1345: CapEx, 1031 Exchanges & Homebuyers Getting Older

Those who have understood that the paradigm has changed and that perhaps we need to do something that's counterintuitive, like being in debt, which obviously we have all been taught is a horrible thing. You know, maybe it's those few early people who understand that and who witness that. So perhaps the people who are more sensitive to risk or more risk averse, or, I don't know, the perfectionists, but the canary in the coal mine, if you want. And this is perhaps what you are and what you have been. I am surprised, Jason, right now that basically what we are saying is not yet more mainstream. I'm not saying that this should be or that this should already be what everybody's thinking, but that so few people are thinking that or at least that so few people are vocal about it. So perhaps it's just a well kept secret and those who know it don't want to talk about it. But I'm very surprised because this is so much against the mainstream of what you're reading in the paper.

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 multimillionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's owned 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. And now here's your host, Jason Hartman with the complete solution for real estate investors.

Welcome to episode 1345. 1345. Adam is here with me because we need to do something we have not done in quite a while and that is take a couple of your listener questions. We always appreciate your questions. Go to jasonhartman.com ask. There are no dumb questions. And here's why there's no dumb questions because we won't put them on the air.

It's a safe space here.

It's a safe space. Yes. If you ask a dumb question, don't worry about it because it won't be on the show. Okay? So, so fire away with complete confidence that you are in a safe space with rainbows and unicorns. Okay? And speaking of being dumb, I will be dumber than usual today because I have not had my coffee yet and it is very early in the Morning. And Adam, you don't drink coffee, so you don't need it. But for people like me, it's a crutch. You need it. You can't think without it. It doesn't. Your brain doesn't work quite right.

Yeah, my brain just says, you know what? I go off everything, just need water. I drink three things. Water, sometimes milk and alcohol. That's it.

Well, I used to say I only drank three things, water, coffee, and vodka. And now I pretty much don't drink at all. So I hardly ever drink vodka. So it's just coffee and water for me. Occasionally a juice drink. But, folks, you gotta be careful of those juice drinks. Some of them are a scam, okay? And we are consumer advocates on this show, and we want to point out the scams. And these juice drinks, a lot of them are full of sugar. They're terrible for you juice. You know, you got to be really careful, make sure it's only vegetable juice. And if it tastes really good, it's probably got a bunch of sugar in it. And Adam, you shouldn't drink milk. Milk is terrible for you.

I pretty much only drink it in, like, cereal or oatmeal.

Well, get some almond milk, okay? Because that. That is good. A lot of that is loaded with sugar, too. So you got to get the low sugar almond milk, too. It's just we're under attack by scammers who scam us financially and a food industry that scams us with giving us cancer, diabetes, and a whole host of other ailments. But this is a real estate show, so the median age of home buyers is now 47 years old. You gotta be kidding me. You know, back when I came of age, if you didn't buy yourself a condo or something by the time you were 26 or 7, it was kind of a sign that you were going to be behind in life. But this time it's different. Maybe it is a little different. I mean, the famous last words of every investor, this time it's different. Right, Be careful about those words. But, you know, sometimes it actually is different. And things are a little different nowadays for reasons we have discussed many times on prior episodes. What do you make of this article, Adam?

Well, I thought it was interesting down here towards the bottom of the article, where you have the study saying the median age is now 47. But we've talked about the student debt crisis, and I was thinking it might be overblown or maybe not quite as big as we thought. But the national association of Realtors, it says they did A study on non homeowners and 83% of non homeowners said they think having student debt has delayed the ability to buy a home. So, I mean, it's bigger than I realized it was. But I also just think it shows that the jobs that you're able to get coming out of college or high school just aren't the higher paying jobs you were able to get that long ago. I mean, you've got not only baby boomers aging in place, but you also have baby boomers working in place more. You have that big level of CEOs, CIOs, all of those people, if they're not retiring until 75, 80, 85 now, the next generation can't get promoted, right?

