CW 155: Evaluating Housing vs Office Retail Commercial Real Estate Investing Opportunities

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Welcome to Creating wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven't thought of before and a new slant on investing fresh new approaches to America's best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine self made multi millionaire who not only talks the talk but walks the walk. He's been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason's footsteps on the road to financial freedom. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors.

Good day and welcome to the Creating wealth show. This is Jason Hartman, your host and this is episode number 155. Thanks for joining me today. Few things today for of all, we're going to talk about our predictions for 2010 and we'll get into that here in just a moment. I wanted to share with you some thoughts on the office space market and the retail market and I think this will be instructive for you. It's really one of the reasons that we moved to our new office after being in the last office for just two years. We weren't there for very long. But I tell you, you do not want to be in the office market. As far as real estate investing, when people talk about real estate investing and they say residential real estate, everybody kind of knows what that is. And then they say commercial real estate and a lot of people really don't know what that means. And I think before we get into our predictions for the coming year, let's talk a little bit about the different sort of segments of the real estate investment markets for a moment. Now, of course, there's residential, there's housing and we really like housing. The best that could come in the form of single family homes, condos, apartments. Generally speaking, we don't like condos very much. We like single family homes. We like duplexes, triplexes and fourplexes. And then we like apartments. Now why don't they call apartments six plexes or eight plexes or 22 plexes? Well, they could call it that. But generally speaking, I think the reason they don't call them that is because when it's one to four units it's considered residential real estate. When it's five units and higher, it's considered commercial real estate or multifamily apartments. Now we like multifamily most areas of the commercial real estate market though, we don't like. So don't ever let people say to you commercial real estate because that term is way too broad to be understood correctly. Here's an example. Two segments of the commercial real estate market that are just a disaster, a massive disaster, are office space and retail properties. So let me just give you some realization that came to me about the office space market that I wanted to tell you about. So about a month and a half ago, it was a very stormy day and I was walking with Sarah, one of our investment counselors, you've heard on the show before, and we were doing our typical daily afternoon walk over to Starbucks. Now right by our old office there was a Starbucks coffee shop. And right near our new office is a Starbucks coffee shop. They've got a lot of those around. And we were walking there and it was the middle of the day, it was like 1:30 in the afternoon and it was so stormy out that it was basically dark in the middle of the day. Now that's very unusual for California. I know in other parts of the country and other parts of the world this is not unusual. But here in California it's very unusual. And I had this startling realization that came to me because I looked back at our 12 story office building, our former office that we just moved from. And in the middle of this very dark, stormy day, very few lights were on as you looked up through all 12 stories of that building. And it really, really shocked me. And then I looked across the street to the shopping center. Kind of a single level shopping center that's kind of a retail plaza that formerly had restaurants and a clothing store and a dry cleaner and some things in it. And that whole shopping center was basically vacant. And our office building was, I don't know what the exact number is. When you ask the landlord, they'll tell you the vacancy rate is about 30%. But here's the thing. In the office world, they've coined a new term. They don't just talk about the vacancy rate. They talk about what's called the availability rate. And the availability rate includes the space within the building that is available to someone to lease because it's not really occupied, even though there is a lease agreement in place that someone has just basically defaulted on. Company has just left the space. And on the third floor of our old office building is the big shipping company, Maersk, who you've heard me talk about on prior shows. And they are moving their operations completely, I think, to Dallas. And they have that Whole space up for sublease for about half the price of what we were paying in our space in the same building. And it's kind of interesting because if you're in the office business, that is a high management intensive business. I know that some of you residential real estate investors that invest in housing, which we think is really the place to be in the income property in the real estate market, when you're investing in housing, sometimes you think it's a hassle to manage your properties. But let me tell you something, if you've managed office or retail properties, you ain't seen nothing yet when it comes to management. Those are highly management intensive jobs. And just in two years, from our old office to our new office, which I love, our new office by the way, in Irvine. And by the way, I better give you the address of our new office. It's 3333 Michelson M I C H E L S O N drive. Suite number 280 in Irvine, California 92612. Our rate in this move dropped by 29%. That's a 29% reduction in the rental rate in a mere two years. If that happened to you in one of your residential properties, you would have a fit. You would be totally panicked. Now I know we have seen in some markets some declines in rental values, but let me tell you something. Compared to the office and the retail market that are just coming into their disastrous time and it is going to get much worse for them, residential has maintained itself pretty darn well as long as you're in the right markets. And that's key. Geography is obviously key. The old thing in real estate is location, location, location. And the old saying in real estate is that all real estate is local. And those things are certainly true. See, people misconstrue that location, location, location concept to take it to mean that here in Newport beach, right near me, we're in this place. Newport Beach, Costa Mesa, Irvine, these are called like the Tri Cities. They're all right next to each other. You drive from one to the other, you don't even notice the difference. They're all just right here mixed together. And in Newport beach people say things like, well, my property here, my home, my office building, my retail property, whatever it is that I own will always be desirable, it'll always maintain its value because it's right here on the beach, the coastline of sunny Southern California. Everybody wants to live here. Well, I've disagreed with that for a long time. I don't think that's true at all. I guess everybody wants to live here.

