2104: The Hidden Rental Boom: Why 2024 Is the Year for Property Investors!

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You'Ve got the best podcast going. Jason. I love your show, man. It's good stuff. What I wanted to share was I. My wife and I, for the first time ever, paid effectively no income tax in 2022 through doing a cost segregation study and generating about a $200,000 paper loss on our real estate. I'm a real estate professional and it really works. It's magic.

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 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 2104, episode 2104, and thank you for joining me today. I just returned from Dallas last night where we had an awesome event for the collective inner circle. I did a presentation there and then I did a presentation at the real estate guys goal setting seminar as well. So really just a fantastic weekend except for one big thing. Help me understand how you can possibly live in a cold, cold climate. When I got up to walk the dog Yesterday, it was 15 degrees. But wait, there's more. The feels like temperature, which includes the wind chill factor and the humidity, it was negative one. And I had my down jacket, I had all the right warm clothes and it was freezing. I mean, walking the dog, I felt like my eyeballs were going to freeze. How do you do that if you live in a cold climate? Give me a comment below and tell me how you do it because I don't know. I'm glad to be back in Palm Beach, Florida, where I was sitting at the coffee shop this morning and it was 73 degrees. So you folks with your cold climates, you're. You're tougher than me, I tell you. Anyway, hey, we've got a great show for you today. We're going to continue our conversation as we talk to my friend Michael Zuber about one rental at a time. But first I wanted to share with you one of the many, many things I presented over the last few days, last week at both of the events. And that is about how all the experts got it wrong. Because this is so critically important. It is so critically important that you understand this thing. And it'll just take a moment before we get to our guest today. So here it is, look. When we saw these interest rates increase, they went to a multi dec, they went up so quickly. And everybody thought, how will anybody possibly afford a home with the lowest affordability in four decades? 40 years, housing affordability has never been this bad in 40 years. Since the early 80s, young people obviously can't afford a home. That's the cry we heard over and over again about how will society move forward if young people cannot afford to buy homes. And the experts, they just got it wrong because they had the wrong context. And context is so important for everything in life. Everything we do, everything we think about, it's all about the context, more important than the content.

So what does that mean? Well, you saw me show this before, but I've modified this chart just a little bit to show it to you. Because since we saw these massive interest rate hikes, only about 5 million transactions have occurred. And those people accepted much less affordability than the prior people who had already purchased or refinanced their home or have no mortgages at all, right? Those people account for the bulk of the issue, right? So here we look at this chart and we say, yikes, this is terrible. Affordability is so low, nobody will ever buy a house. The market's going to crash. Lots of inventory is going to flood the market. We're going to have an oversupply of properties. But we didn't have that at all because this was only 5 million people. It was only 5 million. It wasn't a big deal in the overall scheme of things. Remember, 25% of the country approximately has a mortgage at or below 3%, 65% of the country at or below 4%, and 42% of the country, no mortgage at all. Free and clear, so no distress. Very, very comfortable people. And that accounts for about 135 million properties compared to only about 5 million that had transacted during the lower affordability era since we saw the interest rate hikes. So the biggest amount of properties, the lion's share of the properties, represents people are extremely comfortable in their mortgages. They have a very high rate of affordability versus this small number. Only about 5 million with a much lower rate of affordability. No problem for them, they're extremely comfortable. They have no concerns about affordability. In fact, I shared with you before about how literally, if they became unemployed, they would quite literally qualify on a debt to income ratio with unemployment insurance, not with their regular jobs. They would qualify for the mortgages they already have. And remember, 42% of those people have no mortgages at all. So this is the important thing to look at. I just can't stress this enough because this is where all of the so called experts got it wrong. They just completely missed the mark. But your humble host, yours truly, I got it right and I understood this and I shared this with you before in many different permutations and iterations. And this is why it's so important. You know, during my first presentation in Dallas, they said, well, Jason, prices are set at the margins. And I'm like, what the does that mean? Look, I'm an economist. I understand, you know, diminishing marginal returns. I get it right. I understand all of those economic concepts. But the fact is, when people get wonky and they try to talk about things like the yield curve, and they try to talk about this, that and the other thing, all of these 135 million mortgages or properties, I should say, because 42% have no mortgage at all, they don't care about the yield curve. They don't care about prices set at the margin. They don't care about any of these wonky concepts. They only care about the fact that they are extremely comfortable, that they either have a super low mortgage rate and thus a super low mortgage payment. In fact, their mortgage payment is $18 cheaper in nominal dollars than the typical mortgage payment was 10 years earlier. Ten years earlier, the mortgage payment was literally higher than it is for these 135 million properties. Right. It's absolutely astonishing. And again, 42% have no mortgage at all. So that's all they care about. They don't care about any wonky economic concepts. All they care about is the fact that they are extremely comfortable and they are not giving up the incredible deal they have. They are not selling their house. And that's why we only have 499,000 homes for sale in the United States inventory, compared to about 140 million housing units. Only less than 500,000 of them are for sale. That's some of the lowest inventory we've seen ever in history. Yes, it got a little lower during the crazy pandemic era down to about 240,000. But again, that represents about a 700,000 home shortage of inventory. So Again, I know I've repeated some of this stuff on prior episodes, on prior videos, on prior podcast episodes, but this is what is so critically important. To understand the overall context of the market shows us why we have continuing appreciation in a market where we have seen the cost of money triple and prices have still appreciated. Literally the most resilient asset class in world history is income property, residential real estate, single family homes. These are the coveted properties that everybody wants and we have a massive under supply of these properties. In fact, one of the things I shared in my presentation, you know, we've heard these numbers bandied about, oh, we've got, you know, 5 million houses short. We need to build 5 million homes to get to a normal supply ratio. We need to build 3.8 million new homes to have enough supply. Well, I shared an article that made the case that we need over 7 million homes built to make the market balanced. Right? So, you know, whatever that number is, look, the fact is we have what we have and we have an incredible shortage of housing. And if you are an investor, you want to have assets that are scarce, that are in demand, and that's why you want to increase the size of your portfolio. And if you want to learn how to do this, and you want to learn how to do this properly, be sure you register for our Empowered Investor cruise coming up. We're gonna have last call on this very soon. So that is coming up. Go to empoweredinvestorlive.com and get your tickets for our five day investor cruise coming up. This cruise is such a bargain. I mean, it really is such a bargain. You get to mastermind with all the right people for five days. You get to have fun, you get to be on vacation. So go to empoweredinvestorlive.com and join us for our upcoming cruise. So let's get to our continuing discussion with Michael Zuber and let's talk about one rental at a time.

