CW 298: America's Economic Outlook with John Mauldin Author and Publisher of ‘Thoughts From the Frontline’

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Welcome to the Creating Walt show. This is your host, Jason Hartman, and this is episode number 298. We're almost at that magic number, 300 episodes. And the 300th show will be of course, a tenth show. And we'll talk about something of general life interest. But today we've got John Malden on the show. Many of you are very familiar with his newsletter. It is very, very widely read in financial circles. And he's also affiliated. I actually just heard this today. I didn't know this. He's affiliated with Doug Casey and Casey Research. And we've had Doug and Doug's right hand man on the show before on prior episodes. So we'll go to John Mouldin here in just a moment. But I've got one of our investment counselors, Michael, on the line with me to do the intro. Wanted to touch on a few current events. And Michael, welcome. How are you? I'm great.

Good afternoon to you, Jason. How are you doing?

Well, fine, thanks. Just got back from the Money show in Orlando, Florida and I did that show with Steve and did two speaking engagements there and it was quite interesting. You know, one of the things that was very interesting about the Money Show, Michael, is that first of all, at the beginning of the show, it's like a lot of senior senior citizens, not just senior citizens, but I'm going to call them senior senior citizens come in just to kind of get free stuff. And we didn't have any goodies to give away at our booth, but the booth with the free pens and the free whatever those were the crowded booths. So I decided we got to get some swag. Next time we do one of those trade shows, it's not about how much.

Money they can make, it's about what they can get for free, apparently.

Yeah, yeah, that's true. But as soon as I Got to speak. I did two speaking engagements there, and soon as I got to do the first one, then I became famous at the Money show. And our booth was very crowded after that. So it was a pretty good show. And we'll probably have Steve on to talk a little bit more about that. But, you know, one of the best things about that was really not all the new clients we gained. And of course that's great, but it was really what I learned because I got Steve to man the booth more than I did. And I went around to the other booths and in my typical way, being a, you know, a consummate skeptic, I went around and I talked to all these other guys promoting these energy deals and these oil and gas exploration and the gold bugs were there selling coins and bullion. And there were a lot of public REITs there and master limited partnerships, which is all the rage now in the Investment World, the MLP's master limited partnerships. And, you know, I went around and I got to question all these guys just for hours on end about all of their offers and stuff and really learned a lot about the sort of the double meanings they all give away. And, you know, I'll talk about that probably with Steve. But investors beware. That's my takeaway. There's a lot of things that are just too. If it sounds too good to be true, it probably is, as the old saying goes. But hey, Michael, let's talk about Zimbabwe first here.

This was an article that caught both of our eyes, and it was pretty interesting to see. They said they were down to just $217 of total cash on hand for the government. And some of that stems from the fact that they have no currency their own at this point. So they don't even have enough money to organize a vote for constitutional referendums or elections coming up. So what do you think of that?

Jason, this is. Michael, that is literally unbelievable. Now, I just want to remind everybody that before the debt ceiling was increased, I think it was not the last time, but the time before here in the US Apple actually had more money in the bank than the United States government.

And I think the number. You might remember this because you're a big reader of Zero Hedge and you keep track of current events very well. But I believe the number was Apple had 76 billion with a B billion dollars in the bank, and the US government only had like $72 billion in the bank.

But of course, ZeroHedge made a funny little jab at the US government that to still meant that Zimbabwe had More net cash on hand than the United States.

Well, what do you mean as it relates to GDP or just net netting.

Everything out due to the, you know, the liabilities on our balance sheet?

Well, actually that's true. That's probably a good point. The, you know, if you look at it that way with net worth, it might be true that Zimbabwe actually has more money than the U.S. i don't know. You know, I haven't done that math, but given our obligations, our $120 trillion entitlement time bomb coming our way, it's amazing. Zimbabwe. I remember reading an article a couple of years ago in the Daily Reckoning, Bill Bonner's newsletter and just fascinating. But of course their solution to everything is just buy gold, which I think is at best a mediocre solution. But you know, Zimbabwe is like the poster child for mismanaged central banks. And their central banker, the equivalent of our Ben Bernanke or formerly Alan Greenspan, is a guy named Gono, I can't remember the first name. And Bill Bonner was so funny and snarky about it. He said if there is a hall of fame for central bankers, Gono, and they called it Gonoism, would be in that hall of fame because they so debased Zimbabwe's currency and just ran the whole country into the ground. It's mind boggling it really. So here you've got an entire country, admittedly a small, frankly worthless country, kind of. But oddly enough, with exports this year slated to be over $1 billion, mining exports with $217 in the bank that can't even run its own elections. What do you say to that? Insane, huh?

Yeah, it's just unbelievable. And it said their GDP is growing I think at 5%, but it's just not going to be enough. Effectively their only solution was to ask for donations from the international community to help them get back on track.

How embarrassing is that? Basically the US in a way does the same thing because we're asking for donations in quotes in the sense getting China and Japan the two biggest buyers of our Treasuries, they're basically making donations, you could argue to us in doing that because it doesn't make much logical sense for them. But folks, what everybody's got to remember and how this applies to U.S. real estate investors is that the real rate of inflation and the real rate of GDP growth, you've got to take into account that the GDP and you mentioned Zimbabwe growing at 5% has to be higher than the rate of real inflation. So the US is In real terms, not official terms, it's decreasing in size. Our economy in the US Is, is decreasing in size. Because if the real rate of inflation is 9 or 10%, which I submit to you that it is, and the reported rate of growth being much lower than that, our economy is contracting. There's just no two ways about it. The economy of the US Is getting smaller and the lifestyle, the standard of living in the US Will decline. For most people, just remembering our listeners, economics is a relative issue. So if everybody else gets poorer, but, and you even get poorer at a slower rate than your neighbor does, you're winning. So just understand that, that everything is relative. It's the theory of relativity as it applies to economics, but mind boggling. Mind boggling. Now, Michael, also you had something interesting that you just read on Zero Hedge about Greece. Another complete disaster of socialist spending, entitlements gone wild and what it's done to that country. Tell us about that.

