Real Estate Economic Indicators and the Demise of Sears

Real Estate Economic Indicators and the Demise of Sears

Jason Hartman covers some current economic headlines and data regarding the housing market. He connects this to what it means for investors. Data as it is oftentimes presented can be misleading. Later in the show, Jason discusses the demise of Sears for commercial real estate investors.

Investor 0:00
Hey Jason, congratulations on your 1000 podcasts. That’s amazing. You are so productive. Not only that for creative wealth, but everything else that you do pretty incredible football as well. Just want to let you know I’m thinking about Chin up, things are going.

Announcer 0:19
Well, welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it on Now, here’s your host, Jason Hartman with the complete solution for real estate investors.

Jason Hartman 1:09
This is your host Jason Hartman with Episode 1076 1076 Thank you for joining me this evening. Yes, it is this evening where I am I am in San Diego, California, where it’s a little chilly. I gotta tell you you know when you spend time and places like Florida and Hawaii and Europe in the summer, it feels kind of cold here. It really does. So you know, they say hey, California is not cold but I don’t know if I’d agree with that. So quite a few things going on of course in the world as always, but hey, did I not tell you inflation was coming? I told you so right. Well, Dollar Tree Dollar Tree, you know, the store dollar tree that sells everything for a buck? Yeah, they are finding themselves in a bit of a problem with inflationary things going on in the world. Because Heck, you know if that’s your brand, if your brand is built around this, everything’s $1 in your store, what happens when you have inflation? Because there’s a difference between price and value and nominal and real, right? And it is hard to hike prices when your brand is built around a $1 dollar store type of concept. So yes, that is happening. Inflation is happening. It took a while to get with us, but it is definitely here. So I want to tell you first in today’s episode about a property Yes, here is a property. That might be a good opportunity. Okay, check this out. This house was built in 2002. It’s an Indianapolis market we’ve been in for many, many years. It is 2400 just over 2400 square feet before. I tell you that price and the cost per square foot, which might just blow your mind. I want to tell you some other important statistics about this particular property, the debt coverage ratio. Now, this is a metric that I don’t talk about a whole lot, but I talk about it a little bit. It’s an interesting metric. It is the metric that basically tells you how likely are you to get in trouble with this property where you can’t pay the debt service, right? How likely is that kind of thing? Well, this has a debt coverage ratio of 2.5 2.50, which is very good. It means that there is a very, very small likelihood that you could ever find yourself in a problem on this income property with paying the mortgage. So very good debt coverage ratio, the cap rate or the capitalization rate, which I don’t talk about very much because I think it’s kind of a faulty metric. And it is Some applications I know it’s big in commercial real estate. But hey, a couple of the reasons I don’t like cap rate as a metric very much is it doesn’t count the power of leverage, right? It doesn’t take that into account. And it doesn’t take into account appreciation, maybe two reasons why it’s used so commonly in commercial real estate, because you don’t get very good leverage in commercial real estate compared to residential. And because you tend to generally not get as much appreciation, because your appreciation is based on income. And the income is tied to usually consumer price index or CPI increases in your rent performance. So you have a more tethered appreciation. That is, frankly, more logical. But hey, when I’m the owner, I don’t care about logic. I want the market to act irrationally. So they will overpay me for my property, right. If, if, if you are the owner or the seller, that’s the position you want to be in. So the cap rate on this property Still phenomenal 11.4% cash on cash return projected at 14% total return on investment projected at 24% with only a 4% appreciation projection in here, not the usual 6% appreciation projection which would have made that overall return on investment significantly higher. Okay, let’s go back a little bit now. And let’s talk about the rental income on this property. The rent is 1195 per month, and the cost per square foot, I’m kind of giving it to you backwards because I’m gonna zing you with the price. Remember, this home is just over 2400 square feet. It’s not old, it’s built in 2002. And it’s only $32 per square foot. $32 per square foot. Yes, incredibly cheap because the property is only 78,000 thousand dollars. Well, I’m sorry to tell you. This is a property we sold back around October 23 of 2012. Yes, it came up on my Facebook memories. When I posted, you can’t beat my investment companies deals with a Caveman’s club. Look at these projections of 