AIPIS 207 - Interest Rates Impact on Prices & Rents

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This is your host, Jason Hartman. Thank you so much for joining me today as we talk to listeners from 164 countries worldwide. We so appreciate you listening and telling your friends and family and coworkers and your enemies about the show because even your enemies need some help. In fact, there's a great quote that just reminded me of. It's by Winston Churchill and I don't remember the actual quote. Isn't that terrible? I come on with this quote that I just reminded myself of and then I don't remember the quote. But anyway, it's about the importance, believe it or not, the importance of having enemies. And it basically says something to the effect of if you don't have any enemies, you probably haven't done anything in life. So you can always sort of keep score by how many people you're upsetting and how many enemies you have. That is one metric. You don't want to have too many of them, obviously, but a few are good, you know, it means you're doing something, you're making some waves, creating some dust in the world. Hey, maybe that's what we'll do today. I don't know. We've got a pretty likable person here on the show with me today and that is one of our investment counselors. It's Carrie. Welcome back, Carrie. How are you?

Hey, thanks, Jason. Thanks for having me on.

It's good to have you. Do you have any enemies?

I'm sure.

I keep them close by.

Yeah, you do. You? Well, you know, that's another quote Abraham Lincoln, I think, said, keep your friends close and your enemies closer. Right? Yeah, very interesting. You know, they say you can always judge a person by the company they keep. Well, maybe you can judge them by the enemies they have too. I don't know. We're off on a tangent already and we haven't even talked any about real estate yet. We're just talking about enemies. But yes, I think it's good to have a few enemies, kind of healthy, long as they're not severe enemies. Want to talk to you more, Carrie, about other markets and kind of what's going on in the world of vetting properties and vetting local market specialists and so forth. But before we do that, you had some questions about interest rates and you know, kind of what that means for investors and you know, to the economy in general. So do you want to go into that first?

Yeah, sure. So one of the articles we recently came across was on the spike of interest rates. What do you see as investors come to me, you know, should they be worried about these interest rates? Should they hold off on buying or is it still a good time to go forward with financing their property?

