Terminal Value

Interest Rates and Housing Inventory with Jason Hartman

Doug Utberg

Business Growth Authority | Technology Strategy & Resourcing | Cost Optimization Expert | Business Process Architect | Financial Strategist | Founder - Terminal Value Podcast

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I have Jason Hartman on the line and this will also actually be on the creating wealth podcast which is Jason’s podcast that has far more listeners than mine does at this current juncture. Of course Jason also has about a 13-year head start. So I’ve actually.

Actually 15 years. Yeah so, so don’t feel bad Doug nobody listened to my show in the beginning either.

Yeah, exactly. Yes, he’s a 15-year overnight success in the podcasting.


But I’ve actually known Jason for a really long time. He runs an extremely successful investment real estate company, but he does it a little differently because a lot of people like to invest in real estate in their own state but he you know. He but when he started the company he was in California and everything in California was ridiculously expensive. So he came up with the idea of investing out of state for cash flow in areas that have much more reasonable prices and much more. I guess you’d say rational relationships between rent and values so that you could get decent cash flow. Jason let me stop talking for a second and let you introduce yourself to the audience.

Yeah, good stuff thanks Doug and it’s great to talk to you and we’ll do this as kind of a co-interview. You’ve been on my show many many times over the years and we’ve talked about a lot of interesting macroeconomic concepts and you always have really interesting views and angles on things so anxious to dive in and talk about the market, the potential bubble, that some are talking about and just some macro issues and real estate and how they all tie together.

Yeah, absolutely. Well and because I think the thing is right you know in my heart I’m a value guy. You know I’m a kind of born contrarian right. You know I’m an ardent believer that over the long term the hurt is always wrong. The problem is that long term can take a while to show up and so because you know. I think as you’ve said right with the current low interest rates. Just the there’s basically a bull market that’s happening in everything right. You know the equities are going to the moon. Real estate’s going to the moon. You know, my you know my intuition is that this can’t last forever but it probably will last a few more years.


Which it’s you know it would and and incidentally that’s actually one of the reasons why you know, why bears tend to do really bad is because you know what what bears will almost always say or like what contrarians will say is they’ll say hey the market’s overvalued and they’re right and then it goes up another thirty percent.


Let’s say the market’s over even more over value.

And they keep missing it.

And it goes up another thirty percent and by that point they’re wiped out.


And then when the inevitable correction comes and it’s you know and the market goes down by 60 or whatever they’re, they’re out of the market .


Because they were you know because they were betting on the decline and you. It’s just so hard to call a top.

And of course.

I know everything’s high but I have no clue where the top is going to be.

Yeah. Market timing is a fool’s errand and you spelled it out perfectly. You know the people that who win are the people who embody the value investing philosophy and they buy good assets regardless of what the type of asset is we can talk about that of course.


And they hold on to them. And they just manage them and they keep them and they watch them grow over time and those are the people that succeed.

Yeah well one of the things I think that you and I have talked about a few times to either conferences or whatever you know in the in the mainstream media everybody likes to talk about you know stocks bonds. You know kind of stuff that you mutual funds you get through your financial advisor. You know that that’s a way that you can amass some assets but the way that people become really wealthy there’s really only two ways and that’s either through real estate or through a business that they you know that they start and grow and then it grows at just a meteoric rate because you know you know most businesses either fail or they grow rapidly. And so I think that’s one of the other things to think about. Also just you know one of the things I think about macro wise is that right now you’re actually seeing a lot of concentration in kind of the technopoly. I know this is one of your you know one of your hot buttons is you know is big tech and just how big tech is getting just so much bigger. And a lot of small businesses are just really suffering.

Yeah. It’s really an unfair system we have. We have this winner take all system listen you know. I don’t expect it to be fair. I said fair and that’s probably the wrong word we have a system that is essentially a scam. It’s a winner take all system, where big giant evil tech companies are the new dictators, they’re the new censors and they have armies of lobbyists, lawyers, accountants to you know manipulate the law in their favor. pull the wool over your eyes, fight you in court. You’re just not going to win the end.


And there is some hope because finally the government and I’m no big government fan but finally the government appears to be doing their job. The job they should have done 15 years ago and filing antitrust complaints against these companies because they are just totally abusive. It is ridiculous. No matter what side of the political aisle you’re on, you should be very scared that we are living in this Orwellian disaster of a world. Doug it’s like and and we’ve talked about these concepts over the years but we’re living in a world of not only Orwellian 1984 but also a brave new world. Aldous Huxley’s book and Iran’s atlas shrugged and you know. I don’t know a bunch of others. It’s just a dystopian disaster. We’re living under with these big tech companies.

