2069: Inflation-Induced Debt Destruction: How Real Estate Trumps Traditional Investments

This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit hartmanmedia.com hey, brother.

I just finished listening to your July 5 episode, man. I just absolutely love your content, man. It gives me value every time I listen to it. It gives me a different perspective on how I view some of the stuff that I do. It's just always good, man. And I just, I want to keep telling you the same thing over and over and over. It does affect people, it does change people's lives and really appreciate all of the effort that you're putting in for that because I know that you've really got better things to do than this, but yet you still sacrifice that time and do it. So hats off to you, bro.

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 multi millionaire 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 2069. Thank you for joining me today. We've got a fantastic episode for you. And our next episode, of course, will be a 10th episode show and a flashback Friday combined all in one. So I know a lot of you look Forward to those 10th episode shows because they are kind of special. They're different. Today we've got an interview, a discussion I had with the real estate guys and some interesting news at the end about a little merger that we did not for all of our businesses, but for one of our businesses. So you'll hear about that at the end. Stay tuned for that. And I want to talk to you for a moment though about property management, which is probably the biggest issue in our business. You know, everything else about it is pretty great. But the property management with some of these property managers is a real challenge. You know, there are industries really that are, some are just better than others. I would say that the legal industry is like a pretty bad industry. A lot of people complain about the legal industry, A lot of people complain about contractors. How many people do you know that renovated their house or renovated their kitchen or bathroom or whatever and love their contractor. Right. And have great things to say about them. Oh, they finished the job early, it was less expensive, it was better than I thought. Nobody says this, right? Nobody says it about their attorney. Right. You know, hey, you know, I had this legal matter and my attorney handled it and guess what? The bills were lower than I expected and they did a better job than I expected and they communicated with me better than expected. Nobody says this. And the same is true of property management. It's another one of these industries that just, you just don't hear a lot of people saying great things about their property managers. And I think there's a lot of cause to say they're justified in these and we want to help you with that. We've got a lot of solutions to make the property management world easier for you. Whether it be through our hybrid self management approach or managing your manager. We've got a whole bunch of solutions for that. So if you are unpleased, with inconsistent financial reports, higher than expected maintenance costs, frequent tenant turnover, if you are concerned about lack of communication, unjustified fees, maybe the rents aren't high enough, or maybe they're pricing the rents too high and it's increasing the vacancy rate of your property. If you're concerned about tenant complaints or lack of regular inspections of the property or you know, inconsistent monthly statements, or maybe no monthly statements or vacancies or unauthorized decisions that they've made, or negative online reviews that they have. You know, by the way, one of the issues we're noticing is so sometimes they're operating under different names and it's hard to find the real review of this particular property manager. Right. The seller might be the party you thought you were dealing with and then they've got a different name for the property management company. So these are also concerns. Right? Here's some preventative natures. We can help you with this. A lot more regular check ins, reviewing financial statements, staying informed, getting feedback directly from the tenants, and then reviewing your property management contracts. We've got a bunch of solutions for this. So what do I want you to do to get some assistance here if you need it? Go to jasonhartman.com Ask jasonhartman.com Ask Tell us who the seller was, who the property manager is and what's going on. Just give us a little narrative as to what's happening and we will reach out to you and see if we can assist you. I'm almost, almost 100% sure we can assist you with this. So Jason hartman.com ask and get some support. That's what we're here for. Even if didn't buy the property through our network, we are happy to support you and make your experience better because you do have the most historically proven asset class in the entire world, income property. And it should go well. Everything should be great. This is the best investment in the world. It's the most tax favored asset class in America. And if you are experiencing challenges at any point in that process, let us know. Reach out through jasonhartman.com ask and we're actually developing a checklist and a report for you that can help you with some of these issues as well. So look for that on Future episodes. Okay. Jasonartman.com Ask without further ado, let's get to our discussion with the Real Estate guys.

Welcome back to the Real Estate Guys. We're glad you've tuned in today and you picked a good show because we have an amazing guest. We go way back with this gentleman. He's one of the good guys. Welcome fellow podcaster Jason Hartman. Hey Jason.

Hey Robert and Russ. It's great to be here with you.

Maybe take us back and start at the beginning. When did you get invested in real estate? When did that become a hot button for you? And then why single family houses?

