In this Flashback Friday episode, Jason Hartman explains the different segments of the real estate investment markets. He also shares his thoughts on the office space and retail markets. Then, Jason talks to Doug about the White Paper Special Report that they published. The report includes an “ROI Build” profiling over 30 markets nationwide, including The S&P/Case–Shiller Home Price Indices. It also contains an executive summary, numerous charts, and graphs that can be used to make decisions in the future.
Announcer 0:00
This show is produced by the Hartman media company. For more information and links to all our great podcasts visit Hartman media.com.
Jason Hartman 0:08
Hey, this is Jason Hartman, thank you so much for joining me. Do you know what day it is? Yes, it is flashback Friday, where you hear the best of the creating wealth show and you hear some good prior episodes, some good review. Remember, we’ve got almost 500 episodes out. And you know what? iTunes doesn’t even hold them all if you’re an iTunes listener, if you are listening on Stitcher, thank you for joining us. So we want to bring you some good review stuff. Now. What’s interesting about flashback Friday, it’s a little scary for me. I got to be very, very candid with you on that. Because you the listener, you get the chance to hold my feet to the fire. Did I make any predictions? Was I right? Was I wrong? I’ve been right about a lot of things, but I’ve been wrong about a few. So you can give me a hard time about that if you wish. But it’s flashback Friday, and we will give you the uncensored Best of the creating wealth show with a prior episode. So let’s dive in. Here we go. Remember, this is not current. It’s flashback Friday.
Announcer 1:22
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur whose own properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day, you really can do it on Now, here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 2:12
Thanks for joining me today. Few things today. First of all, we’re going to talk about our predictions for 2010. And we’ll get into that here in just a moment. I wanted to share with you some thoughts on the office space market and the retail market. And I think this will be instructive for you. It’s really one of the reasons that we moved to our new office after being in the last office for just two years. We weren’t there for very long, but I tell you, you do not want to be in the office market. As far as real estate investing. When people talk about real estate investing, and they say residential real estate, everybody kind of knows what that is. And then they say commercial real estate, and a lot of people really don’t know what that means. And I think before we get into our predictions for the coming year, let’s talk a little bit about the different sort of segments of the real estate investment markets for a moment. Now, of course, there’s residential, there’s housing, and we really like housing the best that could come in the form of single family homes, condos, apartments, generally speaking, we don’t like condos very much. We like single family homes. We like duplexes, triplexes and for plexes, and then we like apartments. Now why don’t they call apartments six plexes or eight plexes or 22 plexes? Well, they could call it that. But generally speaking, I think the reason they don’t call them that is because when it’s one to four units, it’s considered residential real estate. When it’s five units and higher. It’s considered commercial real estate or multifamily apartments. Now we like multifamily. Most areas of the commercial real estate market, though we don’t like so don’t ever let people say to you commercial real estate because that term is way too broad to be understood correctly. Here’s an example two segments of the commercial real estate market that are just a disaster, a massive disaster, our office space and retail properties.
So let me just give you some realization that came to me about the office space market that I wanted to tell you about. So about a month and a half ago, it was a very stormy day. And I was walking with Sarah, one of our investment counselors you’ve heard on the show before and we were doing our typical daily afternoon, walk over to Starbucks. Now right by our old office, there was a Starbucks coffee shopping right near our new offices, a Starbucks coffee shop, they’ve got a lot of those around, and we were walking there and it was the middle of the day. It was like 130 in the afternoon. And it was so stormy out that it was basically dark in the middle of the day. Now that’s very unusual for California. I know in other parts of the country and other parts of the world. This is not unusual, but here in California is very unusual. And I had this startling realization that came to me because I looked back in our 12 storey office buildings Our former office that we just moved from. And in the middle of this very dark, stormy day, very few lights were on, as you looked up through all 12 storeys of that building. And it really, really shocked me. And then I looked across the street to the shopping center, kind of a single level shopping center that’s kind of a retail Plaza that formerly had restaurants and a clothing store and a dry cleaner and some things in it. And that whole shopping center was basically vacant. And our office building was, I don’t know what the exact number is, when you ask the landlord, they’ll tell you the vacancy rates about 30%. But here’s the thing. In the office world, they’ve coined a new term, they don’t just talk about the vacancy rate, they talk about what’s called the availability rate.
Remember, you’re listening to flashback Friday. Our new episodes are published every Monday and Wednesday.
