Jason Hartman: Welcome to the Creating Wealth show. This is your host Jason Hartman and this is episode number 277 and today we are going to have as our guest in a few minutes here after I talked with Steve and we go over some current events and so forth. Today we are going to have Steve Sjuggerud on and now what’s interesting about this guest is you may have read his work or been familiar with his name at one time or another. He is with Agora Financial and as you may know they are the largest publisher of financial newsletters in the world. We had many of the guests on the show before including Addison Wiggin, the number two guy there and many others and they are pretty much stock guys. They like stocks, Wall Street and those more mainstream type investments. I called the more mainstream than income property oddly, but what’s interesting is that Steve is very, very bullish on real estate right now and he even says in the interview that that’s an odd thing for him, but he talks about how now with all the analysis that he has done which is quite extensive that now is really one of the best opportunities to either buy a home for yourself or make money in real estate as an investor. So we will get to that here in just a few minutes but we have got the other Steve. Steve our investment counselor on the line with us and we just want to go over a few announcements and current events. Steve how are you?
Steve: Doing great, Jason.
Jason Hartman: Good, good. Now what’s interesting is you know we spent the weekend in Silicon Valley at an investor conference where I spoke and it was an interesting weekend but I just got to mention it because a lot of people talk about geography there and they talked about where you are located. Well what’s funny is that the company is located in California I now live in Phoenix, you live in Salt Lake City having recently moved your family from Indianapolis which is where I met you and isn’t it interesting how everything is so virtual and everybody can be all over the place nowadays physically, but we can communicate so well together. Isn’t that — I just got – it’s such a marvel, it really is.
Steve: Yeah, yeah. We get to communicate, we get to skip all of the office politics and ridiculous meetings. It’s great being virtual and it really makes it very efficient and the people in Silicon Valley definitely appreciated that, they are all about the technology and that’s how we do it.
Jason Hartman: No question about it and you know, an interesting point on that. I just finished reading a book, but I have read some great books over the last few months. I probably need to talk about some of them on the show, but one of them was a book called Rework and it’s a short book and it was gosh forgive my memory here I think it was the founder of – oh yeah the founder of base camp. That is an intranet tool that allows people to collaborate and one of the things he mentioning is how bad meetings are for productivity and how people are most productive when they are alone, when they are working on their own and not in an office. And not in a meeting and all that kind of stuff and I couldn’t agree more. I mean the real work, it’s done when you’re alone doing your work, okay. No not when you are — not when you are sitting in meetings and talking by the water cooler and politicking and all that kind of stuff. So I definitely agree with that, but hey let’s talk Steve about an interesting article. This was realty check, this was Diana Olick. Of course she is very well known, the home of the business of real estate and she is with CNBC and you wanted to kind of talk about this one because it’s about how as housing recovers, what will happen to the boom in apartments?
Steve: Right, right and that has been a huge boom in apartments. And I think that’s for two reasons. Number one obviously a shortage of residential housing, right with everything that’s been going on and number two, because so many large funds and things have been skittish on the stock market and other choices, they want to go into real assets, the only way they know how to do that is to go into the real estate investment trust or something like that and because it’s such massive amounts of money, they can’t go by a bunch of houses although some of them are trying. All they know how to do is buy a bunch of apartment buildings or you know strip malls or large commercial and they all have been competing for this and I think that’s part of what’s been driving the price up in these things because you know you and I were talking earlier about the demand for single family is just better than apartments. Apartments are transitory, nobody was to be in an apartment for a long term. All these most people don’t.
Jason Hartman: Yeah, right, right. No. I’m kind of weird. I like being in an apartment because you know I’m single and I like the social aspect to it, but by and large most people, they don’t — they look at an apartment as a temporary thing. They want to be in a single family home and that’s the great thing we offer to tenants, to renters as we offer them single family homes most of the time and if not we offer them duplexes and fourplexes and sometimes larger apartment buildings, but by and large most of our clients are buying single family homes. One of the things I want to mention because someone might disagree with the remark you made initially when we started talking about this is that there is a shortage of single family homes because, they keep hearing about the inventories hangover and so forth you know we have discussed that on prior episodes extensively and it’s debatable and its nuanced and there is a lot more to it than meets the eye, blah, blah, blah. But there is a shortage of single family housing that people can have access to. I think that’s maybe the most proper way to say that and what I mean there is, can they afford to buy it, can they qualify for a loan, are there enough rentals. So many people have been displaced through foreclosure or deed in lieu of foreclosure or just shortselling the home to get out before foreclosure occurs. And these are people that were used to living in single family homes. So these are people that are, that is their mentality. If they had to move to an apartment due to the economic circumstances that goal is to be back in a single family home. They would probably love to own it, but if they can’t own it, they are going to rent it. And they want to be in a single family home and they want to be in a community and they probably most of them especially if they have children want to stay long-term. So they probably be good renters to stay for several years. I mentioned it before and I got to get my mother back on the show, Steve. Everybody said they loved that episode with mom so much. And I will get her back on the show. I want her to talk about one particular thing and that is this property where she had this tenant in there since I believe 1989. Yeah it’s Moreno Valley and I couldn’t believe that. I had no idea, the longest tenant I ever had stay in a property I own was nine years. This tenant stayed for nine years, kept raising the rent, they wouldn’t go, nine years, they just paid the rent. What’s 12 times nine, forgive me, it’s 108, right 108. And so 108 months, they cut me a rent check. And did it ever call to them that maybe they should move out and buy a house I don’t know, they didn’t. But my mom said she never even changed the carpet in this house since 1989. And the tenant is still there. I got to get her on the show to talk about that.
