1348: Property Profile, Wage Growth & Labor Participation Rate

I've been following Jason's company ever since 2007. I went through a seminar in his Newport beach office by Fashion island and I've been listening to his, all his podcasts since then. Always wanted to buy some more, but a couple years ago we went on the property tour in Cincinnati and it was great. We actually sold our Texas property and did a 1031 exchange in Hamilton, Ohio and they've been working out great for us ever since. This just in 2017. Yeah, last year we sold our home in Chino Hills that we lived in for 25 years, raised our family and all that. We're taking all our proceeds and we're going all in on rental properties. And the funny thing is we're kind of following Jason's lesson to the T and it's working out great for us. We're not going to buy again in California. We're renting actually in Newport Beach, California. I got into real estate investing because I've been a student of the stock market for years and years and it just doesn't seem to make sense to me anymore besides what Jason says, it just, it just seems like the guys at the top make sure that they win and you don't win, which, you know, it's just, I feel the same way even before Jason said that. And the fundamentals don't seem to make sense to me. But there are fundamentals in real estate and income property investing that aren't going to be able to be changed by high frequency investors or anything like that. The fundamentals are there and they're going to stay there. I'm fine with income properties. You know, it's a slow and steady approach.

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.

Greetings from beautiful Key Biscayne, Florida. It is absolutely stunning down here. I am at the Ritz Carlton Hotel, just a beautiful place. As much As I like the Ritz Carlton, I have to tell you, it ain't what it used to be. It seems like it really peaked in the 80s, maybe into the mid-90s still. Certainly a great luxury brand, but not quite what it used to be. Not quite what it used to be. There are hipper, more modern hotels, I guess, and you know, every brand kind of has its cycle and everything has its cycle. But one thing that doesn't have much of a cycle at all, that's always perennially great. Do you know what I'm gonna say? Yes, you do. Yes, you do. That is income, property. And boy, if that has a cycle, it has lasted thousands of years. Okay, in episode 1348, today I want to talk about something that just isn't too much of a problem anymore. In fact, this former problem, and it has been a problem throughout the ages, has been largely solved by a man that half of the country absolutely despises. Now, for homework, I want you to go and ask Siri or Alexa to give you the definition of Trump Derangement Syndrome. Tds. It's funny, a lot of people have it. I see them all over social media spouting about it. So, you know, I talk a lot about the rent to value ratio, and I talk constantly about how ratios are really the most important things in life. When someone spouts out a statistic and they say, oh, you know, billions of this or trillions of that, you always got to ask, compared to what? Because compared to what is what a ratio is. It is a compared to what question. And a ratio answers it beautifully. So we talk about the rent to value ratio. We talk about the. Another ratio that I created, the LTI ratio, not the LTV ratio that most people know, the loan to value ratio. This is the land to improvement ratio. As part of the Hartman risk evaluator, that can help you mitigate your downside risk in a real estate deal. Well, I've created another ratio. And you heard it here first. Dun, dun, dun. Here it is. Here it is. This is the OTC ratio. Yes, the OTC ratio. It is the opinion to contribution ratio. Yes, the otc. Not like it's used in medicine, like aspirin, over the counter, or in the commodities market, the over the counter trades, right? The OTC is the opinion to contribution ratio. Because something I have noticed that you have probably noticed too, dear listeners, it is that people who make little contributions have too many opinions. And you know what? I think everybody's entitled to an opinion. But if you want to spout them all the time you need to earn them.

Yes.

And how do you earn them? You earn them. Well, if there are opinions about the country, to some extent you earn them by paying taxes. And isn't it funny that a lot of these people that pay the least, that contribute the least have a lot of big opinions and a lot of big stupid opinions. So that's it, there you go, you heard it here first. The OTC ratio. Try it out. Spread it around on social media, hey, hashtag OTC or OTC ratio. Now I have no idea what else that hashtag might stand for because I haven't looked it up, but I think it's a good one. The OTC ratio, opinion to contribution ratio. It ought to be balanced. Try that with. I know you all have that one person on Facebook, you, who's got all these opinions and who's a total slacker and you know, it's like the over entitled teenager, okay? You gotta earn your right to have your opinions, okay? So there you go, try that one out and see how it goes. So what is this problem? Well, you know, this guy everybody hates, or half the country hates, that's of course our President Trumpster, you know, love him, hate him, whatever. You know, I admit he says a lot of dumb things that he really shouldn't say, but he has earned the right to have an opinion anyway. Whatever. Here's what I want to talk about though. Let's talk about something you heard a lot about during the Obama era. Under the Obama regime, of course, we had very high unemployment. Not all his fault, by the way.

