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The year-round sunshine, the convenience of direct flights, the incredible food and culture—there’s a lot to love about Puerto Rico. As an American citizen, all the same rules apply for buying investment property in this balmy, seaside U.S. territory as they do on the mainland. 

The Market Details

According to short-term rental tracking company AirDNA, it should come as no surprise that Puerto Rico is a booming and profitable short-term rental market. The capital city of San Juan gets AirDNA’s top score of 100, with average occupancy rates of over 60%, average nightly rates of over $200, and average annual revenue of over $45,000 (up almost 10% YOY). 

Like all Caribbean islands, Puerto Rico has a hurricane season that runs from June 1 to Nov 30, so bookings can be a little softer during August and September, dipping below 50% occupancy rates for these months. That said, during winter months, average nightly rates hover around $325, and occupancy rates bounce up closer to 70%. Investment properties here run the gamut just like any other beach location—huge, multimillion-dollar single-family homes, sweet beach cottages, and condos with wide ocean views.

Snowbirding Has Big Benefits

But there are even more reasons to love investing in Puerto Rico if you’re willing to make some bigger changes. What if you moved there? At least for part of the year? Rather than snowbirding in the usual locations of Scottsdale, Naples, or Tampa, if you elect to spend winters in Puerto Rico, you will be much, much richer for it.  

This is thanks to Act 60, which creates huge financial incentives for mainlanders to move to the island. If you become an island resident, under Act 60, otherwise known as the Individual Investors Act, you benefit from:

• 100% tax exemption from Puerto Rico income taxes on all dividends
• 100% tax exemption from Puerto Rico income taxes on all interest
• 100% tax exemption from Puerto Rico income taxes on all short-term and long-term capital gains
• 100% tax exemption from Puerto Rico income taxes on all cryptocurrencies and other crypto assets

This means a break on both local and federal taxes, since the U.S. federal government does not directly tax Puerto Rico residents, leaving that up to the local government of Puerto Rico.

To qualify for these amazing incentives and pay zero capital gains on all your investments, whether that’s real estate or stock investments, you do, however, need to actually move to the island for part of the year and purchase a home within two years of arrival. 

There are three tests the IRS requires you to pass to prove this:

1. Presence test: There are many ways to do this, but you basically need to show that you are physically present in Puerto Rico for 183 days (six months) during the year. During 30 of those days, you can be traveling in other countries (just not the U.S.), so it’s actually 153 days (five months), and there are medical and weather exceptions to this also.
2. Tax home test: Your primary or regular place of employment needs to be in Puerto Rico. If you don’t have a regular place of employment (i.e. if you’re a passive investor or retired), this defaults automatically to where you live.
3. Closer connection test: This is slightly squishy but includes things like where your permanent home is, where your cars and clothing are, where your bank is, etc.

The Fine Print

• Currently, Act 60 sunsets at the end of the year in 2035, after which time you’ll owe taxes on any passive income. 
• You have to apply and pay the fees, which are around $6,000.
• You must make a $10,000 charitable contribution.

Final Thoughts

Ready to buy your plane ticket yet? Puerto Rico is win-win, a great vacation market for short-term rentals with high occupancy and nightly rates, but for the right investor, the real home run involves a moving van (or boat?). Incredible financial incentives await investors willing to call this island home.

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Justina Chiu, CEO of Fortune REIT, discusses Hong Kong’s property measures, saying the company is excited to see an effort to “foster the growth of the REIT market in Hong Kong.”

Imagine one day living in a luxurious, spacious house with everything you could possibly want in life. Now contrast that with red and blue lights filling your home, with officers yelling and sirens blaring. Then, envision a SWAT team ripping you away from your parents. 

Although it seems far-fetched, this actually happened. 

By all accounts, John was living a charmed “trust fund” life, but that was quickly all taken away from him. At age 10, that left John Mansor a ward of the state—orphaned and alone, with only his brother, David, alongside him. He’s spent the last 15-plus years climbing back to the top.

Challenges mold you, and John has risen above the challenge each time to oversee a $40 million real estate portfolio with over 600 units under management. Today, he leads a collaborative team dedicated to financial well-being and the liberating power of financial freedom through real estate, specifically focused on multifamily and RV park investments.

The Ebbs and Flows of Fortune

John was born into a loving family who valued success. His father was a successful entrepreneur in construction as well as interior design. His mother was on track to become a CPA. 

Everything changed in the early 2000s when an 18-wheeler T-boned his father’s car, resulting in severe back injuries. As a workaholic committed to maintaining his business and success, John’s father sought ways to get back to normal to override the pain.

He turned to painkillers, and his reliance on them led to a spiral of addictions. Unable to cope with the responsibilities of the business and parenthood, John’s father lost everything. 

Simultaneously, his mother struggled with a silent addiction to narcotics. In the aftermath, John was forced into Section 8 housing and government subsidies, and the family was thrown into challenges they’d never faced. John recounts:

“One night in the mid-2000s, all I heard was a loud bang and unknown voices saying, ‘freeze and get down on the ground.’ Next thing I knew, I had automatic rifles in my face. You see, my mom was involved with a drug dealer.” 

Subsequently, John became a ward of the state and soon found himself in foster care, experiencing the instability of bouncing between housing placements and eventually landing in a group home. 

John says: “At this point, I didn’t care about school. I didn’t feel like I fit in with anyone because I didn’t feel like anyone understood what I was going through.”

A Way Out: Focusing on What Can Be Controlled

Living as a ward of the state, life was a real battle of survival for John as a child. As he entered middle school, an opportunity for a change of scenery changed his perspective on life.

He was granted a scholarship to a sleepaway camp nestled in the Adirondack Mountains called the Raquette Lake Boys Camp. Soon after, John was taken in and adopted. These transformative experiences ignited a spark within him, propelling him to aspire for a better life. 

During this time, he learned many lessons. John says, “I didn’t have to stay at the same station in life that I was currently in.” He realized that there were certain things he could control. Namely, academics and getting into college. 

All of his weight shifted to ensure that he went from a mediocre student to an excellent one by putting in the hours needed to get results. His motivation was to become an investment banker after college. John remembered being fascinated with stock traders when living his early years in New York. 

Hard work paid off when he was accepted to Bentley University. There, he engaged in several stock exchange-related programs the school offered to get firsthand experience.

Preparation Meets Opportunity

Upon graduating, the harsh reality of the job market hit him when many potential employers believed he lacked relevant experience for an entry-level finance job. Undeterred, John entered tech sales.

After some success, John realized something was missing and couldn’t figure out how to get back to the life he used to have as a kid. A W2 job wasn’t going to get him back to the kind of life he knew was possible.

Luck or Fate? Becoming a Wholesaler

There’s a saying that “luck is when preparation meets opportunity.” This is the type of luck that those in search of financial freedom seek. They don’t wait for something good to happen—they find ways to stack the deck in their favor. That’s exactly what John did.

Once John set his sights on earning more, he began researching ways to create passive income, searching the internet for phrases like “how to build generational wealth.” He dug into a variety of topics but was most intrigued by stocks, real estate, and starting his own business.

During the pandemic, he reconnected with Ben Simon, a friend from college. John discovered that Ben, along with partners Carl Venezia and Alex Stanton, were growing a full-scale wholesaling operation in Massachusetts. With his sales skills and eye for value-add investing, John fit right in.

John didn’t just want a job; he wanted ownership. He decided to prove his worth by taking on more work and getting results. Some wholesalers go for volume with lots of deals, even if the fees aren’t as high. John decided to take an entirely different approach: Go after big deals.

Upon implementing this strategy, the average assignment fee grew to between $30,000 and $60,000. After landing a $105,000 fee on a 12-unit multifamily, John became a partner at Archer Acquisitions.

The Value of Active Listening

Early on, John realized that sales is fundamentally about active listening—a skill that involves understanding the other party’s needs, concerns, and motivations. With determination, grit, and an inherent knack for connecting with people on a genuine level, John recognized the power of emotional intelligence in real estate transactions. His ability to make others feel heard and seen emerged as a cornerstone of his success, setting him apart in a competitive landscape. 