Steve: You got to get pictures, when the tenant does — you need to see this carpet.
Jason Hartman: It’s definitely going to be a new carpet then. But yeah, what are your other thoughts about the apartment situation? I mean apartments have been raging. You know a lot of people and Steve you know this firsthand of course. They are asking you, they are asking me to find apartment buildings for them and it is very, very hard to source good apartment deals. I mean look, if you want a mediocre deal, we can source them all day long for you. But if you want a good deal, they are pretty hard to find because buyers and investors, bidders if you will are lining up in droves, every apartment property that is offered, there is a ton of people that want to buy it. You know the single family homes are easier to source and I would say by and large, the deals are actually better. I think the apartments are almost getting into a bit of a bubble.
Steve: Yeah, I would agree and the article is trending in that, in that direction. The good apartments, they get snapped up so quickly. There is a line for those like you said. And that’s because — that the institutional money doesn’t really have any choice. The big money has nowhere else to go. So the article is essentially asking this. It’s saying that, well the housing market you know has it bottomed. Well, we can’t be totally sure, but the worst is probably over and I tend to agree with them there. You know the free fall, I don’t see that happening again in the near term, barring some major economic event. So what is going to happen is that the housing market fuzz out, will that compromise the high priced multi family sector because the rents have been going up there and at some point these tenants are going to have weigh, you know do I want to keep playing this ridiculous apartment rent or should I go into single-family, but the funny thing is, is the article doesn’t mention this. Rents are going up for single family’s too. So you know they have got to live somewhere and that’s what I mentioned and that’s goes back to what we say is, they have to downgrade many times and that’s why we see so much activity in the investment grade single-family real estate instead of the jumbo stuff that’s a 3000 ft.² and higher.
Jason Hartman: And then that’s the problem, when you listen to these reports on the housing market. It includes the big mansions, it includes the higher middle and everything. But the investor grade properties, they are just getting snapped up like hot cakes. I mean you know look, we haven’t even talked about St Louis at all, maybe the listeners notice that because our vendors being overwhelmed. They literally cannot keep up with the supply. It’s going to be a couple more months before they recover. Inventory in Phoenix is nearly impossible to source, prices in Phoenix are up 31% from the bottom. I mean this is, this is just craziness and there is so much incentive on the monetary policy, on the government and on the fiscal policy side to see housing prices go up because it means higher property tax rules, it means fewer foreclosures, fewer bank bailouts. It means so many things, that’s why real estate is always just at the heart of the American economy and you know what’s interesting too is our time in Silicon Valley this weekend, we both just got back. You flew back to Utah today, I flew back to Phoenix today and it was amazing. I mean share some of your thoughts about the weekend. I mean I spoke Saturday morning at about 11 AM, the rooms were packed. Standing room only. It reminds me of 2005, the sort of the fever that people just want to buy properties and in Silicon Valley, you have got a highly educated group of people. These are sophisticated people that have college degrees, masters degrees, maybe PhDs, these aren’t schlocky real estate seminars and schlocky dreamer type people that are attending. They have real money, significant savings, good sized investment portfolios and they want to be buying a lot of investment property right now.
Steve: They do, they do because and it goes back to this. It doesn’t make sense to buy that investment property in Silicon Valley or in the Bay Area.
Jason Hartman: Not even close. Are you kidding?
Steve: Not even close, it’s ridiculous and it goes back to a term that you geniusly coined earlier called sticker joy. They hear about the low prices of these and they can’t believe it. It’s a down payment to them, but they can actually get a property for $80,000 for example.
Jason Hartman: Well actually that’s half a down payment for Silicon Valley, for a cheap housing Silicon Valley. But that sticker joy comes from the, you know I made that up just of the cuff remark because the old thing you have heard is sticker shock. People have sticker shock and that’s why they can’t buy stuff. But you know when you look at some of the markets we are in, where you are still buying and boy, this opportunity, the ship is leaving, the train is leaving the station, where you can still buy below the cost of construction. And that opportunity is — is going away. It’s already, you can’t buy – you can’t buy for 35% of the cost of construction in any market we recommend any more. You can still buy for maybe 60% cost of construction. Now in markets we would recommend. Now granted if you go to Detroit or something, all bets are off. I don’t know what you can buy for there, but I still wouldn’t touch it.
Steve: No, I think they will give it to you in Detroit.
Jason Hartman: Even now, yeah even now.
Steve: Yeah it’s — and you know what I noticed a recurring theme because we talk to a lot of investors. You know at the end of the night you and I say to each other, we are exhausted. We have been talking all day and these investors, some of them are having a little bit of trouble grasping what this kind of investment is and it made me realize this is our world all the time, where these single family properties. But the overall market, they are still quite new to this concept. So when they hear real estate, they think what I mentioned earlier, a real estate investment trust or some kind of a private placement and we have to tell, no you actually own the property and the tax advantage is the advantage is overall, from taking title to the property is what makes this such a great investment. This is what makes it blow out of the water everything else and they have really started to grab on to that for your speech. Jason gave a great speech on the 10 Commandments of investing that everybody really enjoyed and that’s — that’s what got so much interest is they saw these principles, that you can follow time and time again on the single-family properties and what that does for you over decades. And how your returns compare to the overall market because these people were looking for alternatives. They had lazy money that wasn’t really doing anything for them and maybe they were actually losing it and they have got to go somewhere else.
