Jason Hartman talks about rent increases exceeding inflation, Fed tapering off on mortgage backed securities buying and the possible end of the government’s role in the secondary mortgage market (Fannie Mae and Freddie Mac). After a quick announcement about the Austin, Texas property tour https://www.jasonhartman.com/events/ Jason discusses Little Rock, Arkansas with our Local Market Specialist (LMS).
From Wikipedia: Little Rock is the capital and the largest city of the U.S. state ofArkansas. The Metropolitan Statistical Area (MSA) had a population of 717,666 people in the 2012 census estimate. The MSA is included in the Little Rock−North Little Rock, AR Combined Statistical Area, which had a population of 893,610 in the 2012 census estimate. As of the 2010 US Census, Little Rock had a city proper population of 193,524. It is the county seat of Pulaski County.
Located near the geographic center of Arkansas, Little Rock derives its name from a small rock formation on the south bank of theArkansas River called la Petite Roche (French: “the little rock”). The “little rock” was used by early river traffic as a landmark and became a well-known river crossing. The “little rock” is across the river from “big rock,” a large bluff at the edge of the river, which was once used as a rock quarry. There have been two ships of the United States Navy named after the city, including USS Little Rock (LCS-9).
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ANNOUNCER: 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 financial freedom. You really can do it! And now, here’s your host, Jason Hartman, with the complete solution for real estate investors.
JASON HARTMAN: Welcome to the Creating Wealth Show! This is your host Jason Hartman, this is episode number three hundred and thirty-four; thank you so much for joining me today. And I told you on the last episode, episode #333, that we would be announcing a new market. And I figured, there is no better time than the present. Let’s do it on this episode! So we will have our local market specialist with us to talk about this new market in just a moment. I’ve got just a couple quick items I want to cover with you. I’m going to keep this one pretty short, because it’s a fairly long interview as well.
And remember I had mentioned that article to you on the last show on how rental price growth has exceeded the rate of general inflation? Which is pretty darn amazing, really. And I found the article on that. It was from the National Association of Home Builders—that’s the NAHB—did an article on this with a couple different charts showing how general inflation is 2%. Of course, nobody in their right mind would believe that. Of course it depends how you spend, it depends your level of wealth. Because if you have less money to spend and you’re spending more on the necessities of life, you feel a higher inflation rate than a wealthier person who spends it on more of the luxuries of life, which have not—although some, at the high high ends, have inflated pretty dramatically—have not inflated that much. So it depends how you spend.
Your rate of inflation will be very very different, of course. So, one of the things that I found was really interesting about this article, was one of the comments from John P. White. And it sums it up pretty well. So the article, again, is about how rents are exceeding the rate of general inflation, which is pretty unusual, historically, okay? So that’s why I brought this particular article to your attention. But here is the comment on the article, and John says, “it should come as no surprise that rents continue to rise faster than inflation, since our national housing policy since 2007 has been to make it much harder to buy a new home. This policy extended what should have been a two- to three-year downturn into a seven-year nightmare, which is not fully over.
The finale, and the end of the American dream as we know it, will be the privatization of the secondary mortgage market.” Now of course, we’ve been talking about that for a long time. And he goes on to say, “which is shunned by private investors to the point that the Federal Reserve must buy billions in mortgage-backed securities each and every month to keep the market functioning. Interest rates rose 75 basis points when a Fed official simply mentioned the possibility of tapering the QE.” The quantitative easing, he’s talking about. When they said hey, we’re going to taper the buying activity, which is of course going to cause rates to go up, right? “What happens when it is forced to end this buying spree?” He says. So, that is a very, very good point, and one that we’ve talked about ad nauseam on this show on prior episodes. So we’ll see, eventually, the end of Fannie Mae and Freddie Mac as we know it, and ultimately, that will make it much harder to buy a home, because the private markets, they don’t want to commit to these incredibly low 30-year yields on their investments, okay?
Only a silly stupid government—pseudo-governmental agency like the Federal Reserve—would do this. It just doesn’t make sense. It defies the laws of supple and demand, of legitimate economics, of rational thinking, of markets, okay? So that would end. And of course, you know, immediately would put downward pressure on home prices. But it would put dramatic upward pressure on rents, and you see, that’s what that article is all about. So, we have a lot to look forward to in very positive ways as investors if we play our cards right. And if we invest on a non-speculative cash flow type of basis, which—by the way, this whole interview with our local market specialist for this new market we are opening is going to talk about pretty extensively, and one of the reasons I like this market is because the institutional investor is not there in any real major degree, at least not yet.
The hedge funds, private equity groups, you know, of course they’re probably dabbling in every market, okay? But not in any real way in this market, which is good for us, right? We want to get there before they do, okay? If at all possible. So, another article that’s pretty interesting—and this was posted by Cody in our content group where we post all of our ideas internally for stuff that we want to talk about on the podcast, so thank you, Cody, for posting this one. And it says Renters Warehouse, by the way. That’s a big property management company, and this is sort of a probable a press release for that company, but it’s really interesting what they say here, okay? It says, Renters Warehouse proves Americans aren’t in a rush to buy houses. They’re much happier renting. Minnesota-based firm takes top owners again on the Inc. 5000 list, the fastest growing companies. And it’s talking all about, well, Americans may not be in a rush to buy houses, the housing rental market itself is booming, and it’s the kind of boom that has led Renters Warehouse CEO Brenton Hayden and his team to the top of this year’s Inc. 5000 list for a fourth year in a row.
