Announcer: Please note disclaimers at end of show. Welcome to Creating Wealth with Jason Hartman. 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: Welcome to the Creating Wealth Show. This is Episode No. 146. This is your host, Jason Hartman. Thanks for joining me today. I want to talk to you a little bit about what happens after the fall. Our guest today will be talking about that. He’s got a book of a similar title that is about picking up opportunities in the real estate bloodbath. And as you know, I’m sure a lot of you were on our forecast call where we forecasted about 35 markets around the country, and there are some markets this year that will appreciate slightly. That’s our prediction. Some markets did that last year and the year before actually, even in the midst of a huge financial crisis.
And some markets will decline dramatically and we had ROI projections where we did a totally unique, what we call ROI build, looking at the return on investment, not including tax benefits and inflation benefits. And what I mean by inflation benefits is not inflating the value of the property, but the destruction of debt on a property as you pay it back in cheaper dollars. And what do we call that? We call that inflation-induced debt destruction. I know that’s a mouthful. Talk about it at your next cocktail party or barbeque or whatever. Inflation-induced debt destruction, another huge hidden benefit of something that most investors don’t understand, especially when they’re investing in properties.
So with that, we had projections going from Miami, Florida, and Los Angeles that are pretty much complete disasters because the ROI Build includes three of the multi-dimensional elements of an income property investment. What does it include? It includes cash flow. It includes appreciation or depreciation, and it includes the benefit of leverage. But remember that leveraged benefit cuts both ways sometimes because if the property is going down in value, it accelerates the decline.
As long as you can hold the property through that decline, though, you can mitigate any losses. In fact, you won’t experience them at all because usually what happens, not always, but many times, in a declining market is that potential homebuyers don’t buy because they’re waiting for a better deal and so here you see again another element of the multi-dimensional nature of an income property investment where they will go ahead and they will wait. And that will actually have the effect of strengthening the rental market.
So a lot of things to consider here and I know we talked about them on many shows in the past and we’ll continue to in the future. But before we get into talking about opportunities after the fall, and I believe this book was actually written by the author – it’s about a year or two old, so keep that in mind in the context in which he’s talking.
But a couple of properties to highlight. Here’s a cash flowing property in Denver. This is a single-family home and it’s only $129,000. The cash flow is projected at nearly $1,000.00 and the return on investment is projected at 22 percent annually. And the RV ratio is .85 percent. Now the RV ratio is my metric that is the rent-to-value ratio. So pretty darn good deal. Again, these homes are newer. They’re not older so that’s a pretty nice property.
Here’s another one for you in Katy, Texas, and if you were looking at this – actually, if you were looking at the picture of either of these properties, you would think these are just gorgeous properties. Both for different reasons. The Denver property I mentioned is really new and nice and kind of one of those new suburban type looking properties. This Katy property is still newer, but it has a big beautiful tree in the front, a big beautiful shade tree, a big, long driveway, and a big giant yard.
Again, single family home. This one was built in 1994 and for us, that’s sort of the oldest stuff we really recommend usually. $94,000.00; this is only $40.00 per square foot. Cash flow is nearly $200.00 a month on this property. Projected return on investment, 27 percent annually. And the RV ratio is a whopping 1.37 percent, so that’s pretty darn phenomenal.
And join us for our Creating Wealth Bootcamp on January 23rd. There is a special we extended actually for the next ten people who register. They get half off. That includes two tickets and half off. The promo code you want to use for that is “HALF,” spelled out. If you go to www.JasonHartman.com and you sign up for the Creating Wealth Bootcamp on January 23rd and you’re one of the next ten people and you type in the word “HALF” in the coupon or promo code box, you will receive a 50 percent discount. Pretty darn good deal.
Masters Weekend, of course, in March. We have another person signed up for that one today. And this Masters Weekend is going to be awesome. We’re going to sprinkle in – we have one speaker pretty much confirmed now on the Masters Weekend who is going to talk about internet marketing and small or home-based business. And I interviewed her yesterday for a future Creating Wealth Show and it was just a fantastic interview. And it looks like she’s going to be speaking at Masters Weekend, so we’re not going to be 100 percent income property, finance, and real estate investing. It’s a whole weekend with probably 14 speakers or so this time in March, so we will touch on some of this exciting marketing stuff, one of our new focuses on the Creating Wealth Show.
That’s it for now. Let’s go to the interview and talk about what happens after the fall. Here we go.