I'm sticking up for Obama.

You know, certainly he inherited a tough situation, but to blame the inheritance after two or three years, you know, I think that's the time you gotta just accept that this is now your economy. Okay? So you know, Trump could have said the same thing, right? But you know, he just went on and stimulated, stimulated, stimulated. And listen, I don't even about economics, okay? As much as I think the economy is booming largely, it is still an economy like all economies in the world. The super symbolic economy as I call it, built on a house of cards, built on smoke and mirrors. But hey, that's the way every modern economy is. It's nothing unique to the us. So it's, it's a glass house, right? It's a glass house. In fact, that's like the OTC ratio. People who live in glass houses shouldn't throw stones. There you go, same idea. Hey, I think that's like a biblical idea, right? Anyway, check that one out. Okay, so unemployment rate versus labor participation rate. We heard a lot about this in the Obama era. We had John Williams on the show, the founder of that great website shadowstats.com he talked about how, of course, the consumer price index is a lie. We all know that because we've discussed it ad nauseam over the years. But also the unemployment rate is a lie also. So another metric for this is the labor force participation rate, or just the labor participation rate as many people call it. And I came across a couple of great little lessons on that. So I'd like to share, I think two of them with you. They're very short and one of them is from One Minute Economics, which is a great YouTube channel that, that's got all kinds of great little quick lessons. And I like the way they did this video. Go check out their channel. I am a subscriber. It's a good video on labor force participation rate versus unemployment rate in explaining what the difference is. So let's listen in.

The labor force participation rate tells us which percentage of the entire working age population is economically active. In other words, it tells us which percentage of the people capable of working are actually working or at least looking for a job. Let's assume you live in a country with 10 million working age people. We'll also assume 5 million are currently working and 500,000 are actively looking for work. So we have five and a half million economically active people. In this scenario, the labor force participation rate is 55%. The unemployment rate, on the other hand, tells us which percentage of the total labor force is currently unemployed but actively looking for work. To figure out how many people are jobless but actively looking for work, the authorities figure out how many people are receiving unemployment benefits and other forms of help on the one hand. And on the other hand, they also analyze data from unemployment offices to measure how many people are making an effort to find a job.

See, that's where it gets dicey. But it gets even worse when you deal with what's called the discouraged workers. Now, thankfully, this is not much of a problem nowadays, but it was a big deal during the Great Recession. A lot of people were talking about this. In fact, they were saying as the unemployment rate approached 10%, you know, it was, it was getting up there. I mean, it was getting pretty bad. You know, it didn't count the, what I call the underemployment rate. I don't know if anybody uses that phrase officially. I called it that though, the underemployment rate, which I think is still a Very valid thing, even today, even in much better economy than we used to have. But some would calculate that the true unemployment rate was approaching levels that it was approaching during the Great depression, during the 1930s. You know, they didn't want to say it was ever that high during the Great Recession ten years ago, but many evaluated it that way. And so it's interesting, you know, what do you think of this? What is the more accurate way to look at things? Is it better to look at the unemployment rate, which is widely used, widely quoted, discussed all the time, you hear it all over the news media constantly, or the less discussed labor force participation rate? Let's keep going.

In the previously mentioned scenario, with a labor force of 10 million people and 500,000 people who are looking for a job, the unemployment rate is 5%. The unemployment rate alone can sometimes paint an overly optimistic picture. So the labor force participation rate complements it nicely. Together they help you accurately assess the health of an economy.

Okay, so what do you think? Well, here's another take on it, which I think you'll find interesting. And this one is from Prageru, a, another great YouTube channel with lots of very interesting and very thought provoking content.

When you hear that the unemployment rate has gone down, you usually think that the economy is doing better, right? But the numbers don't always tell the full story. This is what's not said. If someone has gotten so frustrated that they've stopped looking for work or just decided that they won't work anymore, they no longer get counted as unemployment.

That's the discouraged worker component. And that was very important, especially during the Great Recession. And it's still an issue today. You know, a lot of people aren't counted even though the unemployment rate is extremely low. In fact, some would consider the unemployment rate today to be full employment because everybody who wants to work can get a job.

So imagine you had a town with 100 people and 10 of them were unemployed and trying to find jobs. The unemployment rate would be 10%. Make sense? So now imagine if five of those people got tired of looking for jobs and decided to move into their parents basement. The government would now say that the unemployment rate has gone down to 5%. Yippee. Wait, now that doesn't make sense. The people in the basement are no longer part of the labor force because they've given up. So the labor force participation rate goes down too. Not exactly a reason to celebrate. So while the unemployment rate is important, the labor force participation rate, which as you can see, tells the real story. Now that makes Sense. Remember this the next time you hear a reporter on the news say the unemployment rate is getting better.