Yeah, I was kind of puzzled. I think you meant to say single family, but we've done both. Single family is kind of our main bread and butter multifamily. We do a little bit of that too. I've owned some big apartment complexes as well. For my money. I like the bread and butter single family homes. The it doesn't scale quite as easily if you're big and you've got tons of capital. But as far as appreciation metrics and the thing that everybody wants, the single family home I think is really the key thing. I love what Russell said. He said businesses cater to the biggest demographic and that's people. And most people want single family homes ultimately, you know, they may not be able to afford it initially for sure. You know, people will usually start out in an apartment. But yeah, you know, I've been in the traditional real estate business for a long time. I had my own company. I sold it to Coldwell Banker in 2005. I got into the part of the business that I really started in that I liked the most and that's helping investors buy properties. That's how I started my traditional real estate career, selling HUD and VA government repos in Southern California where I lived. What I tried to do is start investing nationwide many years ago, about 19 years ago, and it was really difficult. So I thought, you know, a lot of other people will want to do this. Why isn't there a business out there that can help them do this nationwide? So I created that business and I basically was the first customer of my business. And I think that's where a lot of entrepreneurs start. They just notice a problem, kind of a something in the market that's missing and they, they just end up providing it. So not an uncommon story.

Yeah. And I think the point you make about single families a strong one if you think about it in terms of the extremes. Imagine I 1031 my way up to a 600 unit apartment complex. Well, how many buyers are there for a 600 unit apartment complex? A few. Right. Big syndicates and REITs and groups like that perhaps. But a single family house is universally exchangeable. Easy to sell a single family home if you need to. If I have a renter in it, I might sell it to another investor as a rental or perhaps I sell it to the tenant themselves and they become the owner. Or maybe I sell it to an owner occupant. So there's a lot of flexibility when it comes to single family. What are some of the other big reasons you see, Jason, for folks to consider and maybe even concentrate on single family homes?

Well, you know, it is the most desirable, it appreciates the best. It also has the best financing far and away because as you were saying in your intro portion, it's the most protected and really coveted asset class. Everybody in Congress probably lives pretty much in a single family home. Okay. This is like the sacred cow of our tax code. It's got the best financing, it's been, it's really subsidized by the government. And, and so if you ever get upset and you feel that the welfare state is too big and that they're giving away too much free stuff to other people, well, you can't beat them, so join them, Right? Become a real estate investor because they're giving away stuff to you. And after the Great Depression, you know, decades and decades ago, they formed these government sponsored entities like Fannie Mae, Freddie Mac and some others to basically subsidize housing that makes the United States market unique in all the world because it has far and away the best financing. And one of the strategies I've been teaching for a long, long time is called inflation induced debt destruction, where basically you borrow money at today's rates, but you pay it back at tomorrow's rates. And what do I mean by that? Well, everybody's sort of accepted that we're going to have inflation as the normal state of affairs because it's been going on for decades and decades. When you do that, you get the value of borrowing at today's dollars, but you get to pay back the debt in cheaper dollars over time because inflation basically debases the debt. And with income property, we don't even pay our own debts. Our tenants pay our debts for us. So imagine that if you have a million dollars in mortgages, say you own three or four single family homes and that totals a million dollars worth of mortgage debt. And you look at your statements today and it says $1 million. That's how much you owe. And then you go five years, 10 years into the future and that million dollars will be worth a lot less. So you progressively pay it back in depreciated dollars. It's a very good deal. And this is the exact same deal that our government engages in. Because when we owe money to, say, China, for example, where we owe about a trillion dollars to China and we inflate the value of our curr, the debt is denominated, we basically pay it back in cheaper dollars. So the United States gets a very good deal on that too. So what I'm suggesting is that all people that want to be investors follow the same business plan as the United States government and that's exactly what they're doing. Now the obvious question here is, well, Jason, don't they know this? Don't the Chinese understand this? Of course they understand it, but what choice do they have? You know, the US has the reserve currency the world, and it's likely to continue, in my opinion, having that reserve currency for a very long time, maybe longer than any of us will live. And that's the game we're playing. Yes, there are brics, nations nibbling around the edges of that and we can get into that conversation if you want, but these are basically dying countries that do not have the status the United States has. So I believe this game will continue for a very long time and make this a very good deal for investors.

Well, it's a great point. You know, the financing part is of concern and we'd be remiss if we didn't talk about what's happened to interest rates because that has certainly eaten into affordability. Not only that, but availability of properties because fewer people want to sell those homes that have those low interest rate mortgages. But there's always a market that works and there's always people that are don't wanters, that want to sell. And as investors, we don't get emotional about a property necessarily. We maybe study a market and find a market that we like. But then we're going to look for a property that's going to work based on its income, expenses and the interest rate. What are you seeing in terms of that? How much has the interest rate rise in the last year or so really impacted investors with single family homes?

