This Flash Back Friday show was originally published in March 2017 as episode 876. Jason chats with Investment Counselor Sara about the impact of Hurrican Harvey in Houston. While it was one of the worst natural disasters in recent history it also provides a great opportunity for rebuilding. The price of commodities increase so this will impact the area’s real estate prices.
Jason Hartman 0:00
Welcome to this week’s edition of flashback Friday, your opportunity to get some good review by listening to episodes from the past that Jason is hand picked to help you today in the present, and propel you into the future. Enjoy.
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it on now. Here’s your host Jason Hartman with the complete solution for real estate investors.
Jason Hartman 1:06
Welcome to the creating wealth show. This is episode number 876 876. This is your host, Jason Hartman, thank you so much for joining me today. I have got Sarah, our lead investment counselor here who’s been with me the longest to do this show with me today. Sarah, how are you?
Hey, Jason. Good. Thanks for having me back.
Jason Hartman 1:25
Looks like your son. Jordan had his first day of sixth grade today. How exciting.
Yes. Didn’t he look great? Yeah, I
Jason Hartman 1:33
saw him on Facebook. He looked good. He looked good. First thing I want to talk about Sarah today is the absolute tragic chain of events that is unfolding in Houston with this flooding. I mean, it’s just it’s just so heartbreaking to see those pictures on TV and the news and the videos. I cannot believe that I feel so bad. I donated to a couple of the Houston recovery charities yesterday. And it’s just terrible. You know, we’ve done a lot of business in Houston over the years, and many people have reached out to me since the flooding unfolded there and asked me, you know, people are being disaster capitalists. Which, by the way, I want to mention I think was Naomi Klein. I read her book called disaster capitalism many years ago, and I don’t think that’s a bad thing, even though I’m kind of laughing about a little bit because whenever there’s a disaster, you know, these people the opportunists jump in and, and go and think how can I make money off that right? And the stock market reacts and, you know, the whole economy reacts to this type of stuff. And that is not a bad thing. That is a good thing, because all of the disaster capitalists, okay, and I admit there are people who are crooks and bad people to take advantage of situations, but for the ones who don’t, they are providing needed services for safety and recovery. And, you know, all the things people need without capitalism, specifically disaster capitalism, who would be there to provide it the lousy government? I mean, look at the tragic job they’ve done. Look at that terrible job they did during Katrina and New Orleans and the other areas that were affected. I mean, it was pathetic. And I, you know, I’m being an armchair quarterback. I don’t know enough about it yet. But it seems like the government’s response here is pretty pathetic. Again, not only is the response pathetic, but the fact that they even allow this to happen in the first place. And what I mean is going back to the urban planning and the flood control, and, you know, all of the systems involved in water management in Houston, just not acceptable. So we’re going to dive into this topic a little bit today. But first off, I want to express just my deep concern. And Sarah, I know, you feel the same way. It’s just a terrible, terrible situation in Houston and hopefully, the recovery will be swift.
Yeah, I mean, it’s just really heartbreaking. I’ve been totally glued to the TV and my Facebook feed. You know, I have a friend I went to high school with that has been posting live video of the flooding. And ironically, she lives where I own a property in in Katy, Texas, which is pretty far inland. I mean, I’ve had that property for 10 years, I’ve been through hurricane before with, you know, very little damage. But I really think that this storm was even bigger than anybody really expected. I mean, I know there was warning, and I know they said it was going to be the biggest storm ever, but it just, you know, it happened quickly. And I think they’re still storming out there. I mean, it’s really too early to tell the magnitude of this thing and the devastation, but I completely agree with you that there’s going to be a huge need for help, you know, in housing and several different areas and so we’re going to need You know, people, you know, these capitalists to come in and make that happen. So I completely agree with you there.
