1385: A Nation Of Renters! Negative Interest Rates? Self-management, & Equities vs Real Estate Investing

2012 is when we did our first purchase. I think 2011 is when we started.

You know, attending meetings. Probably 2010 is when I started listening to podcasts. My husband was a little ahead of me, so he was probably, you know.

Late 2009, early 2010 and, you know.

We just obsessively listened to.

I think you were on episode 300.

At that time, though.

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 1385 and greetings from beautiful Sarasota, Florida. It is just a beautiful day here and I'm glad to have you join me from 189 countries worldwide. Thanks for joining us for episode 1385. So I've got good news for you, and this is not good news from a selfish investor perspective, although it's that too. It is good news for us investors because selfishly, we are benefiting from this. But you know what I dare to say, bucking the common trend of the peers in my industry who do not like me because they are, they are just looking out for themselves and not looking out for society. And one of our listeners, Patrick, sent me this article from CBS News entitled America is Increasingly a Nation of Renters, not Homeowners. I know if you're new to the show, you might be thinking that doesn't sound like good news. I think it is great news. I think the homeownership is way too high even now. It was definitely too high and that sparked the Great recession just over 10 years ago. Why should the homeownership rate be so high? There's really no reason. It's a completely illogical idea. As I've said many times over the years, I believe the homeownership rate should settle at about 50 to 55% and that's the right number. That's just my opinion. I could be wrong, but hey, I'm not. So there you go, so this article is quite interesting because what it shows is it shows that the renter population is moving up in class. No longer is being a renter instead of being a homeowner a thing. For people who are in the lower socioeconomic classes, being a renter is an acceptable thing nowadays. It's nothing to worry about. It's a great strategy, and it is good for society. So we see the renter class changing. And when you look at the numbers here, you'll probably think, as do I, that a lot of these people could afford to buy homes, right? But they're not. They're not. They're choosing to rent. They're renting by choice rather than out of necessity. So the article says a decade ago, more than 2/3 of people who rented an apartment or a single family home in the US earned less than $30,000 per year, a recent Harvard study shows. But beginning in 2010, with the economy still suffering from the effects of the subprime mortgage crash, not to mention everybody calls it the subprime mortgage crash, but that's only part one of the crisis that befell us just over 10 years ago. The second part of it was the Wall street scumbags and scam artists. They really caused the economy to crash. If it were just a mortgage crisis, meaning if it were just a matter of, of foreclosures that were caused by lenders, maybe they were doing predatory lending, or maybe they were just being too liberal in their lending policies, we could argue that all day, but that doesn't matter. The point is they made loans to people who shouldn't have received loans, and they created a bubble through that. Because when you put more money into the system, just like with Sallie Mae or Fannie Mae or Freddie Mac or any type of situation where you increase the supply of money, you increase the supply of dollars, but you're chasing a limited supply of economic widgets, whether they be houses, college tuitions, whatever. Doesn't matter, Right? They simply cause inflation in that asset class. And that is terrible. It's improper, it shouldn't happen. And that's why we should get the distorting government forces out, out, out of the marketplace, because they just pervert the market. And it's a, it's a terrible thing. So anyway, we had phase one, the mortgage crisis. That was one thing that would have been relatively minor if it were just that. But then, of course, the criminals on Wall Street, Wall street is the modern version of organized crime. They were basically repackaging and securitizing these Loans in all sorts of really imprudent to say the least, if not totally criminal, to say the worst, in all bad, underhanded ways. And selling the same loan 33 times in different fake pools of loans and all, all kinds of stuff. We don't need to rehash that. But just understand, the Great recession just over 10 years ago was a two part story. The first part was the mortgage meltdown or the subprime mortgage crisis. The second part was the Wall street shenanigans, which made it much, much worse. Okay, so $30,000 a year renter, just over a decade ago, that was your typical renter, right? Two thirds of the renter population was made up of that. Now, as of 2018 though, 62% of renters, and that's 27.1 million people earned middle class incomes of between $30,000 and $75,000. Okay? At least 10.3 million families with annual incomes of at least $75,000. Now that's, that's above the median, okay? Significantly above the median, are renting the roof over their head. And that is a jump from the prior year. So the shift came as the country started to rebound from the 2008 housing bust. See, they call it a housing bust. They never call it a Wall street bust. Only part one was housing. It was only half housing, okay? Along with the straining family budgets across the country, we saw home prices getting driven up and up and up. So in 2013, for example, they talk about households needed to earn at least $53,300. Now that's around the median, right? Not far from it. A number that jumped to $67,300 in 2018, according to NAR. That's the national association of Realtors, of course. Meanwhile, worker wage gains did not keep pace with those prices. Right, but what's the problem with this analysis? See you. Since you listen to my show, you are smarter than that. Why? Because you don't look at income versus price. That would be a faulty metric that only, only the uninformed people would use. Right. What we need to do is look at income versus mortgage payment much more significant. Now, one of the other interesting things is there are quite a few pressures out there in the marketplace that may, and of course we don't know, but they may cause mortgage rates to actually decline even more. We are in an era of arguably negative interest rates. Negative interest rates. Why do I say arguably? Well, because it's subject to debate, right? You know, it depends what you think the real rate of inflation is versus the interest rate on a mortgage, right? Most people would say, well, we have positive interest rates, but they're only slightly positive. And think about the calculation you need to do for this. Let's assume that the inflation rate, the official inflation rate, is 2%. That's the Fed target rate. And let's say that the mortgage rate is 4%. Just for example here. I mean, these numbers aren't far off from where we actually are. But you know, we'll just use this as a nice round number example because it's, hey, it's close enough for government work. Well, let's say that you're a typical home buyer and the interest on that mortgage is tax deductible. So if you pay 4% in interest, and let's just say, for the sake of round numbers, I know this would rarely be the case, but let's say that you're a high income earner and let's say that you live in my former home state, the Socialist Republic of California. So of course your tax rate is insane. It's outrageous, right? And let's say that that brings your marginal tax bracket up. And I know it's not going to be this high, but you know, we're rounding off here, folks. Relax, calm down. Don't try and fact check this. You're not going to get anything out of it. I'm talking about a concept. So if the mortgage rate is 4% and your tax bracket is 50%, well, then essentially half of that interest becomes tax deductible. So really you're paying 2%. And if the inflation rate officially is 2%, how much are you paying? This is like one of those word problems you had in junior high, right? If the train leaves at 2pm and Johnny is on the train, you know, you know those word problems, right? Okay, anyway, the answer is.