Yeah, so I think today would be day seven of a strike, and it's the seamen that are on the strike. So most of the ships and the ferries have now shut down. And talking about trying to export, just crushing their own economy, they now have shortages on grocery shelves and none of the farmers can get any of their agricultural products exported to, you know, the Balkans and beyond there.

Unbelievable. So basically now that's got to be really bad on tourism too, because if those ferries aren't running, you know, a lot of, lot of tourists use them. And if you want to take a boat to another one of the Greek islands, which, I mean, this, this is what happens, folks. And this is why you've got to be ready for the worst to happen. You know, I always like to say, Michael, expect the best, but prepare for the worst. And that's why I started a few years ago my holistic survival show. And our listeners, we talk about how to invest, how to win the game by investing, and basically in a lot of ways, gaming the system and doing what our government here in the US Is doing, and most governments around the world that are playing the same game with fiat currencies and central banks to kind of game the system and to win economically. But if we really have a bona fide economic collapse, which could happen, as they have in Greece and many other countries around the world, where things shut down, I mean, do you know if anyone listening expects the store shelves to stay full where you can just go to the grocery store and get your provisions? You're out of your mind. I mean, the grocery stores, at the first sign of crisis will probably be virtually empty within hours, if you know, or at least a day or so. So you gotta. You gotta store some food, store some water, one gallon per day per person in your family. This is just prudent. This is not paranoid, this is not crazy. It's just smart. It's responsible. You gotta do that. And we see that example that's happening right now in Greece, and it's happened so other times. Not surprising, is it?

No, not really. And you know, just to touch on that, it's. People really underestimate what could happen. I mean, I'm in Orange County, California. We could have a 9.0 earthquake any day, and suddenly, if I don't have that food and that water supplied, we could be in really big trouble.

Yeah, no question about it. So. So certainly natural disaster, solar flare, emp, electromagnetic pulse, or just economic uncertainty or economic collapse. I mean, look at like, you know, I grew up in west la, and you just got to ask yourself, if you live in a big city like Los Angeles where you've got a significant amount of the population that is depending on government welfare and the EBT card or the food stamp program, essentially, and if they don't get their checks and they don't get their card recharged electronically, can you imagine the type of civil unrest that will occur? And this is another aspect of how I pick areas in which to invest. You know, I don't want to be investing in an area where they're extremely likely to have these types of problems. That's another thing. But enough about doom and gloom. Well, the next article is about doom and gloom too, but it relates. This all relates to real estate investing and how people can game the system and just win that game. Well, this one was interesting to me. I just saw it the other day. Canadian pennies are no more. The mint will stop distributing the coins as of February 4th. So as of today, no more pennies in Canada. And I've long sensed that the US should demonetize the penny and the nickel because it costs more to mint these coins than they're worth. It's just completely stupid. Your thoughts? Yeah.

And it was just back to more charity. One of the recommendations was that people just donate all their pennies in Canada to charity at this point.

Yeah, that's the best thing you could do. I remember when I was a kid, my mother was executive director for the Los Angeles chapter of the Leukemia Society of America, now called the Leukemia and Lymphoma Society. And they used to have these boards, and I remember As a kid, I used to go around and distribute them with her, and they still have them. And this is what amazes me. There are these. These. They're called coin boards, where people can put a quarter in this cardboard thing. And, you know, you might have seen these at various merchants. You know, there's a pizza place by my house here in. In Phoenix that I go to and get a slice of pizza once in a while. And they have one of these boards where you pop a quarter in it to donate to the Leukemia Society. And I mean, they had these things in the 70s, and what's happened to the value of a quarter since then? I can't believe it's worth for them to even produce this cardboard and go around and collect these things, given that people just pop several quarters in there. You know, you ought to be able to pop a dollar in there now at least. I mean, with the rate of inflation, it's just ridiculous. But I instantly when I realized that the penny and the nickel aren't worth the metal they're printed on, I mean, in monetary value, I thought, well, why don't people just melt them down for their metal value, which they should. I mean, the value of the metal in a penny and the value of the metal and nickel is worth more than the nickel or the penny. Well, of course, there's a law against that. The government makes laws against any of their illogical, unreasonable stuff. So that's called the smelting law. If you melt them down, you're going to jail. You can't collect a bunch of pennies and melt them down. And I think the reason the government doesn't demonetize these things is because it would be embarrassing. It would be an obvious admission that inflation in real terms is much higher than we've been told. Isn't that amazing?

Yeah. Well, I'm just thinking how sad to be the first president to have your coin melted down.

Yeah, well, that's true. That's true. Well, hey, thanks for coming on today. We've got to get to John Malden, and I think you're going to find this interview to be very interesting. This was recorded fairly recently, and I think the listeners will enjoy this. But, Michael, listen, this was the first time we've had you on the show, and I want to have you back on soon. Okay?

Absolute pleasure. Have a great afternoon.

Jason provides an extremely unique service deal evaluator. Are you interested in a property outside of our network? Need a second opinion? No problem. Let our experts evaluate the deal. Find out more about it@jasonhartman.com.

It'S my pleasure to welcome John Molden to the show. You've probably heard his name. He's a renowned financial expert, New York Times best selling author and a pioneering online commentator. John, welcome. How are you?

I'm doing awesome, thank you.

Well, good to hear. Good to hear. Hey, it's good to hear such a positive response from an economist.

You didn't ask me about the economy. You asked me about Maine.

Oh, okay. Well, good, fair enough. Good answer, Good answer. Glad you're doing well. So talk to us about the economy and the investment market though. What are your latest thoughts and how does the future look?

