Jason Hartman reminds listeners to prepare for the Meet the Masters of Income Property event taking place in La Jolla this month. He also offers several tips for property owners regarding real estate income property including pet rent, property managers, and checking numbers before committing to purchase a property.
John Burns, CEO of John Burns Real Estate Consulting and keynote speaker at the Meet the Masters event joins the podcast to speak with Jason about Amazon’s potential city picks, the self-driving car and what it means for cities, the definition of a “surban” and why the 1980s has earned the nickname the “sharer” generation. The two also look more deeply into the different markets in the United States, as well as their predictions on which hybrid markets are on their way down.
Meet the Masters Tickets
Hartman starts the podcast by announcing that one of the Meet the Masters visitors is coming from the longest distance so far to attend the event, Central Africa. There have been visitors attending from several different places all over the world including Australia, New Zealand, Japan, and parts of Europe, but this visitor coming from Central Africa might be traveling the farthest distance so far to attend.
He also has Alexa remind listeners to get their Meet the Masters tickets today, and Hartman notes that one of the keynote speakers at the event will be on the show today, returning guest John Burns, founder and CEO of John Burns Real Estate Consulting. Hartman explains that though the interview was recorded two months ago, it gives listeners a good preview of his thinking before seeing him speak at Meet the Masters.
You can get streaming tickets to attend the Meet the Masters event via livestream at www.jasonhartman.com/watch.
Some VIP and general admission tickets are still available at www.jasonhartman.com/masters, as well as the opportunity to win two free general admission tickets in a raffle at www.jasonhartman.com/contest.
Pet Rent and the Benefits of Pets
Hartman addresses one of his real estate income property topics by mentioning the issue regarding pet rent. Hartman loves animals, finds their personalities fascinating, and states that as people we should aspire to be more like our good-natured friend, the dog. If we can’t do that, we should at least try to live up to being the people that our pets think we are.
With this said, he mentions that he has never seen an animal improve the value of a rental property, but assures listeners that pet rent is a normal part of income properties, especially when it comes to institutional places. He suggests pushing property managers to start accepting pets, with the addition of a $25 pet rent fee and an extra security deposit to cover any additional wear and tear a tenant’s pet could create. It’s a reasonable fee and it increases the property’s return on investment. Some property managers are not into the idea of allowing pets or pet rents, but Hartman is trying to push the movement from the landlord side of the issue.
He notes that if you self-manage, accepting pet rent should be an easy process, and if listeners are looking for more real estate income property self-management information, there are several podcasts available if “self-management” is searched on www.jasonhartman.com.
Pay Attention to Your Property Managers
A second tip that Hartman encourages when it comes to real estate income property is for landlords to pay attention to their property managers on a spot-check basis. Take time out of the day to look at their statements, and don’t be afraid to question things or push back if necessary. If a repair has to be made, ask for multiple quotes on what the repair might cost and take a few minutes to verify the cost yourself. Check and see how much the repair costs and send links of your findings to your property manager.
This should be done to let them know that you’re an astute landlord, that you pay attention to what’s going on with your properties. Even if you’re quite busy, being involved and communicative with your property managers is a benefit to everyone.
Check Numbers Before Purchase
Hartman advises that when you’re looking at real estate income properties to purchase, it’s important to look at the overall return on investment. The cap rate is not that meaningful, unless you’re looking at commercial real estate, because those properties are strictly sold based on the income they produce. With residential investment real estate, you’re dealing with a less sophisticated market. You can sell homes to more illogical homebuyers that strongly desire the home for personal reasons.
He states that the more perfect a marketplace is, the less opportunity is available. Hartman gives an example involving the stock market, a perfect market as addressed by the book A Random Walk Down Wall Street. It’s not possible to beat the wisdom of this sort of market, as it is a perfected type of market.
