CW 292: Local vs Long Distance Real Estate Investing with Logan Mohtashami Financial Contributor for BusinessInsider.com

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 multimillionaire 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.

Welcome to the Creating wealth show. This is your host, Jason Hart. Hi, I'm Hartman and this is episode number 292. And we're going to keep the intro portion really short today because our guest, we had a relatively long discussion about 50 minutes with him and he is going to talk about a lot of economic factors. He's a well known mortgage lender and I think you'll really enjoy what he has to say and learn a lot from it. And his name is Logan and he'll be with us in just a moment. But first I've got a question from one of our listeners and that is Mike calling in from Phoenix. Mike, how are you?

I am well, sir.

So good to talk to you. Good, good. Well, hey, thanks for coming on the show and doing a little part of the intro portion with me. You had a question about investing and about especially as it applies to long distance investing. Right, Exactly. I live in Phoenix and have done.

A little bit of investing locally and I love your show, I love your stuff, but I just have some concerns.

About investing in a town or state.

That I don't live in.

It's a little scary. Yeah, well, very good concern. And I got to tell you, when I was 16 years old, as I've talked about on the show before, I, I read a book by Robert Allen and it was called Nothing Down. And one of the things that Robert Allen said is he said try to always invest in properties that are within one hour of your home. Well, 20 some odd years ago that was probably reasonably decent advice. But that was before Al Gore invented the Internet.

Joking of course, and it was before a lot of the sophisticated tools we have nowadays. Here is the problem with, with thinking locally and the problem is really twofold, Mike. One problem is that you may not live in the right place. You may not live in the best place to invest. So, for example, if you lived in any place virtually in California, or if you lived any place in say, the New York City, the greater New York City area, or any area in maybe like the city of Chicago, or in any of the more expensive areas in Florida or more expensive areas in Connecticut or Boston or any anywhere in the country where the real estate or the land values are very high in those markets, you only live in places where it makes sense to speculate or gamble. And those aren't the types of markets that we like. Those are very unreliable markets. They're very inconsistent. They've got the roller coaster effect where prices go up and they go down and it's really nice or really ugly. And you're definitely not investing for cash flow. Now, don't get me wrong, you can make money in those markets. And I have made a lot of money speculating on real estate in California. But it's not a prudent thing. It's a thing where you're more lucky than good. And our approach is pretty conservative. We invest for income, we invest for cash flow. So the first issue is you may not live in the right place. Now, that said, you happen to live in Phoenix. Phoenix is okay. It's not great. The problem is that Phoenix is up about 34% from the bottom. So the market in Phoenix has recovered pretty nicely in terms of prices. And the rents never keep pace with the prices. That's why expensive markets pretty much always don't work as a good prudent way to invest in real estate, because the rents, the cash flow never, ever keeps up with prices. Now, the other issue is. So that's one issue, but even if you live in a great place to invest, and Phoenix is certainly not a bad place to invest, that's one of our markets. We do a little bit of business in Phoenix, but not a lot because the prices have come up so much. But say you lived in Atlanta, one of my favorite markets, or Dallas or Houston or St. Louis, or, you know, any of the markets that are really, really good for investing right now, Indianapolis, there's a. There's a whole list. But if you lived in any of those markets, the second problem is you would encounter by thinking only locally is that you would never be diversified. You would always be investing in having your eggs all in one basket. Now, there's an old saying in real estate that I talk a lot about on the show. All real estate is local, and that is definitely true. And local markets can experience problems regardless of the market. Even a really good market Like Houston is experiences problems. I mean, I think it was the late 80s, you know, this kind of before my time here, but I heard a lot of stories about it. And there were actually billboards in Houston along the freeways in the late 80s. I believe it was the late 80s. Don't quote me on the exact time frame, but around there. And they would say things like, will the last person to leave Houston please turn out the lights? So Houston is like the energy capital of the United States, besides, you know, North Dakota with the oil fields. But Houston is a great place in terms of that. But even good markets can experience problems. So take the most historically performing asset class income property and diversify geographically into good, prudent, high income, high cash flow markets. That is my answer to that. So it's a twofold problem. Number one, you may not live in the right place. And number two, even if you do, you're not going to be diversified. So I say that the issues of geography, which are far less meaningful than they've ever been in human history with the Internet, with the tools we have nowadays, with our system that my company offers the complete solution for real estate investors. With those tools, you overcome the handicaps of geography pretty darn well. And you would be far better off investing in a property that can give you positive cash flow diversification in terms of markets over being close to your home in Newport Beach, California, for example. So, and even if you live in the right market, you gotta be diversified. Does that, does that kind of address the issue and answer your question?

Yeah, that makes a ton of sense. I feel a lot more comfortable. Thanks, man.