Jason Hartman: That’s for sure. We have well over 100 leads from that weekend and I just couldn’t believe the enthusiasm of people just wanting to deploy capital and be investing in properties all over the country and building diverse portfolios. It was very successful weekend. One of the other interesting things is and I know you had to take a phone call, so you were out of the room for part of this, but at dinner last night, a bunch of the speakers went to dinner together and you know we had a big table and kind of a private room at the hotel there and we were talking and one of the interesting people, well there were two interesting comments. The first one, you were there because I remember you were sitting next to the gentleman and that was Tom by the way that I am referring to and he said he came to Silicon Valley in 1969 and he was in tech right at the Genesis of tech and I can’t remember the name of that company he worked for but I certainly knew who it was. It basically started the whole semiconductor industry, you know it’s Intel and everybody, Trent Gordon, Moore you know they can all trace the roots back to this company. I think it’s Fairchild, was that the name of the.
Steve: It’s something like that.
Jason Hartman: I think it was Fairchild. Yeah I have definitely heard and read that name before. And anyway, he made a bundle of money in technology, but what he said was so interesting is he said, I have been around tech, I’ve made a lot of money but the thing that is the most reliable is why real estate and now he has a real estate company that buys up investment properties in the greater Dallas metropolitan area and he personally owns over 230 doors himself in Dallas, combination of single family homes, duplexes, fourplexes and some large apartment properties. Isn’t that amazing though? Isn’t that a telling, telling thing, the tried and true just you can’t say anything a sure thing but, boy it’s starting close. It’s just like the tortoise and the hare. The technology is the hare. You know you might hit a big home run, but I tell you — I just love hitting solid doubles and singles my whole life, it’s just a great thing, it’s so consistent. If you can do that, you may not be as famous as Mark McGwire or Sammy Sosa, but I tell you, you are going to be the solid player that overall wins over the long term. So just chug away at those doubles and singles. What’s interesting you know I want to talk about the banks, but I know we are going to run out of time. So let’s skip that one Steve. Let’s talk about an interesting article, you sent me the other day. This is the Securities and exchange Commission, the SEC coming down on a well-known radio talk show host, Mr. Ray Luchia.
and I have been to his seminar actually and you’ve probably all heard of him on the radio and what’s this all about. They are saying — the SEC is accusing him of misleading investors.
Steve: Right, right. They have apparently been following what he has been saying and what he has been promising investors for quite some time and they think it’s unreasonable and they are making some rights and looking into his operation. It doesn’t say that they have filed any kind of charges or anything here, but [Indiscernible 0:18:09] is definitely not on their good side right now because he’s essentially been promising returns over a certain period of time and saying what kind of rate it would be, how much dividend people would get. And the SEC is completely on the opposite spectrum. I think it would be good, I will just summarize it here. They say that – well Luchia says that investor who put $1 million in 1973 would have generated 60,000 in yearly income until 1994 and the 1 million would have grown to 1.5 million.
Jason Hartman: In principle value. So you would have had a 50% and this is not in real dollars by the way, it’s only a nominal dollars. So these are not inflation adjusted okay. Inflation is going to have killed you along the way by the way. We should just point that out, a little thing everybody always seems to gloss over. But this is his buckets of money strategy okay, Ray Luchia is well known for that whole buckets of money thing and he has got a book on it and so it says that you would have had a 50% nominal dollar gain on your principal from 1,000,000 to 1.5 million and you would have had this income of 60,000 a year. About 6% of principle.
Steve: Right and the SEC is taking issue with exactly what you said. They are saying that these investors would have been broke, they would have been totally wipe down by inflation by 1989.
Jason Hartman: Yeah, so Luchia says that if they invested $1 million in 1973, they would have had the same returns we mentioned and that income would have lasted until 1994, but the SEC says grow by 1989 given inflation rates. Wow, the SEC really gets it about this inflation stuff don’t they.
Steve: Yeah, they got to get it about something, but what’s funny here is according to the SEC you are broke by 1989. According to Luchia from 1973 to 1994, so that’s 21 years, the return is just not able very good still even if it goes according to what he said.
Jason Hartman: Well that’s what I say because you are only getting 6% on your original invested capital and your gain is only 50% over 21 years. That stinks, folks. This is why all these stupid life insurance policies and these annuities, I mean if you ask me all that stuff is just a big scam. I mean you know it looks good, but do you really think Steve that the financial engineers, the PhDs and MBAs at these insurance companies and annuity companies, that engineer these financial products, do you really think they don’t understand that inflation is going to decimate the returns for these investors and benefit them because they get the use of the money now. That million dollars if it is put into annuity life insurance policy, the company takes those at the time you invested and what do they buy, they buy real estate with it. That every life insurance company I mean everybody knows they are all the big buyers of skyscrapers and huge apartment complexes and REIT investors and all that kind of stuff. I mean isn’t it funny, people will not invest in real estate so that they can stupid life insurance policy or annuity and if they all of that money to the insurance company and what does the insurance company do? They invest in real estate.