So they're working in place. I like that saying. That's a good point. In other words, they're not leaving the job market and that is making it hard for people to get into the job market. The same is true in housing where they're aging in place. And that's keeping the housing market more constricted with lower inventory levels. So that's an interesting concept. So the student loan debt disaster is a 1.5 trillion. That's with a T, a 1.5 trillion dollar problem. And just for comparison sake, because these big numbers, you know, you just don't really know what they mean unless you put them in some context. You got always ask yourself the Jason Hartman question, what is it, Adam? Compared to what? Compared to what? Compared to what? Compared to what? Exactly. So the GDP of the country is around $20 trillion. The GDP of planet Earth, the entire world's productivity every year is around $65 trillion. Last I checked. You know, you know, a trillion here, trillion there. It's no big deal, folks. I'm just giving you rough numbers here. I'm not looking at anything when I say this. So when you talk about a $1.5 trillion student loan debt bubble, that's a big deal. And these people who have student debt, they basically have a mortgage, but they didn't get a house included with it, as I've said many times. So it is a problem. It's hugely significant. I don't think this is as bad as it sounds though. And the reason is I've talked about the downsides of homeownership. I've talked about the portability of society nowadays. I mean, we are so much more portable than we used to be. Our stuff is smaller, lighter, better, more portable. There's this whole market, you know, this conference I'm at, they're talking a lot about short term rentals and the Airbnb market, which, you know, I take that with a grain of salt. Certainly the early players made money in that market and they did very well. But like many things, when you get into it late in the cycle, when it's matured, the opportunity is lessened. And the other thing I want to say about Airbnb is it has yet to go through a recession. Airbnb has had only an upswing in the economy out of the gates, so we'll see. I'm not saying it's bad, I'm just saying it is something to be mindful of. But that does make society more portable. A lot of these digital nomads, as they call themselves, are just moving around from place to place and they can work on the go. They have virtual careers. They just simply need their laptop and an Internet connection and they're in business. And so Airbnb caters to that, the short term rental market caters to that, and so many other things cater to it. And homeownership causes stagnation. It causes people to lack the ability to go to where the jobs are. It's not necessarily all good. I don't know that this is terribly bad news, as most people probably think it is. Thoughts on that? I mean, it's quite a difference from, what was it, 26 before Adam?

In 1981 it was 31 years old and now it's up to 47 for the median age. But according to realtor.com just at the time of the financial crisis starting, it's gone up eight years since then.

In terms of the age of the.

Age of first time home buyers, I don't know.

Well, this is not first time, actually. Sorry. This is all home buyers. Median age of all home buyers. Right.

I think it's, I mean, it may be overblown a little bit, but I do think based on studies I've seen before, there may be more renters. But a lot of people still want to be home buyers. So even if they are portable, they don't want to be. So, you know, you have the desire people there. So people are still desiring to purchase homes. But it says down here, with the affordability crisis, the average now they're going average. Now the average annual income of home buyers has increased to over 93,000 and the national median income is only 61,000. So I mean, you're looking at, you have to be 50% over the median income of the United States in order to really be able to afford homes in the obviously probably cyclical markets in that respect. So I mean, it's, it is important.

Yeah, it's definitely important. It's definitely something to be mindful of. The other thing that's catering to this is the single family home rental market. So everybody listening, pat yourself on the back right now because you are supplying single family rental homes, whereas before, of course, renting pretty much meant you were going to be stuck in an apartment and that was never considered as desirable is living in a single family home. So it's just an interesting change. But now we've got so many investors like everybody listening, supplying nice single family home rentals to people and we've got the big institutional players like Invitation Homes and the others supplying thousands, tens of thousands really overall, in the aggregate, hundreds of thousands of single family homes to renters. So again, there's not as much urgency for them to buy for all of these reasons.

I definitely agree with that. I mean, as long as you keep your properties updated a little bit or at least in great condition and with the amenities that are needed, people nowadays, especially as you're sitting here still looking back at the Great Recession and thinking it's been a long time since another one, then people are a little bit more willing to wait for, for, you know, the quote unquote, perfect house that they want.