Good, good stuff. Well, hey, let's go to our guests without further ado and be sure to check out jasonhartman.com We've got a few more days of that special promotion in the store on all the products. I know a bunch of you have taken advantage of this, by the way, all the products are 50% off. That's the biggest sale we have ever had. Every single item in the store, every product@jason hartman.com 50% off through new Year's Day. And the promo code is Christmas. So just type that promo code and check out. Actually, I misspoke. Sorry. It's through New Year's Eve. So at midnight on December 31, the promotion ends. So the promo code for that is Christmas. Go and buy your stuff right away and get 50% off with the promo code, Christmas until the end of the year. And we'll be back with our guest in just a moment.

It's My pleasure to welcome Logan Motashami to the show. He is with AMC Lending Group located in Irvine, California and I actually met him on Facebook and really enjoyed some of his posts and articles and invited him onto the show last week. So I'm glad to have him. And his father remembers me as a young realtor many, many years ago in Southern California. So Logan, welcome. How are you?

Good, good. How are you doing?

Great to have you on the show. And as I mentioned in the intro there, I really enjoy some of your posts and your take on the economy and inflation and monetary policy. I've been following them for a while. So glad to actually have you on the show in real life. First of all, I guess I'll just ask you about this chart that you posted last week and I thought it was a really telling chart, inflation and very interesting. I shared it with our investment counselors and they had a lot to say about it as well. And this chart basically shows in December 2008 versus October 2012 the percentage of change in the price differences on some things that we all buy and use on a pretty much daily basis and compares them with the consumer price index and really shows how flawed the consumer price index is and how it doesn't really stay to inflation.

I couldn't agree more. But really, if you just look at those things, butter, milk, eggs, gasoline, the things that majority of Americans purchase on and the effect that it has because we have such a lack of income growth in America that these percentage rises, we're not talking about 4, 5, 6, 8%. We're talking about 70, 90, 116, 170% rises in the last four years, a lot of it due to monetary policy. And that has an effect on a lot of American lives. And this is not even including the drought, which these prices are most likely going to be going up in the early part of the year in 2013. And these are the things that majority of Americans would, whatever their minimum income is, would purchase on.

Yeah, it's just completely false because they're saying that inflation during this period has been 6% and potatoes per pound went from 32 cents a pound to $1.30 a pound. That's a 306% increase. Number two on the list, as you mentioned, was butter, $1.95 in December 2008 and $5.19 in October of 2012. That's 166% increase. I'll just do one more coffee. $5.49 in December 2008, $13.69 in October 2012 not even two years, or I should say not even four years, sorry. And that's 149% increase. Yet they really think we're stupid enough to believe that inflation is only 6%.

Ignorance is bliss. I always use kind of a matrix line to this. You know, only in the matrix you could believe inflation doesn't exist. I think what the biggest disillusion is that because our 10 year note is artificially low and the rates where we can borrow are artificially low, they believe that to be a main component of inflationary. And we just do not have the type of monetary policy that will stop this type of inflation. So majority of American, especially the poor, get affected. The most, excluding CD rates and everything are so low that you get no returns there really for the country. It's not designed well, it's more asset inflating. The Fed has always believed in this philosophy that wealth creation by inflating assets is the best way to go. And we're basically caught right now. We're finally paying the piper of years and years and years of bad monetary policy. And even with the bond market bubble that we have right now, it can't even juice the economy anymore. So we're kind of finally paying our dues for just a lack of economic discipline for a very long time.

So do you think the chickens have really come home to roost as it were?

Finally, as it finally happened, it's just a mathematical reality. I mean, we had mortgage rates to 3.5% and people can't buy homes. Why? Because they don't have the incomes to. We are pushing the needle to get the stock market going. There's a chart that I always post. A lot of times when QE is announced, the market goes up. When QE is gone, the market goes down. Every single time the Fed is targeting the stock market, it's targeting housing because they believe that is the only way to inflate the US economy anymore. And we've had two financial bubbles, two boom and bust cycles, there's no real income growth in the US and it's just right now, this last attempt really shows how bad it is for the majority of Americans. Because unless you're invested in the S and P index, you don't see any wealth creation. And I'm afraid that at some point the biggest bubble of them all, the US bond market, will eventually create the biggest calamity of all because we have near $50 trillion of debt around the world. And that's not including the unfunded liabilities. This will blow up in everyone's face. And when we blow up, that's going to really affect the world because we have $16 trillion of that debt. We have unfunded liabilities well over $100 trillion. So we're just pushing it, pushing it and we're just not getting the kind of juice that the Fed believes in. And I just don't think there is a, there are no more fake magic bullets anymore and we're just paying the price. Right now it might seem like things are going okay, but considering how low interest rates are and still growing at sub 2% with low taxes, it really proves the point that America is just not financially doesn't have the capacity to grow like it used to.

