Governments create monopolies through regulations, which was a chief reason that big banks and Wall Street became riddled with corruption and failed during the financial crisis of 2009—and it remains a reason why big banks and Wall Street continue to corrupt through this very day.
But as an informed and wise investor in real estate, you know that big government actually can be on your side for real estate tax benefits, because the Internal Revenue Service’s tax code does not properly account for inflation. This is what real estate investing expert Jason Hartman calls “inflation induced debt destruction,” and he expounded on that theory more fully during a recent episode of his popular podcast show, “Creating Wealth.”
Joining Hartman on the podcast to discuss inflation induced debt destruction and real estate tax benefits, as well as other issues essential to you as an investor in real estate, was his colleague, Andrew “Drew” Baker, who’s a member of Hartman’s Empowered Investor Network.
In addition to government over-regulation and inflation induced debt destruction, the podcast co-hosts talked about how you, as a direct investor who controls your own portfolio, will notice the financial bumps that can arise in a financial deal—more than you would as an investor in a group transaction.
They also share some favorable reasons to self-manage your income properties, which is a practice that Hartman favors, though Baker does not.
How the Government Creates Monopolies Through Regulation
Baker recently had watched an episode of another podcast, the Joe Rogan Experience, in which Rogan and Peter Schiff, an investment broker, author and financial commentator, discussed issues that arise with minimum wage laws.
Hartman tells Baker and his podcast listeners and followers that there are indeed problems with minimum wage laws—he calls such laws “the stupidest idea ever.” “Anybody who believes in minimum wage has no understanding of economics,” he says, adding that minimum wage laws “create massive unemployment and massive crime problems.”
“This is one of the concepts that changed my life as a real estate investor, as a person, and it’s just critical to understand, and that’s the differences between context and content,” Hartman says. Context is the picture of government as some sort of hero who always rides in on horseback to save the day, which is the way the government often gets portrayed on television and in the movies, he says. Content, meanwhile, is the reality that government is not the hero once you look at all of the messes it creates.
“During the financial crisis, everybody on the left said, ‘We’ve got to regulate these companies more,’” Hartman tells Baker in the “Creating Wealth” podcast. “No—we’ve got to regulate them less. We need to regulate financial companies less. The reason the financial companies became too big to fail is because the government gave them a monopoly.”
Hartman compares the regulation of financial companies to the regulation of drugs, which has created the massive amount of crime problems that include killings by violent drug cartels, he claims.
By regulating drugs, the government has given the cartels a monopoly, he says, the same way it gave “the criminals on Wall Street a monopoly through regulation … you’re not going to start a new bank and compete with Goldman Sachs or the criminals at Wells Fargo.”
Just this week, Wells Fargo said it may have opened an additional 1.4 million fake accounts that its customers didn’t want—which was 67 percent more than it initially estimated when the fake-account scandal broke early this year.
The bank revised the total of fake accounts to 3.5 million, after discovering that employees may have been opening unauthorized credit card and bank accounts for customers much longer than it originally thought. The revision results in yet another black eye for Wells Fargo. It also was recently reported that 570,000 of the bank’s auto loan customers were charged for insurance they didn’t need, driving some of those customers to default and getting their cars repossessed.
“Wells Fargo has to be the most crooked bank out there right now,” Hartman says in his recent podcast.
“During the financial crisis, it was Bank of America and Chase and now it seems to be Wells and it’s just like scandal after scandal. These are criminals, and nobody ever goes to jail. The company gets fined, but all you’re really doing when you fine the company is punishing its shareholders, and they didn’t do anything wrong. It’s the people who run (Wells Fargo). And they don’t get fined individually, they just take their shareholders down the hole with them.”
Baker agrees with colleague Hartman that financial companies are over-regulated and that such over-regulation has led to problems such as those suffered by Wells Fargo, banks and Wall Street in general.
“The way to solve this is to make the power of government smaller,” he says. It’s ‘power corrupts,’ I guess.”
How You Can Win the Tax Game Through Real Estate
As a real estate investor who follows Jason Hartman and his “Creating Wealth” podcast, you already know what he thinks of Wall Street: He calls it a scam and a bad deal that you should avoid as an average and well-informed investor. He also deplores “the gold-bug crowd” who profess investments in gold and other commodities as a way to pad their Wall Street portfolios.
Whenever you do have a big gain in something like a stock or commodity, “just remember the government hasn’t collected their fair share of that yet (in taxes), and that’s significant,” Hartman says.
He says that as a real estate investor, you may overly worry when you face such issues as a vacant rental property or a tenant tearing up your property and forcing you to spend several thousand dollars to get it rent-ready again.
“Income property is not immune to problems,” he says. “It definitely has problems. I deal with them and hear about them constantly, but what you aren’t remembering about the problem you’re having is that the government is also your partner on the downside.”
“You have a $3,000 disaster and you’re all depressed and sad about it with your property, but also when tax time comes around, the government is going to cover about 40 percent of that, depending on your tax bracket. This is when it’s good to live in a place like the socialist government of California, which taxes you to death, because you get a bigger deduction.”
