Cleveland

Cleveland

 

Once a forgotten city with a struggling manufacturing sector, Cleveland is rebuilding a stronger, more diverse economy and workforce. It is a diamond in the rust belt.

 

Cleveland is making a comeback.

Along with other industrial cities like Pittsburgh and Detroit, Cleveland saw a downward slope 

in the late 20th century that was only accelerated by the 2008 recession. Unemployment soared, and home values plummeted.

Now, a shifting focus to the healthcare and tech industries and a slow but steady return of manufacturing spells a new slogan for Cleveland … it’s Believeland, Ohio.

Here’s what’s changing in Ohio:

  • Diversified economy. Shuttering factories led to widespread unemployment. While some of those jobs have returned, it’s no longer the largest sector of the economy, and that diversity is promising for the future of the market.
  • The leader in healthcare. Cleveland Clinic is one of the best healthcare systems in the world and is the national leader in cardiology and heart surgery. Watch for continued growth in the biomedical industry.
  • An emerging tech hub. Greater access to capital, support for entrepreneurs, a low cost of living and a vibrant health tech corridor are just a few of the reasons why technology companies are choosing Cleveland as their home.
  • Eight Fortune 500 companies call it home. It’s not all surgery and computers here. Progressive Insurance, Goodyear Tire and Rubber, Sherwin Williams, and others provide jobs and revenue. And that influx of capital and people is revitalizing neighborhoods.
  • A newer, younger population. Millennials want to live closer to where they work and are coming back from the suburbs to the cities. Cleveland is the 8th fastest growing millennial population in the US, and they’re renting and purchasing homes.
  • Centralized location. According to Forbes, Ohio is within a day’s drive of 60 percent of the US GDP and 150 Fortune 500 businesses. It’s easy and cheap to get to many major cities.

Downtown Cleveland is changing rapidly. As the Health-Tech Corridor expands and innovates, Cleveland will continue to be a diamond in the rust belt.

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STRONG economy, BUT ….

This may be one of the most interesting times in economic history. 

The pace and amount of change is creating significant challenges and opportunities for both investors and entrepreneurs … not to mention policy makers.

It’s fun to watch, hard to keep up with, and impossible to avoid.

The changing future of money and wealth will affect everyone … believe it or not, like it or not, prepared or not.

Aside from growing threats to dollar dominance in global trade … there’s a tug-of-war going on between stimulating and constraining the flow of dollars through the economy.

We recently said the rollback of Dodd-Frank might increase community lending … especially into real estate.  This stimulates the economy.

But the Fed decided to raise interest rates again … ever so slightly … and toss in some hawk talk (more hikes coming this year).

Obviously, higher rates mean fewer borrowers qualify for loans, and those who do can’t borrow as much.  This constrains the economy … and directly affects real estate investors.

Earlier this year, Uncle Sam implemented tax cuts and a ginormous government budget.  Tax cuts leaves more money in the hands of individuals and corporations, hoping they’ll spend it.

That’s stimulating … IF they really deploy the funds.

Of course, even if individuals and corporations won’t spend, the government is going to (shocker, we know).  This generally stimulates the economy.

Meanwhile, rising prices … led by gas prices and healthcare … and let’s not forget tariffs … mean dollars don’t go as far, so people can’t buy as much.  This constrains economic activity.

Dizzy yet?  It’s like watching a tennis match.  And we’re not done …

The dollar is strengthening because of an improving economy, rising rates, and its safe-haven status in times of geo-political uncertainty (like now).

strong dollar makes foreign products cheaper for Americans.

Domestically, this can stimulate activity … if people buy more stuff … if it’s made overseas … and if it’s not subject to tariffs.

On the other hand, a strong dollar makes exports harder to sell, which is a drag on sales made to foreigners.  This potentially constrains cash coming into the USA.

Meanwhile, a tight U.S. labor market and the rising wages we’re told will follow tends to increase people’s ability to borrow and spend.  This stimulates the economy.

Unsurprisingly, both consumer confidence and small business confidence are VERY strong right now.

People and businesses generally feel good about their economic future.

