CW 393: Airbnb in San Francisco Plus Trading vs Investing and Apartments vs Single Family Homes with Douglas J. Utberg

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 Hartman. And this is episode number 393. 393. We are getting up there today. Our guest Doug, who's been on the show many times, will be talking with me about apart versus single family homes and trading versus investing. And you know, this kind of blends pretty well. We're going to talk very specifically and drill down very much on real estate investing, or as I like to say, income, property investing in this episode. But it really dovetails very well on the last couple of episodes, especially where we talked with Vitaly about Warren Buffett and value investors. So I think it ties in pretty well there. And I've actually got our producer that's going to join me for the intro portion today and that is Patrick coming to us from the Socialist Republic of San Francisco. Patrick, welcome. How are you?

I'm doing well, thank you. Good to be here.

Good. I hope you didn't get mad at me for saying that.

Well, I actually live in the Haight Ashbury, so I'm in the most liberal voting section of the most liberal city in the most liberal state. So I guess it could be a fair character. That's good.

But you know the thing I really, I gotta tell you, Patrick, I really enjoy, enjoyed our very first conversation when I first met you, met you via Skype, I should say. We meet people virtually nowadays and asked you about living in San Francisco. By the way, I should make the disclaimer. I love San Francisco. I've spent a lot of time there over the years. You don't know this, but I had a couple of uncles that were very big in the bar and restaurant business up there. They were very successful. One, my late uncle Norman, his last bar was called Eddie Rickenbacher's and he passed away and he basically gave that bar to some of his managers. And my other uncle Jack, who owned a bunch of bars, some with him. One was the Balboa Cafe, which is pretty well known. He sold that several years ago. But they owned a bunch of bars and you know, they owned, Jack, owned one with Boz Skaggs, the musician. And so, you know, I spent a lot of time in San Francisco. I love it up there. It's a great place. I just wouldn't want to be a landlord there.

It's a great place to be a tenant.

Yeah, it's a great place to be a tenant. And that was really interesting, our first conversation because I wanted to share this with the listeners and your experience there and talk about how it affects investing and prospects for that and all of that good stuff. So, you know, maybe first, Patrick, I'll just ask you to kind of tell the listeners a little bit about maybe about yourself if you want, and about your rental situation. You've got a fantastic deal and you know, you're just right in the heart of San Francisco with a great location, been renting it for a long time. So take it away.

I've been here in San Francisco since 95 during the dot com days. And really rent control is the equivalent of affordable housing in San Francisco. The majority of people that live in San Francisco are renters. So there are more protections for renters here which, which is very useful because the median home price here is $1 million now. So it's very difficult to be an owner in San Francisco unless you have considerable amount of wealth.

What do you get for a million bucks? I mean it's. That's so outrageously expensive, but it's obviously a very desirable place to live. Do you have any friends that are living in that sort of stereotypical million dollar median price home?

No. And actually the median price home, there's nothing glamorous about it at all. It's a very average looking kind of kind of home. And like to get like one of the Victorian, the old single family Victorians here, I mean you're looking at about 2.5 to $3 million here in the Haight Ashbury or Ashbury Heights. But by being a renter you can really get a good deal. And the great thing for me was I was able to move from a one bedroom apartment to a two bedroom apartment back in 1998 and the rent was a lot at that point in time it was $1,800 a month. But right now for June of 2014, the rents for a two bedroom, two bathroom apartment is $4,200 a month. That's, that's the average.

Okay, now is that, is that one rent controlled, by the way? I mean, can someone walk into that market today and get a rent controlled $4,200 apartment and stick around and stay there for.

And then that'll look cheap eventually.

Absolutely. And that's how it works when you first rent in San Francisco. It's whatever the market will bear. And then your rent increases are controlled on a yearly basis by a percentage that's set by the city supervisors, which tends to be about between 1 and 2%.

So that's the increase that's lower than even the stated inflation rate, much less the real inflation rate. That's a great deal.

The great thing for me is having moved into this apartment in 98 at $1,800 a month, it's now a little over $2,000 a month, but still it's a lot less than what the $4,200 a month average would be for people that are just moving into the market newly today.

Right, okay. So I think what's interesting here is to look at the dynamic of rent control and how it impacts the market. And Patrick, you know, we had such a great conversation about that initially because I had a couple new revelations that I really hadn't thought about in too much detail when we, when we talked initially. And that is that, number one, I would think that that really ca of settling and a lot of stagnation. In other words, someone like you, why would you ever move? If you move, you would have to be like, you can't take that with you. Like, one of the things in California that's sort of interesting, I'd almost make the comparison, is that there are some cases where you can take, if you own a home, you can take your Prop 13 taxes, your property taxes to another home. And you know, forgive me, I cannot really remember how that works, but when I was in traditional real estate many years ago, I remember people would do that and that would be a big thing they would think about. Especially older people, you know, want to move from one house to another and move, you know, maybe from one part of Orange county to another and take that Prop 13 low tax rate with them. So their taxes wouldn't really increase in any substantial way. And you can't do that with rent control. You just got to stay in that same place.