11.4% cap rate 14% cash on cash return. I love income property. Now granted, I should have purchased this property myself. I did not one of our clients bought it. And frankly, I can’t remember who but that’s the kind of deal you could have had six years ago. What’s my point? Is it to bum you out to make you depressed? No, it is to make myself and all of the rest of us understand that it is very difficult to time markets. And so what that means is you should just buy good quality Quality sensible properties along the way, and not stress over trying to time the market. Because it is hard to remember, you know, the old saying hindsight is 2020. Right? We’ve all heard that. And in a way it is. But in a way, it’s not. Because it’s very difficult to remember the kind of psychology back on October 23 of 2012. Now, granted, that wasn’t during the depths of the Great Recession, we were definitely coming out of it, things were looking brighter, but people were still very unsure of where things were going. You know, they didn’t know if this house built in only 2002 right, 10 years before we were selling it, reselling it. They didn’t know that $32 per square foot was going to be an incredible deal. They didn’t know that just several years later, you wouldn’t be able to touch this property for Probably, by the way, I haven’t looked that would have been a good idea, Jason to prepare for the show a little more, and actually research what this house is worth today. But you know what I don’t have to, because I know it’s worth a lot more. Okay? They didn’t know that, you know, you couldn’t touch this house years later for 8090 100 120 bucks a foot. Okay? It’s amazing. It’s truly amazing. What has gone on with these properties. Now, I do want to give you a word of caution. Because I believe I am going to play an episode I recorded for one of my other shows. I think I’m going to play it on this show in the future. And I want to warn you about something that you’re going to hear. That is not the full story, not the full story. Why not? Well, when people look at appreciation statistics, you know, there’s a lot of ways you can slice and dice these stats, as you all know, but one thing that is extremely misleading, is this. Maybe you had a teacher or someone you knew in your life named Miss leading? Well, this was very misleading. See very bad joke, right? It is getting a little late here on Sunday evening. But anyway, this is misleading because I even make myself laugh. This is ridiculously entertaining. It’s misleading because when you look at comps in a neighborhood that has been largely improved through sweat equity, through rehab, through construction cost and improvements to the property, that is not real appreciation. Yes, certainly there’s a blend of it. Neighborhoods get improved because people in the marketplace believe that appreciation will come. That’s why rehabbers and flippers and our local market specialists go in and buy up properties in these areas and pour money into To them, but the real appreciation cannot be counted in the gross original sales price. And then the new sales prices several years later why? Because you have to account for the actual capital improvements made to that property, it wouldn’t be accurate to say that’s all appreciation, because it’s simply not. capital improvements are not appreciation. They are improvements. So for example, if you take a neighborhood where all the properties were selling, like this one for $78,000, in $32 per square foot, and then six, seven years later, you look at those properties and you say, Okay, now they’re $120 per square foot, and you know, the price is close to, you know, $180,000 or $200,000. It’s not right to view that all is actual appreciation. It’s simply not all appreciate In an area, and this is why you have to know the neighborhoods a bit right? in an area where there’s been a lot of capital improvement that has gone into those homes. Okay? So just understand there’s a difference between appreciation of course and capital improvements that will skew the comparable sales in a neighborhood. So be aware of that and be wary of that. When you’re looking at valuation. Okay, a couple of updates on the economy and the housing market. So mortgage applications, up 4.9% from the previous week, and purchase applications, see those are a refi and purchase right, Rose about 2%. For the week, basically about flat compared to a year ago. Certainly there’s some people sensing some urgency, by the way, in locking in interest rates. Now an interesting thing. One of our dear listeners from Europe, was boxing me the other day and he was saying that He thought it was kind of, you know, potentially bad advice that I was giving about locking in interest rates. And what was odd about this conversation is as it evolved, he said, Well, you know, if you said lock in the interest rates years ago, they would have only gone down until now. And you’re right. But when you lock in, remember, you get to renegotiate your deal at any time, at a relatively cheap cost. Because you can refinance, you get the best of both worlds, you option the future by getting that