You know, that is the million dollar question. My company helps people buy properties nationwide. That's what we do. We thought business would be much worse than it is. And amazingly, the resilience of the real estate market is truly astonishing. Business is actually quite. People are buying properties, investment properties at these much higher rates. The cost of money has basically tripled. Housing affordability is the worst it's been in 40 years. And amazingly, people think it's only going to get worse because housing affordability has no signs of getting much better. And we see these interest rates making the cost much higher. But most people, when they think of the real estate market and they try to predict what will happen with prices, they make a giant mistake. They have a huge blind spot here. And here's the blind spot. They think it's about today's market and they think it's about a person buying a property today. And they say, well, nobody can afford a home. You're right, nobody can afford a home. I mean, obviously that's a figure of speech. Housing affordability is the lowest it's been in four decades. That just puts upward pressure on rents. And rents during the COVID era accelerated dramatically and they went through the roof. Now they've been decelerating, but they're still net positive rents are still going up. They're just not going up as fast as they were going going up. So that's one factor for investors to consider. But the real thing is, is not to consider affordability today. It's to consider affordability of the 140 million housing units that exist already. And the fact that most of those people either purchased or refinanced their home during the COVID era and they have extremely comfortable mortgage payments. So people basically that refinanced or purchased during the COVID era entered a time mach. They got into the back to the future DeLorean car and they basically went back to 10 years ago. So in 2011, the median mortgage payment was about a thousand bucks and the median house price was 225,000. In 2021, that median house had appreciated dramatically to $397,000. But that mortgage payment was actually cheaper. It was $18 less expensive than it was 10 years earlier. And this is the reality. The vast majority of people have this very comfortable payment that they won't give up. They absolutely will not give it up. Think of it this way. If anybody listening has or has had a corporate job, what is the way they do it in corporate America? To retain employees. It's called the golden handcuffs. Okay? And what they do is they make future so good that you won't want to quit your job because you'll lose that future opportunity. That's exactly what we have with tens of millions of homeowners now. And why inventory is so low and so constricted, because they simply don't want to sell their house. Most people wrongly think that, oh gosh, the Fed is raising interest rates again. So that's going to just decimate the market. No, it actually makes all the existing mortgages more valuable to the people that have them. Okay, this is counterintuitive for a lot of people. 25% of the country has a mortgage adder below three percent. 65% of the country has a Mortgage adder below four percent. And about 90% of the country has a mortgage ADD or below five percent. Now those are the mortgaged people. But guess what? 42% of the country has no mortgage at all. Yeah, free and clear. The one ingredient you must have if you want to have a real estate crash is millions and millions of distressed sellers. We simply don't have that. There's just no distress in the market yet of any substantial amount underwater properties. You know, during the Great Recession, back in 08, we had a whole bunch of properties under underwater. In other words, they had negative equity. And that at the peak of this, 26% of the homes in America had equity below the mortgages on the properties. Yeah, that number now is only 2%. So we would have to see, to have the situation we had in 2008, we would have to see the negative equity go up by 13x. Right. To have basically the same thing. So back to this payment discussion for a moment. The mortgage payment today. Well, the people that got them during the COVID era, that refinance then or purchased their mortgage payment is actually cheaper than it was 10 years earlier. But wait, there's more. It gets better than this. Okay, we've had 26.7% inflation since then. If you follow only the official numbers. Of course, we all know, and I've heard you guys talk about it Many times the real rate of inflation is much higher than that. Yeah, okay, but let's just go with the official understated rate of inflation. That means when you adjust these mortgage payments for inflation, look what happens. The person today that you think has a mortgage payment that's only $18 cheaper than people that got their mortgages 10 years ago is actually dramatically cheaper. Yeah, it's over $200 less expensive in real dollars. And the house that you think is so much more expensive when they bought it, adjusted for inflation, is only about $65,000 more than the 2011 house. So it really. These people are sitting pretty. They have very comfortable situations. If they had to move their rent in, anything approaching equivalent house would be dramatically higher than their current mortgage payment that has 28 years left.

