Why We Need Institutional Buyers in Today's #HousingMarket

Welcome, empowered investors, and greetings from beautiful Tokyo, Japan. Got here just yesterday and it's my third time in this city. I love Tokyo. Love Japan. You probably heard me say that before. It is the most civilized country on earth. Just such a great place. It's really great. But it is chilly right now. It's quite cold. And this is a very difficult place to. To do business with the West. So I'm glad to say I will be leaving Southeast Asia next week and on my way back to the good old US of A. I can hardly wait to be in a better time zone because it's pretty hard to be productive over here because you folks, well, I know we have listeners all over the world, but most of you are in the Western hemisphere and you folks like to sleep when awake and the opposite. So that's the way it is. Hey, I've got something here for you. I want to play a short clip from a quickie little short video, and it relates back to what we were talking about just a couple of weeks ago. And that is the refi till you die segment, because it talks about how wealthy people use money, how they don't pay tax on income that they don't show they don't have because they try not to have big income. Oh, by the way, if you're watching on video, I must just comment here. This is now our second bathrobe show. Yes, it is. That might want to get some of you watching on video if you're only listening on the podcast. I won't be doing these bathrobe interviews much longer because I will be back in the US And I'll have a much more normal time zone. But it is almost midnight here in Tokyo, so that's that. And I really like my viewers and my listeners to just tuck me into bed. Okay, here we go. This is an interesting point. And it starts off, I don't know if you'll be able to hear it right in the beginning with the announcer saying that if you have no income, you don't pay tax. Right. Because the best way to structure your income, the most tax efficient way to get the wealth out of your real estate portfolio, is to simply refi till you die. To use my strategy that I've been teaching for 21 years. And this is another example of how wealthy people do exactly that. Here we go.

You don't pay any tax. This is exactly what wealthy people are doing. Elon Musk never took a salary at Tesla. Instead, he got paid in stock options, which went to the moon instead of Selling his stock. Elon says to the bank, I own billions in Tesla shares. Can I borrow against them? The bank says, sure, here's millions. And that's how the rich pay interest, not tax, which is far cheaper.

So what we know about Elon is he actually did sell a lot of his shares and paid a huge amount of tax. But this is a strategy that a lot of well off people will use because of course you don't have to pay tax on loan money. I do think that a lot of times this tax benefit is exaggerated, it provides a huge benefit, but at some point those loans do have to be paid back. So usually what I see is people that are well off will get a huge benefit from this, but do still have forms of income that they are paying tax on.

Right, but what she didn't tell you is he only paid capital gains tax, he didn't pay income tax. So it's much better to have the loan. I mean, think about it, interest on a loan, right? If you, if you refi your portfolio, right? So say, say for example, you're doing the silly old fashioned thing and you're paying off your properties, right? I know a lot of people are going to comment below and they're going to say, but Jason, I want my properties be free and clear. You are out of your mind. They should be free and clear, okay? So you can have tons of positive cash flow and you're going to pay income tax on that income, right? Versus leverage your properties up, make them perform much better, be in a much safer position. I know it's counterintuitive. I'm not going to go into why it's safer today because I have talked about it ad nauseam. Just listen to the old stuff. I've talked about it on and on and on. And you're going to borrow the money to live on against your assets. There's no tax on borrowed money. That's why it's beautiful. It's a beautiful thing. And in her example, she's saying, well, the example's over exaggerated. Okay, maybe it is. You know, she says someday the loans have to be paid back. Well, not really. They don't really ever have to be paid back because you can keep refinancing them. Elon Musk, in this example can keep refinancing those stock loans. You, in your example, can keep doing the refi till you die strategy on your properties. The best plan is to constantly equity strip the properties. Let's listen to the rest. Now. This is a tax advisor talking. So whenever you're talking to a tax advisor, you know, you're generally getting a much more conservative view. But what we've learned, if history is our guide, what we have learned through so many examples is that the seemingly more conservative thing is actually the more risky thing.

If you don't have an income, you don't pay any tax. And this is exactly what wealthy people are doing.

