Get Rich Education 455: Disturbing Facts About Your Bank, Many Millennials Will Rent Forever
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Storing your money at a bank entails more risk than you think. Your deposit is a bank's liability. Banks must take risks with your money because they don't charge you fees.
Banks used to have a 10:1 reserve ratio. As of March 2020, all reserve requirements are now eliminated.
Rather than storing lots of money at the bank, borrow lots of money from the bank.
US households own $41T of owner-occupied property—$29T in equity, $12T in debt. The national LTV ratio is 30%, historically low. That's 70% equity.
Of the five ways real estate pays: one profit source is the market, two are from the tenant's job, and two come from the government.
Many Millennials plan to rent forever. 63% have nothing saved for a down payment.
The interest-rate lock in effect keeps constraining the available supply of homes.
This forces more homebuilders to build.
Last week, NBC Nightly News covered the rise of build-to-rent communities.
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Complete episode transcript:
Welcome to GRE! I'm your host, Keith Weinhold. Do you have any idea what banks do with your money? How home equity is like a bank, hot Millennial rental trends, and the proliferation of Build To Rent real estate, today on Get Rich Education!
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Welcome to GRE! From Glens Falls, NY to Klamath Falls, OR and across 188 nations worldwide, the voice of real estate investing since 2014. You're listening to Get Rich Education. I'm your host, Keith Weinhold.
You did not wake up to be mediocre today. So we don't focus on long-term budgeting here.
Correlating financial betterment chiefly with reducing your expenses is just a race to the bottom. You and your peers would just be racing to the bottom.
We know that, instead, yes, arbitrage is created when you borrow low and invest high. But the ultimate arbitrage - which is the gap or that spread, is when your quality of life vastly exceeds your cost of living.
That's that gap that you & I pry open ever wider together right here, every week.
Savers lose wealth.
Stock investors maintain wealth.
REIs build wealth.
Savers lose wealth because inflation makes holding onto a dollar like a block of ice melting in your hand.
Retail stock investors only MAINTAIN wealth because their 9 to 10% long-term return is worn down to less than nothing with inflation, emotion, taxes, fees, and volatility.
And real estate investors BUILD real, durable wealth.
If you have a mentality of trading time for dollars, then you have a certain way of looking at your life.
If you realize that your investing mission in your life is to build things that pay you to own them, then you have a different way of looking at life.
The resources that you need to build those things are what we cultivate here on this show.
You know something though, by the time that I bought my first rental property, I didn't have all of that figured out yet.
It really wasn't until I bought my second property. It was also a fourplex, just like the first one. This second one cost $530,000. And check out how I bought it.
I bought it with a 10% down payment, interest-only loan, and interest rate of 7⅝%.
Yep, I took accumulated equity from my first four-plex and used it as a down payment on the second four plex.
Now, that way, I essentially had zero money in the deal - which is an infinite return strategy - and both fourplexes cashflowed.
Now, the interest-only loan on my second fourplex there… that gives some people pause.
Why would I do that?
That kept my monthly payment amount down - since I could pay only interest - and didn't have to pay principal. That turned a property with a small cash flow into a nice cash flow.
Yeah, some people don't like interest-onlys because then the tenant isn't paying down your principal for you.
I typically take interest-only loans because for every dollar that doesn't go into your illiquid principal as equity, instead, it becomes a dollar of liquid cash flow that goes into your pocket.
In fact, changes are that the reason that you have fat equity in home right now is from market appreciation, not principal paydown.
In fact, why don't I approach the classic GRE principle of "your return from home equity is always zero" from a new and novel angle here today.
Gosh, this could make you hundreds of thousands or millions over your investor career.
Imagine a bank. We'll call it a red bank. This bank is offering you zero rate of return, it's difficult for you to withdraw your money from it, and this red bank might not even let you withdraw your own money at all - it is at their discretion.
How motivated are you to hold your money at that bank? Well, you aren't at all.
Well, I just described equity that's locked inside properties… and that's why… your properties make terrible banks.
Equity is the opposite of you being liquid.
Instead, the GRE Way is leverage and arbitrage, but it needs to be supported by cash flow.
So, we are not quite on an island here with our strategy, because we're still connected with the mainstream finance world - but we're, say, a peninsula then.
And, like a peninsula, maybe, real estate keeps you insulated - though not completely disconnected from that more volatile stock and bond shuffle that most people are on - which provides little to zero leverage or cash flow.
Do you know what that stock and bond shuffle is - that seesaw?
