On this Flash Back Friday episode 287, originally published in November 2012 as show number 287 Jason hosts Larry Muck, the Executive Director of the American Association of Private Lenders. They talk about the organization’s history and their mission and vision. Larry explains the difference between private lending and public banks.
Jason Hartman 0:00
Welcome to this week’s edition of flashback Friday, your opportunity to get some good review by listening to episodes from the past that Jason is hand picked to help you today in the present, and propel you into the future. Enjoy.
Announcer 0:16
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 and 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 1:07
Hey, welcome to the creating wealth show this your host Jason Hartman. This is episode number 297. super short intro today, I just want to get to our guest we have a lot to talk about on future shows. And we’ll be back with that in the next episode. But before we go to our guests today, just quickly, we only have a very, very few more seats for our meet the Masters event in January. I’m guessing right now but there’s probably like six or eight more seats left in that room. We were not able to get a bigger room This one will max out at about 80 people. So please register for the meet the Masters event January 18 through the 20th Hyatt Regency Irvine, and you can do that at Jason hartman.com get the last few seats there because we’re about to close it out and call that event completely sold out. Okay, let’s go to our guests in just a moment.
Jason Hartman 2:05
Hey, it’s my pleasure to welcome Tony from Cleveland calling in and he’s got a very good question about inflation and more specifically, target inflation. Tony, how are you?
Tony 2:15
Good. How are you doing, Jason?
Jason Hartman 2:16
Good, good. It’s great to talk with you. And thanks for calling into the show. So tell me what is on your mind?
Tony 2:21
Well, you know, my question revolves around inflation. And I hear you talk about a lot a lot on your show. And I know you talked about investing in multi unit properties and single family real estate as well, and you call them package commodities. And this helps keep pace with inflation and the expected inflation that you see coming. Right. And, you know, my concern is and I have two duplexes, in which I hope you know, I’m doing the right thing with my investments. I love my duplexes. They give me cash flow, and long term I really hope that they do Well for me, but what I’m concerned about, I hear you talk about it a lot is you talk about inflation. And I’m concerned more about targeted inflation. And what I mean by that is the Fed, as you know, they, they take inflation, and they measure it in a different kind of way when they use kind of an accordion feature in which they take items in and out of the inflation pool.
Jason Hartman 3:25
And let’s just explain that a little bit for the listeners, that’s the basket of goods, so to speak, that the CPI or the consumer price index uses and of course, like you said, they take things in and out, that’s called substitution. And they also wait things differently. That’s called waiting. And so they wait, they substitute and then they apply hedonic to, which we’ve talked about on prior shows too. So, but yeah, go ahead with a target inflation question.
Tony 3:50
And basically what I’m getting at is, you know, historically, a lot of our people’s income usually gets you know, sliced up in the pie of their budget. In In historical terms, a large portion of that pie has been always used for rent, and, you know, your your any kind of debt instrument, you know, like a mortgage or right, you know,
Jason Hartman 4:11
housing. In other words
Tony 4:13
in a car, yeah, for good for that exam, you know, for an example. But, you know, in historically what we’ve seen, I think, is a large portion of the consumers budget being appropriated towards those things. But as I’m starting to wonder if we’re starting to see maybe something a little different, as far as maybe, you know, are the consumers going to be constrained where you see certain items becoming hyper inflated, and you’re going to see a bigger inflation rate on things like utilities, you know, electric, gas, water sewer, and, and I talked about those in historical terms. Those have always been a really small portion of the, you know, Americans budget but, you know, my concern is, you know, here in Cleveland, for example, The sewer rates are astronomical and they’ve laid out like the rates are going to go up exponentially over the next 10 years. And that’s really going to push put a ceiling on, you know, the the amount of rent that I’m thinking you might be able to get long term. You know, those kind of increases. Is that going to kind of, I guess,
Jason Hartman 5:19
is it going to derail? Yeah. Okay. Well, let me let let’s talk about a couple things here. First of all, so when you talk about target inflation, who causes target inflation, are you saying that the Fed can actually control which things inflate more than others? I mean, you know, I first want to kind of smoke that part of the question out and then I want to talk about utilities are certain things rising and other things falling or staying even, you know, I’m not I’m not seeing so much is, you know, targets for say, the Fed goes and says we want this type of commodity to raise in value. I’m not talking about that. I’m talking about more Because the scarcity of resources, specifically with the global Academy, you got China, India becoming big players, especially for energy. And are those demands that are really inflate in especially as more people come out of poverty across the world, you know, you’re going to have a huge demand on natural gas. Oil, you’re starting to see that and and is this going to push constraint on the amount of rent, you’re going to be able to charge and the value of houses for that matter? It’s a great question. Now, let me let me address it. I don’t know what your point was there. But let me just kind of make it a little more succinct, if I may. Okay. So here’s the thing. Personally, I think energy costs will continue to rise. And as they rise, that will actually increase the cost of those what I call packaged commodities or houses. Because energy cost is in every single product and service we buy energy is everywhere. It’s it’s omnipresent. And so if the cost energy goes up the cost to build a house goes up. Now granted, you’re you’re you’re thinking is very interesting because what you’re saying is, well, gee, if the cost of energy goes up a lot, well that curb the the ability for me to charge more rent in the future for my properties.
Tony 7:18
And and not just that the the price of houses or commercial buildings are going to either going to be able to go up at the same rate increase, if you can’t get a loaner, or the cost of that loan is going to be such that, you know, it’s going to put constraint on a budget, any kind of budget, you know, like a household, especially for the single family house perspective.
