Jason and Ron discuss the true rate of inflation, and then Jason and Cliff, a title company executive, talk about REOs. Also, one of our property managers updates us on the greater Houston market.
Announcer: Welcome to Creating Wealth with Jason Hartman, President of Platinum Properties Investor Network in Costa Mesa, California. 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.
Jason Hartman: Hello and welcome to another edition of Creating Wealth. It’s great to have you here with us today from listeners all over the world. I’m your host Jason Hartman and I’m here with a guest, who is going to help me with the Ask Jason part of the question. We got a very good question and we’re going to sort of answer it together for you.
Before we get to the question, though, this show we will talk about REOs and real estate owned by banks. I have an interview with a title company executive who’s been looking at REO deals all across the country and we’re going to sort of explode some of the myths and let me remind you when we talk about this that this is just a snapshot in time. So what we talk about is what is going on in the current market and it is always subject to change.
And the reason I bring that up, especially on the real estate owned, the REO, the foreclosure topic, is that I’m seeing so many ads and I think I’ve mentioned this in prior shows for buying REOs for pennies on the dollar, $.20 on the dollar, $.60 on the dollar. Huge discounts. And you do find stuff like this that looks somewhat like it in areas with declining populations, such as Detroit, areas that are not really wise investment choices at this time.
But when you’re looking in the really desirable areas, we are finding what you would call “Lender Capitulation” and what I mean by that is that lenders are not really cutting these deals yet. We’re finding them still wanting to hang onto properties and not loosening up and letting them go. It takes a little while for reality to hit the psyche of an individual and be willing to sell at a given price, and the same is true on an institutional level. Banks have a hard time letting go of properties at big discounts. So be careful of what you read and what you believe out there in the marketplace. We are here to try and explode these myths and give you the real story.
So anyway, we’ll interview a title company executive on that and then after that, we will interview our property manager from one of our excellent markets, the energy capital of the United States, and also a big medical center of the United States. So stay with us for that, but first, I’d like to welcome Ron Fortier.
Ron Fortier: Hello.
Jason Hartman: How are you?
Ron Fortier: Great.
Jason Hartman: Good to have you on the show for the first time.
Ron Fortier: Absolutely.
Jason Hartman: Ron is responsible for a lot of the marketing here at our company and is doing a great job at that. And I was kind of talking through this question we got with him because I think it’s a very good one and I was kind of wondering why nobody had asked until now. So Ron, what is the question?
Ron Fortier: Okay, so Mark from Pennsylvania asks, “I tend to agree with your take on the real rate of inflation. My question is, however, if it is somewhere in the 8 – 10 percent range, how do the investors, or whoever ends up holding the mortgages actually make money?”
Jason Hartman: Well, that is a great question and I’m so glad you asked. My first answer is I’m not sure, but here are my thoughts. First thought is, why would anyone put their money into a savings account and only earn – what – nowadays, what does a good CD pay, about 4 percent maybe?
Ron Fortier: Right.
Jason Hartman: I’m not sure. I haven’t shopped for them lately, but why would anyone invest their money – and it is sort of an investment, I guess – in the bank at 4 percent? Why would they buy bonds? And by the way, I think bonds are really one of the worst investments out there at 5 percent. Ron, why the heck would people do this? Well, I guess they consider it a safe bet, right?
Ron Fortier: Yeah, and I’m not sure why they would do it. It’s just easy, it’s available, and it’s right there.
Jason Hartman: Yeah, and they don’t really understand or see inflation. Inflation is the insidious hidden tax that is destroying savings. It’s destroying the value of bonds and it’s destroying stock market returns and it’s also, fortunately, destroying mortgage debt. So we want to be the borrower, of course, as we agree. But here’s a couple other thoughts on this. One other thought is, you know, remember nowadays banks don’t keep loans anymore. They make loans and then they just sell them to somebody else, so it becomes a game of really passing the buck, and all they’ve got to do is get the next investor, and of course, in this case, it’s almost always an institutional investor, to buy this pool of mortgages from them and believe that this return is an acceptable return at 7 percent, right?
Ron Fortier: Right, so they’re just looking at that very small window, whether it be 90 days or a year, that they’re going to hold that loan, right, so they’re qualifying somebody for the purchase and within that one-year period, how much is it really going to affect them?
Jason Hartman: For their holding period before they sell off that note to somebody else or that pool of notes to somebody else, that’s, of course, a big issue. I mean why does anybody invest at 7 percent or 6 percent, if that’s what you get on a mortgage? Why do you put your money in a savings account or in a bond? As an individual, you’re doing the same thing, right. But the other part of it is, maybe these banks really believe that that is the rate of inflation, that it is only really 4 percent, and if they make seven and they’re getting, in essence, a 3 percent margin above the inflation rate, maybe they believe it.