Historically, people have stayed in their homes for about 8.1 years. I have a sneaky suspicion in a decade that's going to average 12 or 13 years, we're actually going to have people pay off their mortgage. Jason, that's going to happen.

42% of the country has no mortgage already. The interesting thing about it too is we're in this strange market where housing affordability is so low. And I saw this when I lived in Newport Beach, California, you know, where you have all these, you have a very rich area, you have all these rich people, okay? And what was interesting about that is it's an area where like no new blood comes in because nobody would relocate there hardly because it's just too expensive. Okay. So if you're moving from, you know, Phoenix or Minneapolis or wherever or Atlanta or Dallas, you know, it's just way too expensive to move to Newport Beach. Right. So, so you would have this sort of like, it'd be the same people that would just hang out there for decades and decades. And the real estate industry was comprised largely of people who already owned a home, had a lot of equity and were selling that home to buy another home. And so housing affordability didn't matter to them very much because they weren't impacted by affordability. They were trading a large chunk of equity into a more expensive property where, you know, maybe the mortgage was the same or got a little bit bigger.

That's, that's the wrinkle. That's the wrinkle. We had 40 years of falling rates. So if you happen to be in Newport beach and had all the depreciation, you could trade up in Newport beach and probably keep your payment right about the same. Yeah, that is not the case today. If you're a move up buyer today in Newport beach, you're going to go from a 3% mortgage to a slightly bigger house at 8%. That math doesn't work.

And that's why everybody's going to age in place.

Correct?

Yeah, yeah. I'll tell you a funny thing about that. I remember talking to my friend Rick one day and I was, at the time I was not in a relationship, I was single. And I said, hey, you know, Rick, what happened around here? You know, years ago there used to be all these cute 25 year old girls here. And he said, well, Jason, they're all still here. They're just 45 now.

I think that explained the real estate market really well. Yeah, so it's, it's interesting. So what else does this say about what we can expect and what we should do as investors, as homeowners?

Well, to me, investors is obviously where I focus. To me, this means the real estate market's slowing down. I actually think we're going to go into a deep freeze. But I want people to hear this. I actually.

Will transaction volume get even lower?

Yeah, I think it's going to go to 3.75 to 3.8. It's going to go down about another 5%.

Okay, 3.75 to 3.8 million transactions per year, right?

Correct, correct. But what that's going to mean is it's going to be easier to Find motivated sellers. And my job as an investor is to deploy capital that produces an above average yield or cash on cash return. And I'm looking to do that going forward. There's going to be more motivated sellers. Death, divorce still happens, job transfer still happen. And if the house isn't perfect, I won't pass an inspection. You're going to need, you're going to need a buyer like me to come in and I'm going to offer a lower price. So I'm going to be aggressive.

