Jason Hartman hosts client Drew Baker in a two-part interview highlighting Drew’s journey into self-management. He’s being self-managing a handful of properties in the Indianapolis market and talks about repairs he’s done to retain his tenants. He discusses the software he uses and how it has helped his self-managing. Then he discussed how to accelerate his depreciation in a cost-effective manner.
Investor 0:00
Just about mid 2011, I was I was leaving command I just taken over a position in a great job at the Naval Academy for a two year position there and had a lot more free time than I did on my submarine as you can imagine, and I was searching for a way to shift active income into passive you know, I’d read Robert Kiyosaki books over the years, I really just, I mean, they just spoke to me, Rich Dad, Poor Dad, and most of the others, you know, his prophecy, it all just made a lot of sense to me. So I was looking for, you know, following his model of shifting into you know, passive cash flow income, and I’m a mechanical engineer. And the thing that made most sense to me, you know, not buying the coin laundry machine, although i think that that facility may be a great idea to but for me, it was about real estate and buildings. And so I was looking into that you happen to have a great podcast and I started listening in the teens, I think it was and I’m starting to listen to all of them. And I just kept kind of become a junkie with that. I you know, so I forgot my first property in the end of 2011 and St. Louis. I bought a few more there. I’m up to eight and my wife, Susan. Is today In fact, we’ll we’ll get her first three and we’ll she’ll be at six by the end of this month. And hopefully if all goes well, we’ll have Susan topped out and then we’ll go back and start focusing on Gary again.
Announcer 1:11
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 2:01
Welcome, welcome. Welcome. And thank you so much for joining me. This is your host Jason Hartman with episode number 1188 1188. So we’ve got a follow up to the multiple show case study we’ve done on self management with Drew Baker. This episode actually will be in two parts today and tomorrow. And then we will have our 10th episode show on Thursday, which was a real zinger for you. So you’ll see you’ll see 10th episode coming up in a couple of days here. I’ve got drew Bach on the show. We have a variety of important topics to discuss today, not the least of which is self management. And we’re going to give you a continuing perspective on that. We want you to become an empowered investor. That is our big goal here is to empower investors to take control of their financial future. Of course, the first way you can do that is by getting away from the pool money investments, the Wall Street scams and all the rest. And the next layer once you’re a direct investor and income property is to self manage, or at least manage your managers with authority. Yes, have authority. And that’s what we help you do here on the show. So Drew, welcome back. How you doing?
Drew Baker 3:24
Great. Great. Jason. Glad to have you back in the United States. He Yes,
Jason Hartman 3:27
I am. I am back from China. And Wow, what an amazing trip. That was i was i was really quite surprised at the level of prosperity, you know, especially Shanghai, but even Guan Joe, Beijing, China was actually quite a bit nicer than I expected, you know, is the 83rd country for me. I’d never been to mainland China, only Hong Kong before. And I have been all over around Southeast Asia, Kuala Lumpur, Singapore, Valley, etc. But yeah, I was pretty impressed Now, of course, the Kyle bass. And how, yeah, how was the pollution there? I know that was a big issue in China for quite well, you know, I think the pollution is still a continuing problem. But it was not a problem for us. We didn’t get any days that were that it felt bad. In fact, in Shanghai, it was actually quite nice. I didn’t think it was polluted at all. In Beijing a little bit, but not bad. Maybe we just got kind of lucky about it. But let me tell you the type of pollution that you don’t get in China, this is good. You ready for this one? You
Drew Baker 4:40
know, I’m gonna start with leaf blower.
Jason Hartman 4:42
Yes, you You nailed it, Drew. You nailed it. You don’t get noise pollution. See here in the us here in the US. We get all sorts of noise invasions, right. We get disgusting leaf blowers, the worst invention in human history, possibly But we also get a lot of these cars and motorcycles that modify their exhaust systems. I think that should be completely illegal. What right to they have to disturb everybody else? You don’t hear any of that. It’s just very nice. You know, people use brooms in China rather than a leaf blowers. What a pleasant surprise. And then you don’t have the modified cars and the modified motorcycles. Everything’s just really quite quiet. Nice. I have a question for you. Because like, I think, for example, Tesla is building a factory in Shanghai, and, you know, anything to get done in the United States, you know, factory wise takes a couple of years if you’re going to build out something like that. And they were talking about the timeline in China. And they said that since there’s no ordinances and there may be in the city center, but like, they can build 24 hours. Yeah. And so I don’t know if I would buy that noise pollution thing in certain parts because when it comes to industry, They never sleep. Well, I’m not addressing construction. Now. We were not affected by any construction noise on the trip. I did see a lot of construction. But I did not hear construction. So I don’t know. You know, that may be a problem for some, but it’s definitely you definitely don’t have the leafblower problem. You don’t even have the gardening equipment problem. We stayed at two different Shangri La hotels on the trip and I love Shangri La hotels. They’re just gorgeous. The one we stayed at in which one was that was that I think it was the Hong Kong Shangri La. You know, I went out by the pool one morning and it was so pleasant that there was a gardener out there and he was clipping the hedges with you know manual non motorized clippers. It was just so quiet and pleasant and peaceful. I really enjoyed it.
