because when we do that our workers can’t find jobs, we can’t compete fairly we have this ongoing massive unemployment crisis that we have there workers are artificially undervalued, and they gained the employment benefits from doing so. And this is just it’s a massively bad situation for both us workers and worst retirees. In terms of how the internet like I’ve got, I should I should say, each one of these I’m referring to I’ve got extensive resources available on on my website, and that’s
Jason Hartman 56:44
Daniel Ammerman calm and I just want to say that Ammerman is am er ma n.
Dan Amerman 56:49
Yeah. And if you go to the tab called retirement investing, I have an article called bullets in the back where I disagree. on exactly how this current manipulation works and how it is us workers and us retirement investors, who are basically paying the price for that, in terms of the currency manipulation that’s being enabled. If you have, if you want to know how the Federal Reserve is controlling all of this, I have what’s called a tab for a money creation primer, that shows you how the Federal Reserve has literally created out of nothing, you know, over a trillion dollars and given it to insider interest, and used it for market manipulation and so forth. And it’s basically what they do is that they will, for instance, buy a mortgage if they want to manipulate mortgage interest rates from a bank, and they will pay them in what are called excess asset reserve balances. Now here’s the key point. The excess asset reserve balance didn’t exist until the Federal Reserve said existed. This is not like the money was there beforehand. This is not even like the multiplier effect that people talk about how banking used to work in the past. This is unprecedented. The Fed simply the Federal Reserve is the central bank has the ability to directly create money when they create a liability, it’s money, and they have an unlimited ability to create that and an unlimited ability to control the market. Now, the other central thing absolutely essential that I tried to sound the warning about my gut out to some people a lot enough when QE two was announced quantitative easing is the methodology that the Federal Reserve used to do it. What they did was they created this money, and they didn’t use it to directly buy US Treasuries. They didn’t use it to directly finance the US debt, which would have been technically illegal but the law could have been changed. They did something much worse. They took this massive sum of money and they said they were going to use it to control prices and yields in the US Treasury market. So we haven’t openly officially admitted with an official goal of the Federal Reserve controlling the interest rate paid on US Treasury bonds by the US government to make sure there’s not a free market. And then the interest rates for the entire rest of the economy are based upon that. That’s probably about as far as I could go on that topic for now, but I don’t know if that helps address your question.
Jason Hartman 59:23
It does. It’s just amazing. I mean, how this stuff works, it’s just it’s really hard to get one’s head around it Dan, you know, the concept of money being lent into existence and but once you do, it really just opens up a whole new perspective on on the financial life
Dan Amerman 59:41
more and you know, the other thing to keep in mind here is people often treat this has been obscure stuff. This is really dry stuff. And most people have either never studied economics or you know, they didn’t college 20 years ago or 30 years ago or something like that. And if you’re basing your knowledge Have the world around you on either newspaper reporters or an economics class you took in college 30 years ago, you just have no idea. And that is absolutely what the Federal Reserve and the federal government are counting on. In this case, the Federal Reserve has never acted in this fashion before. They’re doing entirely different things, for the benefits of privileged insiders than they were ever doing before. I can’t tell you why. Whether the newspapers don’t understand it, or they don’t choose to report it, whatever the case is, it’s not being reported. And it’s changing all of our lives.
