In the first part of this episode, Jason Hartman talks about changes in the economy and how technological advancement can help with the shift. Then, he answers a question from a listener about investing in an apartment building. Jason shares the critical questions that need to be asked, why it pays to be cautious, and the importance of reading every word of the documents.
Announcer 0:00
This show is produced by the Hartman media company. For more information and links to all our great podcasts, visit Hartman media.com.
Announcer 0:13
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 1000s 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 1:03
Hey, welcome to the creating wealth show. This is your host Jason Hartman episode number 541 541. Thank you so much for joining me today. I am in beautiful Portland, Oregon. Yes, Portland, Oregon. I’m here for a conference. And I tell you one thing this state did, right. You know what I’m going to say that right, libertarian Jason, one thing they did, right? No sales tax, as left wing as this state is, it is a great place for shopping. So if you need some retail therapy, no sales tax is quite a good deal. Quite a good deal. Hey, So today, we’re gonna take a call from a caller and just talk a little bit about investing in funds. And I gotta tell you, it boggles my mind. People, it boggles my mind, how many smart, sophisticated people will go into deals, just not really even knowing what they’re getting into. And this is not rare. You know, this is done, probably 10s of 1000s of times every day, maybe hundreds of 1000s. I don’t know, I’ll venture to say it maybe millions of times around the world, each day, that people do things like this, just really knowing so little about what they’re getting into, you know, they just don’t talk much about it. And it’s, it’s amazing that people will go in, and they will invest in some sort of pooled money asset, whether it be a stock or real estate fund, whatever kind of anything, where you pull the money together any kind of fund a general partnership, an LLC, whatever the vehicle, let’s not complicate it with that, let’s just call it a fund. And they’ll do it and get a lousy return on it. Or they will even lose money, they’ll be susceptible to one of the three major problems might be investing with a crook might be investing with an idiot, assuming they’re honest and competent, taking a huge management fee off the top for managing the deal. I’m going through that quickly. Because you already know commandment number three, but it just boggles my mind.
I got pitched last week by a friend of mine who syndicates hotel and apartment deals. I said, Look, send over your documents, I’ll take a peek, and probably nine attachments to one email, with monumental amounts of reading, that have to be done to look into video. And still, when you do all that reading after you’ve done all of that, you still really don’t know what you’re getting into. It is mind boggling. And I have to tell you this, of course, as you know, is one of the reasons I started the venture Alliance, because I want to do some bigger deals. And I’ve done some big deals myself and you know, with with a couple of different clients, you know, they’ve worked out fairly well, I definitely would say some have worked out very well. But, you know, I, I think the thing is, when you when you want to do everything as a direct investor, that’s great for the vast majority of people, the vast majority of our clients, being a direct investor, and buying 510 20 houses over the course of you know, maybe quickly depending on how much you have to invest in terms of capital. Maybe you do that over the course of several years. It all it’s all different for everybody. No problem there. But, you know, the one downfall it has is you can’t have access to big deals necessarily by yourself, right? So it necessitates making this choice and I say the fund choice where you’re doing it with a bunch of people you don’t know. And you’re basically giving your money to a fund manager, you don’t know, that is not a good choice. And above that the bigger bigger choice is the sort of a wall street type choice.
And that’s a really bad deal. And below that, if we’re looking at amounts of capital, by the way, that’s how I’m kind of ranking that, you know, you’ve got the big wall street stuff, the huge stuff, you know, all of their different funds and pooled money investments, even stocks, private equity, hedge funds, whatever, we’ll call that the, the sort of the Wall Street category. And that stinks. We all know that, okay. It’s great for the insiders, but it’s terrible for the average investor. And then below that, we’ve got the people that are out there, you know, syndicating hotel, or apartment deal or whatever, you know, those are, I don’t know, they’re all different, but maybe they’re raising $10 million to buy a hotel or an apartment or something like that, those deals usually stink to, okay, because you’re doing it with a bunch of people you don’t know. And you’re just likely to get burned at some level, with the three major problems, then below that, in terms of amount of capital raised, is getting together with a few people, you know, like, and trust hope, well, you don’t even have to like them, just know him and trust him. And, and there, you’re basically going in on a deal together. Now, I’m not sure how it might be structured, you can structure it a lot of different ways. general partnership, limited partnership way, lots of different ways. But you’re doing it with some people, you know, in all the people in the deal, or at least the vast majority of them, you know them. So you’re really keeping an eye on it. It’s almost like being a direct investor. And then the level below that, in terms of, you know, overall capital raised for the deal is where you’re just doing it yourself. You’re being a direct investor.
And, and, you know, I mean, we all know people who have started with very little and created some really nice wealth for themselves, just buying some houses. I mean, it’s so simple. And as humans, it’s funny how our nature is that we want to just overcomplicate everything. I do it myself all the time. And, and I see other people doing it. And it’s, it’s a lot easier, I guess, you know, certainly to critique what other people are doing who’ve been to look in the mirror and to critique myself. But you know, I have this tendency to I certainly overcomplicate things, a lot of times when the best things are really pretty simple. So, something to keep in mind there. So we’re gonna take a call and talk about that today. I think it’ll be educational for you and enlightening. So we’ll get to that in a few minutes. But as I’m at this conference, you know, I i’ve been hanging out with Doug, you’ve heard Doug on the podcast, he lives up here in Portland. Tomorrow, I’m meeting with one of our lenders, the conference ends tonight. And you know, these conferences, I really have expanded my horizons, my network a lot, you know, the past couple of years, I’ve really made it a point to attend a lot of conferences and get out there and see what’s going on in the world. And, you know, I’ve done this over over the course of years, but I don’t know, I guess I was in a little conference rut for a while where it wasn’t really going to too many things. You know, this has been a fairly interesting event. It’s called the world domination summit. Kind of a funny name, definitely skews left wing for sure. I mean, heck, we’re in Portland. Okay. And it just always amazes me how inefficient conferences are, you know, I mean, it’s great. You get inspired, you learn some things, you meet some great people and stuff. But someone has got to do an expo is a, really, someone needs to take this on, and it’s not going to be me. Okay, so. So listeners out there, maybe you’ll do it. But someone has got to do an expo say I never see anybody talking about this on these conferences, and the environmental impact of them. I mean, you know, this conference there, they’re talking about, you know, how we need to take care of the environment and all this kind of stuff.
And, you know, when I was in Europe, a month and a half, two months ago, I was in Croatia, at another conference, the same type of drivel, you know, we got to take care of the environment. But people are traveling to these things from all over the world and making a huge environmental impact. Now, I don’t think, you know, I think people are a resource. You know, I don’t I don’t think that’s all that bad. I think we should be good stewards. I think we should be conscientious about things. But I don’t think we should view ourselves as like this elite class and get up on stage and say that the rules apply to all of the little people out there, yet they don’t apply to us. Right? And that’s just what I hear over and over are these some of these left leaning conferences and I it’s just really annoying to me. But anyway, enough of that. So the debt crisis? Wow, you know, we’re watching the news about Greece, it continues to unfold. Do you know that in Greece, over half of the population under age 34, is unemployed? And over half are Oh, sorry, no, it’s more than half. I can’t remember the number, but it’s like a really high percentage. I am gonna, I’m gonna botch this one, I bet I just want to say it’s like 70% of the population under 34. lives with their parents in Greece, and Spain is almost exactly the same. Right? In terms of those numbers. Do you know that for 90 years, Greece has been an irresponsible debtor, they’ve basically been in a debt crisis for nine decades, half of the time, they’ve been independent. It’s just it’s mind boggling. When you look at this stuff. And you you look at what’s next and the domino. And I constantly am talking about this about, you know, the US, and how much debt we have, and how many unfunded mandates we have, how many obligations we have that we cannot possibly meet. In less. One of the six things happens, the six things I talked about, and I’ll just highlight a couple of those, I’ve talked about them before, they’re Jason’s six ways to escape the debt disaster. One is to have garage sale. Another one is to increase taxes, not enough tax money to increase to solve that problem.
Another one is to have technological innovation. That is America centric. And you know, that, I don’t know, you know, it’s a wild card, because nobody really can analyze the impact. It’s, it’s impossible to tell. But as you know, and I’d love to have some listeners come on the show and talk about this with me, because I am wrestling with this big time. I really, you know, I, I like to make predictions. I like to think of myself, to some degree as a hack economist and a hack futurist. And in doing that, you know, I’m talking to all these people all the time on all of my shows, not just the creating wealth show about scientific advances about technology. And in doing that, it is a huge wildcard as to what technological innovation will mean to us. But if America is at the center of some of these things, and certainly the whole world will benefit from them. That could save us all, technology could save us all. And the thing I’m really wrestling with specifically as it comes to technology, is the subject of robotics. And the way they will displace workers in virtually every industry, the transportation industry, the I’m going to say it, don’t laugh when I say this, but the poetry industry, yes. You didn’t know there was a poetry industry, did you? But computers, and artificial intelligence can write songs, it can write poetry, they can write books, do you know some of the stuff you’re reading now? is actually written by computers? It’s written by machines? Yes, it is. There are now algorithms and you know, the the burgeoning field of AI or artificial intelligence, that is literally writing some of the articles you read. There’s a company who does this, I actually talked to them on the phone about a year ago, and communicated with him. And for example, if you need an article, if you’re a media outlet, and you need an article on a sporting event, or the financial markets, think of it it’s really not that complicated. For a computer to write about this stuff. You have an event. And with that event, you had certain numbers occur yesterday, you know, the Dow went up, the Dow went down, the NASDAQ went up or down or the s&p went up or down the Russell 2000 went up or down, you know, the the Nikkei index went up or down and in what happened, you know, that’s just some data. Those are just data points. And you can put that into English or any language for that matter what machine.