At the right price. Obviously, this market is pretty darn bad here. And so many investors, I see them making so many huge mistakes because they're impatient. I just had an investor sit in my office a few minutes ago and he's interested in looking at properties in San Diego. And he asked about Miami and he asked about Las Vegas. Those markets are disastrous. I mean, they're a mess. Beyond mess, they're just terrible markets. Will they always be terrible markets? No, certainly not. I may completely change my tune about Las Vegas in the next six to seven or eight months. I may change my tune about California properties like San Diego in the next year or so. I don't know. This is what we do. We are area agnostic. We monitor these markets all the time. And when we like one, we're going to be recommending it to you. But so many investors, they fall under this spell. They think because it's a nice area, because it's a beautiful place, or because it has nice weather, they think those things drive value. Now, those things drive value, yes, I guess they do to some extent, but they don't make the property worth 160% or 300% or 600% of the value of a comparable property in another area. There's a ratio, yes, it's certainly true. People will pay a premium for a location, but that premium is limited. Just because it's in a nice location doesn't mean it's a good investment. And that's what we're going to talk about as we talk about our white paper today on this show, as we talk about our predictions for 35 different markets around the country, including the 20 case Shiller markets, most of which are not good markets in which to be investing. But when you hear about the real estate market in the United States, you're pretty much hearing about the Case Shiller Index. And only about four or five of those case Shiller cities of the 20, that's only what, 20? 25% of all the cities in the index are even worth considering at this time. In our eyes, we wouldn't touch the other 15 or 16 markets. 75 to 80% of the case Shiller Index holds no interest for us because it doesn't work. It doesn't make sense. All real estate is local. Different segments of the real estate market are completely different. You can have a market where it might make total sense to invest in a house, but it might be a terrible idea to buy an office building, an office condo, a retail property. It just Depends. You've got to be agnostic. You've got to get good advice from people who do this every day. And that would be yours truly and my team here at Platinum Properties Investor Network Incorporated. We are here to do that for you. We are here to watch those localities, to watch those market segments and to make sure we are recommending the best possible thing at that time. All real estate is local. Different segments of the market are very different from one another. So a couple things. We've got a new thing that we'd like you to join us for on February 24th. We have a conference call coming up where we're going to talk about our Creating Wealth Boot Camp and we're going to give you kind of a nice preview of that. If you have not attended it or if you have not attended it in the last six months, you will definitely want to be on this call. You can register for that call. It's totally free@jason hartman.com and we're also going to talk on that call about our new and this is totally new. We've never done it before, but a lot of you have been asking for it. So we're going to do it for you. We're going to talk about our Creating Wealth Boot Camp telecourse, where it will be an online web based course over six weeks where you can interact with me, you can interact with the other speakers and you can see the visuals, the PowerPoints, the slides and things like that. You'll hear from different market specialists around the country. And we'll do this over the course of six weeks. You have been asking for this for a long time and we're finally delivering on it. So I think you'll enjoy that and you'll get more information about that on February 24th and you'll get some great information just on investing in general, of course, on February 24th. So that'll be a live conference call. Register@Jason Hartman.com now of course, March 6th and 7th is the Masters Weekend here in Costa Mesa. That's a live event and it's going to be a great Masters weekend. So join us for that. Register@jason hartman.com and the last thing I want to say before we get into our predictions, where we're going to start off talking to one of our clients and contributors and then we're going to play you a radio interview that I did that will be rather enlightening about our predictions about different markets around the country. Now this is not the same as the conference call we had a few weeks ago. This is different. It's a different thing. You have not heard this before. This is not a repeat. So the last thing I want to say before we jump into that is that you need a coach. Everybody needs a coach. No matter how successful you are or no matter how difficult you're finding the times right now, if you are struggling, if you are achieving success, wherever you are in the game, you got to have a coach because a coach can help you see things that you don't see yourself. And I really want to encourage you to get into either our group coaching or individual coaching. And this is on two facets and it's wherever you want to go with it. One facet is creating income through personal entrepreneurship through a sideline business or a main business if you're not employed and you're not busy in another business. But diversifying your income through personal entrepreneurship through micro entrepreneurship, that's one thing. And then the other thing is of course, building wealth through the prudent investment strategy through prudent income properties in diversified markets. So join us for one of those programs. We'd love to have you involved. And again, more information there@jasonhartman.com alright, let's talk about predictions for 2010. And first we'll start with a little discussion on it and then we're going to jump into a recent interview that I did that I think you'll enjoy. Here we go.