When people feel good, they spend, borrow, and invest.  All are stimulating to the economy.

So on the surface, the U.S. economy seems to be leaning towards growth and stability.  And because a rising tide lifts all boats, real estate investors should be very happy right now too.

Still, there’s an obvious tug-of-war going on between stimulating and constraining the economy.

The challenge (and opportunity) is that SO much is changing SO fast.  Too much stimulation is a problem and so is too much constraint.

And with so much happening at once, it’s probably dangerous for an investor to put TOO much emphasis on any one thing … or prepare for only one outcome.

After all, the economy is a very complex system.

Investors who bought too much into the sunshine narrative leading up to 2008 weren’t prepared for a storm. When it came, many got washed away.

Those who bought too much of the gloom and doom story missed out on one of the best real estate cycles in recent memory.

So it’s important to listen to a variety of viewpoints … then have a plan for variable outcomes.

For years, we’ve talked about the benefits of healthy tension … opposing forces tugging hard at each other.  Just like an old-fashioned rooftop TV antenna …  it’s the tension between opposing positions that creates stability.

So we like all the debate and chatter in the market right now. It’s less confusing than comforting.  It helps us see both the opportunities AND the risks.

Robert Kiyosaki reminds us all the time to stand on the edge … so you can see both sides of the coin.  And there’s no one-size-fits-all answer.

We think it’s important to keep in mind that strong economy and astrong financial system are two very different things.

It’s like getting into a boat and thinking it’s seaworthy simply because it’s fast.  A bad hull with a slow leak will eventually sink even the fastest boat.

Right now, even though corporate profits are up and more jobs are being created, interest rates are rising in the largest sea of global debt in history.

As we learned in 2008, when debt goes bad, financial ships can sink VERY fast.

But dangerous global debt levels is only one of several concerns about what some consider to be a fragile financial system tasked with supporting robusteconomic activity.

Will it hold up?  What if it doesn’t?  How will you know things are starting to break?  What will you do if it does?

Sunshine is awesome and we should all enjoy it.  But it’s always smart to watch the weather reports … and pack an umbrella just in case.

We’ll have much more to say on this important topic in the near future …

Until next time … good investing!


More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.

Profits, jobs, and opportunity …

In spite of rising rates and concerns about bubbles … real estate is looking pretty good right now.  At least the right real estate in the right markets.

Of course, “real estate” can mean a lot of different things.  In this case, we’re talking about good ol’ fashioned single-family residences.   Houses.

Yes, we know mortgage rates are rising.  But that just means it’s harder for renters to buy a home … which keeps them renting … from YOU.

And if you proceed with caution, there are some reasons to pursue single-family homes even though prices have recovered substantially from the 2008 lows.

Consider this Yahoo Finance headline:

Small business earnings hit all-time high, NFIB declares

“Small business earnings rose to the highest levels in at least 45 years last month, according to the results of a survey from the National Federation of Independent Businesses (NFIB) …” 

“ …  the 17th consecutive month of ‘historically high readings.’”

That’s good news for small business owners … and for the U.S. economy.  It’s commonly believed that small business drives a majority of job creation.

So perhaps this CNBC headline isn’t a big surprise …

Job openings hit record high of 6.6 million

Of course, job creation is good for landlords.  It’s a lot easier for tenants to pay rent when they actually have jobs.

But there’s the issue of wages.  Even though the unemployment rate fell below 4% … which is considered “tight” … wages still haven’t risen substantially … yet.

Meanwhile, life is getting more expensive as rising interest ratesgas prices and healthcare premiums are among several factors squeezing household budgets.

While jobs are good, it’s hard to save up for a down payment when living costs are going up faster than paychecks … which keeps people renting.

And if all that isn’t a big enough challenge, there’s the problem of high housing prices.  Obviously, higher prices also make it harder for renters to become homeowners.

So all that’s not horrible news for landlords … especially those who are investing in more affordable markets and property types.

But there are two more parts to the story …

First has to do with a deeper dive into the jobs market.  The April jobs report didn’t seem great at first blush.