Ron Fortier: Why not?
Jason Hartman: They haven’t investigated the true reality of inflation. And you know, Ron, before we started recording here, we were talking about what I like to call the personal rate of inflation.
Ron Fortier: Right.
Jason Hartman: And you have a family and you have a couple of kids.
Ron Fortier: Right. Girls.
Jason Hartman: And you spend your money differently than I spend my money, and differently than Karen, our operations manager, spends her money. And we all really have our own what I call personal rate of inflation, right?
Ron Fortier: That’s right.
Jason Hartman: Now, what were your thoughts about that that you mentioned before we were recording?
Ron Fortier: Well, yeah, for families, you’re buying a lot of food. You’re taking your kids to the soccer games and to the baseball games and whatever, so you’re consuming a lot more of the things that are not included in the government’s rate of inflation, which are food and gas.
Jason Hartman: Yeah.
Ron Fortier: So as a family, you’re personal rate is going to be far higher than somebody who’s single or retired. So the rate of inflation is really relative to the things that you buy and that you use.
Jason Hartman: And that’s why nobody can really agree on the exact rate of inflation. So John McCain, he recently said, when he was talking about the price of gasoline, he recently said that the higher prices of gasoline really hurts the poor and the lower middle class the most because most of those people commute further to work. For example, in our area here, a lot of those people live in the inland empire, which is not as expensive as Orange County or L.A. County, but they work in Orange County or L.A. County and they commute, whereas the people –
Ron Fortier: Not only are they traveling, they’re sitting in traffic, consuming more.
Jason Hartman: Right. That’s an even worse commute. And so the people that are doing better, they live right near their office. They have white-collar jobs and they might live in Newport Beach and work in Newport Beach, so they’ve got a six-minute commute to work. So the gas price doesn’t really affect them as much and so that’s how you see this unequal distribution of inflation and that’s why we are really, really vigilantes or missionaries or whatever you want to call us in making people understand this because you can use this to your advantage.
Ron Fortier: That’s right.
Jason Hartman: Yeah, you really can.
Ron Fortier: Because if you think of what is it going to cost a homebuilder a year from now to drive the commodities to the site to build the homes?
Jason Hartman: Yes. So what you’re talking about there is you’ve got to obviously manufacture all the raw materials that are the ingredients of a house, so steel, possibly, lumber, petroleum products, plastic, copper wire. What’s the insulation on the wires? What’s on the switch plate? The metal that’s in the hinges of the doors and on the doorknobs and all of this type of stuff, you’ve got to manufacture it. Now, that takes a lot of energy, a lot of fuel, and then you’ve got to bring it to the work site and assemble it.
Ron Fortier: Absolutely.
Jason Hartman: Yeah. So you think these thinks are going to be less expensive next year or five years from now, or more expensive, folks? What do you think, Ron?
Ron Fortier: More.
Jason Hartman: A lot more expensive.
Ron Fortier: A lot more. And it compounds year-to-year.
Jason Hartman: Yeah, absolutely. So this is why our philosophy again is trade those evermore worthless dollars you have sitting in bonds, mutual funds, your savings account, equity in your house because equity in your house or your rental properties is represented in what? Dollars, and if you are in another currency and you’re listening to this in another country, it might be represented in Euros.
And all of these currencies around the world are declining in value because all currencies today, at least so far as I know, are what they call fiat currencies, and fiat, the definition of that, is “by authority.” So it just means that a dollar or a Euro or yen, or whatever it is, is worth what the Central Bank or the government of that country says it’s worth. And of course, no governments around the world are really responsible at all. The United States has been really bad for the last 45 years, since Lyndon Johnson came up with this whole, great society idea and they’ve just been giving money away like crazy and there’s these huge deficits.
So as governments are irresponsible with their money, they have to print more of it and it devalues all money in circulation. And this is really bad for you if you have money in cash in savings accounts, in stock portfolios, in mutual funds, in bonds, or under your mattress for that matter, but it’s great for you if you have money denominated in debt. So it’s important to remember that all currencies around the world are fiat currencies and they’re not tied to anything real. The point we want to do is we want to trade our evermore worthless currencies for commodities and especially commodities in the form of a structure sitting on land because that structure, as Ron and I were just talking about, gets more and more expensive to build as time goes on for all those reasons we mentioned.
But the other thing to understand is that there is, of course, a personal rate of inflation because we all spend money differently. But one thing we all need is we all need shelter, so this is a common part of inflation that affects everybody, and it’s good for us if we own income properties, but bad for us if we own anything denominated in dollars, including equity in these properties.