Well, I gotta tell you, folks. I have, for the vast majority of my adult life, fallen—and I’m gonna say fallen—for the idea that I need to be a homeowner. I have almost always been a homeowner, ever since I moved out of mom’s house in my early 20s. I think I was 22 when I moved out, okay? And before that, I bought a rental property, my first property that I owned was a rental property that I bought from a client of mine. I sold it to him while I was still in college. It was in Huntington Beach, California, a little crummy older one bedroom condo on Coventry Lane. And I’ve talked about that story before. And I bought that as my first property, and my second property was a little condo in Irvine, California that I actually moved into. And pretty much since then I’ve always kind of “fallen for”—and I’m saying “fallen for” in quotes—the idea that I should always own the home in which I live. And now, my opinion of that has changed pretty dramatically.
Two years ago, when I moved out to Phoenix, everybody said before that, because I had to sell my home in Orange County, California—I had this gorgeous home there, and I put it on the market for about 6 months. When I wanted to move, it had no luck, and had my privacy invaded every day. Had to make the bed every day. It was a big hassle to show the house. Had to experiment with the marketplace, and deal with open houses on the weekends, and all this fuss—it was just a big flipping hassle, frankly. And I didn’t have any luck the first time around! I didn’t sell it. Well, the second time around, I had to open my own company—my own real estate auction company, called Open Door Auctions, that I never really kind of got off the ground, but I sold two of my own properties in Orange County, California with this company, because you know, hey. Sometimes to just get something done, you gotta just do it yourself, right?
And I opened a whole company to do this. Formed a new corporation, marketing materials, developed a business model (that by the way, to this day I still remain very excited about). But I’m focused on my other businesses, and so I never really got that off the ground in any significant way. We did a few deals for clients, and then a couple of my own deals, and eh. Got busy with the investment thing, which is really my core business. So, in either case, what was my point about that? Well, my point was, if you are living in an upscale home—you know, a home that is somewhat significantly, maybe 30% higher than the median price home in your city. If you’re living in a home like that, and if it’s 50 or 100%, you know, double, higher than the median price in your city—boy! You should rent! Because the deal you can get renting, because of a lack of rent elasticity in the marketplace, is going to be phenomenal.
Now look, my lease is coming up on my swanky penthouse here in Arizona. And one of my really, my best life decisions, I think was leaving California and moving to Arizona two years ago. And so now I’m kind of starting to think—well, do I renew my lease here, and stay? I certainly like my beautiful penthouse. It’s gorgeous. 10-foot ceilings. 3,000 square foot interior, about 700 square feet of deck space, gorgeous views, curvature of the earth. I guess you can really see the curvature of the earth. I don’t know. But the view is forever, almost. And it’s pretty nice! I like it pretty well. And I think it’s all in all a bargain, compared to, you know, on an RV ratio basis. Because it would cost a lot more to buy this property than it would as a ratio to rent. Most of my properties that I rent to other people, my lower end properties, I rent for 1% or, in many cases, more, of the value of those units. Well, here I rent as a renter for a heck of a lot less than 1% of the value of the property. So, again: a very good deal to be a renter.
But the best thing is, when I want to move? When my lease is up? I just give me 30-day notice, and I move. I don’t have to hire a realtor, I don’t have to deal with anybody showing the property, I don’t have to deal with an invasion of my privacy. All I have to do is hire some movers and have them move all the stuff, and heck! I’m free! Footloose and fancy free. It’s so easy and so convenient. And we offer that convenience to our renters, and if we’re renting, or you know, we would own a home that’s 30 or 40% or more above the median price in the city in which we live, then we should really, really consider being a renter. Because you can really score in terms of an RV ratio. And, at the same time, you might be able to free up a bunch of equity in the home that you own, and buy income properties in diversified markets around the nation that you can rent to people for a much better RV or rent-to-value ratio than you’re getting owning your own home.
So, really something to strongly, strongly consider. And I get it, I know there’s the whole psychological aspect of that. I totally get it. I’ve discussed it at length on prior episodes, so I won’t go into it here. But listen, that’s the two things I wanted to share with you today about renting, rent elasticity, and how rents are outpacing inflation. And of course, they’re not doing this, by the way, in the higher end of the rental markets. They’re only doing that in the lower end of the rental markets—the area in which I suggest you as an investor should be investing. So, enough said on that. Join us for our Austin Property Tour coming up at the end of September.