Steve: Yeah, that’s right, that’s right and they do — they get their fees and you know the investors left to deal with you know how the investment performance and get eaten alive by inflation, I got approached by somebody trying to sell me an equity indexed universal life policy, about four years ago.
Jason Hartman: God one or the other way.
Steve: Yeah and those things pay literally at least a 50% commission to the agent, why do you think these guys are promoted so heavily and talk about it being the greatest thing since sliced bread. Well it is for them, but for the person that puts the money into it, they are locked into that for so, so long and they don’t have any control whatsoever.
Jason Hartman: Well you know, it’s the old — the old Wall Street question is where are all the clients yachts? You know, the brokers will go down and show you their yachts, but the question you always need to ask is, where are all the clients yachts.
Steve: Right, right. You asked that question in the room in Silicon Valley which I think is fairly ironic. You said how many people know somebody who got rich in real estate, almost everybody raises their hand. Then you say how many people know somebody who got rich in the stock market? And you get two.
Jason Hartman: Yeah, well and yeah that I was — I just did that yesterday. Yeah that was amazing and that was a room of I don’t know how many people, maybe there were 300 people in there and you know I asked the question and I called them out and I said well what happened. One of them said lucky. Now nobody quantifies how many what does rich mean. It’s sort of generic question and nobody knows how much they started with because my intention is if you want to become a millionaire in the stock market the best thing to do is start with 2 million.
Steve: Yeah give your broker two million, he will be a millionaire in no time.
Jason Hartman: He will be a millionaire soon. And if you want to be a billionaire in the airline business, start with 2 billion. But yeah then I asked the other guy and there were the two hands that went up, when I asked that question and he said well that was an insider. It was someone who, who was with the company. There was a start-up, a Silicon Valley tech company start-up and that company they got a lot of stock in it and then it went public. Well that’s not, that’s not an investor. That’s an insider, that’s a business owner. That’s like saying well, if I sold my business is today, yeah I would probably get a big fat check from it. I sold another company I had, back in 2005 I got the big fat check. But that’s not being an investor. I had to actively manage and build that company. This is different stuff. So anything more on that he wanted to say?
Steve: Well I just thought, it was really funny that this — in this room that would be probably the highest ratio ever, as the room full of people with inside knowledge of Silicon Valley and these tech companies and these IPOs and still you got two. And they all said they were lucky.
Jason Hartman: I got a probably 300 people who raised their hand all of them. So they knew someone that got rich in real estate and two of those raised their hand on the second question how many people do you know that got rich in the stock market and then one was an insider and money said was lucky, so.
Steve: It’s horrible. People plow their savings into the stock market, the whole lives and they are believing you know compound interest thing, but I guess it happens for some, but you don’t get rich.
Jason Hartman: Well folks let me tell you something. If you believe in the magic of compound interest as it is called, then you better believe in and understand the magic of compound inflation, very important. Inflation compounds too just like interest.
Steve: Yup and it’s working on the whole journey with you, eating up all that profit.
Jason Hartman: It’s the thief, the lair and the thief that cheats you out of the money right in your wallet, your bank account, your stock portfolio, your bonds and everything. It’s pretty ugly for most people. But we know how to beat it, don’t we.
Steve: Okay, hey one more thing we want to talk about, then we got to get to our guest and that is assumptions. Now I am kind of putting you on the spot here but you sent an email to one of our providers the other day and that was on September 5th, you sent this email and I printed it out without telling you because I wanted to bring it up on the show when we recorded together again and here is what you said. You said when you upload properties to our site, we need to make sure that you use conservative assumptions, okay basically is the tone here and we adjusted the maintenance on a few of your properties based on the following scale. Talk about that scale if you would or maybe you don’t have this in front of you, I am kind of putting you on the spot. So I will – if you don’t remember it all, I will just say the scale.
Steve: Yeah I can probably recite it, but if I get it wrong let me know but, you know we are essentially looking for properties 1995 and newer, we want the maintenance reserve on those to be 3% and then 1980 to 1994 we want it to be five and then older than that we want it to be 8% and the maintenance, this local market specialist had uploaded was kind of all over the map and we really had to take into consideration the age of the properties an the renovation level that he had one on them in order to get a more accurate return for the investors because maintenance is a fact of life on real estate. I mean you have to do it and –
Jason Hartman: And let me tell you folks, the hockey thing I remember I was trained back when I went to work for Century 21 when I was 19 years old and still in college, I remember taking one of their classes and the instructor was a guy named Dennis Mckinsey. He wrote a bunch of the real estate books, he was a great instructor by the way. Whatever happened to that guy I wonder. If he is still around I should get him on the show because he was a really good teacher. But you know he used to always say, have this thing called hockey broker goes to jail. That was the thing, hockey broker goes to jail with these bogus assumptions. And I am telling you, what most of these investor groups do, most of our competitors, the few there are, they don’t put in anything for maintenance. They don’t put in anything for vacancy, they quote the interest rates too low, they quote the rents too high and I did that comparison, you know maybe a dozen episodes ago where I took the exact same property off of my competitors website and I took it off of our website. It was the same property from the same provider because I know who we are working with okay. And their pro forma show that property performing a lot better than our pro forma showed it performing. You know I just believe in this promise less, deliver more and hey sometimes what we promise doesn’t even work out. It works out worse than the promise. You just got to be conservative about this stuff, though folks. There is no guarantees in life except death and taxes. Any other thoughts on these assumptions?