So we want to control the properties with as little equity as possible. That’s one thing. And then the other thing to realize is that you need to make a distinction between monetary inflation, which means money is getting more worthless as it is, and commodity inflation, which means the prices of commodities, lumber, energy, raw materials, copper wire, plastics, which are petroleum products, all the ingredients to make a house and many other commodities as well, are increasing in price. So this really benefits us as income property owners.
Ron Fortier: Absolutely, in a couple of ways because as we you pay your fixed priced mortgage, you’re paying in future dollars that inflation is eating away at.
Jason Hartman: Right, so those dollars are getting more worthless, so it’s great to pay it later.
Ron Fortier: Right, right, but it’s still a fixed price.
Jason Hartman: Right.
Ron Fortier: So even in areas that may not have huge appreciation in terms of the price of the house, the nature of inflation to build a new house in that area will cause the value of the house that you buy today to rise because the replacement value or the replacement cost to build it is going to be higher in the future.
Jason Hartman: Absolutely, yeah, so that’s a very good thing. And there are other factors to this that we really don’t – we’ve got to get onto the segments here, but we’ll talk about them on future shows, so keep on listening. But that’s a good point. So just circling back to the question here from Mark, did you have any other comments on that, Ron? I think you did.
Ron Fortier: So if you think about it from the point of view of the bank, they’re looking at it from the monetary viewpoint only.
Jason Hartman: Monetary inflation viewpoint.
Ron Fortier: Right, not from a personal.
Jason Hartman: So they may believe the government’s numbers. They may just think I’m only holding this in essence loan or bond, which is what a loan is really, for a short period of time and selling it off to someone else. But they’re not really thinking necessarily of the commodities inflation issue either. So we’re going to investigate this more, Mark. It’s a very good question and I’ve actually been thinking of it for a while, so we’re going to have a lot more to come on this and tomorrow, I go to Dan’s seminar, as I’ve talked about on the prior show. I’m going to ask him the same question. I think he’ll have something to say about it as well. So Ron, thanks for joining us today and let’s go into this REO segment and hear a little bit about what’s going on in that world.
I’m here with Cliff Bass, a vice president of California County’s Title Company, based in Irvine, California. Cliff, welcome to the show.
Cliff Bass: Thank you.
Jason Hartman: We just wanted to get a little insight from you on the REO market and your prediction for the California market. Talk a little bit about builder closeouts, and kind of just get an overall birds-eye view. What is going on out there with the banks and the REO market?
Cliff Bass: Well, I don’t think, Jason that the California REO market is actually here yet. From the things that I’m seeing, there’s quite a few banks that are still in the process of putting together their ability to properly foreclose on houses. There’s such a huge volume of them that they don’t have the infrastructure to handle it.
Jason Hartman: So I just want to, if I may, first of all, let’s notice the date. Here we are in the middle of 2008 and everybody is talking about foreclosures and REOs, REOs, of course, meaning real estate owned, and there’s two aspects maybe to what you’re talking about. Now, the first aspect is banks’ willingness to foreclose.
Cliff Bass: Correct.
Jason Hartman: That’s the first thing, so we’ll talk about that.
Cliff Bass: Or their actual ability to foreclose.
Jason Hartman: Willingness and ability. Now, some might ask, why the heck wouldn’t they be willing? They want to get their collateral back, right? And then, let’s also later talk about the capitulation issue, which is when banks will not make deals. They’re hurting. They’re in trouble. They need to liquidate REO inventory, but they just don’t want to let it go too cheap, so they wait and wait and usually hurts them more. So on the first aspect, willingness, and ability to foreclose.
Cliff Bass: When a lender forecloses on somebody, there’s some costs. The costs really aren’t that great. They’ve got that pinned down. But they do have a tremendous amount of manpower hours that are needed to foreclose on it, take it back, clean it up, remarket it, package it, get it out into the public, and then sell it.
Jason Hartman: And actually maintain it during that whole process because what is happening now and some of our listeners may have caught this in the media, but a lot of these banks are really getting in trouble by various cities and municipalities because the cities are angry and the neighbors are angry that they’re not taking care of the properties they foreclosed on, and so the grass is ten feet high and vagrants start moving into the property.
Cliff Bass: It’s just the infrastructure that’s needed to actually take care of the piece of property when they take it back. On top of that, it’s federal law that if they take an asset back, they have to have three times the reserves in their books to actually take it back. So a lot of the banks can’t take it back financially when you’re talking this huge of a scale of foreclosures that’s going on right now.
Jason Hartman: So that’s really interesting because listeners should make sure that they realize that what you as an investor might consider an asset, a bank considers a liability. So an REO is actually a piece of property that they own. That is not an asset for a bank, as in say a liability.