potentially lower rate today. But if rates go down again, you simply weigh the cost of refinancing and all these lenders are out there offering no cost reifies. Of course, nothing is truly no cause we all know that because we have a brain and Well, hey, we don’t expect something for nothing like, well, like a lot of democrats do, frankly. But we know that somebody is making money right now. refinancing our loan. So you will end up refinancing your loan to a longer term. For example, if you have 25 years left, then it will be a new 30 year loan. Right? So it’s not really no cost. It’s there’s always cost built in. It’s some level in some way. But who cares if the loan is longer? I mean, we believe in inflation induced that destruction. So we like long, low interest rate fixed rate loans, right. But you can always refinance. And he went on to explain how it was really difficult to refinance in certain European countries. Well, look, this is the thing. This is why I love the US as a real estate investing market. It’s a very special market, because of the liquidity you have, because of the features of the market because of the transparency of the market, and the ability to get data. In the US. It’s just not comparable anywhere else in the world. And you simply get the option either way. Remember, when you Purchase a piece of income property, the deal is not final. What do I mean by that? I’ve talked about this before, when you buy it, the day you buy it, those terms on that day are final, you financed it a certain way you paid a certain price for the property, and that property is going to produce or is already producing a certain income. But that’s really negotiable for the rest of the time that you own the property. So if you own it for 30 years, you might refinance it six times, or three times or not at all. You might improve the property, you might raise the rent, you might change the terms, you might do this, that or the other thing, you always get to renegotiate your deal along the way. However, if you owned another asset like precious metals or cryptocurrencies or stocks or bonds, You don’t get to do any of that. You don’t get to renegotiate your deal. The deal you have is the deal you have forever. Only with income property, do you get these very, very special, multi dimensional characteristics where you get to constantly renegotiate the deal. So if you don’t like the loan you got, and, you know, you listen to this guy on a podcast, and he said, Hey, the rates are going up. And by the way, I didn’t say that. The Federal Reserve said that. Okay. And they have said it over and over and over again. And they have followed up on what they said, when they said they’re going to raise rates, they’ve raised them. Okay, this is not me making a prediction. This is me just simply telling you what this largest central bank on planet Earth is telling all of us, right? I’m just the messenger here, right? So if the rates don’t go up, say for example, this just doesn’t happen. Just refinance. It’s a low cost, refinance. is a very low cost way to renegotiate the deal you have on your property, renegotiate that financing. Okay, pending home sales slightly lower than a year ago, well, hey, there’s no inventory in the, in the lower end of the market. And in the higher end of the market, it’s soft. So see, you can have sales be slowed by either one of those things. You can either have fewer sales because there’s simply nothing to buy, or you can have fewer sales because inventory at the high end of the price spectrum is really soft, and people aren’t motivated to buy either one of those things can cause home sales to decline, right? new home sales dropped by 5.5% to a near two year low now this is new homes okay in September, however, numbers will likely be affected by Hurricane Florence and could be skewed right so If you have a new home tract in a hurricane affected area, well, hey, it’s not selling right at the moment because it’s probably recovering and doing repairs and so forth. So there’s lots of factors, lots of things that skew the stats. This is why I say don’t agonize over anything day to day look at big long macro trends. The mega trends, if you will, john Nesbitt in his very famous books back in the 80s and 90s mega trends, I remember reading those books and being very influenced by them. And it’s the mega trends that you should look at the big macro picture, not the day to day this is why all the stock market and cryptocurrency fanatics out there and gold bugs, you know, they’re like, Oh my God, my whole mood is gonna change because the stock market or gold or Bitcoin was up or down this day. That’s just silly. That’s not the way life works. Investing is the long term process of creating value over time. Okay. new applications for unemployment aid, Rose last week, the number of people receiving benefits fell to a 45 year low. The labor market tightening. And, wow, it is a boom time in the economy, that’s for sure. Maybe the Federal Reserve will try and stop the party, like we’ve talked about. Trump says they are being loco. Yeah, you know, that man does not use complicated words, does he?