Steve: Well generally, if you’re going to stick by them, you are going to be okay. I mean we have tested them in all the markets that we are in, we really have a lot of experience in this and we know how these things are going to turn out. I mean how these materials, how these packaged commodities can depreciate. There is going to be a maintenance cost to them and when you plan for that and you are realistic, it’s not going to be a surprise and your budget accordingly, the investments run very smoothly for you, right.
Jason Hartman: And everybody should know that on the older properties, there is still rehab. We don’t have any property that anybody ever buys, it’s unrehabbed. So it’s always fixed up and brought up to like a current spec level before you buy it. So even if the property was built in you know 1970 for example. When you get it is fully rehabbed and rent ready, so sort of — it was originally built in 1970, but then there have been improvements along the way. So that, one thing I want to mention and I’m sorry to say this folks but the Atlanta tour is sold out, it’s just completely full. The biggest bus we can get holds 40 people and now we have to use it think we have got so far two chaser vehicles in addition to the big tour bus that we have for that tour, so we are fully sold out on the Atlanta tour and we will have another creating wealth Boot Camp and tour coming up at another city. We haven’t decided yet but it will probably be first week of November and then we are just about to confirm our meet the Masters event for I think the third weekend of January. So stay tuned for those and we look forward to seeing you at those events, but hey, that’s it for us. Steve thanks for joining me again on the intro today and let’s go to our guest Steve Sjuggerud and he talks about housing and he is coming from a stock market guy, is going to be a very interesting interview. So we will be right back with that in just a moment.
Jason Hartman: Be sure to call into the Creating Wealth show and get your real estate investing and economics questions answered by me personally. We would love to have you call in, share your experiences, ask your questions and a lot of other people listening have those very same questions. So be a participant in the show at 480-788-7823. That’s 480-788-7823 or anywhere in the world via Skype, Jason Hartman ROI. That’s Jason Hartman ROI for a return on investment. Be sure to call into the show and we are going to enter all of the callers in a drawing for some nice prizes as well. So be sure to call into the show and I look forward to talking with you soon. It’s my pleasure to welcome Steve Sjuggerud to the show. He is the editor at Stansberry Research, a company that you may be familiar with. They’ve produced some big-time videos and they have got a lot of subscribers to their e-mail newsletter that we will touch on today as well. Steve, welcome.
Steve: Well thank you Jason.
Jason Hartman: How are you doing today?
Steve: Doing great. I am looking forward to talking about your favorite subject here.
Jason Hartman: Well there you go, there you go now. In just a minute or two, that we chatted before recording here, you mentioned that you are not a real estate guy, but you think real estate is looking pretty good now, huh.
Steve: That’s correct you know. I have spent my career studying. I got my PhD studying international currencies. I have traveled the world looking at stocks and bonds and real estate and over a couple of decades this is the first time in my career that I have residential real estate in US at the top of the list of things to buy. I really think it’s the best moment in US history to be a home buyer or to buy residential real estate.
Jason Hartman: And I am — I am surprised, I really had no idea you would be that bullish on it. A lot of Agora people have been writing about the adjustable rate loans and the various time I have seen a lot of graphs in some of the other Agora publications about when they are adjusting and such and kind of doom and gloomy in a lot of sectors really, but tell me why you think that? Why are you so bullish on real estate. But tell me why you think that, why are you so bullish on real estate.
Steve: Well I mean I could bring it down to a smaller level or back it up to a bigger level, but the simplest things are — look we’ve seen home prices fall by a greater amount than any time in American history in our lifetimes and we have mortgage rates lower than any time in history as well. So houses are now more affordable than ever and they are selling below their replacement costs and people are scared. They have never seen a moment like this and this is really what I look for, moments when people are scared, there’s a lot of uncertainty and that’s the moment that you can get the greatest values in an investment and a lot of times I’m hunting the far corners of the world and here it is finally right here in our backyard.
Jason Hartman: Yeah and I’ve looked around the world, I have met with many of the Agora people in different countries and toured around with them and so forth and the people they refer especially through international living. And you know I have just never been impressed with international real estate that much, having been to 64 countries myself and looked at real estate in almost all of them very specifically, but did you mention by the way a moment ago about being able to buy below cost of replacement. It can still be done, but I have got to say to our listeners, it’s disappearing pretty quick because — and I think what is the barometer of that is really that new homebuilders seem like they’re just back in swing now. There’s a lot of new construction, again I mean I don’t want to say a lot you know in terms of what it used to be, but we are sure seeing a good amount of new construction out there and it’s kind of surprised me really.
Steve: Well I will just back up and you mentioned all the travel that you have done and I had the exact same feeling. I have been you know I don’t know dozens of countries and I have been in Belize and showing a beautiful real estate on the coast and saying well look you can live here for so much cheaper than you can in the states and I thought you know not really or in Nicaragua and such and I would rather live on the coast of Florida where I do, where I live homes within a mile of the beach are selling for $200,000 and you can get a – it is your standard three bedroom two bath home with a garage and a backyard and you know you can walk to the beach for $200,000 and it’s hard to beat that around the world.