Very well stated. So before we get to our listener questions, I just want to share a couple things on the actual graph that I'm looking at at how the median age has changed over the years. So as Adam said, In 1981, the median age of all home buyers was 31 years old. 31. And steadily it kept increasing. In 1987 it was 35, and then it went down a little bit and in 1989 it declined to 34. So younger people were buying more homes. But here's one for you, okay? In 1993 it escalated substantially to 42. So that was even a more pronounced increase between 81 and 93. In that short 12 years of time, that median age went up by basically 12 years. In 12 years. Right? That's a hugely significant move. But by 1997, as we were getting into the dot com boom and then later bust, and the economy was really on fire because of the globalization trend and the increases in productivity with information technologies, namely the Internet itself. We're now, you know, a few years into the Internet's impact on life and the median age had gone down to 35 years old in 1997. So younger people were buying again and, you know, not quite back to 1981 levels of age 31. And then we saw it go up. Of course we had 911 and the dot com bust. And then interestingly the median age went down a little bit. Okay. It was up to about 40 years old in 1999, 2000, but by 2002 it had declined again to 36 years old. Okay, so that's kind of interesting. You know, does that show that it was probably because of the massive amount of easing by Alan Greenspan, who was Fed chair at the time, and the sharp decline in interest rates post 911 and post.combust to try and stimulate the economy? Or was it those who survived those debacles had money left over and they decided housing was safer and they shoved it into housing again. Nobody really knows the exact things here, but it's kind of interesting. And now we're up to 47 years old. So. Pretty amazing, huh?

I'm going to say that a big part of that was just coming out of the recession that spiked so much just because they were the only people who had money for the down payments at that point. You know, everybody on the younger side, you know, your 30 year olds who had bought their 300, $400,000 one bedroom apartment somewhere who'd gotten absolutely annihilated, they were the ones who went under and so they didn't have any money anymore. That would be my guess.

Yeah, yeah. You know one other interesting thing before we go here is the average annual income of home buyers has increased over $93,000, well above the national median income of about $62,000. So what's interesting about that is that is it causation or correlation? Right. That's always the question when you look at stats of any type of. And they say, well you'll make, if you are a college graduate over the course of your career you make like a million dollars more. But what nobody asks is would you have made a million dollars more anyway if you didn't become a college graduate? The reason is, is that there's some self selection bias or some pre selection bias and I'd say that's true here too because you know, if you say, well the best thing you can do to create long term wealth for yourself is to become a homeowner. Right? That's an old idea that's been around with us a long time. Well yeah, homeowners might be wealthier, but guess what, they also earn about a third more income to get into the home buying class in the first place. So of course they're wealthier. Duh. It isn't because they bought a home necessarily, maybe that had an impact, but causation or correlation, that's the question, right?

Yeah, I would have to agree with that. So especially as the housing affordability becomes worse and worse, it's just going to keep going up, I think in terms.

Of the age, the age of homebuyers.

Will keep going up, the age of homebuyers. And then obviously as the age increases, you know, usually older people have better paying jobs and so that average will just keep rising.

Yeah, we shall see soon. You know, on a future episode we might be saying the average age of home buyers now is 55 years old. Double nickels.

Until Google starts paying their entry level people, you know, 200, $300,000 and they can afford to buy everything. And Facebook does the same. Who knows, maybe it'll skew younger at that point. But they don't have to and they're not doing that.

So hey, hopefully by that point both of those companies will be busted up under antitrust laws. That's what I'm hoping for. I'm not holding my breath on that one. We shall see. Okay, let's get to a couple listener questions. You had one about Capex, right?

Yes. So we have one from James Cutney. And James says that he has repaired homes for years and he's not certain about the pro formas covering the large Capex expenses and was curious about whether the maintenance percentage in the pro formas covered those things. You know, your new H vac, your new roof, those kind of things.

Yeah, that is a great question. And so Capex relates to capital expenditures. Okay. The big items that you only have to do every many, many years. Hopefully every 10, 20, 25 years even. Right. The answer to that question is sort of.