Rather than solely promoting his agenda, John embraced a question-based selling approach to unearth the core issues that mattered most to sellers and investors. By genuinely understanding the intricacies of someone else’s situation, he positioned himself as a problem solver. 

This approach became a game changer, especially when dealing with distressed sellers who needed quick solutions. John’s ability to offer sellers a swift resolution—providing them with cash quickly and securing an assignment fee—exemplifies the power of active listening in creating mutually beneficial outcomes. 

By actively engaging with sellers, understanding their unique challenges, and crafting solutions tailored to their needs, John secured profitable deals and built lasting relationships based on trust and empathy.

The Discovery: Real Estate Syndication 

Fueled by a desire for longevity, wealth, and passive income, he knew that there were other opportunities in real estate beyond wholesaling. 

For John and his partners, syndications offered a chance to build equity, the key to generational wealth. So, they identified a property in their pipeline and decided to give it a shot.

From $0 to $40 Million in Assets 

Taking down this eight-unit property marked a shift from quick, active income to a more strategic approach focused on creating sustainable wealth. With a keen eye for acquisitions and a knack for sourcing opportunities, John entered real estate with a commitment to invest back into the business. 

The journey was one of bootstrapping, where each step forward was a lesson in sourcing, acquiring, and operating the acquired assets. This quickly led to rapid growth over a two-year period, where they would purchase RV parks and more multifamily properties, such as a 40-unit townhouse community on Cape Cod.

A pivotal moment came when John and his partners’ investors took what turned out to be a fruitful risk when they purchased their first RV park. John and one of his partners decided to take it upon themselves and moved into their first RV park, gaining firsthand experience that transcended their level of asset expertise.

Although John and his partners were syndicating prior to the RV park, they began scaling their efforts upon seeing the results and returns they were getting. The syndication efforts started out as investments from friends and family but have grown to a new level. John and his partners cater to busy professionals who seek to benefit from real estate without the demands of full-time investment. 

At the heart of John’s real estate philosophy lies a commitment to creating passive, generational wealth that can’t easily be taken away from you.

After a little more than two years, the company has successfully purchased approximately $40 million worth of real estate, with a pipeline closing in on an additional $20 million in acquisitions in 2024. John operates on a low-fee model, where the upside is largely granted to the investors primarily and then to his company. This helps to offer outsized returns to investors, initially friends and family, and now expanding to others.

Informing a Meaningful Mission

In the dynamic landscape of real estate, John’s investment philosophy transcends mere financial gains; it’s rooted in a profound commitment to creating value, providing affordable housing, and fostering enjoyable living and camping experiences for investors and tenants. His specialization in RV parks and multifamily assets is a purpose-driven approach that stems from personal experiences and a desire to give back. 

This firsthand experience of living on government assistance became the impetus for his focus on multifamily assets. By investing in properties that cater to workforce housing and Section 8 multifamily properties, John aims to bridge the gap for those who depend on affordable housing solutions. 

Final Thoughts

In the dynamic landscape of real estate, John’s success and philosophy transcends mere financial gains and is rooted in a profound commitment to creating value, providing affordable housing, and fostering enjoyable experiences. John says: “I am in the position to create a better environment for people like me. Our company wants to work with like-minded individuals who see value in investing in real estate for its long-term benefits and not short-term gains.”

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Quickly find and compare investor-friendly lenders who specialize in your unique investing strategy. It’s fast, free, and easier than ever!

It’s no secret that high interest rates and a low supply of homes for sale have pushed prices up, grounding the housing market to a near halt. Conversely, the rental market has thawed considerably after scorching-hot rent rises in 2021 and 2022.

Consider these data points. According to the National Association of Realtors, months of supply for existing homes sits at just 3.0, down from 4.6 at the beginning of the pandemic. The S&P CoreLogic Case-Shiller Home Price Indicies hit an all-time in December. And the average 30-year mortgage interest rate has been hovering around 7%.

However, according to Zumper’s year-over-year data, rent growth has stalled. Two-bedroom rent growth has fallen to just slightly above 0%, and one-bedroom rent growth has turned negative.

With the two markets diverging, this leaves potential buyers with a simple question: Where are mortgage payments less expensive than renting?

BiggerPockets crunched the data to provide the answer for cost-conscious dwellers. Using Zillow’s metro area January data for both home prices and rent, we assumed a 7% interest rate to calculate a monthly mortgage payment to compare to rent in the 50 largest metro areas in the United States.

But, the mortgage payment is largely dependent on the down payment. According to the National Association of Realtors, the average down payment for first-time buyers is 6%, while it’s 17% for repeat buyers. This makes intuitive sense, as repeat buyers have likely built up equity in their existing homes, particularly those who bought in the lower interest-rate environment.

The two maps show where it’s more expensive to buy (blue dots) and more expensive to rent (red dots) for both first-time buyers and repeat buyers. The size of the dot represents how much more expensive it is for the given scenario in that metro area.

Use these as good indicators of what it takes to enter a market and how easy it is to cash flow when you’re there. Note that in markets where it’s cheaper to buy than rent, you’re more likely to cash flow.

Mapping the Markets

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Ashley:
This is Real Estate Rookie, episode 377. We’re going to hear about losing $40,000 from a partnership and then talk about what are the things you need to consider when getting into a partnership. Then Tony also mentions which fast food napkins work best for contracts. I’m Ashley Kehr, and I am joined with my co-host, Tony J. Robinson.

Tony:
Welcome to the Real Estate Rookie podcast, where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. We’ve got some great questions lined up for you today. We’re going to cover what to do when a tenant absolutely trashes your property, what a HELOC is, and how it impacts your credit score, but first, we’re being joined alive by someone from the Rookie audience who wants to ask a question to me and Ashley, and he’s coming live from Miami.

Ashley:
Miami-yami-yami.

Tony:
For those of you who don’t know, that’s the famous Will Smith song, and Ashley is dying to sing that one for the Rookie audience today.

Ashley:
Jerryian Francois, welcome to the Real Estate Rookie podcast on our reply episode. We are so excited to have you today to ask your question live with us, so welcome.

Jerryian:
Yes, glad for you guys to have me here. I’m super excited, guys.

Ashley:
Okay, well, what question do you want to throw at us today?

Jerryian:
Okay, well, hey, Tony and Ashley, I’ve had a partnership over the last few years and made many mistakes. There was no structured partnership roles, no defined percentages, and just a signed piece of McDonald napkin to validate our partnership.

Ashley:
Before you go any further, I just have to ask, what did it actually say on the napkin?

Jerryian:
It said that we’re going to be in business and everything from this point on would be 50/50. That’s just all they said.

Tony:
I think the first mistake, Jerryian, is that it was a McDonald’s napkin. You always got to go Chick-fil-A napkins instead. That’s my fast-food place of preference, but please, continue.

Jerryian:
In a result of that, I lost about almost over 40K. I learned a lot from the situation and I know I would need partnership to utilize, to scale. My question is, what should I look for, what traits, what experience, basically, what buy box, what I would need for me to step out into partnership again?

Tony:
I think you touched on a lot, and I’m sure Ash and I were probably thinking in the same direction here. You said, hey, we had no structured partnership role, no defined percentages. I think before you even go out and start looking for a partner, you’ve got to identify what exactly is it that you’re hoping this partnership can fulfill.

Jerryian:
Exactly.

Tony:
Because there’s different reasons that people will partner. When Ash talks about her first partnership, it was like, man, I’m just so scared to do this by myself, and I don’t have a whole lot of capital to go out and get this thing done. For me, it was like, hey, we’ve got the experience, we’ve the skillset. I’m super confident in making it happen. I just lost my day job so I couldn’t get approved for the mortgages. I even had capital set aside to put down. I just couldn’t get the mortgage approved anymore. It was like, you got to think about what are the different reasons you’re looking for that potential partnership, and that’s how you start to build out what those potential roles are.