Zero. You're paying zero interest in that example. But wait, there's more. As they say on the late night infomercial, say, for example, the real rate of inflation is not 2%, but it's 4%. And remember how I've talked to you over the last 15 years about how the IRS doesn't really understand how to calculate inflation? And most of the time that benefits the IRS. But sometimes for U.S. investors who are in the know, who listen to my show and understand how things really work in real life, most of the time we benefit dramatically from this. So think about it. Got that 4% mortgage, you've got that 50% tax bracket combined state and federal. Really, Instead of paying 4%, you're only paying 2%. The official rate of inflation is 2%. There, you're paying 0. Net. Net. Okay, just rough numbers here. Bear with me. Calm down. I know if you're. If you're an accountant or an analyst and you're analyzing what I say, you're going to poke a couple little minor holes in it. I get it. It's just a concept. It's just, you know, I'm not doing exact math here. Relax. Okay, so. But what if the inflation rate is 4%? Well, now you've got a 2% tax deduction because the IRS doesn't care about inflation when they calculate your deduction on the interest. Right, 4% interest you thought you were paying after taxes in your 50% tax bracket, state and federal combined, you're really only paying 2% after you take the tax deduction. Now, I'm talking about a homeowner, not an investor. This is just for a homeowner. And it shows you why the laws are in favor of the rich. The rich get richer. Okay, not completely, though, because the rich do pay more in taxes. Dramatically more. Well, hey, they're the only people that really can pay, okay? The poor don't have any money to pay. They get handouts. So I'm not saying that the rich are hugely benefiting from this. I'm just saying it's a better deal than it looks like on paper, that's all. Okay, so we're effectively paying 2%. Inflation comes along. It's officially 2%. So you believe the official numbers, which are completely bogus because the government maligns those numbers in three ways. What are those three ways, you ask? Well, you've heard me talk about them many times over the years. They are waiting substitution and hedonic indexing. Those are the three ways the government lies about the real rate of inflation. Okay, fine. We're not going to go into that. If you want to know more, just go to Jason hartman.com, look at the search bar on my website and type in inflation or hedonics. And you'll find lots of podcasts in the past and transcripts and articles about all of those topics which will educate you in detail. We don't have time to dive into those three things today, but we've talked about it extensively over the years. So now, remember, our example was 2% in tax deduction on that 4% mortgage, but now we bumped the real rate of inflation up to 4%. So now we're getting paid. We're getting paid to borrow the money. We're getting paid approximately 2%. Okay, let's stack it up and do the math. We've got a 4% interest rate and we've got 4% inflation. So those two completely cancel each other out. We're paying zero. But then the IRS comes along and says, hey, you're paying 4%. And we don't want to tell them, no, we're not. No, we're really paying 4%. IRS, go ahead and believe what you want. We're not going to correct you. And the IRS has said, hey, if your marginal tax bracket, state and federal combined is 50%, we're going to let you deduct 2% of that. So now we've got a 2% deduction and a mortgage that's already free because we're paying 4% and the real rate of inflation is 4%. So we're getting paid 2% to borrow the money. And folks, guess what? This is not even inflation induced debt destruction. See inflation induced debt destruction. My trademark term IIDD it's a mouthful. Say it 10 times fast. That really looks at the past. It looks at the way you get a huge break at the way you get paid to borrow money over time. But.