And by the way I’m just going to say for any younger listeners what we’re talking about here let me get you we’re talking an example thing it’s called a book. It’s made with paper and glue. They have them in these buildings you might drive by them every now and then. It’s called a library if you.

Yeah because.

A lot of it are in there.

You have to drive by the library and you can visit all the homeless people that live in the library because you know that’s a whole problem. That’s absurd, it was created by the government but yeah it’s a whole other discussion, No these big tech companies, it’s awful and you know we agreed on something a long time ago Doug that real businesses make money.

Make money.

You know and we’ve seen with you know a whole new slew of IPOS. These basically zombie companies that the way they make money is by raising money. That’s all they do. They don’t have real businesses. It’s absurd.

And I sure you know disclaimer alert right. I’m not giving investment advice but I mean that, that’s basically what Tesla did. And at least in my view I don’t think they’re really making money now I think they’re just cooking the books to make it look like they’re generating profits.

Master of financial manipulation.

Yeah all the equity on their balance sheet is because they sold convertible bonds the stock went up they can it converted to stock. But you know that they don’t have any retained earnings. They have no retained earnings but anyway that’s another topic for another day. One of my many many rants.


But the thing that I think is actually particularly dangerous about the big tech. Especially like Facebook, is just the utter and complete destruction of people’s ability to have civil conversations and to focus. I don’t know fantastic book I read recently deep work by Cal Newport.

Yeah. I had, I had Cal on the show to talk about that book.

Outstanding. Yeah it’s a wonderful book. I’ve read it a couple of times and every time I read it, it just really makes me think about how important it is to really be able to focus and avoid getting distracted because it’s just so easy. It’s like I mean it’s I don’t think it’s any less addicting than like tobacco or anything. I would say that the kind of the information addiction is probably even worse than a lot of substances. And but it just kind of gets ignored. And I’m actually really concerned that you know .The social media and the kind of the online technology is just really deteriorating people’s mental health. I mean you’re already seeing it suicide rates are just going through the roof. Not that anybody’s talking about it.

It’s terrible. Yeah.

It the only thing they’re talking about is the, it’s the mortality counter for Covid. You know but you know there’s a way bigger problems that are that are brewing under the surface and just totally ignored.

Yeah now I know. You’re absolutely right. It’s really a dystopian world we live in. You know at the same time there’s a lot of opportunity. So, if we want to circle over to like the direct economic issues.


You’d probably agree although we haven’t talked about this Doug but you probably agree with the concept of the k-shaped recovery right. I’m guessing you would.


And so, it’s very, it’s very uneven right.


Some people are really suffering and some people are just killing it and there’s some are in between. The ultra wealthy are killing it right. Now they’ve become insanely rich. That’s just part of the winner take all world in which we live and it’s unfortunate because it’s not democratic. It’s very anti-democratic. It’s not capitalistic, it’s crony and it’s too bad we can complain all we want we’re not going to change it. The thing we have to do is align our interests with the most powerful forces the world has ever known and I’ve always said those are governments and central banks. And so let’s talk about that because we’ve had endless conversations over the years.

Exactly, exactly. Well and one of the things that I think is actually really, really unique about the investing model that you put forward is you know is

the idea that you know your asset when you have a rental property is really that you have a you know basically a item of universal need right a house you know, place for someone to live where the rent offsets your debt service so then in that case what you’re ultimately doing is over the long term. You’re just levering inflation.

You know so then you even if inflation is the reported three to four percent which of course it over the long term with the amount of money that’s being printed now that’s nonsense. There’s going to be inflation at some point. You can’t not have it. We’ve been saying that for 10 years but it’s going to happen eventually and yeah just.

But it has happened. You know, I mean I mean there’s a lot more inflation in the system than the government would say yeah. It’s just, it’s just ridiculous.


You know there’s much more inflation in there. So go ahead.

Oh yeah and so but I was gonna say even if there’s only that three to four percent inflation you know if you if you’re at a four to one leverage race ratio right you say you have eighty percent loan to value borrowing four dollars for every one of your dollars that’s in there and then your cash flow is offsetting your debt service then over time as the value inflates. You’re just gonna get you’ll end up getting a net multiplier on whatever that increase in value is. I mean and the thing is right you don’t know in advance what’s going to go up so that’s what you so what you do is you just say okay you know I’m going to spread my bets across the board and you know over time. I know that rising inflation tide is going to lift the nominal price of all the boats you know but you know but the thing that’s really valuable is actually that fixed rate loan because that’s what gives you that cheap money that you know where your debt service stays flat but the nominal value of your asset goes up. And it really gives you a chance to lever inflation in what I call a real way right. You know, you’re not depending on the inflation. It’s just inflation’s inevitable and you’re, you’re just aligning your interests with it.