I mean, Google has made incredible advances in understanding natural language. And if you look at the apps like Siri, on your iPhone, or the, I guess there’s a similar product on the Android, I don’t know, I’m not an Android user. But this morning, for example, I said, on my phone, I said, Siri, tell me a story. And, you know, it came back and said, you already heard that. Or I already told you a story. And then I asked a few more times, and it really did tell me a story. It was kind of funny. So try that on your on your iPhone, if you have one, ask Siri to tell you a story. So when you look at that, maybe this will save us all. But overall, as far as the debt crisis goes, and being the you know, the best house in the worst neighborhood, I think the United States is definitely in that seat. Because I’m looking at a Business Insider article now of 14 countries that are spiraling towards a government debt crisis. This articles by Heather Stewart from the guardian. And let me just share with you a little bit of these lists. Okay. And you know, you think Greece is bad. You think the US is mismanaged? And you know, we’ve got a lot of debt in the US. Certainly, you’re right. But the US happens to have the reserve currency. And like I always say the military to keep it that way. So forgive me if I’m pronouncing some of these country names wrong. By the way. They’re, some of them are rather small countries. Okay. Boo Hatton. Cape Verde, Dominica, Ethiopia, Ghana, Laos, mera tawnya, Mongolia, Mozambique, Samoa, Sao Tome a principi. I don’t know how to say that Senegal, Tanzania, Uganda. Those are countries that all have a very high risk of a government external debt crisis. And these countries are currently in a government external debt crisis. Armenia believes we use we’ve we’ve talked a lot about believes over the years. Costa Rica you know many people think let’s just go invest in Costa Rica. Are you kidding me? Have you been to Costa Rica? Have you tried to drive on those roads in Costa Rica? The potholes are like the size of VW bugs. Sometimes it’s insane. Croatia, I was just in beautiful Croatia, external government debt crisis already. Cyprus, you know about that they had the haircut where they just swiped a bunch of money out of the bank accounts. The Dominican Republic or the Dr. El Salvador, Gambia, Greece, of course, Greece, Grenada, Ireland, I was just in Ireland, Jamaica, Lebanon, Macedonia, the Marshall Islands, Montenegro, Portugal, Spain, Sri Lanka, St. Vincent and the Grenadines, Tanzania, Ukraine, Sudan, Zimbabwe. Okay. All of these are already in a debt crisis. The world is in a debt crisis. I mean, in those are just the high risk countries. There’s a lot of lower risk countries as well. I mean, look at what is going on around the world. I mean, China is an I had just had Harry dent, I just recorded an episode with Harry dent again last week, and that will air soon. You know, that’s, I think his fourth time on our show. And China does not look good. Okay. Russia does not look good.
I mean, this is a matter of relativity. Okay. It is relativity. So when we look around the world, there’s there’s a lot to consider. And when we look when we look at real estate investing, the United States has a very special real estate market, very special, very unique characteristics that are unrivaled in the world, having been to 78 countries, myself, and some of those countries I’ve been to several times, okay, it’s not just a one visit. In many cases, I tell you, the US has got some pretty good real estate deals for sure. But if you are interested in this topic of robotics, and robotics, replacing jobs, and what that means to the economy, call into the show, leave a comment, go to Jason hartman.com. And just press that little leave a voicemail tab there on the right hand side of the website at Jason hartman.com. Leave your comment about what you think about robotics displacing jobs about the future. There’s an interesting Mises Institute article that I want to share in a future episode. Maybe we’ll have another we’ve had some Mieses Institute guests on the show before over the years, you know about robotics and about how it’s it’s great news because we don’t want jobs. We just want wealth and prosperity. Well, maybe that’s what the future holds. Maybe we really are moving into a state of utopia. Maybe we are, we will see. Or maybe we’re going to see as some say, 47% unemployment around the globe. Of course, we’ve already got that in Greece and Spain, and, you know, many other countries like that that are close to it. In the United States with these minimum wage increases in the movement to increase minimum wage, we’ve got that in some minority communities. I mean, I think that’s just downright cruel. You increase minimum wage, and you basically put people out of work. By the way, we haven’t talked much about it lately. But certainly, we had john Williams on the floor from shadow stats, calm, very interesting insights into what’s really behind the government statistics. And we’ve talked about the unemployment rate, the inflation rate, how all of these things, the GDP, how they’re all manipulated, okay?
Now, they’re talking about how the unemployment rate has fallen to 5.3%. That is totally bogus on so many levels, because it doesn’t take into account the labor participation rate, the much more important metric, and it doesn’t take into account the types of jobs. So we’re seeing, of course, manufacturing jobs disappear. We’re seeing many white collar jobs evaporate. And part of this is the alchemical economy. You know, part of it is robotics at some level. And when I talk about robotics, I don’t just mean some machine, you know, building cars on an assembly line. Robots come in many forms. Okay. Some of them are just circuitry, nothing actually moves. They’re solid state robots, right? They, they think they do high speed, high frequency trading with robots on Wall Street. Okay. They displace jobs to there. And they’ve certainly displaced investor profits. We all know that for sure. So let you know, what will this mean? I’m really struggling with it. I do not know, I can’t quite formulate my thinking around this. But I think it’s critically important because I’ll tell you why folks, this is imminent, it is like three years away, five years away, by 2020, we are going to see massive shifts in the economy, we’ve got to be thinking about this, it is hugely significant. And it doesn’t just affect the US it affects it affects the entire world. So a lot to think about there and a lot to talk about. So if you want to call into the show, and you know, talk to me real time about it, I’d love to have you do that. Just go to Jason hartman.com slash Jason, if you want to be on the show book a time with me real easy to do that there. And, you know, make some comments in there. So I know what it’s about and so forth. If not, just go to Jason hartman.com. And leave a comment on the voicemail. We’d love to hear from you. And those of you coming to our Chicago tour, look for an email in your email box. We’re going to be touring Chicago, Grand Rapids. And if you want, join us for our little side trip to the poster child for big government disaster, Detroit.
Okay. You know, you may want to be packing heat for that trip. I don’t know, I haven’t been there in a while. And here, it’s pretty bad. But we’re gonna go kind of look around there, just for a little while. And we will see you on what is it Thursday? Yeah, we’ll see a Thursday morning. We’re gonna meet at 830 at our hotel, and then we’re going to our first provider, we’re going to have breakfast there. We’re just going to spend a great day together. So I’m really looking forward to it and look for an email with details about that. And you can get the full details there. But 830 Thursday morning, that’s when we need to meet you. So you know that that’s our little semi private Chicago, Grand Rapids and yes, Detroit. I can’t believe it. Property two, or Hey, Detroit’s right there. We might as well go check it out. So it’ll be interesting to say the least. Alright, let’s get to our caller today. And let’s talk about investing in funds or maybe why not to invest in funds. Here we go. Hey, we’ve got a listener call in and it is Andrew, who I know through one of my mastermind groups. He’s looking at a real estate deal in Texas. Andrew, how are you?
Andrew 24:47
I’m doing great. Thanks for having me. Jason.
Jason Hartman 24:49
Yeah, well, The pleasure is all mine. Tell us about your deal.
Andrew 24:53
Okay, so, um, it’s really in the very early stages but it’s it’s it came to me through My brother, who I trust and gentlemen have one of his close friends that he’s known for a significant period of time, who’s done from what he says very well in real estate, and my brother has a lot of trust in him, but he doesn’t have the time to really look into the deals, do the due diligence, and, and be the competent investor that he wants to be. So I’m, I’m, I’m filling in for him, and I’m going to be doing the investment a while potentially, I’ll be the one doing the investment if everything looks good, so I kind of wanted to get your perspective on the the handful of details that I know. And I’m going to be getting more information as, as as as we proceed down the line. Obviously, before I make any agreement, I’m going to have more information than I have now. But I kind of wanted to run past you kind of the information that I know so far. Okay, super.