So does that make sense? You don't hear much about the labor force participation rate. And this is another of so many ways where we are just constantly, constantly misled.

And Adam is here today and he has a property to tell us about in the great state of Alabama. We have done a lot of business. Mobile, I own property in that area. And Adam, what do you have?

Yeah, so I wanted to bring this up to people. It's a little cheaper than I usually buy and that, you know, it's on the lower end of the price range. But I wanted to highlight this one because as you said, we've done business there, but not a whole lot recently. But I just wanted to, you know, remind people that new inventory and new markets is coming. So this is one in mobile that's $61,000. It is a resale property that has a rent of $750. So that's almost one and a quarter percent rent to value ratio and is estimated a cash flow at $238 a month with the cash on cash of 15%. And so that's with the vacancy of 8% like usual, 10% management and 5% maintenance.

So that's a good property. So what's the price of it?

It's $61,000.

Oh yes. Inexpensive property for sure. How many square feet?

It's 874. It's a cost per square foot of $69, which is kind of in line with your kind of mid range price.

Tiny place. Yeah. So that would definitely be a C class property. Yeah, yeah, definitely. So those of you who like those bargain hunter deals out there, you know, if this were a new home, you'd probably pay about double.

Double.

Yeah, I was going to say even a little more than double. Like 2.2 times that probably. That's a very good. This is the kind of property we don't love these types of properties. Okay. But you know, a lot of our clients do and that's why we still offer them. And this is a very good type of property for a starter investor. This doesn't have the price right.

This was about the price point we did with our first one. Just because it was kind of a dip your toe in type thing. It was one of those things that, you know, if, if everything goes horribly wrong, you know, we're not going back. We've at least got the land down there and when we get the land value, you know, we haven't lost too much. Yeah.

The land is probably worth 20, 25,000 just alone.

Right.

So. Yeah. But projected 15% cash on cash.

Yep. With a total return of 37% estimated.

Wow. Wow. Let's just go over some of those assumptions that drive that. That is 8% vacancy, which means we're performing that at one month per year vacant. And what appreciation rate, maintenance percentage?

Appreciation rate is set at 6%. I'm not certain that mobile is going to get 6%, but I guess.

Well, I think the area could, if it's the right property, you know, but I don't think an older house like that's going to get 6%, so that's probably too optimistic. But I don't. Hey, you know, I don't know, man. There are some crazy appreciation rates going on in some markets and. Oh yeah, yeah, it's. Wait till, I think tomorrow we'll cover this. This massive amount of equity gain homeowners have received. And keep in mind this is in the middle of a market where cyclical markets are declining. That's been staved off a little bit by the dramatic cuts in interest rates, but still those cyclical markets are hurting. And that makes up 75% of the case Shiller index, as we know. So it's pretty amazing, this equity gain. You're going to hear about it. Okay. We'll probably cover it tomorrow.

I think sometimes you hit the jackpot. Aaron and I bought a property about a year, year and a half ago that in the first year went up 20%.

Wow.

It was in the, we were looking, we looked at the area and it looked like it was a nice up and coming area. And we bought it for right around 100 and we got our property valuation back at the end of the year for property taxes, and they estimated it at right around 120. It was a good start. Which market that was in Memphis.

Memphis, yeah. Fantastic. Good to hear, Good to hear. Okay, let's talk about blue collar jobs.

Let's talk about our tenants.

We were certainly talking about workforce housing, as they call it, with. It's a nice way to say C class properties.

You know, I don't think this is necessarily our tenants. These blue collar jobs can make some nice money. And you know, this is a very oddly, I'm going to say Trumpian thing. Trump is very much of a supporter of these types of jobs, these types of people. It'd be hard to argue that he's some sort of elitist billionaire. You know, I mean, this is an interesting thing. You know, blue Collar jobs like plumbing pay $90,000 a year without a college degree and it's driving more workers to trade school. And I think this is absolutely great. I've always said someone has to actually work with their hands and make things. I love these kind of people. In fact, I am way more impressed with a lot of these type of people who are honorable, good, hard working people than I am with these highfalutin Wall Street CEOs that are basically scamming the world. Hey, you know, there's an old saying, have a gun, you can rob a bank. Have a bank, you can rob the entire world. Yeah. Okay, tell us more about this, Adam.