Well, the future is really cloudy right now. I mean we're in a muddle through, you know, one and a half to 2% growth world. I don't think that changing any, if anything the risk is probably the downside. But we're really kind of, I think everything is on hold until we have an election in 60 days or 90 or whenever, however many days it is. But this election is about what is the direction of the compromise going to be. There's no question we're going to have to compromise. We cannot continue in the way that we're going. I don't think the Republican Party is going to sweep 60 seats in the Senate. And if Obama wins, we're not going to get a compromise in the favor of smaller government. So I mean, it's really about do we get. So neither party is going to be able to dictate the nature of our future direction. So it's going to have to be a compliment.

And honestly, I don't think even, you know, when you look at the Republican side, I don't think you're going to see any severe spending cuts even on that side because both sides are just pandering for votes.

Well, you're going to have to see spending rearrangement. So you can, you may not shrink the absolute type of government, but we're going to have to check our priorities. I would like to see us restructure the tax code. There's all sorts of things we could do. I just did an interview, Bowles, the Simpson Bowles committee, you know, and I laugh that.

I use, I get the laugh line in my speeches, but I, people ask me about Simpson Bowles and I say, well, I think it's the worst possible proposal I've ever seen and I would vote for it in the New York second because it solves the problem. The problem is we have a deficit that is going to overwhelm this country and our economy if we don't fix it. So the key is solving that deficit issue and then let's try to move on from there. And Bowles does it by some pretty significant cut that you got Democrats to go along with and some spending increases and restructuring that you got Republicans to go along with. And for instance, the only reason that Ryan didn't go along with it was that he didn't think it went far enough on restructuring health care. He was perfectly fine with everything else. He just wanted more health care. Restructuring something along that line is going to have to be done. If it's Obama, then it's going to be something else. But it's, you know, are we going in the direction of smaller government footprint or larger government footprint? That's going to give us some sense of the direction of the economy. In my personal economic view, a smaller government imprint means a larger piece for the private sector. Larger private sector means more jobs and a faster growing economy. Governments don't produce anything. They just take from somebody else that is producing and get into.

Different set of priorities.

Well, you know, John, to your point on that, that's interesting that you say that because it reminds me of a quote that I saw recently. And actually it was a picket sign. It wasn't a quote. I'm sorry, I think it was a Tea Party picket sign. And it said this, and it's so aptly put. It said, a big government equals a small citizen. The larger the government is, the smaller the citizen gets. So like you said, you know, when you're talking about when the government sector is large, the private sector is small. It is.

And I mean, there's just no way to get around that. I mean, that's, that's a reality now, is there? You know, would we be better off with no government at all? Well, no, I'm not. Of course, I'm not an anarchist.

Anarchy is no fun. Just look at Somalia.

Right? So, I mean, I don't have such a wonderful opinion of my fellow humans that I would be willing to let them run carte blanche in the financial world. I want some regulations, I want some controls on banks. So I recognize that there needs to be safety nets, all those things. But the smaller we can make that imprint, the better the growth of the economy will be. So there's some curve there that's smaller than we are now, especially in terms of deficits because we've just come to the end of our ability to borrow money. We've seen what that does in Greece. Insane. And it's Increasing throughout Europe. Japan's getting ready to hit that wall. Great Britain's having to deal with their own issues. So the bulk of the developed world is going to be either in a depression, in recessions, or in a very, very slow growth economy for quite some time now. And so that means your opportunities for growth are going to be in other places. It's not an ideal situation from a investment standpoint. I mean, just in terms of buying and holding and forgetting about the world, you have to be a lot more targeted and more focused about where you put your money to work. That being said, three, four years, we're through all this. One way or another. It's going to have to get resolved over overall, though.

John, question for you on that. Overall, you talk about the deficit and it is, I guess, still possible to rein that in and get that under control. But what seems way out of our league, out of anybody's league, is the unfunded entitlements. I mean, that is just such a giant problem.

Well, that, that's part of the problem. I mean, that has to be part of the solution, which is what Ryan, I think correctly, when he said he was, wouldn't support Simpson Bowles because it didn't go far enough on the entitlement restructuring. We have to do that. And while we're at it, we might as well restructure our tax code, which is totally crazy and bizarre.

And it's just tainted with special interest everywhere you look.

Oh, yes. I mean, just we could balance the budget if we got rid of all the tax deductions. That's how out of control it is. So we need to get the government to stop trying to direct money in the economy and saying, okay, we'll give you deduction because we want more of this. And then we want more housing and we want. No, stop it. Just let the market and people decide how they want to spend the money and drop the overall tax rate down. If we did something like Simpson Bowles, which reduced the overall tax rate while actually increasing revenue some, I would find that to be enormously bullish. Number one, it would give you certainty. Number two, the lower marginal tax rates are quite bullish in terms of spending and economy and business planning. So I'm not a pessimist. In fact, if we deal with the deficit and given the fact that we seem to fortuitously and wonderfully have found enough energy underneath the continental United States and North America to supply our own needs and actually begin to export, within a few years, we could see the trade deficit really begin. To shrink and even go positive, which would make the dollar extremely strong. We could have one of those wonderful situations where we could find the United States is no longer the United States that it could be, but the United States that we think it is in its mind, or we think it was at one time. I mean, that's actually possible. And by the way, you get through the secular bear market, that whole valuation cycle, you get to the end of all this and you start the next bull market. All of those things coming together could be enormously bullish.

It could be a decade into twenties. Yeah, no question. And John, I completely agree with you on the energy side front. The problem is once again there you've got another special interest problem. You've got the environmental movement that is just restrict, restrict, restrict. And there are other business interests that want to restrict alternative energy. And I don't think solar or wind work at all. I'm talking about fracking, I'm talking about natural gas and oil, ANWR and the assets we have right here at home that could last for decades and decades.

At some point we've got to decide that with an environmentally responsible program that jobs and energy production here, and when solar becomes cost effective, and it will at some point, that's just the nature of technology. When other new alternative forms of energy become cost effective, and they will, that's the nature of technology, then don't replace natural gas. We should recognize that we have an abundance of natural gas and figure out how to produce it. And frankly, instead of exporting natural gas, which we're going to do, we need to be exporting the products made from natural gas, chemicals, fertilizers, that type of thing that are value added, that create more jobs here in the US we can really see a renaissance. That two, three years ago when I was writing my book Endgame, you just didn't see it wasn't there except as some kind of fantasy program. And now it's becoming reality.