Jason Hartman 5:06
Everybody will criticize the disaster capitalists, but without them, you know, there there wouldn’t be any help. So let’s talk a little bit about, you know, what we’ve learned from prior disasters. And what we saw happen and in Katrina is is certainly the best example. Because the first Well, I don’t want to say the first that this is not an order, but just some of the things that happen are number one, we will likely see, obviously, a lot of litigation, okay. There will be a lot of insurance, bad faith litigation, people suing their insurance companies saying that they didn’t provide enough coverage and many times they’re right, I mean, insurance companies, they they try to weasel a lot of times and not pay claims or not pay as much as they should pay. So there will be a lot of litigation there. Of course, there will probably be a call for and probably be an actual more toryism on mortgage payments. When we saw this during Katrina, where many of the lenders did a six month moratorium and said people don’t have to pay their mortgage for six months. And guess who benefited most from that and who got hurt the most from that? Well, the people that had that had equity in their properties didn’t get any benefit from that. Because, you know, if you if you don’t have a mortgage, how can you get a benefit from a moratorium, right? So so that’s the first thing that happened, the people with the debt, they got the benefits. So again, as I always say, the best insurance is a high loan balance. And when you go back to that other topic I brought up of the insurance, bad faith litigation and all the lawsuits that will undoubtedly come out of this. If people have a lot of equity in their property. And if people own their property free and clear, meaning they have 100% equity. Well, they’ve got to go hire the lawyers. themselves and fight with the insurance companies themselves. But in some cases, when they have a high loan balance, the lender will go to bat for them and sometimes the lender doesn’t even formally go to bat for them, but the insurance company just knows that there is a lender and a high loan balance and, you know, if, if the disgusting criminals at Wells Fargo, for example, just like to pick on Wells Fargo, because they’ve had so many scandals recently, I mean, just pathetic, disgusting company. I hate Wells Fargo Have I told you that lately. They they you know, a lot of times the insurance company will be more likely to be on better behavior and pay claims more quickly and more completely, if you will, when there is a lender involved. So again, going back to my very old saying the best insurance is a high loan balance. Okay, after that as your insurance policy. The first thing is a high loan balance. With your lender. So we’re going to see that we’re probably going to see a moratorium and payments, we’re going to see FEMA or some federal agency and maybe state agencies as well come in and offer disaster relief assistance. I’m sure President Trump is visiting, I believe, today, if I’m not mistaken, some of the hard hit areas. So we’ll see, you know, low interest loans will see various government aid and so forth, offered as well as the government, you know, usually creates the problem in the first place, and then acts like the hero when they come in and solve the problem that many times they created or had some hand and creating in the first place. But that’s just the way our system works, what we might see in the future, but you know, I wouldn’t bank on this because nobody knows, is we might see some sort of tax incentive for rebuilding. We saw this in something years ago. And Sarah, you know, because you’ve been with me for what, almost 10 years now, right? Yep, yep. And that was the go zone. Remember the go zone zero?
I do. In fact, when I bought my property in Houston, it was supposed to have been a go zone property and then
Jason Hartman 9:09
read about that
some debate about the, you know, certain zip codes and things like that. And so I don’t think I ever actually took that deduction, but a lot of our clients did. And so, you know, I have to imagine that they’re going to have to do something like that to rebuild this, this huge community. You know, one of the statistics that I heard and you know, in fact check this, but I heard that only 15% of homeowners have flood insurance. And I was personally advised not to get flood insurance and it wasn’t required by my lender. And so I think that’s going to have a huge impact on the devastation and and the rebuilding of the community because I have a feeling we’re going to see that a lot of people were not insured for flood.