Right, that's true. And fortunately, San Francisco is a great place where you'd want to stay for a long period of time and so.

Right. But you might want to move around the City. Right. You might want to move to Pacific Heights or you know, I mean those are really expensive areas but you know, you might want to move to the Marina district or something, you know, I don't know, to a different area or you know, stay in Haight Ashbury and move to a different home, maybe a bigger or smaller house. Right.

I'm very lucky in that I live right across the street from a park, Buena Vista park. And so my entire field of view is green.

Wow.

And so I have absolutely no desire to try to, you know. True, there are a lot of awesome views to be had living in Santa Francisco and I'm perfectly happy with the one I have and can always get a better view. But again, rent control really kind of does make it so that you don't move around as much. Fortunately I'm in a place where I'm able to enjoy where I live.

I appreciate that. I'm just trying to like talk about the broader market though, you know, because I think that pretty big implications for the economy. I mean think about it. When someone moves, they spend money, you know, they buy new furniture, they redecorate, they hire movers. It's expensive to move. It's a hassle too. And you know, moving sort of creates like a velocity of money, if you will, in a real estate market. And so people like your neighbors and your friends and the people you know there, they're probably pretty long term people, right? They just kind of stay in one place.

I assume the vast majority of people I'm in, I'm in a multi unit building and the vast majority of people here are only here for a year or two. There are a couple people in our building that have been here for 10 plus years, but very few who have been then you're in the 20 plus range. Most people are actually just passing through one, two, three years tops.

And so where do they go? I mean who are they? Are they like Silicon Valley people that make a zillion dollars and then move on or what kind of people are they that are moving?

You get the tech people coming through the Google Bus.

Yeah, I was going to ask you about the Google bus.

It's totally distorting property values around San Francisco because it's creating hotspots wherever their, their shuttle bus stops are. So the Google employees are moving in and driving up costs.

Isn't that mind boggling? I mean literally the Google bus, I mean people are picketing the Google buses and all of this kind of stuff. So now why did they need those buses? I mean what was the thing like in Palo Alto? It was, or Mountain View. It was just, I mean it's not more expensive there than it is in the city. Or their employees just wanted to live in the city or what?

That's right, the employees want to live in the city. You know, mostly, you know, most of Silicon Valley, Mountain View, Palo Alto, suburbia. Right, right, Exactly. And it' about 30 miles south of the city. But now we're seeing in the past five, seven years, northward migration of tech workers not wanting to live just in Palo Alto, but they want to live in San Francisco. So there are networks of corporate shuttle buses. Various companies have them, Apple, Google, Genentech, you name it. And so there's many more employees looking for places to live and rent and buy in San Francisco. And it's, it's distorting values in the spots where these shuttle buses stop.

Wow, that's just amazing. I mean, I mean like what, within a two block radius, three block radius of the shuttle bus? Is that how it works?

Pretty much, yep.

Wow. Unbelievable. I mean, when did Google start that program? About two years ago.

Google Buses, that sounds about right. Maybe two, four years ago. It's only recently become a political hot button because they were using public bus stops for their private use. So there was some discussion of using public resources by private companies without known, etc.

Wow. Yeah, really quite interesting. Very, very interesting. Okay, so back to your own situation a little bit. Let's just analyze that if we can, for the listeners. You started paying, I think $1,800 a month rent back in what, 1995?

1800. In 1998.

In 1998. Okay, so that was, boy, that was just at the big ramp up of the dot com boom. It turned into a bubble and a bust, obviously. Now what is it, you know, 15 years late, no more years later. So it's 17 years later or something and you're paying $2,000?

Well, about 2,100.

Okay. And $2,100. Do you pay your own utilities?

I do, yes.

Okay, and describe your place for us if you would. How many square feet is it? How many bedrooms? How much is it worth? Do you know how much it's worth?

It's a two bedroom, two bath. I'm not sure what the actual square footage is. I know that the monthly average now is 4,200amonth.

But what do you think it's worth though? I mean, with that property, if it were to go up for sale today, would it sell for a million dollars? Is it a million dollar Median price.

Home, the whole Victorian home that has like about 12 to 15 units in it.

No, it would have to be just your unit because we can't evaluate that any other way. We're only evaluating your unit that produces $2,000 a month for the landlord or 2,100amonth. You know, what would that go for? You know what, like if you've looked around, you know, what would a two bedroom, two bath place about your size, sort of comparable location. What do you think it would go for?

I would guess maybe 1, 1 to $1.5 million.

Okay, 1 to 1.5 million. So here is the analysis. Typical California, I mean, we're not talking about San Francisco here, but typical California rent to value ratio is about a 3 or a 0.35, meaning that a $1 million property. If you were to rent a $1 million property in say, Irvine, California, south of you, okay, south of LA, about 40 miles south of LA, where I used to live, you would probably pay about $3,500 a month for that property in San Francisco. It's even better or worse, depending on which side of the coin you're on. If you're an owner, it's terrible because a 1.1 to 1.5 million dollar property here, let's just whip out the calculator and let's go $1.5 million. Okay? And if we go 35, that would be $5,250 per month. So that's what that property would generate in a typical California scenario. But again, as you well know from editing the shows, you know, I love it when I know that my podcast editor is the person who really listens to my shows.