Yep, it sure is very, very interesting. Well, so do you think a Republican win, you know, in any big way, the presidency and seats, seats in Congress? Do you think that'll really make a significant difference in terms of getting our fiscal house in order, or is it just sort of another flavor of the same ice cream?

No, I think it just determines the direction of the compromise. If we don't have, if we don't compromise, if we don't deal with the deficit, then we are in fact going to hit the wall. That's just the reality. And by hitting the wall, I mean we run up against the ability to borrow money at costs that are sustainable. We start having interest costs that become the biggest portion of the budget. Those types of things. We start looking like Spain and Italy who can't access the market now at low interest rates. They have to have central bank intervention in order to be able to fund their deficits. That's not a working business model and certainly not a working business model for the United States. But that really changes the nature of our economy and it changes. It'll force us to make larger tax increases and bigger spending cuts than any of us can possibly imagine. Now. It's a very disruptive thing not to fix it. In my conversations with congressmen and senators, they get that we just don't want to talk about it until after the election.

Your outlook on, and I know a lot of this depends on November, but your outlook on interest rates and then two big markets, real estate and stocks.

Well, we saw the deficit. Interest rates are going to be low for a very long time because reducing the deficit over time is by definition deflationary. And the Fed will be able to print more money than we can possibly imagine and still have low interest rates. It's going to drive the gold bugs nuts if we don't solve the deficit. Interest rate environment, inflation become a completely problematic event. Stocks eventually get to some valuation low. Typical secular bear markets are 17 years. They run through their own cycle. We're 12 to 13 years into this one. There have been secular bear markets that are only 13 years. Some of them lasted 20. So that turns around. So right now I'm targeting stocks rather than just buying index funds and buying the US Economy. If I want to buy equities, I want to start specific equity that I want to own for a reason the economy. Solving the deficit does is going to reduce potential growth for a while. There's no question about it. Just because you're reducing the footprint of government and it will take a while for that to take, for those effects to wash out. But in the long run, we're all much better off.

Yeah, no question. I agree with that. We're certainly better off in the long run. But you know, I've got to ask you about one thing you do just mentioned, John. You said that Fed policy would drive the gold bugs nuts. Can you elaborate on that a little bit?

Well, I mean if you're going to deleveraging deflationary world, if you're where the volatility, the velocity of money is dropping, the Fed can print more money, they can do more QE and it's not going to drive inflation up. It's not going to drive gold up.

And you're saying that's because the velocity.

Is slow, the velocity of money is slowing and you're in a deflationary world, especially if we're reducing our trade deficit at the same time. It's one of those things that people want to look at the absolute base money supply and say, well, that's what drives inflation. And the answer is no, that's only part of the equation. So for gold bugs who typically don't think that the velocity of money has anything to do with it, they just.

Look at money printing rather than they look at Right.

And so they miss it. And that's what I mean by saying it drives them nuts.

Fair enough. Well, I know we've got pretty limited time here, John. Just anything you want to wrap up with, any thoughts and please give out your website as well.

People can get my website@johnmaulden.com m a u l d I n.com and I have a free letter. Just stick your email address in and you can be one of my 1 million closest friends. It goes out every Friday night and Saturday morning and we talk about all the different things that we talked about here and a lot more. So love to have your listeners join.

Fantastic. Well, John Malden, thank you so much for joining us today.

You're welcome, sir. Thank you very much.

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Hey, it's my pleasure to welcome a listener to the show. This is Eric calling from San Diego today and he had some questions about cash out refis on one's personal residence and using that to invest with and then also pulling money from other types of investments or investment accounts and using it to invest in income property. Eric, how are you?

I'm doing great. Jason, how are you doing today?

Good. Thanks for joining us on the show and your question is a great one because I know a lot of listeners have these, this exact same question. So, like I say, I appreciate people participating in the show and, you know, just helps us kind of everybody has the same kinds of questions, so it's, it's always great to answer them. But first of all, before we kind of dive into it, tell us a little bit about how you happened to find us. And I assume it was the podcast, but I'm not sure.

Yeah, I found you actually, some time ago, just on a web search. I came across some of your podcasts and I actually attended your seminar probably about three years ago or so. And at the time, it just didn't. It just wasn't. The timing wasn't right or whatever, and I didn't choose to jump right in. But as the years have rolled by, I've been listening to the podcast off and on and certainly been interested, and I really enjoy the guests you have. And I guess recently with the turn of events politically and some things, it just really seemed to click in. And in fact, one of your podcasts, you talked to Dan Ammerman, and I really enjoyed that particular topic. We talk a lot about inflation and taxation and how all those things work together. So I took his mini course and that along with the topics of some of your podcasts, that really sealed the deal. And so I'm in whole hog now and looking forward to making my first income property investment.

Good, good stuff. And I know that you plan to buy quite a few properties. You've got substantial equity in your personal residence and then other investments as well. And by the way, I just wanted to mention to the, the listeners, if you like Dan Ammerman, as I do, he's been on the show, I think, four times now over the years. So if you look back and listen to some of those really old episodes, he's on there. So he's been on several times, but yeah, Good, good, that's great. Well, so tell me, what question, kind of what decision or question are you faced with right now?

Well, the main one I wanted to cover is my personal residence. I. I've been looking into refinancing it, and as part of this shift in investment strategy, I wanted to at least explore the topic of putting the equity in my house to work. I bought the house back in 97, so I've got a fair amount of equity amassed and I want to at least investigate that. Obviously this is my primary residence and the house that my family lives in. I want to be cautious about, about playing around with that Equity. But I want to just explore how that works, you know, how to do it safely and effectively and maybe other options, too. I mean, refinancing with cash out is one option, but maybe another option to look at is selling the house and then buying or renting another house using the proceeds to the same end. So I want to kind of look at pros and cons and maybe there's other options, too.