But in the past, the reports looked great at first, then you’d drill down and discover the jobs created were low-wage service industry jobs.

Notably, recent jobs reports reflect a subtle but important shift in the composition of jobs.

So while the quantity of jobs created might be not bad … the quality is actually looking pretty good.

According to this Wall Street Journal article, manufacturing added 24,000 workers in April … after adding 22,000 and 31,000 in the last two months.

“While manufacturing employment has been generally declining for decades, hiring picked up in the sector over the past year.” 

Way back our 2011 blog, What Washington Could Learn from Real Estate Investors, we argued that not all jobs are equal. We like what’s happening.

Seems to us if the American economy can keep this up, it’s a tailwind for housing … in spite of rising rates, inflation, and high debt levels.

And speaking of wind …

As we discussed at length during Future of Money and Wealth, the entire financial system is based on debt.  So to grow the economy, debt MUST grow.

The why and how of all that is too big a topic for today’s discussion, but if you take it at face value, it really explains a lot.  It also has some big ramifications for real estate.

After 2008, lenders ran away from real estate … but debt still needed to expand.  So new debt-slaves borrowers were needed.

Student debt soared.  Sub-prime auto loans spiked.  Credit cards hit record highs. Corporations borrowed heavily to bid up their own stock.

But today, students are reconsidering the value of a financed college education.  Auto sales are slowing.  Credit card losses are mounting.

Corporations are slowing down their borrowing … with nearly 14% of the largest companies unable to pay their interest payments from earnings.

In fact, a recent Bloomberg article quotes Gregg Lippman of “Big Short” fame as saying corporate debt will trigger the next financial crisis.

“ … corporate debt and equities will face the biggest pain when the next downturn comes. Investments linked to consumer debt, unlike the last crisis, will be relatively safe …”

“The consumer is in much better shape than corporates. Consumers are less levered than they were pre-crisis. Corporates are more levered than they were pre-crisis …”

So let’s wrap this all up and put a bow on it …

If it’s true debt MUST expand, lenders will be looking for where they can make loans.  Remember, your debt is their “investment”.

There are already tremors in the debt markets.  Lenders will be looking for quality.

Similarly, there are tremors in the stock markets.  Investors and consumers will be looking for an alternative for their wealth building (remember, consumers consider their home an investment).

So we think there’s a good chance the focus will shift to real estate again.  Just like it did in the early 2000s.

Yes, we know the run-up from 2000 – 2008 ended badly.  But not for everyone.

If you buy the right markets, use sustainable financing structures, and pay attention to cash flow, there’s an argument to be made that single-family homes still have solid potential for long-term wealth building.

Until next time … good investing!


More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.

Bad times can be good times for real estate investors …

Lost in all the hype over Bitcoin and a red-hot stock market are the millions of people whose real incomes and purchasing power are slipping backwards.

These are the folks falling into the wealth inequality chasm … which has largely been created by the financialization of the economy.

“Financialization” is wonk talk for “making money” by not doing anything more than trading paper …

… as opposed to actually producing goods and services that benefit people.

You can’t eat, enjoy, be healed or entertained by paper trading profits.

All you can do is spend those profits to buy real goods and services … assuming someone else gets up and creates them.

But to high-level lever pullers, goosing financialization is a way to move numbers … like the Dow Jones … without a corresponding level of ACTUAL productivity.

We understand the THEORY is all these paper profits will make their way into spending … thereby creating demand for products and services and stimulating productivity.

But just like high-priced real estate doesn’t mean higher rents (it’s the other way around), a booming stock market doesn’t necessarily mean more jobs and productivity.

Of course, no one in charge is asking our opinion.  The lever-pullers act according to what they believe.

We don’t need to agree.  But we do need to understand.

Low interest rates are the fuel of financialization … and loose money from low interest rates can cause asset prices to bubble up … sometimes to all-time highs.

Don’t get us wrong.  Bubbles are great … IF you own bubbling assets like stocks, real estate, and now Bitcoin.

But if you’re Joe Sixpack, or an underemployed Millennial with college debt, living paycheck to paycheck … and you don’t own any of these assets … you don’t get to sip the bubbly at the asset party.