Okay, so to answer that question, Kerry, first of all, I have to, in the interest of full disclosure, I have to disclose that I have been very right about very, very many predictions, but one that I have been fabulously wrong about is interest rates. You know, if you came to my semin are in 2004, okay, 13 years ago, and then if you came in 2007 and then if you came in 2009 and then if you came again in 2011, I would have told you interest rates are going up. And I have been fabulously wrong about this. Okay. So that's the first thing I want to say, I admit when I'm wrong. Okay. Interest rates, very hard to predict. Probably one of the best places to to get interest rate predictions and I want to get them on the show and that is someone from Grant's Interest Rate Observer. Grants Interest Rate Observer, a high end newsletter that talks a lot about interest rates and so forth. But it's clear to me, and it should be to everybody that the Federal Reserve, our central bank, believes that the economy is strong and it is in well into recovery and they are raising rates. And you know, for the first time since 2000, 2008, we've really seen a real rate increase and we see an upward trend in interest rates. There is no question about that right now that that is the track that the track the Fed is on is to raise rates at least one more time this year. They just did it once recently and that was just what, a week? I don't know. I can't keep track of time anymore. Just a week ago. Yeah, just like, well, 10, felt like five days. Yeah, it was last week. So clearly they think the economy is strong and they're raising rates. They still have a target inflation rate that they want to get to of around 2%. You know, what does this mean for investors? Well, Kerry, as you know, we've talked a lot about the multiple dimensional nature of real estate investing. And we've talked a lot about the three dimensions of real estate. And so when rates go up, it means housing affordability declines. It means fewer people can buy, fewer people can qualify. And so when that happens, there are millions and millions of people who are now renters. And the vast majority of them think, I want to buy a home. I want to get that house with a metaphorical white picket fence and have the American dream of home ownership. The vast majority of renters think that way. I'm not passing judgment on that. For most of them, it would be a good decision to buy a home. They are then priced out of the market. Of course, there's been a lot of appreciation. Prices have gone up quite a bit in the last six, seven years, obviously. And, and then with interest rates going up, the Fed is kind of signaling that, look, you know, the economy is recovering, we've got to raise rates. And one of the reasons they have to do this is because the Fed has certain weapons that it can use to fix the economy when it gets into a recessionary time or a depressionary time. And one of tools, one of those, you know, very powerful bullets in the gun, if you will, are interest rates. They can lower rates to stimulate the economy. And the problem they've been facing for many years and the reason so many people thought, and you heard Harry Dent talk about this years ago on my show and many Others, Peter Schiff, etc. These are the people that are almost always wrong, but they're darn interesting to listen to. And they've, you know, they have said, you know, maybe it will be like Japan, the lost. What was originally the last decade, then became the last two decades and now is moving into the last three decades in Japan, where basically there is no weapon to combat a bad economy. And so if the economy tanks again, for whatever reason, the Fed needs to have rates be a little higher so it can then lower them. You know, it's all relative, right? And if the rates are at basically zero, there's no, you know, the Fed is shooting blanks. They have no weapon, they have no tool to stimulate the economy. So they've got to get rates back up. It is imperative that the Fed increase rates and that we see those rates then play through the market. Now, it's important also to understand that the Fed does not directly impact mortgage interest rates. They only do it indirectly. Okay, but they definitely influence it. There's no question. But they do directly impact short term interest rates. The Fed needs to raise Rates, we need to see higher rates. It's totally unfair to senior citizens that have saved money, that just want to put their money in the bank and have a cd, a certificate of deposit and ladder, those certificate of deposits so they expire at different times and you know, retire off off their money. Why should they have to be investing in risky stuff in, you know, stocks and they should be able to just coast at retirement age, but they can't do it because the rates are so low there's no yield for them. So it's very unfair to those people to have very low rates. So there are many aspects. It is unhealthy to have really, really low interest rates. Rates need to go up and the Fed realizes this and so does the rest of the government. And if you ask me, that's where we're going. Okay, so what will that do to the market? Well, it's, it's going to make rents go up, it's going to put upward pressure on rents and it's going to reduce the frothy bubble market that we're in. In these cyclical markets, carry. Because in the cyclical markets and you know, all of California, the Pacific Northwest, South Florida, the expensive northeastern markets, those markets are crazy. Prices are way too high. You know, clearly they need to dampen that and higher interest rates should do the trick. So it makes the market more healthy. When interest rates are at a normal level, they're way too low. It's unhealthy to have really low rates for so many reasons. So, you know, you got to take away the punch bowl at some, you know, the economy is getting too drunk off low interest rates. And hey, Kerry, there's one more aspect that's kind of interesting too. You know, you've heard a lot and certainly you and I have talked about this, about how the middle class is just being destroyed in America. We used, you know, what made America so great for so long is this big middle class. And the middle class is declining in numbers. It's a sad thing. I really don't want to see it. Low interest rates make the rich get a lot richer. They concentrate wealth. The rich get much richer in a low interest rate environment because they take advantage of inflation induced debt destruction. And you know, the middle class might get a little bit of a benefit of this, but it's nothing compared to the wealthy classes. So that's another thing that higher interest rates will do is it will lessen the concentration of wealth. Now people could argue that all day long, but that's what I believe Anyway, you know, so, so does, does that kind of make sense though, on the interest rate thing? I mean, it's, it's good for rents. We're going to see higher rents. Higher interest rates mean higher rents.

Yeah, no, that makes sense. That's good. That'll answer a lot of questions out there. So thank you.