And the availability rate includes the space within the building that is available to someone to lease because it’s not really occupied, even though there is a lease agreement in place that someone has just basically defaulted on company has just left the space. And on the third floor of our old office building is the big shipping company Maersk, who you’ve heard me talk about on prior shows, and they are moving their operations completely, I think to Dallas, and they have that whole space up for sublease for about half the price of what we were paying in our space in the same building. And it’s kind of interesting, because if you’re in the office business, that is a high management intensive business, I know that some of you residential real estate investors that invest in housing, which we think is really the place to be in the income property in the real estate market, when you’re investing in housing, sometimes you think it’s a hassle to manage your properties. But let me tell you something, if you’ve managed office or retail properties, you ain’t seen nothing yet, when it comes to management, those are highly management intensive jobs. And just in two years, from our old office to our new office, which I love our new office, by the way in Irvine, and by the way, I better give you the address of our new office, it’s 3333 Michelson, M I C H E L S O N, Dr. Suite number 280. in Irvine, California 92612. Our rate in this move dropped by 29%. That’s a 29% reduction in the rental rate in a mirror to yours.
If that happened to you in one of your residential properties, you would have a fit, you would be totally panicked. Now, I know we have seen in some markets, some declines and rental values. But let me tell you something compared to the office and the retail market that are just coming into their disastrous time and it is going to get much worse for them. Residential has maintained itself pretty darn well as long as you’re in the right markets. And that’s key geography is obviously key. The old thing in real estate is location, location, location. And the old saying in real estate is that all real estate is local. And those things are certainly true. See people misconstrue that location, location, location concept to take it to mean that here in Newport Beach right near me, we’re in this place, Newport Beach, Costa Mesa, Irvine, these are called like the tri-cities, they’re all right next to each other, you drive from one to the other, you don’t even notice the difference. They’re all just right here mixed together. And in Newport Beach. People say things like Well, my property here, my home, my office, building my retail property, whatever it is that I own will always be desirable. It’ll always maintain its value because it’s right here on the beach, the coastline of sunny Southern California, and everybody wants to live here.
Well, I’ve disagreed with that for a long time. I don’t think that’s true at all. I guess everybody wants to live here.dot.at the right price. Obviously, this market is pretty darn bad here. And so many investors, I see them making so many huge mistakes because they’re impatient. I just had an investor sit in my office a few minutes ago. And he’s interested in looking at properties in San Diego. And he asked about Miami and he asked about Las Vegas. Those markets are disasterous. I mean, they’re a mess beyond mess. They’re just terrible markets. Will they always be terrible markets? No, certainly not. I may completely change my tune about Las Vegas. In the next six to seven or eight months. I may change my tune about California properties like San Diego in the next year or so. Don’t know, this is what we do. We are area agnostic. We monitor these markets all the time. And when we like one, we’re going to be recommending it to you. But so many investors, they fall under the spell, they think because it’s a nice area because it’s a beautiful place or because it has nice whether they think those things drive value. Now those things drive value. Yes, I guess they do to some extent, but they don’t make the property worth 160% or 300%, or 600% of the value of a comparable property in another area. There’s a ratio. Yes, it’s certainly true, people will pay a premium for a location. But that premium is limited. Just because it’s in a nice location doesn’t mean it’s a good investment. And that’s what we’re going to talk about as we talk about our white paper.
Today on this show, as we talk about our predictions for 35 different markets around the country, including the 20 Case Shiller markets, most of which are not good markets in which to be investing. But when you hear about the real estate market in the United States, you’re pretty much hearing about the Case Shiller index, and only about four or five of those Case Shiller cities of the 20. That’s only what 20 25% of all the cities in the index are even worth considering. At this time. In our eyes, we wouldn’t touch the other 15 or 16. Markets 75 to 80% of the Case Shiller index holds no interest for us. Because it doesn’t work. It doesn’t make sense. All real estate is local, different segments of the real estate market are completely different. You can have a market where it might make total sense to invest in a house. But it might be a terrible idea to buy an office building in office condo, a retail property, it just depends. You’ve got to be agnostic, you’ve got to get good advice from people who do this every day. And that would be yours truly. And my team here at Empowered Investor investor network Incorporated, we are here to do that for you. We are here to watch those localities to watch those market segments. And to make sure we are recommending the best possible thing at that time, all real estate is local different segments of the market are very different from one another.