Drew Baker 6:51
Yeah, I think my first world complaint which years can be least blower’s was going to be restaurants playing music way too. Oh, yeah. So at home No unnecessary.
Drew Baker 7:03
Does anyone like that?
Jason Hartman 7:04
Please explain. It’s I don’t get it. You know, the restaurants want to make people feel unsettled. So they don’t stay long. Yeah. So they can turn the tables over fast because it’s just all about money. I introduced the idea on this show years ago, the concept of what I call air conditioning abuse, where you walk into these places, and they’re just way too cold. I know first world problem, I get it. The same is true with what I call audio abuse. We need to start being a lot more conscious of all of these forms of abuse that we’ve got going on. And I know some of you listening think Oh, shut up you guys this total first world ridiculousness? No, it’s really not it matters. But hey, let’s get an update on your self management. You took over management of a whole bunch of your properties Drew, you spoke at our meet the Masters event about self management, you showed a ton of pictures and had one of our audience members a little angry. He’s in the property management business and he didn’t like self management. And he’s probably listening now Hi, Adele, give us an update a little bit on what’s going on with your properties.
Drew Baker 8:14
It’s funny because I the the crescendo in that meet the Masters event. When I spoke the slide that we ended up getting the interruption from was mon slide talking about all the downsides of self management. So maybe at another time, I can bring that up and we can talk about that. But yeah, things are going well with self management. You know, I took the better part of six months to kind of straighten out what I had most of the properties I’ve owned for about 10 years now. buying the first one, I guess in like mid 2010. So maybe nine years actually, I remember when you bought that property and you agonized about it and Are you glad you did looking back? It was a good investment at the time because the way I looked at it was if I could buy the property below the cost of construction and there’s a strong rental Mark In the area, it seemed like there wasn’t a lot of downside. Now granted in 2010 if you had had any money and you threw it at the dartboard, you probably would be okay. If you would have purchased golden or silver in 2010. You wouldn’t have done that. Well,
Jason Hartman 9:14
it’s so certainly the stock market’s gone up in the real estate markets pretty much gone up. And that first property you bought was in Indianapolis.
Drew Baker 9:22
Yeah, that is true. Yeah. If you’d bought gold, but you know, the thing is, you don’t want to buy gold when everyone’s there’s a liquidity issue. A bunch of people are afraid. There’s the fear level that an all time high, then everyone just floods into that. So you would have made more money if you’d bought it back when everybody wasn’t scared to death. But yeah, you’re right. So I guess if you had bought gold, it would have you never the problem with gold is gold, not really an investment because it doesn’t, it doesn’t produce any income. It just sits there and looks pretty and sure it’s a great off grid asset. So the way I look at gold is if the government comes in and tries to take everything away. That’s kind of like you’re off grid money. It’s the end of the world. Yeah,
Jason Hartman 10:06
yeah. So yeah, precious metals, as I’ve discussed ad nauseum over the past years are highly overrated, you want things that produce income, if it doesn’t produce income, it’s a speculation, not an investment. But you know, you can have a little bit of it to stash away, you know, I get the idea. Okay. So self management, how things going anything new any new information, you know, one of the nice things you’ve you’ve been doing is you’ve been improving your properties. And, you know, putting new faucets in new light fixtures with all the money you’re saving by not paying property manager. And, you know, just doing it yourself, which is really quite easy. You know, you’ve been improving your properties nicely. So I think you’re gonna see your tenant turnover go way down, and you’re going to be able to keep your tenants better and in all kinds of Good stuff. So yeah,
Drew Baker 11:01
the thing that’s nice is all of my properties were all either going month to month, or they were just about to come out of lease. So I was able to get everyone to resign, and kind of just as sort of a proof of concept for them, I said, Hey, I’m going to spend some time and kind of address some of the things you want some of the things you need and fix up the place. I mean, they all decided to resign. So I think they like what I’m doing. But you know, it does come, I’ll tell you kind of my strategy of buying the places and when I did, I sort of bought them in clusters. So I decided to sort of by three or four in one neighborhood or adjacent neighborhoods, they were somewhat close to each other. And I think the issue with that so there’s a couple things there one thing is great is like tomorrow, I’m going to have a roof replaced on one of my properties. And I told the roofer I want you to look at two other properties while you’re over there to get me an estimate. See how that rooster doing. But with that, since all the homes were built between 1999 and 2003, they’re all about 20 years old. So having bought them in clusters, you’re seeing all the roofs kind of go out at once, all the mechanicals like the H fak. all sort of start to give issues at once. So that is sort of a something I didn’t foresee in terms of like budgeting for that. Because every 20 years, you’re going to have some expense in that way that will cut into your performance. But the nice thing is, is I don’t expect to sell them for another 15 years or 20 years. So it’s going to level out but at the same time, you have to expense it this year, and then take the depreciation over 27 and a half years. So that’s what’s going on. Have you
Jason Hartman 12:42
