Why Real Estate Investing May NOT Be a Good Business 10 Years From Now…

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Well – I’ve got to tell you that I am in a strange circumstance with the statement which is the title of this article.  After all, I am a rather outspoken proponent of real estate as an investment vehicle and have been for years.  What am I doing – shooting myself in both feet at once?

Maybe I am, you decide; but, I have to be honest with you about what I see, and not all of it is rosy.  The real estate investment game was easier 10 years ago than it is now.  Financing was easier, but more importantly the Cash Flow was easier – and unfortunately, I see this trajectory continuing and as such I am sad to inform you 10 years from now this business will be even worse.

Let’s talk about this…

Let’s Agree on the Basics

Generally speaking, all of us agree that real wealth in real estate comes as a result of holding property long-term.  I’ve spoken to many investors, and even those who practice the disciplines of fix and flipping or wholesaling generally agree that the end-game is to hold property long-term in some shape or form.

There are two reasons why so many of us agree on this.  First of all, while investors can and do make a lot of money by utilizing all types of techniques techniques, in the end we want to retire!  But, when we do, we would rather the income to continue coming in – we want Passive Cash Flow.

You nubies out there – listen up:

Seasoned people understand that while business is about money, life is not.  Life is about freedom.  LIFE IS ABOUT TIME – the most priceless commodity!  As such, passive cash flow from property owned becomes important to us at a certain juncture in our careers.

Having said this, it would be wrong to say that equity is completely unimportant.  If our buildings appreciate in value, than we gain the option of bridging this equity in some way in order to acquire more building which will throw-off more cash flow.

So, as you can clearly see, the theme of Cash Flow + Equity seems to run through the entire life cycle of our investment objective.  As such, if it becomes evident that either one or both are under pressure or in danger, then it becomes necessary to admit that the entire business model may be in danger…

This, my friends, is indeed the case, and I am about to tell you why…

About Cash Flow

Cash flow is income minus expenses.  Are your expenses going up every year?  Mine are – garbage, water, sewer, property taxes, and don’t even get me started about the fire insurance – those guys will rob you blind and you have no choice but to let them.  All of the expenses are going up like clock work indeed my friends.

So, if the expenses are going up, then the income has to go up as well, otherwise cash flow suffers – right?

Question:      Can income go up every year?

Answer:         Sure, you can charge more rent every year!

Question:      Are you sure about that?

Answer:         Sure – as long as people can afford it…

Question:      Why wouldn’t people be able to afford it?

ANSWER:

Yesterday I took-in an application for rent.  This particular applicant works full-time, and her pay before withholdings is $1,300/month.  She earns a bit over $8/hour…minimum wage in my State is currently $7.70.

Now – you tell me how much rent this single mother can afford on $1,300 gross.  My rental guidelines stipulate income of at least 3 x Rent, in which case the most she can afford to pay is about $400/month.  Unfortunately, this places her and her daughter in the kind of neighborhood and dwelling that none of us would want to raise a child in. In her own words, she is “trying to get out of there as soon as possible.”

How much is my apartment?  It is $615/month.  So, why would I consider her application?  Because she has recently qualified for Section 8 housing subsidy which will pay for this apartment…

The Problem

The minimum wage in this country is such that a person working full-time can no longer afford the basic human dignity of a roof over their head.  And every time we talk about improving this situation businesses big and small revolt saying that they will have to pass the cost onto the consumer or go out of business.

I can certainly understand why a pizza chain can not raise the price of pizza.  The same very people who earn minimum wage are the ones buying their pizza, and they can not afford to pay $6 more for a pie.  And should the business have to eat this cost, then it may not make sense to be in business – I get what the problems are.

There are no easy solutions and our politicians aren’t even attempting to deal with the fundamental problems in our economy. What are those problems?

Do you know how much businesses spend on compliance with federal, state, and local regulations in this country?  Who knows, but I would be surprised if it’s anything less than $300 billion per year; likely more!  Do you think that this cuts into their bottom line?  All we are doing is take the money out of the economy in order to re-rout it through the government to put it into the hands of people who are then going to deploy it back into the economy.  Is there an obvious extra step there which shouldn’t be there, or am I wrong?  Not top mention that some of it gets “misplaced” in the process…

Do The Math

According to an article by Tami Luhbi published in CNN Money on February 27, 2013, “An estimated 3.6 million people were paid hourly rates at or below the federal minimum in 2012, down from 3.8 million a year earlier.”

For the sake of this argument, let’s just take this number to a cool 10 million people.  And further, let’s say that we managed to cut the capital needed for regulatory compliance by a third, and in doing so we freed up $100 billion of spendable cash flow in the private sector.  And let’s say that this newly found cash flow will be reallocated into compliance with higher federal minimum wage standard – what would we be able to raise the minimum wage to?

I haven’t done proper research cause I don’t have time for that, so I am likely overestimating everything – perhaps you guys can check this out.  But, let’s assume that 10 million workers are either below, at, or slightly over the minimum wage.  If $100 billion was deployed in the form of minimum wage to 10 million full-time workers, then each worker could earn an extra $10,000 per year, which spread over 52 weeks at 40 hours per week would constitute an increase in their pay of over $4/hour.

In the State of Ohio this would bring us close to $12/hr and monthly income of over $2,000.  In Ohio, a person could afford to live with decadency, in a clean, functional, and convenient rental unit (just like mine J ) without needing a handout.  And I have to believe that my applicant would much rather show her daughter that they can make it on their own – just saying…

Back to Real Estate

While we know for a fact that all of our costs have been and will continue to go up, how much confidence can we have that our rents will continue to go up accordingly in the environment that I just described?

Rents go up because people’s income goes up.  One can’t happen without the other…

So you see, the passive cash flow that we are all striving and fighting for is under pressure and drying up due to macro-economics every year.  Sure, there are zip codes in this country where this is not a problem, but most of us don’t live there.  And this is one of the reasons behind my thesis – real estate is loosing its’ mojo as an investment vehicle…

What About Equity?

When I refer to a “portfolio” of income-producing property, I am referring to those of us who want to own 50 units or more.  While I know that some people prefer SFR for their long-term holds, as the numbers go up it becomes increasingly difficult to manage a portfolio of this many units if all are singles.  As such, most people who will own 50, 100, or 500 units will do so with apartment buildings / commercial space, and not SFR.

Well, when we talk about equity what we are really talking about is building value, which in an apartment building is a function of income – the more the NOI the more the thing is worth to an investor.  That’s it!

Question:      If you can’t increase the income for the reasons discussed in this article, how are you going to build value long-term…see what I’m saying?

Conclusion

We have grown to believe that true wealth in real estate is accomplished by holding property long-term.  I believe that I’ve stated a case for why this belief, which indeed has been the reality in the past, may be in jeopardy going forward.  What are your thoughts?

P.S. – a bit of good news

Having sufficiently unnerved you, I must now tell you that as bad as things may get I believe real estate to remain the BEST opportunity for the foreseeable future, and here’s why:

LEVERAGE – we use OPM (Other People’s Money) to buy real estate and we use OPM to pay off real estate.  As such, having bought the property with nothing or very little out of pocket we are guaranteed to win, presuming we’ve bought the right kind if thing…

Thoughts?

Photo: Eric Constantineau

About Author

Ben Leybovich

Ben Leybovich has been investing in multifamily residential real estate since 2006. His area of expertise is creative finance. Ben works extensively with private as well as institutional financing. Ben is a licensed Realtor with YOCUM Realty in Lima, Ohio. He is also the author of Cash Flow Freedom University and creator of a cash flow analysis software CFFU Cash Flow Analyzer.

228 Comments

  1. Good article. A little scary title no doubt for many of us.

    Really hits on the importance of being able to raise rents and how important that is for your overall investment over its life. It really seems we are moving to a two tiered society of low skill workers earning barely min. wages and educated or skilled workers earning much more.

      • anthony cecchini on

        you have to take into account what people are going to school for. many of these students go for general business, music, physical education, and other areas of study which are simply NOT needed in the workforce. A general business degree is almost worthless… it has no place except for beginning your own business, which most grads arent willing to do. A business degree from an ivy league school may be worthwhile, but not from your average run of the mill college.
        If you pick your degree wisely, it is worth it. I made sure to choose a degree well worth it, and in the right position, can earn huge returns on investment compared to the time and money put into it. Many other people could do the same thing, but fail to research what lines of work are actually needed, prior to spending 100 grand and 4 years of their life pursuing an education.

    • I hear you on the economics of minimum wage income, but people in these situations will need to either work more hours (multiple jobs), or live with roommates.

      The ratio of 1 earner per housing unit is not a basic human right. Its OK to share a kitchen with someone else if necessary. I have a large investor friend who likes to rent to hispanics because they are willing to pool resources to afford rents, and he is more than willing to accomodate them.

      Or course, as you mentioned, Section 8 subsidies is another option.

      • Yes – but wouldn’t it be better if free market allowed for sufficient minimum wage so that we could get off subsidies… Subsidies cost our economy a ton and this money is not productive. There is a way of getting off of this juice and allowing private sector to organically run our economy.

        Thanks so much for commenting Bill.

        • “Yes – but wouldn’t it be better if free market allowed for sufficient minimum wage so that we could get off subsidies”

          If the wage wasn’t set by the Govt, yes I’d agree. Just reduce taxes and increase wages for everyone – especially the moms. If only it were that easy.

          But just raising the federal min wage means you have to pay a 16 y/o or 18 y/o with no skills and no expenses the same as a 30 y/o single mom who actually needs to pay for housing and a kid. And raising the min wage to $12 or $15/hr means that a lot of semi-skilled positions in low cost of living areas, like roofers, assemblers, maintenance people all of a sudden become min wage employees. The pay should be commensurate with the intensity of the labor required and the knowledge or skills necessary to perform it. Shouldn’t a roofer earn a little more than a burger flipper? I like to think so.

          The result becomes higher unemployment of the unskilled workers, who in turn need subsidies/welfare in order to survive.

          Maybe another solution would be to rein in the costs you say go up every year for landlords – insurance, taxes, etc. I’m having to switch insurance companies because my rates have more than doubled in 4 years.

        • I agree that this is a concern for the future of real estate investing, but strongly disagree about the minimum wage! Just like the market dictates how much we pay for an investment, the market determines what wages are paid. By your theory, which is nothing more than the same old tired socialist “Living Wage” why don’t we just make the minimum wage $50 per hour…..or $100 per hour, that way we can all raise our rents and achieve financial freedom sooner! Minimum wage is for entry level, low skilled positions, not to raise a family on. You start at minimum wage and develop job skills and knowledge and then you are more valuable in the market and can demand a higher wage. I agree that we have a problem with low wage folks, but we need to brain storm ways to teach them better job skills and how to improve their lot in life, rather than subsidize their lives.

        • Craig – we are subsidizing their lives man. And I wouldn’t be surprised if it’s costing us much more than it would to just let them earn the money. Besides, earning the money requires productivity, which taking a government check does not. It’s costing you either way – which way do you want it…?

          Thanks for jumping into this mess that I started Craig lol

        • anthony cecchini on

          I think people who earn minimum wage should not be given an opt to earn more. My rationale behind this theory is… would you want a physician, or nurse, or nursing assistant to earn nearly the same wages? this would diminish the benefit of pursing one’s education. More often than not, people who earn higher wages have worked for their position. There are scenarios in which people get lucky, or know somebody who may have helped them prematurely climbed the ladder, but these episodes are an exception. If we begin to put larger sums of money into uneducated people’s hands ( I am not saying that everybody who earns minimum wage is uneducated) we will run ourselves into a larger problem than we already have. Have you ever watched Idiocracy? The movie was meant to be a comedy, but has a lot of truth to it. If we put money into the hands of people who lack wisdom to disperse it adequately, our problem with simply become worse. The government does spend a lot of money on foolish things, but i highly doubt that the average minimum wage worker on a higher salary would correct this.There are plenty of opportunities for this said single mom to further educate herself. If she chooses to, than great, her and her child will have a more rewarding life. If not, than that is her choice to live in poverty. Yes, we should help them afford rent with S8 housing, but we should not provide the benefits of higher salary without the work needed to get there. Otherwise everybody would be a nursing assistant and we would have no physicians….

          Catch my drift?

        • anthony cecchini on

          PS i do love your posts though. I am totally not posting these to disagree. Your podcast was also very informative. I am simply adding my 2 pennies 🙂 keep the posts coming, you are a very wise man.

        • Anthony,

          I don’t disagree, but I think you’ve misunderstood. I am not suggesting that anyone’s salary should go up above what it is simply because theirs is “unfairly” low – nono. Life is not fair and that’s a fact – I am cool with that.

          However, there needs to be an entry point into the job market. Some people think that if you are only “good enough” to earn minimum wage, then you deserve to live like a sub-human. I disagree – I think that if you choose to work hard, stay off drugs, and do the best that your mental capacity allows you to, then your wage should be enough to buy human conditions; clean, safe, functional. No bells and whistles, just the basic necessities. That’s what I think the minimum wage should afford – basic necessities.

          It currently does not. A lot of people are pissed. They work hard and still can’t live without a subsidy. That is troublesome going forward –

          Thanks for following my stuff indeed Anthony!

        • anthony cecchini on

          I think I did misunderstand. That is my bad. I would love for everybody to be able to make a great living. A large amount of my hard work is to be able to improve not only my own, but other’s lives as well. Your proposition for a minimum wage which would provide others a modest, but livable lifestyle is perfect.

          I think this pertains to this topic since the subject matter of your article includes the state of the economy and I will try not to rant.