You know and that’s I think that’s one of the things is because yeah the equity markets can’t won’t grow at 20 percent forever. Like I think the 80, 90 average is something like eight percent a year. And a lot of people don’t know this but, the biggest peak to valley drop of the s p 500 in history was of course you know after the 1929 crash. But that was 86 percent and if it has happened before. It can happen again.


People always say okay buy the dips because it always comes back. Not necessarily, somebody should look at the Nikkei. The Nikkei has never come back and they get peaked in 1990 and I think it’s only like 60 percent of that peak value.


You know, you’re just cause something always has happened doesn’t mean it always will.


That’s something that a lot of people really have a hard time wrapping their head around.

No, no question about it.

The stock market is a two-dimensional asset class at best and many times just a one-dimensional asset class but income property is a multi-dimensional asset class. So you make money in several ways.

You earn your return in several ways and the sad thing about it is that so many people just don’t know how to do the math. They could have had income properties over the years in the past and they just didn’t think it was that great for whatever reason or they’re looking at it now and they think and they listen to Kramer or some liar who’s saying well you know the S&P will typically do eight percent and property only goes up at about six percent but that’s not the the reality of the situation. The reality of the situation is because you earned so many forms of return on your income property, it’s a multi-dimensional asset class. You know a six percent appreciation all In on a good income property turns into a 25 or 30 percent annualized return on investment.

Yeah, it is.

And by the way you can see these performers at www.jasonhartman.com in the properties page for details because some of you may not believe those numbers but they’re they’re all spelled out and I’ve got a video on the front page of my website that spells it out so go ahead.

I know it’s good video. I mean and I think that’s just it is that you know especially because yeah when you’re talking about like the S&P 500 but what people don’t understand is that nobody buys property for cash. I mean you know actually even the hedge funds don’t buy it for cash what they do is you know they just underwrite it with bonds on the back end. At least the thing that is appealing to me is that I think it’s very much a main street way of doing business right you know it’s which is you know buying real property with bank financed loans that’s you know people been you know that’s never going away. That is you know that that’s one of the oldest lines of business for every bank because you know banks will underwrite real estate all day long because they like writing debt on real assets.


And at some point in the future people are going to get more picky about what kind of debt they underwrite. it obviously isn’t happening now but it’s going to happen at some point. And you know but I think you know just the idea that you know not being dependent on a speculative fever pitch. I mean of course you know if, if you happen to hit the jackpot on a speculative fever pitch great. But yeah you don’t want to be dependent on it.


And I think that’s, that’s one of the things that I just I really like about your model and I think it’s also you know. I really like about the philosophy which is the main street versus wall street. I mean everybody who’s listened to you talk for more than five seconds knows you’re no fan of wall street.

As I always say Doug. Wall street is the modern version of organized crime.

That was I think there was one there was one conversation we had from a long time ago. You just reminded me of that. I wanted to bring up to the audience. So, I’ve been at Jason’s conferences for a really long time and it would think it was in twenty.

And you’ve been a speaker at some of our conferences too.

Yeah I’ve been a speaker at the conferences a few times and in 2012 when we were talking about bitcoin and I think just reminded me of my line at the time. And I said when bitcoin is traded on in ETFs and futures then we’ll know it’s real. Well it’s traded in ETF’s of futures. So I think, I think that probably means bitcoin’s actually real. Well and also if you’re if you’re a company like I just saw that I think it was the department of energy. I just had a huge cyber attack and so it’s like yeah. You know if you have to pay off cyber hackers they only accept bitcoin and so because I know this but you know when I was in IT department, one of the things we had to do is we had to open up a coin coin base account. So that we could have.

So you could pay your ransom.

So that we had to pay ransom. Bitcoin stored up yeah.

That is sad but you’re almost making the case though for the government to make it illegal that’s what worries me but yeah I get it. I get it yeah, yeah.

Something else I’d be really interested to see yeah. If bitcoin gets shut down then do the cyber hackers go to some other crypto or does you know or what would happen? That would be. I’m not sure that I really want to know. I don’t know.

Yeah, yeah I don’t know. It’s a hugely speculative question but it’s a good question.