Jason Hartman 7:42
Yeah, let’s not let’s not go into the loan and financing yet because that’s sort of a different discussion. Let me just address the energy part. Okay. I say and, you know, again, this is just my feel about it. And my prediction, I could be wrong. Okay. But I say and I’m pretty sure I’m going to be right about this one, the higher The cost of energy goes, the higher the cost of housing will go. Because it costs more to, to build a house to build an apartment building. And it’s going to cost and if it costs more to build it and own it, it’s also going to cost more to rent it. Here’s what, here’s what declines. What declines as these things go up and food will cost more. energy will make everything cost more energy is more expensive. Everything else is pretty much more expensive, too. But here’s the thing, the thing that will suffer, where does the money come from? If people have to pay more for food, if they’ve got to pay more for utilities, if they’ve got to pay more for all of the goods and services that are derived from energy and energy is a component of all those costs. Then here, here’s where the money comes from. It comes out of the standard of living, the standard of living is what suffers and declines and I’ve said it many times, look at it like two ladders. Okay, and this is the best way I can think of to visualize it, there’s probably a better way. But if you if you look at the tenants you have you have two duplexes now and your tenants that live in those duplexes. They have been throughout their adult lives and their childhood too, but you know, let’s just take their adult lives. They have been at different levels of the socio economic ladder. Sometimes they’ve had a great year, and they’ve been doing really well and they’ve got more money to spend, and they live in a nicer, better, bigger place in a better location. Other years, things aren’t going so well. They’ve got less money to spend, they live in a smaller place, they live in an inferior neighborhood, and they live in an attached house rather than a detached house. So this varies throughout one’s life. But where where the cost will come from is it will come out of the standard of living. So if your tenant lived once in a 3000 square foot house in a nice neighborhood, they may in the future as these costs rise. I live in a 1200 square foot house in a lesser neighborhood. That’s where the cost comes from. And the reason I know this is because if you look back in like, I lived my childhood, I grew up in Los Angeles. And in my adult life, I pretty much lived in Orange County, which is about 40 miles south of LA. And there’s an area there Newport Beach, which I’ve lived in Newport, beach, Irvine, etc. And in Newport Beach, there’s this really nice upper class neighborhood. It’s called harbor view homes and harbor view homes. Those homes I think were built in the early 70s. And I think and I could be wrong on this, but I remember I did study it before, and I really thought a lot about it many years ago. Okay, so don’t quote me on the exact numbers, but I’m just giving you the concept, but I think when those homes were built in the early 70s, you could buy one for like 42 to $62,000 something around there. Okay, and here’s the Deal. They started, I think the smallest home and there’s like maybe 1600 square feet. And then there are larger ones. And it’s a really nice neighborhood. It’s got a school down the middle. It’s nowadays it’s like to keep up with the Jones yuppie neighborhood. Everybody’s driving a Range Rover and trying to outdo each other. And everybody went to USC and UCLA and all this stuff, right? But But here’s the thing. The funny thing is that you see all of these studies, they quote, okay, Americans are living better than they ever have. Because the typical home built after world war two was 900 to 1200 square feet, or whatever it was right when all the people came back, and the economy started to boom after World War Two. And now the typical home is much larger than that it’s made by I don’t even remember the number. It’s maybe 2200 square feet. And you think by looking at that not knowing any better and this is why you can’t just look at a book or a website. You have to think about these things and be experienced in the market. But what they didn’t Tell you and that is how much smaller the average yard God and how much denser the the people started living. They started living like rats stacked on top of each other in high density housing developments. Yes, the unit they lived in might have gotten larger, but the yard and the piece of land that they had with it, and the location of that property got smaller and lesser and inferior. So it’s not just about the square footage of the unit. It’s the whole picture. If you live on a 10,000 square foot or 12,000 square foot lot in harbor view homes in this area of Newport Beach versus living in all just take for example another area of Orange County in Garden Grove. You might live in a larger home but just doesn’t make sense when you look at the studies.