Let's remind ourselves… that when money flees the stock market, it usually ends up in bonds. As demand for bonds goes UP, interest rates go DOWN.
Then, as interest rates go down, investors go back to stocks in pursuit of yield, and everything reverses. It's an ebb and flow of funds which often provides you with zero real return. That's how that seesaw goes.
So rather than get a part-time job, which is selling your time for dollars, get a few rental properties instead.
Whether you manage them yourself or you manage the manager - like I do, I manage managers… you've got the income stream of a part-time job with an asset that appreciates at the same time.
As time passes, the reason that you will feel satisfied is because you took strategic risk.
Now, to stick to the bank analogy theme here, a lot of people still don't realize that when you take your money to the bank, you are a creditor of the bank, and the bank is now lending your money out.
So, just think about what you're doing - well, you yourself probably aren't doing so much of this - you're probably a better than average investor since you're listening here.
But think about those depositors that keep a lot of money at the bank.
Yes, we know you're losing to inflation, but besides that, just think about what happens to your money this way.
What about a parking garage and your car? OK, when you park your car at a valet, the valet is supposed to turn around and park it in a garage.
The valet does not have the right to take your car and let an Uber driver go make money with it while you're off having dinner.
And then maybe they'll give you the same make & model back at the end of the night… and they stick YOU with the risk of having a problem with your car - or your money.
That's what banks are doing with your money when you park it there. It's like a valet letting an Uber driver use it and take risks with it without your knowledge.
What isn't FDIC-insured is… at… risk.
Well, what's the alternative to banks lending out the money that you deposited with them? Well, the alternative to the existing system is that banks, instead, could make money off of fees that they charge you.
How is it that you avoid paying fees to your bank right now, like you are? I mean, afterall, banks have capital expenses, technology expenses, and employee expenses.
If banks charge fees to you rather than profiting from the spread that they get on lending your money out, we could have a safer system.
But most people like the allure of fee-free banking, partly because that's what they're used to.
Banks used to have to hold onto a dollar for every $10 they had in deposits. That's also known as a 10:1 fractional reserve ratio.
Well, the risks of parking your money at a bank went up in March of 2020. That's when the Fed just COMPLETELY eliminated reserve ratios for banks.
Now, for every $10 they have in deposits, banks can hold zero dollars in reserve.
Instead of parking your money at a bank, you do the opposite. You borrow from the bank, pay them their 7% interest and invest it in "Real Estate Pays Five Ways" property that beats 7%. Right there's… your arbitrage.
Now you're using their money instead of them using your money - like the valet that you entrusted your car with that lent out your car to the Uber driver while you were at dinner.
So outside of inflation, why is it risky to keep your money parked AT a bank - rather than borrowing from them. Because, as has often happened this year, banks implode.
Why are they imploding?
Well, just a couple years ago, when banks lent on mortgages at 3%, they're only collecting 3% for 30 years.
What happens to the BANK when interest rates go up? No one wants to buy their 3% debt. The depositor (that's you, the customer) wants their money back - because they can go invest it for 5% elsewhere. That's a problem for the bank.
And if the government does come in to give a bailout of your bank - we know by now that they're more likely to do it if it's a large bank, like Chase, Wells Fargo, or B of A.
Well, more gov't bailouts of banks… means more money printing… which means more inflation, making our eventual problems even worse.
So rather than keeping too much money at the bank, BEAT the bank.
Now, earlier, I mentioned how having a glut of equity in your properties is like keeping your money in a rather illiquid bank.
That is a germane point - a pertinent discussion to have right now, because take a look at this. This is America's equity position, right now.
This is for the latest quarter ended. The Federal Reserve Flow of Funds report tells us that
U.S. households owned $41 trillion in owner-occupied real estate. Alright, $41T is the value of that US residential property.
Of that $41T, how much do you think is in debt, and how much is in equity? I'm just doing some rounding here.
$12 trillion in debt and the remaining $29 trillion is in equity.
Therefore, the national loan-to-value "LTV" right now is about 30%. That is historically quite low.
Another way to say it is that America's primary residences have a 70% equity position today.
Yes, 70% of the value of American homes is locked into that vehicle that's famously unsafe, illiquid, and always has an ROI of zero.
Homeowners today have an average of $302,000 of equity in their homes.
Now, as inefficient as that might sound from an opportunity cost perspective from homeowners.
There is, at least, a little upside to your neighbors having a glut of equity even if you try to opportunistically hold a low equity position.
This equity provides a cushion to withstand potential price declines, but also prevents any future housing distress from turning into a foreclosure situation.