Well, they looked at it and they're saying, you know, blue collar professionals like plumbers and mechanics are earning more than the average salary for white collar jobs and they don't require a college degree. Now, this is obviously not every blue collar job, but you know, you're looking at your specialized blue collar jobs, you know, especially if you live in a rural area. If you look at rural area electricians and plumbers, they're making 90,000. No, they're making in the low to mid six figures because they have a huge area they service and there just aren't many out there.

And it's really cheap to live there. And guess what? If these people are making 90 grand, the equivalent of a college educated person with student loan debt payment of, I don't know, you know, let's call it $600 a month, that's a pretty significant difference in net income.

I think it's great just because this will promote more inside of our schools as well. You know, getting back to promoting the trades and getting more of these workers. And, you know, if people see jobs like this, they'll, they'll go for them. You know, if you say, hey, you can go to trade school for two years or you know, one year and make a great job, it actually made me think of. I'm going through. My kids love to listen to this series called the Story of the World. It's kind of a history textbook, but we use the audiobook. And we just heard about when the plague hit. When the Black plague came and killed.

Off in the early 1900s.

No, this was back, you know, before then, whenever it came out and wiped out about a quarter to a third of the world's population.

Right.

And that was mostly Europe. Was really hit.

Yeah, this is mostly Europe. But you know, one of the big, big impacts of that was it drastically shortened apprenticeships because you just needed the workers. And so you had to pump them out. And this is kind of, obviously we haven't had the plague, but this is one of those incidents where it could be driving the movement towards the blue collar job. Because if you tell somebody, hey, you can go to school for, you know, two years at a community college that costs a tenth of what it costs to go to one of the four year universities, come out with no to little debt and make, you know, say maybe the same or $10,000 a year less. You know, would you take it? You've got a lot of people who'd probably be willing to take it.

Well, that's another cost of college that people don't realize. It's four to five years of your time that you could be working or could be learning real world skills.

Yeah.

So, you know, again, listen, I don't hate college. I just hate that it's a ripoff and it's overpriced. That's all I hate about it. Otherwise, I think it's great.

Yeah, you've got millennials who are valuing their time more than money, supposedly. I mean, obviously they like to make money and especially the coming generation. So if you tell them, hey, you can have two years of your 20s back. That's a big draw. That's big. And that might cause colleges to, you know, start looking at their pricing. So if the Democrats win and start coming in with the student loan forgiveness, then might drive it even more. But who knows?

We'll see which way that'll turn. It could go either way, I think. But the thing that has to happen is we've got to stop having the government insure student loans because if that stops happening, then the funding will dry up and the price of college will drop to where the market can meet it and reasonably pay, and it'll all get real again. But it's just silly the way it is. By the way, Adam, don't forget, we don't have time today, but I want to talk about a conversation I had with a very bright venture capitalist today. I'm at this conference in Key Biscayne, Florida. You know, it's at the Ritz Carlton. There are hundreds of people, very wealthy crowd. I had a fascinating conversation about this gentleman's thoughts. And he's an experienced, wealthy older gentleman who had some very interesting thoughts about the next big revolutions in the economy and technology. I think that's going to be really important. I want to impart this conversation to our listeners. Let me just assimilate a little bit. Maybe tomorrow we'll talk about It. But yeah, good.

If we want to look at real estate, how this is going to impact real estate, you know, we always want to drive it back to that. Let's be honest. Usually community colleges aren't in the ritzy, high end parts of town. It's more in the blue collar parts of town. If more and more people, and especially people in their 20s or 30s are going back to trade school or going to trade school, they're going to be going to these community colleges. And that will create a demand for properties around those areas and in those blue collar neighborhoods that we're investing in.

Yeah, I think. Absolutely, absolutely. And it will also create a larger supply of workers, driving down the cost of maintenance and repairs for our properties. So that's okay too.

You know, it always seems to work out for the real estate investor, doesn't it? At least. At least in the long term. Not always in the short term, but in the long term, for sure, it'll.

Make Yelp reviews more important. So they want to see service you better and get better reviews.

Well, there you go. And there's going to be more competition, more supply of laborers in the market. So that'll all be good. All right, let's wrap it up for today. Until tomorrow, everybody. Happy Investing. Go visit Jason hartman.com for more or call us. Yes, you can call us on the phone. Remember that phone, phone. I know. 1, 800, Hartman 1, 800, Hartman are investment counselors. You can push two and be connected with an investment counselor or leave a message and. And one of them will get right back to you. So the website jason hartman.com or 1-800-hartman until tomorrow. Happy investing. We'll talk to you tomorrow.

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