War & Inflation: Why Foreign Direct Investments in Residential Real Estate are Made in America

Welcome to episode 2065 and greetings from beautiful Florianopolis, Brazil.

I thought I'd give you a little.

View of this place if you're watching on video. And today we've got Joe Brown back on the show, Heresy Financial. Really good insights. You're going to enjoy this interview a lot. But first I thought I would tell you about a conversation I was having yesterday with one of my friends and one of our clients. Same person, by the way. Maybe some of you saw him speak at our New York Mastermind event years ago. He was gracious enough to come and talk with us a little bit about the short term rental market, the Airbnb market. But I decided to create a new bit of a meme out of this. And I teased him about it because he was complaining that the real estate deals weren't good enough anymore. They just aren't as good as they used to be. And here was his criteria. I thought you'd enjoy this. So cost segregation, as you know, can be a very good deal. And by the way, if you're interested in cost segregation, which basically means you get to accelerate the depreciation on your properties and you know, I've said, said it many times before, that depreciation is.

The holy grail of tax write offs.

Why? Because it's a phantom write off. It's a non cash write off and it provides an excellent opportunity to get a tax benefit without paying for it in terms of writing a check or, you know, spending some money. It's, it's a phantom write off, a non cash write off. Anyway, here was his criteria and here's.

The meme I made for it.

His criteria was that he should be able to buy a property, do a cost segregation study and then get as much tax benefit on the purchase of that property with the cost segregation. And again, if you want to do cost segregation, go to jasonhartman.com ask. We've got a few different good relationships that can provide this very inexpensively for single family home and commercial and multi family property investors. Some really good low cost, sort of semi automated cost segregation alternatives. So again, jasonhartman.com ask if you're interested in that. But let me tell you the story, getting back to the story here. So he wanted to basically get the property for free, in essence have the tax benefit offset and pay for the.

Down payment on the property. And I thought, you know, isn't that.

A pretty high expectation? You know, when you buy precious metals, bitcoin, stocks, bonds, mutual funds, do you get those for free? And, and so the meme I created, which I, I teased him about, I said, you know, this is a new meme. It's the over entitled investor. Yes, the over title entitled investor. You know, a lot of talk, we have a lot of talk nowadays about how millennials and Gen Z are over entitled. And you know, there's a case to be made for that. But this is the over entitled investor. And it's amazing that income property is such a sturdy, incredible asset class that you could actually get it for free. Well, you can't anymore. The deals aren't good enough to do that. And that was his complaint. The over entitled investor couldn't get the deal for free, couldn't make the cost segregation analysis pay for the down payment. So you can't get a free property anymore, apparently. Folks, sorry about that. It's close to free. It's pretty good, it's pretty incredible.

But it's not quite free anymore.

Oh, where are the violins? Okay, cue the violins. Anyway, can't quite get the property for free. Sorry, but still pretty incredible.

You can get it for almost free.

If you can do a cost segregation analysis, having it basically offset the cost of the down payment. So the property is free and that equity that goes into the down payment is free too. The over entitled investor. Folks, do you think we should make some T shirts, some swag for the over entitled investor? I like this. I think this is a good new meme. So anyway, that's how awesome income property is that you could actually be the over entitled investor. It's a pretty incredible asset class because remember, most of your return like an iceberg is below the water. It's not obvious. You know, you get a lot of this return kind of below the surface of the water, whereas most investors just look at it above the surface, they think, oh well, I get some cash flow, right? They don't really understand the multi dimensional, incredible beautiful characteristics of income property investing. So that's it for my monologue portion. The over entitled investor can't quite get the properties for free anymore. Sorry about that, but still pretty darn incredible. Close to free. Close to free. Anyway, let's get to our interview with our returning guest, Joe Brown.

Here we go. It is my pleasure to welcome my good buddy Joseph Brown, who is with Heresy Financial. He's got that fantastic YouTube channel that a lot of you watch, including myself. Want to just bring him on today to talk about the crazy tragic events we have going on in the world, but also to talk about some broader topics as well. Joe, it's good to See you. Welcome back.

Hey, thank you so much for having me. Really appreciate it.

Good to have you. So let's start off with conflict that's obviously been going on in Eastern Europe with the Russia, Ukraine, we have Israel, things are getting pretty hot with China and Taiwan. The world is becoming a pretty unstable place. What are your current thoughts on that?