Tony 12:52
And you can you can actually look at one thing I find fascinating is around here in Cleveland, we you know those old homes here you know you guys homes from the early 1900s. And one thing that just kind of shows how we’ve, I guess grown as a society or how we have so much more disposable income is look at the closet space, you go into a good window 1900 home, a closet is, you know, it’s it’s one door, then all of a sudden in the 70s, you saw the two door closets. Now you got walk in closet, so just people are having more and more disposable income and buying more and more things. And, and I guess to my point is, for example, utility bills in my area, we’ve just become deregulated here and you’re starting to see a lot of electric and gas companies, you can pick your own service and you know, you pay and what they’ve kind of done is they’ve upped the fixed rate, usually, you know, in the past, the fixed rate has always been really low. But they’ve upped the fixed rate to say, a minimum of $25 for gas up here in Northeast Ohio. You know, in the summertime, it’s usually pretty cheap. In your gas bills would be pretty well. But now they get the fixed costs up to $25. Right? So now and they’ve lowered the cost per unit per MCF or per unit of utility, but I have a feeling over time, those things are going to start to go up. And that’s going to put pressure on how much more rent I’m going to be able to raise. Because typically in the past, you know, you’d figure 3% inflation, I can boost my rent, depending on the area, you know, four to 5%. But my theory is these utility companies are going to say, you know what we’re going to get, we’re going to slice them out, and we’re going to start increasing our rates and it’s going to really damper yet it’s funny, my buddy, you know, he works for the sewer district. And he, his famous quote is, you know what, someday you’re gonna have to choose over cable or your sewer bill that that’s how it’s going to be in the future. And then I kind of laugh and I’m like, you know what, he’s probably right. They’re just gonna jack the rates up so high. And one more thing. You talked about the, you know, 10 And, you know, obviously that’s a whole different discussion how we’re so much in debt, but what municipalities are starting to do is they, you know, because they own the sewer districts or you know, these regional or water districts, they’re passing on the tax base that they’re missing out into these utilities to try to get extort more money out of people, you know, because it can’t get it to the tax base,
Jason Hartman 15:21
right. Remember, you’re listening to flashback Friday. Our new episodes are published every Monday and Wednesday. So the I say one day, you’re going to have to choose not just between like your friends as your cable in your sewer bill, but you’re going to have to choose between a bigger house and a smaller house, a newer house and an older house, a better neighborhood and an inferior neighborhood. And that’s the choice everybody has to make today. But the standard is what what is going to happen in America and it’s already happening. I mean, it’s been happening for years, is the standard of living is going to decline. Fine, it has to. I mean, folks, the only thing that can really rescue us from this, and here’s where it’s the wild card. And it’s what I don’t know. And I hope I’m totally wrong about it. The thing that could save us all is technology. I have a friend who’s a young guy, okay, he’s like 23 and he just moved here to Phoenix from Dallas. He’s actually my neighbor, and he works for this energy company. And they think they have like solve the energy problem and they’ve got this little black box and they say, and I don’t know how it works I even had them talked to one of my energy friends who was in the energy business and he couldn’t figure it out either. They say they’ve got this little black box that more energy comes out then goes in and it doesn’t split atoms, okay? Does it through magnetism somehow. And and, and you know, look, if this is true, if the if, if, if some incredible technology like some incredible way to produce energy is discovered or invented or some incredible biotechnology or nanotechnology or, or whatever that solves big huge problems. I mean, if someone masters the energy problem, for example, energy’s got to be the biggest industry on the planet, I would assume that would be the world’s first trillionaire. You think Bill Gates and Warren Buffett are rich? You know, the energy person is going to be that the trillionaire the first trillionaire right. And so that would be massively deflationary Initially, I mean, if energy got super cheap or free, remember, I had Steven Kotler on the show who wrote the book abundance along with Peter Peter Diamandis, that’s a few episodes ago. And you know, one of the things they talked about in that book is how the prediction was, that electricity would become so cheap that it wasn’t even worth metering. It wasn’t even worth keeping track. Just give it to everybody for free. Now, that didn’t quite happen. But compared to the olden days, it really did happen because electricity is still Pretty darn cheap. Okay, even though it’s gotten more expensive and in recent years, so we don’t know, the technology thing is a total wild card. Right. And
Tony 18:10
in to that point, you know, I guess you can say, with technology and that and that’s another aspect of the whole inflation because because I guess my whole, you know, circling back to my whole point was, is inflation and energy going to put deflationary pressure and house appreciation and commercial, you know, building appreciation and, and rents is that what we’re going to see going forward, you know, and to that point, I guess you got to bring in supply. Now, I know you’ve seen how sort of household formation has been really pretty stagnant, you know, a little bit since the Great Recession, but as and and you know, I guess that’s a great hope is there has been zero, new boobs are constructions really come to a halt. So you’re going to have this real constraint on supply and I think the the what everybody’s thinking going Can Happen is all of a sudden you’re going to have all this household formation, you have lack of supply and it’s going to drive values up. I think that’s kind of what everybody’s Batman. But from a technology standpoint, people are starting to work from home now. And you got a lot of office buildings, you have a lot of once retail space once warehouse space, and now those are, I think are going to be existing units that can be converted into housing, you’re starting to see it all over the inner city in urban areas already. That point, you know, do we have enough supply out there that it’s really going to not create that inflation that we’re hoping for and instead push deflationary pressure? Is that another tool that’s going to happen as the years go on?