Cliff Bass: It’s a liability.
Jason Hartman: And similarly, a deposit is not an asset for a bank. It’s a liability. It means the depositor has loaned the bank money. So they have to pay back loans in essence, right, with interest.
Cliff Bass: Correct.
Jason Hartman: So it’s sort of the opposite balance sheet that we as investors have in our head, so you sort of have to switch shoes there. Okay, so tell us more.
Cliff Bass: Well, I do know that there is a tremendous amount of notice of defaults that haven’t been filed. I know that there’s a tremendous amount of defaults that have been filed, but the banks are dragging their feet. And in California, there’s a couple ways to foreclose on a property. One is to do just a traditional foreclosure, which takes just a short period of time, about 181 days from start to finish. The other is to do a judicial foreclosure and we’re starting to see some banks that are starting to file judicial foreclosures.
Jason Hartman: And that means that’s a full-on lawsuit.
Cliff Bass: A full-on lawsuit and that can drag the foreclosure process out in excess of two years, which means that if there’s somebody living in that house, they literally can live there for a couple years rent free, per se.
Jason Hartman: Pretty good deal.
Cliff Bass: But the bank itself is trying to spread out their losses over a longer period of time. Why? Maybe to hope that the market comes back possibly because there’s so much property that they’re taking back to not take as big of an asset hit. They can’t take the write-downs if they’re going to dump the property. They can’t take back the property because they don’t have the three times assets on their books. There’s a lot of reasons that the banks may be doing this, but it’s definitely dragging out the timeline that we’re usually looking at as to, okay, notice of default’s been filed, we’re going to have a foreclosure in 180 days.
Jason Hartman: There’s been some talk, Cliff, that a lot of these banks are intentionally doing judicial foreclosures to intentionally slow the process.
Cliff Bass: I don’t know that to be actually the reason, but I do know that that is something that is probably being done, yes.
Jason Hartman: Yeah. It’s interesting. So we talked about how long it takes to foreclose and that can be about four months, maybe a little bit longer for the bank. But most banks are waiting and waiting before they even file the notice of default, which is the beginning of the foreclosure process or the official beginning of it. So people are living in the properties rent-free for a long time before that. Let’s talk about the capitulation issue first and then I want to talk about these claims of buying foreclosed properties for pennies on the dollar, these emails that fill up my email box every day. I want to get your opinion on those.
Cliff Bass: So as far as what the banks are doing with not selling their properties, somewhere somebody has made a decision that okay, we’ll take this much of a loss on a piece of property, and let’s say that they’re going to take $100,000.00 hit on a house. Well, if you multiply that by 1,000, that’s some big numbers there, so let’s hypothetically say a bank is worth on the stock market, they’re worth $100 million.
Jason Hartman: So this is the market capitalization of the bank, $100 million.
Cliff Bass: Correct. It’s worth $100 million.
Jason Hartman: Okay.
Cliff Bass: And it’s trading at $10.00 a share. Well, if they go out and they take a $10 or a $20 or a $30 million hit, which is called a write-down, now, their stock literally has dropped, is going to drop, or they’re saying that their company is not worth that extra $20 million that they originally said it was worth.
Now, let’s flip that a little bit. Let’s say that the company is worth $100 million and they’re taking – they need to take down a $300 million hit. Well, they can’t. They then become insolvent, so the banks are making sure that if they take a write-down on a house or a loss on a house, it’s something that they can take on a sustained basis. So even though somebody comes in and the market might say, okay, this house is worth $150,000.00, the bank is going to be taking a $150,000.00 hit because it was their note or their lien against the property they had was for $300,000.00, they might come back and say, well, we don’t care if the house is only worth$150,000.00. We’re only going to sell this for $200,000.00.
So then it gets denied. They buyer walks away. Nobody really wants to pay $200,000.00 for the house.
Jason Hartman: And no deal occurs.
Cliff Bass: And no deal occurs. So the bank just maintains that. How long they’ll maintain that piece of property before they actually say okay, well, we need to sell this, I don’t know. But what we have seen over the past few months is they’re coming back six months after and saying, okay, well, we’ll take that $150,000.00 now. The problem with some of the places in Southern California is now the property has dropped another $20,000.00 or $30,000.00, so instead of getting $150,000.00, it’s really only worth $120,000.00 now. So now they’re taking an even bigger hit because they’re not moving with the market fast enough.
Jason Hartman: Right.
Cliff Bass: They’re chasing the market backward.