Yeah, I mean, number one, it's really devastating. It's very easy, I think as an American to, to be emotionally isolated from what is going on and specifically from the death and suffering. And when that happens, I think it can be really dangerous for the decisions especially that policymakers are making. Because throughout our whole entire history, we have rarely ever had to deal with blood on our own soil, war on our own soil, outside of the civil war, which was self inflicted. So when we see stuff like this happening around the world, it's easy to beat the war drum. But, and I don't like to engage in things that people typically look at as feeling like conspiracy, conspiracy theories, but because many times when you look at, you know, government involvement in things, it's like, is that the result of incompetence or is that malevolence? And for it to be the result of malevolence, you have to have a high degree of competency, you have to have a high degree of organization. So many people involved and you just don't get those types of people. And results in bureaucracies, especially the large ones like governments. And so I do typically like to chalk things up to incompetence more often than not. But one thing that, you know, you've always said is as long as war remains profitable, we're never, it'll never end.

Yeah, right.

Well, there will never be peace. And especially when it's profitable for the people who are making the decisions.

Yeah.

So just within the last few months, you look at the trades made by members of Congress, they've been investing heavily in defense stocks. You look at what's been happening with Ukraine, the tide of public sentiment has been shifting. More and more people were becoming fed up with the amount of money being sent to Ukraine funding that proxy war. And wouldn't you know that four days after the government shutdown was averted by, by stopping the funding to Ukraine, Republicans gave Democrats everything they wanted. No spending cuts outside of cut the funding to Ukraine. Four days later, this whole thing blows up in Israel. And within a couple of days after that, there is already a bill to send $2 billion to Israel. And the slush fund for the military industrial complex just doesn't stop and it's shocking to see the amount of bipartisan support for this war, politically speaking. And so the more we have the decision makers with no downside to war and a lot of upside to war, we're going to. We're going to continue to see more of it.

Yeah. And you know, the obvious sort of level one thinking on this stuff is the military industrial complex. Right. We all know that war is extremely profitable, but after that, we have so many other war profiteers. Right. We have all of the big construction companies, the companies that do the rebuilding, the medical industrial complex. I mean, it's just on and on and on, the profiteering. There are just too many entrenched interests. And especially when, since the US Is the biggest provider of the military equipment to, to a lot of these countries, Right. Our defense contractors are becoming extremely rich because a lot of that stuff isn't outsourced because of security clearance issues. Right, Right. So it is made in America. Okay. If we can avoid sending American troops and fight these proxy wars, that's just kind of a good financial deal for the profiteers. Right. There's no American blood and lots of money coming in. But obviously that increases the debt levels and so on and so forth. But I'd like to talk a little bit about, you know, how this affects people on a personal level. And I don't mean, obviously the loss of life and the devastation and so forth, but financially speaking, this pushes the price of resources and commodities higher because war is just massively destructive. Things blow up. The amount of fuel, the amount of supplies that are used in weapons systems is astronomical. I mean, it's just unbelievable. The environmental damage is insane. So what should people be doing about their own financial situation? The likelihood of war being inflationary, I think is extremely likely, if not almost 100% sure. Because it increases debt levels too, in addition to using all the resources. Right. You know, talk us to us about some of your thoughts there.

Yeah, absolutely. Okay, so let's start off with just the basic understanding of what inflation is and what causes it. So within economics, it's always ceteris paribus, which is all else being equal. And so let's say we doubled the money supply. That would drastically increase prices of things, all else being equal, because now you have more money floating around, so it takes more money to get the same amount of stuff. Similarly, the exact same effect would take place if you had the same amount of money and then you just cut the amount of stuff in half.

Because.

Because then again, the relative relationship between the amount of money and the amount of stuff is that you have more money relative to the amount of stuff. And so it takes more money to get that same amount of stuff. And so while we do have, like, the Fed engaging in deflationary monetary policy right now, they're tightening, they're reducing their balance sheet, they're raising interest rates. You have fiscal policy right now which is just massively inflationary. Number one, high interest rates are pulling more dollars into circulation through the reverse repo market right now. But number you have a destruction of resources. Like you mentioned, massive destruction takes place with war and preparation for war. You have all of the raw materials that are necessary to just make this stuff. All the steel, all the lead, all the copper, all the aluminum, all the gasoline, all the oil, like, all the raw materials then to transport it for the express purpose of it being destroyed. And not just that stuff being destroyed, the destruction of everything that it's used on. So the buildings and then the rebuilding costs of everything, the concrete, the steel, the energy, just to get back up to where you were before. And so, like you said, you know.