Announcer 2: There’s never been a better chance to learn what you need to know to achieve financial independence. And it happens over the course of two powerhouse days, every spring and every fall, with a panel of 16 vibrant, intellectually motivated, and I’ll say it, slightly obsessed with real estate experts leading the way, there’s a good chance you’ll be sad to see it end.
Jason Hartman: This is the Masters Weekend, a Gathering of Experts, where we fly in experts from all over the country. We have guests here today from as far away as North Carolina and Colorado, and then we have experts flying in from many states all over the U.S.A.
Female Guest: Probably the most interesting thing that I’ve learned so far is about the 1031 Exchanges. I thought that was an excellent presentation. It answered questions I didn’t really even know I had.
Male Guest: And yes, we are planning to invest with Platinum Properties and probably in the GoZone, but perhaps not exclusively. We’re greatly impressed today with the surroundings and the glamour and the style, but also the information.
Male Guest: And all the folks here at Platinum have helped us tremendously, so I think we’re on the road to success.
Jason Hartman: Don’t wait to buy real estate. Buy real estate and then wait.
Announcer 2: The Masters Weekend is a twice-yearly special event, so don’t wait another six months to learn the skills that could make you financially independent. Space is limited, so your immediate registration guarantees a seat in the room at Platinum Properties Investor Network with Jason Hartman and our Gathering of Experts.
Interview with Steve Bergsman, Author
Jason Hartman: It’s my pleasure to welcome Steve Bergsman to the show today. He is out with his latest book, entitled, After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade.” And Steve comes to us today from Mesa, Arizona. Welcome, Steve.
Steve Bergsman: Thank you very much. Glad to be here.
Jason Hartman: Tell us a little bit about your take on some of the different markets in terms of product type. When we talk about real estate investments, we have office, industrial, retail, multi-family, and then more traditional residential, single-family, and four-plexes and duplexes and condos and so forth. What is your take on these broader markets and then we’ll kind of explore geographical opportunities as well?
Steve Bergsman: The main product sector that people look at in commercial real estate is office and, as I was researching this book, which now I think I began in 2008 – the book came out in March-April of this year – there was already a divergence in the investment plans of people in office. And the investors who were still buying in 2008 were beginning to fade, but those people who were still buying were buying in just the primary cities, say New York or Washington, D.C., and these were cities where there were difficulties to build new buildings.
So they were staying away from other A markets that were pretty wide open, such as Phoenix, and they were definitely staying away from secondary markets.
But I noticed as I was doing that that things were beginning to fall apart and I made a comment at the end of that chapter that if debt is coming due, investors have a problem. There is no access to new equity and those loans will go into default. There will be blood. And as it turned out, that’s exactly what is happening. And in fact, we really aren’t even seeing the pain yet in the office market. I think things will get much worse before they get better.
Jason Hartman: Just for the record, I want to say to the listeners I couldn’t agree with you more. I think many areas of commercial real estate are in serious trouble. They lag residential by about two years. And office and retail I would say particularly are the biggest spots of pain and I think you’d mirror those thoughts.
Steve Bergsman: Yeah. I just want to throw one other thing in. When I was writing my book, I’d have these main chapter headings, such as “Office” or “Industrial” and then I’d drill down a little bit into some quirky little sector of that market. And in “Office,” one of the sectors that was really growing for the last 20 years was the office condominium. I don’t know, Jason, if you’ve run across them where you are.
Jason Hartman: I know you have a lot of them in Arizona. We have a few out here in California, but it really seems to have caught on big in certain markets and I remember driving around Phoenix in 2004 looking at residential properties and it seemed like every other corner had an office condo sign on it. A lot of the developers were really promoting that. I never thought that was a good deal, by the way. I always thought it was far too expensive. But what was your take on it?
Steve Bergsman: Well, you’re right. Phoenix was sort of the epicenter of the office condo market, but it was big in other areas in the Southwest. In particular, it was very big in the Atlanta area, and it was even creeping up into some of the big cities. Chicago started to do some office condominiums.
But your thoughts were probably right on this. This is a good market for a small business owner and it’s been a particularly good market for medical offices. They go into these office condominiums. But as yet, it’s such a new product we can’t get a bead on whether there is any appreciation if you invest in an office condominium. So it’s too new to see if there’s any appreciation. I particularly don’t think we’ll see any, at least for another decade if you’re an investor in these things, and there are some quirky problems to it as well. For example, most people who want an office condominium, they won’t buy a used one. They will only buy a new one. So if you want to sell, it’s a tougher market to go.