Jason Hartman 9:57
So yeah, when you talk about things like flooding insurance in earthquake insurance. This is a problem because, as opposed to something like a natural disaster, like a tornado, for example, or, you know, maybe it’s not a natural disaster, but a fire, right? Those only affect a small number of homes usually, or maybe just one home, you know, tornadoes can be very surgical. Whereas a hurricane is broad, an earthquake is broad. So, you know, if if the big key Well, it’s not if but when, when the big California Earthquake comes, even if people have earthquake insurance, you know, there may not be coverage and coverage may be very limited because it can’t all be paid. And, you know, the the state is involved in those things. And, you know, as in the in the golf areas that were after Katrina, but you know, even states don’t have unlimited budgets, even countries, as we know don’t have unlimited budgets. We talked about that quite a bit on the show. Certainly insurance companies don’t have unlimited budgets, the likelihood that claims can even be paid is a whole big question. So we’ll probably see a variety of things come out of this but a lot of the people that reached out to me directly were probably thinking well, you know, maybe I’ll I’ll go in and and try to pick up a deal you know, buy properties on the cheap in the in Houston, for example, and rehab them I mean, they don’t need extensive rehab Of course, water is a really tough kind of damaged to deal with. So there are those types of opportunities but for our clients, those are too complicated and too involved and too hands on. Our clients aren’t into that type of thing. You know, another one of our clients talked about he should get into the business of providing construction materials like sheet rock and you know, that’s the old idea of the gold miners instead of you know, mining for gold or panning for gold, you know, just sell Levi’s and pics and axes, you know, provide the infrastructure Rather than the than the actual, you know, doing the things sometimes that’s the Better Business, right? So there are all kinds of things that will happen out of this tragedy. And we don’t even know what they are yet. We’re just speculating on some of them, some of them are pretty obvious that they will happen. We’ll just see how it unfolds. It’s going to take a long time to rebuild. This is a huge, huge tragedy. I mean, the amount of money and damage is just mind boggling. It really is. Sarah, do you have any other thoughts or comments or things you want to discuss about it?
I mean, from an investment standpoint, what would you suggest for somebody who already say owns a property there? Let’s say they had significant flood damage, you know, thousands and thousands of dollars, and they didn’t have flood insurance. You know, would that person continue to pay their mortgage? I mean, assuming the tenant can’t live there, so there’s no income. You know, what would an investor do in that kind of situation?
Jason Hartman 13:00
Well, also, that’s a good point you just brought up kind of as a tangential point is, you know, do they have does their insurance policy cover for loss of rent, some, some policies have that. And it you know, won’t be complete coverage, but it will provide something. But I would say it’s too early to tell. Just wait, you know, a week or two weeks, you’re going to start hearing about moratoriums on mortgage payments and things like that. I’ll just bet you that’s that’s coming. Sorry about the noise, my housekeeper’s in the background here. If you can hear that. So that’s probably coming. So just it’s just too early to tell. So just sit tight, when we hear read about this stuff will certainly talk about on the show, your lenders will notify you directly if you were affected and your properties were affected. So it’s just too early to tell. But yeah, I would say that’s a high high likelihood that there is going to be a moratorium and mortgage payments. So if you followed my plan and you you used to leverage prudently and you tried to maximize your borrowing capacity, that unused asset of credit. And by the way, a small tangent here, one of our listeners was talking about and posting on Facebook about how high her credit score was. And I chimed in right back to her and I said, your credit score is too high, that means you’re not using Enough of your credit, your utilization isn’t high enough. Remember, when people look at their assets on a balance sheet, and you know, you look at a balance sheet has two columns, right assets and liabilities. And people put what things they own, and what liabilities they have against them, what loans they have against them and so forth. And in so doing, you know, they never consider their ability to borrow their credit score as an asset and they should, if you’ve got a really high credit score, that is not a good thing. Once You get over 720 or even 740. It’s irrelevant. Your credit score is fantastic. You know, if you have a credit score, that’s 800, you know, you’re not using your credit enough, folks, you got to use it more. So try to borrow more money. Now, that doesn’t mean get a bunch of stupid consumer debt, that means get more investment grade debt against good quality, rental properties. The other thing and I alluded to this in the beginning of our talk today, Sarah, but I didn’t really touch on the point I don’t think is commodity prices. Whenever you see natural disasters like this, you see commodity prices go up. So the cost of labor, the cost of gasoline and oil, you know, this third, the big part of the refining capacity of the country is in golf. Okay. So we’re probably going to see an increase in those prices. We’re going to see an increase in prices of all of these construction materials. Everything from sheet rock and Congress Create a lumber to copper wire to blast steel, I mean, just every construction material will become more expensive and labor will become more expensive. And there will be a lot of workers moving into the impacted areas. Okay. People will move from surrounding areas into Houston and the other affected areas in Louisiana to do construction and provide services and provide labor and insurance adjusters will move there. You know, I mean, this is, you know, in a way I hate to say it, but it’s an economic boom, okay. Now, this isn’t the kind of economic boom you want because it’s more like war. Okay. War destroys things, but they also say war stimulates the economy. Well, the biggest public works project of all time was World War Two, you know, and many say that’s what got us out of the Great Depression, World War Two. But you know, it’s not the kind of economic boom you want necessarily, right? But it is Is it is it is it boom? Nope, no question about it either way,
quick question there. So when you say that the commodities prices will go up, are you referring to just locally in Texas or nationwide globally,
Jason Hartman 17:16
globally, globally, because these these construction materials are traded globally. So, man, they are not indexed to any one currency, which is a wonderful thing, you know, that they’re not tied to the dollar or the yen, or the Euro, or any any one thing. They are, they are a global commodity, they are money, they have intrinsic value. So, so that’s a that’s a really, that’s a really good thing from an investor standpoint,
right. So assuming, assuming that’s true, and all of those commodities do go up in price, you know, and it’s a catch to the global market, then we could see real estate prices go up because it’s going to increase The cost to build new properties everywhere. So we see now the cost of real estate go up in several markets.
