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.
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.
10 years later, Financial Samurai is now an established brand in the personal finance space that’s generating much more than I ever made in investment banking with 80% less work.
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.
Further, companies are also moving towards the heartland because it’s becoming cost prohibitive to pay their employees hundreds of thousands of dollars a year so they can rent two bedroom apartments for $4,500 a month.
With technology enabling geo-arbitrage, the opportunity is ripe for investment.
Investing In The Heartland Of America
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.
Face Reality To Profit
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.
Further, if you live in one of the many sanctuary cities in America, you are also a loser since Trump has decided to aggressively go after illegal immigration. It is a sad state of affairs to break apart families, but it is a reality we must face.
On the margin, sanctuary cities will be less attractive because they will lose their lower wage workforce that helps drive their economies forward. And since Americans are unwilling to fill low age jobs, overall services and quality of life in sanctuary cities may suffer.
If President Trump takes some or all of that $1 billion funding away from San Francisco, 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 uprooting 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, especially since the new tax policy was instated in 2018. It hurts expensive coastal city real estate with the $10,000 SALT deduction cap and $750,000 mortgage interest deduction cap.
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 to search for investments in Trump’s America instead. They enable investors looking to diversify into real estate to invest as little as $500 – $10,000 into various pre-vetted deals around the country.
There are plenty of deals in the pipeline each month that usually have only $1,000 – $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. Fundrise is open to all non-accredited investors.
Geo-Arbitrage Is Going To Be A Huge Trend
Due to technology, it’s no longer necessary to live in an expensive coastal city where a two bedroom, two bathroom apartment costs over $4,000 a month. Companies themselves have expanded away from the coasts because the cost of labor is too high.
By the year 2030, freelance workers will overtake traditional W2 wage earners thanks to the internet. If you haven’t looked, freelance opportunities are ubiquitous. Depending on your skill-set, you can earn much more contracting while being much more free than working a day job.
Take a look at this great chart highlighting the cost of living difference in Housing, Utilities, and Groceries compared to base case San Francisco living. Not only will more young folks decide to live in the MidWest and South, more people who’ve already made their money on the coasts will move to the Heartland as well to live a more comfortable life in retirement.
Take Advantage Of The Trend
Blue state real estate prices exploded during the eight years Obama was 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.
You are already seeing slowing growth in New York City. With our neighbors in the north Toronto and Vancouver down year over year, it’s only a matter of time before other coastal cities begin to weaken.
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 through 2024 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.
- The latest tax plan calls reduces the mortgage interest deduction to $750,000 from $1,000,000 and limits property tax and state income tax deductions to $10,000. This is terrible news for expensive, high tax states such as California, Connecticut, New Jersey, and New York.
After selling my San Francisco rental house in 2017 for 30X annual gross rent, I proceeded to reinvest $550,000 of the proceeds in real estate crowdfunding to take advantage of lower valuations and higher net rental yields in the heartland.
To earn more income passively with less risk exposure was my #1 goal as a new father. I’m pleased to say as of 2020, the annual returns have averaged around 16% a year with no work on my part.
With the long-term migration trend away from the coasts and into the heartland, I plan on continuing to take full advantage in 2020 and beyond. If companies like Google and Apple are spending billions of dollars expanding into the heartland, it’s probably wise for investors to follow suit.
Check out the announcement on 11/20/2019 by Apple CEO, Tim Cook, regarding its Austin campus expansion for its Mac Pro product. Bringing in thousands of jobs is going to help boost the real estate market in Austin.
The Best Real Estate Crowdfunding Platforms
The best real estate crowdfunding platforms to take advantage of real estate appreciation in the heartland are:
1) Fundrise – They were founded in 2012 and have consistently been the most innovative real estate crowdfunding platform. They created the eREIT fund category for investors to invest as little as $500 to gain real estate diversification in various regions of the country. Fundrise is free to sign up and is open to all non-accredited investors to explore.
2) CrowdStreet – If you’re an accredited investor, take a look at CrowdStreet a real estate marketplace that primarily focuses on secondary metro markets that are lower cost with higher cap rates and higher growth than the expensive coastal cities. These cities include Austin, Memphis, and Charleston. CrowdStreet has a direct-to-Sponsor model. This model improves efficiency and transparency. CrowdStreet is free to sign up and explore.
3) RealtyMogul – They were also founded in 2012 and are highly focused on developing a long-term business. I had lunch with their Founder & CEO and I came away impressed with her desire to build a long-term, sustainable company that focuses on the best deals. RealtyMogul is also free to sign up and explore. Their individual deals are for accredited investors only. But they do have two eREIT products that are open for non-accredited investors.
Updated for 2020 and beyond. Google also announced they are planning to buy $13 billion worth of heartland real estate to expand their corporate offices and data centers. Apple is also expanding aggressively into Austin, Texas. The trend toward the heartland is real.