          A major flaw in the country is in the free handouts we give people via welfare, foodstamps, and medicaid type programs. Some of these are essential for the care of children, but the amount of money wasted on these programs is insane. We essentially give people on these benefit plans a better lifestyle than the average worker.
          Medicaid patients have better insurance than almost all blue (and many white) collar workers, with no out of pocket expense, time or money. Many food stamp programs provide higher funds than most people spend on food. I can tell you people on these programs live at expense rates 4-5 times what I did throughout college, eat much better, and have much better health insurance than I did, without having to take out loans to pay for it, or passing on the cost to family members.

          we cannot provide these programs to people at the rate we currently do. Nearly all of these people could work, but choose not to, since it provides a much glamorous lifestyle than for say flipping burgers, and without the 40 hour workweek commitment.

          This correlates to your article since it is a major money sink which provides people with a no effort way to live, takes out of the working man’s pockets, and cuts into my bottom line since the government doesnt reimburse much AT ALL for medicaid patient care…..

        • Ben, a lot your points are valid, but raising the minimum wage is not the answer. IMO, raising the minimum wage will just devalue everything more where you are at (which you definately do not want) and that entitlements w/ follow suit, leaving w/ the same problem w/ everyone above feeling the negative effect. Instead of raising rates to give people an incentive to get off the coach, make getting the “free money” not free. Require work to get a check and issue food not stamps. People will be motivated when they can do something easier and get paid the same or more and entitled people Dont want to someone picking their food for them!

  2. Ben,

    Common sense from another angle. I’ve never been able to rationalize the build equity for the sake of equity … I don’t run my other businesses like that, so why would I do it with my rental properties.

    With the possible exception of ensuring you are not upside down on a given property {though, I would also argue that you are only upside down if you wish/need to sell}, we build equity only where it increases cash-flow.

    In Canada we have been facing income stagnation since the 1980s … Middle class here is more and more an illusion to which folks subscribe and prop-up with credit. Like it or not, in our current {broken?} economic system wealth trickles up, not down … the goal is to make certain you are above the waterline w/r to the direction of the trickle.

  3. I think that as the middle class declines there will be a lot of people down grading their living standards. As landlord we will be catching people as they are sliding down the economic scale. I know that sounds depressing but it really does look like that’s how things are heading.

    • May be not Shawn – this is a demographics problem as much as anything else. As the baby boomers get out of the way we should see an upward mobility take place to some extent. The trick is to give the boomers enough to retire on – what do you think all this stimulus and reflating of equity and re markets has been about… ?

      Let’s see how she plays out 🙂

      Thanks so much!

      • Ben, very interesting comment on demographics. I’ve read in several economic pieces recently that the post- WWII economic boom in the US was largely driven by population growth. More people need more things so more jobs are created to produce the growing number of things.

        This does not portend well for most developed economies where growth rates are falling (or have fallen below the replacement rate of 2.1) and are not immigration friendly. The poster child for this is Japan, but includes Northern Europe, Canada and even China as the effects of their old one-child policy play out.

        In the US there have been concerns that the same falling birth rates would eventually shrink our economic capacity too but a recent piece by Bill McBride over at Calculated Risk shows that the ‘aging of the population’ isn’t slowing down the growth of the prime earning age groups. Within the next five or ten years those under forty will be the largest groups in the US,,, just like back in the good old baby boom days. They will need things and places to live so they cycle will have to repeat. http://www.calculatedriskblog.com/2013/08/the-future-is-still-bright.html

        • Very interesting Giovanni – thanks for sharing indeed.

          Yes – the demographics will play a large part moving forward. I am not smart enough to predict, but the currently raging immigration debate will play a substantive role in how things unfold…

          Thanks so much for your thoughts Giovanni!

        • Ben I agree with you about predictions but would rephrase the statement to read: “…too smart for prediction.” As Niels Bohr quoted: “Prediction is very difficult, especially about the future”.

          Also I encourage everyone to have a look at the animated chart of US population by age from 1900 through 2060 at the bottom of Bill’s post linked in my comment above.

  4. Good piece. I guess it boils down to the question, Where do you see the US in 10, 15, 20 years? My own view is that the US is being managed into third world status with an enormous mass of peasants at the bottom and an authoritarian/managerial class regime at the top. I’ve done extremely well with my real estate holdings, but I recognize that this situation won’t and can’t last forever. At some point I will sell and move abroad.

    • Doom and Gloom huh William?

      I couldn’t disagree more and I’m about as conservative as they come. One simply has to take a look at new technologies like fracking, 3-D printing and cloud computing to be optimistic about the future.

      Democracy and capitalism continue to lift millions out of poverty and into the global middle class overseas.

      Everything is cyclical including politics, compliance, regulations, etc

      The one things that is not is we (humanity) are moving forward not backwards!

      • Hey Trevor – whatever you’re on, I want some man. I see down-trends everywhere but oil. I am about as conservative free market as they come, but there is a big difference between capitalism and crony capitalism; between the strong survive and Citi; between earning a minimum wage and minimum wage not being anywhere near enough to pay for tooth past; between free market and Wall Street.

        Not everyone can or should attain college education. But, now we are in a dangerous place where not working pays more than working. I used to blame exclusively the liberal mentality for creating this avenue, and certainly still believe that to be a problem. But, someone choosing to do it the right way has to be able to be rewarded with a minimum wage that support life – if not, we will have a revolution in this country. This is what my article is about. Thoughts Trevor?

        Thanks for leaving a comment!

        • Ben, you cant afford to “reward” everyone. That is what got us to this place. They need to add a spot on your tax return. All the libs that support entitlements, check the box and you will be charged your portion to help “those in need.” Before I get destroyed on here, I just want to mention that I know there are lots of people that need help, but the current system is not the answer.

        • Haha Pete – you are a funny guy. I guess my comment to you is this –

          If you agree that there is a structural problem, what solution can you propose 🙂 We need solutions

        • Ben,

          It is incredibly easy to get sucked into the doom and gloom mentality. Are things perfect? Of course not! But are we headed into some hyper-inflation bubble where equity prices have been falsely supported and about to soon capitulate? I think the answer is no, even after the Feds decision today.

          As a conservative free market capitalist I confidently state things are getting better, not worse in spite of current policy and government intervention.

          Check out the following video for a better perspective:

          http://www.youtube.com/watch?v=jbkSRLYSojo

          The four most costly words in investing.. “This time is different” -Sir John Templeton

          Thoroughly enjoy your posts, keep it up!

        • Hey Trevor – that is a pretty cool video. Thanks for that. And yes, I would not want to live anywhere but America, and we are fortunate to live at a time that we do. Good perspective man!

          Thanks.

      • Yes, Trevor, everything is cyclical–including the lifespan of civilizations. This isn’t doom and gloom. It’s just a recognition of reality.

        Many of us who own apartment buildings like to joke around about being “slum lords”. Given the Detroit-like future of the US, one day this may be literally true!

    • William – it is certainly a “though-provoking” time to be doing this and many other entrepreneurial activities. But, some of us wouldn’t have it any other way – we just adjust the sale to fit the direction of the breeze…

      The jury is out Bill 🙂

  5. Ben, if I was just starting out, I would stick to flipping. You really hit the nail on the head #%$^*. For many years enjoyed buying, rehabbing and renting out properties which allowed me to retire early. Nowadays with cost ever rising and cash flow shrinking, not as much fun. A big investor on Bloomberg this morning said that Texas was a really hot market, I don’t live in Texas, I live in Hooter Ville. Renters pays all my bills, mortgages and some cash flow, key word is RENTERS! Properties setting empty don’t pay anything, nada, zero. If mortgages and qualifying were easier, would be selling some. Ben, thanks a lot for the wake up call:(

  6. Jim, I’d say flipping is too difficult for a beginner..Having been down that road, I know whereof I speak…I’m surprised more people don’t focus on tax liens.. Back in June, a friend of mine scooped up a 20-plex comm. building for cheap ..I missed out on the sale and will have to wait til next June..We’ll disagree on this but imo, flipping and trying to assign contracts is for the birds…and I don’t mean bird dogs lol

  7. I generally really like all of your blogs (including this one), but this time I have to disagree. I may agree on the low end properties < 25K but I just don't see rents going down for the majority of properties in the future.

    One counter argument….in states like Pennsylvania, and close by NJ, the real estate taxes alone will keep going up, which ends up raising the barrier for entry to home ownership. As an investor we simply pass those costs on to our tenants.

    I do think it is hard for a single person to qualify for a mortgage and possibly even rent. That said, if you can't afford it you need a roommate to help split the costs. This is a reality and unlike years ago, I believe we have more dual-income families that prior years.

    Keep up the great work, I really enjoyed your podcast on BP and all of your blog posts too.

    • Or, Chris, States will have to go bankrupt because there is a limit to how high they can push those taxes. I appreciate your logic, but I think that your conclusion is the exact opposite of the reality we are heading into. Saying that rent will continue to go up because landlords will be able to pass on our rising costs is counter to reality in my opinion. We will only be able to do that so long as incomes go up, if not we will eventually hit a wall, let properties go back to the bank, and quit paying property taxes – hello State bankruptcy. Thought?

      • Full Disclosure I know little outside of Pennsylvania.

        Property Taxes are a huge hot button issue for PA. It is possible that someday (next 3-5 years) they will be eliminated, and replaced by state income tax. My fear is that owner occupied will be eliminated and not rental units. That said I wouldn’t base a purchase decision on any political guess as I think nearly all the politicians are worthless.
        But it’s possible they would be eliminated all together which would be a huge boom for PA real estate I would think.

        People in NJ would already argue (correctly) their property taxes are already beyond belief / what someone think is reasonable. I think on property tax issue we are at the tipping point. I suppose it could go either way.

        I look at Detroit and think…hmmm thats really not out of the question based on unfunded pensions. All that said, people have to live somewhere, we aren’t a 3rd world country. You may have more trouble finding the ideal credit worthy tenant but their will always be the need for rentals.

        • Yes – people have to live someplace Chri. This is why all said and done RE is likely the best chance any of us have to create financial freedom and wealth 🙂

          But, the headwinds are real and significant…

          Thanks so much!

      • I just want to continue the thought, for one home owner who have decided not to raise the rent that would mean bankruptcy, I agree. That property would get resold and another owner would rent it out for a higher rent. That’s the only way to go. There are more people in the US every year, just by taking into consideration average population growth and immigration. It means that each year there are more people renting than in the previous year. If you have more demand than prices for everything including rent would raise, regardless of the minimum income (actually minimum income would fall or stay the same with raising demand for jobs, especially if business owners choose to hire illegal immigrants). There will be always someone who can afford, just because they can work 2 jobs, or family can help them pay, or they can split the cost with others. Consider this, US is one of the rare countries in the world that can afford living on one salary, majority of other countries cannot afford this.

        • Other countries do not allow gun ownership, due-process, protection of property ownership, and many other things Galya. I didn’t come to America because I wanted to go somewhere. I came to America because it is the greatest civil society that ever was. Too much regulation in some areas and not nearly enough in others – that’s our problem 🙂

          Thanks so much!

      • I agree Ben. Just look at PG county in MD. They got greed w/ there taxes, dramatically increasing the tax rate in the county and it created a lot of sales and a major loss in property value which just increased their problem bc they didnt understand there was a limit on what they could expect the people to pay. Crime and corruption created the same mess in Detroit (although like most of the midwest, creates a tempting environment to rent well).

        • Hey Pete,

          People in government don’t understand basic principals – What establishes value in most municipalities is affordability, which is a function of carrying costs. You increase taxes and values have to go down all things being equal…

          Thanks so much!

      • Interesting discussion on raising rents. One rule of thumb that many professional property managers swear by is 3X rent. That is the prospects pay has to be three times the monthly rent to have a decent chance of being a good long term tenant. Said another way, rent can be no more than 1/3 of monthly income which is referred to as the ‘rent ceiling’.

        Property owners can only effectively raise rents (even when passing on costs) up to the local rent ceiling. Once above that tenants will have to ‘bundle’ together to afford rent and this increases wear & tear, driving up maintenance & repair costs as well as CapEx… and wear and tear on the property manager/landlord from having to deal with overcrowded tenants.

        • Yeah, but this is only a good rule of thumb. Sure 3x the rent might be good in Michigan or Ohio where you getting somewhere around $800-1000, but if you are in a place like Kingstowne, VA or DC it is much harder to find people making 3x the rent on townhomes renting for 2000-2500 a month.

        • Ben Leybovich

          Yes – but this begs the question. What business do houses have renting for $2,500 if people earn $4,000. What market forces justify this level of rent? Could it be that RE is inflated…

        • And how sustainable are rents and/or the rental market overall if your tenants are far above the rent ceiling? 3x rent is used by many (if not all) professional property management companies because according to their experience with many, many tenants in many properties across the country that’s what it takes for a prospect to become a good, long term tenant.

          Remember 3x rent is based on gross pre-tax income. Since most employees take home 2/3 of their paycheck after taxes, 50% of their take-home income will be spent on rent. Everything else must come out of the other half; food, utilities, gas, maintenance and repairs on the car, daycare, clothing, tuition, books and that’s before any goodies like cable tv, parties and travel.

          If a tenant who’s in the property at only 2x suddenly needs a new transmission or has a medical issue that isn’t covered by their insurance where is the money going to come from to pay for it? That’s how good people become bad tenants.