Jason Hartman 19:41
Okay, so we’ve got numerous issues here, we’re talking about Okay, and we just can’t cover them in a short conversation, however, and you know, maybe you want to call in again, and we’ll talk about some of those other issues, especially the financing one, I’d love to tackle that one, as well. You know, the money supply issue that you kind of alluded to earlier, but first of all, I have long said It I’ve been saying this for, I don’t know, eight plus years at least, okay? That housing is where it’s at. Because fortune 1000 companies are telling people to work out of the house. They can outsource the call centers to India, that’s office space, then outsource coding to India, Ukraine, Russia, for software that’s office space. They can outsource manufacturing to China and other countries. That’s industrial property. They can outsource shopping to the Internet, and that is retail centers. So I completely agree that housing is where it’s at now, what you said was really a conversation you were about a year out of date on what you said about construction because construction is definitely ramping up. I am I am looking out my window right now. I live in the tallest all residential building in the state of Arizona and I’m looking out my window right now. And I see two big giant cranes that are building high rise buildings and their residential high rise by the way, not office. So Would not touch office space, I wouldn’t touch retail, I wouldn’t touch industrial. I’m all about housing. And the population has been increasing pretty dramatically in the past few years. Although household formation has not because Gen y’s, the boomerang generation, they’re living at home or they’re having a hard time. But ultimately, they will move out, some will double up. Many people will have roommates for much longer than they used to. And you know that that’s all part of the standard of living, declining. That’s just all part of it. But ultimately, household formation is increasing. That is the trend I mean, it has two people can only live at home for so long. People eventually are going to move out, get married, have kids, granted, they’re doing it much later, but you know what they do in the process of waiting for all that to happen? Is they rent they don’t buy. So But to answer your fundamental question of this phone call is that as energy prices rise, construction costs rise. The cost of creating all those raw materials that are the ingredients of a house, whether they be concrete, milling, lumber, producing glass, steel, copper wire, petroleum products, all of that is energy. And as energy becomes more expensive, so does building and a building gets too expensive, then they stop building unless people can afford to pay for it. So you have all these interplaying factors. But remember my concept that I’ve talked about on prior episodes about the three dimensions of real estate, and there are really more than three, but I call it two three dimensions, because it’s a catchy title. So the rental market and the for sale market are most of the time counter cyclical, because when it’s too expensive to buy or there’s a lack of financing, or the rates are too high on mortgages, or the building cost is too high. People are forced into the rental pool when it’s easy to buy and so and so prices Generally are suppressed to buy properties. But rents are counter to that their counter cyclical, these are non correlating indicators, because the rents go up as one as the population isn’t declining, that is the one thing that really, really would derail my theory. And that’s why states like your state, and states like Michigan, that generally are losing population that are not business friendly, like California, I don’t like those areas that much, because you’ve got to have population growth for my whole theory to work. Like, if we didn’t have population growth, I would have a completely different opinion of how this should all go. Okay. And if we didn’t have spending now, to get back on that energy thing, just for a second, say this, say this kid at his company, it’s not his company, but he’s one of the engineers. That’s like leading this project, say this kid and his company solve the energy crisis problem. I thought a lot about that since I met him and talk to him about what he’s doing. If the energy problem is solved at first, I think that would be very deflationary. Any great new technology like that would be deflationary. However, I wonder and I don’t know the answer. Nobody really does. But I kind of speculate if if energy got super cheap, ultimately that would lead to an era of just unbelievable prosperity and prosperity creates inflation. So initially, I think there would be deflation. But after the prosperity started just coming into the global system in every human being was enriched dramatically. I mean, you think globalization has enriched 275 million people and pull them out of poverty? Wow, you haven’t seen anything yet? If energy was free, or super cheap. I mean, it would pull everybody out of poverty. Everybody would be prosperous. It’d be amazing. And prosperity creates inflation. So it’s it’s all a cycle. So I don’t know What would happen but you know, I think
Tony 25:01
I think if, if that were true if energy were to become super cheap, I really think you’d see other things obviously become a lot more expensive for example rent because I, again, the household budget, I really think you can make that a bigger PC or your expenses if you can decrease other areas of where most families spend.
Jason Hartman 25:23
interesting topic and interesting question, Tony. Thank you. I got it. Hey, my pleasure. I gotta ask you, how did you find our podcast? And how long have you been listening?
Tony 25:32
You know, I’ve been listening probably about three years now. I found you on iTunes, and I’ve been listening ever since. Well, fantastic.
Jason Hartman 25:39
Thank you for listening. And please spread the word and tell your friends. I appreciate it.
Tony 25:45
Yeah, I mean, I’d like to get another conversation with you about about cap rates because I fundamentally disagree with you a little bit there. But that’s a whole different topic. We can talk about maybe some gosh, you know what I
Jason Hartman 25:57
that’s probably a quick one. Let’s talk about it. What about tablets?
Tony 26:00
Well, I you know, to me valuation of a property is ultimately determined by the kind of rent and the kind of income you can produce, you can get from it, right. So obviously, in low cap rate areas, such as New York City, you’re going to see, you know, 434 percent cap rates, even in California at one time, you know, they had 4% capital. The idea is, it’s a better area, kind of like interest, you know, on a CD, obviously, if it’s protected by the FDIC, you’re going to get a lower rate because there’s less risk. So low cap rates, generally, I guess, can be interpreted as low risk. So people are going to pay a premium for that. If you can get the kind of rent and the kind of income from it. So that means there’s competition. That’s what’s driving price up. There’s, I guess, into that is priced in, you know, a revenue stream that’s going to increase at a greater rate. So people are going to pay you know, a pretty We have to kind of get into those kind of deals and again, that kind of action. Okay, well,
Jason Hartman 27:04
so that’s an interesting perspective. And I’ve never heard it expressed that way before. So you are right that in expensive areas with high land values like California and New York, cap rates are very, very low. I think those areas are terrible places to invest. The reason is cap rates are very low, meaning your cash on cash return is going to be low. A trophy property like if you were to buy Trump Tower in the middle of Manhattan in New York City, the cap rate on that would be lousy, and you’re right. Competition does drive cap rates down
Tony 27:39
but the but think about it in a way think about where that competition is coming from though you’re talking a highly educated demographic, you’re talking great access to usually education and you know, people want in on those kinds of markets. You got great jobs and income and all those things. But you know, there’s so much that’s driving that price up. People want in on that, you know, wait a
Jason Hartman 28:03
sec way to say
Tony 28:04
things that have value, right? I mean, you have some, if you have a highly educated workforce, you have great companies paying good wages. And for the foreseeable future, they’re going to be paying better wages like San Francisco, for example, people, people want to get in those areas, and they’re going to pay a premium to get out of them. And if you rubber it up, 100%, then all of a sudden your cash on cash return looks kind of impressive. Well,
Jason Hartman 28:28
but it’ll look more impressive in an area with a better cap rate. I mean, I don’t think that theory holds water at all. Because first of all, those areas, the land and the prices of the property are too expensive. The people that are going into those properties are highly educated. You’re right. But there are the institutional Wall Street Style investors. Those are the ones accepting those lousy cap rates. And we’ve talked about this on the show many times. Number one, it’s not their money, they will bend over backwards to squeeze 30 basis points out of a deal. I mean, it’s incredible. They’re like, they’re like grabbing at the crumbs on the table compared to the kind of returns, individual investors get. They, they can’t manage a fragmented asset class like we can as individuals. So we,
Tony 29:16
it doesn’t work for so many billions of dollars on the sideline, right. And after these deals, I mean, if I got a billion dollars in a bank, and I need to allocate that capital, where am I going, I’m going into Tulsa, Oklahoma, you know, with the 10 cap rate of 14 cap rate, I’m going into where I know that money is probably going to definitely have a better chance of increasing in value than it does. Yeah, I guess it just all comes down to pricing. Yeah, you know, you could take the higher cap rate, you’re taking a little more of a risk, whereas the lower cap rate, you’re taking a little lower risk as far as the fundamentals of what drives rents, what drives appreciation, and some of those things.