I'm not sure I agree with you on that. I don't think there's going to be a lot of motivated sellers. I think you're going to have this constricted inventory that's going to make it unnecessary for those people to become motivated. Of course there's always going to be some. Right, no question. But you know the analysis I want to do, and I've been thinking about this for a while now, I want to do an analysis on rentals. Okay. So go back to your chart for a moment. Can you pull up your spreadsheet again? Let's look at transaction volume because this is something I've been thinking about lately. And let's look at volume in recent years. Okay, recent years. Go to, you know, the last five years or so. Okay, so row seven. So here. Wow. When, when did we do 8.4 million transactions? I, I didn't. I never knew it got that high.

Well, that's the min max. What year was that? It's probably in the bubble. Yeah. 2005.

Wow.

We did 1.2 million new.

Yeah. That's incredible. And that's why we had such an inventory hangover.

Yeah. People don't realize the amount of building that was going on in the 0405 versus today. It's wildly different.

I know. Today there's like no building. Yeah. Okay, so let's just consider this for a moment. Let's talk about renters in the rental market. Okay. You have volume that has declined dramatically. Do you have any stats here on the first time buyer percentage of the market?

I do not, no. That's not on the spreadsheet but can be added.

Yeah, I'm going to call that somewhere. Generally in the 25% range. Is that a fair statement, do you think?

I would have guessed the historical average is more like 20. But yeah, if you want to call 25 on the Rosie side, sure.

Okay, so let's assume that 25% of the buyers are first time buyers. Okay. So they are currently renting and then they buy their first home. Now let's look at, for example, your 2019 number. Six million transactions. Okay, so six million. I'm pulling up my calculator right now and let's take what we've got. You think it's going to be. What's it, what is it now?

Seasonally adjusted today is 3.96 was the last.

So. 4 million. I was going to say 4 million.

So.

So we've got 2 million transactions. Okay. This is easier. I don't need a calculator. 2 million transaction deficit. Okay? That's a deficit. And I'm not taking the COVID era. I'm going 2019 to give it a more flow, right? Yeah, that's a more reasonable number because during COVID it went above that quite dramatically. Actually in 2021, we'll take 25% of that. That's 500,000 people that are trapped in.

The rental market and getting worse. Yes.

I want you to think what that does to rents, people that puts upward pressure on rent like you won't believe. Now this is a little bit unnoticeable right now because people are getting fooled by headlines. One of the headlines is rents are decelerating. That's true. They have been decelerating. That's not declining. It just means accelerating more slowly. Okay? It doesn't mean decline, it doesn't mean stopping. But you have this massive amount of new inventory of apartments that have hit the market. Okay. And that's in a little bit of a bubble. It's going to take, you know, two, three years to work itself out. But if we see consistently lower sales volume and we call a quarter of that market to be first time buyers that are now trapped in the rental market. Folks, I've been saying for a long time rents are too damn low. And I know everybody thinks I'm crazy saying that, but look, now you're starting to see all these articles that say rent, it's, it's a better deal to rent than buy. And I think few people would disagree with that. And whenever it's a better deal to rent than buy, that automatically means the rents are going to start inching up. Okay? And we are going to see dramatically higher rents in the future. And then the uninformed people will say, well, Jason, Michael, come on. People can't afford it. Well, what gives? What gives is their expectation. They just get less. Yeah, they get less reality of it. They just accept less. And that's, that's what happens when you have bad fiscal and monetary policy and a messed up Dysfunctional housing market, which is what we have. I mean.

Yeah, no, I mean, the housing market is clearly broken coming into this analysis. I now think it will be broken for five to 10 years. You take this to the first time homebuyer, we're down 500,000 year one. Then there's year two, year three. If the market really is broken for a decade, we could, we could have 4 or 5 million first time homebuyers trapped as renters into a falling supply. Because also what's going on right now is builders are pulling back. Monster. So I think shelter inflation is rolling over just the way they calculate it. But I actually this morning on the Daily Financial News said I think shelter inflation goes up next summer because the supply is just not going to be there.

Right, Absolutely. In your very comprehensive spreadsheet, do you have a homeownership rate in here?

I do. Very top row, row two.

Okay. Okay, so that's row two. Okay. So go back to, you know, the 70s where you started here. I want to look at these numbers. Okay, so 1970 homeownership rate was about what it is now, 64%.

Yeah. It's a pretty tight band.