And as you know from me talking before on the prior episodes, we like to see people get 1% per month. So if it's $1.1 million, we would hope that a $1.1 million portfolio of properties, which might be 11 $100,000 single family homes, hopefully in diverse markets, they would rent for $1,000 per month each or in the aggregate, $11,000 per month. If it's 1.5 million invested in real estate, we would expect that investor would get somewhere in the ballpark of $15,000 per month. So you really see how living in your unit in San Francisco, you have totally arbitraged the market. I mean, you've just, you've got yourself a great deal. And it's interesting what you said before because you said that back in 1998, eighteen hundred dollars a month for that place really Was a stretch for you. I think you told me that. Either off air or in the scenario. Yeah. So that was a big stretch. But really in a way, it's kind of an investment because the way a first time buyer looks at a home. And I remember in selling real estate when I first got into the business at the ripe old age of 19 years old, I was selling houses to entry level buyers and investors that would buy these really tacky fixer upper government repo properties. That was kind of my specialty to sell HUD and VA repos in San Francisco. You don't even know what this is, okay, because it's, it's not even in the ballpark there. I would go out and maybe in some areas, occasionally in Orange county, but mostly in the Inland Empire, in Riverside and San Bernardino counties, I would be selling these little cheap houses. I remember the very first house I ever sold was in Anaheim, California and it was $92,000 and I think it was on Raymond Avenue, if I remember correctly. You know, you always remember your first one. And I remember the psychology, Patrick, of people that were looking. They would always agonize because they could always, always rent something a little nicer than what they could afford to buy. Buying was always a stretch in monthly expenses and down payment, and it was always a little bit of a step back in lifestyle. But the idea was it was for the greater good, it was for their future. You know, it was mostly a better deal to own a home and build some equity and get in the game, if you will. And really with a rent controlled apartment, people kind of go through. There's this similar psychology. You make a stretch, maybe you're spending more than you think you can afford. But ultimately, in a strange kind of way, it becomes an investment because that lease that you have has real value to you. To replace that lease today would cost $4,200 probably, and if it was on the open market, it should be $5,200. It's a pretty interesting dynamic. You said that people usually come in and they go in, you know, two or three years, they're kind of passing through, as you put it. But the people that have been in a rent control place for 8, 10, 12 years, I mean, they're not going anywhere, right?

Absolutely not.

They just stay put. Now, do they ever say to you or do you ever have these thoughts yourself that, you know, gosh, you know, you kind of wish you could have a different option or, you know, maybe you want a bigger place or, you know, try something different for a while? I Mean, you're pretty kind of stuck in a way because you just don't want to give that up. Right.

It's true. But I'm lucky in that I like where I am a great deal. So that really does kind of offset that a bit because I am where I want to be. Yes, I could, I could move, but my current position is such that I like where I live. I like the neighborhood. I like, I like that there's a park right across the street. I like that when I look out my window, it's all green. It doesn't look like I live in a big, huge city.

Right.

And there are, there are intangibles to that. I mean, I've lived practically almost 20 years under the same roof here in San Francisco. And that's just not the case for most people.

Tell us about, you know, your landlord. I mean, it would seem like your landlord would be just dying to have you move because. Because they could bump the rent up now. I mean, the rule is they can bump the rent up to the market rate of maybe 4200 or so. Right when you move.

Absolutely. Whatever the market will bear once I move out.

In rent controlled apartments and situations like that in, in New York, Santa Monica, San Francisco, I have heard many times of stories where landlords will kind of try to make life a little bit miserable for their tenants. You know, they won't be attentive, they'll make noise, they'll just, they'll just want them to move. It's like, please move, you know. Do you ever get that vibe at all?

No, not at all. Actually, I bet I've been pretty lucky. We certainly hear stories around the city about, you know, landlords that behave badly.

Yeah. Right.

Towards their tenants. And there's also a lot trying to convert units to take units off the rental market and convert them into the tenants in common and things along those lines. Our landlord would rather have a 20 year tenant that pays rent consultants consistently than someone who just comes in and doesn't pay.