Jason Hartman: There’s just no good resale market for them.
Steve Bergsman: Exactly.
Jason Hartman: I don’t think the office market in any form is really going to be too good for quite a while. What else is going on in terms of some of the other product types?
Steve Bergsman: Industrial had – over the last 10 – 15 years, industrial was really an important product because all the manufacturers were gearing up for global sales, and when you do global sales, you have to get on a supply chain. They were building these massive million square feet of industrial space for great, quick, fantastic distribution of product. So there was a lot of new building of industrial product out there and this was really to get coordinated on the global supply chain.
Obviously, with the recession, which is international, everybody’s plans have been upset and there’s a lot of big buildings out there, big industrial buildings, that are empty. We’re seeing a little bit of pain in the industrial sector.
When we say pain in the industrial sector, we’re talking a 12 percent vacancy. When you see pain in the office sector, that’s 20 percent vacancy. So it’s a lower vacancy rate, but you still have the same amount of pain.
And the other problem is to get on the global supply chain, a lot of companies, retail companies, they were reorienting their distribution lines as well, and of course, in this recession, people aren’t buying anymore. So they’re cutting back on their plans. So industrial has a lot of empty space out there. I suppose if the global recession ends anytime in the next year or two, it will take about another year or two to get up and running and start absorbing some of these empty spaces. So industrial probably has another year or two of pain and then it will flatten out. So that’s industrial.
Jason Hartman: How about retail?
Steve Bergsman: Retail has been a real disaster. I don’t even know where to go on retail because there’s almost nothing good to say about it. One of the chief problems in retail was that a lot of new retail was built to follow these new communities that were built way out on the excerpts of places, like Phoenix or Atlanta or even some of the bigger cities that still had space, like Chicago. So these new communities were planned way out and the retailers wanted to get in on the ground floor and they started building to coordinate with these new communities.
Well, in 2007, we had the subprime blowout. Building stopped and a lot of these communities, I think, will become ghost towns. And these retail plazas built way out will become ghost towns as well.
Jason Hartman: I think there was just a mass of oversupply in the retail market. I mean financing was so easy to come by for developers that they just built and built and built, and there were really never enough customers. The supply/demand imbalances are beyond bad in retail.
Steve Bergsman: The only place that I would invest in retail and I’d have to look at it carefully is an underappreciated center closer in towards the city, as opposed to further out towards the suburbs because there’s going to be a change in the way people think and there’s going to be more movement closer into the city as opposed to farther away.
I remember about a year ago when gas prices hit ridiculous heights. That was kind of a tipping point for people and they realized that the cost of commutation had to be taken into consideration where they bought a home. So I think there’s going to be more pressure to move closer in and then some of those spaces, underperforming spaces closer in, will probably be a better investment.
Jason Hartman: Okay, good. So speaking of housing, let’s talk about one of the brighter spots. And it has its share of problems and it depends geographically because, of course, we both know that all real estate is local. But one of the brighter spots in the market is housing. The population is increasing and housing has been beat to a pulp and it was sort of the first to go into the downturn. People still need a roof over their head and a place to live. They may not need an office. They may work out of the house. The manufacturing can get outsourced to China. The call centers can go to India. There goes the office space. There goes the industrial. The retail to some extent is outsourced to the internet and also oversupplied. But people still need a place to live. What about the multi-family market?
Steve Bergsman: Well, an odd thing happened to the multi-family market. When we had all these problems in the single-family home market, there was great expectation that people were going to be moving out of their single family homes and they were going to have to go into apartments, and that just didn’t happen.
And it didn’t happen for two reasons, because even if you lost your home, you probably found a better deal renting a single-family home than getting an apartment. And secondly, the recession was so bad that individuals couldn’t afford to even rent an apartment and they had to double up or quadruple up or even sometimes move in with parents. Multi-family has unexpectedly taken it on the chin.
Jason Hartman: I’d like to throw in one more factor, if I may. It’s another mitigating factor that’s causing that multi-family a problem and we’ve noticed it. As the crisis began, we saw the rental market actually improve and then we saw it soften. And we’re thinking why is this happening because the rental market should be strengthening as people are losing their homes and need to go rent something. They’re getting kicked out. But the political pressure of kicking people out of their homes was so great that the mantra between Bush and then Obama became keep people in their homes. And there was a lot of pressure on lenders to modify loans, to do workouts, and to go slow with foreclosures.