Yeah, yeah. There's another thing that's important to know, and it's not directly about interest rates, but it's about what the Federal Reserve did during the, the Great Recession. They, they purchased bonds like crazy. They were buying up bonds because they ran out of tools. They, the interest rate tool was exploited. You know, they shot all the bullets. They lowered rates so much to stimulate the economy that the next thing they had to do is buy up bonds. And so when they bought up all these bonds and mortgage backed securities that are essentially act like a bond. Okay. Basically what they, what they did then is they increased the amount of lending because every loan essentially converts to a bond. And so if there's no investor to buy the bond, then the lenders run out of money to loan. Right. So the Fed bought tons of bonds. And Janet Yellen made an interesting remark last week. She said, now the Fed is trying to sell off the bonds, okay. And roll back this program. And she said watching the Fed reduce their balance sheet of all these bonds would be as exciting as watching paint dry. So that was, that was kind of a funny remark. And she's right. You know, it's interesting. Yeah. So that, that'll be an interesting thing to see too. But the, the weird thing is that you combine this with the stuff the Trump administration is doing of rolling back Dodd Frank and making lending easier and borrowing easier, you know, it's, it's pretty good time for real estate investors. I mean, I don't know, you know, without trying to sound too much like some kind of Trump fan, which I'm not, at least not that much, although I think you'll be good for the economy. You know, I think the glory days are here for a little while longer. So I don't, I don't see any big, big disaster happening unless there's just something we don't know that's behind the scenes. So. Yeah. So, Gary, what else is going on in the marketplace? Kind of share with our listeners a little bit the vibe of what the local market specialists are saying to you, you know, the difficulty of getting inventory from them, et cetera, et cetera.

Yeah, so as you mentioned, you know, I'm with new providers and our current ones, local Market specialists who bring on these properties for us. So the majority of it is, like you said, just finding the homes, finding what's out there and making sure that it's quality property for our investors. I did have. One of my investors went to one of our local market specialists the other week and he asked him for properties, trying to work with him. The local market specialist actually said, no, this property isn't good enough to Jason's standards. So I'm not even going to refer it to you. It'll go to someone else. So that's the kind of local market specialist we bring on, too. They know the standards, they know what's out there and what you guys are looking for. And that's kind of reassuring too, that they have our backs as well as your backs in what they're providing. So that said, these properties, they're just going to. Right, right when it gets listed. I mean, they're almost gone within 24 hours if it's a quality home. So that's been a challenge is just to keep the properties on our site long enough for everyone to see them.

You know, Carrie, just to comment on that, I remember when I was in traditional real estate and the market was on fire and houses were selling, you know, in a half an hour, basically, you know, you could sell a house in Irvine or Newport beach where I, I worked, you know, million dollar house sold in 20 minutes. You know, it's unbelievable, you know, ridiculous. Basically a waiting pool of buyers. And one of the things that people had to do back then is they would do all kinds of things. They would, like, write a letter to the seller, including a picture of their cute family and say, you know, basically begging them to sell the home to them because they had multiple offers. And it was just, you know, I've been through that cycle like three times now, okay. In the traditional market. And, you know, now I've seen it a couple times in the investment side of the market that I've been doing for the past 14 years. And it's one of the things people have to understand, and this is another important reason to come to Oklahoma City to our property tour and JHU event is that you need to form, and I'm talking to you investors, you need to form a relationship with the people on our team. And I know this may sound ridiculous, you may think, hey, Jason, Kerry, I've got money, okay? I'm the customer. Sell me the house. Okay? Not so easy in this market. It's not quite that way now. It's almost to some extent a Privilege to get to buy the house, to get to spend your money. Right? And I know, I know that goes against a lot of people's thinking. They think, are you kidding me? No, I'm not kidding. Okay? Now you can buy crap houses all day long and not have to do any of this stuff. But I'm telling you, it behooves you to get these local market specialists to know, like, and trust you. Okay? They want to, you know, look at everything in life. We all know this is all about relationships, okay? And this is one of the softer elements of investing. You've, you've got to obviously have a team and that, you know, come to the property tour and meet the team right, in one of our markets and get them to know like and trust you. Get them to put a face to you. See, it used to be we'd say, you know, we'd say this to our providers in 2009, okay, when, when there, there were almost no buyers and lots of sellers, right. That was opposite side of the equation. We would say, come to our Meet the Masters event so the clients can meet you, so they can know like and trust you. Now I'm saying this to the investors listening, I'm saying come to our event so the seller can know, like and trust you. Okay. It's, it's flip flopped, hasn't it?

It has, it has. It's. It's amazing how much building a relationship will do. And we're can take you these days.