Or you really have an incentive to be a good tenant and maintain a nice relationship because you've got such a good situation. So. Well, I want to give you a comparison and give our listeners a comparison here. Quick. Before we get to our guests. As the listeners know and as you know, Patrick, we have a property tour coming up, a Creating wealth in Today's Economy seminar and a property tour the next day. And that's in Little Rock, Arkansas, Bill Clinton's hometown, this property. I'll just give one example of many. Our Listeners can go to jasonhartman.com and click on the property section to see performance on all of these. But here's an example. This Property is only $78,900, okay? In San Francisco, you just add at least 10 to that, if not more, and the projected rent on it is 895amonth. It's got a brand new roof, a new H VAC system, and so you see there, if you bought 10 of these, you would still be lower than the median price home in San Francisco and you would get 895 in rent times 10. That'd be almost $9,000 a month in rental income. That would still only be $780,000. It's an amazing shocking difference. And this is why investors. One of my pseudo famous quotes is invest in places that make sense. So you can afford to live in places that don't make any sense, okay? So a place that doesn't make any sense to live in from a financial perspective, except in your case is San Francisco for example, or Newport beach or Santa Monica, or any of these places with beautiful coastline and nice areas and great opportunities like that, or New York City, doesn't make any sense to live there either, okay? From a financial perspective, but that's what you can do. You can arbitrage this. So if someone in San Francisco, and we have many clients in Silicon Valley in San Francisco that are investing through us, many clients with Google, Apple, you know, all the big name companies there, we totally appreciate their business and it's great that they recognize this because if they live in say San Francisco and they've got some money to do some stuff with, it doesn't make any sense to go and buy things in San Francisco because you just can't get any good ratios. The overall return on investment on this is projected at 45% annually. And the cash on cash return, now what that means is that even if the property drops in value, even if buy it for $79,000, okay, and then the next day it becomes worth a dollar, okay? The value doesn't matter as long as you maintain that same income to expense ratio, you will get 14% annually cash on cash. The overall return that I mentioned includes all the other multi dimensional aspects of real estate investment. So it includes appreciation and all the other factors, okay, tax benefits, etc. But just cash on cash, which is the really simple metric. 14% annually. And let's take another thing into account. Let's say it only goes half as well as projected. Well then 7% annually, which is about 7 to 14 times better than you're going to get in the bank. Okay. So. And you know, the stock market, who knows? That's all debatable. Invest in places that make sense so you can afford to live in places that don't make sense. And that is really one of the big things that we always like to point out. So I hope our listeners will join us for our Creating wealth in Today's Economy seminar and our property tour where we'll actually look at these properties in good old Little Rock, Arkansas. Again, this is a boring place. It's a place that never makes the headlines. If Bill Clinton wasn't from Little Rock, probably nobody would have ever heard of it. But it's a really nice, clean city where you get nice, stable, not in the news. Rental properties that just make sense from day one. They're inexpensive, they're low risk, and it's a great thing. So that tour is late September. Go to jasonhartman.com click on events to register for that one and we will look forward to seeing you there. Patrick, any other thoughts on San Francisco or rent control or things like that? You know, one of the things we didn't talk about that I think is important to notice and I'm sure because the numbers aren't very good for investors or landlords in San Francisco, it's not in their favor. I would assume there's just a huge shortage in supply. I would assume that there aren't very many new investors coming into that market thinking, gosh, I want to be a landlord in San Francisco. You know, I mean, supply is really tight there, right?

It's super constricted. And it's one of the biggest and most contentious political issues that the mayor has faced for multiple election cycles has been the lack of supply and the lack of affordable housing. San Francisco had, you know, we're a peninsula. There's. So there's limitations. You can't just build out. You can't sprawl out because there's a, there's an ocean there.

What is it, seven square miles or something?

Yeah, it's seven miles by seven miles or as they like to say, yeah, 49 square miles surrounded by reality. That's, that's the joke.

I love it.

While there is new ply coming down the pipeline being constructed, for example, there, there is a new high rise on Market street right by the Twitter headquarters. And it's not, and it's not even done being construct yet. And it's already 100% sold by Twitter. Twitter has already bought up all of the stock for themselves. And so here's this new housing that's never even going to hit the open market because it's pre sold.

And so those are condos then, I assume that's correct. Yeah, yeah. Is there a gray market or a black market for rental housing? I mean, there's always develop in rent controlled cities, you know, where you've got people doing stuff under the table. And then of course you have an. I know someone personally who did this. A friend of mine who had a rent controlled place in San Francisco that he never gave up. He moved to Southern California. Well, he moved to Chicago first, then he moved to Southern California and he still had a lease on a place there that his friends leased from him. And of course, if his landlord ever found out, you know, he would be, he would not be able to do that, obviously, because you can't sublease. But do you know anything about a black or gray market there?

Airbnb is, is huge here in San Francisco in terms of both sides in terms of tenants renting out a spare bedroom and also in terms of landlords using Airbnb because they can get a higher rate per day, daily rate from renting out just short term rentals via Airbnb. And they've been getting into some degree of trouble with that because it takes us, you know, rental stock away from the, from the market.

Hoteliers, of course, hate Airbnb because they represent competition. What else happens? I mean, you know what? Like is the city wanting to shut Airbnb down and outlaw it there because it sort of bypasses the rent control market?

They actually just recently signed an agreement with the city so that Airbnb will now start paying a hotel tax to the city, San Francisco.

So now the city's happy.

That's right.

Oh, interesting. It's just crazy. But no gray market. Like, have you ever heard of people finding a landlord and saying, hey, choose me as your tenant and I'll pay you under the table a little extra or something?

I haven't heard that yet.

Good stuff. Well, hey, thank you so much for sharing this with us. We really appreciate it. That was a very interesting discussion.

My pleasure. Good to be here. Thank you.