considered doing any cost segregation studies on your properties, to take that depreciation faster on certain components of your properties and get a better tax deduction? I know since meet the Masters a lot of people been asking about that after college You’re right spoke on it. I’ve been looking into it a little more. And I did I want to remind everybody listening. A long time ago, I did a show on this, where we had a guest on that did inexpensive cost segregation studies that actually were economically feasible for single family homes where I think he was charging $995. And that makes it work, usually, a cost seg or cost segregation. It was cost prohibitive for the single family home on a large commercial property. It made sense to do it and I’ll tell you, I did it on an apartment complex I owned. It was I think we spent my partner and I spent like $28,000 to do the cost sake study. So that was a lot of money. Right? But we got it back. Way more than respect. It was a good deal for us to do that. But you know, again, we ended up selling that apartment building for I think $8.2 million. Maybe it 8.1 don’t quote me on the price, but like about a million bucks, give or take, okay? It was worth it to do that cost savings study, but usually on a single family home, you know, it’s not really economical. But I did interview against that does those so go to Jason Hartman, calm type in cost segregation in the search bar. And you can find that episode
Drew Baker 14:18
where the gentleman was on the show, offering that for single family homes for a very reasonable price. Go ahead, Drew. Well, when you did the cost sag, and then you did a 1031 exchange and other places. I know you didn’t fully cover it all. But by doing that cost, I guess it probably did make a lot of sense because you ended up selling the property. I mean, I guess it would make sense either way. But, you know, you were able to capture depreciation that you wouldn’t have been able to capture had you, you know, sold the property. Is that fair to say?
Jason Hartman 14:48
Yeah, we’ll just remember this. Ultimately, you’ll capture all the depreciation is and as time goes by, right, I mean in 27 and a half years, all depreciation will have taken place, but accelerating it because of the time value of money. It’s always better to have. I’ll gladly pay you Tuesday for a hamburger today is when he says Popeye right? So that’s the point of cost segue.
Drew Baker 15:14
My question is, since you like let’s say you are going to sell a property like a large multifamily unit, in a few years from now, doing the cost, seg would allow you to capture some of the depreciation that you wouldn’t get to see because you ended up selling the property. You may not get it all by the time you sell it. But remember, when you 1031 exchange everything just rolls into the next thing,
Jason Hartman 15:40
right him and there’s a there’s another thing though, this just came to my mind as you were bringing that up. You could probably offer that cost savings study that you paid for to the next buyer, and it would help them because that body they could use it to and you know, they may have to tweak and revise it. Sure, but at least they’ll have a base where you did the heavy lifting for them. And that’ll make it more valuable to the new buyer. But hey, let’s not get too stuck on that. Okay, let’s
Drew Baker 16:10
get to deep No, you’re double dipping the chip on that one. That’s hilarious. Yeah. Hey,
Jason Hartman 16:14
look, we’re in the capitalism over here, folks. Okay, so keep listening.
Drew Baker 16:19
We’ll help you. So yeah, no, I didn’t do any cost segregations on any of my properties, you know, a lot of these places were purchased with cash, so that you know, and they were under $100,000. So I think the cost savings wouldn’t be that. Great. And since a lot of the repair maintenance that I’m doing, like a roof, it is what it is. I don’t know that it would accelerate it dramatically. And also, you know, if it’s $1,000 it’s just one of those things I haven’t gone through the trouble to and I don’t know how much it would help me but I’m open to it. I think it does make sense in certain circumstances. Now, so you all have your tenants renewed and all the properties since you’ve been self managing You were telling me just a minor thing, but you’re using hellosign to do the leases, you know, so you’ve got like a DocuSign type platform now to make it more convenient for you and your tenants, no papers to deal with, right? Yeah. So I originally I was having my leasing agent send renewal contracts as she graciously offered to do. But I felt like since I’ve kind of spread out the lease renewals, so they don’t all collide at the same time. Having to ask her every month to do that I just thought was kind of something sticky, and I didn’t want to bother her. You know, because you have to upload the PDF and get places for them to date and sign and put in every email address. It takes like 15 minutes. It’s not a huge ordeal, but it’s to ask that favor every month. It’s kind of a hassle because I have about 10 units that I’m now self managing. So the beauty about hellosign is they have a free version that you can get three documents signed a month, which for most Your average listeners that’ll cover will easily cover their spread. And I don’t really like to have properties renew all in the same month, because if to go vacant, a lot of times the repair people I use, you know, it may just end up where I have extra vacancy because I can’t anticipate. So that’s how I approached it. And also, you know, the thing that’s important understand is, when you have a place like the place that I’m referring to is Indianapolis, where you have these unpredictable weather patterns, bad months where the weather’s horrible, and the only people moving are the ones that have to move that you don’t want as tenants per se. You know, going through divorce separating getting kicked out at Christmas, because they can’t make ends meet. I’ve just found that I have a higher likelihood of success when there’s more competition in the warmer months. So that period, or that window of time, is about four or five months. So I Find that I tried to get most of my tenants to sign to your leases. And I’d say most more than half have gone for that. So when you take a two year lease, and then you know, maybe the other half do a one year lease, and you have that four or five months wiggle room, I found that I it’s very rare that I’ll have to that will renew In the same month because of the way I kind of have it spread out.