Inflation induced debt destruction also works in your favor as a real estate investor, Hartman notes.
He explains inflation induced debt destruction this way: If you borrow for a $100,000 house now, and then there’s inflation in succeeding years, you’re still paying back the same fixed amount of $100,000—but you are paying it back with cheaper dollars you can afford.
Older people generally own assets in the form of savings, stocks and bonds, while young people generally have debt, so their debt is paid off through inflation. However, older people suffer because the value of their assets is debased by inflation—if they had invested in real estate instead of stocks, bonds or commodities, they most likely would have a more healthy looking portfolio, Hartman and other real estate experts argue.
“It’s all denominated in dollars or whatever currency is being inflated,” says Hartman.
As an investor, you also reap real estate tax benefits with any outstanding mortgages on the properties in your portfolio— benefits that stocks, gold and commodities, and other financial investments don’t provide.
First, there’s the IRS allowing mortgage holders to deduct 1/27th of the value of a piece of property as depreciation against their taxes each year. Other tax write-offs and deductions also can arise, including the 1031 Exchange program in which capital gains from a property’s sale can be avoided by re-investment in a similar property.
There also are GO Zone tax benefits that the federal government has offered to investors after Hurricane Katrina and similar disasters in the Southeast begged for immediate investments and improvements in that region. Who knows: With Hurricane Harvey’s strike on Houston and the surrounding area this past week, similar legislation could arise in Congress and provide similar real estate tax benefits for you as an investor.
“Taxes are the largest single expense any of us have,” Jason Hartman says, yet “income property is the most tax-favored asset in America,” providing opportunities other investors do not have when it’s time to settle with Uncle Sam in mid-April.
As a Direct Investor, You Will Feel the Bumps in the Roadway
When you invest in a fund, such as a mutual fund or a stock or a bond, you don’t see “the bumps in the road most of the time unless they’re hugely significant,” Hartman says.
An example of “hugely significant” would be the recent scandals centering on Wells Fargo. Hartman in his podcast provides another example, which is Apple’s patent lawsuits against Samsung.
If you had invested in Samsung and then witnessed the daily news reports about the giant judgments won against Samsung by Apple, “that’s a bump you would feel.”
However, with most such forays into what Hartman often calls “the scam that is Wall Street,” you most likely won’t hear about what’s going on behind the scenes.
“There are all kinds of small bumps that you don’t even know about—lawsuits, sexual harassment, patent infringement, little things like the competitive landscape that exists within that investment. But it gets transferred to you as an investor in mediocre, even terrible returns on your investment.”
What should you do as investor? Stay away from Wall Street, invest in real estate income properties and practice the third commandment of Hartman’s 10 Commandments of Successful Investing, he says. That commandment is: “Thou shalt maintain control: Never leave your financial future in the hands of incompetent, unethical, or greedy brokerage houses, fund managers or corporations. Always be a direct investor.”
“When you’re a direct investor,” Hartman reminds listeners in his recent podcast, “when you follow Commandment Number Three, you’re investing directly, so those bumps … you feel them.” However, “One of the important things about becoming an investor is to control your own mindset, your own emotions.” If you stay focused, the bumps will eventually smooth out, Hartman says
What Should You Do? Self-Manage Your Properties or Get a Manager?
Along those same Third Commandment lines, Baker and Hartman discuss in the podcast whether you as an investor should manage the properties in your portfolio on your own—or whether you should get a property manager to do the job for you.
Hartman prefers self-management; Baker does not, and he favors hiring property managers instead.
“The thing I’ve found with the properties I have is that it’s a three-legged stool,” says Baker.
“You have to have a good deal when you bought, you have to have a good tenant who’s going to help you pay the bill, and you’re going to have to have somebody who’s good to manage it. Maybe that’s me, maybe that’s a property manager.”
“But you also have to realize that you have to manage your property manager … I’ve seen turnarounds in markets where I changed property management companies to where now I’m getting 20 percent more in rent, I’m getting a better quality tenant, and we’re partners together.”
Baker says he prefers not to mess with day-to-day issues that might arise from managing an income property yourself, such as dealing with a tenant “every time a light bulb goes out.”
“That was my line of thinking, too,” Hartman says. He thinks self-management, because of the reasoning he offers under his Third Commandment, is better.
“I think about this in every sense of my life: There are things that it makes sense to delegate, and there are things that are just better to do yourself sometimes. And sometimes, having an intermediary or third partner in there (such as a property manager) just slows the whole process down and makes it more expensive and less efficient, and it puts things out of alignment.”
However, Hartman does think that property management is “worth considering” for a first-time investor who’s not educated in self-management or the Third Commandment centering on self-control. For such investors, he says, “If you have a good property manager, go with it.”
When you manage your own property, you also might find comfort in the fact that you’re not creating a monopoly through regulations like the government does—and that the government, because of inflation, actually can work in your favor to gain some real estate tax benefits.