Meanwhile rising costs of essentials like rent and healthcare are taking bigger bites out of the household budget.    Not surprisingly, people are going further into debt.

Some pundits say consumers are taking on more debt because they’re feeling better about the economy.  Maybe.

But with credit card interest rates rising and defaults increasing, it seems to us the consumer is having a hard time.

Meanwhile, home ownership remains at historically low levels.  That’s millions of people heading into retirement without the benefit of home equity.

So it seems many Main Street Americans have a prosperity problem.

When we interviewed then-presidential candidate Donald Trump and asked him about his plan for homeownership, he gave us a one word answer … “jobs.”

In the meantime, while now-President Trump works on jobs … we think the forces pushing against Main Street prosperity remain fairly formidable.

While we’re waiting for Washington and Fed prosperity policies to trickle down to Main Street … local municipalities are making some interesting moves …

… which have the potential to affect a popular real estate investing niche.

Check out this headline from an article recently published on the PEW 
Charitable Trusts website …

Why Some Cities Are Buying Trailer Parks

This article is worth reading … whether you’re personally interested in mobile home parks or not.  For now, here are a couple of select excerpts …

“… rising prices are prompting park owners to sell their land to developers …”

“… localities, desperate to hang on to homes middle- and working-class people can afford, have stepped in to buy parks, fix them up, and transfer ownership to residents or to a nonprofit on conditions that rents be kept low.

If you’re not familiar with mobile homes (sometimes called “trailer” homes), it’s a very interesting and potentially profitable niche.

Typically, the land is referred to as the “park” … like a big parking lot … where the individual mobile homes are parked.

The residents usually own the structure (the home) and pay rent to the land owner for the parking space the structure sits on.

It can be a great niche because the structure is owned by the tenant …  and so do the costs for maintenance and repairs.  Great!

Also, because the structure is more permanent than mobile, the tenancies tend to be long term.  This means less vacancy and turnover expenses.  Great again.

The park owner (the landlord) collects rent and is primarily responsible for infrastructure and common area maintenance.

We really like the mobile home niche because we expect affordable areas and product types will increase in demand based on economic conditions and demographics.

So what are the take-aways from this week’s musings?

First, Main Street USA is still struggling in terms of real income and standard of living.  This will have a direct impact on their housing choices.

We also think this affirms our contention that demand for affordable product types and markets will grow.

We think both mobile home parks and apartments … and their owners … will likely be among the beneficiaries.

Of course, this is a drum we’ve been pounding for quite a while.

What’s new is that cities and counties … “localities” … are stepping in and competing with investors to acquire mobile home parks.

These are potentially deep-pocketed players not concerned with profitability, so they’re both capable and potentially willing to bid up prices to unrealistic levels.

Think about it.

If the reason the government is stepping in to buy the park is because “rising prices are prompting park owners to sell their land to developers” …

… they’ll need to bid MORE than the developers to get the park.

And if the plan is to keep rents DOWN, the deal can’t possibly make financial sense without subsidies from somewhere … presumably the local taxpayers.

Hopefully the local voters are okay with this.  But we suppose that’s the politicians’ problem.

Meanwhile, we’re guessing our friends who’ve been pouring money into mobile home parks are probably smiling.

After all, while mobile home parks crank our great cash flows, they’re also a long-term land banking play.

Eventually, the path of progress or demand drives up the value of the land.  It’s always fun to get in position ahead of the crowd … and even better when being early still cash flows.

This also bolsters our argument that the right real estate is a winner in both good times and bad.

In this case, increased demand for affordable housing due to soft real economic growth at the working-class level …  is potentially increasing mobile home rents and asset values.

Of course, in good times, everything goes up, including the demand for developable land … whether it’s land under your C-class apartments or your mobile home park.

The moral of the story is even bad times can be good times for strategic real estate investors because people will ALWAYS need affordable housing in ANY economy.

Until next time … good investing!


 More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.