So a couple things, we’ve got a new thing that we’d like you to join us for on February 24, we have a conference call coming up, where we’re going to talk about our creating wealth boot camp. And we’re going to give you kind of a nice preview of that if you have not attended it. Or if you have not attended in the last six months, you will definitely want to be on this call, you can register for that call. It’s totally free at Jason hartman.com. And we’re also going to talk on that call about our new and this is totally new, we’ve never done it before, but a lot of you have been asking for it. So we’re going to do it for you, we’re going to talk about our creating wealth bootcamp telecourse, where it will be a online web based course over six weeks where you can interact with me, you can interact with the other speakers, and you can see the visuals, the PowerPoints, the slides, and things like that you’ll hear from different market specialists around the country. And we’ll do this over the course of six weeks, you have been asking for this for a long time, and we’re finally delivering on it. So I think you’ll enjoy that. And you’ll get more information about that on February 24. And you’ll get some great information just on investing in general, of course, on February 24. So that’ll be a live conference call register at Jason hartman.com. Now, of course, March 6, and seventh is the Masters weekend here in Costa Mesa. That’s a live event. And it’s going to be a great masters weekend. So join us for that register at Jason hartman.com.
And the last thing I want to say before we get into our predictions where we’re going to start off talking to one of our clients and contributors. And then we’re going to play you a radio interview that I did that will be rather enlightening about our predictions about different markets around the country. Now this is not the same as the conference call we had a few weeks ago. This is different. It’s a different thing. You have not heard this before. This is not a repeat. So the last thing I want to say before we jump into that is that you need a coach. Everybody needs a coach no matter how successful you are, or no matter how difficult you’re finding the times right now if you are struggling. If you are achieving success wherever you are in the game, you got to have a coach because a coach can help you see things that you don’t see yourself. And I really want to encourage you to get into either our group coaching or individual coaching and this is on two facets and it’s wherever you will To go with it. One facet is creating income through personal entrepreneurship through a sideline business or a main business. If you’re not employed and you’re not busy in another business, but diversifying your income through personal entrepreneurship through micro entrepreneurship, that’s one thing. And then the other thing is, of course, building wealth through the prudent investment strategy through prudent income properties and diversified markets. So join us for one of those programs, we’d love to have you involved. And again, more information there at Jason hartman.com. All right, let’s talk about predictions for 2010. And first, we’ll start with a little discussion on it. And then we’re going to jump in to a recent interview that I did that I think you’ll enjoy. Here we go.
Just a reminder, you’re listening to flashback Friday, our new episodes are published every Monday and every Wednesday.
Let’s talk a little bit about the white paper that we published that went out in early January, or we followed it up with a conference call that included our predictions for 2010. And we did these in a very unique way. And so far as I know, nobody but nobody else is doing it this way, or has ever done it this way. Because our white paper instead of just predicting appreciation or depreciation for various markets, our white paper actually does a complete ROI build meaning what is the return on investment of this income property asset in that specific city or that specific Metropolitan Statistical Area that marketplace and it considers the multi dimensional nature of an income property asset. So again, a much clearer, much more accurate view of the market. But we didn’t just talk about real estate per se and income property in this white paper. It’s 40 pages long, we talked about several other aspects of the economy and the geopolitical environment. And I have Doug on the line with me to talk to us a little bit about the white paper today, Doug, how are you?
Doug 17:03
Not too bad.
Jason Hartman 17:04
Good. Tell us what your thoughts were on the white paper and putting it together and helping contribute to it.
Doug 17:09
The thing that I thought was the most interesting, and I’ll go ahead and give myself a little pat on the back of vindication here was that the primary political trend that we forecasted in our white paper was a moderation of the political tone in Washington, DC in 2010, is the midterm elections approached. And as we all know, Scott Brown won the Kennedy seat and all of a sudden, the super far left Congress and Senate is suddenly starting to get quite a bit more moderate. In fact, I believe it was just the other day that President Obama said that he is okay with bankers getting bonuses, as long as they’re in a free market, whatever that means, in the current context.
Jason Hartman 17:44
He’s talking out of both sides of his mouth. But what’s what’s interesting is that that prediction already came true. Yeah, just certainly after the white paper,
Doug 17:52
I thought it would take until the middle of the year before things really started to tax center. But things just pulled hard, hard, hard center.
Jason Hartman 18:00
Right. Yeah, They sure did. Well, what were your other thoughts on the white paper?