But you know, I mean, one would argue, and by the way, I agree with you. Well, first of all, maybe what I want to say about that is one might argue that look, the US is a very mature, obviously the largest economy on earth with massive amounts of infrastructure. And you know, isn't it sort of one way to look at it is that when an economy grows so much as the United States economy has, even back when we were on the gold standard, when we, it was like legitimate growth back then before 1971, you know, after that it was all caffeine and drug induced growth and smoke and mirrors induced growth. But even then we had so much growth really owning the Industrial Revolution when, you know, other industrialized countries were just destroyed from World War II. You know, America was the recipient of all that benefit and did very well under that. I mean, isn't it legitimate to say, look, we had our peak, we plateaued at a certain point. Isn't it sort of like you just go for small rates of growth and you know, kind of holding steady and that you're not going to have a big jump after you had one? You know, isn't that sort of the way things go? A bodybuilder can only get to a certain point and you can't, you can't, the Incredible Hulk can't double in size, right?

Yeah. Well, you know, here's a good point and I've had this debate on Bloomberg and cnbc. The ability for us to grow like it did in the 50s and 60s is just not coming back. I mean, we went from a producing country that was the capital of production to now, starting from the early 80s, we went to a servicing country and we had, I think a near almost $2 trillion economy. We pushed it to 16 trillion. We borrowed a lot of money, we had a lot of wealth creation through asset inflation. But we're just not the exporting king or manufacturing king anymore. And we're just services. And if you don't have the income growth, and a lot of this comes to two things, globalization and technology. We were not prepared for both and we are not going to need the manpower like we did in previous past because there is no real demand for our goods, not just domestically, but overseas. So we are going to have a smaller workforce, a more efficient workforce due to technology, but we are not going to have the income growth as we might have in the 50s and 60s because the demand for our services isn't there as much. A good example is look at our greatest innovations in the last few years, social media. You don't need 500,000 people to run Facebook, 100,000 people to run Instagram. We're becoming more efficient, but it's coming at a cost. Unless we build something that has great demand, the math is not there. You're not going to be giving people 10, 12, 13% raises for services that is not in demand anymore. And globalization and technology has probably number one or two factors for that.

Yeah, I think that's the really tough thing that Americans, especially college educated Americans, have had to learn. That lesson pretty, it's been a pretty harsh lesson is that credentials matter for far less than they ever used to. Americans haven't had a real raise in real dollars in decades. And we have essentially just gutted away our sciences, you know, our manufacturing. You look at the advancements of the past. They were in the sciences in the 60s when it was such an exciting time with NASA and going to the moon and so forth, and the stuff that we did, even in the terrible, miserable 70s, you know, we landed the Vikings probes on Mars. We were talking about manned missions to Mars by 1990. But then the welfare state and all these crazy financial schemes and financial quote innovations seem like they sucked away a lot of the resources. Where we saw the middle class that managed to get along for several decades pretty well, and now it's just been under attack in the past couple of decades. And the extreme wealthy have just gotten extremely wealthy. I heard recently a stat that there are 65,000 people on Earth with over $100 million in the bank each. And that's just fantasy land. I mean, that's like you're completely separated from the real world when you're at that kind of level.

I mean, there's a good portion of Americans in this country that have less than $100 in their checking accounts.

That's that is really, really scary.

And it's, and you can borrow money only up to a degree. And when you have asset inflation, such as the stock market bubble and the real estate bubble, and once those bubbles burst, you fall back to your incomes. And right now, falling back to our incomes, no matter how low the Fed is trying to push their rates, it's just the money cannot circulate to the economy enough because really nobody's going to pay people more unless there's demand for their services. And it's hard, it's very hard for Americans to kind of look at it and think, you know what, man, did we have our best run already unless we innovate, unless we create a new industry where we can compete here and around the world. A good example is everybody was so excited about the green energy revolution and yet if you look at the biggest solar company we have here in the United States of America, First Solar, they're almost not near bankruptcy, but pretty much.

Well, all Obama's done with his stupid green energy, his misguided green energy programs is increase solar panel manufacturing in China.

And he's helped a bunch of campaign contributing criminals in the U.S. i mean, it's unbelievable.

You know, if you look at, if you look at why hasn't solar taken off? I mean, it's not that it doesn't work.

No. Well, I mean the idea is good, but you can't get enough energy out of sunlight to pay for the what it costs to produce solar panels. Yet the equation simply doesn't work. I mean, anybody who thinks solar panels work, they're just, they're just diluting themselves, the equation, the math doesn't work, the physics doesn't work.