All right, well, we'll go to our guest and that is Doug and we'll talk about trading versus investing and apartments versus single family. Family. Welcome to the show, everybody. I'm here with Doug today and we are talking about a couple of really important things you're going to want to hear. We're going to talk about trading versus investing. And maybe we'll even get into the trade of the decade, which we talked about at a Meet the Masters event a few years ago. We're also going to talk about pull versus push appreciation and the age old question of what is the better investment, apartments or single family homes? We'll kind of dive into into a few of these issues. But first let me apologize. I am outdoors and I know there may be a tad bit of background noise. I'm trying to overcome my perfectionistic tendencies and it's good enough. So I hope you agree with me that it's good enough because we are not in the studio today. Sometimes we're out mobile and when the idea strikes and the opportunity's there, you ought to just record a show. So that's what we're doing. Hey, Doug, welcome. How are you?

I'm doing well, Jason, although I would recommend that you should go with the Microsoft standard of 85% of good enough.

Oh, okay. The thing I always complained about over the years when I was a Microsoft user, I've converted to Apple and I found paradise. I know you're still using a PC. I feel sorry for you. But the thing I always complained about is Bill Gates would force us all to buy the next version before he fixes the last version. And I just thought that was really quite wrong. So, Doug, let's talk about this recent article from John Burns Real Estate Consulting. Our listeners know we have John John on the show before and he's got some great information. But this is really startling how single family rental homes are increasing dramatically as a percentage of total rentals. And I think this shows a preference in the marketplace and the demand being met to some extent too for single family homes over apartments. Talk about some of your thoughts about this article if you take a look.

At the chart that's in John's article in 2000. In 2005, just under 31% of all the homes that were available for rent or all the units that were available for rent were single families. Whereas the estimate for 2013 is about 30, just over 35%. So that's roughly a 15% gain in the proportion of single family homes as a percentage of total rentals. What's really interesting is you think about this on the backdrop of what the market's been like since since 2005, because there were basically no new single family homes built for all of 2009, all of 2010 and at least half of 2011.

We gotta be clear though, Doug, when you say there were none built, of course you're using that as a figure of speech. There were some built, but compared to the building boom pre financial crisis, it was negative.

Yes, I'm using hyperbole, but it's just barely supported by facts, much like politicians.

Okay, good. At least you admit it.

The thing that's interesting is that during this whole time there have still been apartments, units that have been being built. But even during that stall, I mean, I think from 2009 to 2010, the rate of single family homes as rentals stayed roughly flat. But otherwise, for that whole time period, single family homes have been increasing as a proportion of total rentals. And I think like you said, what this is showing is that there is a structural preference in the market for single family homes. And what's been happening is that of course, a lot of people know lately that a lot of the houses that have been bought out of foreclosure have been being purchased by investors. Those investors have been turning them into rentals, and those rentals have been slowly displacing apartments because people have a natural tendency towards single family homes. This sort of segues really nicely into our conversation of single family versus multifamily investing. Because one of the things to think about when you're an investor is that there's two forms of value. One is cash flow and one is appreciation. Those are your main vectors. As a multifamily investor, the only way you can get appreciation is by what I call push appreciation. So multifamily properties are valued based on a multiple of their cash flow. So like, for example, capitalization rate of 10 would mean that you're valued at 10 times your annual net operating income or annual cash flow. And so the only way that you can make the value of that property go up is to push up the cash flow, either by cutting expenses, raising rent, or something else. Alternatively, with single family houses, their price is based on market comparables. In a lot of cases, what will happen is when the market value of single family homes goes down, then the capitalization rate will go up. But then when people start moving into the area and buying more homes, it pushes the price up, but the rents don't go up in unison. What you end up with with single family homes is almost like a call option, which I know to a lot of people the notion of a call option is a little confusing. So in the financial world and the world of options, a call option gives you the right to sell something at a certain price. For example, say I buy a call option on Microsoft to buy it at a certain Price. Say that I buy an option on Microsoft at its current market price and it goes up $10. I get to keep that whole $10, but the amount I paid for that option was much less than if I'd bought that stock outright. Similarly, if you own a single family house, you have your cost of capital locked in. But if the local area suddenly becomes very desirable, that market value can start to shoot up, can go up that hockey stick chart, but the rental value will almost certainly stay flat. That's the issue you run into with multifamily, is that if your market suddenly gets hot, rents don't go up a hockey stick. Rents go up a slow, plodding slope. Anybody who has rental properties knows that rents never go up as fast as you think they should.

That's absolutely true. Because when I talk in the creating wealth boot camp, when I talk about the three dimensions of real estate, of course there are more than three. I talk about the main three. When things become really illogical and frothy and bubbly in a market, that's where single family home investors can profit dramatically. I love that it's illogical like that. It's great that there's just not much rhyme or reason. And the rents do flatten. Sometimes they decline in those markets because everybody's buying instead of renting.

The single family home economics are just so different from, from the apartment economics because as you said, you know, one of the things that, like for example, one of the things that killed apartment owners in 2000, 2001 and especially 2008, 2009, was that the interest rates dropped. And so a bunch of people that used to be renting apartments, now they've gone out and bought houses. That killed apartment owners. But that enriched everybody who owns single families because all the people who stopped renting and started buying, they moved out of apartments and into single families or out of a single family rental into a single family owner occupied. If you own that single family, all those people who are buying those owner occupied properties, they're pushing up the market value of your property every time they log another transaction. But that doesn't happen with multifamily because nobody buys an apartment unit, Nobody wants to own an apartment unit. People want to live there for just long enough to save up enough money to buy a house.