Ashley:
While you’re in that identifying moment for yourself, identify what your strengths and weaknesses are, so what are you going to bring to the table, and then what do you need someone else to do? Or you maybe have no idea about rehab, construction and you want to bring someone on that has that kind of experience. Literally, sit down, write a list of what your strengths are, your weaknesses are, and then flip those for a potential partner. Another thing that I wanted to add is you could do a personality test too, like a DISC profile on someone. Do it for yourself and do it for somebody else, too. There’s also an Enneagram too, because having great communication with your partner, you’re going to learn how to actually communicate with them. Sometimes it’s not that anybody is a bad person or they’re not doing what you think or you don’t think they’re treating you right.
It’s literally just the way they communicate, and when you can understand what Enneagram someone is, it can help you understand the situation better, but also, learn how to communicate with them too. Then they can also learn how to communicate with you too. I think that’s getting to understand your partner, and Tony jokes about the love languages, but I think that’s also something to make you compatible with a partner too, is understanding how they show appreciation. That may not be showering them with chocolates and things like that, but that could be acts of service where they like, Jerryian, I know you appreciated me getting that deal under contract because you brought me lunch today. Like, thank you, I value you as a partner. Things like that.

Tony:
Just out of curiosity, Ash, I don’t know if we’ve ever talked about this, but do you know your DISC score where you score the highest?

Ashley:
Yeah, it is an I.

Tony:
Gotcha. I’m like a low I, I’m a super high C. Super high C and super high S, just like the structure.

Ashley:
The other three are kind of level with me.

Tony:
I think the only other thing I’d add as well, is you talked about the no structured percentage, Jerryian, I thought that’s a super important thing to try and figure out upfront as well. Before you guys go out and any money exchanges hands either between the two of you as partners or buying this property, whatever it may be, you should sit down and have as tough of a conversation as you can about, hey, what exactly is the structure of this partnership? What percentage do I get and what duties and responsibilities do I need to fulfill to obtain or to earn that percentage? What exactly are you partner going to be doing and what is your percentages for doing that? Then just start to think worst case scenarios, what happens if one of us wants out? What happens if one of us dies? What happens if one of us gets divorced? There are different questions you want to ask to try and identify how to structure this.

Ashley:
Jerryian, I want you to think of some of the things that went wrong in your partnership, and can you even think of different ways that you could have had more transparency as to what are some of the things that happened with your partner and maybe we can help you come up with ideas of how to prevent those things happening again by creating that transparency.

Jerryian:
Well, he was able to probably steal 40K from, because like Tony said, we didn’t have any structure on percentages, so he was always the type to be in control of the bank accounts and stuff in that nature. It was really tough for me to even be involved in the business because it was his way or no way. That situation kind of pushed me back a little bit with that.

Ashley:
I think that’s a great example of what Tony was just talking about is clearly defining your structure and your roles and responsibilities, having it in writing. Yes, one person can be in charge of the finances and everything like that, but I think that’s where having the transparency of any single time you could log into the bank account and look at it.

Jerryian:
Exactly.

Ashley:
For my business partners, I control all the bank of accounts, I manage the money, but they would all have the apps where they can look on their phone. I’m pretty sure one of them has never even logged in, but they can go in at any time and just look through what transactions are happening, but also, sitting down every month or every quarter and going through the financial statements too, as to you have the right to see what the financial statements are and if your partner isn’t giving them to you or there’s delays or things like that, that might start the red flag sooner so it doesn’t get to the point where it’s 40,000.

Jerryian:
Exactly.

Tony:
Jerryian, I think the biggest thing is to not let the, I don’t know, I guess the fear of another partnership going off the rails stop you from pursuing that in the future. Because you’ve got two options here, it’s either you learn the lesson that partnerships are terrible and they’re never worthwhile and you’re just never going to do them again. Or you can learn the lesson to say, hey, I know partnerships have a time and place to be effective and I just maybe didn’t go about it in the most effective way to begin with, and what are the lessons I can learn from there? What I like to tie the partnerships to, and Ash actually talked about the love languages, but I feel like there are some truths that apply to all different types of relationships, business, personal, whatever it may be. Are you married, Jerryian?

Jerryian:
I’m engaged.

Ashley:
Congratulations.

Tony:
Yeah, congratulations, brother.

Jerryian:
Thank you.

Tony:
When you think about your fiance and how your fiance maybe balances you out, what are some of those strengths that you feel your fiance brings to the relationship?

Jerryian:
She definitely keeps us organized, I could tell you that much. Just having everything easy and well-to-do, that’s her right there.

Tony:
You’re more maybe the big picture guy and she’s the detail person. Now you know when you go start looking for a partnership, you don’t want another big-picture person because no one is going to do anything. All those little details are going to slip through the cracks. It’s like, okay, can I find someone that compliments me in the same way that my fiance does?

Jerryian:
Yeah, exactly. I’m actually in partner with her now from leaving that situation, so I feel like I found the best partner now.

Tony:
There you go.

Ashley:
Because it is mutually beneficial because it’s one household and when you are partners with someone else, it could also be their spouse, their kids. You have two different families that you’re trying to support and each person is territorial towards their own family and they want the best of that. When you’re in one household, it definitely makes it a lot easier to know you’re loyal to each other in the business and that you’re trying to benefit each other.

Tony:
I just want to quickly share some ideas in terms of where to find that potential partnership, because obviously, you’ve partnered with your fiance, which like I said, I think is a great place if you and your significant other can go down that journey. It is fantastic. My wife and I have done that as well. For other people who maybe don’t have a significant other, spouse, fiance, whoever that they feel that they can partner with or maybe who’s interested in partnering, I think you’ve got to start to expand your network in ways that exposes you to different and new people. Going to local meetups is a fantastic place to spark some of those partnerships. Going to bigger conferences like BPCon, a great way to spark some of those relationships. Just being active in the BiggerPockets forums, the Real Estate Rookie Facebook group. Because you can start to build connections with people virtually now easier than ever before. I think the more people you can start talking to, the more connections you can make, the easier it becomes to start to identify, okay, who’s the right person for me to actually partner with?

Jerryian:
Yeah, I definitely agree with that, 100%.

Ashley:
Thank you, Jerryian. Before you leave, we actually want to see if you have another question, so start thinking of another question for us. We are going to take a short break and we’ll be back to answer that. If you, listening, are loving this format, love having Jerryian as our guest and you want to be a guest on a live episode of Real Estate Rookie, you can go to biggerpockets.com/reply to submit your question and maybe we’ll get to talk to you live on the show. We’ll be right back. Okay, we are back with Jerryian. Jerryian, do you have another question for us?

Jerryian:
Yeah, I have one question that I wrote for you guys.

Tony:
Yeah, please.

Jerryian:
How do you balance your short-term cash flow needs with your long-term wealth building in your investment?

Ashley:
Well, I can tell you how I started out doing it and how I do it versus now, I guess. Starting out, I was just 100% cash flow because I was thinking that I would have, even if I didn’t have appreciation in the property, that I would have debt pay down to build equity in the property. My long-term wealth was these properties, they cash-flowed now, but in the future, they’d be paid off because the tenants were paying the rent and that was my wealth builder. Now, I’ve built myself a comfortable cash flow standpoint, and now I’m a little more focused on appreciation because that’s going to give me even more wealth down the road. I still like to see some cash flow. I did recently buy a property that’s probably just going to literally break even, but it has a huge, huge potential for appreciation to sell it five years down the road.
One thing I’m trying to do is stagger things so that it’s just not all cash flow at once, but no appreciation, but in five years in this area, I know that I could sell this if I wanted to or refinance it and build wealth that way. Another thing too, is you can do 1031 exchanges and do the stack method where you’re maybe buying a single-family duplex now and then you’re just going to do a 1031 exchange where for tax purposes, you will sell the property and then purchase another one and not pay taxes on that gain of selling the property and you’re just rolling into bigger and bigger and bigger properties. James Dainard talks about this a lot. You can find him on YouTube on ProjectRE. He will describe how he does the stack method and that’s how he’s been able to build wealth is redoing the 1031 exchange, but just starting small and continue to build up, build up.