Doug 18:03
A few of the other things that we’re really looking at one and putting the white paper together was what are some of the things that are going to be happening with interest rates and Federal Reserve policy? Because the tenuous situation the Federal Reserve is in right now, is that they floated a whole bunch of extra capital out into banks. And right now the banks aren’t lending the money. And the reason they’re not isn’t because of some evil conspiracy, it’s because the Fed funds rate is so low, that the banks are better off just borrowing money, and then buying treasuries and then pocketing the spread. But what will happen is, eventually when things start to recover, and when there’s more viable loans available, you’re probably going to see more banks start loaning out money, which is going to create inflationary pressure, because as we all know, the way fractional reserve banking works is that $1 of reserves can be turned into $10 of loans, that’s in the US. In England, it could be turned into an infinite amount of loans,
Jason Hartman 18:57
Right. And what people need to understand about fractional reserve lending is that money is created because it’s loaned into existence. So for example, if I have a million dollars, and I loan you a million dollars, if someone asked me before I made that loan, how much do you have, I’d say a million dollars. And then if I loaned it to you, I would take a note back. And if someone asked me that day, how much do you have? Like, what’s your net worth? I would say, well, I’ve got this note for a million dollars, so I’m worth a million dollars. Now, of course, that’s as long as you the borrower pay me back. And then someone would ask you, what are you worth and you would say, Well, I got a million dollars. So that’s just a kindergarten example of how money is loaned into existence. Right?
Doug 19:38
That’s actually another layer. another layer on top of that, because that’s if you’re a Jason Hartman person, if you were the Bank of Jason Hartman, and you had your million dollars, you could loan me $10 million and still be within the regulatory requirements. So then what happens is you have $1 million that just got turned into $10 million that I’ve taken out in the loan and presumably spent on either investment capital or inventory, or marketing or something or other else, presumably some kind of viable business alternative. I mean, I might have just decided to go to Vegas and blow it. I mean, that certainly happens too. But what happens is when a bunch of this reserve capital starts getting loaned out, it gets loaned out at a multiplied rate. So a lot of people see your $800 billion of unknown reserves, they say, Okay, well, yeah, so what you know, there’s trillions of dollars out there, but $800 billion of unknown reserves can be turned into $8 trillion of currency, almost overnight, all things have to do is decide they want to start underwriting loans. And we can suddenly see the money stock inflate by $8 trillion.
Doug 20:40
Effectively, instantaneously, it’s just a question when the ball drops,
Jason Hartman 20:43
It could happen literally in a day. That decision, and then the impact could hit the market really, really quickly hitting the street and trickling down to the broader economy. But what are your other thoughts on what’s gonna happen in 2010, and some of your thoughts about the predictions for the coming year.
Doug 21:00
So outside of like the interest rates and inflation, let’s just start with interest rates and inflation. So we believe that both interest rates and inflation are going to be picking up. And the main reason for this is that the Federal Reserve knows that there’s this big inflation risk out there, they’ve basically been riding along more or less betting that this money isn’t going to all get loaned out at once. Well, so unless Chairman Bernanke, he really really, really gets his arm twisted, which may happen, he has to figure out that he’s going to need to start pulling some of that back. And when you start pulling money out of the banking systems, you’re going to push up interest rates, because interest rates are really a market equilibrium, right? Because when everybody says, say like the 10 year bond interest rates, well, it’s not the interest rate on the 10 year bond, it’s the yield to maturity. So it’s a combination of the buy the bond at a premium or discount, and what are the coupon payments? And then what is the internal rate of return for that bond from now until when it matures? That’s what people commonly refer to as the interest rate for bonds. And that’s all market driven. So anytime that the Fed tries to tinker with monetary aggregates, or with different bond inventories, then that’s going to impact the money supply. And when that impacts the money supply, it’ll impact relative prices, because I think GDP is technically growing. I personally have doubts as to how much of that’s real versus how much of that’s just the government borrowing, you’re borrowing against future revenues and spending in the current time?
Jason Hartman 22:24
Well, and the other question we’ve got to ask is, is it fair to count haircuts in GDP? Since they’re not exported? They’re used here in the US, right?