I should say to the listeners that a lot of the stuff we're talking about here applies to retail properties, industrial properties and office properties the same way, because they're all sold on income rather than being sold on illogical things like, like scarcity mentality and ridiculously low interest rates and silly monetary policy. And whether it be Janet Yellen, who I'm sure is going to be guilty of it during her tenure, or Greenspan was the most guilty of anybody, and Bernanke too, of putting the economy on steroids and juicing it to get their result, their short term result for their tenure. And a lot of residential investors profit from that quite dramatically.

Another way of saying that is the legendary investor Jim Rogers. One of his aphorisms was to buy panic and sell euphoria. And so as you said, single family housing is frequently illogical. And if you sell into that euphoria, you can do very well. Similarly, if you buy into that panic, you can also do very well, for example, with apartments and with the multifamily, whether they be those office complexes or apartments, or retail, or even the light industrial. What happens is you don't get those irrational swings. You don't really get those chances to really time the market like you do a single family.

Families.

The reason being that I've seen listings for an office complex that was say 10% occupied, that had where the cash flow was just atrocious. The listing was still for pretty close to replacement cost. Whereas on the other hand, at the bottom of the financial crisis, when you were picking up foreclosures, they were being sold at less than half of construction cost. Prices in panic on housing gets ridiculously low. And then whenever, whenever things get frothy, whenever you get bubbles, the prices go ridiculously high and those swings just don't happen. You don't have that to really ride the huge cycles like you do in the single family houses. Now on the other hand, if you're an idiot, you can lose money in single family houses much more quickly as well. But the best remedy to that is to just not be stupid.

The way to not be stupid is to invest for cash flow and to invest for income, rather than trying to invest in cyclical markets where you have those big swings. In the markets that have the big swings, you'll never get the cash flow to. It just never ever works.

What investing for cash flow does is it puts you in a position where you can benefit from the swing. Because anybody who tells you that they know where the market's going is lying. The best anyone can possibly do is to have an edge where they have a slightly better than average chance of knowing where the market's going, meaning that nearly half the time they'll still be wrong. Or they can make a slightly better than average rate of Return, meaning that nearly half of the time they're still going to lose money. What investing for cash flow does is it lets you be wrong for a really long time without losing your shirt.

Right. That's a great way to put it. It lets you ride the storm so you don't have to be a market timer, which is something that I've just never seen anybody successfully do it.

I've seen people talk about it.

Yeah, I've gotten lucky a lot of times, but it wasn't genius. It was just luck.

Timing. The market has always been easier to talk about than it has been to actually do.

Great cocktail part party discussion. You know, the other thing I want to say, and we did a show several episodes ago where I talked about single family versus apartment buildings. And look at, I've owned both, I own both now, and I like both. However, one of the things that a lot of investors just don't really understand is how much more complex it is to manage an apartment complex. Because just think about what happens when you put a bunch of people together and they are neighbors and they have music they can play and dogs that do things and they have parties. You've got to basically run a business. It's like you're running a hotel. You've got to keep all the guests happy all the time. And then they do this other thing, Doug. They form little mutinies. They do things like start talking to each other and they form little Internet group and they go on Yelp and write negative things about your apartment building. And your apartment building is on Yelp, just like any business. Right? Just like the restaurant or the chiropractor or whatever, your apartment building is there too. Okay. And you know, you really have to manage a reputation for your building. When you have single family homes, you don't have to do this kind of thing.

One of the things that I liked was if you want to go large scale with a single family home, the best way to do that is to work on buying out a whole neighborhood. Because then you can still get the economies of scale, but you don't have to deal with a lot of the ancillary issues that are associated with a multifamily property.

And that's something I've talked to some of our larger clients about who are building big portfolios. And something I'm going to talk about more on the show in the future of ways that you can basically buy and form little monopolies on neighborhoods. And if you do this in about three cities, you're also well diversified at the same time. So for larger investors. Stay tuned. We'll talk about that some more. So, Doug, this is a kind of a good segue. Let's talk about trading versus investing just for a moment. And do you want to talk about. I think it's fair to ask for revisiting the trade of the decade that announced four years ago before we talk about trading versus investing and before we dive into the trade of the decade that was announced four years ago. I just want to make sure we point out some of the specific numbers from John Burns, because we opened with that. And these numbers are pretty astounding, really. In 2005, single family homes as a percentage of total rentals was 30.8%, and by 2013, that was 35.3%. That's a pretty big increase statistically in just eight years.

Most certainly is, Jason. I mean, eight short years, the proportion has increased by about 15% increase over those eight years. And if you think about that, that is relative to the total amount of rental units outstanding.

Right. So what you mean there is that there's more housing stock. It's like looking at statistics based on a per capita basis. There's a larger stock of housing. So not only has it increased 8% based on the overall supply, but if you kept the supply steady the way, you know, you might think of adjusting for inflation in real dollars versus nominal dollars. So in 2005 houses. That'd be a fair way to say it. What would that look like in 2013? It'd probably be, I don't know, 41%. Right.