You know hopefully no one ever has to experience that. You know one of the things that I think is really interesting to note is that when you see all of these pundits on tv and so forth and they’re talking about oh there’s a bubble and let’s just use real estate as an example. We could use the stock market or anything else but real estate has some particular interesting things okay. So real estate has actually gotten cheaper over the last 14 years. The difference when you adjust for the median house price and the 30-year mortgage interest rate on a 30-year fixed-rate mortgage and inflation you adjust for those three things.


Now I’m not adjusting for wages okay. I just want to make that clear but, I don’t know that you need to that much. It wouldn’t make that much of a difference the concept still is definitely the same. So when you adjust for inflation interest rates and the price of the house which is much higher for example median price now is about 313,000 median price 14 years ago before the great recession, was I think about 235,000 okay. But the interest rate is much lower now. So the the real dollar difference in mortgage payments is 657 dollars less.


Today than it was 14 years ago. So houses have gotten cheaper. Contrary to popular belief. You’ll see all the idiots on CNBC saying well you know if you look at the price of a house now it’s higher than it was before the great recession so there must be a bubble things are going to crash. You know and they’ll miss the whole thing because nobody buys the house based on the price. They all buy it based on the payment and that’s the reality of the situation. So real estate is a bargain okay. It’s, it’s gotten cheaper especially good quality suburban real estate in linear markets.


We’re not recommending high-flying cyclical markets. We’re not recommending trophy markets. We’re certainly not recommending urban areas and high density areas because they suffer from a concern about Covid of course but, they also suffer from a concern about Joe Biden campaign rallies. I mean riots where people are breaking windows and burning buildings. I mean Joe Biden campaign rallies riots oh same thing anyway yeah and and i we should note that when I say Joe Biden campaign rally I’m talking post election. They’re still going on.

Everything’s going crazy.

The world is nuts. It really is.

The world is absolutely nuts. I mean and but I think that the point that you made there I think is, is you know for everybody who’s listening is really important which is that you know the thing to really to really think about is you know what’s going to be your mortgage payment and debt service. And that the real value of that or the real cost of that is actually on you know for a median value house has actually gone down.

It’s lower.

The median rent has gone up.


You know so it’s like even though real estate prices have gone up, there’s a lot of cases where they’re actually say it’s still actually a better deal than it was than it was 14 years ago.

No question about it. It is a better deal than it was 14 years ago and that’s why prices keep going up.


And there are bidding wars and the market is going crazy now. You asked earlier though Doug about you know

the low interest rates can they last? No of course they can’t last. They’re artificial. They’re that you know they can only defy gravity for so long eventually interest rates have to become normal okay.

But here’s an interesting thing you might remember Patrick, one of our team members who lives in a rent-controlled house with his wife in San Francisco. They rented this house back in 1996 and I think they’re paying twenty four hundred dollars a month rent now and the price of the property value keeps going up and up and up and it has for many years of course we all know what happened there. Until recently, now it’s reversing and going the other way with the Covid and the Joe Biden.


Campaign rallies but before that, the price had gone up a lot. So that house now is worth about 2.4 million dollars and they’re only paying 2400 a month. So they’ve got a bargain. Patrick and his wife Robin would really like to move but, guess what, they can’t make a move make any logical sense.


Because they’ve got too good a deal. So rent control causes a market to stagnate it. Distorts the market but the same thing my prediction I’m making a prediction now will be true.

It makes a lot of predictions and a fair amount of them actually happen.


The inflation one not so much or the interest rate one not so much.

No I’m, I’m terrible at predicting interest rates but, I do know the effect of interest rates. So, listen to this idea okay. So in the future when rates do finally go up as they must.

They have to. Yeah.

Okay, the market will become more stagnant. Where people will stay in their houses because they’ve got that incredible mortgage that doesn’t have to be paid off until 2050. They won’t want to give that mortgage up. It’s like a rent-controlled apartment

A sensible yes.

It is too good a deal to give up. So guess what will happen, that’ll restrict supply in the future. There will be a lower supply of real estate because people aren’t trading it and you’ll see a constraint on the supply which will put upward pressure on rents and prices. But not only that if you’re thinking of what’s the business opportunity or you know what’s the hot investment. Well home improvement will increase as it already has in the Covid world. So there will be a lot more interest in adding, adding on a room, adding on a second story. Improving the house, fixing it up. Buying new furniture whatever because people won’t move. They’ll stay put because if they leave if they move they get rid of the mortgage at the very the most they might do because these rates are so incredible and they’ll never want to give them up. They might turn the property into rental okay and then buy another property or rent another property. So that’s an interesting effect that I think is going to be hugely significant. You know three years, five years, ten years, fifteen years, twenty years in the future because people just aren’t going to give up these great mortgages. They’re just too good to give them up.