Again, join as a member—you get 20% off of the tour. So go to www.jasonhartman.com, become a member, you get 20% off, you get the Creating Wealth Home Study Course, $297 value, for free, included. And you get the executive property tour, of course, at the end of September. So you can do all that at www.jasonhartman.com, but remember, to get the discount, you gotta become a member first, and then sign up for the tour after that, okay? And this tour’s a small one; it’s limited, so, sign up as soon as possible. And we look forward to seeing you in Austin, Texas—in beautiful Austin, Texas, at the end of September. So we will be right back to talk about this new market, which is not Austin—we’re talking about one thing is the tour in Austin, and then next, we will talk about our newest market, which is a very exciting one. And we’ll be back with that in just a moment.
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ANNOUNCER: Want to know what you’ve missed in the Creating Wealth series? Well, here’s your opportunity, with Jason’s 5-book set. That’s shows 1-100, through digital download. You save $288 by getting this 5-book set. Learn all of the advanced strategies for wealth creation. For more details, go to www.jasonhartman.com.
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JASON HARTMAN: Hey, it’s my pleasure to welcome Jeremy, and I want to talk to you today about a market I am very excited about. And I think you’ll be surprised that I’m excited about this market, but it’s Little Rock, Arkansas! Hmm, Bill Clinton’s area, right? Well, the reason I’m excited about it is because there is no real noticeable—or at least, not that we’ve noticed—hedge fund or private equity activity in this market in any real way. And as you know, as prices have been increasing around the country, and we’ve been doing business in all these different markets, what seems to happen—although this is not exactly analytic—it’s a little bit anecdotal, frankly—but what seems to happen is, we’ll go into a market, and we’ll be doing a lot of business there, and our clients’ll be having great experiences, and then the hedge funds come in, and the private equity groups come in, and they start bidding up the prices, because frankly, they’re overpaying a lot of times.
And we know this, because we have some of them as clients! And they just need to deploy so much capital so quickly that they don’t bargain too much, or worry too much about the prices. But what that has the effect of doing, is it has the effect of sucking up too much of the inventory, so the regular investor, like yourself, listening to this show, doesn’t have the greatest of opportunity, sometimes, when this happens. So, glad to talk about Little Rock, and let’s dive into it. Give us some of the basic overall facts, Jeremy, if you would, about Little Rock.
JEREMY: Absolutely. First of all, thank you, Jason, for having me on. Little Rock is the capital of Arkansas. It’s centrally located within the state of Arkansas. Its population, metro area, is just shy of a million people. And it’s about 116 square miles, and what’s interesting about Little Rock, geographically, it’s the center of the state. And not only the center of the state, but really, centrally located throughout the United States as well. 40% of the nation’s population and buying power is within a 550-mile radius of Little Rock, Arkansas.
JASON HARTMAN: That’s pretty amazing, yeah. Yeah, and you know what impressed me about Little Rock when I was there last? Is how clean it was! I mean, it’s a really kind of, honestly, a surprisingly nice, clean city.
JEREMY: It is, and in fact, Little Rock was voted the second cleanest city in the nation, back in 2011. And you hit the nail right on the head. You go to Little Rock, you tour the city—very nice, very clean, you get a great feel being there. The downtown area is fantastic. There’s a lot of shops, restaurants, quaint little spots to hang out. There’s a lot of culture there, and you can just tell that it’s a city with a lot of pride in its development, and also its layout.
JASON HARTMAN: Yeah, and the housing prices—we’ll talk about that here in a bit. But in comparison as a ratio to the average household income of just over $47,000 annually, the housing prices are pretty darn attractive, aren’t they?
JEREMY: Very attractive, very favorable. So whether you’re a homeowner looking for your for first property, you’re looking to upgrade, or if you’re a tenant looking to rent a property, there’s a lot of nice options. And we toured Little Rock about a month ago. The properties that are being offered there in some of these neighborhoods are very nice, even in the so-called C-class, or tier 3, neighborhoods, depending on your terminology. These homes are very nice; well kept, you see very few board-ups, very few areas where there’s graffiti, or bars on the window, or cars in the lawn. You just get a good feel driving through the neighborhoods, and you can feel safe and take pride in owning a property there.
JASON HARTMAN: And 14% of the population, or, 14% population growth since 2000 census. Cost of living, nearly 11% lower than the US average. And remember, we talked about that income number—household income average of $47,000, just over that, but median home price is $114,000. Where national average is about $154,000, right?
JEREMY: Absolutely. So you’re still looking at affordable housing, and affordable quality housing. Not just shacks, but these are investment properties that are well built and have a lot of amenities.
JASON HARTMAN: And a decent renter population. Not the biggest of any of the cities in which we’ve done business, but 32% of the city, approximately, rents. So, that’s good. You’ve got a good tenant base. Tell us more. Tell us about the property taxes, and some of the other stats we should know.