And a lot of these people really are still in homes they can’t afford, but they haven’t really been pushed into the rental market yet. And if they have, many times, they’ve rented a single-family, not a multi-family. That’s true. But I just wanted to kind of throw in that one other issue that we’ve seen out there.
Steve Bergsman: There are some good things going on with multi-family. Now, the amount of multi-family, what they consider the replacement of old multi-family with new multi-family, there’s generally a need for about 170,000 new rental units a year. But all the big builders have been winding down whatever building they were doing and now we’re down to about 100,000 units a year. So we’re actually below sort of the replacement number of units.
So the general thinking is that by 2012, 2013, there is going to be a real demand for apartments and this, once again, will become a landlord’s market. You think of 2012 and 2013, but we’re almost done with 2009. That’s not very far away. So if you’re a long range or mid-range investor, I like multi-family and I think they’re right. I think this is going to become a landlord’s market again in just a couple years.
Jason Hartman: I agree with you very much so. What do you think, though, about the single-family market? Some people are calling a bottom. I would say we are at a bottom in some markets, but in other markets, still have some pain ahead and it just depends on where you’re looking at in terms of geographical factors. What do you think?
Steve Bergsman: I think many cities, including some of the places that have been really terrible, such as Phoenix, have hit bottom in terms of pricing declines. I think we’ve hit bottom here in Phoenix, in the Phoenix area, and other places across the United States have as well.
However, I have this theory. I call it the Bergsman Theory that when we hit the downturn in the real estate cycle, it takes about six years to swing around. And that includes three years to hit the bottom. So if you figure we may have peaked in residential housing somewhere around 2006, then we’ve been on a three-year decline and that takes us to this year, 2009.
Then it takes us another three years just to get back to historical appreciation levels. So what’s an historical appreciation level? In most markets, that’s just 1 percent or 2 percent appreciation. We’ve been at three years coming down, three years coming back just to get to 1 percent and 2 percent appreciation. So we’re in the middle of sort of a U, not a V. A U downturn. We’re at the bottom of that U downturn.
Jason Hartman: A good way to look at it is the U. So I asked you when we talked about that – I didn’t have to point it out because you thought of it the way everybody does – we think of prices, the price of buying a house. What about the rental market in the private renter world? The investor who owns a couple of single-family homes and rents them out. Of course, this is much harder to chart because there aren’t statistics that are as good as there for the large institutional apartments and so forth. And of course, then, we have to look at geographical things as well. But do you see an improvement in the rental market for individual, private rental properties?
Steve Bergsman: It’s funny that you asked that question because I write a column for “In the News,” and I was working on this column about home rentals and I got into a debate with one of my sources. The source said that this is still a good market and he still recommends to people that they buy and rent. However, my take on it is that there is a coming glut in rental housing and even though you’re buying in at very, very cheap rates, so is everybody else. And there’s going to be a lot of competition and even though you’re buying in at cheap rates, you may not be able to get the rent that you want to cover whatever mortgage that you have. Now if you’re a cash buyer, that’s something else. Then you’re fine.
Jason Hartman: But if you’re a cash buyer, you’ve tied up all that money in the property. I don’t consider that fine. I’d rather have the lender with all the risk. Not me.
Steve Bergsman: Oh, I agree with you. I wouldn’t put all my money into it either, but it’s hard to get financing, so a lot of people are buying with cash. So that’s my take. I think in a lot of markets, including my home market in Arizona, I see a coming glut.
Jason Hartman: In Mesa.
Steve Bergsman: In Mesa and Phoenix in general. Mesa is a suburb of Phoenix.
Jason Hartman: So parse that up geographically a little bit. You see in your hometown a glut of rental housing coming. About when?
Steve Bergsman: I see within the year. I see there’s going to be so many – I mean so many properties are turning over through the foreclosure process and a lot of these are being bought by investors. So if you want to be the investor that buys these homes and rents them out and you want to own three or four or five or six of these things, that’s fine. But you can’t buy that home in a neighborhood where there are seven, eight, nine, ten other homes for sale because you know those properties are going to be bought by other investors, who are going to be doing the same thing as you.