In his example, Hartman uses a live person as a stock broker rather than brokering online. If a person calls the broker on the phone and has stock in XYZ company, their stocks might be trading at $100 per share. If the person with the shares were to ask the stock broker if he or she could promote XYZ company more aggressively and present it well and get $110 to $120 per share, the stock broker would laugh because this is not the way perfect markets work. Creativity cannot be applied to that sort of market. Hartman explains that in this sense, the term “perfect” market is not a good thing, as it diminishes creativity.
The residential real estate market, and the single-family home market are the least perfect markets. When it’s less perfect, creativity can be applied to make it work. Hartman assures listeners that they are all creative, as dumb people do not listen to the show because they can’t keep up. He advises using creativity in presenting properties and offers a random tip to file and name items on your computer for easy access and proper organization.
Hartman also suggests taking quality photos of your real estate income properties, and providing a virtual tour if at all possible. The properties will look at their best when they’re first purchased or newly rehabbed, and Hartman reminds listeners that there is a specific genre of photography catered to real estate. The photographers have wide-angled lenses that make rooms look spacious and it’s worth spending a couple hundred dollars for excellent photos.
Amazon’s Second Headquarters Choice
John Burns, CEO of John Burns Real Estate Consulting, joins the podcast to discuss with Hartman the recent news of Amazon.com setting up a second campus. Burns states that he wouldn’t be surprised to see one hundred bids from cities all over the country and mentions that his home of Orange County already has two bids in. He and Hartman agree, though, that California is an unfriendly state for businesses so it’s unlikely that Amazon will choose to build their second campus there. Burns is predicting that Denver, Colorado will win the bid.
Hartman compares the market in Denver with those around the middle of the country and Burns states that coastal cities have become too expensive to live in, and that young people are looking for fun and affordable places to live. Amazon is looking for a pleasant market as well as a city with a good airport. He also mentions that since marijuana was legalized in Colorado, there has been a lot of growth in the Denver area for young people, as the state has shown acceptance and open-mindedness. Most jobs are still drug testing for marijuana use, but the legalization has still brought the population up.
Burns’ Market Classifications
Hartman mentions that he categorizes the market into three types: linear, hybrid, and cyclical. He asks Burns if he has any specific way that he categorizes and Burns answers that he has five classes of the market, but doesn’t recall all of them at an instant. He mentions that the expensive markets, or as Hartman calls them, cyclical markets are so supply constrained that they have a couple of years of surging demand while prices go through the roof, and they crash as soon as recession hits.
Burns also looks at markets that can ramp up in supply, and states that the Texas market is there now. He states that these markets don’t cycle because they’re too expensive, and that they cycle because there’s so much supply being built until there’s a recession and they’re crushed. He also mentions that he breaks cyclical markets into two pieces, those based on prices and then what’s based on brand new construction.
Hartman mentions that markets like Houston have the ability to meet supply demands quickly, unlike cyclical markets when there’s an up surge. Burns mentions that Houston went through an over-supply period earlier in 2017, when there was enough supply to offer tenants two months of free rent to fill up vacancies. The hurricane came along and destroyed some of the apartments, and those that were left were occupied.
Burns also states that the linear markets are those that are steady. They never really heat up and don’t have crashes. Most of the country falls into this market type, for example Memphis and Little Rock.
He states that the hybrid market definition is a good one for Austin and Denver. Those markets don’t get oversupplied often, but in this period, they have due to so much job growth. There has been more than enough demand to cover it. Austin is now reaching a high in housing related to income, though according to Burns, Austin’s best days are behind it with price appreciation in mind.
Shift to Suburban Apartments
Hartman mentions that five or six years ago, every city he visited had cranes building new apartment buildings, and Burns points out that there are twelve cities now where construction has really been happening. Some became overbuilt, not just in terms of numbers, and the new housing had to target affluent people to rent. He states that there has been a shift to more suburban apartments driven by local money rather than institutional building. It’s not overbuilt at this point, but certain submarkets are.
Hartman states that it feels like builders haven’t been building on this side of the cycle, unlike before the recession when there were a lot of new entry level homes. This time, there has not been as much building in the entry level housing category.