Jason Hartman 18:08
Absolutely, that is a indirect impact, because this will cause construction prices to increase. So, you know, all of these things, you know, you don’t need to be affected. And and by the way, I want to talk about one more thing that I saw happened in Katrina, sometimes in just a moment about insurance claims and so forth. But yeah, you don’t need to be directly impacted from this because when commodity prices go up, it basically increases the value of your property anywhere, okay, especially closer to the incident itself, but globally, because, again, you know, lumber and concrete and all of these materials, copper, they’re traded globally, they’re not tied to any one currency. Talk about one other thing here. And that is something that I think happened during the Katrina disaster. And that is insurance claims. Okay. So sometimes people look at this tragedy and you know, I used to talk about how the Chinese symbol for crisis is the same as opportunity. And literally translated that symbol means crisis is an opportunity writing the dangerous when writing the dangerous wind. And we all have had and you know, when you’re younger, it’s hard to understand this. But when you grow up a bit, and you’ve had a lot of experiences in life from which to draw, you know, that a lot of things can seem really, really negative. Really bad things happen in your life. And you think, Oh, my God, this is the end of the world. Right? But, you know, it’s like, the author Richard Bach said, you know, what, what the caterpillar calls the end of the world, everybody else calls a butterfly, okay? So it depends. how you look at it and if you just wait long enough, a lot of times, things can turn out really, really positively. So let me give you some examples. And this happened to one of our clients in Katrina. Okay. His property was completely destroyed, completely destroyed by the storm surge. Okay. I mean, just wiped, it was gone. And you know, this client, Sarah, you remember him, okay. And I won’t mention his name right now, but it was completely destroyed. And, you know, this is a way of actually renewing and rebuilding. So a condo developer came along and wanted to do an assemblage and buy up some lots in this area. And it turns out the property as a vacant lot post disaster was worth a lot more money than the than the home itself. Okay. So, so it’s interesting how that works, and sometimes the insurance claim now I’ve talked about insurance, bad faith and how sometimes insurance companies don’t like to pay claims, but it’s Does the insurance claim will actually overpay, and you can get the construction done for less than you receive from the insurance company? So, a lot of times these things work out a lot better than we think at the time.
Yeah. I mean, I can’t recall which client you’re talking about. You have to tell me later.
But we’ve seen this over the years with, you know, other types of insurance claims as well. You know, where did they get a lump sum jack and worked out better, you know, so, yeah, I guess we’ll kind of have to just wait and see. I mean, for all I know, it’s, I think it’s still raining in Houston. And Sir, you know, we have to let the storm work its way through and, you know, then take it a day at a time and, you know, I just, I feel so bad for these people that are, you know, actually occupying the homes and, you know, people that are still stranded. So, there’s still going to be a lot of, you know, relief efforts out there.
Jason Hartman 21:59
You heard this unboxer yesterday when Brittany had chimed in on one of our threads there, she said that one of her friends that lives in Houston just moved there three weeks ago, can you imagine? And they’re their house is full of water. There are literally fish swimming in their living room. Yep. Oh my god, I can’t even imagine. It’s just terrible. But um, hey, Sarah, let’s wrap this one up. But do you want to just grab one quick listener question from our AirPods contest. We’re trying to work our way through some of these questions. And maybe we’ll just grab one of them real quick before we wrap up. So Sarah, you can pick
Yeah. Okay. Let’s do we’ve got Laura. And her comment actually was I love the tangents.