Love that. Well, and you know, to speak to the folks that haven't bought, didn't buy, and now they're facing the much higher interest rates today, the tripling of their payments. Well, they are likely to be renters. And that's good for landlords. Right. Folks that have houses who are, you know, taking advantage of the rental rates that have gone up to your point, not quite as swiftly as they went up maybe a year ago, but still trending in that direction. The challenge, I think, is for folks to get in today. If you haven't yet invested in real estate, then you've got to really sharpen your pencil.

Housing affordability is a big problem for buyers and for renters. The advantage, though, that people have is that most people think the Fed will ultimately pivot. I mean, they pretty much have to. Okay. And rates will come down. Now, interest rates are extremely hard to predict. And I've been very good at my predictions over the years. But the one I have been very bad at is predicting interest rates. I'll be the first to admit that. But if I had to predict it, I think rates will ultimately settle somewhere in the fives for mortgage rates. Okay, so you're basically in a position where you marry the property, but you date the rate. I know we've all heard that saying. It's getting a little bit overused lately, but that is the position. And as a real estate investor, you basically have the opportunity to renegotiate the deal indefinitely. You don't have that in other assets. If you buy gold or Bitcoin or any precious metal or stocks or bonds, the deal you got today is the deal. It doesn't change. Right. That's the deal. So if you overpaid. Sorry, tough luck in real estate, though. Because it's a multi dimensional asset class, you can renegotiate that deal essentially in the future. Right. The deal you have today is not the deal you're stuck with.

Right. We negotiate the price of the property once, but we can negotiate the financing as many times as we want. Given what the market hands us, they have to be a little careful. Right. Because of amortization. So I remember when folks were refinancing every other month, month, when rates are on their way down, they were also kicking out their amortization schedule and you make your early payments to the lender and they're almost all interest and just a little bit of principal reduction. But by the end you're paying down a lot more principal. So you give that up when you refinance. But it still has that flexibility. If you believe that rates are going to head down at some point, then you don't have to sell the property to take advantage of that. Especially with single family. Not true for commercial properties. Right. Those loans are often not easy to manipulate the rates on, but it's another big advantage of single family property. Hey, Jason.

Yeah. Because the commercial properties have prepayment penalties and the mortgages aren't as long and they're higher rates. Yeah, good point. Yeah, go ahead.

So, Jason, before we take our break, I want to get your input on something else that's kind of in the vein of this conversation and that is when you've got somebody who is looking at buying a property and they're trying to figure out that affordability part. And you hear a lot of the folks, especially in macro economics who are saying, and I totally get this, hey, if Treasuries are paying five and a half, why take all the headache and risk of buying real estate? So I know you've had folks on your show that have that opinion. We've had folks on our show that have our opinion. I'm not saying that's a bad way to go, but there's. They're leaving something out. When you invest in a Treasury, there's no upside at all. And you can say that you know that, that it's risk free or as close to risk free as you can get. And that may be true. But when you buy real estate, there's other attributes you've already talked about the potential appreciation of the property, but also the rent can change, the tax benefits and so forth. So what, what would you to say, say to somebody who says, well, rather than invest now, I think I'll just put my money in Treasuries.

Yeah, well that's absolutely, they, they just simply don't understand math. I mean, like, okay, real estate investing is like an iceberg, okay? You know, a little bit of the iceberg shows up above the water and for most people they think, okay, well it's going to appreciate or I'm going to get some positive cash flow. That's the above the water part of the iceberg. But what they don't see is all the stuff that's below the water, that's the larger portion, which is leverage, tax benefits, principal pay down, and most importantly, my inflation induced debt destruction strategy. See, the, the amateur thinking is that the sort of, the first level thinking is, look, I'm going to make money on the real estate because I'm going to get some positive cash flow and when I sell it in five years, it's going to be worth more than it is today, right? And I'll get, I'll make appreciation money. But what they never calculate is how the debt keeps getting cheaper to pay. That's inflation induced debt destruction. And guess what? That return becomes an infinite return almost. If you don't pay the debt, the tenant pays the debt. Basically what real estate investors do is what all of the corporate kingpins do and the investment bankers and the private equity people do on Wall street. They engage in LBOs, leveraged buyouts, okay, where the property has self liquidating debt because the tenant pays the debt and hopefully they pay you a little extra every month and you call that positive cash flow. But even if they don't, the debt is self liquidating because the tenant pays it. So on a leveraged buyout. And the reason these people get so rich on Wall street is they buy a company and they use the company's income to pay the debt. They saddle it up with as much debt as possible. That's why it's called a leveraged buyout. And they acquire the company, then they make the company pay the debt back. That's exactly what we do with income property. We buy the property, we get all this fantastic 30 year cheap fixed rate debt. And yes, it is actually cheap still. Okay, I want to point that out, but that's a longer discussion. Okay? And then we tell the tenant or the property to pay the debt back for us. So it's an incredible, incredible deal. It's just a very unique asset class unlike any other. And the other thing is with the treasury comparison, you know, if you were to go to jasonhartman.com and look at the performance of properties on there, okay, they would show that even in this market with very conservative projections, many of these properties return over 20% annually because of that multidimensional return and a lot of it being underneath the water, the surface of the water, like the iceberg. So they've just got to learn how to do the math. The Treasuries, you know, those are short term Treasuries. We have an inverted yield curve. You cannot get five and a half percent on a 30 year treasury.