If you're going to try to keep your units of measure constant. Because the one, one thing to consider is that your total housing stock has been growing for this total time period. So that means in order for the proportion of single families to go up from 31 to 35%, that the growth rate of single family rentals is going to have to be significantly higher than the growth rate of your overall rentals because it's increasing as a proportion of the total.

People just want single family homes. That's the American dream, you know, The American dream. Whenever you see that, you know, idyllic image, image of the American dream, it's never somebody living in an apartment building.

Let's talk about trading versus investing and the trade of the decade for just a moment, if we can.

A few years ago, we announced what we call it our trade of the decade. Whole idea behind that, behind this was that at the time, everybody was worried about when interest rates were going to go up and That's a really valid concern because interest rates have been basically ridiculously low for quite a while now. What we said was that the rate real trade of the decade that we're still in the midst of right now is to continue purchasing reasonable cash flow rental properties while rates are low. But once rates shift to go from purchasing on credit to purchasing with cash, because what happens is when interest rates go up, then that means your payment to purchase a house is also going to go up. So that's going to put pressure on the prices for how the pricing for house houses. And so that now of course, all the people who own these properties are going to say, oh my goodness, this is terrible because all of the houses that I just bought on credit, the price is going to go down. Maybe it's not quite as terrible as you think though, because think about what's happening in the overall market that's going to be driving the price of your house down. What's happening is the cost of acquiring a new property is going up. So that drives the price down, but it also pushes more people out of owner occupied houses and into rental houses houses. As we just saw from John Burns, there's a structural preference in the market for single family houses versus apartment units. So now what happens is once interest rates go up, once you already have your, if you already have properties now those properties, the price may go lower, but your rents will start going up because there will be more people in the rental pool. And if you have cash now, what you'll be able to do is you'll be able to start, you'll be able to keep buying properties at depressed overall prices for good cash flow ratios. And then once interest rates come back down, you'll be able to refinance and pull cash out of that property. So the real thing to do with our trade of the decade idea is to modulate your strategy for purchasing properties based on what happens with interest rates. The real bottom line takeaway is that there's not likely to be a bad time to buy properties coming up in the future. The question is going to be whether it's a better time to buy on credit or a better time to buy with cash.

It's always a better time to buy with credit if you can mortgage the property. However, sometimes you can't. So when you can't, that shouldn't keep you from not buying because the investment compared to anything else, at least now or in the last many years, when we look at it, because it's got multi dimensional aspect, one of them is Leverage, which is wonderful if you can get it. Even if you take away the leverage in the acronym ideal, I D, E, A, L. The L is leverage. There are still other great factors. And you know, you're still a great commodities investor. You're still investing in something that has universal need. You still have the most tax favored asset in America. There's still many reasons to do it. And if you look at it solely from a cash on cash return anywhere over these last 10 years, if you're in the sensible market, buying the sensible property in the right segment of that market, you're doing better than anything else. Maybe there's some little blips when gold would have outperformed you, some little blips when the Dow or the S P might have outperformed you. But overall, if you're into something for three years, the real estate has been a better deal. Even non leveraged many times I'm much better.

I think that's actually where the real trading versus investing intersection comes in. Because the way that I think about trading versus investing is that an investor is looking to buy something that's a good value and hold it for a long time. That is the model for real estate. As you say, real estate investing. There's a reason why we say real estate investing.

Yeah, we don't call it real estate trading. Thank you. There are stock market traders. There's a lot of trading software for the stock market stuff. ETF traders, there's forex traders. Real estate traders are flippers.

The way that I like to juxtapose like say financial markets and real estate is that I think real estate is the world's best investment market and the world's worst trading market. And I would put the financial markets as exactly the opposite. They are fantastic places to trade and they are just atrocious places to invest. With the financial markets. There's a lot of ingrained volatility. Now if you're a trader, volatility is literally lifeblood. You know, traders live because of volatility. Because what a trader does is they engage intensely, study the market to be able to anticipate which direction either a stock or a market or a currency or a country or a commodity is going and then trade that direction profitably and then take their profits. And then when the direction flips to trade it, to trade that other direction profitably. What investors try to do is buy something that's a good value and hold onto it for a really long time until that full value is recognized. One of the best phrases I ever Heard on value investing, I think it was, I forget which hedge fund manager said this, but there was three rules of investing for value. Rule number one is that investing for value works. Rule number two was that investing for value doesn't always work in the short run. And rule number three was that rule two is the reason why number one was true. And so what that means is that if you are a value based housing investor, there will be years when you will have been able to do better in something else. In gold, in stocks, in something. There will always be individual years where something many times, lots of times, many other things will outperform investing in real estate. But over a really long time, what will happen is if you have invested in good values, you will generate superior long run average return.

I agree if the real estate is unleveraged, however, if the real estate is sensible income property that we would recommend produces income that has cash flow and it's leveraged, nothing's going to outperform it. You're going to have to be totally lucky and buy Apple at $80 and see it go to 400 in a year, then you'll outperform it. But if it's leveraged, it's always going to win pretty much, you know. If it's unleveraged though, you're absolutely right. And that's what the stock market people, the Wall street people love to do, is they love to compare non leveraged income property with stocks that are not multi dimensional like the real estate.