So no real progress is made for humanity. Unfortunately, NASA's setback. Yeah, right. I mean, I mean, it's crazy when I hear, just as a quick aside that, you know, people say, well, war stimulates the economy. That's like saying caffeine stimulates you. Yeah, for a little while it does, but then the crash is you have to pay it back.

Right, Yeah, I mean, it'd be more like. More like saying that meth stimulates you. It's like, yeah, you might get that little short. Obviously, massively decreases your overall life expectancy. Right, yeah. So it is. It is just massively devastating, the economic cost. Putting aside all of the human cost, all of those resources, all that energy, all that cost being freely available for other uses allows the price to be at the natural rate, allows people to use it for what it's most profitable for, and allows the creation of wealth. And so it just diverts all of this for destruction and makes everything more expensive. Ceteris paribus.

So. So, you know, as you know, I've been teaching this philosophy called packaged commodities investing for almost 20 years now. And that whole thesis of it is that, look, as real estate invest, we're really not real estate. I don't think real estate's really that great. Okay. I think commodities are great. Okay. And, you know, when I'm in my home now, you look behind me and, you know, what do you see? You see lumber, you see concrete below me, you see Petroleum products everywhere. You see copper wire in the walls in front of me, you see glass and steel. You know, all of these commodities, I might think that they're okay to invest in on a commodities exchange, but when you stick the real estate label on them, you get 30 year cheap financing. Even now it's still cheap overall because when you take into account the tax deductibility and the real rate of inflation, you're still getting paid to borrow. Okay. And you get special tax benefits and so on and so forth. So I like to invest in what I call packaged commodities or assembled commodities. Right. So all of this stuff, all of the rebuilding effort after natural disasters, wars, et cetera, that puts upward pressure on the prices of these commodities. It also creates more inflationary pressure in the system in so many ways that you alluded to a moment ago. So it seems to me like this is good for real estate in at least in locations where it's not going to be destroyed. Right. Any thoughts on that?

Yeah, absolutely. I mean, that gets down to kind of the. Some of the fundamental economic principles of wealth creation is that the raw copper, let's say in the ground by itself is worthless until you put in the capital and the labor required to pull it out and refine it and then turn it into a form that is useful, like, you know, into a copper wire. And then even that is relatively cheap compared to what you. The end result when you take that and you throw it through a house with all the lumber and all the drywall and the paint and the design and everything that goes into it, it turns it into a useful product. And, you know, it is many, many, many times more valuable or infinitely more valuable than the valueless raw material that it starts off with before you get human labor and capital put into it.

Beginning to sound a little bit like Adam Smith, I'm just pointing that out, but go ahead.

But that's, that's wealth creation. That's not a zero sum game. There was no wealth there before. And through that human input, then you actually have wealth. There's far more wealth today than there was 500 years ago, a thousand years ago, 10,000 years ago. And that's the course of human history. It's not a zero sum game. It's a positive sum game, which also means wealth can be destroyed. And it's much harder to create wealth than it is to destroy wealth. I mean, it takes a flick of a match to light a house on fire and destroy all that wealth. And it takes years and labor and capital to create that wealth. And so it is very difficult, which means it is scarce. And when you have external factors imposed on the system that are making resources themselves thereby also the end product of wealth way more expensive, that makes all the current stock of wealth much more valuable.

Say that again. I like that.

When you have external forces artificially imposed on the system that are making the raw materials and the end products more expensive through the destruction of, of those resources, it makes the existing stock of wealth much more valuable.

Right, yeah. Because the scarcity issue is created. So what should people do with this knowledge?