Burns agrees that this is true, but that it’s starting to shift. The country’s demographics have had a large growth of people in their 20s delaying marriage and having children. Young people want to live close to fun as well as work, and this becomes affordable in areas surrounding cities. Millennials are going urban and have started to commute. Builders have responded to this, but have had a harder time with price plans.
What is “Surban”?
Hartman mentions that he was talking to developers and quoted a word that Burns coined, surban and asks Burns to explain what it means.
Burns states that the government in big cities has put a good deal of money into redeveloping their urban areas. Suburban areas have said that they want some redevelopment in their area as well. At one time, suburbs wanted to have as few homes with lots as big as possible, and now they want density and a developed downtown area. Young couples are choosing these areas to be close to things to do, and empty nesters are choosing to sell their homes and rent places downtown, where they are close to everything.
Hartman mentions that in Burns’s book, he defines people based on their birth decade, rather than using monikers like “millennials” or “baby boomers”.
Burns states that there are times when these generalized terms are okay, but that using words like “millennials” in data can be confusing. Millennials take up a large chunk of the population and many times, due to their age differences, they are not in the same place financially. He has broken generations down into decades to compare ten-year periods. He also notes that 13% of the population was born in another country and that with these old generation-defining terms, 1/6 of the population was being ignored.
Hartman agrees that these decade comparisons seem like a more reasonable way to compare people and asks Burns if these generations of people will be different from each other.
The “Sharer” Era
Burns states that what happens to a person as a teen greatly impacts their behaviors later in life. One group that was born in the 1930s came into the Great Depression and experienced food rations during WWII. These people didn’t borrow a lot, and to compare those born in the 1980s and 1990s, they saw what happened to their parents in the recession and became afraid of debt as well.
Hartman notes that millennials saw their parents face devastation in the housing market and it might explain why so many are not in a hurry to buy homes. Another factor he mentions could be the enormous student loans these young people have incurred. They also seem to have the desire to be mobile for jobs, and live a more portable lifestyle.
Burns mentions that those born in the 1980s have earned the name “sharers” as they invented the sharing economy. These were the same people who were told to go to college and that they’d be set for life, until they ended up needing to work in retail jobs even with degrees due to the bad economy. Burns states that they’re an extremely resilient group, despite the bad-mouthing they’ve received for living with their parents when both parties find it financially smart. He reminds listeners that the GDP growth is only half now what it was in the 1930s and 1940s.
He also states that people who were born in the 1970s should be in their peak spending years today, the heart of our economy. In the early 2000s, they were having kids and starting families. They were the highest level of homeowners during their ten-year high school reunion, and at their twenty-year reunion, they were 10% behind prior generations. This group was crushed during the recession and now the economy is coming back slowly.
The Self-Driving Car
Hartman asks Burns for his thoughts on self-driving cars, and if they’re going to be a game changer for real estate values. A primary factor in real estate has always been location and if transportation becomes cheaper and easier, it might put downward pressure on primary locations. He asks if a 45-minute commute versus a 60-minute commute is really going to matter if you don’t have to do the driving.
Burns mentions that one big change is that we are not going to continue seeing a lot of parking lots, as well as large retail lots, which Amazon has disrupted. There will be a lot more opportunities to live close into the cities, but it will still be more expensive, he predicts. He notes that it will take a little longer for Hartman’s idea to come true, but that it very well still may.
Hartman noted that he read somewhere that cities have about 40% of their land space dedicated to parking areas. If self-driving cars take over, they won’t have to stop moving enough to park. Everyone’s driveway and garage could stand to become another space dedicated to something other than car space. He predicts that parking areas are going to change as well, but that the changes will come about slowly.
In wrapping up the episode, John Burns offers his website for listeners to visit at www.realestateconsulting.com and notes that his book, Big Shifts Ahead, is available at all major book outlets, namely Amazon.