Jason Hartman 25:54
So don’t tell us exactly where the property is located. But it’s a it’s a Texas property. And it’s two apartment buildings, is
Andrew 26:02
that correct? That’s correct. Two apartment two buildings, which is attractive to me, I think that’s a better direction to go. Rather than just individual units. Both of the apartment buildings have 32 units. And they’ve done they said they’ve done due diligence on it. And there weren’t any surprises. And properties are in excellent, excellent condition. And they’re planning on? Well, you let me read you some details on it.
Jason Hartman 26:33
Yeah, I’m gonna ask you the income they produce, how old they are all kinds of stuff. Also, I want to get your take on why you think this is better than single family homes? Probably because of the deal size? I’m assuming. But tell us what is the seller asking for the property? And how much income does it produce every month?
Andrew 26:51
I don’t have those exact numbers in front of me, Jason, I would have to I would actually have to, I would actually have to get some of that information from, from the gentleman that I’m talking to.
Jason Hartman 27:04
Okay. So that is obviously critically important, right? So first of all, do you have a price
Andrew 27:10
yet? Well, they’re breaking it up between several investors. So the, they’re going to purchase the 232 unit buildings under a company. And they’re going to have multiple investors who are going to invest chunks of it. Who is they? This gentleman and his his partner who have approached me about the investment.
Jason Hartman 27:30
So what you’re saying is he’s not actually selling the property, as one piece, he’s selling a bunch of little shares and basically syndicating it to investors. He’s not
Andrew 27:39
selling the property, he’s going to purchase the property with me as a partner. So him and I would be partners along with maybe one or maybe zero other investors, we would all put down chunks of money, you know, own different percentages of the two properties.
Jason Hartman 27:54
Okay, so what’s the partnership structure he’s offering? Is it a true partnership? Or is it an LLC, where you’re owning shares and or, you know, all that kind of stuff?
Andrew 28:02
We haven’t gotten that far yet. And kind of one of the reasons I reached out to us because I don’t know the exact questions I need to ask in a situation like this, whether it’s a single unit, or a multi unit dwelling, I don’t know the exact questions I need to be asking in this situation. Okay.
Jason Hartman 28:16
So what’s the likelihood Andrew, of you doing this just with with him? Or? I mean, is it going to be many investors or you just have no idea yet?
Andrew 28:27
I don’t know yet. Exactly how expensive the the the properties are, and how large his personal investment is going to be?
Jason Hartman 28:38
So what makes you interested in this deal? I mean, there’s so little information about it, I know that you’ll get more information. But why are you interested in it? I mean, there’s a zillion deals out there. I want to do business with somebody I trust,
Andrew 28:49
obviously. But I’m really looking for the questions that I need to ask before I even consider the deal. All that I have right now is a very basic information, and they’re going to be giving me more information in the future. But I don’t know the proper questions to ask.
Jason Hartman 29:03
Well, there’s definitely no shortage of deals. Okay. I mean, you know, deals are all over the place. But I should actually clarify that whether they’re actually a quote, deal, unquote, is quite another question because most of them aren’t very good deals. So you know, I’m saying you can buy properties you can buy into syndications and partnerships quite easily. Those are plentiful, but most of them aren’t very good deals. So the first thing we’ve got to do is we’ve got to get a price. We’ve got a we there’s just a zillion details, we need to know what do you know, you said you had some information you wanted to share about it?
Andrew 29:39
Yeah, I can give you I can give you the outline as it’s been given to me. They’re going to be running this as a single entity, because they’re adjoining apartment complexes. They’re conservative five year projection is returned to 100% in five years. They’re classified property’s built in 1986 in a in a great location in between two major freeways into sub market, and the properties are already stable, meaning that there’s no vacancies and the rents for class B properties in this area are increasing more than in any other class. From their analysis, they say that they’re planning a $3,000 door in rehab, which will be completed as units become vacant. And rehab is virtually offering interior improvements, because there’s very little required on the exteriors, the interiors are in excellent condition and are easily rented as they are due to the location in excellent condition. The property management company does not even need to market or advertise and they have absolutely no issues renting the units.
Jason Hartman 30:45
Did you say they were 100%? occupied? No vacancy at all?
Andrew 30:48
Yes, that’s correct. They’re 100% occupied at the moment.
Jason Hartman 30:51
Okay, that’s, that’s pretty awesome.
Andrew 30:53
Okay, go ahead. And once they take over in the units become vacant, they’re going to make improvements to update with newer fixtures, lights, kitchen backsplashes, interior paint, and in some cases, they’ll also update the flooring. Now based on their market, their market analysis, they should be able to get an additional 20 to $25 a month in rent, if they do not make any improvements just by raising the price. But if they make some minor improvements, they should be able to get an additional 50 to $75 a month. If they do the full upgrade, including floorings, we should be able to get an additional 75 to $100 a month. So from their pro forma, they’ve only bumped the rents rents up by $25, which they say is conservative, and they use a economic vacancy of 10%. But the management company who conducted the market survey believes that 8% should be achievable. So 10% is conservative is what they say. And they did not increase their their other income, but they’re, they’re considering charging for covered parking Petric cable test in trash, which will result in even better returns.
Jason Hartman 32:01
Okay, great.
Andrew 32:02
Well,
Jason Hartman 32:02
you know, I think like, Look, you know, me, I mean, listening to the show, I don’t like funds or really investing with with groups, unless you really know the people. I mean, obviously, if you’re going to be a direct investor, and everything, you know, it’s going to keep you small, if you want to do something big, eventually, you’re going to have to partner up with someone probably right, or it’s gonna limit your growth. So I can totally understand that. If this is a fund type deal with a bunch of investors, I would, I would definitely shy away from that, as as you probably know, without me even saying that.
Andrew 32:37
Hey, Jason, can I ask you a question on it? So what in particular about that specifically? makes you want to shy away from it? Is it is it just having that many people involved makes the deal complex can introduce unknown legal issues? What is it would make you shy away from something like that? Oh, yeah,
Jason Hartman 32:57
great question. Well, you’ve heard me talk about my 10 commandments of successful investing. And number three is thou shalt maintain control. And you know, whenever you relinquish control of the investment to somebody else, you leave yourself susceptible to the three major problems. Number one, you might be investing with a crook number two, you might be investing with an idiot, assuming they’re honest and competent. The third hurdle is they take a huge management fee off the top for managing the deal. And most of these guys running funds or partnership type investments of any kind, are usually just looking to skim money off the top of the deal. And that’s, that’s how they make their money. A lot of them are involved and engaged in the construction themselves. You know, they have these like, vertically integrated businesses, and you just really don’t know what you’re getting until later, unfortunately.
Andrew 33:45
Okay, that that makes sense. So that should be one of the questions I ask is, is they are they taking a management fee or a cut? Because they’re fronting? They’re, they’re spearheading the deal?
Jason Hartman 33:54
Right. And they will definitely take some kind of fee for that. But beyond that, Andrew, there are so many more subtle ways in which they do this. You know, for example, if you have an investment fund, and you want to bring other investors into the fund, even if it’s a small fund, like it’s you, the owner who’s doing the kind of the syndication deal, or the buyer, I should say, and they want to bring five other investors in? Well, you know, do they have to go into wine and dine them? Do they have to travel somewhere, and all that’s happening on your dime most of the time, right? Yeah. Right. So I just I just don’t like that. There’s also a lot of trickery that goes on. And it may not be overt cookery, in the construction side of the business. I will guarantee you that any of these guys that have big projects, when they want another project done for them or they want their home remodeled are some favoritism from a lender, any party in the transaction, there’s so many people in the transaction, that they’re going to get some favoritism and basically Simply that cost is going to be built into your deal. And so I There are just so many reasons I just don’t I just totally believe in being a direct investor, you know, I mean, I have partners and some of my deals, and most of them have worked out great. You got to really watch them. And when it’s a bigger deal, and there’s so many little subtleties, you know, you’re not gonna have time to figure all that out, even if you can, you’re not a forensic accountant. And even if you were, who wants to spend the time doing
Andrew 35:26
that, right? Well, and that’s, that’s kind of sort of a catch 22. Because, you know, one of the reasons that a deal like this would be attractive to me is because I don’t have a whole lot of experience myself. I believe, you know, this is a personal family friend that’s been vouched for. So that inspires a little bit of confidence in me. And I don’t have the time to manage it myself. But this is what they do full time. So I think the question is very good. Is there a management fee, because that hasn’t been brought up at all? I because before you mentioned that, I was assuming that they’re just looking for investors to fill out the remaining cash that they need to get a large property,
Jason Hartman 36:07
right. You know, usually, the way this stuff works is if the deal is that good, they’ll just buy it themselves, you know, they don’t need to take on partners. Now granted, nobody has unlimited amounts of capital, so you can’t buy every deal yourself, right. But if the deals really good, and if they’re not looking to, you know, melk, the the partners and the investors, then usually, they’ll just figure out a way to use bank financing, or some other type of financing to buy the deal. Even if it’s hard money financing, it’s cheaper than having partners, and what I mean is hard money financing at high rates, you know, it’s it’s usually easier than actually getting real partners, you know, because partners are like the most expensive part, you know, for you to split the equity and the profits with someone if the deal is good. So, I mean, is this a Is this a big company, tell me a little bit about who the promoter of this deal is.