You just may have to move up to a little different neighborhood where there’s only one other home for sale that may be bought by an investor. And there will be less competition. Of course, you may have to pay more to get in at that moment, but you won’t have that competition factor.
Jason Hartman: That’s interesting that you say that, Steve, because we used to recommend the Arizona market about four years ago, I guess it was, and then we closed it because there was just too much appreciation and the bubble was just getting too frothy there, so we stopped recommending that market to our investors. And then we just recently opened it again. But let me tell you something that we recognized in 2004 – 2005 timeframe.
Everybody from California, it seems, went out and they bought a rental property or two in Phoenix, and they were all buying the same thing generally speaking. They were buying the three-bedroom, two or two and a half bath home, in the newer subdivision.
And at first, this seemed like this is the smartest rental property because it has the widest appeal and the widest market of renters, but with everybody putting that same supply on the market, it really became oversupplied, whereas people would move up just maybe 10 – 20 percent in purchase price, get a slightly nicer home that wouldn’t on the face of it seem to make as much sense as a rental, they really had no problem renting their properties because there just weren’t so many investors in that part of the market. And there was a lot less supply of rental housing. Is that what you’re saying now?
Steve Bergsman: That’s exactly what I’m saying. I think people just have to rethink what they’re doing because the traditional way of thinking just isn’t going to work in the near future because of the competition factor. So I’m in total agreement with you.
Jason Hartman: People really have to realize that when it comes to the real estate game, there are so many ways that you need to parse things up. You need to parse them up in terms of product type, in terms of price range within that product type, and of course, in terms of geography. That would probably be the most important and most obvious. So there is a lot to consider here.
The subtitle of your book is Opportunities and Strategies for Real Estate Investing in the Coming Decade. What are the prime opportunities and strategies?
Steve Bergsman: I always make the point that for the little investor, the individual who might be buying single-family residences and renting them out or trying to flip them. The problem is it’s a good idea, but they don’t ever do the research. They never do the proper research and they fall in love with the property. They may find a property in a neighborhood and think this is the house I want. Even a little bit of research might tell them just a mile away somebody is going to be building a new, huge apartment complex and what is that going to do to their rental?
Or they find a property, they fall in love with it, and they don’t realize that the main employer, some manufacturing company, half mile down the road is going to go out of business and most of the people in the neighborhood are going to be without a job.
So the first thing I want to tell people is they just need to do a little better research. Even though they may fall in love with a property and it looks great and the pricing looks good, you really need to know what’s going on in the wider market and the wider economy. That’s just a general statement.
Jason Hartman: That’s a very good point.
Steve Bergsman: Now what would I invest in? Well, we know the condominium market is a disaster in many areas. However, I have this theory that, again, working on the trend line that people have realized that there’s a cost to commute and they have to factor that into where they’re going to live. And if they live too far out, then it actually becomes too expensive to commute to go to their job, which might be towards the middle of a city somewhere.
So I’m entirely in favor of the condominium market, but not the vacation home condominium market. I like the condominiums that were built closer into cities. I think these condominiums will benefit sometime in the future from this trend line that’s coming, where people are going to live closer to their jobs.
Again, it’s a little bit of a long-term strategy, but of all the condominium markets out there and if you divide them up into sectors, I think those have a stronger chance of coming back quicker.
Jason Hartman: What you’re really saying there is that you think gas prices are going up a lot. Is that correct?
Steve Bergsman: Yes, I definitely think they’re going to go up again. I think the prices that we saw a year and a half ago, although they were huge, that’s going to be pretty close to normality in the years ahead.
Jason Hartman: And does that mean oil at $160.00 or $150.00 a barrel and gas at $4.00 – $4.50 a gallon?
Steve Bergsman: Yeah, exactly.
Jason Hartman: So that is part of your thinking or part of your prediction, right?
Steve Bergsman: Right. Gas prices will not go lower. They’ll only go higher. Do you agree?
Jason Hartman: Yeah, I do. I make predictions every year at the end of the year and it’s all recorded. It’s on my show, so the listeners can hold me to it. I’m not always right, but I’ve had a pretty good track record. And my prediction this time around was around the end of this year, we’re going to see oil at somewhere between $80.00 and $100.00 a barrel. And that was back when it was $42.00, coming down from much higher.