Tony:
I think for me, Jerryian, a lot of it comes down to how you would prioritize those goals, those motivations, because usually, people get into real estate investing either for cash flow, appreciation, tax benefits. Those are the three big buckets that drive people. If you know that today cash flow is what’s most important to you, like generating cash today, then I probably focus on activities that prioritize that. My thoughts on this have evolved over the last couple of years. It’s like, say I were starting from zero today, I would probably focus on something that’s a little bit more active income to begin with.
If my goal is to leave my job as fast as humanly possible, I would probably focus on things that are more active income, like flipping, wholesaling, property management you can scale relatively quickly. I consider that active income as well. Then once you get that business to a certain point where you can walk away from the day job, now you can start maybe putting some additional cash away to start buying assets. I think if I’m starting from zero, my biggest focus is cash flow, that’s probably the approach that I would take.

Jerryian:
Perfect. Love the answers, guys.

Ashley:
Hey, Jerryian, before you go though, I’m curious, what does your portfolio look like right now?

Jerryian:
Right now, I have two duplexes. One is with three units, and I’m actually house hacking one that I’m in right now.

Ashley:
Congratulations. That’s awesome. Next, we have to get you on for a full episode to tell us all about that.

Tony:
Yeah. Well, thank you for coming on, Jerryian.

Jerryian:
Thank you. I really appreciate the opportunity, you guys.

Tony:
Of course. You’re actually the very first person we’ve brought on for a live question during a Rookie show. You’re going to be hanging in the, yeah, you’re hanging banners in the Rookie Hall of Fame right now, man.

Ashley:
Well, Jerryian, thank you so much for joining us today. We really appreciated you taking the time to come on and ask your question. Hopefully, it was really beneficial to other Rookies to hear your experience and to have some answers for finding a partner. If you’d like to find more about building out a partnership, you can go to biggerpockets.com/partnerships to purchase Tony and I’s book called Real Estate Partnerships. If you’d like a discount on the book, you can use the code partner 377. Jerryian, thank you so much for coming on.

Jerryian:
Thank you.

Ashley:
Okay, Tony, that was amazing, wasn’t it, having Jerryian on the show? I think that we should continue to do this with having guests on live.

Tony:
Yeah, it’s a different dynamic. I love being able to actually interact and the guests being able to ask follow-up questions. Guys, again, biggerpockets.com/reply, get those questions in. We want to hear from you live on the show.

Ashley:
If you’re watching this on YouTube, give the big thumbs up and let us know in the comments if you want to hear more people on as guests during the reply episode. Now, let’s get into our regular format and get to some more questions. Our next question is from Mike Woodruff. What are some recommendations on how to best protect myself as an investor? I am purchasing a rental and trying to figure out what is the best type of insurance and or ways to protect me personally. I know an LLC would probably be best, but have heard of mixed answers if I should be able to transfer it after closing if there’s a loan on it. Another option I have heard is just to get an umbrella policy. Also, are there any specific disclosures or terms you make your renters agree to? We got a couple of different options there and a couple of questions.
Let’s start back at the top here. He’s purchasing a rental and trying to figure out the best type of insurance or ways to protect himself personally. The first answer is that you’re going to talk to your agent and you’re going to get a landlord policy. This is where you are not living in the property, but you still want to ensure you’re building your property. If there’s a fire, you’re building burns down, you still want to be able to build new. You can either get replacement cost insurance on that or you can get actual value insurance on that. Then another thing you want to look for with insurance is that since a tenant is living in there, the tenant’s contents are not included in your insurance policy. You want to make sure they have their own renter’s insurance policy to cover their contents because your policy will not cover theirs.
Then ways to protect yourself, you’re going to want to make sure that, that landlord policy has liability attached to it and it’s going to be up to a certain amount. This is where, as you had said in your question that you have heard of getting an umbrella policy. If you have your landlord policy, that covers up to a certain amount of liability protection. Let’s say it’s 300,000, that means that if somebody sues you or there is a claim or somebody has hospital bills they’re wanting you to pay because of something that happened on your property, the insurance is going to pay up to $300,000 to hire an attorney and actually fight the lawsuit for you. Or they’re just going to settle and pay out a claim so that they don’t have to deal with it and it ends up being cheaper than I’m hiring attorneys.
What you can do is purchase an umbrella policy, which is an all-encompassing policy that works like an umbrella. It goes over your other policy. Your first policy, your landlord policy will kick in first. Then after that, if you exceed that first 300,000, then maybe you have a million of liability coverage in that umbrella policy and that’s when that policy will actually kick in. In that example, that’s $1.3 million that you have to cover any kind of lawsuits or claims against you. That’s what you can do if you have your property in an LLC or it’s in your personal name. You can put those two types of insurance policies on your property with either of the options of LLC or you, personally. The difference between an LLC and having in your personal name is who the person is actually going to sue.
Is it going to be your name personally that they’re suing or is it going to be the LLC name? If your LLC owns the property, part of the reason of an LLC is limited liability protection, hence, LLC. This is going to, they’re going to sue your LLC and they only have stake or right to the content, so the assets of your LLC. If you just own this one property in the LLC, you don’t have a ton of equity in it, maybe $10,000, you just bought it recently, there’s not going to be a lot for them to actually take from you. If they sue you personally and you have your primary residence paid off, you have like three sports cars sitting in the garage, you have all of these assets and have a high net worth, they’re going to have a lot more to go after than just you having to sell your rental property to give them the equity in it.
A lot of times this can be a personal decision whether you should go the LLC route or the personal route because if this is your first time buying a property, you bought it seller financing, 100% seller financing. You don’t even have any equity in it right now and you are just getting your little bit of rental income and slowly saving it into a checking account. You rent, you don’t own a car, you have a bike, you don’t have any assets to your name except for this one rental property, it’s probably going to be okay because nobody can take anything from you if they sue you because you don’t have anything else to give, but you do get the great financing. Tony, do you want to talk about the financing piece and how that should be considered when deciding against LLC in your personal name?

Tony:
You made so many great points, Ash. It makes me think of episode 105, back when we interviewed Brian Bradley who specializes in asset protection for real estate investors. One of the things he shared that’s always stuck with me and that I try and repeat as many times as I can on this show is that, and this ties in exactly with what you were saying, is that your level of asset protection should scale with your business. Because does it make sense to go out and spend tens of thousands of dollars on asset protection when your net worth is $10,000 or $50,000? If you go back and you listen to that episode, he does a really good job of talking about the different types of asset protections at different levels of scale. The person that’s got decamillionaire, their level of asset protection is going to be different than the person that’s starting off with zero.
I want to caution our Rookies from maybe going too far off the deep end with the asset protection upfront. You want to find the level of asset protection that fits where you’re at. There’s people that are setting up these holding companies and this and that. Before you know it, you’ve got eight different LLCs for one property. Is that really serving the purposes you’re hoping it’s serving? Back to your point, Ash, about how sometimes the financing can play a role and how you take title to these properties. For us, we bought our first couple of short-term rentals using a 10% down vacation home loan. We bought one in Joshua Tree, we bought one in Tennessee. As we’re using this type of debt, the loan does allow you to rent it out on a short-term rental basis when you’re not using it yourself, but it is technically a loan that’s meant for personal use, not business use.
I couldn’t enclose using a 10% down vacation home loan while also closing in the name of my LLC because my LLC is a business entity. The loan itself is supposed to be for personal use, so just make sure you’re triple checking. For example, if you wanted to go buy, say you’re house hacking, you can’t get an FHA loan and put it in an LLC. You got to make sure that the loan supports the type of entity you want to close in. It’s just another thing to be aware of. One other thing I’ll add on that Ash is, aside from the loan and the entity matching up, you just also want to make sure that you’re being super transparent with your insurance provider about what this property is being used for. Because I’ve seen them talk to some other investors who are buying a property and they plan to rent it out, but they’re their mortgage person, they’re telling their insurance provider, they’re just going to live in it themselves.
While you might get maybe slightly better terms, maybe your insurance policy is a little bit cheaper, if something did happen, you’re not going to have the right protection. We’re very clear, if we’re flipping a house, we tell our insurance provider like, hey, this property is going to be vacant. We’re going to have people working in this home. No one is going to live in there for probably six months. If it’s going to be a short-term rental, we tell our insurance provider, hey, we’re going to have 12 to 15 different groups of people coming through every single month for as long as we own this thing. Just make sure you’re being transparent with your insurance provider because the more information you give them, the better, more comprehensive coverage they can give you to match what you’re using that property for.