Yeah, right. Okay, well, this is, this is a great thing. So let's analyze this. At first I thought you just wanted to talk about refinancing the San Diego property, but now that you brought up the idea of maybe selling it is something to consider. Let's kind of analyze that. So a couple questions for you, Eric. First of all, how much is the property worth?

Conservatively, it's probably worth about 850,000.

Okay, so $850,000 property. And what is your loan balance on it?

It's about 165k.

Okay, so you've got a good amount of equity in there. Now here is a question to which not know the answer, but I hope you can take a guess. If not. I can. What do you think that house would rent for? Say you were a renter. Are there any, any of your neighbors that are renting their house that are maybe on your street or in your neighborhood that. That don't own, but they rent? And do you happen to know what their rent is?

I've explored it a bit and I. It's. It's a little hard for me to gauge, but there's a house down the street that rented for something like $4,000 a month, but it's, it's a bigger house. I would, I would put it in the range of maybe 2,500, maybe 3,000.

And I'm going to guess, actually usually I'm not super generous on the rental amounts. I'm going to guess it would rent for about 3,000. Does that sound fair?

That sounds fair.

Great. Well, if that would rent for 3,000, then that is renting for. And I'm just doing this off the top of my head, about a 4 or a.38 maybe RV ratio sound about right? Because it's 0.5 would be 4000 or, well, 4. 4250 per month would be a 0.5 RV ratio. So it's renting for less than half of 1% of the value. And to me that says really it's a good deal to be a renter. And the reason I say that is that any of the income properties that you would buy through our network, you can get a 1% to, you know, even a 1.7% RV ratio on them. It makes far more sense, just from a financial only standpoint to rent the high end house in which you live and own a lot of lower end properties that other people aren't smart enough to buy or can't buy that they'll rent from you. Because as a ratio of the value of the assets, you can create a lot more income if you just took $850,000. We're going to do this just very simplistically and instead of, I know that you don't have that much equity in your house. You have about 700,000 in equity in the house, which is a lot, but your obligation to that house is about 850,000 between the money you have in equity that's not working for you and the loan you have on it that you're paying for every month. And we're not even talking about association fees or property taxes or anything else. We're just looking at the asset value of $850,000. So if you were to take $850,000 and invest it into say, eight income properties, okay, that were a hundred and a couple thousand each, okay, totaling 850, you would rent those for at least $8,500 per month in income rather than cost. And then you could turn around and rent the house down the street from you potentially for $4,000 a month. So do you see how you're arbitraging all sorts of great things there? And I mean, that's so beneficial to do it that way, right?

Absolutely.

Yeah.

I think there's, you know, there's some security in owning a house. I mean, if things really got bad, you know, if, you know, I guess that's maybe the counter to that is just you'd have to give up the security of owning your house. It's your house if things really go south.

Right, Right. Well, that's the next thing I was going to bring up. It's not just security of owning your own home, it's also the emotional attachment to the house. And if you were a renter, you might do a two or even a three year lease. Most leases are one year. And the owner of that property might decide, hey, they don't want to rent it anymore. Maybe they want to move back into the property, maybe they want to sell the property, whatever, you don't know. So there's definitely something to be said for that. And the other thing that you have to consider is, you know what? If you really want to make significant modifications to a house, if you're a renter, the landlord will almost always allow you to do paint or wallpaper. I don't think anybody uses wallpaper anymore too much. But, you know, you could do paint or wallpaper as long and the owner will just. Just say, hey, you restore it to the original condition. If you want to put up a chandelier, tint the windows, most of that stuff they're going to be fine with. But if you want to add an addition to it or something, then that's kind of a different story. But the thing, Eric, I would really submit to you is what you just brought up. You said there's a security in owning your own house. And I know this is counterintuitive to almost everybody out there, but I say that there's not much security in owning your own house. And I will tell you, my thinking has evolved in this because I remember I was. In fact, it's funny, I was just thinking about this yesterday. A friend from a long time ago, Katherine, I remember that her parents were very successful people. They lived in a beautiful home in Orange county and had a big yacht and they were doing quite well. And I remember that they got into financial trouble and they lost their house that they lived in. And years ago, when I. I remember saying to her that maybe the one thing you always do is you always pay off your own house. And. And I used to think that was a good idea many years ago. I didn't think it was ever a good idea from an investment standpoint. But I thought the home and the hearth, maybe you just own one of them free and clear, and that's the one in which you live. But the problem is you never really own it because if you have a homeowners association, they always exert extraordinary power, scary power over you, where they could foreclose on your property. And I could tell you stories about that. I've read many articles on it. But the other one is property taxes. In the US, Nobody owns their property. There's a perpetual, forever lien on your property called property taxes. And if you have a lot of equity, it makes you a target for litigation because houses are very easily identifiable and searchable. So say, for example, someone was after you in a lawsuit, a creditor of sorts. They could find out where you live very easily. They could find out how much equity you have in that property very easily. Any Realtor can go, you know, you don't even have to be A realtor, frankly. But you could. There's all sorts of databases online. But. But for realtors, it's tied in with the MLS and you know, everybody and their brother's a realtor. Right. They can just go look up your property address and it ties into the county tax records that'll tell what is your loan balance, what is the approximate value of the property. You just do the subtraction. There's the equity. You're a sitting duck for a creditor, whether it be a lawsuit, litigation type creditor, or it just be, say, in another area of your life, you got into financial trouble. People can find out what you have very easily. Unless you have it in some sort of an entity like an LLC or a land trust, which does give you an added measure. But those come with responsibilities and problems, too. So I know this is totally counterintuitive, and I've talked about it on the show many times. But oddly enough, and here's another example, say that small $160,000 loan balance, say, for example, you weren't able to make the payment on that, just even that small, small loan, which might seem crazy, but it's happened to millions of people where they'll have a property that's worth hundreds and hundreds of thousands of dollars, and their loan balance might only be 20 or 30% of the value of the property, a very small loan relative to the value of the property, and they get into financial trouble and they can't pay that loan. Well, if you have all that equity in your house and your neighbor has the same $850,000 house and it's leveraged up to the hilt and they stop making the payment, who do you think the lender is going to be more likely to foreclose on swiftly? The person with a lot of equity or the person with little to no equity?