Jason Hartman 19:22
Yep, that’s good. I think that’s good to split it up. And then always try to get your lease renewals in the prime time of your for your marketplace. I used to use a clause in my leases that said you know, even if the lease is month to month at that point, like if you you have a one year or two year lease and then the tenant just stays and for whatever reason you didn’t have them re sign a new lease. It would still say that they cannot vacate in December, for example, you know, because I just, I know I’m going to have a vacancy if they vacate into December, it’s just not a good month to lease. Right.
Drew Baker 20:02
Very good. Good point. Good point. That’s interesting that you can write that in the thing that I like about having, you know, all these clients because they are customers, you know, since they rent for me, so they have a good way to look
Jason Hartman 20:13
at it. way to look at it is your cost. I
Drew Baker 20:16
have them all on lease, the thing that I did that was kind of fun was I added up all the time that I have in rental commitments, and I know this is one in the hands better than two, you know, two in the bush. But as far as binding contractual agreements of time, you know, I looked at all these rental units, and I added up how much how many days I’ve had in commitments, and it’s something like 12 years, between all my rentals, and I was just doing the math and I’m like, I have 100 and, you know, $50,000 worth of commitments. And, you know, the thing that’s nice is that’s an annuity meaning and what you mean by that is if you add up all the months of rental income This day has contracted for, it’s $150,000. Is that what you’re saying? Yes. Okay. Also, you know, duration of time, you know, half or doing two years, the other half might do a year, all that time between, you know, nine or 10 rentals is about 12 to 13 years. And I think a lot of these people will stay even longer, and I’m sure they will looking at it, and
Jason Hartman 21:23
then a couple, you know, one or two are probably going to default to and break their lease. And you know, that’s just part of the business.
Drew Baker 21:29
Right. I’ve certainly had that. So that does happen. But the thing that’s nice is, you know, I’m looking at some of these clients, and they’ve been there for five or six years. And now that I’ve taken over self management, I mean, I have much more of a pulse on kind of what they’re doing
Jason Hartman 21:45
longer. Yeah, you ran you know what’s cool, yeah, I love it.
Drew Baker 21:49
Yeah. And so you know, and the other thing too, is I had kind of an interesting situation with one of my tenants where their lease was about to expire in about a month and so about 45 days before I said, Hey, I would like to find out whether you want to do one or two year lease and you can lock in this existing rate for one or two years, it’s up to you. And they opted for one year. And when I sent them the lease renewal, they said, Hey, I don’t want to sign yet. My lease isn’t up till the first. And I very delicately told them that in the same way that you have to give 30 days notice if you’re leaving, I need to give you a 30 days notice for the renewal. In other words, you need to give them 30 days notice to vacate or to say they need to renew what exactly do you mean? Yeah, so just in the same way that they need to give me notice if they’re leaving, I’m giving them notice of what the new leases and they need to sign it 30 days before the lease expires. That was my strategy because hey, I’m not going to have them sign the new lease on the first when their lease starts like that doesn’t give us any time. They still need to get 30 days notice but that would kick them off of the lead. renewal date. So, that’s the way I approached it. Okay, cool.
Jason Hartman 23:03
Yeah. Good, good stuff. Okay. This will be continued on the next episode. Thank you for listening and happy investing. Thank you so much for listening. Please be sure to subscribe so that you don’t miss any episodes. Be sure to check out the show’s specific website and our general website heart and Mediacom for appropriate disclaimers and Terms of Service. Remember that guest opinions are their own. And if you require specific legal or tax advice, or advice and any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to iTunes or Stitcher Radio or whatever platform you’re using and write a review for the show we would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.