Jason Hartman 22:46
Well, thank you, Laura. I will I will keep going with the tangents. I always go off on tangents.
Yeah, so I’ll read the question here and then you can answer. Hi, Jason, could you please discuss some specifics of how your own single family portfolio Perform during the Great Recession? Did your rental rates go up or down? Did you have more tenant turns? Did class a property tenants move to class B, and C properties? And the last question, did you see any more in one marketplace versus the other?
Jason Hartman 23:18
Oh, gosh, you had to pick such a long question right? For this, because I know you’ve got to go and so two eyes here I’ve got a record another recording coming up. But I’ll try to answer that one is to simply as possible Laura. So first of all, at first and now you know, we’re talking 10 years ago basically now right? So this has been a while but the nice thing is you can go and listen to my past episodes of the podcast that I was doing way back then and you can hear what I was saying you know, like right from that actual experience them but um, what I noticed happened is that it first the rents strengthened on my own properties. My clients properties, and the tenants stayed longer. And that was good. And then what I noticed happened as the stupid government got involved. And we had we, you know, we had an election year in 2008, obviously, right. So the the politically correct, idiotic thing to say was let’s keep everybody in their home. Now, of course, the question on answered from that was, what home should they be in, in other words, was the school teacher who was making, you know, $58,000 a year in that $800,000 home that they got with a subprime loan that they never should have received that loan anyway, in the first place? Should they be staying in their home? And so the government shoved every you know, down everybody’s throat, the loan modifications and the workouts and the bailouts and, you know, millions of people stop paying their mortgage and you know, that’s going to happen in Houston. A little Louisiana to just wait. And, and so that really perverted the market. The market forces couldn’t do what they should have done, okay, because what they should have done, which I teach about in the three dimensions of real estate, and they started to do but then they ultimately didn’t it didn’t continue is when the housing market, meaning the sales market falters, and it slows as long as the population is increasing, which it kept increasing through the Great Recession. The rental market should strengthen and rent should be there should be a lot of upward pressure on rents, and people will stay longer in the rental property. And that didn’t start to happen. I noticed it at the beginning of the Great Recession. But then as we moved into it, and the government kept telling the banks to bail everybody out. And you know, of course, there were three Big bailout multi trillion dollar bailout programs that we taxpayers paid for, as they did that the market forces couldn’t do their thing. And so there really wasn’t as much increase and upward pressure on rents, as we should have seen. So again, to answer that question, it started to happen at the beginning, and then it kind of just petered out and sort of stabilized through the Great Recession. Really, if you think about it, for investors, it was only a couple of really dark years there. Because people started coming back into the market, you know, reasonably significantly. I mean, Sarah in 2010, you know, I started to see business really pick up and those were the people that made all the money. I mean, you know, they they just did really well, because they obviously bought when, you know, when there was a lot of fear, right.
I was just thinking, you know, that ties right into this whole Houston discussion. It’s like it when it’s happening. I remember when that first started happening in 2008. I mean, it seemed like The world was falling apart. It was really dark and gloomy and people were scared. And it was bad for a couple of years. But you’re right. 2010 it just picked right up. And we haven’t looked back since. And, yeah, the buyers in 2010 2011, you know, they made out, like, just beautifully. You know, so maybe a little inspiration for anybody having, you know, challenges in Houston is that, you know, it’s going to probably seem heavy for a little while, but you know, it will, it will work out good stuff.
Jason Hartman 27:35
So anyway, I know we’ve got to wrap it up. I think that kind of answers that question, Laura. I know your questions, a little more in depth than that, but we’ve got to run. So we will, you know, maybe touch on that a little bit more on a future episode. Okay. Sarah, thank you for joining me today. And our thoughts and prayers are with everybody in Houston. You know, please listeners if if you find it in your ability, you know, figure out out the best charities to donate to, and donate to the relief effort there. And you know what, just hope that things work out for the best. We will talk to you on the next episode. Thanks for listening and happy investing to all of you.
Jason Hartman 28:15
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