Well, buy scarce resources. And like you said that that sometimes can be like the raw materials. I mean, I love a good commodities etf. That's something that is literally like zero barrier to entry. Anybody in their 401k, well, pretty much everybody in their 401k could have an option like a commodities mutual fund. Now that's like the bare minimum. You throw that in your IRA or your brokerage account, you can, you know, maybe get a little bit more specific if you want to go, you know, gold or copper or silver or any of these other resources. But like you said, the more you can get towards that end product where that wealth is put together that is much more valuable than that initial product that's being used for those end purposes. And so scarce resources. Absolutely. Like in the United States, we have a very different situation than the rest of the world. We have 30 year fixed rate mortgages. So that scarce resource, very, very scarce. We've got the rest of the world in this position where mortgage rates are resetting over the next couple of years to double or triple what they are right now. People won't be able to afford their payments anymore. That doesn't happen in the United States. And so it makes, it puts US real estate in a very different situation than the rest of the world.

Yeah, well, keep your thought. But I want to also make sure we talk about capital flight and the direction with all of this geopolitical instability, but go ahead. Yeah, I've always said I think the American real estate market is very special. I would love to be talking about investing offshore store and you know, all of these opportunities, I've looked at a zillion of them. I never find them to be as good though.

Yeah, yeah. I mean there's, there's certainly some reasons to diversify throughout the world. I mean, just look at the stock market. The US Stock market is not always the best performing market around the world. And so get some international diversification. Real estate. There are other reasons other than pure Performance to invest overseas if you want a place to start working on residency somewhere or second, second citizenship somewhere. So you have, you know, you know, a little escape plan in your back pocket should things get really, really bad. There's reasons to have real estate in.

Other places and of course, it depends on your level of wealth. Sure, definitely. But yeah, yeah, yeah, I, I'm very versed in all of those options, by the way. I've investigated them thoroughly. I'm leaving for Brazil in a couple of days. When I was just in Colombia, I was, you know, talking with lots of experts there about visas and citizenship and bank accounts and brokerage accounts and all of this stuff. I've done that in many, many places I've visited. You know, I, I know a lot about the, the passports and stuff like that.

So. But I mean, you're, you're the best person as well then to confirm that typically those other reasons are specific for those other purposes. And if your goal is the creation and the preservation of wealth through real estate, typically it's going to be, it's going to be us. And that's why we have so much foreign investment in US Real estate as well.

Yeah. So FDI in the US has always been extremely high foreign direct investment because, you know, the US has always been considered the brinks truck of the world. It's where you've got, you know, good rule of law, political stability. You know, there's a lot of reasons to be concerned about what has been going on the last many years. But compared to what? I mean, like, show me a better option and believe me, I'll be there in a New York minute. But I just don't see really better options. When you look around the world and.

There'S a good argument to be made that that will continue for quite a while, especially given what's happening geopolitically around the world right now. The increase of war. I mean, there's some parallels that we can see from World War II to what's going on right now. The American escalation of war around the rest of the world. It's very, very possible, if not likely that the devastation, economically speaking, around the rest of the world will, number one, drive more capital into the States, number two, drive more immigration into the States, which a population increase is absolutely necessary for economic growth. I don't care what anybody says.

And more demand for real estate.

Exactly, exactly. Many of those immigrants are not being counted right now when looking at population stats. And they all need a place to live. And so the stuff going on around the world right now. Very reminiscent of World War II, bringing, you know, increasing manufacturing in the States because of the war effort, economic destruction around the world, capital flows into the United States. And so given what's going on, I wouldn't be surprised to see that continue for a lot longer than many people expect.

Yeah. Yeah. Okay, so let's move to some of your other themes. You know, recently on one of my episodes, I shared one of your tweets and I thought this was quite interesting, but I'll let you start where you want. I've got that. That tweet up. I can share the screen if you want to start with that or something else. Feel free.

Let me give a background to it first. Then we can pull up the charts that I shared.

And I guess we shouldn't call it a tweet anymore. What do we call them now? An X?

I don't know. Yeah, exactly. A post, a tweet, An X position. I don't know. Since I started talking about finance and economics on YouTube, which was August of 2019, I've been very adamant, very bullish on residential real estate, not commercial real estate. Even back in 2019, you just look at the number of square. Square footage of commercial real estate versus the rest of the world. It seemed a little bit out of. Out of whack, supply and demand. And my tune has never changed on that. And I've always, on that note, felt like I was in the minority. And, you know, the same voices that were calling for a real estate crash in 2019 and 2020 and 2021, they're still doing that today. And I've.