Jason Hartman 29:53
I disagree fervently, and here’s me. No, no, I’m not kidding you at all. Okay, listen, I live My whole life in California, I’m abundantly familiar with trophy properties that my friends have purchased in places like La Jolla, and Newport Beach in Irvine. And I think they’re out of their mind. And and the reason is, is because the the you’re you’re saying that you think that’s a speculators game, you’re thinking that those properties will appreciate. And they have done that in the past. I’ll give you that. But I don’t think the future of those markets is is very good at all. If we if if we are really in for a bad swag in the economy, granted, it’ll look like and it’ll fool people into thinking there has been appreciation, but that appreciation will be a nominal not real dollars, because there’s been overall inflation, that that that boring property in Texas, just churns out cash flow, and I’m a cash flow investor. If you are any of these other people are speculative investors, and Listen, I’ve made live Money speculating. Don’t get me wrong if I can buy a property, like I’ve purchased properties in Newport coast before Newport coast, California, a very high end area, and I’ve lived in them and sold them just a year or two later. And you know, I got another $300,000 give or take out of that property. I mean, that was a great deal. But could I depend on that? Did I know that was going to happen? Absolutely not. I got lucky. And I’d rather be lucky than good any day of the week.
Tony 31:30
But I like cash flow, you got tons of land, right? I mean, there’s a lot of land as far as the eye can see. So you’re always going to have the risk of supply now you go into Metro Manhattan, it’s all the top there’s no end. So you’re going to you know, if you want in on in going there and, and and back to the demographics, for example, you have a younger generation who aren’t even buying cars. I just read 30% of 18 year olds don’t even have a license. So so they’re willing to live around. Then in the city, and that’s what they’re not going to have a car payment. So maybe they can pay that higher premium and rent going forward, they can allocate more of their money towards them. And, and I think people are looking at that, that whole, all those aspects and they will pay a premium to go into those places where there’s so much scarcity of supply and future supply is kind of Florida down especially with like you said, in California, you got building codes, things like that, that just make it very difficult to build and to bring in new supply. Whereas you go to Texas, I can go in there with, you know, a few buddies in a toolbox and probably start, you know, building some houses if I had a little cash on me.
Jason Hartman 32:41
No, no, you can’t. You’re wrong. Okay. And here’s why. Because we don’t invest for land value. Our land is free. On the on the stuff we buy, who cares about the land, it doesn’t matter to me, if there’s a zillion acres of vacant land, because we’re buying packaged commodities. I mean, you understand that you open this call with that. Question.
Tony 33:00
Oh, no, no, no, yeah, that’s that’s what I’m saying. But when you have, when you have area for growth, if you have areas where you can build a lot more houses or new builders can come in these institutional investors can come in and start building up. But that’s the point, you know, you’re going to be able to increase the supply and drive down prices were if you’re in Manhattan, and that’s the whole, I think, fundamental of the cap rate, because people are paying these premiums because they know where else are you going to go, you know, who else is going to, nobody’s going to build in New Jersey, you know, tomorrow, they’re not going to be able to clear out five buildings and put in new apartments, you know, it’s going to take a lot of resources to do that. So people are willing to buy these turnkey, like you say, you know, rent ready houses or in a big city like that.
Jason Hartman 33:50
You’re not seeing the picture. Yes, an institutional builder can come in and build on all this vacant land, but so what they have to pay for construction materials. That’s the whole point of my philosophy is you’re you’re investing in commodities not land. I have said it many times before. I hate real estate. I don’t even like real estate. You know what I like? I like commodities tied to 30 year fixed rate debt. So if these institutional investors want to go in and act like idiots and buy three and four cap properties, let them do it all day long. You know why they don’t care that much. First of all, it’s not their money. It’s someone else’s money. institutional investors like trophy properties. And I say to you, trophy properties are not where the money’s at, unless you have massive appreciation and speculative bubbles. And those do happen and they have happened, but they are highly risky. We are very conservative here. We just want to be in a situation where we can buy properties that produce cash flow, what is
Tony 35:00
Jason, I totally agree. I totally agree with you, you know, don’t get me wrong. I’m not saying it’s I’m just trying to under you know, and I think you understand that the philosophy behind these low cap rates, do the numbers make sense for you and I are a lot of investors out there. No. And should we be investing in those kinds of properties? I would say no, but, you know, when you’re talking people with hedge funds with billions of dollars, and they need to employ and they need to engage that capital. That’s where they go. I know.