Ashley:
I actually had a situation where I forgot to notify my agent of a change that we were doing. We had purchased this property and it was going to be just a slight little cut two-week cosmetic update and then we were going to rent it. Well, then we started to decide that actually, we wanted to make this a higher-end rental and we started to build out a scope of work that was more intensive and now it went from a couple of weeks to months of rehab. With that, was we never notified the insurance agent that we were doing the switch. When the insurance company came to do their inspection, they were not insuring this, the place is vacant, there was people there working.
This was supposed to just convert into a rental property right away, and so they gave us a notice of cancellation. Having a great insurance agent on your team is very beneficial because the agent right away went and rewrote it before the cancellation. They give you like 30 days’ notice or whatever that they’re going to cancel it, rewrote it that it will be vacant and is going under construction and we got the new policy in place with the same carrier and things like that. It is so important because if something would’ve happened there, we wouldn’t have been covered at all.

Tony:
One last thing I want to mention too, we just recently interviewed Natalie Kolodij on episode 360 at the Rookie Podcast, so if you go back and listen to that one. The other, I guess potential downside of getting too crazy with the asset protection is that if you end up having a lot of LLCs, there are tax implications and additional cost implications associated with that as well. We just got a quote back for our 2023 taxes. We have some entities we’re paying like $6,000 to get our taxes filed for one LLC. It depends on how much activity is going on and things like that. You want to make sure that you’re including the maintenance, the cost of maintaining those LLCs with your decision as well.

Ashley:
We’re going to take a short break, but when we come back, we’re going to talk about HELOCs and debt to income, and does that actually affect your debt to income when you take out a HELOC? We are back from our short break and our next question is from Nick Solder. If I take a HELOC, which is a home equity line of credit out on our primary residence, does that impact our debt-to-income ratio? I have no plans to use it for now. I don’t want to run into an issue when purchasing another investment property in the next six to 12 months. Any experience with it? Thanks in advance. Tony, have you taken out a HELOC on your primary before? Actually, I don’t even know.

Tony:
I haven’t, actually. We don’t have a HELOC on our primary, but I think before we even answered the question Ash, about HELOC, I just want to, because I hear a lot of Rookies who get confused between the HELOC and the cash-out refinance, so I just want to quickly define the differences.

Ashley:
Yeah, great idea.

Tony:
When you buy your primary residence, unless you’re paying cash, you’re getting a mortgage to cover the majority of that purchase. For round numbers’ sake, let’s say that you buy a home that’s worth, I’ll use super small numbers here, but $100,000. Say that you put down 20%, so you’ve got an $80,000 mortgage on that property. Over the years, let’s say that, that property, the value increases and you bought it at a value of 100. Now, say it’s worth $200,000, and maybe your mortgage has been paid down to 50,000. Now you owe 50, the home was worth 200, you owe 50, the home was worth 200. You have $150,000 of equity that you can tap into.
When you have this equity in your home, there’s two different ways you can play it. You can either get a HELOC or you can refinance or you could sell if you want. Assuming you didn’t want to sell, HELOC or refinance. With a refinance, you are essentially paying off the original mortgage. You would pay off that original balance of $50,000, and let’s say you put in a new mortgage for maybe $150,000. Of that 150,000, 50 goes towards paying off your balance on your first mortgage, you get to keep the additional $100,000 and then you have a new mortgage in place at $150,000. The old mortgage is gone forever, it’s never coming back. With a HELOC, again, same numbers. You owe 50,000, the home is worth 200.
You can, instead of replacing your original mortgage, it stays in place, but you then get to take out, think of it almost like a credit card with your home as like the collateral, but you get this revolving credit account and maybe you don’t get the whole 150. Maybe you get, I don’t know, maybe they’ll give you up to $100,000 or whatever it may be, but you get some number, some amount of that equity that you can then use. Your original mortgage stays in place and now you’ve got this line of credit that you only have to pay on if you start using it. With the cash-out refinance, when you put a new mortgage in place, it doesn’t matter if you use that $100,000 or not, as soon as you close in that refi, you got to start making those new payments. There’s pros and cons to each of those. I just wanted to lay out what that difference is.

Ashley:
Now, actually, answering the question.

Tony:
It’s like, Tony, stop talking so much. Just answer the question.

Ashley:
I’ve never taken out a HELOC either on my primary, but I do have lines of credit. The way the lines of credit work against my debt to income is if I have a balance drawn and I am making monthly payments, my credit report will draw with that interest rate or that minimum payment just like a credit card. If you were to pull your credit, it may say that your monthly payment for your credit card is $53 because on that month’s statement, your credit card is reporting that you owed $53 as your minimum payment. Even if you paid off, say it was $1,000, you paid that whole thing off, it’s still going to just show what that minimum payment was, and that’s what’s calculated into your debt to income. If you continuously pay off your credit cards, it’s probably not even going to show anything.
With your line of credit, you’re going to have that interest expense depending on how your line of credit is set up. If you have an interest payment that you’re making every month, then that is going to show on your credit report and will go into your debt to income because you do have that monthly payment. If you don’t have any balance withdrawn on that, then there should be no minimum payment or monthly payment and should not be factored in. It will only be factored in if you have drawn from your line of credit. I think you’re pretty safe with that if you haven’t used the balance and just letting it sit there. That’s one of the benefits of doing a line of credit compared to refinancing because when you refinance, you’re getting that money and you’re paying interest on it right away and it is going towards your debt to income.
Our last question today is from Adam Keys. Traveling nurses just left my unit after a three-month stay. The home is so awful that their deposit doesn’t even cover the full bill for repairs and cleaning required. I’m itemizing everything and sending an invoice, but expecting no additional payment. Aside from leaving a negative review on Furnished Finder, I’d assume the cost to pursue legal action may not be worth it. Are there any other options that we have? Tony, I have to say, this is my first time ever of hearing traveling nurses trashing an apartment. Usually, everyone is saying these are the best guests that you ought to have in your unit. They stay long, they treat it like they’re home.

Tony:
Adam, first, hate to hear that you had this experience, but it is part of just being a real estate investor, especially in this medium-term, short-term stay environment. Now, one thing I will add is that for all the flack that Airbnb gets amongst hosts in the community, one the benefits is that they do have a process for damage claims like this. Maybe moving forward, Adam, and I don’t know if it’s going to happen every single time, obviously it won’t, but had you had them book through Airbnb or Vrbo, one of the OTAs, then you’d have a path for collecting that income back. I’ll just quickly give a rundown on how it works on those platforms. Vrbo, I actually like really well, because when someone books your property through Vrbo, you can require them, make it a requirement that they buy damage protection insurance. For them, it’s a cost of like, they can choose, I think it’s like 70 bucks, 80 bucks or like 100 bucks.
At each one of those levels, there’s a different coverage amount that they get. Say they spend 100 bucks, there’s like $5,000 in protection that they get by paying that insurance policy. Now, the insurance policy, it’s nonrefundable, so when they pay that, it’s paid for. If there is damage, they don’t have to worry about the host coming after them to get repaid. For you as the host, it’s great because A, it’s mandatory, they have to buy the insurance, and B, if something happens, all you have to do is claim the amount that you need and you automatically get that amount back. On Airbnb, a slightly different process where Airbnb plays a mediator and you might not always get back exactly what you’re looking for, but at least there’s a process in place to get above and beyond whatever a typical security deposit may be.
Adam, just something to consider is that maybe for your future medium-term rentals, even if they’re finding your listing through Furnished Finder, maybe still have them book on a platform like Vrbo or Airbnb so you can get that damage protection. Or if you’re going to self-book, if you’re going to self-book, do a direct booking, there are companies out there that you can also require from your guests to sign up for that still offer that same type of damage protection. There’s a company that I know called Superhog, and Superhog basically acts the same way as an Airbnb damage protection or as Vrbo’s damage protection as well. That when your guest book, they have to pay a non-refundable fee upfront that covers their insurance policy during their stay. If there is a claim, now you’re just billing against their policy versus having to go after the guest themselves. Superhog is another option for you to look into as well.