Jason Hartman: Right and so he who hesitates has lost. I mean the only rescue I could really see for the bank is either No. 1, the regulators just come and shut them down – now, that’s not a rescue. No. 2, the regulators come and bail them out, i.e. we’ve seen that recently on a very large scale. Or No. 3, the market improves and the market saves them. And I certainly don’t think we’re going to see the market saving them in Southern California any time soon.
Cliff Bass: Not anytime soon.
Jason Hartman: Yeah. So what you said earlier is that we haven’t really seen the foreclosure market really hit yet.
Cliff Bass: We’ve just seen the beginning.
Jason Hartman: That’s an amazing, amazing thought, and when you’re talking about this, you’re really talking about Southern California, right?
Cliff Bass: I’m only talking about Southern California.
Jason Hartman: Yeah, so not a nationwide market.
Cliff Bass: No.
Jason Hartman: So it’s going to get a lot worse. I mean any predictions on prices for Southern California? And by the way, I just want to say to our listeners, whatever we say when we say Southern California, you can probably substitute almost any bubble market in the United States, whether it be to some extent Phoenix, Vegas, Northern California, certain areas of Northern California, some areas of Florida, for sure, similar type of scenario. It’s a little different everywhere, of course, but would you agree with that or am I crazy for saying that?
Cliff Bass: I agree with you. I think I’m a firm believer in your calculation where you calculate rents versus the price that you pay for the home.
Jason Hartman: Yeah, the RV ratio, the rent-to-value ratio.
Cliff Bass: Once Southern California gets back to where the RV ratio makes sense, California will explode again. So there are certain cities in certain places right now that are very close to that. I don’t see much more drop in those specific cities, but some of the upper end houses are not even close to that. So who knows what’s going to happen with the higher end homes, million plus homes?
Jason Hartman: So prediction on the California prices, another 10 percent decline maybe?
Cliff Bass: Ten percent over the next 9 – 12 months, and then I think it’ll be steady and I think we’ll start to see it come back out of this market some time in 2010.
Jason Hartman: Two thousand ten, okay. Here’s an interesting thought and I’d like to actually get the author on a future show, Harry Dent. Harry Dent is a famous author and predictor of economies and what he’s always said and I’ve been hearing for maybe about 17 or 18 years now is he’s talked about how in 2010, as so many baby boomers start cashing out of expensive homes, that would be a really good time to buy a high priced property. And I think that’s sort of a next possible wave in California that might actually leave it in the doldrums longer. What else do you see going on out there? Any thoughts about what you see going on at these real estate auctions?
Cliff Bass: Real estate auctions are kind of unique. They were having – they, I shouldn’t say they, but it really does include everybody – having issues with buyers coming in and making offers and bidding up a price of a home. Let’s use $150,000.00 example again. Again, my thoughts on real estate is the price is what somebody’s willing to buy and sell it for. So if a buyer comes in and says the maximum I’m going to pay for this is $150,000.00 and then the auction says, okay, this is good. We’ll take this. They do all the paperwork, they open escrow, they go into escrow, the offer’s sent off to the bank, and the bank comes back and says no, we want $200,000.00, the deal falls apart.
Jason Hartman: Right, so there’s no meeting of the minds.
Cliff Bass: There was no meeting of the minds. Now, I will have to say that the auction company has done an excellent job in trying to alleviate that problem and they’ve brought in the banks that are doing the foreclosure and allowing the auction to go on, somebody there that had the ability to say yes or no on the spot, so that if just because the starting bid is at $100,000.00, it doesn’t necessarily mean that’s what the bank’s going to take. If the bank’s cutoff is $150,000.00 and it goes to $140,000.00, they had somebody there from the bank that could actually make the decision right then and there on whether or not that house would be sold, which really had alleviated a lot of the problems with going into escrow, everybody’s spending money to facilitate the close of the deal, and then finding out the banks didn’t want it.
Jason Hartman: So Cliff Bass, Cal. Counties Title located in Irvine. You’re doing some creative stuff, not just in the typical traditional sense of the title insurance industry, but a lot of things with foreclosures and builders, and we’re anxious to hear more. Thanks for joining us today.
Cliff Bass: Thank you.
Jason Hartman: I’m here with Mike, one of our property managers and he is in the greater Houston area. Mike, welcome to the show.
Mike: Thank you. Glad to be here.
Jason Hartman: It’s great to have you on. This is your first time being a guest on the show and we’re really anxious to talk with you about the Greater Houston area and one of the things you said to me before the call, which I thought was interesting, is we’ll really be talking actually about everything other than Houston on this call because most of the recommended areas for good rental properties are outside of the center of the city. Is that correct?
Mike: That’s correct, yeah. Most of the growth in the last few years has been outside. The inner city is pretty full up and most of the good investment properties have been out in the outer-lying areas of the Houston area.