This example is just a present day analysis. It's a snapshot in time. So if we click that picture today, 4% inflation, 4% interest, 50% marginal tax bracket. Today we're getting paid 2% to borrow the money in that example. And this is as a homeowner, not an investor. As an investor, it gets dramatically better. Why does it get better? Because we're not even paying the mortgage. The tenant is paying it for us. And the tenant is probably giving us a little tip every month called positive cash flow. Maybe, Maybe that'll be $200 per property and that's a pretty great deal. So America is becoming a nation of renters. And I think it's a great thing. Renters have a lot more flexibility. When that new job opportunity comes up or that parent gets sick and you know, someone wants to move to a different city or a different neighborhood to be close to their ailing parents. Sandwich generation, right? Or they want to pursue that new career opportunity or whatever it is, maybe they just want to change their lifestyle. They're not saddled with a property that they need to wait and wait and wait to sell that maybe they need to lose money on because it's not the right time to sell it. Renting is a great deal. But dear middle class renters, with your $75,000 incomes that we just talked about, yes, you could Afford to buy. So you should buy a lot of investment properties. Maybe you won't own the house in which you live and that's a better deal for so many reasons, especially if it's an expensive higher end property and the rent to value ratio is really favorable to you. But you should definitely be stocking up on high quality investment properties in good linear markets that you can find@jasonhartman.com properties. That's jasonhartman.com properties. Okay, let's get to a live clip from one of our recent live conferences and we will do that for a few minutes here and then I'll be back.

Evan, what brought you to real estate? Why were you interested in it?

Well, I think I looked at it, I mean always been just from my parents and grandparents, really focused on equities. I remember my grandmother telling me, you can never make enough money with your own two hands. And so I always knew that investing was a good approach to life and that I had family members who did things that were successful but not mega wealthy. And so I knew that investing was a big part of it. And really it was learning from you and your podcast and seeing that equities did fine but also experiencing the recession and knowing that there was kind of a, you know, an insecurity to it.

And then as my equities mean stocks.

Stocks. Right, right. And, and as my kids, I have a 10 year old and a 12 year old, I began to see, you know, think about the future and preparing for them. And I think my initial foray was I want to buy some properties and then the cash flow can support them, can help pay for their college. And this was maybe three, four years ago, five years ago. And then it just got more and more into it. It was the cash flow and the appreciation and really just the more I understood about it, mainly learning from you and the podcast and your gu more I loved it and saw the benefit of it. So that was really, it just made so much rational sense. And then I think what I really saw from you, there's so many promoters out there, you just see so many people trying to get you to no money down. And it's such an industry that if you find the right approach, you can do so well. But it takes a lot of effort to find the right approach. And once I found the right approach, I thought this is the way to go. That was really it.

Good stuff. So you don't self manage any of your properties, right?

No, no. But I actually when you were talking about information and the value of information I kind of was thinking about self management as part of that with the technology that the technology that allows us to self manage more effectively is effectively a value add via information. And so, you know, I haven't and I don't see my still having a full time job and I don't see myself doing that in the near future, but definitely something that possibility.