Ashley:
Tony, that’s awesome. I never knew that. That has always been a fear of direct booking because we always do Airbnb for the short-term rentals obviously, but also for all of our midterm rentals. We have stayed on Airbnb. When we first started them, we talked to a couple other investors and some had done it the way Adam did where you get them through Furnish Finder, but you do a lease agreement using Rent Ready or something like that, but you send them a traditional lease and it’s just for three months or whatever time period they’re staying. I ended up going the Airbnb route because of the air coverage and the protection and having that mediator for the platform. I definitely agree that checking out a different way to actually book people can help. Since you are more on the long-term rental side, I’ll say right now because you had them sign the lease agreement, depends how much information you got from them.
Did you get a copy of their license? Did you get their social security number? Did you do a credit check? Things like that. Because first of all, you can take them to small claims court, so whatever town your property is in, you can go to small claims court. You can fill out the paperwork yourselves. You don’t have to have an attorney to do this. It really depends how much information you have from them, and then if you have proof. Hopefully, you took a lot of pictures, things like that, what the property looks like beforehand, and then after they have left the unit. You can file a claim against them in small claims court where if you end up going to court, they come, they can state their case, or if they don’t, a judgment will be issued against them. I’ve done this before. There’s somebody who I have a judgment accounts for like $5,000, I think. We’re in year, maybe eight of this judgment, and it’s a 10-year judgment.
After 10 years, if they don’t pay, the judgment is gone off of the record and they never have to pay it. One caveat to that is if they ever sell anything, it’s supposed to be a lien on that property. If they sold a house or sold a car, I was supposed to be paid from the proceeds first before anybody else would get paid. Obviously, they haven’t sold anything. It hasn’t been tracked well enough, I’m not sure. Then the next thing that you could actually do is put it into collection. If you have enough documentation, you have enough proof and you have all of their information, you could send it to a collections agency too, to call them and nag them to try to get it. Well, that wraps up our last question today for the Real Estate Rookie Reply. I’m Ashley, and he’s Tony. Thank you, guys, so much for listening. Make sure you check out the show notes. You can follow us on Instagram, the links are in the show notes and we’ll see you guys, next time.

Skylar Olsen, Zillow Chief Economist, joins ‘Fast Money’ to talk Pres. Biden’s proposes solution fo the U.S. housing crisis.

Dave:

Hey, what’s up, everyone? Welcome to On the Market. I’m your host, Dave Meyer, and today we’re going to step into the macroeconomic global economy. And I know on the show we normally talk about real estate and housing, and we are still talking about that tangentially. But we’re sort of going to zoom out and talk about what is going on a global stage, and how things that are happening in China, the conflict in Israel, the war between Ukraine and Russia are impacting global economics, and how that might translate to our investing decisions here in the United States.

To do that, we’re bringing back one of our most popular guest ever, Joe Brusuelas, who’s the principal and chief economist at RSM. He was actually named the best economic forecaster in 2023 by Bloomberg, so you’re going to want to pay attention, especially at the end here where he gives some very specific predictions and forecasts about where he thinks the US economy is going.

Before we bring Joe on, I just want to caveat that some of the stuff that Joe’s talking about is a little bit more advanced. It’s a little bit extrapolated from direct real estate investing decisions. But I encourage you to listen and pay close attention to what Joe’s talking about, because he really helps explain what’s going on in global stage, and then translates that back to what it means for you and me and our personal investing decisions.

So with that, let’s bring on Joe Brusuelas, the principal and chief economist at RSM. Joe, welcome back to the podcast. Thanks for joining us again.

Joe:

Thanks for the invite, and I always look forward to talking with you.

Dave:

Likewise. Well, let’s just dive right in. I want to start here by talking about China. Can you give us a broad economic overview of what’s happening in China and why their economy seems to be taking a bit of a nose dive?

Joe:

So the Chinese have entered a period of debt and deleveraging. I’m not going to call it a crisis, but one economic era in China has ended and a new one’s beginning. In some ways, it looks a little bit like what Japan went through in the nineties, and what the United States went through between 2007 and 2014. There’s an enormous debt overhang in their banking sector, in their housing sector, and their commercial real estate sector, and that’s really caused the economy to slow to a crawl.

Now, China, who for the past four decades has relied on a model that basically revolved around state-directed investment in infrastructure, housing, and commercial real estate. That development model now has reached an end. They’re in what economists would call a middle income trap. They’ve gone about as far as they can go with the current approach, and it’s going to have to change, but the problem is the political authority is not comfortable with changing that up. Essentially, they’re going to have to spend the next seven to 10 years working down that debt. They’re going to be selling properties around the world to repatriate capital to deleverage. Now, anybody out there who’s listening, this should resonate because this is what happened in the United States after an epic housing bubble that burst, which obviously caused real problems and came close to causing the United States domestic banking system to collapse.

Now, because China’s a one-party authoritarian state, they’re trying to slow drip to work their way through this. The current policy path isn’t to reflate the housing sector to absorb the excess inventory; it’s to redirect risk capital away from housing, buildings, infrastructure towards manufacturing. Problem is, they can’t mop up that excess supply. We already for the last about a half a year or so have seen an export of deflation out of China. China is going to attempt to export the burden of adjustment to its trade partners, primarily in North Asia and Southeast Asia. It’s going to cause a problem, because China is really trying to protect its employment base. They don’t want to see a significant increase in unemployment from already current elevated rates.

Now, what that means is if you trade with China, when you buy their industrial goods and you produce industrial goods yourself, you’re going to have to accept a smaller share of manufacturing as a percentage of global GDP. That’s going to cause an increase in tensions both economically and likely in the security side through all of Asia. Now the Chinese just, again, aren’t going to be growing at 7-10% anymore. India’s the one that’s going to do that. China’s going to be slowing to probably that 2-3%. Even the 5% they reported for last year is highly dubious. So we really are in a different world when it comes to Chinese growth.

Dave:

That’s super interesting. Thank you for setting the stage there. And just to make sure I understand what’s going on, they have extended themselves too much in terms of debt, and that’s mostly revolved around real estate development, right? They’ve poured a lot of money into building, like you said, commercial real estate. You see a lot of residential towers that have gone empty.

I’m just curious. Because, as you said, China is a one party authoritarian state, how did this happen? Because in the US, in retrospect, we can sort of trace this to lax lending standards and a lot of different debt practices that happened in the private market. But how does this happen in state-controlled investments, as you said?

Joe:

Well, when you look at China’s… The composition of how their economy is organized and where it’s directed, we often in the West make the mistake of thinking it’s a one-party, communist-controlled state, and Beijing controls everything. That’s not the case. A lot of the development was driven by the prefects, the states or the municipalities, the cities. Not just in the state-owned banking sector, not even on the private real estate developers or the private commercial real estate developers, but the debt at the states and municipalities is anywhere between $15-66 trillion depending on who you listen to. So their development model, in many ways was locally driven in a way that didn’t have proper oversight or accounting. So they’re in a real difficult situation where they’re going to have to work down that debt.

If you remember 2007 to 2010, Ben Bernanke’s heroic move to create a bad bank inside the Fed to take those distressed assets off the hands of the financial markets, the banks and other owners of that debt, and to create a situation where we could buy time to deleverage. This is going to be difficult. Right now, the Chinese just haven’t moved to create that bad bank that’s going to have to be created.

Another example that some of your listeners might remember is the savings and loan crisis from the late eighties, early nineties. Essentially, we created a long-term workout strategy vehicle set up by the federal government, and it took until literally the eve of the great financial crisis, 2008, when it was really getting intense, for us to actually have worked through all the backlog of all that bad debt, all those overpriced properties. It took a good 20 years.

And so the Chinese haven’t even really got down the road on that yet. That’s why the policy pathway they’re taking is quite problematic. I’m not convinced that it’s going to work. They’re going to need to simultaneously reflate the financial system and the household, the Chinese household, in order to absorb the excess capacity.

What that does is it creates a situation where what’s happening now, they’re just turning and taking on more bad debt, which is going into unproductive investment in a situation where industrial policy amongst the advanced developing nations has returned. And it’s going to be difficult for the Chinese to sell anything other than low-value added materials into the West, and that’s not what they’re really building right now. They’re building value added goods that no one’s going to be interested in buying.