Treasury.

Okay, you're going to have to do something else after that bill ends and hopefully you're going to be able to achieve that return. It's all about Tina T I N a which means there is no alternative. The question is not, is real estate perfect? It's certainly not. Okay, nothing is perfect. But compared to what? What else is anybody going to do that's going to beat it?

Well, this has been a great discussion and always love to pick your brain when it comes to the single family market. We have kind of a co cool little announcement to make. We've been friends for a lot of years. We've been podcasting to the world for many years. You've been on our show, we've been on your show. And now after all these years, we have kind of a fun thing that we're gonna be announcing today, and that is we've got an opportunity for folks to be part of this incredible tribe that you and Kenny McElroy and George Gammon put together called the Collective. Tell us about the Collective, Jason.

Well, we are changing the name of the Collective to the Collective Inner Circle, which is the exciting part. We are coming together and we're going to do some great stuff together. One of the best things I have ever done in my life is join mastermind groups. I've been in many of them over the years. You know, in life, we kind of go through life sort of picking our friends by default, not really picking them by choice. Right. And what you want to do, you know, Jim Rohn has that famous great quote. He was one of my original mentors I discovered at age 17, changed my life. And that great quote is you'll be the average of the five people you spend most of your time with. Right. So you want to choose the people with whom you associate and make sure they are pulling you up. You don't want to be the smartest guy in the room. You don't want to be the richest guy in the room. Right. You want to be in a room where you can learn from others, where others will inspire you because they are Doing bigger things than you are. And that's one of the big values of the Mastermind group. Besides a million other values, like fun, learning, great experiences, once in a lifetime experiences, many times with the travel and the events that we do, it's just really an awesome thing. And we are so excited about coming together with you guys and doing something even bigger than we have been doing for the past three years.

As are we. We've been privileged to be invited to many of the collective events. Well, Jason, this has been great stuff. Any closing words for folks that are maybe feeling a. Uncertain, a little unsure just about, you know, real estate investing and what the future may hold?

Sure, absolutely. One more thing I did want to say on the collective inner circle though. We have our next event coming up in the Bahamas and it's in early November. Join us there. I mean, these are just incredible events. You're going to meet some incredible people and learn some incredible things. So I wanted to say that. But in terms of real estate, look, too many people are myopically focused on on is the market going to appreciate or depreciate when there's really much more to it than that. As a real investor, you invest for yield, not appreciation. Capital appreciation is the frosting on the cake. The yield is the core of the investment. Okay. And that's what we're investing for. So say for example, the real estate market softens. Right now. It surprised everybody because prices are actually up. Even though we've tripled the cost of mortgage money. Right. Prices have actually increased. And many people can't believe that all the experts have revised their forecast, whether it be Fannie Mae, Freddie Mac, Goldman Sachs. I mean, I could give you a whole list. I presented it on my podcast and my YouTube channel already. You know, that's fine, but remember, people only have three choices. They can buy a home, they can rent a home, or they can be homeless. And those are the choices they have. So if the sales market softens, then the rental market improves. When the sales market is booming, most people don't consider this. Most of the time, the rental market starts to soften because would be home buyers are pulled out of the rental pool and they're buying homes. Now if they can't buy a home where you've got the lowest housing affordability in four decades, then they're forced to stay in the rental pool, putting upward pressure on rents. And that's one of the things people have to consider. The other thing people are never considering is capitulation and just accepting reality. And the reality is housing is less affordable. Sorry, that's the way it is. So people just have to simply adjust their expectations. They can't buy the same great house they could have purchased two or three years ago during the COVID era when money was cheap and houses were a little bit cheaper too do it's just more expensive and people just simply learn to accept less. That's the reality of life. That's how I look at it.

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