JEREMY: Yeah, it’s kind of interesting how Little Rock is laid out. In the northern part of Little Rock, you have an air force base, which brings in a lot of transient traffic. So, 25% of the population in North Little Rock will tend to be renters, because they work for the air force base. They’re gonna be there maybe for a couple years and then move on. So that’s one source of tenants. To the south and west of Little Rock you’ve got a lot of newer development going on, and some neighborhoods where you can really find some attractive deals. And other drivers of the Little Rock market—in terms of employment, you have two major universities in Little Rock. You’ve got the University of Arkansas at Little Rock, and then you’ve also got the university—UAMS, University of Arkansas Medical Sciences. It’s a major university that brings a lot of jobs, and a lot of research and development is going on there as well.
Another interesting company that’s headquartered in Little Rock is Acxiom. They do data processing, and what they do is develop what’s called business intelligence for companies that are looking to put together marketing campaigns. And there are major IT company headquartered in Little Rock. You know, it’s kind of interesting, Jason, because I think you and I both know the days of privacy are pretty much over in this country.
JASON HARTMAN: Say hello to the NSA.
JEREMY: Exactly. So, every time you do an electronic transaction, that data is being stored somewhere and processed, and Acxiom is one of the companies that does that. But you just have a slew of companies, both in technology, and in the nautical field, that are a major driver or both tenants and homeowners of the Little Rock market. So, that brings in—you’re absolutely right about the percentage of population. About 32% of the population are tenants, or renters, there. Property tax is very favorable in Little Rock. Some other markets around the country, some of the Midwestern markets like Memphis, Atlanta, and even Birmingham—just by comparison, Little Rock, your taxes are going to be a little bit lower than those markets. I would say rough estimate about 80% of what you would get in some of those markets. The rent is comparable in Little Rock to those other cities. Maybe a little bit lower. So by the time you factor in the adjustments in lower rent and lower property taxes, you’re looking at cash flows in Little Rock that are comparable to some of those other markets.
JASON HARTMAN: Yeah, fantastic. Well, what would you say to people that say, oh, you mentioned the word transient, and some people might be thinking, well that’s not good, we don’t want transient. Well, we don’t mean transient like, a low-end crummy apartment building that rents by the night or the week type thing. We mean transient in that people move in and out. Especially if they’re in the military. So, that’s good, because they don’t buy! They rent! Right?
JEREMY: That’s right. And you don’t know how long they’re gonna stay. They may stay a year, but they may stay several years, also. Your goal is to get a lifetime tenant who doesn’t want the responsibility of being a homeowner. Renting has become the new American dream now, instead of home owning, because of the last housing crisis that we’ve had. And you get a certain percentage of the population that are just too busy in their careers, and then their jobs, and the military population is a great example of that: where they move in, they rent for a while, they’re not sure how long they’re gonna be there, and they may stay a couple years and then move on, but they also may stay several years—five years or more, and that’s good if you’re an investor. You want a long-term—ideally a lifetime tenant to stay in your property.
JASON HARTMAN: Yeah. My mother, I’ve had her on the show a couple of times, and everybody always seems to like the shows when I bring my mom on to talk about her investing experience. And she’s had a tenant in one of her properties since 1989 now. The longest—I mean, that’s just a miracle. She’s never painted, carpeted that house, or anything. It’s mind-boggling that the tenant stays. And she raises the rent regularly! I mean, you gotta raise those rents though. Just enough so the tenant’s not quite gonna move, but you’re still gonna get your yield. And the longest tenant I ever had in one of my properties was 9 years. So, my mom has beat me. But some of these tenants do stay a heck of a long time. So, that’s a good thing. Well, tell us about the business process, if you would. This again is the turnkey opportunity that we offer in most of our markets. Not all of them, but most of them have the turnkey phenomena, so tell us what your company provides to people.
JEREMY: Absolutely. Well, I think we’ve got an excellent team in Little Rock. We have property management established, and our main director of acquisitions has been a lifetime native resident of Little Rock for about 40 years now. Knows the city really well, took us on an excellent tour about a month ago, and is very passionate about real estate in the Little Rock market. We’ve got an outstanding team of property managers in the Little Rock market. In fact, our property management team in Little Rock is the second largest professional property management company in the state of—or, in the city of Little Rock, Arkansas, managing about 350 units right now. 15 vacancies as of the last count, so if you’re doing the math, that’s about a 4% vacancy rate, which is outstanding. We’ve got a full crew in place to do renovations, and we do quality renovations. In fact we’ve got a property right now in our inventory that we’re offering in Mabelvale, it’s kind of southern part of Little Rock, and this is an outstanding property. Fully rehabbed, and including a new roof with architectural shingling, updated kitchen with granite countertops, hardwood floors, three bedrooms two bathrooms, rented at $1200 a month. It’s an outstanding—
JASON HARTMAN: And what’s the price of the property?
JEREMY: That one will sell for $109,000.
JASON HARTMAN: Okay, so there, what did you say the rent was?
JEREMY: $1200 a month.
JASON HARTMAN: Okay, so we’ve got—I thought you said $1200, I just wanted to verify. So we’ve got more than 1% RV ratio per month! So that’s fantastic! And I gotta tell you, that is getting rare nowadays, since the prices have increased so much, that you can get more than 1%. I mean, it’s during the worst points of the market, we used to see properties at up to maybe 1½% RV ratio, and now they’re hovering around 1, even a little lower sometimes. So when you can get more than 1% you’re doing pretty well. Now, is that sort of a really unique opportunity? Or can you do that fairly consistently?