        • I agree that 3 times the rent is a great estimate to use, but there are other factors. Ben, you are using an extreme example that is not at all what I am saying. To clairfy my point, you cant convince me someone making $1800 a month will always have an easier time paying $600 then someone making $6000 a month paying $2200. It all depends on how well they use there money, but the person making 6k+ definately has a better opportunity to be able to afford the rent. The point of all of this is sometimes it might not be by the book, but if you look at everything and it makes sense AND is putting money in your pocket, that is really all that matters. You cant predict the future, only look at the past and watch the trends.

        • Pete – there is a big difference there. Someone making $1,800/month does not have the option of tightening their belt and cutting fat – there’s no fat there to be cut. This person is in trouble specifically because the cost of life is greater than their income-potential. On the other hand, if someone making 3x as much is having problems, then it’s more due to their behavior than the market, and there is room there for them to make other choices… If the best someone can do is the bottom of the barrel it is quite different from someone being at the bottom due to their behavior and choices – makes sense?

  8. iI Ben,

    Loved the article and the topic.Funny, as I started reading I did not look at who authored it and about an 8th of the way down based on the style of the article I immediately thought about you and thought this was your article!! 🙂 This is something I struggle with daily as I have various units all with different lease anniversary dates. As much as I would like to make specific rental increases across the board come renewal I simply cannot do that. I find myself looking at the specifc tenant and if I think they can afford a rent increase or if it will cause them to want to move out… Kind of a delicate balancing act so to speak…..

    Living in NJ yearly tax increases are not uncommon to be 200, 300, 400 dollar hikes and thats just the taxes not to mention the insurance hikes ESP. this year due to the 2 bad storms we got hit with the last 2 years! That being said these increases are not even to create more positive cashflow, they are just to keep up with expenses like you said more times then not. And the scary thing is if you let say a great a tenant go a few years without increasing rent when it is time to increase the amount is usually substancially higher that you have to increase to “catch up” to the rising costs that have continued to increase on your end….
    I have begun to invest a large part of my + cashflow into quality dividend paying stocks this way to create more passive income and diversify my portfolio of passive income. Because as I get older I would like my passive income to be well, more passive then it is with Real Estate.

    But at the end of the day you are right in saying if people cannot afford to pay rent that covers your expenses at the VERY least and hopefully then some (which I have come to expect) then I Think we are in trouble.

    The one good thing that could be mentioned for us long term investors that brings some good news is at some point these investment properties will be paid in full (via OPM) at which point you have vcarious options IE. continue to rent out with a large increase of monthly cashflow or sell and cash out for a nice chunk of cash to be used for another investment.

    thanks for a great eye opening article Ben!!

    best regards,
    Chris

    • Haha Chris – thank you much for following my stuff. You made my point eloquently for me. It is getting tight out there, aside for a few pockets. I, frankly, did not intend to suggest that it is bad out there, just that it’s worse than it used to be. And considering the trajectory, if I were just getting started I would be concerned…

      Thank you indeed Chris!

      • Hey Ben, appreciate the article, very informative. I guess in all you are saying that while rents are continuing to creep up to cover the investors expenses, minimum wage is stagnant for the time being. I would believe if that trajectory continues, people will undoubtedly make it a standard practice to “pair up” and/or get multiple jobs until they can go back to school to get a better job, or even create businesses. I believe that all the underdog tenants out there will eventually adapt because the bottom line is, people instinctively will make a way.

        • I know Adriel. But, America is the beacon of everything that is good. It has always been and it still is. If we end up a country where people have to room together to afford rent, then America will be no different than USSR that I ran from – people did and still do that there. This is not a solution. We have to do better than that.

          LOL as I write this because I am typically so hard Right on all this stuff it’s not even funny. But, I want to pass a business over to my kids and I am worried. Time to bring back the “passionate conservative” attitude and allow people t make minimum wage that is more attractive than the government check!

  9. More and more they aren’t just covering the lack of living wages by using credit.

    There seems to be a huge jump in the cheap properties that have been picked up in the last 3 years, cleaned up and rented at the max rate using programs like Section 8 and sold off to others based on that cashflow. Which could dissolve under Congressional whim at any moment.

    Add in the number of retiring boomers who can’t sell the big home in the suburbs as the next generation increasingly wants to be downtown and is already saddled with a mortgage payment’s worth of student debt to pay off – and a huge increase of hedge fund owned rental properties that can’t possibly be managed even as poorly as they did the slice-and-dice mortgages.

    10 Years seems pretty optimistic at this point. I’m not interested in anything that requires me to accept less cashflow today in return for any mythical increase somewhere down the road. Totally different rules of the game than it was 10 years ago.

  10. Another facet of the economy is the continual migration away from manufacturing jobs to STEM jobs. The days of high paying factory jobs are gradually being replaced by automation or moving them overseas, while Technology and science jobs are taking their place, albeit not on a 1 to 1 ration. This shift creates a gap the educational requirements make it hard to transition from one to the other, and so folks in these manufacturing jobs don’t have the skillset, and end up actually taking an income cut to survive. This has a cascading effect on the economy. You can no longer sustain a family on a high school education, and the tie between education an income will become more pronounced. the haves and the have-nots will be split along those lines. Hardly any job these days doesn’t require computer knowledge of some mort. the bar is being raised, which is creating, in part, the gap increases we’re seeing.

    Eventually education will catch up, and the bachelors will become the new HS diploma, but in the interim it’s going to be a rough road with the middle class continuing to disappear.

    • The middle class is an invention of the politicians – it is unreal, unnatural, and unsustainable in the long-run. But, all of our businesses are based on it – that’s the problem. Will there be enough steam in this engine to last for you and me; this is the question Chris…

      Thanks so much!

  11. Great article Ben.

    As both a seasoned investor, and a mother with several children who have graduated from college I know just how tough the market is right now, and the implications it will have for the future of our economy going forwards.

    People in my age group often like to demonize the youth as lazy, incompetent, not willing to work hard etc. There is some truth to that, but the glaring issue is the number of jobs created and tuition rising 400% that of inflation. The debt makes it difficult to get married, buy a house (flippers) and raise a family. Its a tough market and its going to have far reaching implications.

    The depressed wages will make it more difficult for rental units moving forward as well as Ben pointed out.

  12. I agree that costs continue to rise which is why I attempt to bring out efficiencies where ever possible in my properties. That starts with getting a great price on a property that needs work amd is discounted as such. Next is going about that work and improvements in a cost effective manner.I must create value in reality and in perception of my prospective tenants. I put money into splitting utilities so they are all in tenants name as well as efficient furnances and a well insulated home. If I can lower my costs I can undercut market rents just a bit and still manage superior profits.

    I do worry about folks that jump into Section 8 as it seems just a vote away from losing funding at any minute. Even a small disruption is worrisome. I also want my tenants to have the tools available to manage their money as well as possible. I give book recommendations and advise as well as I can on specific issues. As a matter of fact, I recently signed a new tenant up for a 9 month lease with a higher security deposit. I told them if they cleared and paid off an old utility bill on their credit report I would refund $200 of the security deposit at lease renewal time. It does not benefit me too much but it will assist them a great deal.

  13. Very thought provoking article, Ben, I always enjoy your writing. Some thoughts:

    The reason I started looking at real estate is because of concerns over the economy long term. People need places to live, housing is important. Investing in areas with strong economy / jobs / low taxes is attractive. We need tenants who can afford the housing who have solid income.

    On minimum wage, it’s not really meant to sustain a family. Minimum wage is entry-level, i.e. your first job, for teenagers, or part-time, or as a second job. The idea of minimum wage is a baseline to start at, but it’s not supposed to be not where you stay forever. Experience, attitude, dependability, all should lead to greater opportunities for people. It is hard for people now. I would like to see people get paid more through promotion and opportunity and business growth than forcing the minimum wage higher. Workers are supposed to gain skills, experience, confidence, reputation and grow as people to higher levels and greater compensation.

    In addition to real estate, I have been looking at the stock market, which is on a tear, and also won’t last forever. My desire to increase our family’s resources is precisely because I don’t want my kids to struggle and suffer if things get a lot worse.

    Side note: Over the past few days I have been watching a documentary about the American Dust Bowl, a devastating agricultural real estate “bubble”.

    Best wishes and good fortune to all.

    • We are subsuduzing everything and everyone – it’s sick Karen. This leads to bubbles and busts. Here’s the problem with minimum wage – as our economy transitions more and more into high-tech, more and more people will be “demoted” out of the middle class and into unskilled / low skilled minimum wage. NOt everyone can go to college.

      This means that unless we, as a society, figure out a way to allow minimum wage earners to “live”, we will fall! Taxes will go up to pay for these people’s subsidy, and eventually will bust.

      In my opinion, it is a lot easier to find ways to drive minimum wage up to a level which support life – thoughts?

      • Hey Ben, there are many jobs that do not require a college degree, but many of these jobs require training, study, practice to develop and refine a skill set. You know that. College isn’t the only place to learn about technology, either.

        Artificial price and wage controls hurt people, limit freedom and reduce opportunity. That’s not the right direction.

        • Hey Karen – I love a spirited discussion, thank you. Here’s my point:

          1. We are backstopping the banks and their shareholders.
          2. We subsidizing the middle class by reflating the market and their 401k
          3. We are subsidizing the middle class by reflating RE and their Net Worth
          4. We are subsidizing RE investors by keeping rates artificially low
          5. We are subsidizing the farmers, energy, green, etc.

          What part of our free market economy is not being backstopped and/or subsidized by the tax payer Karen? We are picking winners and losers every day of the week. Everyone wins except those earning the minimum wage – this can not last. They need to live or we will have the French Revolution all over.

          I am about as free market as they get Karen. And this, to me, is not about “fare”. Life is not fare and is not supposed to be fare. Some will always be better of and they deserve to be. But, we have to re-structure our economy to be accessible to the minimum wage crowd – not the asses that sit at home watching TV smoking weed and collecting government checks, but those who are out there trying to make it. Like the tenant at the center of this article…Thoughts?

        • Ben, but…. look where this is going… aren’t you suggesting that your potential renter’s wage to be increased by government minimum wage policy so she can put more rent money in your pocket? Is that a “landlord subsidy”? or am I missing something here? 😉

        • OK, more seriously, we can look at history to see what types of economic (and social and education) programs and incentives have truly benefited our economy, lifted up the middle class and reduced poverty. Unfortunately, talking here doesn’t change a thing. Personally, I try to vote right and support the values and standards that set people up for success.

          Gotta lot of work to do Ben, it’s very nice talking with you and thanks again for the conversation. These are important topics for people to consider.

        • Of course it is Karen a landlord subside – but there are major advantages to this:

          1. Tenant feels “better” about “making it on their own without a handout”. This equals to a healthier society.
          2. It is easier to find qualified tenants = easier to cash flow = more incentive to buy more units. This leads to more purchased equipment, more contracting, more property taxes, more economic impact.
          3. You can’t up the minimum wage without lowering inefficiencies elsewhere. I contend that where this needs to be done is by limiting regulatory compliance costs. Good for growth.

          Thoughts?

        • You are right Karen. Our Section 8/Food Stamp government has created too much reliance and slothfulness.

          I was talking with the concrete crew next door (3 men + the owner) and the (working) foreman of the 2 man crew was making $23 an hour which required no college degree which I thought was not a bad wage considering most of the skills could be acquired with 2-3 years of OJT.

          The government is the problem making it too easy to slide by with little effort… IMO.

  14. Jeff Brown

    Gonna stay away from the third rail here. 🙂

    What I do wanna stress though, is that OPM is likely THE most abused concept in the investment universe. The Rothchild’s use of the principle is on one extreme, i.e., excellent execution. On the other extreme are real estate investors who simply don’t or won’t see what history has to teach on the topic. (I’ve been rereading a book I read last year about this. Thanks again, Dave.)

    Next month marks my 44th anniversary in the business. I work by choice, cuz I’m an addict. 🙂 What I’ve seen a few times — and will again — is highly leveraged investors watching their cash flow disappear faster than they can watch it happen or apply any sorta financial tourniquet. The last such episode wasn’t all that long ago, the early to mid 1990s. Even in high employment regions like SoCal, the double edged sword of skyrocketing vacancy rates coupled with plunging market rents, saw huge numbers of the OPM crowd disappear almost like steam.

    What’s almost never said is how much at risk highly leveraged investments really really are. When the market eventually drops the hammer, and it will, given time, the ultra leveraged investors have nowhere to go, but away. Sad, but savagely true. For the vast majority of long term investors, extreme leverage/OPM works perfectly ’til the day it doesn’t.

  15. I just got a new job paying just over 30k. I’m very glad about it but was shocked when I followed the front end ratio rules that banks use. They want to see you not spend more than 26% of your paycheck on your housing. What this means for me is that I’m stuck renting in probably the bottom third percentile of rentals. I simply cannot afford, according to the banks, the housing I would prefer. Its frustrating!

    • Wow – last time I looked (years ago) Housing Ratio was 28% – I guess they took it down a bit. I wonder if the DTI is still 36%, because if it is, what the banks have done is realizing that everything besides housing costs more they reallocated 2% to those other items by lowering the housing component of the DTI.

      It’s like saying – people like stakes, but stakes are too expensive for most so we are going to expect people to switch over to chicken breast. What’s the big deal – it’s almost the same thing…

      This as opposed to fixing the problem of affordability… our government (and banks cause it’s one and the same) at work for you!

      Thanks for your comment Steve.