Here's why it's very hard to answer that question. It depends on the property you buy in the first place. Just like the typical home buyer makes 93,000 a year and the typical non home buyer only makes 63,000. Same idea, right. It depends what you enter the game with and that is very hard to determine. So if you're buying a brand new home and we do have new construction homes available for you, if you buy a brand new property and make that a rental, then your capex is likely to be virtually non existent for and you know, who knows, Everything is different. Right. But I'll say a good eight, maybe 10 years and that first capex will probably be a water heater or an H Vac issue. Your capex on your roof probably won't be due for 25 or even will last a very long time. Maybe only 20 years, you know, we don't know. Okay. But if you enter with a very low level of rehab property or renovated property that just had very minor renovations, like cosmetic stuff, then you should definitely plan for some capex expenses. Okay. And your maintenance percentage will probably be higher on that pro forma. But will it cover capex? I don't know. It really represents a slush fund. So that slush fund, if you have a good tenant who's handy, who doesn't cause problems, and everything goes well, and you don't have minor little repair issues, then you're building up that slush fund. Even if it's a virtual fund, if you don't technically keep it in a separate account, you're building up that slush fund. Those funds earmarked for future capex expenses. So it would include them. If you look at it that way. Right. Again, this one is very hard to perform. It depends what you enter the game with. That is the most important thing. And each of you buying different properties through our network because you've got this wide selection of properties that you can buy through our network, and you can see them@jason hartman.com in the property section. You will need to really evaluate how you're entering the game. So that's very important. Okay. It's kind of like a handicap in golf, right? Or in bowling. We've done some golf stuff at some of our events and bowling stuff at some of our events as well, and they've been a lot of fun. But look, the people who aren't as good, sometimes they get a handicap. Right. And that's how you should look at it with your properties. Right. If you're entering with an old property that doesn't have much in the way of renovations, then that's a handicap. Okay. And you should plan on more capex expenses.

Yeah. I definitely think it's important you ask your. Your local market specialist for that scope of work. I mean, some of them on the pro formas will say new roof, new H vac, and those kind of things. But it's definitely important to ask them for the scope of work so you can see exactly what they're doing. And then, you know, if it doesn't say anything about the roof, just ask them, say, hey, how old is this roof? You know, did you put one on two years ago? Did you put one on five years ago? Did you have. You never touched the roof? And we don't know exactly how old it is. You know, same with the H VAC and all of those units. Just check on the ages before you purchase, because there have been some that Erin and I, my wife, have looked into, and we thought, you know, this looks like a good deal. You know, we might be interested. And then we found out, you know, oh, the roof is seven years old, so it's going to up that a little bit. Doesn't make it quite as enticing. And so we passed. But, you know, maybe it would work for somebody else. So ask for that scope of work and then ask questions off of that.

Yeah. And some of this stuff is negotiable. And remember, you can do a specialty inspection on the roof and you can get a roof certification and be sure you have your home inspections and be sure when needed, you have a re inspection where they come back and make sure work was done if it wasn't done the first time around. Okay. Adam, was there a comment there or just that question?

No, this. This contest. You did not ask for comments, so.

Okay, that's.

Shame. Shame, Jason. Shame. Shame.

Oh, we always love your comments, too. Okay, next one.

Next up, we have Michael Jones. Michael has a phenomenal email address that I won't give out the full thing, too, but it says it has I invest for later in it. It's a great.

So Michael really wants to know.

Michael understands delaying gratification. Gratification. See, that's one of the big keys to success in life, is delaying gratification. If you invest for later, your later will be better. Okay, good, Michael. Awesome. That's an awesome email address. Love it.

So he wants to know when is the time to not do a 1031 exchange?