JEREMY: I think that’s par for the course. I see us as being able to do that consistently for this market. I do think some of our offerings will be over, will be offered at a lower price than that one, also. So, I think we have some outstanding opportunities coming up in sort of the $75, $80,000 to $100,000 price range, so I’m excited about that opportunity. And just planting a small seed—we did take a tour of some of the so-called C-class, or tier 3 neighborhoods. Didn’t actively look for opportunities there, but I was pleased with the possibilities there as well. The neighborhoods looked well kept, clean, looked like the pride of ownership was there, so for some of your clients who are looking in more of that $40-$50,000 range, we may have some opportunities coming up there as well.
JASON HARTMAN: Yeah, and what do you think those will typically rent for, those lower end C-class properties?
JEREMY: I would say $550 on the low end, to $700 on the high end, would be my guess.
JASON HARTMAN: Yeah, so if you can buy that for $50-$60,000 per unit, that’s a pretty good deal.
JEREMY: Yeah, it is, and you’re still consistently beating the 1% rule that you talked about. So if you can do that—I think 1.2 would be a comfortable ratio to target for those types of properties.
JASON HARTMAN: Right. So, with our package, you know, you’ve got low-cost property insurance that can be offered, financing referrals for private lending, or hard money lending—the off market opportunity, sort of. And then conventional financing as well, through the big banks, Fannie Mae, Freddie Mac type financing. And business structure set up, if someone wants to set up an LLC or an entity to hold the properties, you can buy through your IRA, of course, your retirement plan. And tax accounting referrals to maximize tax benefits, and everything in terms of consultation, to help devise a strategy to purchase numerous properties in this market, if someone’s interested.
JEREMY: Absolutely. The idea is to make the process completely turnkey. Handle everything from finding the property, doing a quality rehab, lining up financing, look at conventional first, and then look at private and creative sources second, and then we have an exclusive deal with insurance companies; we get a lower rate for our clients. And then offer quality, consistent back-end property management with, like I said before, the second largest property management group in the city of Little Rock.
JASON HARTMAN: Now, I would venture to say that before this show, maybe some people listening haven’t even heard of Little Rock, but probably since Bill Clinton became president, you’ve heard of Little Rock. Before that, probably not so many people. But it’s really received a lot of recognition in the news media, hasn’t it?
JEREMY: It really has. It’s interesting, I mean, there are some exciting things going on with Little Rock. I mean, it’s another one of those markets that—it’s not going to see the extreme highs and lows that you’re going to get on the coasts—Florida, California, Vegas, Phoenix—it’s slow, steady, consistent, and that’s what makes it so attractive if you’re a buy and hold investor.
JASON HARTMAN: Yeah, we call those the linear markets versus the cyclical markets. And these are markets that we like. They just chug away, and overall do their return. You know, there’s something interesting about that that I don’t always share, but I sometimes share in my Creating Wealth seminars. It’s a study done over I believe 16 years, and so, it covers really two market cycles. And it’s Orange County, California, where I spent most of my adult life until just two years ago, comparing it to—what was that market? I think it was Indianapolis, Indiana, if I’m not mistaken. And most people would think a high-flying market like Orange County—you know, with high end properties, and a wealthy population, would have really outperformed this boring market that I believe was Indianapolis.
But the example is still the same regardless of the market. And so, you compare the cyclical market to the linear market, and over the course of time here, the linear market actually appreciated at 0.2% more than the cyclical market! Because the cyclical market has these ups and downs. They always make the news. You know, you don’t hear much about the real estate market in Little Rock in the news media, right? But you do hear about places like LA, San Francisco, the coastal stuff, Orange County’s right near LA—high-flying market. And in these linear markets, you don’t really give back so much when the market has a downturn, whereas in the high-flying markets, you give back a lot! And granted, when things are going up, and things are going crazy, they may well go up more, but it’s like if you own a property and it goes from $200,000 to $100,000, to get back that $100,000 that you lost, it has to double! It has to appreciate by 100%! Just to break even. So, it’s a big deal. You know, a lot of investing is really about not losing money.
JEREMY: That’s exactly right. It’s not about what you make—it’s about what you keep. And in those markets, you can do really, really well. The problem is, you gotta be good at timing it, and if your timing is off, you can get hurt really bad. A market like Little Rock—a linear market, like you’re talking about—here’s some interesting statistics. It’s the 4th strongest economy in the country, by Businessweek, back in 2011. And it was voted the 10th strongest real estate market back in 2009. You know, this is a few years ago when things were still pretty dicey. Touch and go at best, with the real estate recovery. And you’re talking about Little Rock being recognized as one of the strongest economies, as well as one of the strongest real estate markets, and slow and steady wins the race.