Yeah. Yeah. Okay. Okay. And then by 86, it got to like 63%. Went down a little bit. Now let's go up more. It's pretty tight.

It's a pretty tight band.

Yeah, yeah, it got 1996, it was 65%. 2001, 67%. And here's that George era of the ownership society coming in, folks. That led to the bubble.

2004, I think was the highest at 69.

Yeah. So remember what I've told you over the years. I've been saying this for at least 12 years. Every 1% decline in the homeownership rate is about 1 million new renters. Yep.

Correct. Roughly. Yep.

Think about that. One million new renters with no new inventory of properties. What does that do to rents? They can only go up.

Well, there's, I mean, there's, there's. Either that or we got to build a lot more apartments. I mean, the people are talking about apartments being. People have to down select. Yeah, Right. They're gonna have to trade a house for an apartment.

Yep.

And that's cheaper. And yeah, I. Single family, because I, I spend a lot of time with single family. I own apartments as well. But single family rents are still strong. People want, people want space. They want a backyard, they want a garage for their stuff. If demand keeps going up, like we've talked about, rents are going to go up and the people that can't afford it will go to apartments. They will down select.

The only way to fix this is to make it easier and cheaper to build more houses.

Supply problem. Not a demand problem. Supply problem.

It's a huge supply problem. Or maybe you, you know, tell everybody they got to take some new medicine which lowers the population. That's scary. Yeah, yeah. Well actually. Wait, they did that already?

Yeah, this is just, this is just a giant problem that I don't see a fix for it now. You know, think our home state for both of us, California, they've done a couple of things that are interesting. You know, they made it really easy for people to add accessory dwelling units to their houses. I'm sure, you know.

Absolutely.

And more recently they just passed another law allowing people to sell those separately as if they were like a two unit R2, like a duplex property or a condo. But interestingly, this doesn't really solve the problem and I'll tell you why. Because the ADUs can cost around 500 a square foot to build. I mean, you add land to that and you've got a $700,000 little, tiny, tiny house in the backyard. I mean, that doesn't work. That doesn't solve the problem.

It's going to help with the margins. I think adding more units helps at the margins. It's going to be really good for, for, you know, for the baby boomers who bought their houses in the 70s and 80s to get income. It'll help with the margins, but it's not the fix. But you know, it's not a bad thing. It's a nice attempt.

Yeah, no, I mean, I agree that it, it'll create just a tiny bit of pressure release on the housing affordability problem. But again, unless you can allow people to build those cheaper.

Correct. Off the shelf.

Yeah. Or disruptive technology that makes it. And then I know I'm going to get a million emails and say, well, Jason, have you heard of Boxabl? Do you know about 3D printed homes? Yes, we've done shows on all of this, folks. Do you know you can buy a home house on Amazon? Yeah, I know that too. I've done a video on that. None of these things work. They're much more expensive than you think they are. By the time you engineer them and everything, you're at least 250A square foot without land. No land included. Okay.

Yeah, yeah. I just did a show with a ADU expert and, and doesn't recommend boxable or any other stuff because it does it's hard to get a certificate of occupancy.

Oh, tell me about that.

Basically they're not on foundations. You have to run plumbing and all of that to them. They're also not engineered to the local building spec. That's why it hasn't taken off. Because every building department has their own thing. The first person to solve it. Like if you solve it for my market of Fresno California, that doesn't mean it's approved in la. It doesn't mean it's approved in Vegas.

Right.

Everybody has their own requirement. That's why it's not rinse and repeat. That's why Fresno California has five approved plans that you can go get for a couple hundred bucks and build. They're trying to solve it with approved plans. You know, you can't just buy a boxable or a Home Depot or whatever because you can't get a certificate of occupancy.

But all of that, go buy those plans and. And build. Is building a traditional stick built house.

Correct. It saves.

Super expensive to do that.

Yeah, it streamlines the process. So you get it done three months sooner than going through architectural review because you just get a rubber stamp. You save about 10,000 bucks in architecture and permit fees because they're trying to encourage these. So it's a little cheaper and a lot faster.

Yeah, yeah. But still it's not cheap enough.

I agree. Not cheap enough.

And what are the sizes of those houses? I mean, they're just tiny.

They're tiny. I think this, I think the small ends 480 square feet. The big one's 880 square feet.

Yeah. So if you think the first time buyer entry housing program for a couple with a kid or two is a 400 square foot house.

I think it helps generational living, like. Yeah, that's what I think it helps with.

Yeah. It could keep mom and dad out of an assisted living house.

That's the goal. That's how I see it.

Yes. Right, right. Very interesting. Or it makes a good place for your teenagers to, you know, do drugs or have sex.