The guy with lots of. Lots of equity.

Yeah, right, right. Because. Because they can gain something, that equity actually makes you a target. Where it seems that having a lot of equity and paying down your debts is the prudent, conservative thing to do, I say it's actually the more risky thing to do.

Yeah, it's a very, very interesting perspective, and there's definitely some validity to it.

Yeah, yeah, there really is. And I also invest a little bit, although they seem much better on paper than they are in real life, at least for me, in tax liens or tax deeds. And, you know, some of our listeners have asked me about that type of investing where you can get these returns of 16 to 35, 40% sometimes. But let me just tell you, in real life, it doesn't quite work that way, folks. At least not for me. But. But that's a whole nother story. But what I wanted to say about that is that, say, for example, you even accidentally didn't pay your property taxes. You know, when that happens, people miss a payment, you forget about. It only comes twice a year. In California, you. You could have a tax foreclosure on your property, on your hands. Equity is, is risky. It's risky to have equity. It makes you a target. Whereas if you have little to no equity, if you stumble into a problem, the lender is going to work with you. They're going to bend over backwards. You know, if there's a lawsuit, you're not going to be as likely to be sued because you don't have clearly identifiable assets. Now, I mentioned before about that, like, you could put your property in an entity, you could have it in an LLC or a land trust. And a land trust won't give you any asset protection, but it does give you some privacy. But the thing there is, even without doing that, if you have no equity, big deal. What are they going to get anyway? There's nothing to get. And with our plan of having these properties spread all over the country, where you have different state lines that you cross, different county recorders where records are kept differently in every place, it's very hard to figure out what you have, you know, when these properties are all over in different, different cities, different counties, different states. So one of it is just an issue of privacy before anything else. Does that kind of make sense, what I've, what I've said so far?

Yeah, Yeah. I think that that paints the good picture for at least the one option of perhaps selling my current house and probably renting over, buying another house.

I'll tell you another funny story. One of our clients who just purchased a property from us in Indianapolis, they're probably going to listen to the show and they know who they are. Well, they live in La Costa and they are renting a gorgeous, gorgeous property in La Costa. And I think they're paying like $4,200 a month for it. And I don't remember, forgive me, I don't remember the exact number, but it was really extreme. I said, how much would that house sell for? And they said, we think it's all for About a million, 5 million, 600,000, I think is what they said, 4,200amonth. It is such a better deal financially to be a renter. The only Thing is, remember the person saying, this is a single guy. That's me, right? I don't have children. I'd love to get married, I'd love to have kids. Don't have a wife. Okay, right. I gotta, gotta start with a wife. Find the right girl first. But, but you know, I tell you something, it's like, I mean the one thing, if you're a renter, like I said before, the landlord might decide they want to sell the property. They might decide they want to move back into it. The best thing, if you're a renter and you have a family and you really need a longer term kind of stability, get yourself see if you can negotiate a two or a three or even a four year lease. And that doesn't mean the landlord's committing to the same price. If you want to be a smart tenant and you want to sort of give the landlord what's going to make them feel better, you could easily just do what they do in commercial leases and the landlord won't be smart enough to figure this out because they're probably not listening to my podcast. Okay, so here's what you do, okay, is that you want to be the landlord, but also make them feel good at the same time. You say, look, I'll rent this property. I want to stay here a long time. I like the property. I'd like to do a four year lease with you and I will give you inflation adjusted rental payments every year. We'll tie it to the consumer price index. So for example, if my rent is $4,000 the first year, in order to protect you, Mr. And Mrs. Landlord, I am willing to pay whatever the consumer price index says is inflation. I'm willing to adjust the rent up every year by. And what's the consumer Price index? It's totally faulty index. Right? The landlord doesn't know any better. Probably. So now what would the consumer price index say? It'd say like 2%. So okay, you pay $4,080 the next year. Whipp de do, big deal. But that'll make the landlord feel better. But you can build rent increases into your lease. It doesn't mean it's going to be 4,000 for four years, which the landlord might not agree to. There's one other thing I just want to tell everybody. You know, I'm promoting this idea of if you have a, if you live in a high end area like San Diego where there's high land values, I am promoting this idea of renting. But there's one more prudent thing you need to do as a tenant. And here it is. Just remember, you hold your question there. Remember what it is. Okay, Eric, but there's one more thing I really want to advise people. You got to make sure your landlord is actually making the payments on their mortgage. And some renters, some savvy renters, if you're not renting from an institutional landlord, like I rent from an institutional landlord that owns a huge apartment complex, right? But if you're renting from an individual landlord, there is a threat that they might not be paying their mortgage and they are collecting your rent. Now, many people, clients of ours, listeners to the show, have done this very thing, and it's a pretty great deal. But I don't want your landlord to be able to do it to you, right? So a lot of savvy tenants will ask for the landlord to send them their mortgage statement every month. Now, of course, they were really crooks. They could dummy up their mortgage statement with a computer. Nowadays you can counterfeit anything, right? But you could also check the tax records on a regular basis. There are not the tax records, but the county records to make sure that there's an nod or notice of default hasn't been filed against the property. There are some things you want to do to be a savvy tenant.

And is that because you could be legally held responsible for past mortgage payments?

No, not because of that. It's just because that a foreclosure on a property just totally terminates all leases. So if the lender takes back the property, you are now the tenant of the lender. And the lender can say, okay, they do have to. They have made some new laws about this, you know, in the past few years, where the lender will have to give you a certain amount of notice. At least 30 days, I'm sure, if not even more. But a lot of times, the tenant even gets another reward. Get this one, okay? The lender will send someone over to knock on your door, and they will offer you what's called cash for keys. And they'll say, look, if you'll cooperate and move out of the property, and within 30 days, we will give you $5,000 to move.