JASON HARTMAN: Yeah, let’s share a few more here, in terms of media recognition. Kiplinger Magazine, in July 2013, so just a month ago, rated it the #1 place to live in the United States for cities under one million population. And its population, by the way, is about 860,000 or so. Top ten smaller markets in the south for foreign investment—that’s Southern Business Development. No real estate boom or bust, thus earned recognition in the top ten strongest market—I think that’s what you mentioned, the Forbes article. Second—I like this one a lot. The second most diverse economy, by Moody’s Investors Service. And diversity is great. We really like diversity in employment, and the local economy. Second cleanest city—we talked about that. Forbes. I wonder what the first one is, just out of curiosity. I’d really be curious to know. I gotta Google that. And really just some great stuff! I mean, the Brookings Institution—I’ve had a guest on the show before from Brookings. 7th best metropolitan economy in the United States in 2009. We mentioned that. Pretty amazing. Who would have thought.
JEREMY: 22nd out of 361 metropolitan areas back in 2005 by Forbes Magazine. Interesting, it’s very interesting.
JASON HARTMAN: It sure is. Tell us more about what makes it the #1 place to live. I mean, that’s a surprising ranking, that first one I mentioned.
JEREMY: Well, I think people like a clean city. They like a good-looking city, and they like a safe city. I think those are the three things you get when you go to Little Rock. The downtown area, there’s enough going on there so that you feel like you’re in a big city, but not so large that you feel overwhelmed. I mean, it really is a nice downtown area to tour. When you drive the streets, you see a lot of shops, you see a lot of little restaurants, little bars, little pubs, art galleries. A lot of culture. And it’s clean, it’s safe, and you feel that you can get around the downtown area without fighting a lot of traffic. The Bill Clinton Presidential Library was completed back in 2004; I toured it a few years ago. It is a very impressive facility. And regardless of where you stand politically, you’ve gotta acknowledge that Bill Clinton is one of the shrewdest politicians we’ve ever had, so that’s another driver.
Little Rock also, interestingly enough, is one of the top spots in the world for non-profit organizations. And that also brings in a lot of interest in the city. To the northwest of Little Rock you have Conway, Arkansas, which is where Acxiom is also located. Conway is also home to Central Arkansas, and for those of you NBA fans out there, Scottie Pippen went to that school. I walked the campus, it’s a very nice campus. And to the southwest is—I’m sorry, the northwest is Conway, and the southwest you have Hot Springs, Arkansas. You have a combination of mountains, you have a combination of river, and just a really nice city. And very easy to navigate and get around. And clean. Second cleanest city in the United States.
JASON HARTMAN: Yeah, fantastic. In the Bill Clinton Presidential Library—I have not been there, but I saw an exhibit at the Reagan Library years ago. Did they have his jogging shoes there? They did at the Reagan Library.
JEREMY: I think they not only have the shoes, but if I recall correctly, the gray sweatpants as well. So, it’s all on display.
JASON HARTMAN: Remember, that’s when Clinton first became president. He was always jogging with Al Gore, and that was looked upon as, oh, we’ve got this young new president, and it’s all gonna be so different and great this time around. But I didn’t like Clinton much as a president at the time. But looking back, well, compared to nowadays I feel that he was pretty good. Scandals notwithstanding.
JEREMY: I grew up in the 80s. I know you did too, so, we grew up in the Reagan era. Comparing what happened in that era compared to what’s happening today—it’s quite a contrast.
JASON HARTMAN: Well, you know what’s funny, I remember seeing Reagan speak. I saw him live, and he was campaigning for George Bush Senior. And it was in Orange County. It was in Yorba Linda. And Orange County is famous for these Santa Ana winds, where the wind blows in the opposite direction, and it’s kind of known for that. And anyway, it was on a day when the Santa Ana winds were blowing, and Reagan gets up there—he’s such a funny guy—and he goes, it’s great to be back in Orange County. I always enjoy the Santa Ana winds. And he says, but our opponent, speaking of Clinton, he doesn’t like it here. He avoids any place where there’s a draft.
JEREMY: [LAUGHTER].
JASON HARTMAN: Reagan was great. He was funny. Good stuff. Okay, politics aside, because I’m probably making a few people angry right now. Anything else about—how about industry? You know, you’ve got diverse industry, as we talked about. State government, two major universities, 28 of the Fortune 500 Companies, the air force base, you mentioned. Health care, a very large base from hospitals, insurance, manufacturing. Dassault Falcon Jet Corporation, Verizon, Caterpillar, wow! I mean, what a list!
JEREMY: Caterpillar has an impressive facility, too. I like cities where things are made. Where people make things that are tangible that they can ship out.
JASON HARTMAN: A manufacturing base is so good to have, because it just gives a city so much more stability. Manufacturing doesn’t move very easily; big factories do not pick up and move. Now, Facebook, they can pick up and move and leave Silicon Valley and move to Austin, and it wouldn’t be too darn difficult for them, because it’s just software. All they need is Internet connections, really. But manufacturing stays put pretty well, right?