Let's talk a little bit about the white paper that we published that went out in early January where we followed it up with a conference call that included our predictions for 2010. Now, we did these in a very unique way. And so far as I know, nobody, but nobody else is doing it this way or has ever done it this way. Because our white paper, instead of just predicting appreciation or depreciation for various markets, our white paper actually does a complete ROI build, meaning what is the return on investment of this income property asset in that specific city or that specific metropolitan station statistical area, that marketplace, and it considers the multi dimensional nature of an income property asset. So again, a much clearer, much more accurate view of the market. But we didn't just talk about real estate per se and income property in this white paper. It's 40 pages long. We talked about several other aspects of the economy and the geopolitical environment. And I have Doug on the line with me to talk to us a little bit about the white paper today. Doug, how are you? Not too bad. Good. Tell us what your thoughts were on the white paper in putting it together and helping Contribute to it.

The thing that I thought was the most interesting, and I'll go ahead and give myself a little pat on the back vindication here, was that the primary political trend that we forecasted in our White Paper was a moderation of the political tone in Washington D.C. in 2010 as the midterm elections approached. And as we all know, Scott Brown won the Kennedy seat. And all a sudden, of, of a sudden, the super far left Congress and Senate is suddenly starting to get quite a bit more moderate. In fact, I believe it was just the other day that President Obama said that he's okay with bankers getting bonuses as long as they're in a free market, whatever that means in the current context.

He's talking out of both sides of his mouth. But what's interesting is that that prediction already came true just shortly after the White Paper was passed.

I thought it would take until the middle of the year before things really started attack center, but things just pulled hard. Hard, hard center, right?

Yeah, yeah, they sure did. Well, what were your other thoughts on the White Paper?