  16. I would point out that the single mom with 3 kids working 40hrs at min wage does make a good living wage, but it’s based on entitlements. Lets say she brings home 1,000/mo. Her portion of the 525/mo rent is likely 180 thx to sect 8 (18% of post tx income). Her electric bill is 20/mo no matter the usage thx to an income based assistance program, nat. gas bill similar. She will receive a combination of child support / food stamps for groceries of around 400-600/mo. She will pay NO federal taxes, and in fact she will receive a 3,000 to 5,000 bonus every spring thx to child tx credits, earned income credits, etc. They have a free cell phone and their medical insurance is 100% free through medicade. They can go to school for free or cheap because of programs. Child care is free or reduced. Kids lunches at school are free. I have renters living pretty darn good on min wage! They have TV’s that look like a drive in movie theater, cars/trucks that are decent, top tier cable/dish packages, etc. Their lifestyle is often good at min wage, but it all hinges on entitlement programs that could (and should) be reduced or cut at some point, then it will get interesting!!

    • I agree with everything you’ve said, but I disagree with the conclusions. Let’s think this through:

      The poor in America are actually better off than the middle class. The middle class is raped by the insurance, taxes, you name it every single month. The middle class carry the load in this country, and they have figured out that it’s a lot easier and almost as lucrative to live off of the subsidy – thus the middle class is disappearing. Those of us that are trying to hang on are really feeling the brunt of paying the poor’s bills…

      How long can we do it Dave. Theory is a convenient thing because it causes no action. reality, though, is that fewer and fewer people are working in our country. The right says – cancel the subsidies because they incentivize bad behavior. The left says – hike taxes and pay more subsidies. I am more on the right, we should limit the subsidies, but we have to have a workable plan for allowing those people to earn enough to live on…

    • I think this is overstating the case. First, most minimum wage jobs aren’t 40 hours. They’re closer to 30, and the schedules vary from week to week, making it more difficult to pick up a second job. The wait list for Section 8 right now is enormous; even those currently on the program are seeing their assistance cut. Around here, if you’re not one of the first ten or so people in the waiting line for heating assistance at 5 a.m. that week, you’re out of luck. She might get child support if there’s an employed father, but that’s often not the case. Her free cell phone comes with 250 minutes for the month – and having a phone is kinda nice to have if you want to keep your job. The children generally have health insurance through CHIP; she, however, probably has none. This may or may not change with the Affordable Care Act, depending on where she lives.

      This isn’t to say that there aren’t people who abuse the system. There are. But there are plenty of people out there who are one big bill away from disaster. For every anecdote that you can pull out of someone taking advantage of subsidies, I can bring up one of someone who has suffered greatly through no fault of their own.

      Given that if you’re living in poverty your health is poorer, your lifespan is demonstrably shorter, you’re subject to a host of social ills – it’s not exactly living the life of Reilly.

  17. Just an excellent article and comments. I have had 11 rental properties with a partner that manages them for about the last 5 years. The last 2 years I have cautiously purchased 3 properties sub2 as rentals for myself. I understand the risk and personally will only buy with equity and will not leverage what equity I have. As a matter of fact, I will accelerate the pay down of the debt if possible. I would rather manage 15 paid off rentals at some point than 50 spitting off $300 a month, but that is just me. Jeff Brown has written some excellent articles concerning cash flow and using other peoples money.

    Any way the real reason for my comment is the comment that was made “it pays more to not work than work”. This is the reality of the mindset in this country, and I am amazed at the people that think it is so cruel to cut back entitlements. This could be long and boring but I want to give some real world examples of this mentality I have experienced just in the last 2 weeks, yes in just 2 weeks.

    I have a house I just acquired in a somewhat lower rent area but a very nice house and the micro area is mostly well kept. I wont even go into the details, but needless to say over 75% of the people calling about the house are on some sort of assistance. 75 freakin percent. I was shocked by the number of single mothers with children with 100% housing with no job and no child support.

    I was knocking on neighbor’s doors around a vacant house last week. On man saw me poking around and came over to ask what I was doing. After the typical investor/neighbor conversation I handed him a card and mentioned “if you ever decide to sell give me a call” He proudly raised his beer and told me he is expecting over $100,000 in back disability he applied for and went back to mowing his lawn. Oh the house he was living is was his elderly parent’s house.

    And lastly, after getting a house under contract, I was sitting at the table of the seller discussing the particulars of her moving etc. Out of nowhere she says, “I just turned 55 so I now qualify for (cant remember what type of disability) ??? disability and I cant have any money come to me. How can you make it so someone else gets the money but I am protected so they cant take it” I have been meeting with this lady for two weeks and trust me she is fine at least as far as I know.

    People’s attitude treat disability and entitlements like it is a right of passage and they are entitled.

    • Gary – I am with you man. I’ve dealt with this for years. Government is the most inefficient vehicle to accomplish anything and we need to get off the juice. But, there needs to be another avenue available to those people that we kick off. I personally know a bunch of college grads who can’t find work – forget about minimum wage people.

      Look – there are a lot of bad apples here, but not everyone is. I agree with the disgust you feel for those who abuse the system – me too. Not everyone does though, and certainly there are huge structural problems in the economy…

  18. Ben I totally agree with your position here, and it is one that I’ve been postulating for some time now. But I want to add something that it killing more landlord than any other and that is Taxes and Insurances and there is no stop to that.

  19. The point that wages have not kept up with productivity is the main issue here. Profits are up though, and it’s not that the cost of doing business has escalated so that companies can’t afford to pay more. I would posit that the decrease in privately held companies and the corresponding increase in corporate entities (with the need to pass more money on to their stockholders) is a big part of this. This creates a downward pressure on wages that is very short sighted, but the companies are stuck in a cycle of having to pay out more and more profit to keep shareholders happy.

    http://money.cnn.com/2013/03/07/news/economy/compensation-productivity/index.html

    I agree that this will become a big issue in the future. I don’t agree with the “blame the poor!” mentality. The current economic situation really effective at create poor people. And that is what is dragging the system down. Remember, the huge growth spurt of the mid twentieth century was driven by the buying power of the working class.

    • Jean & Ben:

      If you read carefully, the Oracle of Omaha exposes a similar view … the US – and closely following the formula – the Canadian economies have become “trickle-up” not “trickle-down”. While I am not a big proponent of “entitlements”, I also believe in a more equitable partitioning of earnings between owners and workers that our current “drive to the bottom” mentality produces.

      • Let’s be careful here Roy – I do not believe in fairness nor do I believe in redistribution. I was born in Russia and none of that stuff works!

        However, behavior needs to be incentivized – any behavior. People aren’t stupid, they hustle and play the game the best that they can. If we make it disadvantageous to work, they will find another way – and they have.

        Thus needs to change and the surest way is to make minimum wage more attractive than the government check!

        • Ben,

          I believe you misunderstood my statement of “equitable partitioning of earnings”. I did not intend to imply the “partitioning” would be imposed at the will (or whim) of a government … no redistribution.

          Equitable partitioning of earnings needs to come from the business owners themselves. As a whole, we have lost sight of the fact it is in our business interest to pay employees a living wage, rather than constantly trying to drive employee earnings lower and lower. Eventually, you will have a cheap workforce, but no-one who can afford the product or services your business produces.

        • Ben:
          There’s the rub … greed … in apportioned doses greed can be a powerful incentive, left to run unchecked it will devour its own future.

          In my private companies, the shareholders believe paying a reasonable living wage is good for business .. and over the past 12 years we’ve proven that to be true (low turnover, low absenteeism, greater job satisfaction and employee pride in product).

          I took a previous company public back in 90s – as more “money types” became involved the company devolved into the “trickle-up” model that comprises the listings on the stockmarkets – when the original management team stepped away the new, higher paid talent ran it into the ground in less than 24-months.

          No matter how good a CEO and her/his senior management team are {and most of the time they are average}, they are not worth salaries that are 10-20 times that of their workers. We have bank CEOs here in Canada who’s annual pay rivals what a teller can expect to make in a 25-year career … in an industry that is “legislated” to make money.

          Free enterprise is one of the greatest problem solving environments we humans have created, but capitalism as currently practiced here has more in common with the feudal system of old than free enterprise and is very short sighted.

        • Ben,

          The answer to the question is, “sometimes”.

          Costco Wholesale immediately comes to mind as a company that pays above minimum wage and has been rewarded by the stock market. Starbucks is also known for offering benefits and has performed well. So it definitely works for some businesses, but these may also be rare examples. Of course, public companies also need to show solid financials and earnings growth to succeed with investors. These examples of success can inspire other businesses to follow in their footsteps.

          Corporate leadership must be trusted to have control over these decisions. Otherwise, who runs the company?

        • Roy – I don’t disagree. Most CEOs do not deserve anywhere near the pay they get. But, free market will sort that out = share holders will sort that out.

          However, share holders will not sort out the minimum pay; it’s beyond their pay grade. This is why I contend regulatory input is needed on the issue. But, there are MAJOR ramifications to raising the minimum pay – this money has to be made up somewhere. And I content that regulatory compliance is where this needs to happen.

          Thoughts?

        • Karen – my answer to all of this has always been:

          America is the place where you can succeed; if you don’t succeed here, you don’t deserve to succeed anywhere.

          I live by this sword – but I am not most, neither is Roy, Brandon, or you Karen. I run from any hit of socialized anything as fast and far as I can – I have personal experience with all that. But, we are failing to educate people on one hand, and on the other we are failing to ensure that the “uneducated” have a chance to earn a minimum wage which can support basic necessities of life.

          Something has got to give, and it will unless we act as a nation. And we can…

        • Ben,

          I’m not a good source for a reasoned opinion on “regulatory compliance” as our past dances have left me with bruised shins and confusion.

          I see need for an established “code of conduct” (or law) to thwart coercion/collusion, predatory behaviour, and outright thievery (anti “merit-based” behaviours?), but “regulatory compliance” – at least as presently practiced here in Canada – is political, excessively burdensome {to the small entrepreneur}, and ineffective – those with the “right” size, connections, political persuasion, slide by or are bailed out {“too big to fail” ring any bells}.

      • Roy – I would agree, but this isn’t even the argument. All I am saying is that eliminating duplicate and triplicate reporting requirements would, I am sure, eliminate 50% of man-hours required for the compliance, and with it $100 billion…

        Thoughts?

  20. Brandon Turner

    Alright Ben, you wanted an opinion. So, here it goes. I agree that there are issues, and that minimum wage isn’t a whole lot, and that the government regulations are expensive. However, the point I think you are missing (and there would be no way to really prove) is that those regulations are saving us more money in the long run.

    For example – we have regulations against using certain chemicals in our food. Why? Cause it hurts people, making them sick, killing them, and making health care costs higher. So the regulations are good. Are there ridiculous ones? Probably. But most of them are probably semi-cost effective in the long run.

    Point 2:

    However, I would say I adamantly disagree with the idea that real estate won’t be a good investment in 10 years. I think minimum wage will just keep growing at about the same rate that inflation does, give or take some. I think it has to – cause the government is going to do what they can to maintain a civilized world. The poor will still be poor, living on government subsidies, paid for by the middle class. Minimum wage will be $20 an hour, but rent will be $1300 a month, so they’ll still be in the same predicament.

    And here’s why: supply and demand. We, as landlords, know that a tenant needs to earn about 3x the monthly rent in income. We know if they make less, they won’t pay the bills. We know if they make more – they are going to move to a bigger/better property. So overall, in time, supply and demand is always going to keep rental prices around 3x less than the monthly income of the average tenant who will be renting in that area.

    Thoughts?

    • Haha – I did want an opinion. Thank you.

      1. Good regulations – you mean like the one Barney Frank in his infinite wisdom rammed through congress which was intended to put an end to “Too Big to Fail”? Do we need to talk about how much bigger the top 5 are today than they were?

      In the mean time, how many small hedge funds had to shut down because the reporting and regulations are now so over the top and accessible only to the biggest of the big…

      2. If minimum wage grew parallel to inflation, then it would have been at around $11 – $12 today. The very problem is that it does not grow relative to real inflation. I don’t mean the CPI which assumes that if you can’t afford beef you’ll be just fine eating chicken, or that energy is not an expense at all. Life is much more expensive today than 15 years ago Brandon. We, as a nation, have to do better.

      You and I are entrepreneurs who will land on our feet. Most people are not like us. Less regulation to incentivize business formation and more minimum earned income in the pockets of people who choose to work – this in my opinion is the recipe… Thoughts?

      • Hi Ben,

        I’m with Brandon on this one – there are good regulations and bad regulations, and most regulations come about through a political process where there are a lot of different groups trying to get their preferred solution enacted. It’s far from perfect – on the other hand, there are places where it does work. If we’d kept Glass-Steagall (regulation), for instance, and kept the banks from turning into casinos, this last financial brouhaha might have been significantly different.

        You work to change the regulations that don’t work – and it does happen!

        • In lieu of handing money over to the government for dumb ass regulations, I say we reallocate it toward higher minimum wage, thereby creating more consumers for all of the goods we produce and real estate we buy…

          Thanks for being a good sport Ben!

    • As a supplement to Brandon’s first point, for a company to meet government regulations doesn’t mean they just have to burn money or hand it directly to the government. Instead, they meet regulations by hiring employees at much higher than minimum wage. I agree that this is more onerous on smaller businesses than larger ones; but in effect, removing these regulations could increase the minimum wage at the cost of middle class jobs.

  21. Ben,

    I’m one of those nubies & you just burst my bubble! 🙂

    Seriously though, good article. Undeniable that the gap between the haves and have nots is increasing. As has already been mentioned, my guess is that people will be living together more and more; roommates, extended families, etc. That seems to be how people cope in poorer countries. All the more reason to invest in real estate PRUDENTLY so we don’t end up being one of those renters…

    I look forward to your articles. You are a thinker! That’s cool!

    • Hey Emma – thanks so much for the kind words!