It goes back to the how much are you going to pay for that now? Why is First Solar having a problem? Because pretty much the Chinese can make them. I mean, even the Chinese are having problems selling their solar company panels out. But if another country can make them better, faster and cheaper.

You'Re not going to win exporting this thing to the world. But if nobody could afford them domestically, it's just not a very good business model. So as much as some of our ideas that we love so much that even if you had a moral right to always comes back down to math. And I Always post the 3 minus 5 equals negative 2, this is what our economy has become. We have some great ideas, but the math isn't there. And long term, our mandatory payouts, My concern with the, with the deficit isn't so much of what's happened in the last four years because we're such a politicized country in politics. It's what's going to happen between 2022 to 2050 when our mandatory payouts will explode on us. And unless we have 4, 5, 6% growth, there is no way, there is no way we can pay for this. And that's my concern because it's my generation that has to take on that mess 10, 20 years from now. And we just don't have the type of growth anymore. And we've been able to get away with it with the stock market bubble and fake revenues and fake demand and real estate revenues that we've gotten in the last decade. But the future of this country, we need such massive tax and spending reform, not currently right now, but to set it up for the rest of this century. Because, because this is what's happened in the last four years. It's nothing compared to what's going to happen between 2022 to 2050 when mandatory payouts are going to blow up. And you see every single debt chart by every single government source that would tell you from that period of time our debt goes parabolic. And whenever debt goes parabolic, you either become Japan or you become Greece.

But wait a sec. Let's talk about the good side of this. First of all, do you really become Japan or Greece? And I always say this, my listeners are probably sick of hearing it because Japan or Greece do not have reserve currency and they do not have the biggest military in the world to stay the reserve currency. In other words, to throw its weight, their weight around, to force people to accept dollars and to trade in dollars. And we do. And that's never happened before in history. We can sit here and debate all we want about the Weimar Republic, about Hungary, about Argentina, about Zimbabwe, but we are in a totally different and unique position. Now. I agree that we are going to see massive inflation, but whether we're going to see Japan or Greece, well, I'd say it's more likely Japan and a little bit of Greece by the discontents who will be unfortunately impoverished by that inflation. But it's going to be more of a, like a, rather than an austerity imposed by saying, look, we're cutting government programs. The austerity will be imposed by boiling the frogs slowly in warm water and just causing a bunch of inflation. That's where the austerity is going to come from.

I think at some point the bond market does react and does go against us. If nothing is planned, hopefully something will happen next year to address the situation To a degree. But you know, we're talking about maybe $4 trillion of cutting or getting revenues. In reality, we're going to be spending $47 trillion in the next 10 years. It's just not sustainable. And whatever we want to do with our debt problem, it has to be a three part plan. It has to be revenues, it has to be spending cuts. And we have to find a way to grow this country again without the Fed being so much part of it. When can we ever grow again without the Fed having rates at zero, without some type of government stimulus, without taxes being this low? There's my point to where I could be bullish. I have not been a big bull on the American economy for a while now because I, to me it just gimmicks. I can inflate this, I can inflate that. I could make people believe they're more wealthier and let them consume and spend. But at some point the training wheels have to go off and we have to do this on our own.

Getting from that point A to point B to me in the next 10 years is going to be very crucial because we can't have interest rates this low for a very long time. There's going to be long term effects to this. And those who believe that rates will stay this low, just history has never proved that.

Well, that I couldn't agree. I couldn't agree more. So, hey, now that we've depressed everybody, let's talk a little bit about how we can exploit this. Okay? And I want to get your take on that because by the way, I should mention the listeners, we have never spoken before, except for just three, four minutes before we started recording this call, we have never spoken. I've just been looking at your Facebook stuff all this time and I say, Logan, and you know, I asked you to listen to my show a little bit to consider coming on it. Did you listen to a bunch of episodes or just one, or tell me.

I listened to two.

Okay, two of them. All right. And so you're new to my thinking. Okay, So I just want to kind of run this by you. One of the things I always say is that I used to be an optimist. Now I'm just an opportunist. And I think as ugly as things are, and you described it correctly, I mean, the debt bubble, it's a disaster. I mean it is just the people running this country, especially with, with few exceptions, five decades almost of a liberal left wing Congress most of the time, I mean, there have been a couple points in There where it's changed. But even nowadays the right wing is to the middle or left by, by old standards, okay, they, they all spend too much. That's my point. They're all a bunch of sellouts and panderers. And so, you know, we're in this situation and the question is we've been on a drunken sailor spending spree for decades now and obviously that's unsustainable. The only reason we've kicked the can down the road this long is because we do have the reserve currency and because we can throw our weight around as a country and take advantage of that position. And I think the question nobody knows the problem, the thing nobody really knows is how long can we continue to kick the can down the road? How long can we continue to throw our weight around and force bond buying on other countries, force reserve currency status on other countries that want to get out of it? You know, OPEC wants to get out of it. Brazil and Russia and China have been trying to trade outside the dollar. It's not like anybody's wanting to continue this plan except us, I guess. But that's the question first, how long can we kick the can down the road? And there's no historical example. So that's kind of the first thing I want to run by you and then I want to talk to you about how do we exploit it, okay, with these low interest rates and so forth. But any thoughts on that? How long we can kick the candle.