Those equity cushions around American neighborhoods help prevent the down… drain in prices that we saw from 2007 to 2009.
I've got more for you coming shortly, including, has the Build-To-Rent concept that we've discussed on this show for years & years finally gone mainstream now that NBC news is discussing it?
You'll hear that audio clip and get my commentary on it.
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Again, you can sign up by simply texting "GRE" to 66866. More next. I'm Keith Weinhold. You're listening to Get Rich Education.
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Welcome back. You're listening to Episode 455 of Get Rich Education. I'm your host, Keith Weinhold.
Five weeks ago on the show, you'll remember that I reiterated why real estate does not pay 4 ways and does not pay 6 ways - it pays exactly five ways simultaneously.
Sometimes, amid uncertainty - and note that there's ALWAYS - uncertainty.
It never abates. People wondered when the Fed would stop hiking rates at a meeting. Now they did. People wondered when inflation would get down to 4 - now it has.
But those that worry excessively will still point to something else that's uncertain.
But in good times, bad times, and uncertain investing times, you might want to get more offensive. Other times, more defensive.
Real estate is both. Of the 5 ways you're paid, appreciation and cash flow serve your offensive side.
At the same time, your return on Amortization, Tax Benefits, and Inflation-Profiting all serve your defensive side.
Now, let's go and look at the sources - the headwaters - the genesis.
What are your 5 profit sources - for appreciation - it's the market. It's the vibrancy and diversity of the economic market that you bought in. That's where your appreciation emanates from.
For the second way you're paid, cash flow, it's your tenant and your tenant's job.
For the third way, your Return on Amortization - that ROA, that also comes from your tenant, since that pays your loan's Principal & Interest.
The fourth way, tax benefits, that's the gov't.
And the fifth way, your inflation-profiting, that also comes from the gov't.
Yes, that's the source, the headwaters for each of the five ways you're paid and knowing that can help you be mindful about what to pay attention to in your investment real estate portfolio long-term.
Yes, this is just with carefully-bought buy & hold real estate. Unlike most investments, if the value of your property goes down, you still get paid 4 ways.
So to review the 5 Ways Real Estate Pays SOURCES - where your money actually originates, it's:
Appreciation - from the market
Cash flow - from the tenant
ROA - tenant
Tax Benefits - gov't
And Inflation-Profiting - also from the gov't
Now, here at GRE, when we focus on your tenant and where your tenant comes from, you know, one word that comes up an awful lot is Millennials.
Why do we discuss Millennials so regularly? It's not because we're the first generation to embrace avocados or online dating over "in real life" dating or, it's the first generation to be raised in a world of participation trophies. Ha!
It's because, not only are Millennials the largest generation in American history, but they are in their prime household formation years.
Though there's a bit of dissension among demographers, many agree that Millennials were born between 1981 and 1996. That makes them Age 27 to 42 - they are prime household formation years.
BTW, you probably know of the generation after that, Gen Z. They were born between 1997 and 2012, making Gen Z age 11 to 26.
But do you know about the generation after that? That is Generation Alpha. They were born between 2012 and today, making Generation Alpha age 0 to 11.
Well, the Millennial homeownership rate lags that of previous generations of people that were the same age. So this is why you have such a deep pool of people that's driving demand for your rentals.
Millennials have the misfortune of being stung by back-to-back global crises.
When they were coming of age in 2008, many couldn't get a job during the Global Financial Crisis. Then the pandemic disruption made getting their independence pretty bumpy.
In fact, fully 18% of Millennials say that they plan to rent forever. Forever! That's up from 11% just five years ago.
Not just a few, but the MAJORITY of Millennial Renters have zero down payment for house savings. 63% of them have absolutely nothing saved for a house.
And in fact, another 14% have less than $5,000 saved - which is close to nothing. That is all according to a survey from Apartment List.
More Millennials plan to rent forever.
Now, I've done a fair bit of research on Generation Z real estate trends - again they're the age between 11 and 26. And there are a few more Gen Z homeowners than you might think already.
But the short story on Gen Z, just isn't that compelling. To distill everything I've researched, most Gen Zers want to own a home but few can afford it. Well, no kidding. That's not a very novel takeaway, but that's the REAL story there.
If Millennials are your current renters, then Gen Z are your current and future renters.
Now, I've talked to you a good bit about the "interest rate lock-in" effect. So many homeowners have ultra-low mortgage rates that they don't want to sell their home, and when they don't put it on the market, that further constrains supply.