      I don’t care about the gap. Let the rich get richer. Let CEOs make as much money for running their companies as the share holders will agree to. Free market baby.

      But, don’t let the poor get poorer. This is not healthy for the economy in the long run. People who choose to work 40 hours/week need to earn enough to live on…

      Thanks very much Emma!

  22. Ben,

    One thing to refute about the ‘passing cost to the customer’. I agree costs will get passed on and some things will get more expensive, but if we add 35% to someones income by upping minimum wage, and their food bills go up 25%, they should still come out ahead arbitraging that equation.

    Just a thought, odd to as I am known to be a crazy capitalist who says ‘earn more’ don’t ask for it.

    Luke

  23. ben
    spell check baby! 🙂
    decadency? decency
    i sort of agree wih you but…
    minimum wage is for NEW workers and hopefully they move up the ladder to more pay or better jobs. we should have NO subsidies from our government, they make no sense to anyone except politicians. i, personally, made minimum wage for many years and managed to get a decent apartment in a decent hood. it’s budgeting at it’s finest and i’m not good with money. it wasn’t a fancy apartment in a high rise on the gold coast but it was a roof over my head in a safe place. we as americans seem to want everything handed to us with no effort or work on our part. a single mother? her choice or a bad father not paying child support? which means more income for her. too many women think that having a baby is a right, it’s a HUGE responsibility and you have to plan for that or keep your pants on!!!
    real estate will always be a way to wealth no matter what happens to the market. people will always need a place to live, it’s just a matter of how much they can pay for it. if i owned properties before the crash and was renting them, i will still rent them but my equity went down. which only affects me if i decide to sell. they would be worth more today but not much.
    investors seem to think that they need to be wealthy to be successful. we need to have a passive cash flow so we don’t have to have a job to pay our expenses. making money while lying on a beach is still making money, but it doesn’t mean we’re getting rich. as chicken little once said, “the sky is falling, the sky is falling” but he was wrong
    thanks for the article and the thoughts

  24. I just finished reading through all these comments, but something I did not see mentioned is the fact that home ownership is about 65%. This means that 65% of Americans are not even in the renting pool.

    If incomes are sliding, and standard of living is going down (which I completely agree with), shouldn’t you consider the likely result that less and less Americans will leave the ranks of ‘home owners’ and become ‘renters’?

    http://blogs.wsj.com/developments/2013/07/30/landlords-see-silver-lining-in-lower-homeownership-rate/

    You either own a home, rent a home, or are homeless. Since nobody would choose to be homeless, and with lower incomes, doesn’t this place a lot of additional demand on rental units? No wonder multi-family and apartment construction has been the driver behind new construction starts!

    http://www.housingwire.com/articles/26376-multifamily-construction-pushes-housing-starts

    I’d like your take on this, if you’re able to continue to post on this thread any more 😉

    Thanks,
    Matt

    • Matt,

      The historical rate of home ownership is 63-64%. I believe that due to the crisis we just went through, it will go lower. In theory, this should create more tenants – you are right.

      However, lets look at the demographics. Family formation is down because people don’t have jobs. Baby boomers financed their middle class status with debt, so most are living off of SSI in their retirement – is that going to keep up with the inflation of our holding costs you think?

      Here’s the bottom line in the words of my friend and attorney – Jesus Christ himself couldn’t pay you if he were broke. An awful lot of people are broke going forward Matt…

      Thanks a lot for you comment!

  25. I think there’s one thing that may argue against your conclusion about the real estate/rental market getting worse. You conclude that more minimum-wage workers spells less renters, and certainly the ones who end up in that pay range (for whatever reason) are not candidates for our products without Section 8 or other assistance. But what that misses, I think is that wages have been stagnant or declining for a lot of people in all pay ranges. So while there may be more people in that bottom bracket there are also likely to be more people in the lower income brackets that DO make good renters (make enough to rent but not to own).

  26. Historically, from the 1960’s to about 2000, wages have grown faster than inflation, as workers have become more productive. In the last decade, the opposite has happened with is very unusual. Two reasons why:

    1) Total health care costs have risen much faster than inflation. Economists generally agree that the employer’s share of health care costs is actually paid for by the employee in the form of lower wages (e.g. not getting as much of a raise as they otherwise would each year as health care costs increase.)

    2) Massive increases in subsidies in 1997, 2001, 2003, 2009, and 2010. These subsidies are either through spending programs or refundable tax credits. Both phase out as income increases. When these phaseouts are added to income and payroll taxes, many workers see implicit marginal tax rates of near 100%., In other words, their take-home pay basically does not go up even if they get a raise. That gives employers little reason to give employees raises for being more productive. .

    I doubt most people are familiar with the exact phase-outs, but most people know pretty quickly if their take-home pay drops after they got a raise, or if their neighbor who barely works can afford more than them.

    The underlying problem is that the income-based phaseouts of these programs, combined with income-based taxes, decouple a person’s productivity with their take-home pay. That relationship between take-home pay and productivity is what encourages employers to pay people more, and why they aren’t right now.

  27. Jeff Brown

    Ours is either a free market or it is not. We’re ALL worth nor more or less than the relative difficulty it takes to replace us. A well motivated 8th grader with a three digit IQ can be trained quickly to do most, if not all minimum wage jobs. The rest is social engineering disguised as something else.

    • I must say I am surprised by you Jeff. The whole American project is social engineering. The middle class is social engineering at its’ worst. Stock market is financial engineering in support of social engineering. Hellooooo…

      We are bailing out everyone in sight from automakers to bankers. Why not throw a bone to the minimum wage crowd Jeff? It’s not like they sit on their hands – they work.

      America is the place of faith for the whole world. We all came here for the promise of better life. Unless we maintain this promise, the experiment will fall…

      Thoughts Jeff?

      • Jeff Brown

        The fact social engineering exists doesn’t obviate my point any more than a parachute obviates gravity. We’re either gonna be a merit based economy or we’re not. Those who lobby for pay or benefit based upon factors other than merit, debases them and us. A cook at a fast food place doesn’t merit the pay given to the chef at the 5-star restaurant down the street. We can play at words and concepts all we want, but when it boils down to it, merit and value is what it’s all about. Social engineering has never worked and we agree on that. The USSR thought the same way as some here. A janitor made roughly the same as a doctor. That idiocy speaks for itself, which I’m sure you’ll agree.

        I never wanna be judged for anything else in the free market but for the value I bring to the table. To demand higher pay based upon need, shames me.

        • Jeff:

          The bulk of those currently on the top do not want a merit based economy anymore than those receiving assistance … perhaps even less.

        • Jeff Brown

          Kinda vague, Roy, but I think I understand and agree. Regardless of the source, their thinking is wrongheaded. Once we go completely away from a merit based culture, we’re doomed. The rest is nothin’ but vacuous HappyTalk.

        • LOL – Jeff, USSR is something I know a little about so I’ll bite…

          USSR is what happens when lots of people have no money – let me say that again;
          USSR is what happens when lots of people have no money- do you see a parallel?

          Now – I would agree that the best way to have an equitable society by rewarding merit. This hasn’t been happening, though Jeff. Anjelo Mozillo ring a bell? What exactly did he do to create value?

          I am with you – the more productive members of our society should get paid more. And I in no way suggest limits, although even the NFL has caps to allow competitiveness. But, there does need to be a back-stop in my opinion, otherwise the government (meaning tax dollars) has to pick up the slack. I am adamantly opposed to entitlements – something for nothing. We should allow the minimum wage to be sufficient to facilitate the basics…

        • Jeff Brown

          Hey Ben — In Russia the Marxist took over the front end of the 20th century. Shortly thereafter everyone was makin’ minimum wage. 🙂 Attacking the successful and wealthy (not you) is how most approach ‘solutions’. The real solution is real opportunity for everyone. I’m an equal opportunity guy when it comes to call things the way they are. Is there massive crony capitalism? You bet. Is there corporate welfare, i.e. subsidies? Yup.

          The solution is to allow everyone to succeed or fail on their own merits or lack thereof. NOT doin’ that got us where we are today. And for the record, mentioning the USSR was me smilin’ at you. 🙂

        • Jeff – love ya man. And couldn’t be more with you – level playing field across the game board; but this is very important – across the game board. This isn’t what is happening Jeff 🙁

          Thanks so much!

        • Jeff,

          I was intentionally vague, leaving it to you to fill in the missing adjective: “Those at the {political, fiscal, etc} top …” They benefit most from the way in which the current system operates and they expend much effort to keep the status quo.

          A merit based economy has all kids of merit 😉 … perhaps we will get to experience one someday 🙂

        • Jeff – I am with Roy on this one. Merit has to be across the board and it is not…

          That being said, there are people in this world who will spend their life trying to fight the system – not me; I am a pragmatist. I recognize what the system is and is not and I do my best to acquire tools and the proper attitude to allow myself a chance at winning the game. However, the game is stacked Jeff, there is no denying that. Thoughts?

        • Jeff Brown

          Roy — We both see the reality, at the top and bottom. It’s current reality, and shameful.

          Ben — I understand where you’re coming from. You have a plan and are executing it inside the current system. I get it. But it’s been the pragmatists in political and big business leadership who’ve allowed us to arrive at the pitiful state in which we now find ourselves. We’ve seen this movie before, at least those of us in the Boomer crowd. A merit based leader rose up and, more or less, put things back on a merit based system. The poor and middle class experienced a huge explosion of opportunity based upon their own work ethic and talent. We seem to have short historical memories as a people.

        • Jeff – I agree! A merit-based leader is the best solution to the current crisis indeed!

          Where the hell is he? I look to the right and see nothing. I look to the left and see even less. Where the hell is the leader and do we have enough time to get there at this state of affairs.

          I’ve seen this play before Jeff. This shit is only academic up to a point, and then it flies…We need real solutions!

  28. This is a good point of view, looking at the position of profiting from REI for the long term. I have wondered about this too. One thing I commend you on is taking into account that the gov’t ‘charges’ the employers ‘x’ amount of dollars to stay in compliance. This subject of minimum wage workers requesting a raise is currently the in the headlines. This very thing they probably don’t realize cuts into the employer’s bottom, money they could raise wages for those workers. Good observation.

  29. Thanks Ben for an honest reflection on the housing market, if only everyone at BP were writing honest and direct articles. Can you write an honest article about taxes? No one touches on the fact that taxes eats into NOI (well I haven’t seen one yet and I’ve been reading for 6 months now).

    • Timothy,

      What exactly would you like to discuss – is it property taxes or income taxes?
      In the case of income taxes, they are going up my friend. The government needs to cover the debt service on all of the money that the FED has printed. The interest rate has been kept artificially low for years, but eventually it’ll have to go up and when it does so will the taxes.

      What would you like me to discuss Timothy?

  30. I have to disagree with the premise of this article.

    In a market economy, prices are established at the intersection of supply and demand. What people earn is a constraint, but it is only one of many factors that go into rental rates. Renters have many choices in how they live — smaller apartments, roommates, moving to a less expensive part of town, living with parents, etc. Similarly, landlords have choices that expand or reduce the supply of units on the market, and increasing or reduce their operational costs. All of these choices affect supply and demand, and thus the price of rent.

    Consider two very different markets. Here in Milwaukee the median household income is $33K per year, and the median rent is $628 per month. By contrast, the median household income in Brooklyn, NY is $60K while the median rent is $2850 per month. So whereas the typical Brooklyn resident has about twice the income, they pay more than four times as much in rent as a person in Milwaukee.

    As I see it, the macro factor that will most affect overall rents in a given market is population growth. If the population is growing, it will constantly exert upward pressure on rents. People have to live somewhere.

    • Roger – I agree with you in principal, but not in practice.

      Look – let’s say that I want to live in Brooklyn or Pasadena. Price of rent on a tiny 1brm is over $2,000 in both. Looking at that I say to myself – on my kind of income I can not afford that; I need to look for a job in my line of work someplace else where cost of living is inline with my earning potential. That’s fine and dandy and that’s one of the reasons I like Lima, OH by the way.

      However, what happens when people hit the bottom of the pay scale. I may not earn enough to live in Brooklyn, but I do earn enough to live in Lima OH. However, if I was earning minimum wage, it would not be enough to live ANYWHERE – what do I do and where do I go?

      I don’t mean to overly romanticize this issue, and I happen to be vigorously free market. But, would you be surprised if I were a little pissed? lol

      Thanks for jumping in.

  31. Meanwhile the legislative geniuses in California just passed a bill to raise the minimum wage to $10/hour then bailed until next year. Yup, they are now taking the next 4 months off as a reward for their Herculean efforts to improve the lives of everyone in California. Never mind that basic economics and common sense refute their argument and evidence has shown that these efforts harm more than they help. The Governor is expected to sign the bill.

    • Haha – well, that’s just stupid and plain socialist. This is not at all what I am proposing. You can not just take money out of the private sector arbitrarily and expect good outcomes…

      If you notice, I am suggesting taking money out of the regulatory compliance and reallocating it into higher minimum wage standards – zero sum gain. Now a single penny more would come out of the private sector economy in order to do this, but doing so would hugely incentivize productivity…

      Thoughts Bruce?

  32. Ben, I really appreciate the article. It’s something I think about a lot. I’m right now struggling with the decision to pay down some of my better properties to reduce my risk now, or purchase more, so that I can achieve greater gains later. I probably change my mind every month.

    That being said. I feel the problem is a lot greater & more fundamental than a free market discussion. If a free market truly worked then Walmart employees would be some of the richest people in the world. There is not way to force a company to spend their money without some sort of force being applied to them. It can be social, economical or political. But without a cause businesses will continue to do what is in their best interests. Which is to lower costs to improve their bottom line. There are a couple serious problems the world is facing that are allowing our current social problems to exist.

