The IDEAL Investor Show: The Path to Early Retirement

Ep 93 Unemployment Data: How Does This Effect Rent?

• Axel Meierhoefer • Season 2 • Episode 16

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Welcome to another episode of the The IDEAL Investor Show the path to early retirement were in season two that we're in right now, we decided to put cash flow as really the core tenant of the series of podcasts and interviews that we're going to do in season two. And I'm actually going to address a few of the topics that are related to generating cash flow, because as you know, as an idea of wealth grow, if you join us, if you listen to us, if you're not yet a client, one of the things I want to kind of reiterate real quick is that for us, that really important thing is that we want to generate passive income. And when we start the process, we find out okay, how much does it cost us individually, you as a client, me with my family, anybody who wants to come in to live our lives, for our life expenses, for our food, for our beverages for our car, for our house, or for our rent, if we renting for any and all the things that we need for life, and that determines a certain amount of money every month, and that is basically what we call the time freedom number. And then the question is, what do we do in residential real estate investing out of state using turnkey providers and some diversification investments that we also address during season two of this podcast on getting this number, this amount is time freedom number replaced with passive income. So if we were to do a simpler calculation, and to say, Okay, your number is $4,000 a month, and you had investments, residential real estate investments, where each of them is paying you $500 A month in cash flow in money that you have available to spend each month from these properties, you would need eight properties at$500 To make $4,000 to reach your freedom number. And that's what we call it reaching the time freedom point. So when we have economic environments, like right now, where a lot of the media is talking about what is actually going on with employment, what is going on with interest rates, how do all these things fit together, and sometimes, because the news is filled with negativity, it may sound like unemployment or rising unemployment could be an issue for us as investors, and it is an issue but in an probably unexpected way. And why I'm actually very passionate to get this across has to do with a macro economic environment. So let's take a few steps. Step number one is what actually impacts the number of people that are renting our properties. Now, the first thing is, how easy or hard is it to rent a place versus owning a place if you think about that, somebody who wants to buy a property and move in themselves, which is called owner occupied, oftentimes has to pay somewhere between 1015 100, maybe $1,600, unless it's a super, super fancy property per month in the areas where we would actually invest to pay for mortgage and insurance and property taxes and all the things that are associated with buying a property and live in it. So that can be too much, but the same person can afford maybe $1,000 in rent, and that's where we come in, and we basically buy the property and then rent it out for $1,000 or $1,200, which is something that the tenant can afford. Now, if that person with the same income has an opportunity to buy a property and $1,200 a month for cost, not the price, the price will be maybe 150,000 160,000. And then the cost $1,200 A month, they will be tempted to say why rather than paying rent, I can buy a property similar to where I'm renting now. And I can basically have the same amount of payment every month to own it and make it my own. So now in either case, the important part is that the determination if I should own or if I rent comes from the income now what happens when we have a situation like right now and have been having for many years, and even now in 2023, where employers are actually looking for people to work to fill jobs. Unemployment is very, very low. So that's good for us from the perspective of people who make enough money to rent our properties but not enough money to buy an equivalent property for themselves. Those people will be very dependent as of the rent if unemployment keeps going up. and so far it hasn't even though the Fed has kept raising interest rates, and they keep saying, Why are we raising interest rates because we want to lower inflation and lower inflation also means companies have a harder time selling their stuff. And the first thing they always do when they have a hard time selling their stuff is they let people go, because that's oftentimes the largest expense they have, besides the product is to pay the salaries and wages for the people that they employ. And we have heard those news, but the thing that has happened so far is whatever company whether it's Amazon or Microsoft, or Facebook, or whatever the names are, says we're letting 1000 or 2000 5000 10,000 people go, it's not really that unemployment is going up. Because these people oftentimes well qualified people get immediately absorbed into other jobs. So that means the unemployment rate doesn't really go up. That's great for us. Number one, because people who have a good job that is regularly paying income, if they are somewhat prudent with their money, they will be dependable tenants and pay the rent every month, which is good for us. The second thing is if there is a high demand to fill positions, and not enough people who take on these jobs, right there something like 10 or 11 million jobs available in the United States right now. That means there is a competition, and the companies actually have to make offers to people who are willing to consider a job. And people that are working in jobs are going to say, Well, if you don't pay me a raise, like five or six or 7%, increase year over year, then I can find plenty of jobs, similar jobs and other companies. So those who are already employed are actually getting raises, and you can look it up in the statistics, but it's about 567 percent, it was I think, 6% last year, I'm thinking it's probably going to be at least as much this year. And it has to be in a way for the people that actually work for income. Because if we know that inflation is 678 percent, and that's only what the government says, I believe it's probably more like 15% in real terms, for the stuff that we really buying on a daily basis, and grocery stores and stuff like that for the kids. So as inflation is that high, obviously, people need to have higher wages. But it also then means for us, as the people that actually offer places to lease, basically, we're renting our investments, it means when people get higher wages, we can also reasonably increase the rents and get the rents because people have and we'll be getting more and more and more comfortable with realizing that everything gets more expensive. Now we're not just raising the rents because we want to make more cash flow, we're also raising the rents because our costs actually go up. Number one, the cost that goes up and in some areas pretty