I'm telling you, it's just a. It's just an upside down world, Eric. And, you know, it's. It's like. It's just all the wrong behaviors are being rewarded. I mean, you know, I'll be the first to admit it's. It's crazy, but it's the way it is.

Yeah.

So what was your question? Do you remember?

Well, yeah, I think I probably answered my own question, but there's some tax benefits to owning as opposed to renting in the form of interest deductions and property tax deductions. Each probably weigh that into the equation, but it probably gets lost in the large delta between the benefits of. Or the cost of renting versus the cost of owning.

Actually. Well, no, actually, I'm going to. Gonna tell you something else here. There really is no tax benefit in owning a house. Now everybody must think, oh, this guy's an idiot. I better stop listening to the show right now. No, I'm actually not an idiot. Okay, here's why. The tax benefit you get from homeownership is only a benefit based on money you've spent. That's not, in my book, a very good tax benefit. Because, look, if you can. If your mortgage payment is $6,000 a month and 5,000 of that is interest, you can deduct the interest portion and you can deduct the property taxes. Now, homeowners association fees are not deductible, which I think is another big ripoff. But you can deduct your property tax and your mortgage interest, right? So fair enough. But the problem is you have to spend money to do that. Look, you could just as easily deduct donate money to charity. You could donate $5,000 to charity and take a deduction. Okay? Also, you could also spend money on your business and take a deduction, too, if you're in business for yourself or you're an independent contractor. So that's not a real tax benefit. That's a tax deduction. I guess maybe the distinction should be this. There's a difference between a tax benefit and a tax deduction. And this is new. I just thought of saying it this way. A tax deduction is where you spend money and you get a. You get a tax deduction. Big deal. That you got to spend money to get that. But a tax benefit is where you get something that you get a deduction for in your taxes without spending money. And so with income, property, that's depreciation, the most coveted of all tax benefits ever, because you get the deduction if you qualify without spending the money. It's a beautiful, beautiful thing. You know, when I was in traditional real estate, I was such an advocate of homeownership. But that was back in the day, before I did nationwide investing and being located in Orange county, where most of my clients were Irvine and Newport beach, two very, very expensive cities. In fact, Newport beach was one of the most expensive zip codes in the country or at some points I think it was the most expensive zip code in the country or one of the zip codes, the Newport coast zip code of Newport Beach, I should say. And back then I thought, well, if you're not investing where I didn't see investment returns that were as good as they are nationwide because I always had that California mentality, high land values. And back then owning your house seemed like a good deal because that was one of the few places you could get a tax deduction. But when you can invest nationwide and get these tremendously good RV ratios, rent to value ratios and cash on cash returns, I mean, it's just there are many better things you can do than own your own house. Now listen, if you lived in a market that we recommend investing in, you should be a homeowner. If it's a lower end property in the price ranges we like to buy as rental properties, those properties you're much better off owning. It's just that your tenants, tenants haven't been financially mature enough to save money and take care of their credit score and delay gratification because they can probably always rent something better than they can buy as well. Now the Delta is much smaller in a lower end property, but it's like one extra bedroom or two car garage instead of a one car garage. Or this school district versus that school district. They can usually rent something a little better than what they can buy. But in your world of looking at a property approaching a million dollars, you can do much, much better. The Delta just becomes so big because at a certain point renters just won't pay anymore.

Well, that's good food for thought. That's obviously going to take a fair amount of introspection to see if that's a viable path, but that's really some great food for thought.

Yeah, good, good. Hey, can I ask, what type of work do you do?

I'm an engineering manager in the aerospace industry.

Okay, good stuff. Well, any other questions I can answer for you?

Well, just continuing on that theme, what about a refinance with cash out as an option?

I think that's a pretty good option. Of course you're still owning a high land value property that you could rent for much less than you can own it. But it's certainly better than keeping cash in the property equity tied up, doing nothing for you, which is what you've got now. So I would definitely refinance, that would be my first thing. And then the second thing I would consider doing is just outright selling and then renting the house down the street for a lot less money. Right, okay, but, but refinancing is fine. So let's, let's kind of analyze the refinance for just a moment. So have you shopped around for refinance rates?

I have a little bit, yeah.

Okay. And what kind of loan can you get?

It's been a little while since I did. I think it was around, I could do around three, three and a quarter.

Percent, something like that.

Yes.

Phenomenal. Wow.

Yeah. Yeah. Pretty crazy.

Yeah, it's awesome. And is that a 30 year fixed rate loan?

That was. I think it was a 30 year fixed. I was looking at 15 and 30 and maybe the 30s are more like three and a half. But it bounces around between three and three and a half, I think.

Yeah. And you know what I'm going to say on 15 versus 30 year loan? I'm going to say take the 30 year loan.

Right, Absolutely. I've seen the like.

Yeah, yeah. I mean, unless the only time I differ on that, if you, if we were in a market where rates were say 10% and you could get the 15 year loan at 5%, then I might be swayed because the rate was half, but not even close. The 15 year loans or the 30 year loans, a much better deal. You want to lock that in for a long time. So three, wow. 3.5%, three decades fixed. And how much cash out will they give you? What loan to value ratio?

You know, Jason, I haven't really asked, gotten to asking about that because at the time I was just looking at refinancing, you know, and keeping the equity in there. So I don't know the answer to that.