Andrew 37:03
Okay. So here’s
Jason Hartman 37:05
just just always remember, Bernie Madoff had tons of friends.
Andrew 37:09
Exactly. So they already own eight properties. They’ve been doing real estate for a long time. But if done on smaller deals, such as one to four unit buildings, about two years ago, they started getting involved in larger complexes, some are newer deals. And the deals they make are the deals, I’ll read what they’re saying, the deals we are in either make or projected to make 10 plus percent cash on cash return year, in double our money in five years or less, a couple of the deals are already being sold again, because our five year projection has been met in two years. I would not say this is common though. For the sake of discussion, we project these two properties will make a 10 plus percent return a year on cash on cash and double money in five years or less.
Jason Hartman 37:56
Wow, that’s those are pretty awesome projections. But remember, you’d be hard pressed to ever hold somebody accountable for projections. Okay. You know, you can’t sue a fortune teller. Okay. You know, what I mean? You know, what I would definitely do, if you really are, you know, dead set on entering into a deal like this, is, you definitely want to talk with our investors who’ve been in there other deals, the ones that they claim were so good, and so forth, and talk with a lot of them. And, and, you know, I kind of know your dilemma, Andrew, and although we haven’t totally, you know, really talked about it here. But I know you’re a very successful businessman, and you want scale, you probably kind of look at what we talked about on the show and think, you know, I don’t want to fool around with buying six houses, single family homes, right? Because it’s not, it’s not big enough for you, it doesn’t impact your net worth enough, right? I’ll tell you something. If nothing else, as considering it part of your education, just having a few little houses, you’ll learn a lot, you know, and you’ll you’ll, you’ll just kind of get your feet wet with that. And you’ll kind of see how real estate deals work. So that training is pretty invaluable if you just consider it training. If nothing else, that’s a consideration. But I tell you, I just do not like funds. There’s just too many ways. And I’m not saying they’re illegal ways, but sometimes they are. There’s just too many little subtle ways that the investor is just losing out. You know, you’re just not reaping the big profits. The big profits are to be the promoter of the deal, you know, or just do the deal directly yourself.
Andrew 39:34
Yeah, that makes sense. That makes sense. So what would be the sort of questions I would ask to do the due diligence on this besides just know your you know, your two great pieces of advice to talk to the other investment investors in their other deals if I’m not sure there are other investors in the other deals since they were smaller. Ask them if they’re taking advantage fee to handle the deal. What are the questions would you ask Jason
Jason Hartman 40:01
ask them to disclose all of their fees, and disclose whether or not they own or are somehow involved with a construction company that’s going to do the rehabs. If they’re involved with any of the other parties in the transaction, okay. And say you want them to disclose any revenue they get from the deal, or any benefits they get from the deal at all. But see, the problem with questions is, they don’t much matter, because people can lie, they can spin doctor, you know, they can shade the truth, you know, what you really need to do is read their document, read every word of their document with a skeptical eye. And just notice in that document, how many disclaimers they probably have, how long it is, you know, good deals don’t need to be complicated. And you don’t need super long documents. I remember one, a buddy of mine, who’s a really nice guy, he started a fund invest in real estate deals, and I just offered to kind of throw him a bone and say, Look at you know, what’s your minimum? He said, 25 grand, I said, Well, I’ll give you 25 grand, you know, just just to kind of be involved with him, because I because I like the guy, right? Anyway, he sends me three, I think it was three documents. And the main document was 138 pages long. And you know what, I emailed back to him? And I said, Hey, do you have an audio book version of this?
Andrew 41:28
You know, it’s just
Jason Hartman 41:29
absurd. You don’t need lengthy documents like that, unless you’re just looking for ways to paper over things and give yourself a bunch of outs, you know, people complain about the real estate contract, the standard forms, you know, being eight pages long, or whatever they are, depends on the state and you know, the locality. read every word of the document, it’s much more important than the questions, the questions you ask them aren’t going to be that important. It’s the questions you ask their other investors, and try to really be somewhat suspicious about those other investors, you know, are they involved with him? Do they have an agenda in some way? Try and verify them from multiple directions? I mean, one deal that I invested in, I knew the other investors personally before investing before I was even approached on the deal. And that made me feel a lot better, because I knew, you know, it would be really hard for them to be shills unless they were setting up this, you know, big scam from a long time ago, right, which certainly does happen. But that would have been much more complicated to do. So. It’s really nice when you can kind of like verify that from a third party.
Andrew 42:38
Okay, agreed it to be quite honest with you, this isn’t. This isn’t something that I would be interested in if it had just come out of the blue but it like I said it is a family friend. It’s somebody who’s vouched for and I trust. But I completely agree with you. And I promise I’ll have plenty more questions when I actually get a legal document from the
Jason Hartman 42:59
good stuff. Well, hey, let’s have you back on to look at that when you get some paperwork and you know, a whole private placement memorandum, you know, whatever you got whatever you get from them. Let’s talk about it on the show.
Andrew 43:09
Okay. Okay. Sounds fantastic.
Jason Hartman 43:11
I appreciate it. All right, Andrew, Hey, thanks for being on. A lot of people have the same kind of questions you do.
Andrew 43:15
Thank you, Jason.
Announcer 43:17
I’ve never really thought of Jason as subversive. But I just found out that’s what Wall Street considers him to be.
Announcer 43:25
Really now How is that possible at all?
Announcer 43:27
Simple. Wall Street believes that real estate investors are dangerous to their schemes? Because the dirty truth about income property is that it actually works in real life.
Announcer 43:38
I know. I mean, how many people do you know not including insiders, who created wealth with stocks, bonds, and mutual funds? those options are for people who only want to pretend they’re getting ahead.
Announcer 43:49
Stocks and other non direct traded assets are a losing game for most people. The typical scenario is you make a little you lose a little and spin your wheels for decades.
Announcer 44:01
That’s because the corporate crooks running the stock and bond investing game will always see to it that they win. This means unless you’re one of them, you will not win.
Announcer 44:10
And unluckily for Wall Street, Jason has a unique ability to make the everyday person understand investing the way it should be. He shows them a world where anything less than a 26% annual return is disappointing.
Announcer 44:25
Yep. And that’s why Jason offers a one book set on creating wealth that comes with 20 digital download audios. He shows us how we can be excited about these scary times and exploit the incredible opportunities this present economy has afforded us.
Announcer 44:40
We can pick local markets, untouched by the economic downturn, exploit packaged commodities investing and achieve exceptional returns safely and securely.
Announcer 44:51
I like how he teaches you how to protect the equity in your home before it disappears and how to outsource your debt obligations to the government
Announcer 44:58
and this set of advanced strategies for wealth creation is being offered for only $197.
Announcer 45:05
To get your creating wealth encyclopedia book one complete with over 20 hours of audio, go to Jason hartman.com forward slash store.
Announcer 45:15
If you want to be able to sit back and collect checks every month, just like a banker Jason’s creating wealth encyclopedia series is for you.
Announcer 45:30
This show is produced by the Hartman media company All rights reserved for distribution or publication writes and media interviews, please visit www dot Hartman media.com or email media at Hartman media.com. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax legal real estate or business professional for individualized advice. opinions of guests are their own and the host is acting on behalf of Platinum properties, investor network, Inc. exclusively.
In this episode, Steve G Jones joins Jason Hartman to ask about income property and renting versus buying properties. Jason also explains why you should not invest in the stock market and the only three types of smart investment.
Announcer 0:00
This show is produced by the Hartman media company. For more information and links to all our great podcasts, visit Hartman media.com.