I would actually argue that the tech revolution has made real estate more valuable and that's not the way you think. Of course the tech revolution has made a lot of, it's created a lot of wealth in the economy and a lot of people become rich and of course they buy expensive houses. That's not what I'm talking about. And they invest too. And so they create more demand in the market. I'm talking about just that wrapper of information that is available as a tool to investors has literally made your properties more valuable because you have more scale, more leverage, more opportunity to market those properties, more opportunities to expose them to people, easier management of them, less expensive management of them. Just a whole bunch of things that we don't often realize that we don't often really pay attention to.

One other thing I wanted to add too is I actually as a rabbi, I care about improving the world and I actually think that being a real estate investor, we're actually doing so much for the community. It's actually, I mean it's, of course we want to make money and be profitable, but it's a way of giving and helping others. So that's another very attractive part of it for me.

Well, literally like a push pull marketing equation, right? So as you invest and buy more properties, you create more demand in the system. So more suppliers come and go through that high barrier to entry and create more properties. And, and obviously there's a housing shortage, is built in everywhere all the time, right? So yeah, except Detroit. It's not built in there. Go ahead, Doug. Self management was kind of like, okay, yeah.

And on the self management topic, as I'm sure many of you have heard on the podcast, I've been self managing a number of my properties. Partly it was because I had very, very, very poor management in place on one of them. And then I figured if I'm self managing wine, I might as well self manage the other. And what I've really found is that there's a couple of things. Number one, I really like having the direct contact with the tenants because then I don't have to have what's going on filtered through an intermediary who they may ignore it, they may exaggerate it, they may inflate the cost on it, they may just decide to not take care of it at all. And so I like to really have my pulse on what's happening with my properties. And then also I like to be able to reinvest some of that money that I'd otherwise be spending on management into improving the properties, because I've found that the tenants really appreciate that. And because what a lot of owners do, it's really easy to just kind let the maintenance go and let it go and let it go and let it go. And then after a while, you start having really big problems.

And it's easy to let it go when it's overpriced.

Exactly.

You can do it a lot cheaper yourself. And I don't mean doing it yourself, like you don't go to your properties and do that, but just buying the product, sending it to a handyman, doing what Drew Baker's talked about a lot on the podcast.

Well, yeah, Well, I mean, or even like, you know, for example, you know, I can just go on to HomeAdvisor, I can contract with somebody, and then it'll usually end up being 15% less than if I source it through a property manager. And so then what I do. So what I ended up doing was I found a local real estate company in the area and then I just cut a deal where I sent them the keys to the property, and then I'll screen the tenants, and then when it comes time to sign the lease, they'll sign the lease, do the showings, and then give them the property. And then I'll cut them a check for half of a month's rent. And then if I need them to go look at the property, I'll just pay them 50 bucks. I mean, it's a really simple equation. And then I'm just managing the rent collection through cozy. It's not that complicated, but technology's really made it a lot easier. Ten years ago, that would have been very difficult. Twenty years ago, that would have been almost impossible. And so I think Jason's really right. The technology is making our model not only more feasible than it used to be, but it's making it easier and easier to be able to leverage technology to remove intermediaries. And in that case, then what you can do is you can still generate reasonable and to good rates of return while still self financing, improve the properties, which I think has a dual benefit. It's a benefit to me because now my properties are going to have less deferred maintenance benefit to my tenants because they're going to be able to live in a property that's actually being fixed up so technology.

By his ability to increase his return on investment, he made his properties more valuable with the bits and the bytes.

I hope you enjoyed that and thanks for listening to us today. Go to jasonhartman.com for more info. Be sure to take advantage of that free video that explains how to analyze a real estate deal on the front page of Jason hartman.com if you're newer to the show or just want a nice review of the fundamentals, be sure to check out my Quick Start podcast where we have hand picked episodes that cover some of the fundamentals of real estate investing and economics. And all you need to do to find that is just on any podcast platform. Just type in Jason Hartman quickstart Jason Hartman quickstart and you will find that podcast as well. Until tomorrow, Happy investing.

Thank you so much for listening. Please be sure to subscribe so that you don't miss any episodes. Be sure to check out this show's 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.