We’ve got a huge population increase, both in the United States and around the world, and the fact is that the idiots guide to investing is that people consume resources. They consume commodities. I do not like investing in commodities per se because you can’t get leverage. You don’t get tax benefits. They’re very volatile. But I do like investing in commodities in the form of little rental houses, where you’re basically buying construction materials because you’re buying at or below the cost of actual construction.
So when you buy a little house or an apartment building and it would cost more to rebuild that building the day you buy it, that’s a pretty good deal. Now there are other factors, of course. You could have a blighted area, like you look at the whole state of Michigan. It’s a complete disaster and there you can get a free house, where they’ll pay you to take the house if you’ll just pay the property taxes and maintain them. And it doesn’t apply there.
But in good areas, where you’ve got in-migration, where you’ve got increasing population, where you’ve got growth, if you can buy at or below the cost of construction, I think you’re doing pretty well all things considered. A lot of times, we have investors nowadays that are buying at like half the cost of actual construction. The land is free. You’re not buying land. You’re buying commodities. You’re buying wood, labor, energy, petroleum products, copper, wire, glass, steel, concrete, and those things are depressed now, but I think it’s an artificial depression due to the deleveraging that’s going on. I think we’ll see them all come back. Oil is one of those commodities.
Steve Bergsman: The other thing I like – I like second home markets just about everywhere except Florida.
Jason Hartman: Okay. That’s interesting. Why not Florida?
Steve Bergsman: Well, Florida has a lot of problems. First of all, I should say in south Florida, there’s been a buying boom going on. There has been a lot of investment in beat up condos, mostly in the Miami, Ft. Lauderdale, to Palm Beach area. So there’s a lot of buying going on.
Jason Hartman: Those are infamous markets. They really are. If you could pick any place for a huge bubble, it’s amazing people didn’t see it coming. It would have to be south Florida.
Steve Bergsman: And I think that those people buying now, they aren’t really doing themselves any favors. And I just did a story for Barron’s magazine on this and people are telling me that the prices are going to drop another 10 – 12 percent just on a general level all throughout Florida. But Florida has some deep, deep problems and I’ll just give you a couple things. First of all, if you go back about 20 years, let’s say, and I may be off a few years on this, but of all the people over the age of 60, who are going to move out of state, Florida got 25 percent of this crowd.
Jason Hartman: That’s amazing.
Steve Bergsman: In 2007, this was a study done by a professor at the University of North Carolina, and in 2007, that number fell to 12 percent. So of all the people 60 and over who are going to move out of state, now just 12 percent are moving to Florida and that percentage could drop as low as 8 percent.
So when we’re talking about the retiree crowd now, Florida is still No. 1, but there are still many other places, so many other popular places that people are going. They’re going to North Carolina. They’re going to the hills north of Atlanta in Georgia. They’re going to Tennessee. They’re going to places out west. So Florida doesn’t dominate the retiree market like it used to.
Secondly, when people move to Florida and it still gets more move-ins than anywhere else, the odd thing is it gets an almost equal number of move-outs. They lost population in Florida for the first time in 46 years or so. Lost population. They were negative 56,000 or 58,000 people from the period June 2008 to June 2009. They haven’t seen that since World War II.
But going back to my point, there are still more people, except for California, more people move into Florida than any other state. However, almost an equal number of people move out. The population net gain, even when it was positive, was only about 1 percent. So people, even when they come to Florida, they aren’t happy there.
So they have a lot of sociological structural problems there. And then it also has become an expensive state for taxes and insurance. In fact, Florida looks a lot like New Jersey. Taxes and insurance are almost and in my cases, equal to what you’re paying as a mortgage. So if you have a $1,000.00 mortgage on a condo or a home in Florida, you’re probably going to be paying $1,000.00 in taxes and insurance as well.
Jason Hartman: That’s amazing.
Steve Bergsman: Yeah, so that’s why I’m saying there are a lot of structural problems in Florida and it will never dominate the way it did before.
Jason Hartman: So I have to ask you. I am actually quite surprised that you think there are opportunities at all in the second home and vacation home market. Maybe I’m too bearish and you’re much more bullish than I am, but it just doesn’t seem like the consumption economy is coming back real soon in terms of people having a lot of extra disposable income, certainly a second home or vacation home. I mean that’s the good life. It seems like that’s a thing of the past for a while, to me. Obviously, you feel differently. Why is that?