Announcer 0:13
Welcome to creating wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine self made multi millionaire who not only talks the talk, but walk the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities, this program will help you follow in Jason’s footsteps on the road to financial freedom, you really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 0:56
Welcome to the creating wealth show. This is your host, Jason Hartman with you for episode number 527 527. Can you believe how many episodes we have? I can’t believe it either. But I can’t wait until I get to say, Well, this is your host Jason Hartman with episode number 20 731. And you know what, at the clip with which we are proceeding, that won’t be too far away. While I guess you could actually calculate it three episodes per week at our current pace, how long would it take to get to Episode 20 731? How many licks does it take to get to the center of a Tootsie Roll Tootsie Pop? The world may never know. So you have to be old enough to remember that commercial. Anyway, hey, we’ve got a good show for you. Today, we’ve got a listener who’s calling in our listeners, Stephen from Las Vegas, called in we discuss some stuff, rent versus own that kind of stuff. You know, frankly, and I know he’s a newer listener to the show. But, you know, I kind of can’t believe we’re still talking about some of this stuff in a way. And here’s why. You know, I’m always hashing this out with my mother. I don’t know what it is about human psychology and why why is it that? I don’t know, why is it that this doesn’t really kind of resonate with some people? It does with me, because the way I look at it is, you know, if you’re investing, you’ve got a given amount of capital, you don’t want sleeping money, you don’t want lazy money. Heck, all of you business owners out there, you know, if you had a sleepy or a lazy employee, you would want to get rid of them for a productive employee, you got to make your money productive to it’s the same way with money as it is with employees or children, for that matter, no lazy kids. You got to put them to work too, and make them become productive members of society, right? But if we haven’t given amount of capital, let’s take for example, $100,000, right? Or no, no, let’s not take 100,000. That’s a bad example. Let’s take $500,000. And if we could use that capital, whether it’s money we have in the bank, and we’re paying cash for the asset, or if it’s money that we borrowed, partially or completely to pay for the asset. Remember, the money we can borrow is an asset. And it is always perplexed me how a when you look at a balance sheet of assets and liabilities, our ability to borrow is a huge asset. And just as if we have money in the bank that is earning almost zero interest, or we have equity in our real estate that is earning no return. Because remember, I don’t believe there’s any such thing as return on equity, I think that metric is is really false hood, because the return, the amount of income the property generates is the same, at least in theory, it should be the same is the same, regardless of how much equity we have in the property. So all of you listening, if you have equity in your real estate, whether it be the home in which you live, or an income property. Tell me what size check Did you get for your equity last year? And you know how every year in late January and early February, you received 1099, or 1098, I think statements made is at 28.
Now Forgive me, I don’t know. Anyway, you get it. You know, it’s that statement you get for your taxes that shows you what the investment earned. What interest you got on say a bank account. Well, did you receive any statement for the equity in your properties? Let me guess, No, you didn’t receive a statement. Why didn’t you receive a statement? Well, you didn’t receive a statement because you didn’t get any return on your own. Woody, silly, there is no return on equity. If you have a high loan balance, or a low loan balance, if you have no equity, or you have massive equity, if you have 100% equity in your property is free and clear, the property should be generating the same amount of gross income. The tenant has never ever asked you. What is your mortgage payment? I want to make sure I cover it for you. They’ve never asked you that, have they? No, I knew I knew it. They just care what is the market value of the property. So if you have $500,000 invested in an asset, I want you to get 1% of that back every single month, I want you to get 12% of it back every single year, I want you to get $5,000 per month, or $60,000 per year for your $500,000 asset. Regardless of how it’s financed, that’s not relevant to this part of the investment analysis decision is it it is just not relevant. Okay. So it kind of perplexes me why we keep talking about this stuff. So I’ll go back to the example of my mom. Remember, mom was on a show several months ago, and you know, I burst her bubble, I felt kind of bad about it. You some of you listening might say, Jason, why are you always picking on your mom? Well, I’m not really picking on her. Okay. She’s done great for herself. There’s no question about it. She just did it the old school way. And listen, I think that’s fine. She was smart to invest in income property. She always wanted her own income property. I mean, ever since the first home that she owned after growing up poor on a farm in upstate New York. It is amazing how far she’s come. And she bought her first property in West Los Angeles in 1976. For $62,500. Now it’s worth over $800,000, give or take. I frankly, haven’t checked lately. But remember when she came on my show several months ago, you know, she’s been on several times. And she said, I’m so excited. Jason, I just rented my house in West LA, for West Los Angeles, West LA for $4,000 per month. And I said, Mom, yes, you’re excited because you only had it rented for 30 $200 per month before that. But guess what? You’ve got an $800,000 asset there. You are losing $4,000 per month, you’re not making $4,000 per month, I guess it’s really that old issue of is the glass half full or half empty, isn’t it? Right? Isn’t that the question here. So call me a pessimist if you want, but I think mom is losing $4,000 per month. Because if she were to sell that property on a 1031 tax deferred exchange, and by the way, that property is fully depreciated. It has run its 27 and a half year depreciation schedule. So there’s no depreciation benefit, you got to cash out and start over every 27.5 years. You’ve heard Fernando on the show when he spoke at our Memphis property tour. He said, I plan to live to be 125. And by the way, Fernando, I believe is 48. Now he’s in great shape, super healthy guy, very health conscious. I would bet that, you know, given no unforeseen circumstances, he probably live a lot longer than 125 years. Remember, listen to my longevity show. Okay? The problem most of us listening here are going to have is too much life left at the end of the money. And it is a great problem to have. But remember, it is a problem nonetheless. So we’ve got to plan for that. The type of longevity we will be facing in the coming years is going to amaze and delight us. So plan to live a good long life.
So Fernando said at the Memphis property tour when he gave a little speech there, he said, I plan to live to be 125. So he’s going to go through three depreciation cycles with his portfolio. He’s got 70 units, he’s going to sell them. So he’s going to run that depreciation schedule again and again. And it’s just a phenomenal opportunity. longevity is a big deal. Let’s plan for it. Let’s prepare for it. Let’s invest for it. It’s an amazing time to be alive. It’s an amazing time to be alive. I’m not sure the sound is any better. I don’t have my room set up in my new home here in La Jolla, California. But I’m working on it and as one of our listeners Christina pointed out when she saw a picture of my room, one of my rooms here on Facebook. She said you need to get a throw rug a big piece of carpet in that room. Because those marble floors made too much of an echo, so I’m not in the closet right now. If you don’t know what I’m talking about, listen to the past episodes, the closet is the best place to record because it’s got nice soft clothing to help with the acoustics. But given all of that, I want to play another listener question for you here, before we get to our listener guest. So let me just cue that up, and I will play it for you. This comes from listener tape, by the way, thank you for going to Jason hartman.com. And leaving a message for us. We love getting your questions and comments and playing them on the show. Please do that go to Jason hartman.com. Leave us a voice message. We’ll play it on the show. I like this a lot better than emails, folks. Okay, so so please do that. And we love getting your questions. Do tell us though, from where in the world are you calling? We would love to know that what city you know, your city in your first name would be great to hear. We have listeners in 164 countries worldwide, most of them in North America. Please let us know your first name and your city when you leave a message. So here is a message from tait, let me cue it up for you.
Listener 11:15
Hi, Jason, I have two questions for you. The first is, why do you offer to be a 19% partner with any Platinum properties opportunity as opposed to any other percentage, whether it be 20 or 25? or what have you? And my second question is, is there a minimum number of houses that you would recommend a person to start renting out in order to minimize risk? In other words, if there’s a newbie investor, should this person rent out? Just one? Is that okay to just rent out one unit or a home or whatever? Or is it better to wait until the investor can buy five properties, for example? So those are my questions, and I love your podcast, and thanks for responding.
Jason Hartman 12:07
Alright, so tait, that was a really those were really good questions. Okay. Because I know that the first question on the 19% may just seem totally weird. And it does to me too. And that’s not my number. Here’s where I got it. The lenders for some arbitrary reason, and I’m sure this differs from lender to lender out there. But the lenders say that 19% is the magic number, where someone can buy in and own up to 19% of the property without the complexity of going on the loan. So that is the magic 19% number. Okay, and I’m sure it varies between lenders. But that’s what I hear from the vast, vast majority of them. And your second question about diversification is another good question. So when it comes to diversification, if you just have one property, you have one vacancy, you have a 100% vacancy rate, if you just have one property, and it happens to be in a bad area, maybe that city, the economy isn’t going as well, then you have one property with a problem for sure. One of the things we say is diversify. There’s an old saying that all real estate is local, all real estate is local. And in the United States, there’s no such thing as a national housing market. There’s really just about 400 400 local markets, represented by what’s called m essays, or metropolitan statistical areas. So I would say, diversify into at least three markets, and as many as five markets. Now I try to talk about my mistakes on the show somewhat frequently, I do make them. One of the mistakes I made many years ago, among others, is that I over diversified. I just went in and I was buying properties in all the markets that we were opening nationwide, and I had too many markets. And that was a mistake, because I was dealing with too many different parties, too many different property managers, too many different cities, too many different insurance agents, etc. So I would say keep it at a manageable number. If you’re going to buy three properties, then you might buy three in three different cities. If you’re going to buy 30 properties, you might buy 10 in each of three cities, if you’re going to buy 99 properties 33 in each of three cities. But if you want to be a little more diversified, I think our minds can Still handle five markets. So in that same example, it would be 20. You know, if it was 100 properties, it would be 20. In each of five markets, if it was 30, and you were in five markets, just take 30 and divide by five, what would that be? Six. Right. So there you go. There’s, there’s an answer to your question. So I hope that helps. It’s a great couple of questions there. And let’s get to our guest today, Steven, who is a listener to the show, and we’re going to talk about that rent versus buy dilemma, and how to maximize whatever assets we have. That’s what we want to do. We don’t want lazy money, we want to maximize our money and put it to work. Check out Jason hartman.com. For some great properties. Oh, my gosh, one more thing. There’s always one more thing. So I just moved. And in, in moving, you’re never gonna believe it. Guess what I found? I found that we have another dozen of those old classic meet the Masters home study courses. Those are I’m going to check right now. I believe they’re still on the website. I’m going to chase in hartman.com. Clicking on the product section, the creating wealth courses definitely sold out. Those are totally gone. But the meat the Masters home study course the physical product is on the website. We got just about a dozen more of those I was I’ve been stashing these away in all these little places, go on the website, buy those, I will send them to you I fulfill the orders myself. So you know that it was done with love and appreciation. And they’re only 197 bucks. Well, the digital product is 497. I know that sounds like it’s bass. ackwards, doesn’t it. Yes, it’s bass ackwards. So we’ll send those out to you. So go and order them. Well, supplies last can’t believe I found more of those things while moving. But anyway, we did. So take advantage of those the meet the Masters home study course for only 197 bucks. Shipping is free within the continental United States that cost about $22. So we’re covering that for you as well. You’ll get these beautiful CDs and workbook 500 page book. I don’t know what is there about 20 CDs in there, they look beautiful on your bookshelf, any guests that come over to look at your library will think gosh, you must be a very wise and prudent real estate investor because you’ve got the meet the Masters home study course. So take advantage of that. And let’s get to our guests. Here we go.