See, if you don't have an income, you don't pay any tax. So you don't want to get into the income position because that is the highest taxed position. All right, so without any American crew styling cream in my hair. Let's do the rest of the presentation. All right, I want to talk about corporate buyers again. You know, the institutional buyers of investment properties of single family homes the called smart money and it probably is the smart money. So maybe we should take a cue from them and look at their example. Large corporate buyers share of the overall purchase market. You can see if you're looking at this on video, I'm showing a chart here that shows you institutional buyers, but also ibuyers. Just a reminder, what is an ibuyer? Well, remember when Zillow had their big disaster a few years ago, they were eye buying. A company like Open Door is an eye buyer and there are many of them out there. Redfin does ibuying. I don't know if they're doing it currently. Well, they seem to have an ibuyer program because it's on their website, but they might just be referring those leads out to other people. Anyway, the point is there are ibuyers out there in the market and basically what they're doing is they're just buying the properties to usually flip them. And you can see that a lot of times these big corporations just don't do it very well. Right. And Zillow got in over their head a few years ago. We all heard about that story, we covered it on this show. But anyway, suffice it to say the ibuyers, so they're back in the game. They're buying like crazy again. And the institutional buyers, they are way up. So as a percentage of the overall purchase market, what does that look like? Well, for the institutional buyers, about 2.5% of the overall purchase market. Now remember that overall purchase market, how do we define that? That includes owner occupants and non owner occupants. Okay, so it includes the investor buyers, which right now, just a rough estimate, probably make up like 25% give or take of the overall buying market. So when you look at 100%, about 2 and a half percent is institutional buyers and another 2%, give or take, is iBuyers. So about 4 and a half percent, almost 5% of the overall market is corporate players. Now the other thing we've got to do is define, how do we define a corporate buyer or an institutional buyer? Is it a company? I mean, you know, most of us watching, we have LLCs, we have entities. So technically if we buy one property and we use an entity to buy it, we are a corporate buyer, we're an institutional buyer. Right. Well, a lot of people are defining, defining institutional buyers as those who own at least 1,000 single family homes. So 1,000 single family homes or more. Usually they're defining that as the institutional buyer. Right now here on this chart we're seeing Freddie Mac define it and Freddie Mac defines it differently than say John Bur. Right. So everybody's defining this a little differently. Freddie Mac says one to nine properties is a small investor and a mid size investor is 10 to 99 properties. And an institutional investor is 100 plus properties purchased in the last 12 months. That does not mean 100 plus properties overall in their portfolio. It means they purchased those in the last 12 months. Okay. It goes on to say we did identify second homes via mortgage riders via Black Knight data. And so we miss all cash second home purchases. So there's just some things to know when you look at this chart, right. As to how they're defining that. Okay, let's move on. So here is the overall investor share of the purchase market. And what we really need to do here more than anything is, is look at the trend lines because you see that the bands move kind of up and down here in a range of about 7% of the market. Where they'll go from, you know, maybe 30% are inst. Are invest, not institutional anymore. We're just talking about investors, okay? Investors in general non owner occupied buyers. So about 30% will sometimes be investors lately and then sometimes it'll drop down to 23%, give or take. Right? So you see it moves in this band. But look at the overall trend line and you can see lately it's going way back up again. We're up in the 30% or slightly above 30% range. That number peaked right coming out of the Great Recession about 2011 where we saw about 35% of the market as investor buyers. But let's go back further because this just shows you how our wonderful most historically proven asset class in the entire world, single family investment or income properties, the most historically proven asset class in the Entire world for the longest time, right? Not a newfangled thing, a very sure bet, a conservative bet that's been around for a very, very, very long time. I mean, people have been investors for like a couple thousand years, okay? It's a pretty darn proven asset class. Okay? So, but back just 25 years ago in the year 2000, this was a much smaller number. It was about one third smaller. We're only 20%, give or take. The dropping down to like 17%. About half of what it is now, give or take, was investor buyers. So you can just see how the trend is catching, how the fever is catching. In the last quarter of a century, everybody has just recognized that the place to be is real estate income properties. It's just such a historically proven asset class. But you know, way Back to the 1950s, there was Bill Nickerson, William Nickerson, look up his old books. I really encourage you to buy those old books and read them. They're pretty short and it's just amazing. You know, you hear the numbers, it's like, wait for it. Okay, I bought this house for $7,000 and I sold it for 9,000. Woo. You can't even make an earnest money deposit for that amount anymore, right? It just shows you how proven this asset class is. This is just an amazing, wonderful asset class. So here you see John Burns Real Estate Consulting, and they're defining the landlords of 1,000 or more properties, right, as institutional buyers. And this is just another graph, another way to look at it. Doesn't include the ibuyers, just includes the buy and hold institutional buyers playing a huge part in the market, a bigger and bigger part. And again folks, I have said since the beginning, since we've been talking about these institutional buyers, maybe we started really, really talking about them in about 2009, 2010. I have been saying that this is a good thing that they're in the market. Again, they're not that big a part of the overall market, but their share is increasing. They're paying much more attention to the asset class. And it's a good thing they're the market because they are much better at raising their rents than we are. And those rents become comps for us. And as they pump rents up, we see our opportunity to ride on their coattails and see higher rents as well. Because tenants get into the marketplace and they bounce around just like, you know, a pinball machine. I know you millennials and gen zers don't know what a pinball machine is. It was this thing where it had like a. A. A metal ball. And it bounced around inside. Yeah. Anyway, wasn't a video game. It was a physical game. And they bounce around and they see this property, that property, and when they see these institutional investors offering properties for rent, pushing those rents up constantly, every year, raising the rents, then that becomes a comp for our rents. And it makes us better at raising our rents, as we should be. Our costs go up, inflation goes up. We have to keep increasing rents. Do not be one of these lazy investors with lazy money, with lazy equity that sits there and says things like, I like my tent. They've been there forever, and I haven't raised the rent in 13 years. Okay? That is not a good investor. You got to optimize your portfolio all the time. Sam.