massively is property taxes. In some cases, the adjustments by the treasurer as for the property taxes were very significant. Because how they do it is really detrimental for us as investors, if they say, Okay, you buying a property for $120,000. And then two years later, they do a new assessment. And that same property together with all the other properties in the area have gone up in value from 120 to 150, then they want to collect the property tax on 150, which means you have a 1015 20% increase, we have to pay for that we are being charged for it. Same thing is true for anything that has to do with repairs anything as soon as something happens, we get charged to repair this stuff, which we want to because we want to have a nice property and give good value. But if the repairs get 1015 20% more expensive, because any plumber, electrician, and so forth, they all say where the gas is so much more expensive, the parts that I need have gotten more expensive. So the cost for us as landlords or as owners of the properties have gone up. But when we know that people's wages increase, we can reasonably increase the rent and get some of that money back. So that's why as long as we have the low unemployment as we have right now, it is really helpful for us because it keeps the value that we're providing to the market, both on the properties themselves but also on the rent income in the cash flow that we're always looking for relatively high. Now I want to just say we will probably start seeing that unemployment will go up as the year 2023 progresses and into future years because these measures that the Federal Reserve is taking and seems to not stop taking. I don't know whether interest rates ultimately will and will ultimately impact the economy. And what is very, very important in this context is that you as the owner, just like I and I always advise our tribe members that you really keep in touch with your property management to keep an eye on what is happening to your tenants. I actually would recommend for anybody that has multiple investment properties in the residential market that you guys basically check in on a regular basis and as long as unemployment is very low, you can probably be okay with checking in with property manager. I'm literally having a call, like once a quarter every three months. But if you see that the economy start changing, if you see that unemployment is going up, you have to recognize that that could have impact on the ability of your tenants to pay the rent, there is one last point to consider. I spoke a couple of touches here in this episode about rising interest rates, I want to again reiterate interest rates on the Federal Reserve level in the end around the end of 2021, where between zero and 0.5% interest rates right now as I'm recording this in like the first quarter of 2023, around 4.5%. So sometimes you hear in the media that they're saying, well, interest rates have increased from 0.5 to 4.5. So they've increased 4%. And that is not a false statement. But the impact doesn't come across in our mind, when we hear something gets up and 4%. That doesn't sound that much, what is really important to realize is 0.5 to 4.5, is a seven times higher interest seven times or eight times, or nine times, depending on what kind of terms you're getting higher interest, nine times five is 45, is 4.59 times higher, right? So it's can be between seven and nine times depending on which rate you started out with. But nine times higher, or eight times higher, is much more impactful, I think we can all understand what that means and what it really means for us. We used to be in competition, as I said at the beginning of this episode, with people who were either our tenants or just people randomly in the community that were investing in, who are looking for houses to buy to move in themselves, and we were looking to buy the same houses to rent them out. Now with these nine times higher interest rates. That also means it's much much harder for anybody to qualify for a mortgage with the bank to behind the property. And that is a benefit for us. Because we can then basically only or be in competition with other investors, but not with everybody. So the number of people who look for the house that we would like to own has come down. So as you can see, and this is a recurring theme to all our episodes through season one. And now again, and season two is everything and real estate investing is a balance. So on the one hand, we want a strong employment market and low unemployment rate, because that means our tenants will be able to pay the rent, if unemployment is so very low as it is now in the beginning of 2023. There's so much competition that tenants have the ability to get wages increase, and that means we have the ability to increase the rent and increase our cash flow. When that switches the balance has to be found, again to how can we make sure that we get tenants and retain tenants that have jobs that are safe, on the other hand, when we are wanting to add to our portfolio and get more properties. So we get to the time freedom point and our time freedom number that I mentioned at the very beginning, then we have less competition in this environment, because the less people who would qualify for mortgages to buy a house, they don't compete with us anymore. We are basically only really in competition with other investors. So I hope you get a feeling on how employment and unemployment and unemployment rate impacts us and how the changes that the Federal Reserve is trying to make by increasing interest rates can impact us in the future. So I want to encourage you to really be prepared, always keep an eye read our newsletter come in into our episodes on the podcast, and all the other stuff we do. And then there's all the other media but be very careful that you listen in a particular way as it relates to your investments. So with that being said, I hope you learned a lot about how unemployment can really impact your investment, your cash flow and the benefit and the success of your investments on the journey to the time freedom coin. If you have any questions if you have any comments, please put it below the episode. You will also find other resources and links down there. And if you're listening on Spotify, or Apple podcasts, please download the episode because that really helps us I didn't know this when we first started but these platforms actually count the success of a podcast by the number of downloads not by the number of people that are listening so you will do us a great favor to download the episode. So with that being said, I hope to see you at the next episode again, stay safe and be wet. Thanks for listening and I hope you enjoyed today's episode of the The IDEAL Investor Show more info and the links we mentioned during the show in the show notes or you can go to our website at Idea wealth grow a.com and sign up for the Apple podcast link. And if you'd like to talk to me sign up For a strategy call, hopefully you want to share what you learned with your network and bring more people in. We are really eager to hear your comments and until next time be well stay safe and ciao.