Jason Hartman: Excellent. We find that to be true in a lot of our cities. We’re in 37 markets around the U.S. and we find that to be true in other cities as well, so that sounds like a pretty consistent thing.
So Mike, what is your general outlook of the Houston for sale market for the Greater Houston area? What’s going on in terms of appreciation rates and the foreclosure market there and people’s ability to buy good properties at good prices?
Mike: Right now, I think it’s excellent for our investors. We’ve got a foreclosure rate here due to the subprime market, which is put an inventory in the MOS system, which allows investors to come in and make some pretty good deals. Some of the builders have been offering some really good incentives. We’ve got a lot of properties on the market. The rental market has come up significantly because of the slowdown in the sales market from the seller’s side, so it’s a really, really good time right now in the Houston area in general.
Jason Hartman: Good and you know we have so many articles and many of them are posted on our blog at www.jasonhartman.com about how Houston is really bucking the national trend, as some of our other markets are as well. And it’s pretty healthy there overall compared to these bubble markets where they’re just collapsing. You’re still seeing appreciation, right?
Mike: Yes, a little bit. It’s not great, but it’s never been huge here. We’ve been more of a slow, steady, good growth market and that’s still continuing today. We are not seeing the downturn that other markets are seeing at all, so we’ve got properties that are selling more this year than last year. The building prices are going up slightly, the rents are going up steady. We have not seen any downturn in the markets that we deal in at all.
Jason Hartman: That’s good to hear, Mike, because that’s what our investors are really looking for is dependable investments that are prudent, conservative, and where they can just go into what we call these linear markets where you can just count on a good, solid rate of appreciation. It’s nothing spectacular that’s going to make the news and make the headlines, but it’s consistent year over year. That’s good to hear. Who are really the target renters and what goes on in Houston? I mean Houston is the energy capital of the United States and energy is all over the news nowadays with the price of gas and natural gas and everything. It’s something else. What’s going on there?
Mike: We’re getting all kinds of people coming here. A lot of our rentals are being filled by people that are transferring into Houston. We have a lot of people that are upgrading, have some people, frankly, that have lost their subprime loan and so they’ve come back into the rental market.
Jason Hartman: So those are the recycles where –
Mike: They’re recycled and they make fantastic renters.
Jason Hartman: Yeah, they really do.
Mike: They can’t qualify for a loan, but they can, of course, afford the rent on the property they’re trying to rent, and so they’ve turned out to be excellent renters.
Jason Hartman: That’s good to hear. But since you mention that, Mike, what about their credit score? I mean it’s pretty beat up. Maybe they had a foreclosure; maybe they did a short sale on their old house, and now they are forced to rent probably for a couple years while they work on re-establishing and cleaning up their credit. But isn’t that landlord sort of at risk taking this person who just went through that and have some dings on their credit?
Mike: It just depends on whose doing the verifications. Everybody that we look at, we look at that credit very carefully, and as long as that’s the big ding on their credit, most of the rest of their credit is fine. It’s when that payment doubled that they got into trouble, so as long as the rest of their credit items are okay, we don’t have a problem with them and we haven’t seen any of those people default on their rentals. They’ve been excellent tenants.
Jason Hartman: Yeah, okay, good. Now, how is the oil boom really affecting the Houston market? You alluded to it a little bit, but what else do you want to say about that?
Mike: Basically, like you said earlier, we are the energy capital. It creates a whole lot of subsidiary businesses that are also growth oriented and we are just booming. When Houston had the problem that was back in the mid-1980s, we diversified this city. So not only do we have the energy, but we’ve got other industries that have come in and built upon that so that we’re a pretty diversified city now. So we are just growing. Everything is related and everything is booming. We’re No. 1 in job growth the last year in the whole United States, so it’s just – it’s been excellent.
Jason Hartman: That is really excellent. You know, I remember in the ’80s, everyone would joke about those billboards that were up in Houston when they really did not have a diversified economy. It’s not the same Houston it used to be. The billboard said, “The last person to leave Houston, please turn out the lights.” And now, that economy is so diversified. I mean last Saturday, CNBC said that Houston needs about 50,000 workers, so they’re recruiting these people from New Jersey and Arizona. The unemployment rate is only 3.8 percent. Most people would consider that really full employment. I mean everybody who wants to work is working, probably has a job, whereas nationally, it’s about 5.5 percent. And the cost of living is well below the national average. I mean these are some pretty good ingredients, right?
Mike: Oh, it’s excellent. It’s like you said. We see very, very little unemployment. The want-ad sections in the newspaper are just almost non-existent. Everything is growing. Everything’s doing great. It’s just almost exactly the opposite of what everybody’s reading in the papers about everywhere else. We’re just really doing very well right now. Good steady growth, lots of things going on, very vibrant city right now.
