Making a small fortune is really fun. You can do so more easily if you can correctly predict a trend. Not only will you earn a much higher return on your investment, you’ll also suffer less anxiety and grief.
In 1997, I studied abroad in China for six months and realized its economy was on the verge of explosive growth. So I minored in Mandarin and joined the Asian Equities department at a major investment bank to ride the opening up of the region. I was probably the dumbest donkey in the industry, but being Asian, knowing how to speak Mandarin, and having the good sense to hustle for 13 years was good enough for me to retire at the age of 34.
By 2001, after the dotcom bubble burst, it was clear the public’s love affair with the stock market was over. So I shifted the majority of my wealth from stocks to real estate and witnessed SF property prices soar while stocks languished for a decade. Of course, I screwed myself in 2007 by buying a vacation property in Lake Tahoe right before the housing collapse, but the exposure wasn’t large enough to cause me mortal damage.
During the financial crisis, I realized it was now or never to start a website to at least try and take advantage of web 2.0. I had no plan. All I knew was my happy days were numbered due to a structural decline in the banking industry. Increased regulation and narrowing spreads made work less fun. Eight years later, Financial Samurai is now an established brand in the personal finance space that’s generating a healthy income.
So what’s the next trend already? In my opinion, the next money making trend is investing in the heartland of America through real estate crowdfunding. To escape high prices in the coastal cities, people — often younger and with lower- or middle-class incomes — are looking toward the Inland Empire and nearby states for additional square footage and a lower mortgage payment. With technology enabling geo-arbitrage, the opportunity is ripe for investment!
Investing In The Heartland Of America
Do you know who is guaranteed to lose their job in 2017? Hopefully none of you loyal Financial Samurai readers who don’t let your personal political views cloud your financial goals.
The people who need to find new jobs this year are the approximate 7,000 staffers appointed to U.S. government positions by President Obama’s team. For example, Obama-appointed James Comey, Director of the FBI got fired by Donald Trump on May 9, 2017 so he can install his own man. That’s just the way it is as President Trump takes reign for the next four years and chooses his own people.
Power is ephemeral, which is why in order to promote government harmony, the Hatch Act of 1939 restricts the political activities of Federal employees. Basically, the Act says: Don’t bring your politics to the office.
While the private sector operates without a similar Hatch Act restriction, common sense says it’s still better not to go crazy if your boss has a different political point of view.
The uncertainty of power is why large corporations donate to both political parties every year. They are hedging their bets. Money curries favor from politicians who need money to win and stay in power. Even if you donated $1,000,000 to Hillary, you’re not screwed if you also donated $1,000,000 to Ivanka’s charity of choice; Donald should still be willing to take your phone call.
Who Else Wins Or Loses?
Now that we know from a personnel level who the winners and losers are of a Trump victory, let’s take a look at the election results from a macro level.
The below chart is the final electoral college tally. As you can see from the map, the losers are California, Oregon, Washington, Nevada, Colorado, New Mexico, Minnesota, Illinois, New Hampshire, Vermont, New York, Maine, Massachusetts, Rhode Island, Connecticut, New Jersey, Delaware, Maryland, Washington D.C. and Hawaii.
The winners are obviously those states in red.
Now let’s drill down to the election results by county. Not every county in every losing state voted for Hillary. For example, just eyeball California on the map below and you will see the state is pretty divided. But given we have a winner take all system, Hillary was able to gain all 55 of California’s electoral votes.
The real shock from the county-level results is how much of a landslide it was for Trump. If you were just listening to the mass media, you would have been lead to believe the outcome was much more balanced. But as we know, the mass media and firms like Facebook and Twitter lean left. Therefore, you’ve got to constantly be aware of potential bias and think for yourself.
You might now be wondering, how can there be such a county-level landslide victory for Trump when Hillary won the popular vote by close to 2.9 million? The answer simply lies in demographics.
About half of the U.S. population lives in the blue areas seen below, and the other half of the population lives in the gray areas. Folks in the blue areas underestimated the desire of folks living in the gray areas to want something other than a career politician. With globalization, a lot of people living in the gray areas have not been able to take advantage of the economic boom.
Now that we know the basics of what’s going on, it’s important to face the reality that you are a loser if you live in one of the losing counties or states in America.
I’ve lived in San Francisco for 16 years, have property in Hawaii, and want to return to Hawaii permanently within the next 5 years to live the dream life.
Therefore, under the Trump presidency, I am a DOUBLE LOSER, whether I supported him or not. But since I believe the government is inefficient and filled with corrupt politicians from both parties who practice crony capitalism, I’m all about facing reality and finding solutions to building greater wealth so I never have to depend on the government.