Yeah, yeah, absolutely. Very, very important. Okay, Carrie, go, go ahead with what you were saying. I interrupted you with that comment though.

But that's all right. What was I saying?

Well, you were just talking about, you know, getting the properties and then I went into the, you know, the, in traditional real estate, the people that wrote a letter to the seller and put picture of their family and all that stuff. Yeah.

So, yeah, So I mean, we do have, you know, some of the hot markets right now with a lot of inventory and we're still trying to reach out to those other markets. Like Jason said, we have some new ones coming up. So, you know, when I go through these and I vet them out, I probably go through five different local market specialists a week and they don't come on board. And it'll take them six months just to make sure their property management, their properties and their operations all work side by side with what we preach out there too. So it takes a lot of effort. And that's why there might not be as many properties available right now too, because, because we're picky in that area, but when they do come, they're good properties and it's a solid team to back it up.

Yep, yep, absolutely. You know, you might think we're just giving lip service to this, folks, but we're not. Okay? We're picky. If we wanted to sell junk, we could do that all day long. And you know, everything in life boils down to weighing out the short term gain or the long term gain. And you know, it's all, it's always this way, like, do you want to be instant gratification minded? Do you want to sell a bunch of properties this month or this year, or do you want to be able to keep selling properties for the next 10 or 20 years and you know, do you want to make some cash, some quick cash, or do you want to make a fortune? Well, you know, I believe in long term thinking and I'm willing to delay gratification and you know, have that long term foresight in the way I run the business. And all of our people, Carrie, Sarah, Oliver, Fernando, they're all like that. Okay? And you know, that's why we have such a fantastic team because we're just not going to lower our standards too much. Admittedly, we, we have lowered them a little bit. And I'll tell you how we've lowered them. Okay? Years ago, for example, we sold many, many properties. And Carrie, this was even before you were with us. Years and years ago, we sold many, many properties in places like Austin, Texas, Phoenix and Denver. Okay, listen, those markets, I will not deny for a moment that those markets are better than Memphis and Indianapolis and Toledo, okay? But the fact is those markets have all become way too expensive and everybody's priced out of those markets. And here's another way we've lowered our standards, right? You know, you can't be with the one you love. Love the one you're with. The old song, right, Is that, you know, we used to have rent to value ratios back in 2010, for example, of 1.6% regularly. That was a common occurrence. Now, you know, if you can get 1%, which is fine, that's a great deal. Okay, that's fantastic. If you can get 1%. So the standards have declined, but you know, we can't fix that. That's just the whole marketplace. But we're not going to do D quality properties, we're not going to do D quality providers that don't offer any degree of service or follow up and basically scam people. And we're not going to offer D quality Markets that just are crappy, markets that are, are just way too blighted. And we're not gonna, you know, do some of this crazy offshore stuff either. Okay. That, you know, I'm not saying we never will. If something makes sense, hey, we'll do it just like the next person. But we're just gonna have some standards and we're gonna be picky and you know, the, the company, the most successful company on earth is extremely picky this way and that is Apple. The most, almost a trillion dollar company now, most valuable company the human race has ever known. Incredibly high standards. Everybody loves their products and they're willing to pay triple to quadruple the price. I love it when all these people say, well, I can get an Android phone for $99. Why would I pay 700 for an iPhone? Try an iPhone, you won't want to go back.

I can get a little PC laptop for, you know, 400 bucks. Yeah, I know you have to pay 1600 for a Mac, but it's so much better.

Okay.

It really is. So. Yeah, that's the, that's the philosophy. Carrie, any other thoughts on this? I know I tend to go off on tangents here.

No, no. As far as the, the markets, you know, it'll come back, they're working hard, these providers and inventory will be there. But some things to keep in mind is, you know, when you are ready as an investor, of course, first educate yourself, get out to these events like Jason said and get the hands on experience.

And listen to the pod and form the relationship. Form the relationship. Then once you're ready to go, you know, get yourself through lending, get yourself through financing and once you have your pre approval letter, you know, make sure you're ready to jump on a property and know the market, know what you're looking for. So you're not going to miss out on that deal when it does come up.