So this is Steven G. Jones, a listener call in to the show, Steven, you have some great questions that you’ve posed before on the voicemail. So it’s great to talk to you in person finally? And what questions can I answer for you?
Steve G. Jones 17:53
Well, Jason, you’ve done a great job answering all my questions so far. And I appreciate that you really opened my eyes to a new way of thinking. And the current question I have is that I am in a situation where I live in a I live in a condo, it’s a four star luxury resort, and I am renting it. I’m gonna already tell you, you’re a smart guy, because I don’t want you to buy that. But we’ll analyze it. So let’s analyze it. So yeah, I got a really good deal on it is 2100 a month that includes utilities, cable, everything, and it is a what city, Las Vegas. And the reason I moved here is no state income tax.
Jason Hartman 18:36
Yeah, no, I mean, I, I plan someday to live in Nevada, or Florida, or maybe both. Because I really want to live in a no income tax state. So I agree. So you told me that you live in this beautiful four star place 20 $100 a month, and it includes your utilities. It sounds like so let me just venture to guess that that place if you were to buy it would cost you about $500,000?
Steve G. Jones 19:04
not currently currently this place would cost $275,000 with a 12 $100 a month Hoa at the height of the market, this would have cost about 500.
Jason Hartman 19:18
Okay, but that doesn’t matter to the market doesn’t matter. Okay, so so that’s a lot cheaper than I thought it would be. But we’ve got to add in those huge absurd, ridiculous association fees, homeowners association fees, as though it were part of the price. And here’s what I mean by that, Steven, I’m going to do this math. And this is not the only way to slice it and dice it. But your rent to value ratio there isn’t as favorable as I thought it would be for you. Until we tack on the ridiculous association fees. Okay, because you’re paying 2100 a month and you say you can buy the place for $275,000 That’s not bad. Okay, I thought it would have been much worse when I, when I threw out the $500,000 number I thought you were gonna say, Oh, 450 or something, you know, something in that ballpark.
Steve G. Jones 20:12
Okay. Cash Only, by the way.
Jason Hartman 20:14
What’s that mean?
Steve G. Jones 20:14
They don’t you can do financing in this building. Oh,
Jason Hartman 20:17
I’m glad you said that. Let me guess there’s litigation that that means all the lenders have run for the hills and they won’t finance right.
Steve G. Jones 20:24
I don’t know. But it is a condo hotel, which means it’s, you know, part of condo part hotel. I don’t know about the litigation that is possible. Is it in the palms by any chance? No, I’d rather not disclose the place live just because one of the problems but it is not in the palms.
Jason Hartman 20:41
Okay. So first of all, let me tell you that there has been a massive amount of litigation in Las Vegas, condo hotels. And now for the listeners who may never have heard that term condo hotel. What that means is it’s a condo that is owned by an individual owner, but it acts in some ways, like a hotel. Now, Trump did this. He was sued relentlessly, or and when I say sued, I’m using that term generically, because a lot of them had to go to arbitration, unfortunately, and arbitration is an epic scam, in my opinion, that’s a subject of another show that I am planning on doing, by the way, and cosmopolitan and poms, and there are many others. And these things are just really complicated investments. Okay. So I would say that, you know, it’s okay to buy one real cheap, but like you said, at the peak of the market, someone would have paid 500 and something 1000 for that. And a lot of the lenders just won’t finance these types of things. Okay. And I will tell you, I have a personal experience. That has been a horrific experience dating back 10 years. But I’m just waiting for it to wrap up before I tell the whole story on the show. Okay. So let me just go back to that math that I want to do with you, Steven. Okay. Or Steve, I’m sorry. Why do I keep wanting to call you Stephen?
Steve G. Jones 22:10
My mom asked me that when I was in trouble. So maybe,
Jason Hartman 22:16
Stephen in your middle name, right. Okay. So what I want to do is I want to take the 12 $100 a month association fees, and I want to just assume that that is equivalent to if it were a good real estate investment, a good cash flowing investment to $120,000 in actual value, because in most of our network, you could buy $120,000 house and get 12 $100 a month. So I know that’s, you know, kind of an maybe an obtuse way of doing that to some people. But that’s the way I look at the world. If I put in 120 grand into something, I want to get 1200 a month. So in the reverse of that is, if I’m paying 1200 a month, or getting a 1200 a month benefit, which you are as a renter, because you’re not paying those fees. It’s a homeowner’s association, so the homeowner pays it right. So I’m going to equate that to 120,000 in value. Okay. So that means that the true cost of owning that property of buying it is really 275,000. Because that’s what you can pay cash for it, plus 120,000, which makes it 395,000. That’s the way I look at that type of thing. Okay, so, so then I also look at, gosh, you get the benefit of living there for 20 $100 a month. And you don’t have to worry about anything if a pipe breaks on the wall, and it floods your unit in the neighbor’s unit. Yeah, you know, you’re going to have to deal with your renters insurance company and replacing your furniture and stuff, and you’re going to have to move out and that’s a huge hassle. But guess what, you don’t have to deal with contractors, you don’t have to fight with the insurance company over the property damage, you know, the of the actual property itself. You don’t have to fight with the HOA and get in litigation with him. It’s just much easier to be a renter, and one of your very astute questions that you had asked before. And I didn’t get a chance to play all of your questions on the show yet, either. I know I’m a little behind on those from the voicemail. But is you know, aren’t you just throwing money down the drain? Right, and renting? Well, look, we’re all renters, none of us really own anything. We just get the use of things. And if you want another take on this, it’s not exactly like my take, but it sort of has some parallels. Go to the Khan Academy, which is you know, in kind of an odd place, but there is a great couple of videos that they’ve done about renting versus owning, and Khan Academy. is a great free educational website k h a n academy.org. That I just love. Because anytime I have a spare 15 minutes and I want to learn about, you know, organic chemistry, I just go there.
Steve G. Jones 25:12
I do too. I study theoretical physics on there. And I’m certainly not qualified to study that. But on there I you know, they explain it so nicely.
Jason Hartman 25:20
I know isn’t a great, it’s awesome. But but they have a rent versus buy analysis that’s really quite good. You know. So check that out. Okay. It’s really good. But I would say just keep running it, enjoy it. You know, if you buy it, you’re basically going to be renting to yourself, because in my book, the final analysis says, We’re all just renters, we’re all just getting the use of something. And you’ve probably, you know, come in contact with Robert Kiyosaki, Rich Dad, Poor Dad type writings at one time or another. And he talks about how his rich dad said, Your home is not an asset. It’s an expense. Because it doesn’t produce income, it costs you money. So it costs you money to rent a place. So I say pay 2100, rather than the equivalent of 395,000, which should get you 30 $950 per month, you’re basically getting it for half price.
Steve G. Jones 26:17
I fully agree with that. Let me let me run, uh, let me put a little bit more data in the equation. You’re looking at this, I don’t think it’s long. I don’t think it’s sustainable long term. I think that this guy who owns the place, when the market comes up, he’ll dump it because he’s been suffering he bought at the height of the market down half. If it goes back up, he’ll dump it, which means I’m out of here. Also my mark, my my rent is already not, you know, not not market level, it should be up by about four or $500 a month, because I’ve been doing some comparisons.
Jason Hartman 26:50
That’s a fair thing to say. Yeah. So so if you have to replace that you’d probably have to pay 25 or 20 $600 a month. And as a renter, you know, you could be forced to move every year. That’s a hassle. So yeah, there are there are, you know, there are some downfalls?