7/25/10: Entrepreneurs in the New Economy – Getting Paid to Solve Problems

Do you remember the old “new” economy? That was the one where technology companies could go public without profit.  In some cases, they didn’t even need revenue. Ahhhh, those were the days.

The new “new” economy (the Great Recession one) hasn’t been nearly as fun – unless you’re an old school entrepreneur.  That’s the kind who looks at problems as opportunities.  Guys (and gals) like that are having a lot of fun right now because there are opportunities galore coming out of the Great Recession.

The Real Estate Guys™ headed off to Freedom Fest in Las Vegas a few weeks back.  We heard that money manager / economist / author / Senate candidate Peter Schiff would be there (among many other people with very strong opinions about the U.S. economy) and we wanted to do some interviews.  We’re happy to report we got lots of great stuff, including Mr. Schiff and the CEO of Forbes Magazine, Steve Forbes.  Watch for those interviews in future broadcasts.

So we fly into Las Vegas in our private jet (the one operated by Southwest Airlines), and get to the convention venue and start setting up our booth.  Before the event had even started, a man stops by and sees our banner for Belize (we were promoting our upcoming field trip to Belize) and asks a few questions.  The short of it is that we find out he’s working on a very exciting project in the Caribbean – one that solves a problem we’ve been trying to figure out too.  Russ gets so excited that he hugs the guy. Very weird.

After the appropriate apologies and some follow up male bonding, our new friend agrees to do a radio interview.  And that’s what this broadcast is all about.

Manning the microphones for this edition of The Real Estate Guys™ Radio Show:

  • Your host, the Larry King of real estate radio, Robert Helms
  • Co-host, our “I love you, man” booth babe, Russell Gray
  • Special Guest, Investment Banker, Entrepreneur and assault victim, Jeff Villwock

Any time we get around smart people, we jump on the opportunity to talk with them. In this case, Russ literally jumped on Jeff.  When Jeff recovered, we got him on the mic, so you can listen to what he’s doing, where he’s doing it and why.  There’s lots of lessons to be gleaned!

Freedom Fest is an event that attracts people with strong political opinions.  In many of the interviews we did there, those opinions come out.  Great!  We think the world works better when people respectfully debate important issues.  Sharing ideas is among the most sacred of our freedoms, especially if you’re radio guys.

We also realize that the U.S. (the bulk of our audience) is pretty polarized right now.  Now, we love our entire audience and our show isn’t political.  However, policies affect economics and economics affects real estate. There shouldn’t be a serious student of real estate who can look at the last several years and deny that.  So politics are going to get into the discourse from time to time, which is a very good thing.

We think these Freedom Fest interviews are great.  If you disagree with the political views of our guests, don’t let that get in the way of hearing what’s being said.  Here’s why:  a big part of real estate investing is understanding demographics and human nature. How people think and believe affects where they (and their money) will be moving.  Even if you disagree with them, if they believe it, it will affect their actions. So YOU need to understand them (even if you disagree) if you want to anticipate their behavior.

Did we mention that Jeff’s project is in St. Kitts?  It just so happens that St. Kitts is one of the stops on our upcoming 9th Annual Summit at Sea!  So we ask Jeff if we can visit his project as part of our already planned real estate shore excursion in St. Kitts. Not only does Jeff agree to allow us to visit, he says he’ll meet us there and show us around.  Awesome!

Once again, we’re reminded of the importance of getting out of our cubicles and into the world where real people are. No doubt that virtual networking is powerful, but just as phones did not replace face to face meetings, neither will social media replace conventions as a great place to make important connections.  This is one of the reasons we attend trade shows and promote our field trips and the Summit at Sea™.  It’s a great way to get to know great people in the real world.  We hope to see YOU at one very soon!

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The Mortgage Meltdown and Healthcare

What do these two topics have to do with each other?  Well, certainly after the mortgage meltdown the US economy is in need of health care.  Not reform.  Just getting healthy!  But that’s not the topic of this post.  Instead the question is: What lessons from the mortgage meltdown can be applied to the health care debate?  And, as a real estate investor, why should you care?