Jason Hartman: Not just that, you can get a great mortgage for three decades, it’s funny you mentioned Belize because that’s the last place I toured real estate, just last year, the last international destination at least and you know we went around with the real estate broker down there in his boat and I had never toured property in a boat before and looked at stuff and you know just the primitive nature of some of these countries and I was just unimpressed. The US has such great infrastructure, not just in terms of its physical infrastructure, but in terms of its mortgage infrastructure and what I think makes it so different than some of these international destinations is that ever since the Great Depression it’s really been subsidized by the government through Fannie Mae and Freddie Mac and the concept of a 30-year mortgage is a very unique idea, pretty unique to America. Of course you can do in Canada, you can do it a few other places, but the financing makes the deal so darn attractive when rates are this low, really when rates are below true inflation numbers.
Jason Hartman: I fully agree with you once again and I can — I like to — part of my macro thesis here is really about the government is really making this just too great a deal for us to pass up. I mean just beyond the general concepts of Fannie Mae and Freddie Mac really subsidizing the market and also you have your — your capital gain — it’s essentially the best tech shelter for your primary residences. You can do better as far as a capital gains than getting to keep up to $500,000 of your capital gains on your home, but even more important than all of that is what the government is doing, what Ben Bernanke is doing with interest rates and my big thesis is that we are entering what I call the Bernanke asset bubble where stocks go to levels the people can’t imagine, where home prices go to levels that people can’t imagine and this is what — both of those in a good way, crazy bull markets all set up by Ben Bernanke because when you think about the Federal Reserve, they have two mandates. Their two mandates are to keep inflation low and to keep unemployment from skyrocketing, from — they like to keep employment high so to speak and inflation low and right now we have no danger of inflation soaring or of unemployment falling to levels that would cause the Fed to raise interest rates. So that was bit of a mouthful there, but my point is, is that I don’t expect the Fed to raise rates for years and I don’t think that enough people are factoring that possibility in and I think that the Fed would actually like to see a booming real estate market and a booming stock market to create you know what could you call a wealth effect to make people feel wealthier and feel more solvent and help the economy – help the economy get back on its feet, have people buying goods and such. So I really — my thesis is the Bernanke asset bubble and we are just in the start of it and when you can buy an asset what real estate at very close to replacement cost or less than replacement cost, at the lowest mortgage rates in history and really the highest affordability in history, it’s a recipe for enormous gains and particularly residential real estate prices in my book.
Jason Hartman: And I certainly agree with you there. What are your thoughts though on the other side of the equation, when you’re not talking about just capital appreciation potential or getting a good home for oneself, but the subject of the demographics and the econographics I guess I am going to say. I don’t know even if that’s a word. Maybe I just made that one up. Of the rental pool the potential for the income stream that’s available in and the reason I asked that is you know we’ve got this huge student loan bubble and we’ve got generation Y, the largest demographic cohort in American history, about 4 million larger than the baby boomers coming right into their prime renting years saddled with massive student loan debt, delaying family formation. Meaning that those are all prime indicators that they will be renters for a long time to come and someone needs to get out there and serve them and provide good rental housing to them.
Steve: Yeah, I mean I actually believe that the rental industry, the ability to serve those people is actually another source of great gains for a real estate investor, the reason is that when you look at your choices as an investor, you can earn 0% on the bank, you can earn next to nothing on a CD. You can earn less than 2% on a 10-year bond to the government. There is really no interest to be earned anywhere out there. Meanwhile cap rates, you know the return on a rental property are much higher than anything else as a competitive investment. Now traditional real estate investors might say that those returns on rents are low, but when you compare the returns on rents to any other place that you can put your money, I think know the returns are so high that they can push the prices of rental properties much higher, so similar to the residential market you know I think the market for rental properties could do just the same. I mean one of the stock I just recently recommended to my readers as an example is called, the symbol is GOV like governments and what they do is they actually — they own buildings that they rent to the government and rent to government entities, their largest tenant is the IRS and their second-largest is a customs and immigration, but they are able to achieve cap rates of 8, 9%, 10% and they are paying out a dividend, a 7.5% dividend right now and these rents are locked in for 10 years, 15 years, 20 year leases. So a business that has a 8% or 9% cap rate locked in with an inflation adjustment for 10 years plus, I think that would be an incredibly valuable business and so I think that I mean this is just one example and it’s a way for people that can’t go out and buy a bunch of rental properties themselves. They could buy shares of GOV and get a 7.5% dividend right now, but they can have a lot of capital appreciation as cap rates are driven down. I hope I didn’t make that too complicated. I hope that made sense.
Jason Hartman: Well, no you know I actually wanted to ask you to touch on that subject, the issue of these REITs, there is a pretty popular form of REIT out there I mean I don’t know in the overall scheme if its popular, but I keep hearing about it, these REITs that buy real estate and they are not actually – I can’t remember what they are called, they are not actually valued, they are not actually traded non-traded REITs that’s what they are actually sorry.
Steve: Yeah you know I know what you are talking about, the private REITs and it just seems like a bad idea all around to me, so.
Jason Hartman: I agree. Yeah, yeah and what they are basically promise is they are promising income based on – based on the rental cash flows and I hear that there are already lots of problems in that world. Do you want to elaborate on that at all?
Steve: You know it just seemed like such a bad idea that, you know I have kind of written them off before I had even bothered looking into them. I mean I don’t why it would need to be a private product other than for a bank or a bank like entity just to earn a sales commission selling the thing. So now I don’t know much about them at all. Like I said I dismissed them before I have even really looked into them. So maybe there is some value there, but I have been doing this long enough and there enough, I don’t know it just seems like a bad idea.