JEREMY: Yep. And another point I want to make about Little Rock—it’s interesting how cities go through a certain cycle from the time that they—a growth phase, or whatever you want to call it. I mean, go back to 1979. Seattle was the place to live. It was a gorgeous city, I think it was voted the #1 place to live at that time. And over time, it just sort of grew to death. It’s still a nice city, but you go there and there’s just so much traffic. And then you know, a decade later was Portland, and then that city grew. And then Little Rock right now is kind of where those cities were in their prime, when they were voted the nicest cities in the country to live in. The population is just right, the location is just right, the development that’s going on downtown, the cleanliness of the city, it feels safe, it feels good driving around in these neighborhoods, and I think Little Rock right now is in its prime.
JASON HARTMAN: Okay, so we talked about the military there. Anything more you want to mention on military? Because that’s an employer and a tenant base.
JEREMY: Yeah, I mean, it’s a major driver of the tenant population in the northern part of the city, like we talked about. I also think the fact that you have two major universities in the city, and then also that you have an impressive list of medical centers and hospitals—those are always going to be a consistent driver of jobs and of tenants also, in a city like Little Rock.
JASON HARTMAN: Let’s talk about some economic development stuff. I mean, there’s been a steady increase in development activities, manufacturing, transportation, service sector, employment, all growing at a steady rate. We could talk about it being one of the top 15 aggressive development markets in the nation. It has doubled in the past 30 years, with projections indicating that it will double again in the next 20 years. So, faster growth than in the past. The downtown corridor is expanding and developing. What else can you tell us about the economic development?
JEREMY: Well, since 1994, roughly 20 years, you’re looking at projects that have totaled $968 million, that have been completed in the downtown area. With 175—over $175 million worth of projects in progress. And an additional $194 million worth of proposed projects coming. So, a lot of development. $1.3 billion in new capital investment, over $440 million in new payroll since February of 2005, and $1.3 billion in new capital investment directly resulted in 12,000 new jobs. So, bottom line is, the development that’s been going on in Little Rock over the last 19-20 years is driving new jobs, and jobs are good both for population growth, and of course, for tenant pool.
JASON HARTMAN: Let’s talk about how I opened this segment, this interview, and talk a little bit about the private equity and the hedge funds and the institutional investors coming into markets, because you have experience in different cities. We do too. By the way, in about 2004—2004, 5, and I think just early 2006—I was doing some business in Arkansas, and we had some good experiences there. It was pretty good. But our provider wasn’t consistent enough to keep doing business there, so we stopped. And that’s one of the nice things—we’re area-agnostic. We’re not attached to any one market, so we just go where it makes sense. And if it stops making sense, we stop recommending the market.
And that doesn’t mean that all of the people that have already bought in the market—usually including myself, as an individual, or one of my companies—they can still stay there, they’ve got stabilized properties, and they just ride the wave with their tenants and their stabilized property. But, it means that sometimes it doesn’t make sense to keep buying there. Because the dynamics have changed; maybe there’s too many investors in there, prices get big up, too many rentals on the market where it’s too competitive to find tenants—but talk about that with the institutional investors, and why I said I was so excited about this market, because it feels like it hasn’t really been discovered by them yet.
And it also feels like the last two years—maybe year and a half, two years—we’ve been just running from the institutional investors. We were doing a lot of business in Phoenix, and then it’s like, every darn hedge fund an every darn private equity group was in there bidding up the prices too high, and it just stopped making sense. So we got out. We had that experience in Atlanta, although we’re still doing business in Atlanta, and I still love Atlanta as a market. But it has gotten more expensive, no question about it. But it’s not as out-of-whack as Phoenix is. And it seems like we just keep getting sort of pushed out of markets as these institutional investors come in, and we don’t want to keep recommending them, because they’re bidding up the prices too much!
JEREMY: Yeah, well, the hedge funds change the game when they come in. They have very deep pockets, a lot of capital, they can buy up properties in large quantities. Usually they buy tapes. They’re REO properties, or entire packages of—
JASON HARTMAN: Now, wait. I gotta stop you. I gotta stop you. Most people probably don’t know what a tape is. Now, this is some real estate trivia, folks. You ready for this? Do you want to explain what a tape is, or shall I?
JEREMY: I’m gonna let you explain it.
JASON HARTMAN: Okay. So, a tape is basically a list, usually an excel spreadsheet, of a portfolio of REO properties. And my understanding—although I could be wrong about this, I haven’t actually researched it—but my understanding is, this came out of the Great Depression when there were massive numbers of foreclosures back in the 30s. And the properties used to actually be written on a tape—all the addresses of the properties, like a ticker tape. So that’s where it got the name, a tape. A tape is just a bulk portfolio of REOs. So, the institutional investor, as you mentioned, will buy a whole tape of properties, and that changes the dynamics of the market. Right?