Without going into an extensive history lesson, here’s a quick recap of the mortgage meltdown:

  1. Government decides to “help” the free market for mortgages by establishing Fannie and Freddie to buy mortgages in the secondary market.
  2. Assured of a buyer for their mortgages, mortgage originators aggressively market them.  They sell it silly.  People buy houses. Values go up and more people buy. Equity happens and life is good.
  3. Private industry sees opportunity and wants to play, but find themselves competing against the “Government Sponsored Enterprises” (GSE’s) Fannie and Freddie.  Mortgage rates are dictated by risk and the implied government guarantee of Fannie and Freddie means mortgages that “conform) (i.e., conforming loans) are cheaper than private industry.  Of course, the consumer will buy the cheaper loan.
  4. Private industry expands into “non-conforming” (i.e. Jumbo, sub-prime, etc) in order to be in the mortgage business without having to compete directly with the GSE’s.  They make money.
  5. In 1999, the Clinton Administration says, “Fannie and Freddie, you need to make it even easier for people to get home loans”, which is code for “lower your standards”.  Fannie and Freddie comply.
  6. Home ownership surges under George W. Bush.  He’s an economic genius.  Home values soar.  Private industry says, “I want some more!” and recruits foreign investors to plow money into “super safe” mortgage backed securities.  The money is directed at sub-prime, alt-a, investors, jumbo, etc.  Now equity is REALLY happening!
  7. Reality sets in.  People who shouldn’t have gotten loans do what people who shouldn’t have gotten loans do: they default.  The sub-prime crisis sets off a chain reaction of well chronicled events that set off The Great Recession.  As a result, the private mortgage business is almost wiped out.  Fannie and Freddie survive on the backs of the taxpayers (the working private sector).

Obviously, there’s a lot more to the story, but what are the lessons?  Here are two of the most important ones:

1. In a capitalistic society, the objective of enterprise is to make a profit.    It’s what motivates the brightest people to work hard and sacrifice to create solutions to society’s problems – solutions that can be sold for a profit.  Profits are what allow people to pay taxes, give to charity, invest in product development and new enterprises that create jobs and enrich society. Profits are not evil, they are essential.

2. When the government, though well intentioned (giving it the benefit of the doubt) enters into competition with private industry, with the goal of making a product or service “more affordable”  (code for reducing or eliminating those evil profits), the result is a) private industry is crushed, taking its jobs with it; or b) private industry is forced to compromise sound business practice in order to survive (like loaning money to people who can’t afford to pay it back) and eventually those unsound business practices result in failure – and the loss of jobs.

And the correlation to healthcare?

The President of the United States has gone on record as stating that one of the “benefits” of a public option is to create a health care insurance program “without a profit motive” to compete with private industry.  When you follow that thought track to its logical conclusion, does anyone see a train wreck?

When you think about how big the health care industry is, you can imagine how many private sector jobs would be lost if it were to melt down too.  And since the private sector economy is the one that pays 100% of the taxes, the smaller it gets, the larger the tax burden will be on those who remain.

Loss of private sector jobs and higher taxes have a DIRECT impact on your real estate investments. When more private sector capital is sucked into government, there is less of it available for private purposes. And what is available becomes more expensive (higher interest rates).

So even though “homes and healthcare for all” are noble and compassionate causes that everyone can support, the methodology of undermining the private sector to accomplish them is counterproductive in the long term IF one is operating in a CAPITALISTIC society.

There is no debate about whether we all want people to have homes, healthcare and abundance.  We all want that.  The debate is whether or not we are committed to capitalism.  If we are (and you should be as a real estate investor), then the solution will be found in the private sector as entrepreneurs work every day in their “enlightened self-interest” to invent, build and sell homes, health insurance, health services and whatever other products or services enhance the human experience.

Diesel engines run great on diesel fuel. Regular gas engines run great on regular gas.  But when you put diesel fuel in a regular gas engine or vice versa, it might run for a little while, but it won’t run well.  Eventually, it will break down and not work at all.

Until someone re-writes the Constitution of the United States, the US is a capitalistic society.  Let’s be careful about injecting incompatible “fuel” no matter how noble the motive.