Yeah, exactly. I think you’re exactly right and I know that’s one of one of the things that I kick myself out about constantly is some of the times. When I’ve moved in the past, I’m like why didn’t I just keep that thing and make it a rental? Why did I sell it? especially because a lot of times when I sold it after the fees I didn’t even make that much money.

Now, I remember one of your houses that I actually helped you sell.


That wouldn’t have made a very good rental. You know.


It was too expensive to be a good rental. You know rental houses should be necessity type housing bread and butter housing.


So don’t feel so bad about that.

Well, because the thing I think is that even if I’d had to eat a little bit of a monthly for a few years just being able to have that low interest rate debt with an inflating out asset, Even if you’re not pulling in a big monthly. I think you know, that’s you know over the long term that’s you know that’s really powerful.

Sure, yeah. There is no question about it. The mortgage is the asset, that’s what people don’t realize.

The mortgage is a huge part of the asset. It’s not just about the house it’s about the mortgage.

I mean if I could go get a hundred of these super cheap mortgages without even having a house attached to it.


Where I just get income from it equivalent to the rent. I Would do that all day long. Forget about the house. I just want the mortgage, the mortgage is such a good deal.

Yeah well, exactly. The financing is just so unbelievably favorable.

Yeah. We’ve been given a gift by our rich uncle Jerome Powell, that’s a joke obviously. But you know Jerome Powell is the federal reserve chairman you know. He’s a Keynesian and he has just made no bones about it. We don’t care about inflation. We’re going to keep rates low and everybody should just stock up on these incredibly cheap mortgages as fast as they can.

Yeah, absolutely. It’s one of the two ways that people become, actually become wealthy; your other one is to start and grow a business. Those are your two ways that it actually happens.

You’re absolutely right. It’s either income property or a business. That’s about it.


Everything else is, is more of a hedging strategy.

Yeah, everything else you can either pay the bills. You might be able to do all right but, if you really want to make a jump it’s either going to be real estate or business. That’s .


That’s where it comes from.

Couldn’t agree more.

Well hey cap us off with one of your famous thoughts.

How about this one. Invest in places that make sense, so you can afford to live in places that don’t make sense.

Where did you hear that first?

I think, I heard it from you.

That’s correct you did.

And that’s why it’s perfect. Yeah that’s why it was the perfect cap-off for your show.

The perfect cap-off.

It wouldn’t be the thing I would typically say.

I said that to a co-worker one time because you know he asked me why I was buying houses out in the middle of nowhere and I was like I go well it’s because you know I go, I invest in markets that are they’re reasonable and make sense. So I can afford to live in one that isn’t.

But Doug you know, those houses are not in the middle of nowhere anymore okay. If you think about it right now. The whole country is moving to these second and third tier suburban markets.


So Atlanta is booming. So many of our markets in Florida are booming. You know Memphis has just been a perennial excellent cash flow market as has Indianapolis.


You know again these aren’t trophy cities but financially they make great sense. They really do so.

Yeah, yeah absolutely. Absolutely, alright well hey thank you very much Jason. That was awesome conversation.

And thank you Doug and happy investing.


Okay so, following up on that conversation with Jason. One of the things that I think is really important just for everybody to keep in mind is just the impact that these low interest rates are having on the real estate market. You know, I’m just on the business market in general and you know as much as we can. It’s really important to be prepared for what’s going to happen when those rates come up. I mean now it may not be for a little while. You know but you can’t keep interest rates low indefinitely for this song especially with how much debt that’s being created right. The government’s just running enormous deficits and sooner or later that piper’s gonna have to get paid and so I don’t necessarily know how it’s all going to play out and nobody really does but, I do know that it’s really important to make sure that you’re prepared. So make sure that your personal life, your business that you’ve you know that you’re running lean and mean and that you’re taking it. Taking advantage of these low interest rates to reconsolidate and to trim your expense structures and of course getting into real. What I do which is I help businesses to reduce their expense structure without needing to drive layoffs. If you’d love, like to learn more I would love to meet with you and to talk a little bit. Please connect with me at www.meetdoug.biz so we can spend a few times talking and maybe we’ll be able to do work together. I hope you have a wonderful day and I’ll talk to you later.

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