Jason Hartman 18:34
Very just sort of real and folks, he has a need.

Jason Hartman 18:44
I’m Jason Hartman, and I’d like to invite you to our very first two day conference in beautiful Hawaii. Many of our attendees are making a vacation out of this event, you will learn the most innovative strategies for real estate investing available today. We have helped thousands of people invest in properties around the US, and we can help you do it too. So I hope you’ll join us and happy investing.

Jason Hartman 19:18
Okay, so orders to us factories for big ticket goods, big ticket manufacturing slowed in September, however, they were still up nearly 1% from August, pointing to economic growth. That’s kind of a little snapshot of what’s going on in the economy. So here’s something I thought was interesting. This is from the Wall Street Journal. And you know, you’ve probably all here heard what’s going on with Sears right? Sears Roebuck, right? This famous company that has been around for forever, really changed the country in so many ways over the years, right. I remember when I was a kid, being at my grandma’s house and you know, the car catalog. That was a big deal, right? The Sears catalog. I remember I used to look through the Sears catalog and look at all those pages and everybody would wait for the new catalog to come out. My grandmother and grandfather would talk about it. Oh, that Sears catalog comes out soon. Well, you know, times they have changed, right? And that means you have this concept that Joseph Schumpeter talked about, right? The Economist Joseph Schumpeter talked about creative destruction. And Sears was probably creatively destroyed quite a while back, but it’s been hanging on maybe a lot longer than it should. So what’s interesting, though, from a real estate perspective, is that landlords in the shopping malls, where Sears stores exist, you would think that these landlords would be really bummed out, right? For example, remember years ago when Circuit City went out and now there’s been This this retail apocalypse that’s going on. But some landlords are actually very happy about Sears exiting their malls right? A lot of them have higher end malls and you know, Sears low end economy Brandon’s dragging down the brand of the mall, but they have very long term leases. And there’s an alternate use, you know, I mean, when one door closes, another door opens. And that’s the thing we always have to remember in life. And I have had that happen so many times in my life where, you know, I’ll have say one vendor that is selling services to my business or one of my businesses, and you know, the relationship will go sour, they will exit or I will exit them, you know, one way or the other, right? We just decide, look no more when I’m done. We’re done with each other. Right? And, you know, at first you think, well, that’s kind of a bummer. But then what you don’t see right You can’t hear the dogs that don’t bark like an outsider would think, Oh, you know, so and so’s not working with so and so anymore, right? But really, that can be a very good thing. I remember years ago when one of my salespeople left and actually went back to my old company, the company, I founded another company, right? But I had sold it by then this person went back there. And at first I was disappointed. But then I realized that I was making a whole lot more money because number one, this person wasn’t doing their job very well. That’s what you find a lot of times or number two, you were just overpaying them. You know, there there was a person willing to come in and do that same job and do it better for a lot less money. So this is the same thing with landlords and Sears right? in real estate or in really any area of life. We’ve got to remember this appraisal principle and in the world of appraisals, appraisals on real estate, really anything in life, there’s the concept known as highest and best use highest and best use. So we must always try and optimize everything in life to its highest and best use. And a lot of these Sears stores, even though we’re in the midst of a retail apocalypse are sitting on big pieces of real estate that could be used a lot better. And that’s the concept of creative destruction. This is all blended in there. We will see what happens with that but interesting that you know, you think all these landlords would be completely bummed out about Sears, but really, a lot of them are quite ecstatic to see Sears go. Okay, so, home prices, another article Wall Street Journal, literally on the same page. Home prices spur more to think rent, not buy more people Thinking about renting not buying because affordability has been so compressed. Now, interestingly, of course, we know there are three types of markets, linear markets, cyclical markets and hybrid markets. Every real estate market on earth can be classified into one of those three linear, cyclical and hybrid markets. housing affordability is most constrained in which market do you think? Come on, you know the answer listeners, you know the answer into cyclical markets, those who have suffered the highest amount of affordability pressure. Now, we’ve also talked about RV ratios many times rent to value ratios, the RV ratio, and you know, my metric is, as an investor, we try to achieve somewhere in the neighborhood of 1% Rv ratio. Of course, as prices go up, we can’t really do that very often can we now when prices were very low, During the thick of the Great Recession, when everybody was scared to death to make a decision and buy anything, because we thought the world was ending, but it actually was recovering. A lot of times we don’t notice these things. In the midst of them, it’s very hard to notice hard to know, because the context in which we live is the fear context, at that time in the economic cycle. And right now, most people are living in the opportunity context, you know, the bull market, the great time, so we can’t see it. It’s hard to see the forest through the trees as the saying goes, you know, they talk about there’s that movie, the fog of war, right? Well, there’s the fog of the economy, the fog of the market, there’s always a fog of one type or another. And the fog might be influencing to do us to do one thing and take big risk. Or the fog might be saying, Hey, don’t do anything. And both of those decisions depending on the circumstances could be wrong, right? We don’t know at the time, it’s very hard to tell, we try to achieve this 1% Rv ratio on properties we buy. And of course, we could have done way better than that. And many of us did, you know, many of you listening did in investing with us during the Great Recession, or immediately as we were coming out of it, and now prices are higher, but they’re most out of balance in the cyclical markets, because those are always the most out of balance markets, either on the high side or the low side of that cycle. And so, renting in the cyclical markets is almost always a great deal, especially now, when prices are