Jason Hartman: That’s great. Tell me a little bit about income growth and employment growth. I see that since 2000, in eight short years, the population is up 14.9 percent and incomes are up about 13.1 percent. In a city like Houston, where it’s already been so affordable, 13.1 percent income growth in eight years is pretty nice. Everybody must be living fairly well there, huh?
Mike: It’s been great. We’re kind of an untold story here. Nobody realizes we’re down here and everything has just been going gangbusters. We’re just getting good steady growth. Income’s going up, salaries going up. Lots of professional type people coming into town. The oil industry is bringing a lot of that in, but so are some of the others. The electronics and the port and those things are all bringing in good quality people, which is helping everything go up.
Jason Hartman: You know, Mike, I have a few properties in Houston myself and, of course, our area manager, Karam, for Houston has properties there as well, and one of the things that I’m seeing is an issue where you have sort of a somewhat transient population, which is actually something I like because the oil industry might move someone in for a year or two. Healthcare is big in Houston as well, and they’re not really planning on staying long enough to necessarily buy a property, so they rent. Do you see this kind of transient population at all?
Mike: Yes, we do see that. We see lots of people coming in for a couple of years and then going back out again. Some of our clients have had homes that they bought here and we’re now using those homes as rentals because they’ve got transferred out for a couple years and then they’ll come back. So we see a lot of housing like that where somebody is transferring in and then they’re going to transfer back out in a couple years when the whatever company they work for sends them some place else.
Jason Hartman: That’s really excellent for landlords. Either way, it works. What is the average rental time? How many days on the market should we have to plan? If someone’s going to buy a new property in Houston today and they close today, how long would they expect to take to rent their property out?
Mike: If this was last year, I would be telling you 45 days is about the average. Now, it’s under 30.
Jason Hartman: Under 30 days.
Mike: It’s really been fantastic. This is the best rental market that we’ve seen in about ten years.
Jason Hartman: That’s fantastic.
Mike: So it is really strong, especially during the summer. We’ve only got 14 vacant houses in our portfolio right now and seven of those are under 30 days and most of the things that have been renting have been renting under 30 days. So it’s been very, very strong right now.
Jason Hartman: So give us a point of reference there. You said you have how many, 14 vacant properties in your portfolio?
Mike: Fourteen vacancies right now. Seven have been vacant less than 30 days and we have a total portfolio in our office of 350 houses.
Jason Hartman: So out of 350 houses, you only have 14 vacant properties. That’s fantastic. And most of them very short time vacant, so you’re just turning those around and putting renters right in them right away, huh?
Mike: Yes. In fact, we’ve been doing – the perfect thing for an investor is to have a house where we have found a renter before the last one leaves. That’s not your typical market, but right now, this summer, it is. I would say, probably half of the homes that we put on the market, we have found a tenant to move in before the last one even moved out.
Jason Hartman: Now, of course, the big question here is what is the rent to value ratio, which is our sort of initial metric we use to analyze our investments. And in most of our markets, Mike, we say our ideal rent-to-value ratio is .7 percent. So a $200,000.00 property would rent for $1,400.00 a month and it’s all about price because if you lower the price, it will rent faster. But in Houston, we’re seeing .8, .9, even 1 percent, so $150,000.00 house that rents for $1,500.00 a month sometimes. What are you seeing there?
Mike: Exactly that. We’re seeing very good rates. In fact, the last investor that we just closed a house on rented the property in ten days. I believe his purchase price was $161,000.00 and we got $1,595.00 for the rent. So that’s fairly standard right now.
Jason Hartman: Wow, so $161,000.00 house that rented for $1,595.00 and that just rented lickety-split. That’s fantastic. Good to hear. What else do you want to tell us about Houston?
Mike: Houston’s the place to be. It’s great. It’s hot, but we have very good air conditioning. But it’s a great place. It’s so big; it’s so vibrant. There are things going on all over the place. Fantastic – in my opinion, fantastic investor rental market. It’s been good, slow, steady growth. We’ve had clients that we’ve had for 20 years that bought houses back in the late ’80s and they’re still extremely happy with the growth of that property and places are doing fantastic like that.
Jason Hartman: That’s fantastic. Well, Mike, thank you very much for being on the show. We’ll have you back in the future. We’ll check in with you somewhat regularly to get your take on the market as things progress. Thank you so much for being on.
Mike: Certainly. Thank you very much.
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I’m here with Nancy and wanted to talk to you about two of our fantastic markets. One is our tried and true market that we’ll talk about in a moment that is strengthening and has gotten better. And one is a newer market. Nancy, welcome.