So the next three years with respect to China and its relationships with the West and the rest is going to be fraught with difficulty and very tense.

Dave:

Okay, so now that we’ve discussed why China is in such financial trouble, we’re going to discuss how this impacts the US and global economy right after this break.

Welcome back to On the Market podcast. We are here with Joe Brusuelas. I just want to ask one follow up first about the bad bank that they created here in the United States. Can you explain that a little more detail and how that helped the US over the course of 6, 5, 6 years get through the debt crisis, and how that differs from the Chinese approach?

Joe:

Sure. In some cities, we had a 50% decline in housing crisis. People were underwater. Those were distressed assets on the balance sheet of banks. Those assets had to be removed so that those banks stayed solvent, because we went from a liquidity crisis to a solvency crisis. Right? Federal Reserve was buying those assets. They were injecting liquidity or flooding the zone with liquidity, which then reflated the banking sector. We prevented a great depression, but the period from 2007 to 2014 featured one of the more disappointing economic recoveries we’ve seen in the post-second World War era, and it wasn’t until 2014 that the economy truly recovered.

When you go back and you take a look at debt and deleveraging eras, typically it takes seven to 10 years to work through it. Now, we got through it in seven years. There’s a case be made that Japanese are just coming out of it four decades later. So the policies put forward by the Bernanke era Fed and were sustained by the Yellen era Fed in terms of using the balance sheet of the bank to smooth out fluctuations in the business cycle. In the case of Bernanke, avoiding a great depression, and then again during the J. Powell era of avoiding a serious economic downturn during the pandemic, which was a whole unique and a separate discussion, are examples of how the Fed or the central bank can use its balance sheet, in the case of Bernanke, to create a bad bank.

We know how to do these things. These are not unusual. We had the depression, we had several property crashes. Of course, the savings and loan crisis with the Resolution Trust Corporation set up by the Bush Administration is a prime example of a non-central bank approach, using the fiscal authority to do it.

The Chinese are going to be forced to do this. Right now they don’t want to because they don’t want to admit that their economic model has fundamentally changed to the point where it’s not sustainable. In an open, transparent democracy where you would essentially let things fall, cause an increase in unemployment, let bankruptcies happen, let the market work so it clears… Not friendly, very painful. Right? But you end up getting through these things a bit quicker than you do in sort of the closed, non-transparent systems that are… Again, the Chinese is one of the more opaque systems. So I am not confident that they’re going to bounce back anytime soon, and again, I think that the era of 7-10% growth in China is just now over. They’re going to be growing at 2-3% just like everybody else.

Dave:

Well, that was sort of my question, is that if everyone else is growing at 2-3%, what’s the problem here? Do they need to grow faster to pay off this debt and go through the deleveraging, or is it they just have broader aspirations than a lot of the rest of the world?

Joe:

Their unique challenge is the size of their population. For years, conventional wisdom said that if growth were to slow below 5%, they would have significant social problems because it wouldn’t accommodate the growth in the working age population, depending on which number you believe or are looking at. Youth unemployment’s clearly around 20%. In a democracy, that’s a crisis. Right? In an authoritarian state, that could be an existential problem that has to do with the stability of the regime. So China’s got unique challenges due to its size and the composition of its society and economy, and we shouldn’t compare it to Europe or the United States or even Japan.

Dave:

And I believe that they stopped sharing data for youth unemployment. They’ve just stopped releasing that data as probably shows the depth of how serious a crisis they see this as.

Joe:

Well, earlier I mentioned that I didn’t quite believe their 5.2% growth rate in 2023, but one of the reasons why is it’s an already opaque economies become even more so. The shop stopped sharing data. The alternative data that we were using to look at say like electricity generation has also clearly been constrained. So it’s difficult to get a sense on what the true growth rate is.

When you talk to people on the ground, it doesn’t sound or look like the official data, which causes me to tend to think that no, they’ve slowed and they very well could have contracted last year. If you listen to people on the ground, that’s what they’re saying. I don’t know that that’s the case, but something’s clearly not right, and they’ve definitely entered an era of debt and leveraging.

Dave:

So given this slow down and this crisis that’s going on there, how does this impact American investors?

Joe:

Well, what it does is it’s what you’ve seen. You’ve seen capital exit China. You’ve seen the dollar grow stronger. We clearly are past our problems with inflation. So my sense is that the United States is going to be the primary generator of global growth, along with India and a few of the other emerging markets. It’s likely because of the unfortunate geopolitical competition we’re now engaged in with China that it will lager better for investment in capital flows into the United States simply because it’s just not as risky as it is putting it in China. China’s moved to the point where it’s virtually uninvestable, I think. People have been saying that for a while, but based on what I’ve observed in the post-pandemic era 2023, I think that that’s true now.

Dave:

Wow, that’s a bold statement. It’s a big difference from where we were five or 10 years ago, isn’t it?

Joe:

Yes, and also the way we talk about China. Look, China’s going to be a problem geopolitically. They steal our technology. They’re going to be problems in the South China Sea and the Taiwan Straits. All that’s not going to change. But the idea of China taking over the world via their economy, I think is actually just simply not true.

Dave:

So before we move on, because I do want to talk about some of the other geopolitical stuff going on, last question about China here, Joe: Is there any risk that the turmoil in the Chinese property market spills into American banking or American property markets?

Joe:

Right now it looks to me like it’s more of a domestic local issue. It does not have the properties of a global systemic challenge, like what occurred after the United States financial system came close to collapsing. It’s been going on now for two years. And it’s been clear for a year and a half, two years that China was caught in a debt trap. Right? So the deleveraging in terms of the big globally important systemic banks has largely occurred. Now, this does turn into a crisis inside China. We’ll have to watch closely. Because it’s not what we know it’s what we don’t know and then the risks taken. But right now the answer would be a qualified no.

Dave:

Okay, so we’ve gone through what’s happening in China now, and next we’re going to delve into what’s going on in Europe and Israel right after this quick break.

All right, so now that we’ve sort of gone deep on China, and thank you for your insights here, there are two other major conflicts going on in the world. Obviously we have Russia-Ukraine, and the conflict in Israel. So I want to talk just economically speaking, how are these things? How do you see this confluence of geopolitical instability going to impact the global economy?

Joe:

So when you think about the global economy, the first thing you should think about is commodities. The foremost of those commodities are energy and wheat, oil and grains. So let’s take what’s going on in the Eastern Mediterranean, Red Sea and the Middle East. Clearly, that’s roiled the region. The Israeli economy contracted at a significant pace and is in recession. But we did not see a disruption of oil prices other than a modest period of volatility.

But when one is looking at the US economy like I do and the global economy like I do, you have to always think about the risk matrix. And in this case, the channel through which that risk would be transmitted is the oil and energy channel. In many ways since October 7th, my assessment hasn’t changed. As long as the conflict does not involve the attack and/or destruction of oil producing facilities in Iran, this is something that’s going to be largely contained with periods of enhanced volatility.

So that’s a risk, but it’s not dragging down either the global economy or the US economy. With respect to Ukraine, the invasion of Ukraine created the conditions where we had a massive spike in oil. That was largely a reason why US CPI, the inflation moved up to above 9%. But we’ve come back from that peak and we’re through that. The other component of that is the export of wheat out of the Crimea, out of Ukraine, and then that’s caused problems in emerging markets. But again, we’re two years past. The United States, Argentina, Australia, Brazil have flooded the world with those same products to the point now where food prices have come back to earth. Right? So when you’re thinking just purely about the risk matrix, the commodities channel, it’s grains and oil.

Okay, now there’s a bigger question out there around Ukraine and Russia that’s got to do with the political dysfunction inside the United States, which is how to fund the Ukrainian war effort by the West. We’re beginning to see the entertainment of very unorthodox ideas. Today, the Secretary of the Treasury, Janet Yellen was talking about unlocking the value of those frozen Russian assets, IE the $300 billion in Forex reserves sitting in Europe and the US, a little over $200 million in Europe, a little less than $100 billion here in the United States.