Well, don't forget 2015-2016-2017-2018.

Exactly right. Yeah. Yeah. And so basically, I've always tried to look at the data and present my opinion as it looks like the data is saying the direction will go and not tell people on YouTube anything different than I'm telling my friends and my family. And a good example of this is about a year and a half ago, tons of friends and family were asking me, hey, should I sell right now? Because I own? Or some people were renting. I've been waiting for a crash since 2015. I sold my house in 2016. I've been waiting for a crash. Now I'm getting concerned that it's not going to happen. What should I do? Should I buy now and just bite the bullet? And my advice was always, yes, you need to buy now and definitely don't sell and start renting. And I've got some close friends of mine that a year ago bought at, you know, 5%. And about six months later they were like, man, I shouldn't have listened to you. Prices started to drop. I was like, okay, but how much would it have cost you? Because mortgage rates were up by a lot more. And so they locked in a much lower price monthly. Speaking to buy a year ago than. Than right now. And I also have friends and family that didn't buy and are now asking me, I can't. Saying I could have afforded a 20% down payment a couple of years ago, and now I can't even afford to buy anything at all. And so it's this position where three years ago I was saying the real, real estate crisis is that someday people who never bought will, will no longer be able to afford to buy ever. And there will be a class of renters and landlords, and that's it. And if you didn't already own, you will never be able to break into that because prices are going to move away faster than people can save.

Before you move on, let me, let me comment on that for a second. You know, one of the many problems with our psychology as humans is this. And when it comes to the housing market, people always look at the past and they think, gosh, you know, housing is so expensive now. Believe me, they thought that in 1975. They thought it in 1980 and 1985 and 1990 and 1995. In 2000 and 2005. Everybody always feels that way, okay? They never feel like, oh, you know, housing is cheap. I can get my dream home for Nothing and spend 20% of my salary every month. Nobody ever says that, okay? So. So people always feel like it's too expensive. But what they have a very hard time comprehending is how much worse it can get. And this is why I think it's so important to travel. I was born in Europe. I only lived there for a year, first year of my life. But I go back there a lot. And I've been to 91 countries around the world and some of them many times over. I've spent a lot of time looking at real estate around the world and looking for opportunities and just being like a renter or a home buyer and checking things out. Right. I've spent a countless amount of time doing that. So irs, those, a lot of those trips, they are tax deductible, okay? Because I really have been doing research and what I find is that people just don't know how bad it can get, how expensive housing can really be. Because as I Always talk about Europe as the example. You know, people in Europe live in crappy little flats and they spend a high percentage of their income paying for those crappy little flats.

Yeah.

And they have no closet space. They have no space for anything. And, you know, they certainly don't have a front yard and a white picket fence. Okay. You know, so people just really have a hard time understanding how little they can get for their money. They, they think, well, here's how it was in my neighborhood two years ago, three years ago, five years ago, 10 years ago, or a couple decades ago. But that's not the right comparison.

Yeah.

Don't know how bad it can. Real estate in America is still cheap. The standard of living is still very high here, comparatively.

Yeah. Well, I think the main reason why people don't see that is because they ignore the number. The. Really, in my opinion, you could look at this as the only factor that actually matters, which is, you know, it's supply and demand. But for real estate, it's best described as the number of people who need a place to live and the number of places there are to live.

Right.

And that's the number one thing that, that people ignore. And so I think that. Let's, let's pull up the charts here. So this is a chart of the number of people who own their homes free and clear, which is 42% of all real estate. So when we talk about potential supply, half, almost half of the real estate in America, you just have to take off. You have to get rid of that, because none of these people in the current environments are going to get forced out. There's no situation other than death, in which case, in that these homes are going to come off the market while a new home is not being simultaneously purchased. So somebody who owns their home free and clear, they may sell in order to buy something else.

Right. And an important point to make is that to those people, their houses feel very cheap because they're not, they're not paying a mortgage. All they have to pay is taxes and insurance, maybe a little HOA bill, but, you know, these people are extremely comfortable.

Yes.

That's what people don't realize. And as I always say, if you want to have a real estate crash, or even a correction for that matter, you have to have millions, if not tens of millions of distressed owners. We're not even close to that.

Right.