Jason Hartman 35:30
I agree. And I
Tony 35:32
battle it out. Do those returns Make sense? No, no. But I think for that kind of investors, that’s, that’s how they get these cap rates. No, yeah.
Jason Hartman 35:41
That the reason they get those cap rates down is you know, Warren Buffett really pretty much summed it up. I mean, we’ve quoted him so many times on the show, talking and making that quote from a few months ago when he said, If I could figure out how to buy a couple hundred thousand or a couple million single family homes and figure out how to manage them, I would do it but they can’t They can’t compete in our fragmented business. And that’s why the opportunity is here for us and not for them. And by God, I hope they can never institutionalize it. They’re trying. I mean, there are hedge funds buying up swaths of little single family homes now, I don’t think it’s going to go that well for them. I think they’re going to just get tired of the fragmentation and managing it. I mean, how many people do you know that rent a single family home that send the rent check to some sort of hedge fund? Probably nobody, right? But you’re going to start seeing a little bit of that mostly what they’re doing is buying and flipping and they’re just dicing up large portfolios in the smaller ones and selling them off and and taking a profit there. But yeah, I mean, we don’t compete with the institutional investors. You know, I remember one of my friends sold a big apartment complex in Aliso Viejo, California, nice area, and nice suburban area and, and it’s called the city lights, and I think that complex went for like $90 million are some huge price. And I said what was the cap rate and forgive me because I can’t remember but it was low. Okay, the cap rate was like four and a half was terrible. I’m thinking I would never do that deal. But if they’re buying properties with cash and they don’t need cash flow because they’re not going to get it, they can do that kind of premium stuff. You know, it’s just a different type of investor. The people listening to this show aren’t those people and I’m not one of those people. And I want cash flow. I want conservative stuff that just spins off cash and if it appreciates Hey, that’s the icing on the cake. This has been an interesting discussion. What do you think that Yeah.
Jason Hartman 37:33
Great, it was great. I you know, I love the engagement just to give you a little background, you know, I mean, I bought two duplexes back in the market back when the market was almost on the peak you know, I bought one in oh five and then one in LA. So I got one that’s kind of the peak of the market and one of the done in the market. The good thing is I got them in foreclosure they were are your property so I was able to buy them at a discount. They were in good areas with low capital. partition as far as the ones that many duplexes in the city that I bought them in, and there was there are good schools, you know, good, sir. But there there’s the thing. There’s the thing, you’re really you’re really giving the answer here. If you bought properties that made sense the day you bought them one of my 10 commandments, right? Thou shalt not gamble. In other words, the cap rate was probably 8% or better, because that means the property all cash flow, if that cap rate is that good, who cares if the value goes down, you can weather almost any storm if things get bad, and the property depreciates in value is long as you can maintain that income expense ratio. Hey, you can just sit there and wait it out. And I saw that happen for over 20 years as I saw the Irvine company, okay, a big famous company owned by Donald brand, one of the Forbes 400 richest people in america. They’re in Southern California, and they’re all over but mostly in Southern California, right. And I’ve done lots of business with them over the years, I saw them in their residential in their commercial properties. They will just wait the market out there a premium, high priced, high end developer and manager of properties. And if you got a property that makes sense and the reason it makes sense for them is they got the land so cheap so many years ago that their basis in it is so low that they can just wait. And if you’re a big fat institutional investor with loads of cash, and you can wait Hey, you can you the way we the only way we as individual investors can afford to wait is by having a property that cash flows the day you buy it. That’s all that works for him. But But yeah, it’s interesting background. What else did you want to say on that point, though? Oh, no, I, you know, I rehabbed them and I was able to rehab myself I was able to save a lot of money. So my upfront cost Yeah, my cash on cash return is much better because I was able to do the improvements myself. So you know, even when the market went down on the downside that basically hedged my bets. Because I didn’t pay top dollar for an older, you know, an older style house where I was able to buy at the bottom and put in new fresh finishes. So I had a high high end play. So I was able to, you know, that helps when I try to run it out and things like that it kind of gives me a competitive advantage. So, you know, my goal is like yours, Jason, I just want to ride this thing out. And then when I’m older, just keep the cash flowing. Keep it going, you know, and being able to collect my rent, I just want to see I would like to see appreciation on both sides. I want to see appreciation and rent, which I think we’ve all seen in the last couple years. Yeah. But you know, I’d also like to see appreciation on the asset side as well. That would be like you said, the icing on the cake. But even if it’s not there, hey, so be it as long as I can get appreciation as far as rents. I’m going to be happy man. Just remember one thing about that is that you’re you’re really unlikely and we’re all unlikely to see real appreciation. Most appreciation is just the result of inflation. It’s an illusion. You don’t really See much in real dollars, sometimes you do, but don’t depend on that one at all. But if the commodities keep pace with inflation, but the debt is destroyed faster by inflation, and if you have leverage by say, putting 20% down, you’re really beating the inflation rate by a five to one ratio, because you only paid 20% of the assets cost. So if the asset keeps pace with inflation, and it’s only even right, if inflation goes up at 3%, and the property goes up to 3%, in real dollars, you’ve only treaded water, you’ve done nothing. However, if you leveraged it, all you do is you multiply that three by five and that gives you what it gives you 15 and You’ve outdone inflation by a five to one ratio. So you’ve made money there and at the same time, the debt See that’s leverage but then there’s inflation induced debt destruction. It’s getting destroyed by the inflation and hopefully your rents are going Know that my friend is a beautiful equation?