Yeah, yeah, Good question. Good question. Well, that is probably worth an entire episode in and of itself. So I'm going to try and answer it very quickly because there's a lot to that question. First off, do you have gain? Right. If you don't have any gain, then there's no need to do a 1031 exchange. The whole point of a 1031 exchange is to defer the gain, and the gain is not necessarily considered a profit. Okay? That's the first thing to know. Now. You may have a gain, even if you don't think you have a gain, because if you were taking depreciation, which hopefully you were on the property that you relinquished, the property you sold, then that property has a gain in it. Okay. Because you have to recapture that depreciation upon sale. So. So even if you bought the property for $100,000 and you sold the property for $100,000. Of course, there's some closing costs that complicates it, but forget about that. Say that you broke even. It looks like you broke even, but you may have gain because of your depreciation recapture. So be careful of that. Make sure you talk to your CPA or your tax advisor, get some advice on this and get some real analysis on it. Okay? Now, I mentioned, and I also talked at our recent Profits in Paradise event about some other options to the 1031 exchange. And I've mentioned that I am personally in a 1031 tax deferred exchange for a property that I owned with one of our clients. It was an apartment complex that we sold for $5 million. And I definitely have a ton of gain in that deal. But I have been looking at some of these other vehicles that may make it possible to do something else other than a 1031 exchange. And these strategies are pretty enticing. I am just not completely convinced that they will work. And I would hate to see, of course, myself first of all, or any of you have a tax liability that you didn't expect by doing this. So I'm still checking this stuff out. I'm still working on it. The Jason jury is out. Okay. I do not want to come and start promoting these ideas yet until I feel more comfortable with them myself and hopefully do one of them myself. But just keep in mind that I'm working on it. More to come on later episodes.

That answer has to be coming soon because I feel like you've been Talking about this 1031 exchange for a while now. Your deadlines have to be coming up pretty close.

It's coming up at the end of January. So I do have to make a decision and this is weighing on me, but I still got a little time left. I did comply with the 45 day rule where I identified properties. Now I don't know if those properties are still available, so I may be forced into this. Okay? Now the other thing you can do is completely outside of a 1031 exchange, right? You could simply get some tax deductions to offset gain another way. One of the great things about the new tax plan is you can go ahead and you can buy equipment for your business, if you have a business. And that equipment can be deductible through bonus depreciation all in the year you buy it. So this is huge. This is a big deal, okay? And this is driving a lot of increased investment in the economy and in People's businesses. So there are other ways outside of the real estate, but ideally the 1031 exchange, ultimately, it's an awesome vehicle income property is the most tax favored asset class in America. And the 1031 exchange is just a beautiful thing. I've done many of them. I love it. I might complete this one. I might not. I'll let you know. I've got a little time left, so stay tuned for future episodes where I'll talk about it. And Adam, I think we got to wrap it up for today.

We don't want to wrap it up just yet. We've got one more important thing left. Jason.

Okay, go for it.

We've got a property.

Oh, thank you. Yes.

Why would we talk about properties?

We've got to talk about more properties on the show. I keep telling our people to bring a property with them. Yes, absolutely. And you can find more of these@jason hartman.com Click on the properties page. You'll find more there. But Adam, tell us about this one.

This one is located in Hammond, Indiana, which is one of the ones that's up in northern Indiana. And it's close to Chicago, I believe. And about 30 minutes outside, this one is a three bed, one bath built in 1954. You can buy it for the price of $135,000. It rents at $1,395. So it's over that 1% mark. And you can walk away with $234 in your pocket every month after the vacancy, management and maintenance. And you can make a paltry return of 30%, which, you know, you can clearly make that in the stock market any day. Right?

Of course. Sarcasm is noted. Yes. Good luck making that in the stock market. Now, keep in mind, that is the Performa. So those are all projections. Reality is often different. Sometimes it's worse, but sometimes it's actually better. Those are projections, of course, and you need to say that. But yeah, that sounds like a great property. And you have the lower tax base of Indiana because you're right outside of Illinois, Right?

Yep. That's, that's a good reason why a lot of people from Chicago tend to just move a little bit south.

Yeah, right. They can commute in and still make it work and get the benefit of two jurisdictions. So good stuff. All right, Adam, let's wrap it up. And everybody, thanks for joining us. If you have questions, comments, concerns, needs, you need anything, just reach out to us through Jason hartman.com ask and we will look forward to talking with you tomorrow. Thank you so much for listening. Please be sure to subscribe so that you don't miss any episodes. Be sure to check out the shows specific website and our general website, hartmanmedia.com for appropriate disclaimers and terms of service. Remember that guest opinions are their own, and if you require specific legal or tax advice or advice in any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to iTunes or Stitcher Radio or whatever platform you're using and write a review for the show. We would very much appreciate that and be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.