Yeah, yeah, you got to be ready in today's market because in today's market you need to convince the seller that you are the buyer that can complete the deal and can complete it quickly. You know, it's, it's not just being willing to buy a property anymore. It's being, you know, ready and willing and very able. And the way you and having a relationship, that's going to help you too. Big time, Big time. So you know, can't quantify it exactly, but it's important. And so like Carrie said, get pre approved for your financing. Our investment counselors, you know, Carrie and the rest can refer you to the Right. Lenders that specialize in investment property financing, you know, we'll help you buy the properties and, and you know, one of your dear clients and our dear clients recently, Carrie, he's been on the show, he's such a great guy, comes to a lot of our events and you know, he got kind of burned recently on a couple of properties that he was buying and, you know, the seller sort of changed their mind basically, I think because they figured they could sell the property for more and this kind of stuff happens. But you try and do it on your own, it's going to happen to you all the time. There's going to be no recourse. Whereas if you have our leverage, you know, we get these local market specialists to keep viewing things from a long term perspective. They know that the market will not always be this way and it will become imbalanced in the other direction eventually and they will need us. They view that relationship as very important. So you're going to get the power of our relationship, okay, with the local market specialists. That's going to help you make your portfolio, your investments more successful and, you know, get you properties in the first place, good quality properties. But then also we want to help you form your own relationships. And again, that's why you gotta come to our events. We'll see you in Oklahoma City, folks. Okay, be there. Jason hartman.com, click on events, get your tickets for the Oklahoma City tour and meet our team there. You'll really like them. They're a good team. Carrie, are we ready to wrap it up?

I think we're good.

All right. Hey, everybody. Thank you so much for listening. Carrie, thank you so much for joining me and letting me ramble on. Carrie, do I ever go on a tangent?

Thank you, Jason.

Just now and then, right there. Just. Just occasionally. Only occasionally. Yeah. This might be a reason that I'm single.

It's a thought. It's a possibility. Anyway. Okay. So anyway, happy investing to all of you and we'll look forward to seeing you in Oklahoma City. Those of you who joined us in Chicago, thank you so much for joining us in Chicago for Venture Alliance Mastermind. Hey, Carrie, actually, one more thing. But wait, there's more you're working on some good stuff for the Venture alliance. Coming up, our next one, which will be tentatively slated for September, we do these quarterly meetings. Tell us what you're working on.

Yeah, we have a few options here, some exciting things. We could be going to Cuba. We could be going to Kauai or Sweden, into an ice hotel. So that One might be more in the winter, but there's some exciting things, and you should all get out there for one of them.

So, folks, did you see the James Bond movie with the ice hotel? I think that was when Pierce Brosnan was James Bond, I believe, and he had that Aston Martin that was the, you know, cloaking Aston Martin that was invisible, basically. And they were in the ice hotel in Sweden. And that's with. On our. On our bucket list for the Venture Alliance Mastermind. We want to do Cuba. Kauai, which is, you know, the island in Hawaii. Obviously, it's always hard for me to say Kauai. Kauai. Kauai. Carrie, any help on that?

I believe it's Kauai, but Kauai, like Hawaii, Kauai.

Yeah, I know it's hard to say that one, at least for me. The ice hotel in Cuba. We want to do Cuba. I think that would be a super interesting trip. I have actually been to Cuba. I was there about 12 years ago. And. And, folks, it's like going back in time. It's. Everything stopped in 1959 when Castor took over and. And communism took over. So I want to get back there again before it becomes too westernized and modern and uninteresting. You know, as soon as there's Coca Cola signs everywhere, it's boring. You know, it's interesting when it's like this. So. Yeah, so Carrie's working on some good venture alliance scouting. So, Carrie, thank you for doing that. And check out the Venture Venture alliance in more detail. Adventurealliancemastermind.com I just finished that great book Outwitting the Devil by Napoleon Hill, and he just over and over talks about the importance of a mastermind group. It's so, so important. So anyway, before we get on another tangent, Carrie, let's say goodbye.

Goodbye.

Happy investing, everyone. We'll talk to you on the next episode.

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