A few of the other things that we were really looking at in putting the White Paper together was what are some of the things that are going to be happening with interest rates and Federal Reserve policy? Because the tenuous situation the Federal Reserve is in right now is that they've floated a whole bunch of extra capital out into banks. And right now the banks aren't lending the money. And the reason they're not isn't because of some evil conspiracy. It's because the fed funds rate is so low that the banks are better off just borrowing money and then buying Treasuries and then pocketing the spread. But what will happen is eventually when things start to recover and when there's more viable loans available, you're probably going to see more banks start loaning out money, which is going to create inflationary pressure. Because. Because as we all know, the way fractional reserve banking works is that $1 of reserves can be turned into $10 of loans. That's in the US in England, it could be turned into an infinite amount of loans.

Right. And what people need to understand about fractional reserve lending is that money is created because it's loaned into existence. So for example, if I have a million dollars and I loan you a million dollars, if someone asked me before I made that loan, how much do you have? I'd say a million dollars. And then if I loaned it to you, I would take a note back. And if someone asked me that day, how much do you have, like, what's your net worth? I would say, well, I've got this note for a million dollars. So I'm worth a million dollars. Now, of course, that's as long as you, the borrower, pay me back. And then someone would ask you, what are you worth? And you would say, well, I got a million dollars. So that's just a kindergarten example of how money is loaned into existence. Right.

There's actually another layer, another layer on top of that, because that's if you're a Jason Hartman, perhaps if you were at the bank of Jason Hartman and you had your million dollars, you could loan me $10 million and still be within the regulatory requirements. So then what happens is you have $1 million that just got turned into $10 million that I've taken out in a loan and presumably spent on either investment capital or inventory or marketing or something or other else. Presumably some kind of viable business alternative. I mean, I might have just decided to go to Vegas and blow it. I mean, that certainly happens, too. But what happens is when a bunch of this reserve capital starts getting loaned out, it gets loaned out at a multiplied rate. So a lot of people see $800 billion of unloaned reserves, and they say, okay, well, yeah, so what? There's trillions of dollars out there, but $800 billion of unloaned reserves can be turned into $8 trillion of currency almost overnight. All banks have to do is decide they want to start underwriting loans, and. And we can suddenly see the money stock inflate by $8 trillion effectively instantaneously. It's just a question of when the ball drops.

It could happen literally in a day, that decision, and then the impact could hit the market really, really quickly, hitting the street and trickling down to the broader economy. But what are your other thoughts on what's going to happen in 2010 and some of your thoughts about the predictions for the coming year?

So outside of, like, the interest rates and inflation, let's just start with interest rates and inflation. So we believe that both interest rates and inflation are going to be ticking up. And the main reason for this is that the Federal Reserve knows that there's this big inflation risk out there. They've basically been riding along more or less betting that this money isn't going to all get loaned out at once. Well, so unless Chairman Bernanke really, really, really gets his arm twisted, which may happen, he has to figure out that he's going to need to start pulling some of that back. And when you start pulling money out of the banking systems, you're going to push up interest rates because interest rates are really a market equilibrium. Because when Everybody says the 10 year bond interest rate, well, it's not the interest rate on the 10 year bond, it's the yield to maturity. So it's the combination of do you buy the bond at a premium or discount and what are the coupon payments and then what is the internal rate of return for that bond from now until when it matures. That's what people commonly refer to as the interest rate for bonds. And that's all market driven. So anytime that the Fed tries to tinker with monetary aggregates or with different bond inventories, then that's going to impact the money supply. And when that impacts the money supply, it'll impact relative prices because, well, I think GDP is technically growing. I personally have doubts as to how much of that's real versus how much of that's just the government borrowing, borrowing against future revenues and spending in the current time.

Well, and the other question we've got to ask is, is it fair to count haircuts in GDP since they're not exported, they're used here in the U.S. right?

Yeah, yeah, that's another one that's, that's really difficult too is that, you know, how do you parse out the, you know, the tangible versus intangible? What's the real value? I think the way that GDP is built up is it's the assumption is that the dollar, the market value or the dollar value the people spend for whatever they do is assumed to be its real value. Basically based on the assumption that in a free market you'll have a number of transactions and that the equilibrium price will be what people rightfully judge the value of something to be. Now of course that can all be manipulated, it can all be pushed and pulled and different types of things. But one of the things that I think is.