Steve Bergsman: Yeah, I do for two reasons. There’s an old joke. If you went to buy a home near some beach resort somewhere, the real estate agent would invariably say to you, “God only makes so much beach property.” So there’s only so much property on the beach. But the same thing holds true for different reasons in mountain resort areas. And that’s because if you’re skiing and you’re up on that ski lift and you look all around you at the great vast wilderness around you, it’s actually all owned by government. It’s national forests or national parks.
So where you can build in mountain areas is perhaps even more limited than where you build near water, where you’re building near water, whether it’s a lake or an ocean. So there’s a limited amount of development that can occur in many, many second home markets.
And then secondly, what fueled the second home markets over the past 20 years has been middle class retirees. Now, granted we’ve all lost assets in this recession, but we’re at the forward edge of baby boomers retiring. So for the next 20 years, we’re going to see baby boomers retiring at increasing numbers and even though they may have lost assets, I think enough of them – there’s so many of them that it’ll push back on the second home market. That’s why I like it.
Jason Hartman: Okay, we have over 20 million baby boomers retiring in the next five years. I mean if they really do retire, but certainly they’re slated to and that will depend on their health and interests and the economy as to whether or not they need to keep working. But certainly they like second home resort type properties and they do have a little bit of money, but not as much as before. I think we’re all feeling that way.
What other opportunities do you see? One of the chapters in your book is about Urban and Suburban Infill. That’s interesting. I’d like you to talk about that if you would.
Steve Bergsman: That goes back to what we were saying. I think the trend line –
Jason Hartman: Gas prices and so forth?
Steve Bergsman: Gas prices and I think the trend line will be for more families looking to move closer. They don’t have to move back into the city, but there are a lot of closer suburbs and I think there will be good opportunities in those closer suburbs. And there are so many – I was just looking in the Arizona area. There are so many developments planned so far away that even if they get built or they have been built, I think we’ll be pushing out the poorer population, who won’t be able to afford those homes closer in. We may be building slums out there. I think, in effect, that’s what’s going to happen because we’ll be pushing the poor population out as homes appreciate closer in. So I think that’s a problem, something we may have to confront in the future.
Jason Hartman: Yeah. The one saving grace in all of this and I completely agree with you about higher gas prices, but the one saving grace in all of this is really technology and people’s ability now, which they didn’t have until the last ten years or so really too much, is to have real home-based businesses nowadays. That’s one factor that I think will contribute to the opposite side of people can live more where they want to live. But that actually bodes well for resort and vacation properties, too.
Steve Bergsman: The other thing is, and people have told me this and I put it in the book; it’s such a new trend that I have to admit I didn’t quite believe it, but I hope it’s true. Companies would build, let’s say you were an Intel or a software development firm or something like that, and you say I want to build my next plant in Phoenix or I want to have my software development company in San Jose or something like that.
Well, people were telling me that companies are now looking at where young people want to live. So it’s no longer a case of we’ll build it and they will come. It’s okay, young people want to be in places like Austin, Texas. Let’s build our next plant there because we know there’s a base of talented, intelligent, educated young people there. That’s an interesting trend that people are talking about, where companies are researching where they should build because of the population that exists in a certain location.
Jason Hartman: Speaking of location, Steve, you mentioned it in vacation homes, that you like them pretty much anywhere except south Florida. Geographically, as far as the real estate market goes, what are your thoughts? Of course, we saw the biggest downturns in the northeastern states. Florida was a huge bubble obviously. California, Arizona, and Nevada were very hard hit. Oregon was pretty hard hit. It seems like the southeastern United States and the Mid-Atlantic, those faired pretty well through the recession. I would even say that Texas is not even in a recession, although the rest of the country is. What are your thoughts about residential in the different geographical markets? Not vacation homes, mind you, but regular residential, everyday type housing?
Steve Bergsman: Well, let me just start with Phoenix because this is where I live. Everybody likes to lump Phoenix in with Las Vegas, Florida, and California as probably the four hardest hit places in this recession. But Arizona is still one of those states where people want to live and it’s been that way for a number of decades now, and when you’re in a growth state, you have a boom and generally end up with a boom and bust economy. That’s what we have in Arizona. I’ve been out here 30 years, so I’ve seen the boom and bust just about every ten years.
So we’re in a bust now, but people still want to live here. There will still be in-migration, so for an investor, I think if you could get into the Phoenix market in a good location, in a closer in location, I think in the long term, this will still be a good investment for you. So I’m optimistic about Phoenix.