San Francisco is a “sanctuary city,” i.e. a city that has adopted a policy of protecting undocumented immigrants by not prosecuting them solely for violating the federal immigration laws of the country they are now living in illegally. Obviously, this is a hot topic since struggling U.S. citizens are understandably upset with illegal immigrants who occupy jobs or coveted spots at great universities. On the other hand, except for felons, how can we be so cruel and deport people who came to America as children and have the potential to become great contributing citizens?
San Francisco receives about $1 billion annually from the federal government. If I was an illegal immigrant, of course I’d choose a sanctuary city to set up roots. As there are 41 sanctuary cities in America today, you yourself may be living in a losing sanctuary city.
If President Trump takes some or all of that $1 billion funding away, all San Francisco residents will lose because we’ll all be forced to pay higher taxes to help fund our inefficient city government and its underfunded pension system. Higher taxes will result in less consumer spending, less corporate spending, less hiring and a slowdown in growth. A loss of sanctuary status also means potentially less supply of labor for lower paying jobs.
One solution for those who live in one of the 41 sanctuary cities is to just relocate to one of the winning counties/states. It’s clear that Donald will try to take care of the states that backed his campaign. He’s been incredibly vocal about punishing American companies that set up factories abroad and sell those products in America. But given I’ve got friends and property in San Francisco, uprooting my life is not that easy.
Hence, the obvious solution is to accept my situation and instead move CAPITAL towards America’s most favorable cities and states instead.
The Easiest Way To Move Capital To Winning Cities, Counties And States
An easy way to invest in a Trump Presidency is to look at the sectors that should benefit from his victory. These winning sectors include biotech, banks, energy, infrastructure and defense. The idea is that less regulation and more government spending should be a boon for these five industries. We’ve seen these sectors perform quite well since the election victory. They could potentially continue to outperform if earnings surprise on the upside.
The other way to invest in Donald’s America is to fly around the country and invest in commercial or residential properties. The problem with this method is that it’s not only inefficient, it requires a lot of capital and a ton of follow-on maintenance once a property is purchased.
Instead of flying all around the country investing in locations where I have zero expertise, the simple solution is to leverage real estate crowdsourcing platforms like RealtyShares to search for investments in Trump’s America instead. They enable investors looking to diversify into real estate to invest as little as $5,000 – $10,000 into various pre-vetted deals around the country.
Here’s a snapshot of some exited deals on RealtyShares. All deals had successful returns, and all deals except for the New Jersey deal qualify as an investment in Trump’s America.
There are plenty more deals in the pipeline each month that usually have only $5,000 minimum investment requirements. That’s much more affordable than having to fly to Newnan, Georgia to poke at some sheetrock before making a much larger cash investment.
Every project is different, so spend time reading the research each sponsor puts together on the platform before making a decision.
For those of you who want to just have a fund manager invest in the heartland for you, Fundrise created a Heartland eREIT that specifically focuses on the middle regions of America.
Take Advantage Of The Trend
Blue state real estate prices exploded over the past eight years with Obama in office. With his term now over, the good times must wait until the next wave of mega IPOs and hungry foreign investors enrich tens of thousands of lucky blue denizens again.
Good investors always think about secular changes, regardless of where they stand on the political spectrum. Thus, I believe Red state real estate should outperform over the next 4+ years because:
- A Republican president will give back to the people who got him there through the theme, “Hire American, Buy American.”
- There will be a net migration out of Blue states into Red states as more people realize it’s a great deal living in Texas if you can get 3X as much for 1/3rd the price.
- As our country gets older, more retirees will move out of Blue states to stretch their retirement dollar.
- The remote work trend will continue due to technology and a tight labor market.
- Sanctuary cities are at risk of seeing their federal funding pulled and reallocated to Red cities.
- Income growth should be higher in Red states due to demographic shifts.
- Trump’s tax plan calls for an elimination of State and property tax deductions, hitting California, New York and New Jersey the hardest, while benefitting cheaper states with no state income taxes to deduct e.g. Texas.
- Now that investing in real estate is more efficient, Red State 10%+ cap rates compared to <4% cap rates in Blue cities are too hard to ignore. The spread should narrow.
- A potential expansion of who can invest in real estate crowdsourcing will lead to an increase in demand and prices.
- The rise of real estate crowdsourcing platforms increases the supply of capital, thereby increasing the demand and prices of previously hard to tap investments.
- Update 2018: The latest Republican tax plan calls for reducing the mortgage interest deduction to $500,000 from $1,000,000, limit property tax deductions to $10,000, and remove state income tax deductions. As a result, California, New Jersey, and New York get hit the most while heartland states with no state income taxes like Texas, benefit the most.
I’ve currently allocated $250,000 with RealtyShares in order to diversify my real estate exposure to less expensive parts of the country. The goal is to seek a 8% – 15% annual return. If all goes well into 2018, I plan to increase my allocation to $500,000 with exposure to roughly 20 different properties in order to generate $40,000 – $75,000 a year in returns.