Nancy: Thank you.
Jason Hartman: Tell us about Gulfport/Biloxi area and Long Beach area. That’s Long Beach, Mississippi, not California. We were there a few weeks ago. What’s the scoop?
Nancy: Yeah, we had a great trip. Jason always talks about out of a disaster comes an opportunity and I really believe that’s what’s happening in Biloxi. The economy there via the casinos and the major boom on the ocean, they are now allowed to build on land. Biloxi is now the third largest gaming revenue area in the country, behind Atlantic City and Las Vegas.
Jason Hartman: So what you’re saying is that before, the casinos had to be built on barges.
Nancy: That’s right.
Jason Hartman: And when Katrina came along and wiped them out, the city said, hey, let’s let them build on land. Let’s change the law. And that made the casinos so much more substantial. They’re huge now. They’re like 50 – 60 percent the size of a big glamorous Vegas casino.
Nancy: Right and there are 11 casinos currently up and running and they’re employing about 17,000 people. That’s about 2,000 more than all the casinos that were open pre-Katrina.
Jason Hartman: Tell us some of the big corporate names in the gaming business who are in Biloxi. I mean it’s amazing.
Nancy: Yeah, Harrah’s is there right now with the Grand Casino in Biloxi and they’re also building a $700 million resort with Jimmy Buffet, the new Margaritaville Casino that will be open in 2010. MGM Mirage is there with the Beau Rivage, which is the sister casino to the Bellagio in Las Vegas.
Jason Hartman: These are all big corporate names and those casinos, we were there on that trip, and they are unbelievable how swanky and glamorous they are.
Nancy: The Hard Rock is there. Interesting tidbit about the Hard Rock: it was there before Katrina. The whole casino got destroyed. The guitar remained standing. It was the only thing on the beach that remained standing.
Jason Hartman: Long live rock and roll.
Nancy: And they are – they have rebuilt the Hard Rock and it’s just amazing inside there.
Jason Hartman: I mean that Hard Rock Casino is gigantic, five, six levels of parking outside. I remember going through that parking garage. It was packed. I mean it’s just huge inside. It’s amazing how much money they have dumped into this area.
Nancy: Right. They have actually inked about $1.3 billion in casino revenues last year. Prior to Katrina, the gaming revenues were about $800 million. So they’ve just almost doubled the revenues in just a couple years. They’re also, because of the casinos and the tourism, they do $100 million in golf each year. There’s 20 golf courses there. This industry is just spurring all kinds of job growth, not just from the casino workers, but also construction workers to build these places. There is a major military installation there with Keesler Air Force Base, the CB naval base, a couple Army and Navy National Guard installations and also the Stennis Space Center, which is NASA’s backup space shuttle installation. So there’s just a ton of activity there that we really think is going to make this one of our booming higher appreciation areas, and we’re very excited about that.
Jason Hartman: And a shortage of housing because we had to look around a lot for that, Nancy. That’s excellent. Tell us real quickly about one of our tried and true markets, the market where I own and the market where many, many of our clients have invested, and it’s actually improving in terms of the rental market being very, very strong. Stronger than before, and this has just been a real dependable market. What’s the name of it? Everybody’s wondering.
Nancy: This is Kansas City, Missouri, and Kansas City is the 13th largest metro in the U.S. The statistics in Kansas City are just excellent. This is a strong, stable rental market. We talk a lot about our rent-to-value ratios and it’s .7 percent being ideal. All of the properties that we have in Kansas City, we get at least a .8 percent RV ratio.
Jason Hartman: On my property, my four-plex in Kansas City, I’m getting about a .82 percent RV ratio, so it’s phenomenal. It’s just a great property.
Nancy: There are some positive cash flow opportunities in Kansas City, which we haven’t seen for a few years. So if you’re looking for a market with some positive cash each month and a .8 rent-to-value ratio, Kansas City is your market.
Jason Hartman: Excellent. Thank you, Nancy.
Hey, I just wanted to announce a couple of quick things for you. If you are able to come to one of our live events, we would love to see you and meet you in person. We’ve had people fly in from all over the U.S. for them. So hopefully you can join us for some of those events.
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And this particular one that we just loaded in the video podcast is about Naked Short Sales and what goes on with this short sale and manipulation of the stock market. It’s a very interesting report from Bloomberg News and I think you’ll really learn a lot from that. So be sure to tune in and watch that.
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Anyway, we’ll talk to you next week. Thanks for listening.
This material is the copyrighted creative work of either Jason Hartman, the Hartman Media Company, Platinum Properties Investor Network, Incorporated or the J. Hartman Company, all rights reserved.
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Duration: 46 minutes