Doug 22:32
Yeah. Yeah, that’s, that’s another one that’s that’s really difficult, too, is that, you know, how do you parse out the, you know, the tangible versus intangible? What’s the real value, I think is the way that GDP is built up is, it’s the assumption is that the dollar the market value, or the dollar value that people spend for whatever they do, is assumed to be its real value, basically, based on the assumption that in a free market, you’ll have a number of transactions. And that equilibrium price will be what people rightfully judge the value of something to be. Now, of course, that can all be manipulated, it can all be pushed and pulled in different types of things. But one of the things that that I think is, is another tip is another, not as much of it, take it to the bank as attacked in the middle, because that’s already happened. But another thing that’s inevitable, is that interest rates and inflation are both going to be going up. When we did this white paper we forecasted fairly modest interest rate and inflation increases, because we don’t think the dam is going to break quite yet to basically what we’re thinking is, or the line of thinking that we have with this white paper, is that the Fed is going to try to take baby steps. So they can finesse their way out of a big inflation risk, because like we said, if all $800 billion of unknown reserve hits the market all at once, it’s going to be a giant price shock that just hits everything. And of course, you know, that’s very, very bad for incumbents who are seeking reelection, most politicians would prefer that inflation be metered out in say, three to 4% increase over three or four years as opposed to a 12 and a 15% increase. All at once.
Jason Hartman 24:03
Right. Yeah, no question about it. And I think that’s the big urgency for investors is that they got to lock-up these long-term fixed-rate loans before the rates go up, and rates have to go up, they must go up. And I still say inflation has to happen. It must happen. We cannot defy the laws of physics, the laws of gravity on either side of that equation, higher rates, and higher inflation.
Doug 24:28
Absolutely. Getting back to the Irving Fisher equation is that the old MV equals PT, which is the M stands for the money supply, the V stands for the velocity of money or how fast money transaction, the economy, P is the price level and then Qi is the real output. Well, the real outputs the real output, the only thing you can do to make real output better is to have assets be more productive, or to have gains through trade. And we’re not currently making any great strides to do either of those. So real output is probably going to be flat. To only modestly up, and of course, the velocity of transactions during recessions tends to go down, but it’ll regress back to a normal equilibrium, which really means that the the primary hammer that’s going to impact prices is going to be the amount of money that the Fed floats out in this in the system. And right now, there’s a whole lot of money that’s out in the system, a whole lot of on loan reserves, and there’s just this giant flood of capital that could hit the market at any point. exactly when it will. I don’t know, you know, I, you know, how much How big can a snowdrift get until there’s an avalanche? Nobody knows.
Jason Hartman 25:35
Nobody knows exactly.
Doug 25:37
Yeah, right. But I can tell you one thing, you don’t want to be in front of the avalanche when it hit.
Jason Hartman 25:40
That’s for sure. And and if you are in front of it, you want to be in front of it with the the shields with the defensive and the offensive tools that we talked about on this show, long term fixed rate, debt, packaged commodities, investments, and rents that are indexed to inflation and all of that great stuff. We’ve talked about it many times before. So it looks like this year is going to be a pretty good year for investors in in many markets in terms of cash flow, in terms of some modest appreciation, but amplified with leverage, doing pretty well. And your take on comparing income properties to any other investment out there, whether it be paper assets, stocks, bonds, the precious metals, certainly say the two good best places to be are income properties and the right market structure the right way, and then having something of your own business of your own little mini marketing Empire to take advantage of a plan B scenario if it’s needed, right.
Doug 26:39
Absolutely.
Jason Hartman 26:43
Thank you for listening to the creating wealth show. This is Jason Hartman, your host, and we appreciate you following the show. We have many, many episodes, hundreds of episodes, and some of the older episodes have been archived and placed in our members section. And that applies to this one. So we include a sample that’s about 25 minutes long. And then for the rest of the show, you can go to our members section at Jason hartman.com. Many of the other shows are still in their full length complete version. However, some of the shows like this one are in our member section where you can hear the show in its entirety. And again, you just need to go to Jason hartman.com. And you can get the full show there in the members section plus a whole bunch of other great members benefits and resources, whether it be documents, forms, contracts, articles, other video and audio content, just a great resource, so be sure to join as a member at Jason hartman.com and thanks again for listening to the creating wealth show.
Announcer 27:55
This show is produced by the Hartman media company All rights reserved for distribution or publication rights and media interviews, please visit www dot Hartman media.com or email media at Hartman media.com. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax legal real estate or business professional for individualized advice. opinions of guests are their own and the host is acting on behalf of Platinum