    First is the result of overpopulation & increased mechanization. A easy example is the automobile. Before the Model-T it took 1 employee to produce approximately 4.5 cars a year. With the assembly line, Ford was able to produce 20 cars per year, per employee. A huge jump, but also essentially eliminating the need for 3/4 of the work force. Now we can produce 153 cars per employee. There is a certain number that can be picked up by other industries, but I believe that there is a limit & unemployment becomes inevitable. Raising minimum wage won’t help if there aren’t jobs to be had.
    A historic correlation can be found in the wake of the black death, Which created a huge labor shortage. It was the underlying cause of the end of serfdom ( a situation with most the population on minimum wage).
    I’m not encouraging the the mass annihilation of a significant part of our population, but it could easily be engineered by simultaneously increasing minimum wage by 25% and reducing the # of hours until over time to 30 (overtime was instituted in 1937).
    By generating a labor shortage companies would again be forced to offer higher wages to get quality employees to stay. It would also create the opportunity for new companies in both current markets & new leisure based markets.
    I think the second part of the problem, which we are just now seeing. Is the end of free, easy energy. Multi-generational housing was the norm for most of human history. It’s only been in the last 100 years that a single family unit has bee possible. The reason why it is possible is that we are able to use more energy than we produce. The amount of calories it takes to produce 1 calorie consumed is staggering. Right around 12/1. In any other biological system there is a word for it, starvation. Unless we actively strive to find ways of making up the energy deficit from something other than fossil fuels, the cost of living will continue to rise.
    There are a lot more complex factors that play into the current economic problems that the world is currently facing, but I feel those two are huge players often overlooked.

    • Interesting ideas Rusty. I am not sure that lowering the work week to 30 hours is either a good idea or is a practical one. I’ve lived in Europe – Spain comes to mind. I am not sure how many hours they work, but I do know that they take one hell of a siesta for lunch – hasn’t worked out for them too well…I don’t think that this is politically viable.

      End of cheap energy does present a problem – I agree. However, with the current technology this does not have the feel of urgency capable of causing bold action on behalf of our politicians

      Interesting ideas indeed – thank you!

  33. I believe as costs go up peoples dynamics and living arrangements will have to change

    roomates two to a room etc.
    to be able to make up the rent.

    certain costs will continue to increase such as building materials, and property taxes.
    so the rent will have to be at a certain point to meet these basic essentials

    renters will have to adapt their lifestyles in order to put a roof over their heads.

    • This is unacceptable in America – the richest society in history Steven. This sounds like the USSR. If this happens, that in order to survive people have to pair up on rent, we will have to concede that free market doesn’t work any better than socialism. I am not sure that I am there…

      Thanks so much Steven!

  34. Great job getting people to think Ben! I will disagree with you. I saw an article somewhere that showed the US minimum wage is right in line with most of the world, based on cost of living. Yes Sydney and London have higher minimums, but their cost of living is much higher than New York City!

    I agree with Karen’s earlier comments. Minimum wage is a minimum, not average or meant to let people buy everything they want. We are in an agriculture area and if minimum wage was raised to $15 an hour the farmers would go broke. America is the land of opportunity, but people have to make the most of their opportunities not have them made for them.

    Yes, there are subsidies for many things, but increasing subsidies won’t fix things. The less subsidies the better if you ask me. If we force people to make it on their own they will surprise themselves with what they can accomplish.

    • Mark – I love your intro: great job Ben but you’re stupid hahaha

      I’ll tell you what. When I arrive in America in 1989 gasoline was under $1 and minimum wage was around $3.75. Today, gasoline is at $4 and minimum wage is at $7.70. See any problem with this math Mark?

      The articles everyone mentions are based on the CPI – no energy, no food… Minimum wage people spend their money on energy, food, and rent Mark. Thoughts?

      • I see your point, but you can’t base minimum wage on something like gas that fluctuates so much. If your making minimum wage is it necessary to own a car? Like you say, cars and gas are very expensive and most places have great public transportation now. I think most people feel they have to have a car in today’s society, when they actually don’t.

        • Mark – minimum wage needs to absolutely be based on those commodities which come into play the most in the lives of people who earn minimum wage.

          About cars – your suggestion that there is no need for a car illustrates that you do not have many of these people in your inner circle. Let alone that most of minimum wage earners live in rural areas without well-developed public transportation, think about what jobs they do…clerks at a supermarket, news paper delivery, waitress in a big box restaurant, fast food, cart collectors at a big box home improvement store, etc.

          What do all of these have in common – most minimum wage jobs are located in the “shopping district” which is always some distance from the residential communities. Translation Mark – in order to earn minimum wage you absolutely need wheels! Furthermore, because these people are so “corporately expendable” try calling in and saying your car broke down…

          Now, this isn’t just about cars. This is also about food, which has gotten so much more expensive than the rate of minimum wage.

          Look – I am a free marketer all in. But, the trends we are setting will not lead us to any place good. Either we must lower the cost of living, which is impossible considering how much freaking money we are and have been printing, or we must increase earning capacity of minimum wage. If not, we are going to have a revolt – I’ve seen this before with my own eyes and it is scary to me. Thoughts Mark?

        • Ben,
          Would you continually change minimum wage based on food and has which fluctuate wildly? You can’t lower the minimum wage if those costs go down, but then people will always want a raise if those go up.

          As far as cars, people have to make decisions to make their lives easier. If they live in an area without public transportation then move. I have talked to many people in this situation. They value their privacy and a little land more than making a change that will improve their lives. I have seen it on many forums where someone complains all day long how bad things are, how there are no jobs, how gas is too much. People spend hours trying to help them by providing solutions and they come up with excuses on why they can’t do anything different.

          If we raise minimum wage it will decrease the workforce. Not all business can afford to double wages and keep everyone. Big box stores will have to raise prices on food and other items to make up for the labor cost. Fast food, pizza, mom and pop stores, all will have tobraise prices or cut labor and decrease service. You say you are in favor of a free market, but this is not a free market idea, it is the opposite.

          You saw a revolt first hand, but that was in the opposite of a free market and this move would push us closer to that situation. Correct me if I am wrong, but wasn’t a major issue a lack of food and basic services for people, not pay?

          We live in a society with more services and opportunities than at any other time in the history of the world. No where else can someone start with nothing and become as rich as they want to be. Most people will never try and take advantage of those opportunities. Nothing the government can do will change that. The less cushy they have it, the better chance they have of breaking through and makin something happen.

          People in other countries move thousands of miles and leave their families for years to earn our minimum wage. They save enough to send money back to their countries. Yet people here can’t move a few miles to be closer to work so they can avoid car expenses?

        • Mark – thanks for being a good sport. You know, there is an old Russian saying:

          When 2 people argue, 1 is a full because he doesn’t know the answer and still argues, while the other is an ass because he knows that he is right and the other guy doesn’t know what he is talking about, but he still argues.

          Both of us are both – an ass and a full, depending on how you look at the problem. What I saw in USSR was not socialism failing. What I saw was what happens when the masses get fed up with not having any money and loose faith in their prospects. This happened many times throughout civilization in one form or another. Rome, France, Germany to name the most obvious.

          We are headed down this path I fear in that we have masses without money and/or prospects. We also no longer have debt to support the middle class. What you are seeing in the political universe over the last few years is the early stages of manifestation of exactly what I am talking about.

          The divide between haves and have nots has exploded in the 1990es and later. As a very smart man put it to me: “there is no way that a pizza chain owner will take 18 mil. of profit if he can have 20 mil. unless he is mandated to do it…”

          I don’t want to see a revolution in America – this has been the greatest experiment in history of civilization. We can do better. Or, we can stay the course and then America as we know it will be dead within 100 years.

          I feel a bit like an a

        • Haha, I think of it as a discussion, not arguing. I think there are huge differences between Russia and the US. I have been trying to find poverty level statistics to back up my argument, but it is very difficult to find any historical figures for USSR/Russia. The government claimed not to have any poverty for years, but then later admitted they had at least a 20% poverty level in the 1980’s based on 1960’s cost of living. From what I could gather, the poverty level in Russia in the 1980s was at least 25% if not higher and that was based on bare bones minimum living.

          In the US the poverty level has fluctuated between 11 and 15 percent since the 1960s thanks to Medicare and other programs. These figures do not include food stamps or other government assistant to help people, so they are actually lower. Many of the people below the poverty line in the US actually have AC, cable television and many other amenities that those in Russia could only dream of.

          I think we are comparing two completely different situations. The government constantly lying to the people of Russia and telling them their lives were better than they actually are, censorship and other unfriendly activities did not help either. In the US there is lying all the time, but the media will expose most of it thanks to our free press.

          Maybe I am wrong about Russia, I have never been there, but this is my impression. You obviously left for a better opportunity in the US. Personally I think our society likes to complain more than it likes to take action.

  35. Ben,
    Great article. I agree w/ you that something needs to be done, but I dont think it is increasing the minimum wage, which only deflates the value of the dollar, increase costs, and reduce jobs. The market should dictate pay. A great solution to Sect 8 type subs is to eliminate them. Create a work force job placement center that handles various city/county/state level tasks that pays minimum wage, offers business a place to advertise jobs, and help get people employed. Cancel food stamps and issue MREs to those that attend the work. Not only would this eliminate the many using the system, it would also help those who really want to work find employment. I also think real estate will remain the best place to put your money for the reasons you listed, plus the hedge factor of rents and value rising over time.

      • Ok, ill spin it this way. Would you prefer to get some contribution that could save even the smallest amount of money, that at the same time gives people more opportunities and encurages people to get off entitlement programs. You only need to hear one person say that isnt worth it, I can stay home and get the same to understand the problem.

  36. Good article Ben. Peter Schiff talks about this a lot. How big government, high taxes and heavy regulations has been wiping out middle class last 30 years and how they are hindrance to free market and good business practices.

  37. Ben, I usually like what you say, but seriously – “Yes – but wouldn’t it be better if free market allowed for sufficient minimum wage so”…
    There can be no minimum wage in a free market. If you like a minimum wage, why not make it $100/hour. Then everyone can make good money. Why wouldn’t that work? For the same reason any minimum wage is wrong and even evil. Most people simply aren’t worth $100/hour. Those who cannot produce $100/hour won’t be able to find a job at all. Then where will they live? For the same reason, US unemployment rates especially among our young people and minorities are sky high. The minimum wage is not any part of the solution, but really is exactly the problem. You’re right to suggest that over-regulation is problematic, but to suggest a higher minimum wage at the same time is logically inconsistent and even hypocritical. Deregulate and drop the minimum wage. Working for $4/hr is certainly better than not working at all.

    • LOL – Unemployment rates have nothing to do with wage?! I have to chuckle Alan…

      Few weeks ago my father was tasked with filling a position in his department. One of the candidates actually said something to the effect – I bring in almost as much money with unemployment as I do if I hire on; I’m only here because I have to prove that I am looking…

      We have to cut these subsidies – completely in agreement with you. We also need to ensure that earning minimum wage is more advantageous than collecting government check – that’s the only way to incentivize people!

      Thanks Alan!

  38. I’m trying to find any redeeming value in this muddle. The problem is you’re tying your fear for the future to the minimum wage and actually advocating raising the minimum wage as part of the solution. The minimum wage is a pure government price control limiting the employment of young and unskilled labor. If the young and unskilled are your market, then yes, you’ll be in trouble. The higher the minimum wage goes, the more young and unskilled laborers will be unemployed and the worse off you’ll be. Getting rid of the minimum wage or at least ignoring it along with reducing the regulation you advocated would help invigorate the economy. Private investment has been frozen the last 5+ years awaiting the impact of ObamaCare and other bloated, overreaching federal regulation. The incredibly profligate deficit spending as well as the money printing and devaluation of the $ by the fed is also hurting US investment. These are the real problems that we have to address to get the economy moving again. When the economy get’s going, the minimum wage becomes irrelevant as almost all labor prices get bid up. On the other hand, if we continue along the path we’re taking we will end up like Spain or Greece – entitled, unemployed and broke.

    • Alan – this is not about the minimum wage but about affordability of life in America. Trust me – I am not a lover of government; I would rather let the free market work. However, free market needs a framework in order to work. Some examples:

      Health insurance industry used to be non-profit and at that time was affordable. Then it was deregulated and now it’s not affordable – for me personally it is a $20k per year liability. Is this the highest and best purpose for my money in the economy? If I didn’t have that overhead, how many more units could I buy; how many more workers could I hire?

      There was gold standard – then there was Jekyll Island which gave our economy to the top .5% – period. We now have the FED, fractional reserve, inflation (which we didn’t have), and a currency which represents no value and does not belong to the people. Do you think that this is not government control? Why is it always that whenever government interferes with the free market the top .5% win and everyone else looses, and why is it that you are fine with that Alan… ?

      Take me back to the gold standard Alan and then I’ll be with you 100% on allowing the market to solve our problems. As it is, though, our problems were caused by people not the market – the market has not been free in a very long time which is why life is slowly becoming less and less affordable. I am concerned of what the masses will do when they finally get to a point of complete and total disenchantment, and I am concerned for a good reason – HISTORY!

      Thoughts?