Another, not as much of a take it to the bank as a tact in the middle, because that's already happened. But another thing that's inevitable is that interest rates and inflation are both going to be going up. When we did this white paper, we forecasted fairly modest interest rate and inflation increases because we don't think the dam is going to break quite yet. So basically what we're thinking is, or the line of thinking that we have with this white paper is that the Fed is going to try to take baby steps so they can finesse their way out of a big inflation risk. Because like we said, if all $800 billion of unloaned reserve hits the market all at once. It's going to be a giant price shock that just hits everything. And of course, that's very, very bad for incumbents who are seeking reelection. Most politicians would prefer that inflation be metered out in say, 3 to 4% increase over three or four years, as opposed to a 12 to 15% increase all at once, right?

Yeah, no question about it. And I think that's the big urgency for investors is that they got to lock up these long term fixed rate loans before the rates go up. And rates have to go up. They have to go, they must go up. And I still say inflation has to happen. It must happen. We cannot defy the laws of physics, the laws of gravity on either side of that equation. Higher rates and higher inflation.

Absolutely. Getting back to the Irving Fisher equation is that the old MV equals pt, which is the M stands for the money supply. The V stands for the velocity of money or how fast money transacts through the economy. P is the price level and then T is the real output. Well, the real output is the real output. The only thing you can do to make real output better is to have assets be more productive or to have gains through trade. And we're not currently making any great strides to do either of those. So real output is probably going to be flat to only modestly up. And of course, the velocity of transactions during recessions tends to go down, but it'll regress back to a normal equilibrium, which really means that the primary hammer that's going to impact prices is going to be the amount of money that the Fed floats out in the system. And right now there's a whole lot of money that's out in the system, a whole lot of unloaned reserves, and there's just this giant flood of capital that could hit the market at any point. Exactly. When it will, I don't know, you know, how much? How big can a snow drift get until there's an avalanche? Nobody knows.

Nobody knows exactly. Yeah, right.

But I can tell you one thing. You don't want to be in front of the avalanche when it hits, that's for sure.

And if you are in front of it, you want to be in front of it with the shields, with the defensive and the offensive tools that we talk about on this show. Long term fixed rate debt, packaged commodities, investments and rents that are indexed to inflation and all of that great stuff. We talked about it many times before. So it looks like this year is going to be a pretty good year for investors in in many markets in terms of cash flow, in terms of some modest appreciation but amplified with leverage, doing pretty well. And your take on comparing income properties to any other investment out there, whether it be paper assets, stocks, bonds, the precious metals certainly say the two good best places to be are income properties in the right market, structured the right way, and then having something of your own business of your own little mini marketing empire to take advantage of a plan B scenario if it's needed, right?

Absolutely.

Thank you for listening to the Creating Wealth Show. This is Jason Hartman, your host and we appreciate you following the show. We have many, many episodes, hundreds of episodes, and some of the older episodes have been archived and placed in our Members section and that applies to this one. So we include a sample that's about 25 minutes long. And then for the rest of the show you can go to our members section@jasonhartman.com Many of the other shows are still in their full length complete version. However, some of the shows like this one are in our Members section where you can can hear the show in its entirety. And again, you just need to go to jasonhartman.com and you can get the full show there in the Members section, plus a whole bunch of other great members benefits and resources, whether it be documents, forms, contracts, articles, other video and audio content. Just a great resource. So be sure to join as a member@jasonhartman.com and thanks again for listening to the Creating Wattpad Show.

This show is produced by the Hartman Media Company. All rights Reserved. For distribution or publication rights and media interviews. Please visit www.hartmanmedia.com or email mediaartmanmedia.com Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate or business professional for individualized advice. Opinions of guests are their own and the host is acting on behalf of Platinum Properties Investor Network, Inc. Exclusively.