Yeah, okay. Well, I would definitely pull the cash out because you're borrowing. I mean, if you buy into what I say that, I think, you know, inflation in reality is 9 or 10% right now as we speak, and probably going a lot higher down the road. If you buy into that and you know, I've explained it on many, many episodes before this, then you're getting paid to borrow money right away. And you know, that actually brings up one more thing, Eric. One of the nice benefits to owning your own house. Now this is kind of in favor to owning the house is that you get to borrow a lot more money. Because if you can arbitrage inflation by borrowing the money at 3.5%, well, the value of the debt is declining at say 10%. You've got a six and a half percent arbitrage where you're outdoing inflation by six and a half percent. Right. And so with that, just the fact that you get the privilege of being able to borrow all that extra money that you might, that you might not get to do if you didn't own your own house. There's a benefit in that. And then, you know, of course, the other thing we didn't talk about just. And I want to be very balanced here and I want to be very fair on both sides. The other thing we didn't talk about is, hey, what if your house in San Diego appreciates? Well, it is appreciating now, but you know, on balance I think you can do better in the appreciation in the lower end properties in other markets. But we need to mention that. Okay, so the refi sounds pretty good.

If I were, if I just go in with the refinance cash out theme, how much would a transaction like that tie me down to my current residence? I mean, it would make it much tougher to pick up and move if we wanted to at some point. Correct?

What is that, the refinance or renting?

No, if we refinance with cash out.

And I use those proceeds to buy some additional income properties and then two, three years down the road we decided we want to move, move out of state or something. But now I've got, I've got, you know, all those. I've taken the cash out and I've used that to buy income property. I'm getting income from it. But how much does that to that situation tie me down to this, to my current house or keep me from moving?

The only thing that really ties you down is that if you refinance it, you've paid some. You may have, not necessarily, but you may have paid some cost to do that refi. So say you refi it today and you move next year. You know, if you sink 5, $6,000 into that refinance and then you sell the property, you could consider that lost money unless you've either made up that 5 or 6,000 through inflation arbitrage, which you probably would actually as long as you invest the proceeds of the refi or you've been able to get a better return in another investment that you use that cash for. So that's the one way it ties you down. But does it tie you down in any other way, making it harder to sell the home? No. Say, for example, you even refinance the house for more than it was worth. Then you would end up doing a short sale, potentially. Who loses there, you or the bank? The bank does. So it's Just, I just don't know the situation when it's better to have a lower loan balance on a property. Just remember my one saying, real estate or income property specifically is the best investment. But it's a mediocre bank. It's just not a very good bank. It's not a place you keep equity or keep money. It's a place where you control someone else's money and that's the bank's money. It's the most borrowing and tax favored asset in America. I always want to leverage my real estate.

Okay, that's a common theme in your podcast.

Yeah, yeah, I'm sure you've heard it before. And you know, look at, I mean there are some, some of these real estate deals in these lower priced markets where we operate that people, I mean we, by the way, all of this being said, we have lots of people buying properties for cash from us who are, who listen to all of this and they've done as many loans as they can. They can't get any more financing. Maybe in the future they will be able to refi and pull equity out of those properties, but they still love to buy them, even with cash, because just the cash on cash return on an all cash deal they can get 12, 14, 16, 18% cash on cash. I mean with no leverage. Imagine if they're able to refinance that property two years from now and leverage it, how astronomically great it'll be. And then they get the tax benefits too. So even with cash, a sensible property works.

Right, right, right. Okay, let's maybe move on to a slightly different topic if we could. As I'm going through this and trying to unwind my other investments and moving into investment properties, one of the things that's become pretty clear to me is it's difficult. If you want, if you want good 30 year fixed rate mortgages on all your properties you're going to buy, it's difficult to move fast. Right. If you want Fannie Freddie loans that'll get 80%, 80% financed, things like that, there's rules that kind of keep you from moving fast. And at this point in time I kind of want to move fast, but just was interested in your thoughts on that.

Well, you can only move as fast as they'll let you move. That's just the nature of the beast and it's one of the limits you'll have. That's why a lot of our investors, they are buying some of their properties with cash and they're financing whatever they can and that's what they're doing.

Right. That's certainly one strategy is to buy with cash and then later refinance when the rules allow you to, right?

Yeah, absolutely. So that's good. But understand, if you can never refinance that property and you always own it as a cash property, will it be a good investment? And I say, heck, yeah. I mean, where else are you going to get even? Even if you only get 12% cash on cash, plus some tax benefits, if you qualify for them, the rents are going to increase. Yeah, maybe the maintenance cost will increase a little bit, but the rents will probably increase more. As long as you're not making your properties the Taj Mahal and you got a good rehab to start with, where the property's up to snuff the day you get it, which it would be through us, hopefully. So I think, I think it still makes sense, even with cash, to purchase them. I mean, hey, look, I own some properties with cash. I can't get any more mortgages. I have some properties that I own free and clear. I don't like it. It's not my favorite, but, heck, what else am I going to do, right?

Yep, yep. You're limited by what the rules allow.

You to do, that's for sure. And those rules, they're loosening a little bit. They've gotten better since the depth of. Of the financial crisis. It's getting a little easier to borrow. So was there another question about another investment? What about other investments? So, being able to move fast. But do you have a question about, like, liquidating another investment, mutual fund or stocks or anything like that?

I don't, no, not really. I think I know what I need to do on those. I mean, I have some gold investments that I'm actually thinking I might unwind, at least most of those, if not all of them. So that's fairly easy to do. Some of the equity investments I have are a little trickier to.

Unwind just because they have limited liquidation time frames. There has to be like, every quarter or so. They liquidate once a quarter. But I think those are pretty straightforward and it's going to take a little longer than I had anticipated.

My questions were mainly about how to work my primary residence into this. And just in developing that overall strategy, that was kind of the one sticking point that I wanted to explore a little further. So your insight's been extremely helpful and I think that'll help me to make some wise decisions here.

Good, Good stuff. Well, hey, thanks for calling into the show and Eric, happy investing. And we're glad to have you as a client, appreciate your business and you know, I just hope we can really be the real thing that you look back on 20 years from now and say, hey, I'm so glad that I made the decisions I made and they really worked out well for me. So thanks so much for being part of the show and for being in client as well.

All right, thank you, Jason. I appreciate it.

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