      • No doubt the federal gov’t is stepping way over the bounds spelled out in the constitution. The solution is not more gov’t intervention – i.e. min wage law. The solution has to be reform of the welfare state. Even the Dutch have conceded it has to go away. Minimum wage laws mean that unskilled and/or inexperienced people can’t get that all important 1st job. Business won’t hire teens for a high minimum wage if they’re only available a few hours a day or week and those teens lose out on work experiences that are imperative. If the min wage is significantly increased, rather than hire a bunch of teens, fast food restaurants will become giant vending machines. The low wage jobs will simply disappear. The simple fact is that if we could stabilize the dollar to give businesses some certainty they would stop sitting on their cash and the economy would improve. The government cannot cannot force people to invest or force the economy to grow. I still believe in America. Dial back the government interference, stabilize the $, and quit with the war on the rich; and surely the economy will roar back lifting all boats.

        One more thing, I take great offense at your accusation that I don’t have a problem with the top 0.5% gaining and everyone else losing. I’m doing well now, but I’m not in that crowd. I worked three jobs through high school and enlisted in the service, got out and worked my way through school. Other than values and discipline, I was given nothing. I’m well familiar with working minimum wage jobs, layoffs, school loans. I believe free people and free markets protected by a constitutional republic is best way to provide opportunity for all. If a state wants to provide welfare or a minimum wage, that’s its prerogative, but certainly the federal government should have no part of it. I’d rather charities provide charity.

        Finally, free markets don’t need a framework. They need impartial courts, respect for contracts, and the consistent application of the law – none of which the current regime seems to respect.

        • First – thanks you for your service! Second – I disagree with the current administration’s positions on everything, domestic and international. Third – totally agree about government interference distorting every facet of our financial lives.

          Again Alan – we don’t have free markets. One stroke of the pen today by the FED and the top got richer. Did it impact you positively? It didn’t impact me positively. In fact, when inflation comes my buying power will suffer just a little more. Thoughts?

  39. Ben — This is John Adams back in the 18th century. He addresses this topic brilliantly over 225 years in advance.

    Property is surely a right of mankind as really as liberty. … but the time would not be long before courage and enterprise would come, and pretexts be invented by degrees, … in sharing it equally with its present possessors. Debts would be abolished first; taxes laid heavy on the rich, and not at all on the others; and at last a downright equal division of every thing be demanded, and voted. What would be the consequence of this? The idle, the vicious, the intemperate, would … sell and spend all their share, and then demand a new division of those who purchased from them. … anarchy and tyranny commence.

    • Jeff – who is talking about sharing anything equally? Are you suggesting that allowing someone to earn enough to afford a decent place in Lima OH is the same thing as being Buffett, Soros, or -yes, Brown? Seriously Jeff – there surely is a difference somewhere in there…

      Jeff – I don’t believe in “Fair”. But, I believe in righteous. As a wise man said – “..there is no way that a pizza chain owner will accept $18 mil if he can have $20 mil. unless he must”. I believe that in lieu of taking it from him via taxes, which will undoubtedly happen if nothing else does, we would do much better to increase the minimum wage…

      Taxes are what Adams warned about. Minimum wage that facilitates decency is just right in my opinion. But, what do I know – I’m just a dumb landlord 🙂

      • ” I believe that in lieu of taking it from him via taxes, which will undoubtedly happen if nothing else does, we would do much better to increase the minimum wage…”

        Ben, why do we need to take away the money that the pizza chain owner earned? Pizza drivers are earning much more than minimum wage, they make a lot on tips. One of my friends is a pizza delivery driver, he has a wife, two kids and owns a nice house. He is the main bread winner.

        What about all the local business owners who own franchises? They aren’t making millions a year and a raise in minimum wage will mean less jobs. There is no getting around the fact that if the minimum wage is doubled, many business will have to let people go or shut their doors.

        • Even if they do go up, it will most likely go up on the wealthiest Americans. Taxes are at some of the lowest levels in the history of the US for the wealthy. I don’t think it will hurt the wealthy much to see taxes go up. They will always find a way to make money.

        • WOW Mark – so is it OK now if the taxes go up on the wealthy? What about the moral hazard argument?

          I agree that taxes are historically at very low levels. I agree that those who know how to fish will always get theirs – that’s the whole point I was making about the pizza shop owner. You are not going to stop him with higher taxes. But, the better thing to do is to level the playing field Mark. Stop the priming. The FED just announced that economy is shitty and they can’t stop easing. Things are bad because there are no jobs for people who don’t know how to fish Mark. You, me, and everyone on this forum are the exception to the rule – most of America needs jobs.

          I am grateful for all of the comments on this article because I’ve learned something in this process: It is not how much we earn – it’s how much stuff costs. You are right, by increasing minimum wage we would cause problems for the middle class. The thing is, the middle class itself is having same kind of issues. People can not afford the prices of goods – we need to deflate to make life affordable. A deflation would destroy wealth at the top but make life affordable at the bottom and in the middle. Thus far the FED has said NO – we are propping the top at the expense of everyone else… Thoughts Mark?

        • Moral hazard? As far as me? I am actually near the top income bracket and will be there next year. By raising taxes on the higher tax bracket I would be raising them on myself.

          I think raising taxes helps the economy, unlike most. I think raising minimum wage hurts the economy. Raise minimum wage and there will be less workers, because employers can’t hire as many people. Hire less people and we have less services or products. Costs go up on everything and people can buy less things. Raise taxes and the rich have to find a way to Create more deductions. You create more deductions by spending money on business; hiring people, building infrastructure, buying real estate. The higher taxes Re te more incentie there is for te wealthy to reinvest in their business instead of take the profits.

          My lender told me 1031 exchanges are way down because investors don’t think taxes will ever be this low again so they are taking profits now and paying taxes instead of reinvesting.

        • Haha Mark – I love it!!! I don’t know if you are aware but you just stuck your neck way out with this comment…

          Look – in principal I agree. But we have to be careful; earning 150k living in NY City or Pasadena CA is not the same thing as earning this money living in Ohio. I know people who pay 50% of their income in taxes – so, again this is not a simple blanket statement of agreement.

          This entire argument is about affordability and accessibility of life. Look, I made a video on my website a while back where I spoke of Colby cheese – you know the yellow cylinder-shaped brick of cheese. I remember it costing like $1.50 and now it is $4 – why? There are a lot of reasons which we both know, but that’s not the point. The point is that things are less and less affordable. I am not talking about high life here Mark – cheese.

          Now – the CPI’s answer is: well – if this cheese is too expensive, let’s just take it out of the basket of goods and put something in that people can afford instead. This is how the CPI works and this is why when you look at those numbers as compared to minimum wage things looks in alignment. But, we are not comparing apples to apples and at some point something is going to rip – my contention is that it is starting.

          We have 2 choices as I see it Mark. Either we need to increase the income at the bottom; or, we need to decrease the cost of living which requires deflating artificially propped-up markets which will erase wealth at the top. I don’t really see another option.

          When the left talks about the widening gap, what most people want to do is tax wealth. But at the end of the day this will not increase affordability of life at the bottom. We need to deflate; we need to allow the market to adjust to levels which can be supported naturally – this will hurt because a lot of paper wealth will be erased, but what is the alternative…

        • I have no problem stating my views. Lol. I have had discussions on this topic on forums with REO brokers. Most of which are wealthy conservatives. I’m not taking the left or rights side. This is simply what I think would be the best route for the country.

          You mention two options, but I think there is a third. Improve the economy and there will be more high paying jobs and people won’t have to worry what minimum wage is. I talked to our movers a couple months ago and they said they wished Clinton were president again. I asked why, they said because there were so many jobs they had their pick. Now they have to take whatever they can find. I doubt Clinton was the reason their were so many jobs, but we did have much higher taxes on the wealthy back then. There were obviously many other factors, but I disagree that lower taxes improves the economy. Lower taxes and the wealthy will take profits and not reinvest while it is cheap to take profits. This theory is not based on actual percentage of taxes but the perception of how high or low taxes are at a given time. If the wealthy think taxes will rise soon, they will take profits. If they think taxes will lower soon, they will invest and defer taxes as much as possible. That may be why the economy is weak now. Wealthy are hoarding profits instead of reinvesting before the tax hike. If we would just do it and raise taxes then they may start reinvesting again and work on tax deferment until the next round of outrage over taxes being too high.

          Another positive of raising taxes is the revenue to the treasury increases which is the best shot To reduce the deficit. Deficit is a huge weight on many people’s mind and causes a lot of uncertainty. The last time we had a surplus was under Clinton too. I don’t trust politicians to be able to cut enough spending to make a big enough debt in the deficit to make a difference. The best option is to increase revenue.

          Raise taxes on wealthy=more investment in business so the wealthy can pay less taxes, decrease in deficit which increases confidence, more jobs for the working class because of the higher investment. More jobs= higher wages and minimum wage will be what it is meat to be, a minimum for a fraction of the population, not a minimum for most of the population.

        • Still thinking……..

          Pros: 8,000 comments like you have on this article
          Cons: 8,000 comments like you have on this article

          It is an interesting idea to write on, but I wouldn’t want it to turn into a political right vs left shouting match.

        • LOL Mark – I think this is exactly what we need to be talking about right now. Besides, I think that all of us here are staunchly free market and on the right to some extent – but the degree varies …LOL

          Do it 🙂

  40. Let’s be pragmatic. Is the minimum rate hike gonna cause prices to rise? Guaranteed. Is that gonna hurt Buffet, or the guy struggling to make ends meet with a wife and two kids? An artificially high minimum wage will hurt only lower/middle classes. This very thinking is what buried the Soviet Union in the swamps of economic fantasy, Ben.

    Those who wanna take my fish instead of learning to fish themselves can justify it any way they choose. But the bottom line is they used the gov’t, at the point of a gun, to take my fish and put it in their frying pan. You’re hurting the bottom income earners when you force businesses in a free market economy to raise labor costs above what the free market will bare. It’s a deadly and slippery slope that knocks down dominoes the ‘controllers’ had no intention of knocking down.

    Only the hubris of man allows the thinking that a free economy can be controlled. It’s the deadliest oxymoronic concept I know.

    • Jeff I love you and you are the guy I want with me when I go into battle. But Jeff, comparing Russia to America in any way is like comparing a cucumber to a finger – you know what I mean 🙂 lol One is a dictatorship, the other a democracy -thank God…

      Having said that, help me understand which free market economy you are talking about. Is it the one in which government controls monetary and fiscal policy, or the one in which government doesn’t own the currency, which is free-floating and not tied to anything of value? Is it the economy in which the FED, which is 7 private banks Jeff, own the currency, or the economy where we let one bank fail but not the other? Are we picking winners and losers – is this supposed to be happening in a free market economy? Our currency is fiat, literal translation – government decree; that sounds kinda totalitarian Jeff.

      American is the freest economy in the world, which doesn’t make it free. I don’t waste time complaining about the game though. I try to get the tools and play – you know this Jeff. Lots of people game and abuse the system – screw them. Take their government checks and see if I give a rats behind – with you on that completely. But, there are those that are trying, unfortunately they ain’t got upstairs what you and I have. They should be able to earn a minimum wage that makes it worthwhile to show up. I am not talking about being comfortable, but to afford an apartment in a descent area without a handout.

      Finally, I never suggested arbitrarily raising the minimum wage. I suggested to cut costs of regulatory compliance by 1/3 and reallocate the savings into the minimum wage. It has been suggested that this would cost middle class income. So – are we now bitching about too much regulation on one hand, while not willing to cut it? Which way do we want it? Thoughts Jeff?

      • One more follow up. Thomas Sowell posted this recently -http://www.humanevents.com/2013/09/17/minimum-wage-madness/ directly addressing the topic. We agree that more fed pumping isn’t any good, but that really has nothing to do with minimum wage laws.

        • Sorry, that reply was supposed to go under your last reply to my reply…

          At any rate, people calling the USA a democracy has gotten under my skin lately. We are not and god willing never will be a democracy. We are a constitutional republic. Democracy is simply tyranny of the majority. That’s why it’s so gratifying to see that we set up Afghanistan, Iraq, and Egypt as democracies and they promptly turned into hell holes. America is based on out Constitution, the bill of rights and the rule of law. It doesn’t matter what most people want if it doesn’t respect the fundamental rights of others as protected by the bill of rights.

          Meanwhile, throughout this post you seem conflicted. You say you want limited government, but the whole point of this article is to argue for wage controls. I think even the poor are adults who can decide and should have the freedom to decide where and for what wage they’ll work.

        • He Alan – very interesting article; thanks for sharing.

          May be you are right. I think that a true free market is the best solution. A true free market is not what we have. On one hand, the subsidies absolutely introduce moral hazard and distort the market. On the other, we are subsidizing every single industry known to man in this economy. SO – if a courageous politician comes along talking about dumping all of the subsidies across the board – I am there. It seems, though, that the welfare state is the only line of subsidies we ever discuss. Does this not bother you and Jeff at all?

          If we are going to be fiscally conservative; if we are going to expect “think or swim” mentality, which is the way I live my life, then let’s do it across the board. Thoughts?

        • Alan – I am conflicted. I’ve lived in Russia. I’ve lived in Europe. I thank God every day that I have the opportunity to live in America. But, I am saddened to see that there no longer is any personal responsibility: not at the top, and not at the bottom. Everyone has been trained to expect a bailout – I am quite sure this is not what the framers had in mind. I just think that we can do better – enough with the easy money; enough with subsidies; and enough with unemployment; and enough with entitlements. Clean slate all the way around.

          But this won’t happen until the dollar crashes… In the mean time we are here on BP to learn some tools with which to give ourselves a chance in a highly stacked game…

  41. Ben ,

    What would your advice be to people who are just getting started in real estate? I am 23 and would like the majority of my retirement income to come from rental income, but do you think that will be a possibility? I see REI as a more risk averse and faster path to wealth than putting everything into the market if done properly (full disclosure: I do contribue to my Roth IRA regularly). While I have seen first-hand how successful REI can be, I wonder if it will continue.