very, very high, because that rent value ratio swings very much in favor of the renter, and very much out of the landlord’s favor. So this article says more than three quarters of Americans now view renting as more affordable than owning a home The latest sign of rising mortgage rates and higher home prices will continue to pressure home sales. Some 78% of people now say that renting is more affordable than owning according to survey data released Tuesday by mortgage company Freddie Mac. Okay, that is up 11 percentage points from only six months ago. So six months ago, it was an 11 point drop in the number of people who would have said that renting is a better deal than owning. Now here’s an interesting point. Remember, we talked about the Case Shiller index, and the Case Shiller index is so misleading, it’s ridiculous, although it happens to be the most widely quoted and widely talked about index in the news media, but it’s, it’s bogus. I mean, it’s like it’s not totally bogus. It’s just bogus, in that it misleads people into understanding what’s really happened because About 75%, depending on how you look at it, of the Case Shiller index is cyclical markets. And, you know, put a linear in there about 75% cyclical and sorry, not linear, cyclical and hybrid markets. You know, you got a little bit of that time period, but most of it’s just cyclical, it’s it’s the high flying markets, you all hear about on the news, you know, the West Coast, South Florida, and the expensive Northeastern markets, the cyclical markets around the country. And interestingly, isn’t it interesting, that 78% of people, and about 78% of the index give or take is mostly cyclical. That’s just an interesting comparison. I noticed. Say that renting is a better deal. Well, you know, about 78%, you know, set we’ll call it 75% of the index is cyclical markets, and about 75% of the people about the same number of people. Viewer Renting is a better deal. And they’re right. They’re absolutely right. It is a better deal. You know, again, remember the metric right that I’ve talked about before, if the house value is under 250, or maybe now you say $300,000, maybe 300,000 is the number we’ll use, it’s almost always a better deal to rent that home than it is to buy it, right as a renter. But as an owner, you could buy three $100,000 properties and rent them for a lot more than one $300,000 property. Also, another article on the same page. Just a quick mention here, talks about co living spaces, right. So you’re all probably familiar with the company we work right. I recently became a wework member and was working at the we work facility in San Diego the other day, beautiful facilities. They’re really making In a real impact on the working environment in offices and office buildings, because most of these facilities in these Class A buildings and cities all around the world are giant, you know, they have maybe one or 2000 desk. In these facilities, there may be four floors of a building, you know, and a floor is depending on the building, somewhere, maybe 10 to 20,000 square feet. So there, there may be 40 to 80,000 square foot facilities, they’re very large. These are co working spaces. Well, the next big trend, maybe, maybe, maybe not, I don’t know, we’ll see if it takes off. But companies are looking at this. Now this really isn’t something that I don’t think we could do well as investors. But you know, let’s let the big guys play with it and see what they do and just watch the trend. Maybe it’ll be something we think about in the future, but co living, right that’s co working. We work as co working but They’re also talking about these co living spaces. And of course, there are a couple institutional players in the CO living world where people can rent a room and be a roommate in sort of a organized facility. Or they can rent a suite. That’s part of a bunch of suites. But it’s not just an apartment. It’s a little more maybe hotel like, but some of the auspices of these companies that set them up more like a we work type of concept, where they provide some additional amenities and so forth, for this, this kind of new newfangled co living concept. So that’s an interesting trend to watch investors. I want you to keep an eye on that one. I’m definitely keeping an eye on it. We’ll see where that goes. Another thing I just want to remind you of in closing, today is a lot of talk out there about investing for tax benefits. You know whether they be opportunity zones or another kind of tax oriented investment, do not let the tail wag the dog. Do not let the tail wag the dog do not put the cart before the horse, right? How many old sayings Can I think of for this? Because they’re true, they are true. Income property is the most tax favored asset class in America. But the tax decision should not drive the deal. It’s a perk. It’s a benefit, hey, that’s great, but it should not drive the decision to invest in the property. And that’s what I’m seeing out there in the marketplace. As these hype artists and promoters are promoting these tax oriented investments in very blighted areas. So be careful. Now I’m continuing to search. If we find something acceptable, that makes sense. Hey, we’ll be promoting it to. But so far the jury is out. I would advise caution as the watchword there, be sure to go to Jason slash contest. A lot of you already have, and you’ve entered our contest to win the Amazon Echo or the ring doorbell. Just take you a few seconds to enter the contest. And hey, the odds are very good. So this is one contest, you should enter Jason slash contest. Go check that out. I am on my way to Hawaii this week to host our prophets in paradise event there and then our venture lions mastermind immediately following. So I will be talking to you from beautiful Hawaii. And for those of you who are joining us. We look forward to seeing you there. It’s going to be a great time. We will have an app link that will be sent to you shortly. So you’ll have some information about the event on an app that you can load onto your smartphone. You know, you’ll have some details and schedule but the schedule is pretty simple for this event. It’s from 9am to 6pm. Saturday and Sunday from nine to six, Saturday and Sunday. And then Saturday evening, we will be hosting a Hawaiian dinner as well. So we look forward to seeing you all there. And Until the next episode in about two days, happy investing.

Jason Hartman 34:24
Thank you so much for listening. Please be sure to subscribe so that you don’t miss any episodes. Be sure to check out the show’s specific website and our general website heart and Mediacom for appropriate disclaimers and Terms of Service. Remember that guest opinions are their own. And if you require specific legal or tax advice, or advice and any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to iTunes or Stitcher Radio or whatever platform you’re using and write a review for the show we would very much appreciate that and be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.