That globalization has created to a degree, we all kind of need each other and for as much as we have this stripe relationship with China and actually Japan has been buying our debt more than China has recently, we all need everyone to kind of be functioning. And I think in some ways that's a plus. In some ways that can be a negative, our debt. We could continue this until the bond market goes against us. And at that point when the 10 year note and when rates rise, it will just simply ease the, whatever mediocre incomes this country has. So you better have a type of asset to offset that type of inflation because it is going to slap us in the face very hard. Because it's not, we're not thinking about it. We weren't thinking about the stock market bubble before it blew up. People weren't really thinking that I shouldn't borrow $600,000 to buy a house when I only have $3,000 monthly income. This one will be epic in proportion. I think when the bond market, when the rates go against us and when that type of inflation really kicks into the incomes. There's where the real pain will start because there's where profit margins for corporations will go down and there's where the job losses will continue to go down and there's where we have our long term inflation problem. And that to me it's six, seven years away if we don't have a plan to tackle the debt because right now our bonds are artificially low. The Fed is pumping money in there because of the Spain crisis, which was the best QE ever. Money that's being thrown at us. But at some point that turns and we are not in position right now. Or for investors that follow you, unless you have hard assets, where are you going to get the type of income or investment return in the next 20 or 30 years?

I couldn't agree more. I couldn't agree more. Now one thing that's interesting is to look at the reaction. You know, I always say, Logan, that there's always kind of an equalizer to everything in life. So when you say the bond vigilantes, you're absolutely right about how that's going to play out. The rates will go up, inflation will be high, etc. Etc. But the question is, what will be some of the reactions to that? So the first government reaction will probably be okay if unemployment increases. You know, it will be the typical Keynesian reaction that government pretty much always has, like trying to put out a fire with gasoline, which is what we did the last time around, you know, the last few years. And so what will they do? Will they expand housing aid? Will they expand unemployment and keep doling out these fake fiat dollars? And people will just have to sort of slowly, or maybe not so slowly, see the value of those dollars decline like on your inflation chart that we just, we talked about at the beginning of this recording. That to me always seems to be the most plausible government reaction is kick the can down the road, try and keep the peace, try and just pacify people as much as possible by doling.

That's why there's a global race to debase their currency.

Yeah, yeah, it's a race to the bottom because every currency is fine.

World War 3 has already actually happened and it's the currency wars that are going out there. Everyone kind of sees the future, so everyone's going to try to devalue their currency as best to kind of prepare themselves maybe for an opportunity down the road. And with the dollar being pushed up, the rates of the base currency is kind of a world motto right now and doesn't get a lot of play you know, I mean, currency talk doesn't get a lot of play in general anyway. But.

That to me is the foretelling of the future about how everyone really wants to bring their value down because they want to have an edge. And if we're the last one to that party.

Our economy is not set up to be making more profits or consuming when we don't have the kind of income streams coming in. And it's going to be painful on that side. But yeah, that quiet war is already going on and you could just see it all across the world.

Everyone trying to debase their currency to set themselves up for a better opportunity down the road.

Well, let's ask you to expand on that a little bit because I'm not sure I know where you're coming from. I know that debasing currencies is a race to the bottom, but I don't. Other than gaining exports, it's not something increasing export business like China does. It's not something most countries really want necessarily is to have a less valuable currency. I mean, I think they're forced to do it because they spend too much.

Well, the world spends too much. The world's always spending too much. And it's the unfunded liabilities down the road that they all see the end.

There's just not enough growth out there to cover the expenses. And we're finally kind of waking up to that, that, wow, we're going to have to shell out a lot of mandatory, I'm not talking about discretionary mandatory payouts have to go out in the next 38 years and how are we going to grow? How are we going to get the income we're not going to be consuming and our service industry is going to make it up. We're going to have to export our way out of there. To be honest with you, I think the strong dollar is in the back of the minds of people in our government is not the best thing that they're thinking about. In a normal world, when you have a strong currency, it's a good thing. But when everyone has the same kind of financial debt problems, much like some of the European countries, they have to devalue because there's no other way for them to grow. It's a last ditch desperate effort to try to manipulate growth in your country by devaluing your currency. Not normal economics, but. But when you're a lost creature in the economic world, that's what you're basically your last hope is to just devalue your currency and then hope that you could export your way out of it.