Tony 42:05
Right, right. All right, good. Well, hey,
Jason Hartman 42:08
thank you so much, Tony for calling in and I appreciate the heated debate. I love being challenged on my ideas. Okay. So listeners heed that call. Okay, if you got a question out there or you want to challenge me on an idea, you know, it really, it’s great. It makes me think about it. It’s kind of like exercise. You got to exercise your brain and your ideas. So I totally appreciate it and call in again. Okay.
Tony 42:29
Sure. Thank you, Jason. All right, my friend happy
Jason Hartman 42:31
investing. Now’s your opportunity to get the Financial Freedom Report. The Financial Freedom Report provides financial self defense in uncertain times. And it’s your source for innovative forward thinking investment property strategies and advice. Get your newsletter subscription today. You get a digital download and even more, the price only $197 goes To Jason hartman.com to get yours today.
Jason Hartman 43:08
Just a reminder, you’re listening to flashback Friday. Our new episodes are published every Monday and every Wednesday. It’s my pleasure to welcome Larry mark to the show. He’s the executive director of the American Association of private lenders. And you know, in the real estate industry and the private lending industry, it’s a very fragmented business, as we all know, and I’ve talked about many times on the show, and there are some organizations cropping up here and there to try and organize things a little bit more. And this is one of them. Larry, welcome. How are
Larry Muck 43:41
you? Thank you very much. I’m great today. Good. Where are you located? Our headquarters are in Kansas City. We moved the headquarters of the business from Raleigh, North Carolina to Kansas City in August.
Jason Hartman 43:53
Fantastic. And tell us about you use the acronym a PL the history of it just quickly. And what what the vision and the role itself?
Larry Muck 44:03
Yeah, ATL was formed in about four years ago by four guys that were involved in the industry and vary from various aspects and attorneys CPA, portfolio examiner and and a private lender. And their idea was to help raise the standards within the industry and to develop a brand really, that could be used by private lenders to say, Hey, we’re, we’re vetted, we’re, we’re good lenders, we belong to the association and therefore, we’re fairly trustworthy. We all know that in this space, there are people that are predatory lenders, and the Association was formed really to begin to, to emphasize the educational aspects of private lending to bring better knowledge and to raise standards in the industry. We got involved in the association this summer made a capital investment to bring it to a full time staff to bring full time staff positions to it, and to really work on building the value proposition of the association. So we are in the midst of working hard to identify private lenders, and to begin to build that network of people across the US that really are both vendors to that space and investors in it and then the private lenders themselves,
Jason Hartman 45:32
so the members would be private lenders, certainly not borrowers, they’re not going to join an association, but the private lenders would be the members and then I assume different people that provide different tools to private lenders and so forth. What what are the membership fees?
Larry Muck 45:46
Well, we’ve restructured our membership fees. We have $400 minimum membership 800 for a premium membership and 1600 dollars for a corporate membership. We’re looking we continue to review membership structure, because frankly, our goal is to get to the point where we have over 500 members. And then beyond that, over the next year or so we’ve got a long way to go. We were at about 100 hundred and 20 230 members now, but we are working at it full time.
Jason Hartman 46:19
Right? Right. So it’s a pretty small Association, just 120 hundred and 30 members. But what do you estimate? I mean, and this is probably impossible to really know. But what do you estimate as the number of private lenders out there in the country? I mean, are there thousands of them? Are there millions? I know there’s thousands, are there hundreds of thousands? Are there millions of them? Just anybody who makes a loan? And you know, I assume we’re always talking about secured by real estate right in this conversation?
Larry Muck 46:48
Not necessarily. I mean, we have we principally represent the blenders in our association are principally commercial lenders. And I say that we don’t have many mortgage lenders that are doing owner occupied that the laws related to that are fairly onerous realm, right, its investment
Jason Hartman 47:09
property or financing because yeah, they don’t have all the legalities of these homeowner oriented respa laws and the predatory lending laws. In other words, when you lend to a
Larry Muck 47:20
bank and yeah, you know,
Jason Hartman 47:22
right, you know, when you lend to an investor, the law makes something of an assumption that the investor as a borrower knows what they’re doing and can protect themselves. Would that be fair to say that? Yeah,
Larry Muck 47:33
right. Yeah, exactly. Right. But we do have we do have members that are doing larger deals, the commercial loans, building loans, office buildings, that sort of thing. But the the bread and butter is that lender that’s looking into the residential space. Again, we hope to expand the definition and drawing other parties to the to the Associated
Jason Hartman 47:58
let’s let’s talk about why Someone would want to be a private lender. I mean, you know, when you can earn a whopping two tenths of a percent in the bank, why would someone want to fool around with this? I’m of course being sarcastic?
Larry Muck 48:09
Well, cool. Yeah, it’s, you know, I mean, the private lenders do get a much better return than you can get almost anywhere the. And as we look at as we look at the future, where are people going to put their money? Are you going to bet on the stock market for the next four or five years? With the debt bubble that we’ve been building? Are you going to be in the bond market, it’s hard to really hard to see any kind of positive returns in those asset classes for 13 years. And don’t forget, don’t forget to mention, though, that on those asset classes, you have no control.