Obviously, I’m less optimistic about Florida. I think it has some problems and I think the bloom after 50 years is off the rose in Florida. I think people still want to go to California, but it’s very expensive to live there. So California actually has the same problem as Florida. They get probably No. 1 in terms of people moving to the state, but I believe it’s pretty much No. 1 in terms of people moving out of the state as well. So people move there. They find it’s very expensive and they go elsewhere.
So where else are they going? I think for those who first consider Florida, you’re a cold weather person in the northeast, traditionally you might have thought, well, I’m going to go to Florida. But I think a lot of people are thinking, you know, Georgia, North Carolina, Tennessee, South Carolina, really not so bad. You’ve got a beach location. You have a mountain location, so I think they’re going to do well.
A lot of businesses, including foreign automobile manufacturers, have gone to South Carolina and North Carolina, so there’s business there. The for-sale of Wachovia to Wells Fargo will hurt Charlotte, but I think Charlotte has pretty darn good infrastructure and I think it will be a financial hub for the southeast. So I still like Charlotte.
Where else do I like?
Jason Hartman: It’s a big country.
Steve Bergsman: There’s a theory and this was first espoused to me by Bill Sanders, who was one of the great real estate investors in the ‘90s. He had a company called Security Capital, which was like Warren Buffet’s company in that it invested in other companies. But everything he invested in was pretty much in real estate and he was far ahead of his time. He eventually sold that to GE Capital for $3 or $5 billion or something.
But he started a new company in El Paso because he believed that it’s not so much that the U.S. is losing manufacturing, but what manufacturing we’re keeping actually will be all along the border of Mexico for obvious reasons, for the labor cost savings. So his company, which is based in El Paso, started to invest on both sides of the Mexican border. He was buying in Texas and Arizona, but he was also buying in Juarez and places like that because of the cross border effort.
And I’ve come to agree with him. I think, yes, we are losing manufacturing jobs, but there are a lot of manufacturing jobs that are flowing towards the border area. So if you’re thinking about where the growth will be and where’s the biggest border area, Texas, so that’s where growth will be in the future.
Jason Hartman: Good. Well, anything you’d like to say to wrap this up and also please give our listeners your website.
Steve Bergsman: You can find me at www.passportexoticrealestate.com. That’s because my prior book was Passport to Exotic Real Estate: Buying U.S. and Foreign Property in Breathtaking, Beautiful, Far Away Lands, which I’m hoping, Jason, you and I will talk about at some future time.
Jason Hartman: As we discussed before we started recording, I’m an avid traveler and you are an even more avid traveler than I, and every time I go to another country, I look at real estate. And I’ve talked on the show about this before. I just haven’t found anything quite as attractive as the U.S., but I’m so intrigued by it and I’m very interested in getting to Brazil to take a look at properties there. I was in Argentina last year. I was just in Bermuda. Bermuda’s not really a place to invest, but I was there anyway and I always look and I always check it out. And that’s a very interesting concept, so I do want to have you on another show, Steve, to talk about out of the country real estate because that’s a very interesting topic, so we appreciate that.
Anything to say in conclusion about summing up the thoughts of the market and the opportunities that lie ahead?
Steve Bergsman: Well, as everyone says and it’s true, real estate is a very local investment, but I have to say people don’t do the right research and if you do the research, then you’ll end up with a much more secure and long-lasting investment. It may look good on the outside and the price is right, but if you can’t get a competitive rent, then what good is the property?
Jason Hartman: Very good advice. It’s all about the rent and the cash flow. Good. Steve Bergsman, author of After the Fall: Opportunities and Strategies for Investing in the Coming Decade. Thank you for joining us today.
Steve Bergsman: Jason, thank you very much. It was great fun.
Jason Hartman: My pleasure.
Announcer: Copyright The Hartman Media Company. For publication rights and interviews, please email media@JasonHartman.com. This show offers very general information concerning real estate for investment purposes. Opinions of guests are their own. Jason Hartman is acting as president of Platinum Properties Investor Network exclusively. Nothing contained herein should be considered personalized personal, financial, investment, legal, or tax advice. Every investor’s strategy and goals are unique. You should consult with a licensed real estate broker or agent or other licensed investment, tax, and/or legal advisor before relying on any information contained herein. Information is not guaranteed. Please call (714) 820-4200 and visit www.JasonHartman.com for additional disclaimers, disclosures, and questions.
End of Audio
Duration: 45 minutes