Jason Hartman: I have not heard good things about them at all. So I think your initial hunch was probably very correct. Talk to us a little bit Steve if you would about what you see in terms of the stock market, it really seems when we went from a Dow of 6400 at the depth of the crisis to something that shortly after Obama was elected pumped up pretty quickly with all the money creation. It seems like the stock market was really the first thing to have its comeback at least in nominal dollars. I don’t know if it’s in real dollars because you know I don’t know if we have seen the results of that money creation yet and I am sure you have some thoughts on that, but was real estate just sort of the next thing in line after stocks?
Steve: Well I am sure you know better than me, that you know real estate moved, real estate prices move glacially and stock prices can move in microseconds here. So I think that yes the stock market was the first place that you saw the big move, it was just able to happen quicker and I think the glacial changes in the real estate market I mean it just comes down to the slow speed of the ability to burn off supply and you know it just took this amount of time to get to where we are, but now we have had — so yes, the stock market was first and I personally believe that again relative to other investments, 0% in the bank less than 2% on 10-year treasury, I personally believe that the stock market can go dramatically higher from here. But like you said it is already had a dramatic run and meanwhile real estate continued to go lower and lower many years and now we’ve just seen five months in a row of the median home price rising, so to me this is the ultimate moment to be a buyer because those five months in a row of rising prices, that’s sort of confirmation of this idea where and year over year we have had a price rise in the Shiller index as well. So you know we are seeing confirmation that this idea that I’m sharing with you is the correct one I hope and think that we’ve seen the bottom and that this is – this is the start of the real thing in residential real estate.
Jason Hartman: And what are your thoughts about Europe and what’s going on over there. Do you think they are just going to least to some extent, the extent they can and then they can’t, I mean maybe the EU currency is going way, I’m not sure, but to the extent they can try and do quantitatively easy their way out of their mess, they can’t really print the way we can in the US just because they have such structural differences, but you know give us your thoughts on the European situation if you would.
Steve: Well, yeah it’s — obviously it’s — it’s pretty darn bad and we have seen that all in the headlines and — but basically an idea that I have I call it, the secret to a thousand percent gains is the term I use and it’s you really want to buy when things go from bad to less bad, like you don’t make your big money when things go from average to good or from good to great and when things are good in the stock market, you know there is not much room for upside, but when things have fallen, crashed when you think you’re near the end of the world and then all of a sudden the sun starts to poke it heads above the horizon and we have a new day, that’s if you’re able to help to try and identify that moment, then you can make some extraordinary gains. Incidentally there was a moment like that in housing stocks at the end — there was a 73-74 1973-1974 bear market in the stock market and stocks lost 50% but home-building stocks lost 90%. Well then they rose by over a 1000% starting in 1974, over the next few years. 1064% gain and people thought that homebuilders were just going to fall of the face of the earth and at the end of 1973 and right now I feel like a lot of people feel like you know Europe is going to fall off the face of the earth and things just get less bad, you could actually make a lot of money in European stocks. So for example, if you look at Germany and the largest stocks in Germany if the states or large companies are Apple and Exxon and Microsoft and these types of companies. In Germany these companies are companies like Siemens, Bayer, Bayer Aspirin, SAP, Daimler which make sure Mercedes. I mean these are major world businesses that I doubt that people will stop buying Mercedes around the worlds because of the European crisis or the Bayer will stop making pharmaceuticals or the Siemens will stop succeeding, I mean these are major international companies and their trading as if they are essentially going out of business and so — so yes the Europe situation is bad, but as an investor, you know I am actually in my newsletter we are actually buying German stocks through ETF, the symbol is EWG, but the way that we do it is if German stocks were to hit a new low, then we would — then we would step out of the trade, the basic idea is that okay, I believe that we are in an uptrend. I believe that we’ve seen the worst of it, but if we hit a new low, then I was wrong and we get out. So by doing it this way, my downside risk is maybe 15%, but my upside potential is triple digits and so that’s a good risk to reward trade for me. So even though it looks terrible in Europe I still think there’s opportunity as an investor in these companies.
Jason Hartman: When it comes to real estate, what countries have you liked over the years when you consider I mean you said you have looked at international real estate investing and I just wanted to get kind of a global perspective. I know the US is your favorite choice right now, but did you have some other favorites over the years.
Steve: I did when Argentina – when Argentina crashed years ago, I went to — the only way you could buy a real estate in Argentina was cash and when I tell you it’s a cash deal I don’t mean like you write a check or you get a cashiers check from the bank. I mean literally you have a briefcase of cash handcuffed to your wrist. That’s the way you show up at closing in Argentina and so there was a moment when Buenos Aires real estate was incredible and I had actually — basically the banks had shut people out and even if you are wealthy in Argentina, all of your money — if all of your money was in the bank, you are now poor because the banks had locked their doors. It is an incredible situation.
Jason Hartman: The bank holiday you mean right?
Steve: Yes and they had lasted for — I mean it was incredible moment and –
Jason Hartman: How long did it last? I don’t know the details, but it lasted for a while, right.
Steve: It did weeks I mean, people were really shut out and you know no matter how wealthy you were, if your wealth was in the bank, you couldn’t eat for weeks.
Jason Hartman: And then they had capital controls where you could only withdraw — after that where you could only withdraw slowly right?