Steve G. Jones 27:06
Well, what I’m what I’m comparing, so I’m looking for a 10 to 20 year plan, something that’s sustainable. And what I had compared it to on a previous show, and I called in to your show was comparing it to a house that’s about, I get it for about 330,000. It’s also a house here, which would serve my tax purposes, to have a base in Nevada, it would also be, you know, a home for a good part of the year actually, a very inexpensive one story, you know, low maintenance low costs in a good area. And I wanted to throw that into the equation for our conversation here.
Jason Hartman 27:40
Okay, so if you look that $330,000 that’s a single family home, right?
Steve G. Jones 27:45
Yes,
Jason Hartman 27:46
yeah. And I would much rather you see if you’re going to buy something, I’d much rather you see for financial purposes. So you buy a single family home, because though they’re just not fraught with the problems of lenders not lending in there. And litigation and condos are problematic in so many ways. And condo hotels are even worse. Okay. So that’s the first thing. So I’d much rather see buy that type of property. But I bet you you can rent that $330,000 house for about 1700 a month, maybe 2100 a month, you know, less than that when
Steve G. Jones 28:24
I was negotiating with the lady and I went over there and I talked to a lady, she’s moving to China with their daughter, so she needs to get out of the house. She said, Can I stay in the house after you buy it? Can I rent it from you for a couple months before I moved to China? I said, I really don’t want that. But just out of curiosity, what would you pay me? She said, Well, the house across the street runs for 1400 a month and I thought Wait a minute, 1400 a month, Jason Hartman would rent the house across the street. So like, I don’t need to be spent $330,000 on the mortgage,
Jason Hartman 28:55
you know, I think you can pretty much like around the world. I’ve done this in Europe, I’ve done it in Australia, it’s worldwide, you know, you change the currency doesn’t matter, the percentages are the same. It’s amazing how this equation holds up. If you’re going to be in living in a place that is worth more than about $150,000 in price, then you should probably rent it or at least very much consider renting it. And this is only I’m only talking about this from a financial perspective. I’m not talking about it, if you want to live in the call to sack and have your kids grow up there for the next 14 years. Okay, you know, I get that’s a different thing, but you’re gonna pay a huge premium for that privilege. Okay. But you know, what we’re talking about is just the financial angle, okay? So, you know, when when the price goes up, it becomes a great deal to be a renter. It really does. And I never experienced that more than when I first moved to Arizona and rented this big, gorgeous person. house for a couple of years. I’ve since moved from that property. But I gotta tell you, that was just a great deal. You mentioned on your last thing about me moving to San Diego, I am now negotiating a lease for $4,000 a month for a property in La Jolla. And I’m thinking, I bet that property would cost me a million or a million to to own. I’m not really sure, because it’s part of a multi unit. But I’m going to do a little research on it. You know, that’s a great deal.
Steve G. Jones 30:29
Yeah. And I understand your logic with that. And let me let me ask you this. And by the way, I had a meeting coming up in a few minutes, my push to head so I’ve got a little bit more time if you’re, if you’re Oh, okay, great. Cool. So, so that so let’s take that scenario. Again, I know these prices are low, and I kind of like it looks, I want to my my home base in this tax restate to be kind of inexpensive. But the house was 330, she told me about the house across the street, that’s about 1400. I know that’s a point five loan to value ratio, according to the rent to value rent, rental value, okay. Now, that equation, I think is you know, it’s probably going to change over time, because it isn’t, it isn’t the case that if I get a mortgage on the house, I kind of lock in rent for 30 years, whereas my rent the house across the street, it just escalates for 30 years,
Jason Hartman 31:17
you know what I’m so glad you brought that up, too. Okay. And this is an important thing, everything I just said kind of goes out the window, if you don’t invest that money somewhere else that works. See, I’m just considering that look, if you’re going to spend 330,000, or, you know, 275 plus 120, which is really 395,000. You know, if you’re going to spend that money, I’m assuming you’re either going to spend it on that house that you would live in or that high rise condo that you’re running now, okay? Or you’re going to invest it in something else, if you don’t invest it in something else, and you just put it in the bank or stick it under your mattress, which is almost the same thing nowadays. Because the bank doesn’t pay you any interest, you’re going to lose as a renter, because your rents are going to escalate. So I’m only saying, don’t spend 330,000 on the house that you might live in. Because you can spend 330,000 on three income properties for 110,000 each. And hopefully, if everything goes well, you’re going to get 30 $300 a month for them. And you’re going to get to raise the rents on those, you know, and not only are you going to get that 3300 a month gross, but once you leverage them, you’re going to get some positive cash flow from the financing, you might be eligible for some tax benefits, you’re going to take advantage of appreciation. One thing I will say kind of against my argument, too, on the Vegas high rise place because that price is pretty suppressed. If and this is a giant if Okay, it’s a giant if I wouldn’t, I wouldn’t bank on it. I, I’ve just gotten too conservative at my older age. But if somehow financing is available in that in that property again, and the markets trending in the right direction, and interest rates are still low and there’s no litigation, or the HOA is not in litigation with a builder or other owners or whoever, you know, that that property could appreciate fairly well. Because, you know, it might do better than one of my boring bread and butter properties in Memphis or Atlanta or something like that. Okay.
Steve G. Jones 33:33
Yeah. And I have talked to somebody who pumps 15 of the units here. And he was saying the same thing, but I agree it’s a big if it’s a Vegas style gamble.
Jason Hartman 33:42
It’s a gamble.
Steve G. Jones 33:43
Yeah. Yep. So then my further questions that I that I left you that we didn’t get to were, so I have little over a million in cash right now. And Wells Fargo has approved me for $1.2 million for a loan. And I went in and asked him I said, you know, can I use this for I just asked for I just asked for 1.2 million they approved me I think
Jason Hartman 34:04
it’s like a line of credit. Right? For a house. Oh, for a house. Okay. All right.
Steve G. Jones 34:08
Yeah. I asked him I found a house a couple years ago, I liked his 1.2 million. I said, Well, you guys give me 1.2 million. They said yes, of course you did it all with the paperwork. So it’s formal. But and I did it again recently, and there was the same. I have a feeling if I asked for more, they give me more. But then recently asked them, so I started listening to your podcast. And I said, Well, can I use that 1.2 million for investment properties in other states? And they said yes, the interest rate would be low fours, but I could do that. So my question is, I don’t own anything I have, I need to figure out this principal residence thing where I’m going to live got a little over a million in cash $1.2 million to invest in houses either primary or rental. What would you do? Okay,
Jason Hartman 34:52
so would I buy a $1.2 million house or would I buy income properties with that money? Is that The question, right? Yes. Well, you I think you already know what I’m gonna say.
Steve G. Jones 35:05
Definitely you’re not by $1.2 million house.
Jason Hartman 35:08
Yeah, no, I wouldn’t. And listen, I’ve owned, I just want everybody including you to understand. I have pretty much always been an owner. Okay. When I moved out of my mom’s house, and you know, what was it like 23, maybe, or 22, I moved in to a little condo in Irvine. And I owned it, I bought it, it was my second property. Okay, I my first property was that rental property in Huntington Beach. My second one was a condo I bought for myself in Irvine. And, you know, I worked my way up to where I own some beautiful homes in Newport coast. And Irvine. You know, I had three gorgeous homes in Newport coast, they were high end properties. I mean, I certainly felt a certain sense of pride without I guess, and, you know, of course, you can fix them up and change them however you want, because you own them, but you’re ultimately responsible, and you’re gonna pay for your fix up, if the buyer doesn’t like them when you turn around to sell it. But, you know, I just discovered that the delta between the in as long as it’s above 150,000, and hopefully a lot above that, okay, you know, if it’s like a million dollar property, you can rent that million dollar property for 4000 a month in almost any city on the planet, okay, so it’s just a much better deal to rent it when you could buy a million dollars worth of income property, and get $10,000 a month. And when I say that, of course, I’m talking gross, but I’m also talking gross on the personal residence, too. So it’s, it’s pretty much an apples to apples comparison. Now with the income properties, you got to pay attention to them and manage them. So you know, there is some amount of effort that goes with that. But I got to tell you, too, when I owned my own home, and you know, I felt like I was spending every weekend at Home Depot, and those were brand new homes, you know, and I was just always like arguing with a gardener because he wasn’t doing a good job, and the flowers would die. And, you know, the it’s a hassle. I don’t want that hassle anymore.