Yeah, yeah. Before we started recording, you talked about cash flow and how cash flow is such an important investment strategy because there are really very few, if even more than one alternative nowadays in order to get cash flow right.

Yes, there's a lot of ideas. But to me right now, if you follow the big money right now, what are people doing? What's the big money doing? They're buying homes with cash. Because what are you getting for cash right now? Less than 0.30%. You know, CDs, bonds, everything. But buying hard assets, homes with cash and renting them out is something that, you know, that's where the big money is going at. If you look at, if you look at housing, which is my area that I follow all the time, if you take the cash buyers out of the equation, there's not that much existing home sales going on. We have a very high percentage of cash buyers even now with interest rates at 3.5%, we're running at 30% cash buyers right now. And historically it's at 7 or 10. That's big money. That's not mom and pop buying homes to live in there. The big money is being poured into real estate because. Because if you can manage those properties, that is a very, very nice, profitable, long term business for you for a very long time. And to me, that is where the money should be put in if you have that type of capital.

Let me take a brief pause. We'll be back in just a minute.

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I mean there are, there are just no other options. I mean what are you going to do? Put it in the stock market? You can't put it in the bank. I mean you're going to lose money after inflation and tax is obviously there. And right now you can get a real cash on cash return on, on real estate as long as it's lower priced real estate obviously lower price real estate.

But I mean that's, that's where the big money is going. I mean you could you, for, even, for even if you had a couple hundred thousand, you could buy two or three, four properties, rent them out and the difference in returns you get compared to bonds, CDs and cash is remarkably big. So that is to me where the big money. If you look at the biggest players in housing, Freddie, Fannie, home builders, even the banks, a lot of these institutions, they're coming out with rental themes in 2012 even with interest rates being this low because the amount of people that can qualify to buy homes is just not going to be there. That rental market is going to have supply definitely for a very long time. Right now I think the last numbers I saw you had about 5.64 million homes that are either foreclosed or delinquent. Most of those people will become renters. So you're going to have an ample supply for a while. But the percentage of returns you get for buying a property with cash, it's just to me at least it's the best yielding asset you could get in the United States right now.

Yeah, I couldn't agree more. I couldn't agree more. Hey, I'm just curious, what do you think about gold? Are you gold bug? I'm not, but I don't know what your take is on it.

2003, I think it was $222 30 back then and you know I just. My long term target before I had to revisit gold was about 2,400 to 2,800. At that point I'd revisit my thesis on gold. But yeah, definitely for sure been a gold bug for a long time. It did go parabolic last year when it got up to 1900. It needed a little self correcting. But if you look at what gold has done in the last, especially last 10 years compared to every other assets that is foretelling what has been going on. You have a lot of printing and even in that chart I put up, gold is up 100% in the last four years.

I mean, well, that's true. And I tell you, I'd be a gold bug too if it would just produce cash flow and, you know, had income, if you could rent it out, it'd be great. And also if it would produce the tax benefits, the income property does. But you know, oddly enough on your chart, you would have tripled your money in potatoes. That's even better than gold, huh?

Yes, definitely potato, definitely the commodities. If you. Jim Rogers, he's been a commodity bull for a long time.

He's been on the show.

Yeah, these bull markets last 18 to 25 years. And I remember back in 03 04, he was saying sugar, become a farmer, become commodity. Prices are going to go up. It is more difficult. I think it's commodity investing for normal Americans is not. There's not enough information out there. But, but to your point, even though gold has risen up so much, it does not have the tax benefits as a hard asset such as real estate would do. But yeah, all the signs of money printing is there. If you just look at them and this misery index, they'll tell you there is no inflation outside of the things that you buy and use every day. So at some point that other hand of inflation will come into the picture and there's where hard assets would really be beneficial for your investment thesis. But I could not agree more with buying real estate with cash just because of the type of environment where even though the Fed would want to push you into the stock market, the safety in the cost of shelter, you know, for Americans, because that is something that the supply will be there. You know, as long as, you know, we have a country where a stock, you know, a company can go bankrupt overnight, but the price for shelter will be there always. That demand will always have ample supply.

Yeah. And what I, what I like to point out is that you alluded to this earlier is that these people that are getting foreclosed on, they're going to be forced to stay in the rental pool. We've got Gen Y, the largest demographic group in American history. 80 million people bigger than the baby boomers, slightly moving into their prime rental years. They've got massive student loan debt. They're not, unfortunately, they're not going to be able to buy.

Actually, that's my recent article I just wrote a few days ago. Oh, really was, you know, I call it the Young and the Renting.

Yeah.