Well, Redfin recently brought some new color to the interest-rate lock-in effect. They've shared some really interesting material with us.
92% of mortgage borrowers have an interest rate under 6%.
80% of them have an interest rate below 5%.
62% of these people have an interest rate below 4%.
And a quarter have a rate below 3%.
New listings of homes for sale and the total number of listings have both dropped to their lowest level on record for this time of year… and that is fueling homebuyer competition in some markets and preventing home prices from falling.
In fact, Redfin tells us that the national ASKING price for homes is the same that it was one year ago.
Sale prices increased most in these 5 metro areas.
Cincinnati leading the way at (9.2%). We've got cash-flowing Cincinnati property at GRE Marketplace. Miami (8%) not really a cash flow market there. Third-best is Milwaukee (8%), rounded out by Fort Lauderdale, FL (6%) and Virginia Beach, VA (5%).
They are the 5 metros with the highest appreciation.
Current months of national housing supply is still just 2.6 months - scarce inventory. 6 months is a balance market.
Homes that sold were on the market for a median of 28 days. That is the shortest span since September. There's a bit of a seasonal factor there though.
Now, when we talk about the paltry supply of homes since existing homeowners don't want to lose their low rate, it's forced more homebuilders to build - in order to make some inventory available.
It's made a good opportunity for you to buy these homes that are built for renters from Day 1, and rent it to a tenant yourself.
Now, I know that your life is more interesting than watching the NBC Nightly News with Lester Holt and then dozing off to sleep at 9:30 PM (ha!), so in case you didn't catch it, here it is on "Build-To-Rent" last week.
It really takes the perspective of the RENTER and why they want to pay your rent to stay in a Build-To-Rent home… longer than they do for an apartment. This is about 2 minutes long & I'll be back to comment.
BTR on NBC News: https://youtu.be/BXwTerRQWNo?t=954
Yes, that's the popularity of build-to-rent homes. Something that we've been discussing here at GRE, for, gosh, maybe 8 years now.
Like they said there, rents are on the rise. But they're not rising nearly as fast as they were 1 and 2 years ago. Rent growth has slowed for both SFHs and apartments.
I think that the assurance for prospective income property owners like you is that in your Build-To-Rent properties, you can have a reasonable expectation of high occupancy and low vacancy as long as you buy your SFRs in a decent market.
And see, more often than not, a builder is only going to build new, rental single-family homes if there are plentiful jobs nearby to support that.
So you can kind of crowdsource the due diligence that the builder did on what's demographically and economically feasible if you choose to add these property types.
Despite the build-to-rent properties added, today, America only has half as many homes available as 2019.
Compared to just a year ago, there are 5% fewer available properties today.
But, we've got available Build-To-Rent and existing income property here at GRE Marketplace. Yes, just create one login, one time, and get access to all national providers at GRE Marketplace.com.
But say you want a little help, a little coaching. Say perhaps you haven't bought property before, or you haven't bought one in a while, or you haven't bought property across state lines yet - since that's where the best deals usually are - or you just want to lean on a coach to bounce ideas off of as you're looking for your next investment property.
Well, in that case, you can rely on our free coaching service. That's at GREmarketplace.com/Coach
Our coaches don't blow the whistle at you for missing a play. You'll never find them as grumpy as, say, New England Patriots' Coach Bill Belichick. They're not that kind of coach. It's not the kind of coach that will ask you to start your morning with an ice bath.
And if you're new to real estate, there's no such thing as a stupid question with GRE Investment Coaches. No penalty flags are thrown.
To find that property that builds your residual income and pays you five ways, you can choose which coach you want to have help you.
Coaching is a completely free service to you.
What they do is...
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Learn your goals
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Find you the best off-market deals nationwide
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Find the property provider with incentives. (One provider recently offered 4.75% interest rates, another free PM for one year.)
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Help write your offer if you would like that
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Submit earnest money
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Navigate the inspection
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Interpret your appraisal
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Check your management agreement
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And just ensure a smooth closing day for you
Your Investment Coach can do more than this. If you prefer, they can do less than this.
GRE Marketplace is where the coaches source the properties. It is more like an organic farmers' market than a big box store. Property offerings change frequently.
Because there are limited slots available to talk with them through phone or Zoom, it helps if you've got your down payment and are ready to go.
Sheesh. If it were any easier, they'd even make your down payment for you.
Did I mention that it's completely free? To get started, choose your coach and book a time. Start at GREmarketplace.com/Coach
Until next week, I'm your host, Keith Weinhold. DQYD!