Jason Hartman 1:00:35
Yeah, it really is. It really is. Well, given all of this given what you said, we’re in a situation now, Dan, where, according to your article, total inflation adjusted reduction of 49% over a five year period, I mean, talk about a cash flow opportunity investors. If you’re not if you’re not buying good properties with good financing now, you know, you’re just missing About you really are. But given all of this, what do you think about the future of inflation and interest rates? Do you care to make any predictions as to where they will be? By when I know it’s it’s very hard to predict anything with all this government manipulation? Well,
Dan Amerman 1:01:18
I’ll close on two different ways of looking at that. One of them is there is a long and infamous history of governments manipulating interest rates for their own advantage. And economists call this financial repression. The last time US government debt levels were at where they are now at roughly 100% of GDP, was in 1946, just after World War Two, and they knocked off 70% of that over the next 35 years through what’s called financial repression, which is making sure that us savers got cheated relative to the rate of inflation. Again, this is not something you read about in the newspaper. But it is very much it. This is professional economics. This is how it really works. And I’ve got a tab on my website, financial repression that has three kind of essential education articles on how that’s worked in the past, and how it’s working right now. But the other issue is, is is as hard as governments try to control things, and they really do. And in theory, they’ve got the power to keep this going indefinitely. They really do. But the problem is they’re human, they mess up. Given enough time, over time, when a government try something this aggressive and this ambitious, they’re inevitably going to mess up at some point. And when they do, we’re talking about probably an explosive increase in officially admitted inflation as well as interest rates. But because what we’re really talking about is, we have this program in place right now that the media is not covering in most of the country is not aware of, you know, they just look at the lousy yields they’re getting, and they think somehow that’s the I don’t know if a natural economy or where this is coming from, it’s entirely manipulated. But we have this tremendous pressure building up. And that’s the example I use sometimes, is when you have government manipulation, going against what free market desire should be what people don’t desire. So it’s like two big tectonic plates losing against each other. There’s gonna time gonna be as you’ll know, as you recognize the former summer from South California, that’s gonna lead to an earthquake. At some point, we can’t tell the exact day. I know there’s people out there who say, Oh, this will happen in 2013. What happened in January 2014? Well, I wish I was that smart. Yeah, nobody knows. But I do know tremendous pressure is being brought, and the greater the pressure and the longer This builds and the longer we have the divergence between government manipulation, what the markets want to do and what people want to do, the greater that earthquake is going to be.
Jason Hartman 1:03:53
That’s a very, very good analogy, because the tectonic plates are moving against each other. These are unnatural forces that are occurring. And free markets ultimately have to rule the day. And and when they when, when the jig is up, we are going to see higher interest rates, we are going to see very high inflation in my opinion. And it’s very, very important that investors position themselves now for what is coming because you can’t position yourself later. You have to do it in advance of the wave. If you’re a surfer, you’ve got to start paddling before you know as that wave is starting to swell, you can’t jump into it when it’s a nice beautiful to
Dan Amerman 1:04:38
Yeah, well. I mean, let’s go back to 1981 in 1983. Everyone knew about inflation then, but it was kind of hard to profit from because interest rates are 16% you want to be prepared. You want to be rotting that way when interest rates are 4% 5% Yeah, yeah,
Jason Hartman 1:04:53
yeah. or 3.87% which is the rate on a 30 year and you know, of course, this isn’t for investors but it’s close for investors it’s not bad. You know I just financed an apartment building I have and I couldn’t believe it 10 years four and a half percent borrowed $3.4 million wow what I just when I signed those loan documents I just felt like that was a gift from God. Amazing. And you know what the four and a half percent I don’t pay it anyway I outsource the debt to tenants. They pay the debt. So you know, it’s an alternate it’s a great thing. Well, the website is Daniel ammerman.com and everybody subscribe to the still do the reading series, right?
Dan Amerman 1:05:37
Yes, I still have the the free mini course turtle inflation as well. Fantastic course. And that’s where the person subscribing for free gets an email once a week do a couple times a week over the space of about a month, month and a half. And you essentially it’s a bunch of 10 to 15 minute readings. So it just takes a little bit of your time a couple times a week and by the time you’re done you finished a short book that has can really change people’s lives? Yeah,
Jason Hartman 1:06:02
it’s your house. It’s your house. And I’ve been to your three day course and it was excellent and just highly recommend that people take advantage of your work, check it out, learn about what you do, because it’s pretty fascinating. You know, there’s a bunch of other stuff here you talk about the hidden taxes in gold investing. And one of the one of the other things I’d love to ask you about someday in the future is the gold housing price ratio, and how it’s at a historic low gold being used as a measuring stick. Just some great stuff there, Dan. So thank you for all you do.
Dan Amerman 1:06:30
Well, thank you so much, Jason, I sure appreciate the opportunity to talk with you.
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