Right now the Western powers are considering something very unorthodox, which is not confiscating the assets, but taking them, putting them in an escrow account, using them as collateral to float essentially zero interest bonds to finance the war effort. Now, that may be over 20 or 30 years, but that would create a series of incentives for one, the Russians to not continue with this; two, it would fund the defense of Ukraine; and three, it would avoid the confiscation of those assets because the idea is they’re just being used as collateral. They’re going to be paid back, and the Russians can have them back after 20 years.

This is some very difficult terrain we’re now caught in, and the innovative financial mobilization of the deep reservoir or pools of capital in US financial markets and European capital markets, it does represent the next mobilization of Western power in approaching this fight, and I would expect this is going to be part of the narrative going forward in global financial markets and the global economy and international security over this next couple of years. These are extraordinary things that are happening in real time that we really haven’t seen since even like 1914, when John Maynard Keynes was called the London to come up with a plan to prevent the collapse of the UK financial market, which was then the center of the world economy. And it was during a week when two-thirds of the gold reserves in the Bank of England were basically withdrawn in three days. We’re not quite in that sort of emergency here, but we are seeing the sort of same innovative proposals put forward by the community of economists and financial professionals in order to think about how to deal with all of this.

Dave:

Do you think these types of proposals represent, I don’t want to say desperation, but an increased risk to the market because we’re traditional methods or what we’ve been doing so far haven’t been working?

Joe:

Well, I don’t think it’s risk. I think what it is that your situation where you’re acknowledging the reality of the difficulties of the US political entity. So we’re thinking about how to get innovative until that can be ironed out. My sense here is that the West has been reluctant to mobilize its most powerful asset, one of those financial markets and those deep pools of capital. They’ve done things on sanctions, they froze the assets due to the illegal action by the Russians, but they have yet to really even push secondary sanctions onto the Russians. But the fact that they’re doing this means it’s getting a bit more serious.

Now, I don’t think it’s a point of desperation at all. The risk is that you would ruin the reputation for reliability, the rule of law and contracts in Europe and the United States when it comes to investment. That’s why it’s important that this not be a seizure, that it not be a confiscation, that it just be a more innovative proposal that retains ownership. But we’re going to use this because what you did was not a good idea and is actually illegal. It’s a challenge of the rules-based order that the United States and Europe is in charge in, and we don’t intend to see that go. What’s the use of all of this capital, all of this wealth, if we’re not going to defend that which is most dear, and I think that’s essentially what’s happening here.

Dave:

Got it. Well, that’s sort of fascinating. I hadn’t heard of this, but it’s certainly going to be interesting to see how it plays out. Before we get out of here, Joe, I’m just curious, what’s your outlook for US economic growth? You said you think US and India are going to lead global growth. Do you think that’s going to start this year, or is that more of a long-term forecast?

Joe:

It already started. Right now our forecast for the year was that we had 1.8% growth right at trend, but it’s looking that it’s going to be quite a bit stronger, quite possibly in the 2.5-3% range. Unemployment will range between 3.7-4%. By mid-year, we’ll be at 2% in the core PCE; 2.5% in PCE, that’s the Fed’s policy variable; and by the end of the year, CPI will be back at 2.5%. In other words, price stability will have been restored by the Federal Reserve, which you’re going to see is as inflation comes down. That means the real wages of people increase, and that’s going to support overall spending, which is why we had significant risk to the upside of faster growth on our annual forecast. We put the forecast together last November and we haven’t changed it. We had a 15, that’s one 5% probability of a recession, and a 25% probability that the US economy would outperform our 1.8% forecast. That looks like where we’re going.

Now with respect to rates, we thought we’d see 100 basis points of rate cuts. That’s 425 basis points starting in June. Pushing down the front end of the curve, we think that due to the issuance of treasury supply and the decline in the cash on hand in the reverse repo program, you’re going to see rates begin to move up here pretty quickly. We’re already between 4.25 and 4.3. I expect we’ll move closer to 4.5, and then down to 4.25 at the end of the year, and that’s our year-end target.

We had a good year last year. Bloomberg named us as the best rate forecaster along with our colleagues at Goldman Sachs. So we take that portion of the forecast and all the forecasts significantly, and we’re very serious about that.

We think that by the end of next year, you’re going to have a positive upward sloping shape of the term structure, and this is going to be the first time we’re going to see something like this approximate, really since before the great financial crisis. Essentially, that period of zero interest rates, real negative interest rates as a tool of policy, is effectively in the rearview mirror. The normalization of the rate structure is upon us, and the economy will adjust accordingly. Now we think the United States is well-positioned to take advantage of that and do well.

Last thing I want to share with you, the most constructive and encouraging development in the US economy has been the boom in productivity over the past three quarters. Productivity in the United States has increased by 4%. This is an extraordinary thing. We haven’t seen levels like that since the 1990s. For economists, once you start thinking about productivity and growth, it’s hard to think about anything else. That’s that magical elixir or that mythical tide that lifts all boats. It means we can grow faster, have robust employment, low unemployment rates, low inflation. Most importantly, it lifts the living standard of all who participate in the economy.

That’s not something we’ve been able to say in a long, long time. You know what? We can continue to see productivity anywhere near the vicinity of 2.5%. That’s a game changer, and we’re going to be having a very different discussion around the economy at that point. One that doesn’t so much involve risks, but upside potentials and good things.

Dave:

Wow. Well, thank you so much, Joe. We really appreciate your insights here and your very specific forecast and thoughts on the economy. For everyone listening or watching this, if you want to learn more about Joe, we’ll put a link to all of his information where you can contact him, all that sort of stuff in the show description below. Joe, thanks a lot. Hope to have you on again sometime soon in the near future.

Joe:

Thank you.

Dave:

Another big thanks to Joe for joining us on this episode. I hope you all learned a lot. I sure did. The global macroeconomic climate is not something I study as closely as the housing market here in the United States, but I think it’s super important to just help you set this context and backdrop for your investing decisions. It’s super helpful to know are there a lot of risks outside the country that could start dragging on the US economy, or are there things that can increase geopolitical tensions. Because sometimes those are blind spots for us as investors that we might not see, and so we wanted to bring on Joe. In the future, I’d love your opinion on if we should bring on more people like this, because I personally find it helpful and think that it’s worthwhile for real estate investors here in the US to listen to, but would be curious about your opinion.

I do want to just clarify two things Joe was talking about at the end. He was talking about the yield curve and a bond yield. We don’t have to get all into that, but he was basically saying that at the end of the year, he thought that long-term 10 year bond yields would be around 4.25%, and that is important because that means if you extrapolate that out to mortgage rates, because bond yields and mortgage rates are highly correlated, that in normal times we would see mortgage rates around 6.25%. Normally the spread between bond yields and mortgage rates is about 190 basis points or 1.9%. Right now, they’re closer to 3%. So that means if Joe’s forecast is accurate, we’ll probably see mortgage rates at the end of the year be somewhere between mid sixes to high sixes. And of course, we don’t know if that’s for certain, but I just kind of wanted to translate what he was saying about bonds into the more tangible thing for real estate investors, which is mortgage rates.

The second thing he talked about, which I didn’t know and I think is super important, is about productivity. Now, productivity is basically a measure of how much economic output the average US worker creates, and it is super important in terms of economic growth. When you try and figure out GDP and how much economic growth there might be in a country, there’s really only two basic variables. How many people are working in an economy and how much economic value do they produce? And so if we’re in a time where our population isn’t growing as much as possible, and there’s only so much population growth and contributions in additions to the labor force that you can make at this point, and so the better way to grow the economy, according to most economists is to increase productivity. Now, a 4% increase may not sound like a lot, but that is huge, and as Joe was saying, if that trend continues, that could bode extremely well for long-term American economic growth.

Again, I hope this types of more global, more macro level look at the investing climate is helpful to you. We’d love to hear your feedback if you’re on YouTube, or you can always find me on Instagram and send me your thoughts about this episode where I’m at, the DataDeli, or you can find me on BiggerPockets and do the same.

Thanks, you all, so much for listening. We’ll see you for the next episode of On The Market.

On The Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett with editing by Exodus Media. Copywriting is by Calico Content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.