Steve: That’s right and you know now they have — unfortunately they have slid backwards and now they are – you are not going to believe this, there are dollar sniffing dogs at the airport. So you can’t leave the country with US dollars I mean literally US dollars in your pocket, just crazy things are going on in Argentina right now, but at that moment you know property prices had fallen dramatically and you could get just these incredible I mean almost like Paris style penthouses which might’ve sold for $10 million at their peak for less than a $1 million and any way there were incredible – you see these types of things and it is a similar type of thing to what I am describing, I mean Argentina’s example was crazy. I mean I did build a house in Nicaragua in the early 90s and sold that, but I don’t have a lot of international experience in real estate, but you know I am just finding opportunity right here in my backyard, an example is a couple months ago, I bought a property and it was a couple hundred acres — the last contract on it in 2008 was $14.4 million and I did my research and found that the bank that owned it was in trouble and long story short, we bought that property for less than a $1 million and you know it is just incredible. I mean the bank took such an incredible bath on this property and but the way that I actually did this research and I don’t know if you have seen this or thought of this, but I’ve actually found the banks that are close to me that are in the most trouble and then I’ll find the properties that they have, that they’re stuck with and go in and make offers — the simplest way to do that is you can go to bankrate.com and then in the top right you can not type safe and sound in the search box and it gives the bank ratings for which banks are the safest and soundest. You can type the name of any bank in and it gives a percentage rank from sort of 1 to a 100 where the bank stands and the latest offer that I made on a scale of 1 to a 100, the bank was 0.3%. so it was below the 1st percentile, it was the – you know it was the worst possible case that a bank could be and they happen to own about a miles worth of riverfront here, intracoastal waterway frontage which is you know a half mile from the beach and so I’m currently negotiating on — on a miles worth riverfront for – I mean we are at numbers that – they are too low to print as they say, but I think one of the secrets is you can get these – you can’t get these opportunities at 90% below the sort of the high mark for — by buying from the banks that are in the most trouble and the simplest way to see them is I think that bank rates safe and sound ratings — just type in the name of the bank that owns that earth and if their rating is terrible, you have a better shot at being able to get that property.
Jason Hartman: To get it to, oh yeah and I just want to make the disclaimer to our listeners that buying especially — buying undeveloped land can be highly risky, you need to know what you’re doing, there are environmental issues. You know of course that’s fairly speculative bet in almost every case because it doesn’t produce income. So sometimes you need to be able to hold and wait and wait for the path of progress to come your way, not always, but just depends. So be careful and be careful of things like Brownfield laws and so forth, environmental issues get pretty significant and some vacant land transactions, so I just want to throw that out. There is a disclaimer to people, it’s not a good old simple single family home.
Steve: Yep, you are absolutely right. This is definitely a speculation and you know our intended holding period is 5 to 7 years and we are getting it agricultural classification on it, so instead of –
Jason Hartman: So the taxes will be lower, right.
Steve: Taxes, yeah will go from say 50,000 a year to about a $1000 a year. There is timberland on the property, so the income from the timberland will have a very positive carrying cost if that is the right way to say that. You know it won’t cost us any money to carry it over that time and meanwhile we listed it with a realtor immediately after we bought and they listed it for 5.4 million, so the one we bought for less than a 1 million. So, so yes, it’s a speculation and you are absolutely correct. You know it is — the riskiest end of real estate investing.
Jason Hartman: Yeah, yeah most definitely but you know one thing I want to mention — you mentioned the agricultural land and I just wanted to tell the listeners something funny they may not be aware of. Sometimes you will see, not very large plot of land in Texas for example and you’ll see a cow on it and you will just see this one cow on this small peace of land and the reason that cow is there is to get lower property taxes, because it can be classified as farmland, if – if you have a cow roaming around on your land. So it’s just like the funniest thing, you will be in this sort of semi-suburbanish neighborhood, there will be some cow roaming around on a not very large plot of land and that is the reason.
Steve: That is a valuable cow right there.
Jason Hartman: Yeah, you are not kidding. If it can knock your property tax right down by thousands of dollars per year it is a very valuable cow.
Steve: Exactly, yeah.
Jason Hartman: Yeah definitely. But what else do you want our listeners to know, it’s just really interesting to talk to you, Steve and hear your thoughts on it, but anything else you would like to say.
Steve: You know nothing off hand I mean I just think that the big idea for me is this Bernanke asset bubble that asset prices could go higher than anyone could imagine and I think that people are sort of a bit paralyzed with fear, you know there is – you have got Europe and the fiscal cliff and the dollar and people you know, there’s always something to worry about, but you know at the time that there’s nothing to worry about, you’ve already missed it. So you have to be willing to buy in a moment of uncertainty and I think on a risk to reward basis I mean residential real estate, this is as good as it gets.
Jason Hartman: Fantastic, well give out your website if you would.
Steve: Yeah, it’s dailywealth.com, just as it sounds dailywealth.com.
Jason Hartman: Fantastic well Steve thank you so much for joining us today and I look forward to having some more of the guest with the Agora family on our shows as we’ve had many over the years and look forward to having more and thanks for sharing your insights and your bullishness on residential real estate. I couldn’t agree more.
Steve: My pleasure, Jason I enjoyed it, thanks.
(Top image: Flickr | Michael Covel)
The Jason Hartman
Transcribed by: Renee’