And you know, if you look At Pew Research 41% of people of age 18 to 34 are going back and living at home. And for those who actually have a job, they're renting. And what I explained in the article is that I talk to this age group a lot and a lot of them tell me, you know what, getting that 20% down is not happening. Even getting an FHA 3.5% down, it's a little bit daunting. But they say, you know, I'm not married, I'm single, or, you know, I'm still working. Why would I want to be buying a house with such a low down payment? Maybe when I'm settled down and my career is, you know, good and that's when I'll buy. So you, not only do you have the people moving back with their parents, you've got a group that even has the income that is saying, I'm just not comfortable with buying a house, but I will be renting. And I think that's a shift. One of my articles in 2010, I predicted that maybe we have seen a society shift on homeownership to renting.

I think we have.

To be honest with you. They lie to you every month on the number, the homeownership percentage rate. Even today where they come out and they say it's 65.5% homeownership rate. Census counts all delinquent homeowners as homeowners. We have millions and millions of people who are considered to be homeowners, some of them well past the 90 day late. There is no way they're going to be able to keep their house. If you take all of them out of the equation, you're well below 62% and those people will either be moving back with their families or they will be renters. When you have that big of a shift from a bubble high of 70% or near that level to coming down to the 60s, the psyche of Americans change and the thought of home ownership changes and because lending standards are going back to common sense, not strict common sense. The lack the capacity of Americans to buy homes has gone down dramatically because we have no income growth. So the rental market will have a steady supply. This is why you see the. A big boom in multi. Multi family production.

Oh yeah. I mean, I mean, I mean multifamily developers who build apartment buildings, they're just, they're just building everything they can right now because they see that we've got 10 years easy of unbelievable rental demand. And you know, one more thing I'd love to get your take on, maybe this is the last thing because you know we're going along on time. But you probably have a lot to say about this. I don't think we're going to see Fannie Mae and Freddie Mac last forever because those are, those are insolvent smoke and mirrors, government supported entities anyway. And if they are let go, if we cut those loose to the free market, I mean, wow, it's going to be. Mortgages are going to be much harder to come by. The homeownership rate is going to plummet, which means more renters.

I could not agree. You know, this is the one thing that, that doesn't get talked about a lot when they talked about reforming Freddie and Fannie. I think the article I wrote last year was Freddie Fannie and Guantanamo Bay. They say they're going to close it down but they are going to let this sucker go as long as they can. Because they know once this is over, you might not even see a 30 year product 10 years from now.

Think about it. Why would you. The rest of the world doesn't have 30 year mortgages. That's an American thing.

Private sector is leaving the business. Private sector is pulling out of their money. They are not going to go head to head with Freddie Fannie. As long as these rates are so cheap, there's no. With all the regulation they can't make any money.

Yeah, it's ridiculous.

Yeah, it's not. You're not making money. It's a big hassle. The capacity of lending in this country is hideous. I mean it's just hideous. And that's a byproduct of having that financial real estate housing bubble. But the future without Freddie and Fannie and my thing for the last two years has I have been a bear on FHA for a very long time because their capital reserve ratios are so bad. It is the most under reported item in housing. They were down. FHA needs $2 for every $100 they insure. They were down to 24 cents for that $2 back in November last year. And they needed one bailout already. It's a quiet bailout. The robo signing settlement gave them a billion dollars in cash. And the house already passed a 2012 FHA Solvency Act. They are what I call a baby Freddie and Fannie and once that goes away, the treasury will have to give them a credit line. But you take FHA out of the.

Oh, that's huge. Wow.

Too hard. Really? You're looking at least 20% less sales for the upcoming year and they are just hanging by A thread because they were not designed to be a primary lending source. FHA was designed for first time homebuyers. They weren't designed for. I mean I have clients getting FHA loans that are 780fico score debt to income ratios in the low 20s have 401, 529s. They have all their, they don't have the 20% down, but they can get an FHA. The exposure that they have right now.

It'S not as bad as Freddie and Fannie. Freddie and Fannie got up to I think 75 and 72 to 1 leverage ratio, but they're in the 30s right now. And MF Global filed for bankruptcy because their leverage ratios were that high. But you hear nothing from the government on FHA because they know that that wasn't working for them. The housing market would suffer and thus the rental theme for the next 30, 40, 50 years because there's no way FHA will be able to be solvent. And it's just going to be another Christmas Eve Geithner giving them an unlimited credit line. But I think that goes away too. I think Freddie and Fannie in time will go away. But going back to your original point, once the private sector gets back in, the cheap Money days of 30 year fixed mortgages are gone. You know, they're not going to, you know, they're going to actually you have to pay up to buy a house. And then, yes, unless you have income growth, the capacity for Americans to buy is going to be limited. I mean, you see that right now with rates of 3.5%.

Sure.

Imagine 6.57% with rising inflation.