Jason Hartman 48:48
Well, being a private lender, you’re a direct investor. I mean, you have direct control over the investment, the choices, and you know, it’s not hard to learn. I mean, this is not a complicated thing. You don’t have to know how to evaluate a business, which is an incredibly complex creature with so many moving parts. And that’s what you do as a stock investor, really. And then, of course, bonds have massive inflation risk. I mean, I wouldn’t touch bonds in this world nowadays, it’s just too risky. But hard money loans or private loans can be short term. And, you know, I think they offer some great opportunities. Again, as I mentioned before we started recording there my second favorite investment, my first being actually owning the property itself. But the thing I love about the lending is it’s just very streamlined and simple,
Larry Muck 49:34
right? And you know, your listeners notice, as a fact that when we got up to 70% homeownership in this country, we knew that wasn’t sustainable. And now, the way things are, are going the trends are that we are becoming a much greater rental society than we ever have been in the past. And so homeownership who knows where that’ll settle out, but there are tons of have opportunities for people to get into this business and, and, frankly, there are more tools available now to support investors, lenders across the country that talk about some of those tools, if you would, what are they? Well, this guy’s one of the I’ve met a lot of people over the past couple of months as I’ve gotten very involved with this industry. And as I’ve, as I mentioned to you, I’ve got a 30 year lender I’ve, I was in banking for that period of time before I came to the association. But you know, we have one of the ones I was managing to was a real property management franchise system that is really putting tools in the hands of people, they they have GPS tracking tools for your maintenance guys so that you know exactly how long they were at an address. And for those that are managing properties, for remote investors or out of market investors, they offer an opportunity for you to prove what it is that you’re doing with With your investment, and
Jason Hartman 51:01
that’s great on the management side, but you know anything on the lending side to make lenders safer to reduce risk property evaluation tools. Of course, we’re all familiar with the stuff that’s available just kind of publicly. Everybody knows about Zillow nowadays and Trulia and things like that. You know, there are some great research opportunities on the web, of course, better than ever had in the past. But are there some specific tracking tools or evaluation tools that your association is seeing and recommending,
Larry Muck 51:31
we’re working with a company by the name of brand range calm and in in that space, they, they really own that space from providing critical data to property managers in terms of what the rents are, and they’re particularly useful when you’re looking at buying properties. We’re also working with another company that is rolling out a tool at our annual conference and they they provide a nationally bound David risk profile for investment properties. As matter of fact, these guys are private lenders themselves. And we’re using this tool to evaluate risk. And they have now really developed that tool to be rolled out to other investors and lenders that want to use it to evaluate the situations that are getting into our lenders tend to be local market, people, although some are starting to branch out into other markets. And as they do that they they need some of these evaluation tools to be able to, you know, to ferret out the risk. Sure, absolutely, absolutely.
Jason Hartman 52:34
The problem with being a local market investor is you may not live in the right place. And even if you do, you won’t be diversified.
Larry Muck 52:41
So that’s the challenge. Exactly. And so, you know, and as we’ve talked, more and more people are beginning to marry up in this industry. You have turnkey providers that are looking that are soliciting investors becoming fund managers themselves. Also, you haven’t expansion of people that are that are wanting to get into this lending space and association really, for people that are looking at getting into lending. We can network you with guys that have been doing it for a long, long time and are professionals at it. And that’s really one of the major benefits of joining the association is to network with professionals from across the country that not only can help you from an educational standpoint, but will also enable you to push deals to each other and in different parts of the country.
Jason Hartman 53:34
So you have an event coming up in Las Vegas. When is that what is the price and how many people do you expect?
Larry Muck 53:40
Well, we’re the event is at Caesar’s Palace in Las Vegas from November 4 through November 6. And you can read all about the event at WWW dot A PL Expo com and that that’s our event website. We’re expecting in in the neighborhood of 150 to 175 people, we have very high quality vendors to the private lending industry that can be there as well as mortgage brokers, private lenders, we have a number of attorneys coming and who doesn’t want to talk to an attorney and get on for get advice from them that they don’t really have to pay for at a conference. So so we have a we have a wide variety of people. This is I want to make clear that in this at this event, this is not a pitch fest. This is an educational event. And it’s not about selling things. It’s not about selling at the back of the room. It’s It’s truly an educational network event. We have a keynote speaker by the name of Mark Calabria and most people probably don’t know him but he is with the Cato Institute and is director of banking regulation studies. He’s worked on the Senate Banking Committee, he was a staff around the National Association of Realtors, and the National Association of Home Builders. And he will be at our reception on Sunday evening, evening and then giving the keynote address on Monday. And I would urge anybody that would want to come to the conference to get an absentee ballot because we are going to election day on Tuesday.
Jason Hartman 55:20
Good stuff. Well, hey, thank you so much. And I believe you gave out the website. You want to just quickly mention the website again.
Larry Muck 55:26
Sure. It’s www.aplxp.com.
Jason Hartman 55:32
Fantastic. Well, Larry, thank you for joining us today. Okay, thanks.
Larry Muck 55:38
What’s great about the shows you’ll find on Jason hartman.com is that if you want to learn about investing in and managing income properties for college students, there’s a show for that. If you want to learn how to get noticed online and in social media, there’s a show for that. If you want to know how to save on life’s largest expense, there’s a show for that. And if you’d like to know about America’s crime of the century, there’s even a show for that. Yep, there’s a show for just about anything, only from Jason hartman.com or type in Jason Hartman in the iTunes Store.
Larry Muck 56:25
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 Empowered Investor investor net Working exclusively