The way that most people are profitable as traders is really to do leverage trading is through trading in things like options or on margin accounts. Now the trade off to that is that it's very volatile, it's very risky, the volatility creates risk. So you have to really know what you're doing, otherwise you can get wiped out very easily. The advantage that real estate brings to most investors is that it lets you use leverage without being as susceptible to volatility. Because if you're investing for cash flow, then if your price varies but you're still producing cash flow, you'll be able to ride out that volatility. Whereas the way that almost all market trading accounts work is that your accounts are marked to market every day. And then what happens is if your account ends up in a margin deficit, you can enter into a forced liquidation by your broker, but you don't run into that situation. And you know frequently in real estate, because as long as the bank is getting paid on their loan, they don't care how low the price of Your house is gone.

And Doug, let me tell you something else. And remember, you're outsourcing that debt to the tenant so you're not paying the loan anyway. Hopefully you have positive cash flow or at least break even. The other part of it is even if the bank isn't getting paid, sometimes they don't care and don't pay attention. We saw that over the last several years. They'll let you keep not pay for three years sometimes. It's mind boggling. I mean, you know, we've covered that on many prior episodes.

Gotta take your jabs at the banks whenever you get a chance.

The banksters, the criminal banksters. But we're glad we're there because we love borrowing their money to buy good income properties and good packaged commodities. Hey Doug, we gotta wrap up. Did you have a final thought you wanted to share on that? This has been very interesting and enlightening. It's always great having you on the show. You've been on many times. But any final thoughts on this?

A final thought for all the trading junkies out there is that you allude to it a little bit when you talk about packaged commodities. But another way you can think about purchasing a rental property is think about it as a series of trades that you're putting together. For example, when you take out a mortgage, you are going short the US Dollar. In other words, you are trading against the value of the dollar. When you purchase the property, you are going long the value of the commodities. You're making a trade saying that you are placing a bet that the value of the commodities will go up, up. You are purchasing a bond in the form of the rents because the tenant is going to pay you income. And you're also going long the value of your land if you break it apart into the different trades. That's where you see where the real value is coming from. Because the dollar over the long term is in a lot of trouble. Whereas commodities and land value over the long term are likely going to be on an up trajectory. And the bond that you're purchasing is a competitive bond. It's a place to live bond. And the number of people who are going to want to purchase place to live bonds over time is going to go up because the number of people who need a place to live is going up. There's a structural preference in the market for single family housing. And the number of people who can legitimately afford to purchase a house isn't growing very quickly.

Very good points. I mean, Americans haven't had a real raise in income in a couple of decades, depending on how you calculate. So that is very true. And the houses just keep getting more expensive. So instead of being hurt by this, people take advantage of it. Be on the winning side of this trade. The trade of the decade is buy good, sensible income property. Be a buy and hold investor. Don't be seduced by the siren song of the cocktail party conversation that's going to come up again. Okay, at some point. It's not really out there now, but it's going to come up in some other asset class that's going to divert your attention. And the win always goes to those who are focused and consistent and persevere to just win the game. So a great talk on some of this. And Doug, I really enjoyed some of the trading analogies. So if we've got some adrenaline trading junkies out there listening, which I'm sure we do because they've called and emailed me before, they'll appreciate that. So I hope this moved the needle for you guys and for the rest of you who already get it and buy into it, well, you know, it's just more affirmation. So, Doug, thanks so much for joining us. I appreciate it.

Thank you, Jason.

I've never really thought of Jason as subversive, but I just found out that's what Wall street considers him to be. Really? Now, how is that possible at all? Simple. Wall street believes that real estate investors are dangerous to their schemes because the dirty truth about income property is that it actually works in real life. I know. I mean, how many people do you know? Not including insiders who created wealth with stocks, bonds and mutual funds. Those options are for people who only want to pretend they're getting ahead. Stocks and other non direct traded assets are a losing game for most people. The typical scenario is you make a little, you lose a little and spin your wheels for decades. That's because the corporate crooks running the stock and bond investing game will always see to it that they win. This means unless you're one of them, you will not win. And unluckily for Wall Street, Jason has a unique ability to make the everyday person understand investing the way it should be. He shows them a world where anything less than a 26% annual return is disappointing. Yep, and that's why Jason offers a one book set on creating wealth that comes with 20 digital download audios. He shows us how we can be excited about these scary times and exploit the incredible opportunities this present economy has afforded us. We can pick local markets untouched by the economic downturn exploit packaged commodities investing and achieve exceptional returns safely and securely. I like how he teaches you how to protect the equity in your home before it disappears and how to outsource your debt obligations to the government. And this set of advanced strategies for wealth creation is being offered for only $197. To get your Creating Wealth Encyclopedia Book 1 complete with over 20 hours of audio go to jasonhartman.com store if you want to be able to sit back and collect checks every month just like a banker. Jason's Creating Wealth Encyclopedia series is for.

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