    However, there is no question concerning the growing wealth disparity in this country.Concerning minumum wage. I must applaud BP for attracting members that can disagree on such hot-button issues in a civil way. Kudos to all responses thus far. My 2 cents: I worked in the blue-collar world for a decade, thinking I would never get out of it. When I finally left I was making $16/hr as an auto mechanic and I made far less than that the majority of those years. My question is this; why would I work in 100+ degree heat at a very demanding job that requires years of skill and thousands of dollars out of my pocket for tools and training, when I could make nearly the same money to flip burgers in an air-conditioned environment? A huge spike in minimum wage could catalize a mass exodus from blue-collar employment, which in turn would displace the very workers that the pay increases intended to help.

    I believe that the growing wealth disparity in this country needs attention, but a Federal minimum wage of $12 or $15 or whatever, is not the answer. This is because cost-of-living varies greatly from one geographic region to another. $15/hr in Iowa is far different than in New York City. Once people realized this, a possible migration of low-skilled workers could result, and the effects of geoarbitrage would hit places like the Midwest hard. If individual states want to set realistic minimum wage increases, I would entirely support that. But for the Federal government to say that for $12/hr you can live anywhere in the U.S. with the same standard of living illustrates just how out of touch with reality they really are.

    Further I believe that the income problem is partly a product of education, specifically a lack of financial education. One thing that I noticed working in the blue-collar world is the highly contrasting paradigm they employ compared to their wealthier counterparts (we would talk about buying lottery tickets instead of how to diversify our portfolios).Requiring financial education in high-school could mitigate this problem. People would see the value of education and may opt to educate themselves to qualify for higher incomes. And even those who still make low wages would certainly benefit from this knowledge.

    Thank you for the GREAT article and discussion. I look forward to your future articles.

    • Zach – thanks for your question. The answer is helping me to crystalize my thoughts:

      Minimum wage is not the problem – cost of living is. Cost of living, things like consumables, gasoline, etc have far outpaced the minimum wage. Furthermore, the inflation of cost of living is also responsible for the degradation of the so called middle class.

      Now – why is cost of living so inflated? Could it be the forever low interest rates and monetary inflation? Why do we print money – to create bubbles. Why do we create bubbles – to create wealth? Who benefits – not the poor nor the middle class!!!

      So, Zach – may be you are right. The minimum wage is not the culprit. Our entire economy is based on hot air and needs restructuring. However, the FED doesn’t even have the balls to taper – forget doing what it would take to deflate the markets thereby making life affordable again. Thoughts Zach?

      • Ben,

        Thank you for your response.
        I agree. The only problem is that while tapering and restructuring are essential IMO, I don’t want to see the resulting correction in my Roth IRA. O well I guess it’s a noble cause.

        • Well – this is the conundrum, isn’t it? Nobody wants theirs to deflate, and yet we are moving toward the reset… With this in mind, if it were me i’d be doing whatever necessary to get my hands on this money inside your IRA and convert to hard assets – Real Estate 🙂

  42. Here’s a crazy idea!

    What about a tiered minimum wage?
    Keep minimum wage what it is and eliminate the misnomer. This would apply to completely unskilled part-time workers who are new to the work force, like high school kids. Create a “livable” wage for full-time workers who have shown a bit of work history and staying power, say 6 months or a year of full-time employment. This would apply a higher wage only to those who need it. Again, I believe that this should be set by states and not the Federal government.

    Why has no one thought of this?!!!

    • Deciding who needs and who doesnt just creates contempt and those who know how, always will (working shops under the table, reduced work, claimed kids, etc to meet the “free extras”) Let the minimum wage stay as it is. Someone who wants to work is taking those jobs. Reduce the entitlements and require more work to receive them. This will reduce the cost and amount of people using them. Your point on the negative results of increasing minimum wage was spot on. Who wouldnt want to work as greeter and have no responsibility, no stress, and nothing to take home with you.

      • Hey Pete – what do you think of my comment to Zach (either right above or right below this)? The entire economy is out of alignment and we are only talking about minimum wage. That’s like fixing 1 wheel in the rear and not aligning the rest… The so-called middle class is disappearing – the minimum wage folks are not the only ones in the hole. The entire economy across the board needs to be given to the FREE MARKET for a substantive adjustment in my opinion.

        Don’t get me wrong Pete – you and I, we are going to continue to play the game. We are going to continue to study the rules and acquire the tools to try and do what we can. We’ll make it somehow – but our tenants may not, which will negatively impact our business model… Thoughts?

    • Zach – it’s a good idea; after all a high school student looking for spending cash is not at all the same thing as someone working 40 hours in an expectation to buy “life”.

      Having said this, your idea hits too close to moral hazard. We should not be picking winners and losers based on what we think defines their needs. Minimum wage should be higher than what it is unless we are willing to go thorough the pain of deflating this economy to a level where cost of life is supportable by minimum wage… the latter would be more painful but much more equitable and sustainable in the long run! Thoughts Zach?

  43. Ben, I agree w/ you, but I think there worry about cash being “deflated” is overblown. Adjustments need to be made and deflating to reality will only make things better. It is not a big deal if it is happening across the board. This is the major reason I wanted to start in RE. Every second you own cash it is going down in value IMO. I believe RE (while it can go up or down in value) will increase in value (dollars) over time as the money decreases in value, plus the benefit of using OPM to pay for it. Yes, I do fear what you say about the lower end being able to afford rent (it is already an issue in DC and northern VA), but I strongly disagree w/ raising the minimum wage as the answer.

    • Pete – there are no fundamentals in the economy which support the DOW at the current 15400. I have gone from 6500 to 15400 in a few year because why – because the economy is so much better now? This is all artificial and deflation to levels substantiated by the underlying fundamentals would hurt incredibly much. This would cut you IRA by half; the velocity of money would come to a screeching halt. Again, in the long run this would be good – the pricing of goods and services would adjust to income and we wouldn’t have to worry about the minimum wage. But, in the short run it would destroy wealth here and abroad. So, we continue to sacrifice earned income to prop up wealth by printing, which found its way into price inflation of goods, and with increased velocity will eventually guarantee much more inflation. This is a scary prospect for low income earners, and will continue to impact our business in my opinion.

      So, if you can’t increase the earning potential of people at the bottom, and you are not willing to deflate the markets, then what is the solution? I am by no means looking for equality – that’s socialism and it doesn’t work. But, there should be an equilibrium in the economy for it to function – we don’t have it. The stick only has 2 end – you got to cut it on this end or that; or both…

    • Pete –

      A stick only has 2 ends. You have to break it on one end, or the other, or both! Either we need to make basic necessities of life achievable by increasing minimum wage, or we need to decrease those basic necessities. we went from 6500 on the DOW to 14500 – why; what in the fundamentals supports this? Deflation would cut you IRA by 50%. It’s either that or higher minimum wage. Deflation would be healthier in long run, but would be extremely painful!

  44. Understanding that prediction is very difficult, wasn’t all of this expected with the rise of globalization? The only jobs that are safe are jobs that can’t be exported to some place cheaper. At the same time, we’ve foolishly bought into this whole trickle down economics theory that hasn’t panned out so capital has gone from the middle to the upper income brackets through tax and other government policies. People here complain about poor people on Sec 8 or food stamps, but look at how many subsidies those of us in this industry get?

    Depreciation expense is a tax deduction for us. Is it an actual expense? No, but I never hear anyone here complain.
    Mortgage interest on rental properties. Another deduction, again, no complaints
    Capital gains taxed at a lower rate than earned income. Again, no one is complaining…

    It’d be great if we could take a step back and realize how fortunate we are to live in the richest economy the world has ever seen, and understand that many of us here are climbing up the ladder to financial independence. Maybe then, we’d quit being so jaded about helping those of us who are less fortunate. Are the handouts to the poor perfect? No, obviously not, but we can’t sit here & bash them & say they are going to bring our country down while at the same time being the recipients of fairly significant benefits ourselves.

    • Augie – allow me to disagree in some ways,
      First of all, depreciation sucks. If it were “fair” then I would be allowed to depreciate a $2,500 flooring package in the same year I spend the money, but as you know this is not the case. I pump the money into the economy – the flooring manufacturer makes a profit – my installer gets paid – taxes get assessed, etc. And yet, I have to wait to depreciate over 5-7 years or whatever it is – it’s a raw deal if you think about it.

      Granted it’s better than not, but understand why we get it. If it weren’t us taking these risks then it would have to be the government providing living arrangements to 40%+ of the population – they can’t run those systems and they know it so they incentivize us to risk. And risk we do, thus your comparison doesn’t quite work. This isn’t something for nothing.

      Now – I understand this because my IQ allows me to read the tax code and to comprehend that all it is, is a play-book. Most people do not have my IQ, and it’s not cause I am so smart; it’s cause most are just not as smart and for them we have Section 8. Thoughts?

  45. @Augie, I think this is a very bad comparison. One is receiving entitlements for nothing, creating more burden on everyone. The other is a benefit to entice people to invest in their community which helps create revenue and stablize local areas. While I am in favor of a flat tax, I am certainly going to position myself to take advantages of the rules in place. I am not sure you have owned property very long if you believe there is no cost in depreciation. Capital gains could probably generate its own debate on here!

  46. I’ve owned my properties for several years actually. Depreciation is generally understood to be related to the accumulated costs of ownership. Wikipedia (not the best, but certainly the easiest definition to obtain) states it is “a reduction in the value of an asset with the passage of time, due in particular to wear and tear.”

    Funny thing about that, I tend to itemize my taxes for repairs associated to wear and tear, as well as take a deduction for depreciation on a straight line basis. I’m sure most of you, or your CPAs, do as well.

    There’s nothing wrong with it, and as you say you’re simply taking what’s available. As is the original poster’s Section 8 tenant. From a purely governmental budget standpoint it’s a perfectly viable comparison. I have no tenants on Section 8, but I won’t go online and criticize people who use it if for no reason than knowing that those folks get no more from the government than I do. The biggest difference is that they get there’s in a monthly installment and I get mine around April.

    As for the social implications an argument that food stamps and section 8 encourage people to spend money and generate revenue for local areas. I get what you’re saying and agree with you to an extent, I was simply exasperated with the multiple posts berating people on these programs, as if so many of us never received a helping hand along the way, either through being at the right place at the right time or meeting the right people…

    • Augie – I agree. All of us develop a “Winning Formula” in life. For some it involves taking the money from the government. This is why we should get away from paying people to be off work, and instead create an economy in which the minimum wage is high enough to live on. 7/8 of the people would go get a job and make more money 🙂

  47. Ben, I agree with you that the margin will be narrowed in the coming years and it will be harder to make the numbers work. One thing I think that will help us investors is the fact that home ownership is at an all time low, people are getting poorer, the middle class is shrinking. Students graduating from college are doing so with a lot of debt. This debt load is going to cause them to rent longer than they may have otherwise. Inventory will slow since building has slowed in the last 5 years. Lastly, population is growing. I think real estate will be a great investment in the next 10 years, but I do agree making the numbers work will be more of a challenge!

    • Who knows Jim… I am simply commenting on what I see – things are getting tighter and I don’t see it becoming less of a problem. We’ll find a way to make things work for a while, but how long? Sounds like you and I agree>

      Thanks so much for your comment!

  48. Interesting article and very informative. Here is my take on this I consider myself a newbie, I haven’t purchase my first multi-unit but I am planning to in the next few months. All I can say is it very tough out there and you have to do what you have to do to stay above water. I am a college graduate with student loans, everyone keeps talking about go back to school to get a master degree, however I am very skeptical if a job is not in line for me when I get out and only have debt to show for it. I already rack up $67,000. For the past 2-3 years I have been trying my best to find a higher pay salary income to save and really get into real estate, what I found is that they are not willing to pay me what I am worth. I have been working at my current professional position for six years, sometimes I get a raise and sometimes I don’t, the cost of living has raise tremendously and the wages are not added up. I am not asking for a handout but just would like for the wages to be in line with the inflation and economy. Yes I can get a roommate, but is this what America has come down to? That is why I am diving into real estate with precautions of course to have a decent way of living, because as I can see it is the only way. My only choice now to enter into real estate is to take money out my 401K to purchase my first investment. Someone made a comment earlier stating that certain degrees are useless, I kind of disagree because I think if you put time and effort into something it isn’t useless. What I do think is that society and the economy has determined the degree is useless because they are not as many jobs and the market is very competitive. If someone had a standard business degree in the early 70’s and 80’s they can make it, but now I see the college degree is the next high school diploma and they keep saying get an education to earn more. Education is paramount and we all need it, but the cost of school tuition is ridiculous. Why rack up so much money in school loans and when you get out, can’t find a decent job? I do agree there are folks milking the system, it’s not fare but what I am asking for is a chance at a better life, I am not going to complain I will just do something about my circumstance which to invest in real estate.

    • Jordan – very interesting comments; thank you indeed!

      Relative to education – usefulness of knowledge is teed up by the intended use. If you want to understand applied physics because that’s what floats your boat – great; do it. However, realize that it may not pay you anything. If making money with your profession is the intended use of the degree, perhaps pharmaceutical industry is better fit. I wrote about this in an article. Perhaps you would enjoy this:
      https://www.biggerpockets.com/renewsblog/2013/03/26/should-i-bother-with-college/

      A to RE and you jumping in as a means of solving the money issues- right on. Perhaps with a little more skill you won’t need to waste your 401k on a down-payment 🙂

      Thanks so much and good luck!

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