JEREMY: Absolutely. Could not have said it better myself. That’s exactly right. And anytime you have an institution or an entity that can come in and buy properties in large quantities like that, suddenly it changes the dynamics of how we play in that market. Because the rest of us are left sort of competing for the leftovers. Or, we have to get there before they do. So, combined with other “turnkey providers” in a market, suddenly we’re all sort of scrambling for inventory. And we’re also kind of looking and scratching our heads at the hedge funds, wondering how much longer they’re going to continue to do this. And they have a very specific model, run by computers, about what they buy, where they buy, and basically they enter the parameters in there, and if a property meets their criteria, they’ll pick it up.
So, what ends up happening is we have to move away from markets where there’s a lot of hedge fund activity, and we gotta get creative. Now, one of the advantages of being in the central United States is, there are other markets that are not necessarily larger metropolitan areas, where we can play and do pretty well. And Little Rock is one of these markets. It’s a diamond in the rough. It’s an undiscovered gem right now. And it’s just large enough to be viable, and yet not so large that it gets on the radar screen. So, we can go into a market like that, especially now since we’ve already got a team in place, and start mining for the properties, those little nuggets of gold, and turn them into turnkey opportunities, and basically, have the same model there that we are in some of these other cities.
As long as the numbers work—the property taxes we discussed earlier are very favorable in Little Rock. The rents work, we’ve got enough industry to—so that jobs are being created, and also there’s a viable tenant pool, and bottom line is, we’ve gotta be more diligent in our efforts when it comes to locating markets where there isn’t as much hedge fund activity. So yeah, you are right. In a sense, we’re running from the hedge fund activity. The other side of that is, it’s making us more sophisticated and more savvy as investors, and we’re getting better at finding deals, and better at ultimately doing our craft.
JASON HARTMAN: Actually you know something? I’m going to say that differently. We’re not running from the hedge funds and the private equity groups. We’re leading them, because undoubtedly, I bet you they will be in Little Rock soon.
JEREMY: I hope you’re wrong, Jason, but I’m afraid you’re probably right.
JASON HARTMAN: But we’re leading them, we’re not running from them, dang it. I refuse to say we’re running [LAUGHTER].
JEREMY: We’re the pioneers. We’re blazing the Appalachian Trail.
JASON HARTMAN: Well good. Tell us more about your philosophy in terms of acquisitions, renovations, and management, in this market.
JEREMY: Absolutely. Well, we have a philosophy when it comes to real estate investing regardless of which market we go in, that we like to target better properties that are located in better areas, because those will make better investments in the long run. So, we want to be in areas where people want to live. We want to attract quality tenants who have stable jobs, who have—they’re more career-oriented rather than job-oriented, so, they take pride not only in where they live, but also in what they do professionally. We want them to stay a long time, so we do an exceptional job on the rehabs. We’re doing what we consider to be a retail-standard rehab, in what we put in the homes.
And then we do—I mean, we’re looking for properties where we’re going to have a waiting list. Where we not only attract a quality tenant on the front end, but if for some reason that tenant doesn’t work out, or they need to move out, then we can get it re-rented quickly, and we have a demand for the property. So, that’s our overall investment philosophy. And the areas that we target in Little Rock, or any other market that we’re going into—Little Rock being the market that we’re discussing today—are going to be areas where you see very few board-ups. The majority of the population in that neighborhood are owner occupants. I would say maybe 75% owner occupants, 25% tenants, just rough numbers. Also located close to a lot of amenities. So, we want to be near shopping centers. We want to be near restaurants. We want to be near a major source of jobs, whether it’s one of the universities, the military base that we talked about, or some of the other industries within the Little Rock area. And we want to be close to transportation. One of the advantages of the way Little Rock is laid out as a city—you’ve got a major interstate that goes all the way around the perimeter, and it also cuts right through the city, and so traffic and logistics and transportation are very manageable within the city. So, those are the things we look for.
JASON HARTMAN: Yeah, good! Good points! Well, hey, thank you so much for coming on and sharing some of the details about this—I’ll say, unexciting market. Because, you know, to most people, they wouldn’t think that this is anything to pay attention to. But to us as investors, the fact that it isn’t in the news all the time—well, I guess it is in the news quite a bit, with all the media mentions we—but it’s not on the front page of the LA Times, I’ll put it that way. Or the New York Times. And these are just the great little exciting markets that are these linear markets that just perform, perform, perform so nicely over time for buy and hold investors. So, I love it. Thanks for coming on, and if you’re interested in the Little Rock market, go to www.jasonhartman.com, click on the properties section, you can see properties there, and then also, contact your investment counselor at our office through the www.jasonhartman.com website, or if you’re already working with one obviously you have the right phone numbers and so forth. And we’ll be able to help you and tell you more about this and set up a conference call so you can learn more. You know, you can talk to the manager, you can talk with local market specialists, or anybody that you need to about this, or any of our other markets. So, thanks again, and happy investing!
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ANNOUNCER: This show is produced by the Hartman Media Company. All rights reserved. For distribution or publication rights and media interviews, please visit www.HartmanMedia.com, or email [email protected]. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate, or business professional for any individualized advice. Opinions of guests are their own, and the host is acting on behalf of Empowered Investor, LLC. exclusively.
Transcribed by David
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