Yeah.

So Michael, what other things do you want to share with us? Either from your, your research here on your, on your spreadsheet, or just in general?

I think at the end of the day we have to realize that affordability is near a record low. For everybody that wants to know, 1981 is the record low. 1981 is the worst affordability since 1970. The unfortunate part is we could be here a while. I think the only answer to fixing the housing market today is time. You need time for wages to increase. You need time for the Fed to stop. Higher for longer. The housing market will be broken for five to 10 years is my conclusion.

And do you say that, you know, like, what's your prediction on what will happen? Do you see a Fed pivot happening and if so, approximately when?

Well, it depends on what you call a pivot. I actually think the Fed pivoted last Sunday and they went from being the big bad wolf saying higher for longer to, oh, my God, the market's doing our job for us. We're done. So November rate hike. No. December rate hike. I think the Fed's on pause for the next 12 months or so. So that is the Fed pivot to me, if you're asking for a rate cut, I think they're going to hold on with all their might till 20, 25. I don't know that they can. Stuff appears to be breaking the bond. Vigilantes are back. If you gave them true serm, they're talking Q1 of 25 before they cut. It's my, my guess. I don't know. I don't know if they're going to be able. On that long.

Yeah. Okay. All right. What else do you want people to know?

Real estate investing is never easy. The last couple of years, there's been a lot of financial engineers who got lucky and they're going to get hurt in a big way. But real estate investing is still the tried and true way for average folks like myself and Jason to get wealthy. You've seen there is a path.

Yeah. And everybody listening just one at a time. You don't need a hundred, you don't need 50. I think if you get to four, you change your life. And if you choose to get to 10, you know, that's great.

Yeah. Yeah. You know, that's such a good point. Just getting started and getting that one rental. If you already own a few, you know, depending on your income and your situation, if you can get two more per year, I mean, you change your life at four.

Okay.

And then you really change your life at ten. And beyond that, you're just, you're getting.

You'Re playing with house money.

A fantastic level of. Yeah. Where your properties begin buying your properties for you. It becomes the. What they tried to invent many years ago, the perpetual motion machine.

That's really what it becomes. Yeah. Any techniques or advice you want to share other than, you know, we've talked about the market, we've talked about our, our thoughts, our predictions, but specific advice.

Yeah. So I'll tell you, I'm always telling people what I'm doing. So there's a variable that I'm looking at today that he's an offer. And I've never used this variable before in 22 years. It is quite simply days on market. In my market, I don't write an offer unless the property has been on the market for 30 days or greater. I want to know that that seller is not getting the price, not getting the terms or whatnot. And I'll even wait sometimes for 60 days. I'm writing what I call disrespectful offers, aggressive offers on properties that are aged out 30 to 60 days. I don't need to buy every property. I need to buy one or two a year. And I'm going to write offers that, that produce great deals today. And today my metric is days on market. I've never used it before. I've always tracked it, but never used it. It is the metric that I'm using today.

And what about where the rubber meets the road? And that's on management. Any tips on property management? Are you self managing all your properties?

No, I've had a property manager day one. My market's two and a half hours away from my, you know, California house. It's, you know, seven hours away from my Vegas house. I've paid someone. Property management's a hard business. I fired my first five. I like to work with somebody whose owner or principal is an investor. That seems to work very well for me. They put in the systems in teams to help with that. So that's what's worked for me. But no, I don't manage my own stuff. I would never do that. I don't want to.

Yeah, okay. Okay. So that's interesting. I would, I would have sort of picked you as a self manager using the hybrid self management approach like I do. I love self management. I'm a huge fan. It's amazing. I mean, I really just never talk to my tenants. But what's interesting about what you said is that you went through five property managers that you fired before you got one that you liked.

Oh, yeah. Yeah. Party manager is hard. It's a hard business. Expectation management. I have high expectations. Communication. You can't be run over by the tenants. It's tough. So I have a Friday call for 15 minutes every week with my contact. We go through a list of reports. I spend about four hours a month on our portfolio and that allows me to do lots of other things. Gladly pay it.

Good for you. All right. Well, Michael, give out your website and tell people where they can learn more.

One rental at a time. I'm very good at. Everything I do is one rental at a time. Website, YouTube, books, all the. All the above. Jason, again, thank you for all you do. You've been doing this for so long. I've been following you for a long time. Thanks for the opportunity.

Hey, thank you. It's great having you on the show, buddy, and we will talk to you soon. 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 show's specific website and our general website, hartmanmedia.com for appropriate disclaimers and terms of service. Remember that you 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.