It means renters and renters at a much lower standard of living than you have now, folks, I always say this. It's not because someone could listen to this conversation with the uninformed mind and they might say, well, gee, this is really scary. Hey, I hear this question all the time. Well, not all the time, but some of the time people say things like, hey Jason, you're such a pessimist and you're so negative about so many things. I mean, if we're going to have higher unemployment, we're going to have all these problems and people are going to be broke, how are they going to be able to afford to rent my house? Well, they'll be able to afford to rent something. The question is, will they have three roommates and will they be moving down? You know, I always say it's just, it's just look at it like two ladders, okay? And your tenant that you, you talk to five or seven years from today, if you had a conversation with them, they might say, and just in 2018, for example, six years from now, you're talking to one of your tenants and your tenant lives in that property you own, and it's a 1400 square foot house. And who knows what they're paying in rent because that all depends on inflation. It'll be higher for sure. But you might talk to them and they might say, well, hey, I used to live in a 2,500 square foot house that I owned and it was in a better neighborhood than this and now I'm poor, their standard of living is going to decline. It's not that there won't be someone able to rent your property. It's the question is, what will they be renting? They won't have as nice a lifestyle as they used to have. They'll have an older car, they'll have the older iPhone. You know, I kind of throw that in because it's so, you know, trite. They may not have a cell phone at all, you know, because maybe they can't afford that in the future, who knows? But they'll just have less of a lifestyle. They'll still be renting something. They got to be live somewhere. And they might be running on a government 8, section 8 type of program, which will probably be expanded, frankly, under the inflationary, pacify the people type of mentality that we've had. And we'll probably expand. But yeah, you had a comment on that just before we go.

Yeah, going back to when you were saying people asking if you're a pessimist, you know, in general, you know, people that know me my whole life, I am a 100% optimistic, pounding my chest, go America kind of guy. And since I became a financial columnist in writing, friends are looking at me like, what happened to you? And I tell them this. Honestly, I just follow the math. And if this doesn't get you to think, think about what we are doing right now. We have low taxes, we have low interest rates. The Fed has poured trillions of dollars in the system. We've had government stimulus. Between the jobs programs, bailing out Freddie and Fannie, food stamps have risen up up to $78 billion across the US each as of 2011. And that will continue for a while. We're doing all this and we're growing at sub 2%. If that doesn't make you think there's something wrong, I don't know what will. And once the math changes for me, then I will become more bullish. If I saw incomes rising, if I saw a new industry, for example, if natural gas was expanded here in the United States of America, where we actually had pricing and supply, demand and jobs were created, then I could be a little bit more bullish. But if everything you're doing is to just get sub 2% growth, the future can't be good unless you get expansion in jobs and incomes. If we got expansion in jobs and incomes, I would have a different take right away. But for years I've been saying that we're not going to have this booming recovery that everyone thinks. You know, when the White House was talking about 4% growth in 2012 and 3.5% growth in 2011 just didn't have the capacity there. And that's what you have to look at. Follow the math. We're so polarized as a nation that, you know, Republicans or Democrats, you know, we want to get our ideological. But forget about all that. I try to just focus on the math of everything. And if we are just going a sub 2% now with this, what's the future going to hold? And if we get jobs and incomes growing, that'll be a positive for this country. If we don't, boy, it's just not a very bright future.

Well, all I can say is I hope that America is at the center of some new energy breakthrough or nanotechnology breakthrough or biotech breakthrough, because then maybe.

Maybe, maybe we have something.

Yeah, yeah.

I mean, I'm not a big energy guy, but if you. I plug in the numbers of natural gas and really it's the one thing we actually have supply and pricing power on against the world. There are already acts in Congress to try to prevent us from exporting that because they want the energy cheap here. Besides of that, I don't see anything out there that's going to create and, you know, kind of a. We don't have a Henry Ford. We might have a Zuckerberg. That's great for 3,000 people and shareholders for, well, actually not shareholders. But we don't have an industry that's going to create a lot of jobs where incomes are going to go up. And that's what we're missing is that new kind of Henry Ford guy to come in there and say, hey, guess what, here it is. And then the multiplier effect goes off on that. Housing used to be something like that. But again, when you don't have the income to purchase homes, you don't have the multiplier effect on the economy as much as the Fed would love for housing to recover. Just look at how many cash buyers we have, even though rates are at three and a half percent.

Yeah, it's something. Well hey Logan, give out your website if you would and tell people where they can learn more about you and your writings and follow you because you've really got some good stuff.

Sure, sure. I write for Benzinga.com but you can follow all my articles at www.loganmodashami.com. l O G A N M O H T A S H A M I and family run business AMC Lending Group. We've been serving California residents since 1987.

Fantastic. Well Logan, appreciate you being on the show and keep up the good work. Okay?

Thank you. You too.

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