Steve G. Jones 37:10
You don’t want the hassle of owning a house or a condo or
Jason Hartman 37:14
owning a house that I lived in, even though it’s a hassle, you know, so so compare that you’re going to spend some time doing that stuff on your rental properties, too. That’s what I’m saying, you know, in the interest of full disclosure, if you got 10 rental properties that are worth 1,000,002, and they’re 120,000 each, that’s gonna take some of your attention, for sure to manage those, okay? Even if you have managers, you got to manage your manager or self manage either way. So you would take now what would you do you
Steve G. Jones 37:41
talk about the $1.2 million credit line for housing and a little over a million dollars, cash and shopping time, what are you going to buy? Well,
Jason Hartman 37:48
I’m going to go out, and I’m going to pick three, minimum and no more than five different cities, different diverse markets around the country. And I’m going to start picking off nice little income properties. And the typical performance of one of those should be and of course, you know, nothing’s guaranteed except death and taxes. But they should be something along the lines of you’re going to get about, you know, if you can fully leverage them, meaning about 75%, maybe 80% loan to value, which is full of leverage. If you can fully leverage them in that way, then, you know, you’re going to get maybe $200 a month in positive cash flow. And your gross is going to be about 1% of the value of those properties, give or take a little bit, and you’re going to be diversified, you’re going to have say, you know, three to four properties in each of three different cities. So if one economy goes down the tubes, you still got two others that are doing okay. You know, don’t put all your eggs in the one basket geographically. And that’s what I’d recommend you do and just rent yourself. You know, a couple friends of mine live in Las Vegas. And they are they just moved out of this beautiful property that of all things is owned by Leonardo DiCaprio. That’s their landlord. It’s a high rise, condo, gorgeous, gorgeous property. And I think they’re paying like five grand a month, and they just moved out of it. And Gosh, rent that place. It’s worth like a, you know, over a million bucks, you know, really beautiful. I’ve been there.
Steve G. Jones 39:24
Yeah, it sounds good. I know a lot of celebrities own condos around here. But what are your thoughts about? So getting back to my original original question about $5,000 a month in rent being wasteful, I guess it’s just a matter of scale. I mean, because you could rent a house for $1,000 a month in some smaller town
Jason Hartman 39:43
but the in that house, it’s going to be more it’s going to be a better deal to buy that house. See if the value of the house is over 150,000 and if the rent is under 15 $100 per month, it starts to make sense to own It, okay, and live in the house alone, it’s the delta is when you get a seat look at the psychology of this renters will only pay rent to sort of a certain point in when they’re paying, you know, 20 $500 or more per month, they kind of look at themselves in the mirror and they say, why don’t I just buy something, which is not really that smart, but that’s just the way people think. Okay. And so, you know, the the delta between the price increasing, and the rent increasing, it gets bigger and bigger as you move up the socio economic ladder. So, you know, there are these beautiful high end homes on, you know, Martha’s Vineyard and in the in on the coast of California and everywhere, you know, around the world, okay. And mostly, those aren’t rentals, mostly people buy and own those, they’re not rental neighborhoods. So when you get a rental in there, you know, the the rent to value ratio is very favorable in favor of the tenant, not the owner. Because most people will just buy they get out of the rental market. And what I’m saying is, do the reverse of what most people do, okay? If it’s a, if you’re a low priced, renter, 1500 a month and under, you should probably buy that place that you live in, or some comparable place, and own it and live in the house you own. But if you’re going to spend, you know, three 510 1000 a month, I guarantee you, you can rent a lot more than you can own for that, and invest that money elsewhere and use the income from the other properties to pay your rent. It’s beautiful. I
Steve G. Jones 41:52
like that a lot. By the way was that Ben and Sarah who had Leonardo’s? No,
Jason Hartman 41:57
but you know, Ben and Sarah?
Steve G. Jones 42:00
I do I went to a party they had when they first moved into their penthouse level thing, and I met them in Malaysia or somewhere in the
Jason Hartman 42:08
world. I don’t want to mention their name, but I have a feeling it’s the same Ben and Sara with three children.
Steve G. Jones 42:13
Yeah,
Jason Hartman 42:14
same friends of mine. Yeah, yeah. No, they’re, they’re in one of my mastermind groups with me. And this is two guys who are roommates in their 20s. Who are their good friends?
Steve G. Jones 42:26
Okay. Okay. So, back to the shopping spree. So how much of the money would you spend? You got 12 1.2 million in credit and about a million dollars in cash? How much of that? have you spent one also is all said and done?
Jason Hartman 42:39
Okay. Well, you know, there are really only two investments that work well, three investments that work in my eyes. Okay. One that I believe you asked a question about this before, is your own business. And in your own business, if you can put money to work, and if you are sure you can earn a very high return on it without spending a lot more of your own time to manage the investment in your business than a business can be a very good instant gratification type of way to invest your money. Okay, so there’s your own business and you have your own business, okay, as a hypnotist. So that’s something, you know, I would certainly consider investing in which I, I certainly think you are considering or you have considered. Okay, number two is owning income property. And number three, is investing in hard money loans, where you become a lender, and you can lend that money out and get anywhere between eight and 12% annually on it. And you know, listen, I don’t like the lending as much as I like owning the real estate. But for purposes of diversification, scalability and simplicity. It’s not bad. I mean, look, you’re getting a lot more than you could get in the bank. And, you know, I’ve never had one of these first trustee loans go bad. They’ve all been paid 100%. It’s worked very well.
Steve G. Jones 44:00
Yeah, that sounds good. So you would spread out the entire, we’ll say it’s $2.2 million, you would spread it out among those three potential type investments,
Jason Hartman 44:11
I would and of course, you know, you should have some cash reserves. So in terms of cash reserves, for the property portfolio, you should have at least 4% of the value in the bank in cash, okay to cover vacancies, unexpected maintenance, things like that, okay. And so that means if you have $1 million worth of income property, you got to have at least 40 grand in the bank set aside for living. You know, the typical financial planner speak would tell would say that you should have six months of your expenses in the bank, okay, so don’t use it all. But don’t leave too much in the bank because remember, when you leave it in the bank, you’re losing money through taxes and inflation, you know, unless we have deflation, which is another discussion but
Steve G. Jones 44:59
by the way, The numbers I shared with you the historic rate, you don’t like it at all. But the historic rate of inflation being about 2.5. And I know those are just reported figures, and the historic rate of bank savings account what they pay on that over the last 20 years being 4.5. I know you may not remember, but it was at some point, last one is high enough to make the average over the last 20 years, about 4.5. So if we take the reported numbers, it does keep bank savings do keep pace with inflation. But when you add to the argument, what you say, which is these numbers are underreported for inflation. And that goes out the window, of course,
Jason Hartman 45:39
yeah. But even then, you know that that’s really a question of, what kind of player Do you want to be in life? Right? Are you playing to win? Or are you playing not to lose? So in your scenario, and let’s assume that the inflation isn’t under reported, which we all know, it is okay. But let’s say it’s not in that scenario that you shared, you know, that’s a playing not to lose scenario, right? Which, as we get older, you know, we get generally more conservative, right. And, and, you know, that’s okay, depending on your age, and risk tolerance, and so forth. But, I mean, you’re definitely not playing to win, okay, even if you did beat inflation by sticking your money in the bank, where you kept pace with inflation. Number one, it doesn’t account for taxes, so you’re going to lose some of that interest to taxes. And number two, is, your everybody around you, hopefully, will be investing better than you. And since economics is a relative game, then you’re going to be beat out by others around you who are earning 1020 30% annually on their investments. So why would you want to do that? I mean, I just think keeping your money in the bank is a pretty, pretty risky thing to do. It’s kind of counterintuitive. I understand that.
Steve G. Jones 46:59
Yeah. It’s just something that came as a reaction to losing money in the you know, the stock market crash, but I do need to readjust my thinking, and I appreciate your input.
Jason Hartman 47:07
Well, you know what I say Wall Street is the modern version of organized crime. So don’t be in the stock market. That’s like my mission in life is to help people not be in the stock market, the stock market.
Steve G. Jones 47:20
A bunch of money in there, too. I probably need a risk to be careful.
Jason Hartman 47:24
It’s it’s pretty inflated right now. It’s pretty frothy.
Steve G. Jones 47:27
Yeah, I am kind of keeping I’m thinking of pulling the trigger and getting it out. So especially after reading your friends book, rich. I’ve he calls himself, rice Delmon, but it’s like Rick Adelman, or something like, oh, Rick Adelman.
Jason Hartman 47:39
Yeah, right? Yeah,
Steve G. Jones 47:41
I got that book.
Jason Hartman 47:41
He spells it that way, because it’s our I see for Rick, and then, you know, Adelman, yeah,
Steve G. Jones 47:47
it helped me remember it, actually. But now I’m remembering his role. So just to sum up, you would, so you know, my situation, you know, the money I have available? Can you plot out the next few years for me? Would you maintain this rental situation, for example,
Jason Hartman 48:04
you know, if you’re happy living there, and I don’t know if you’re single or married, or in a relationship or not, but you know,
Steve G. Jones 48:10
dating, just
Jason Hartman 48:12
a condo hotel kind of thing sounds like a really cool thing for a bachelor. So I think that’s probably pretty good. I would just kind of hang out there, as long as you like the place, and you’re like your landlord. And I would just be investing and building a nice nationwide real estate portfolio.
Steve G. Jones 48:30
Okay. Now, the long term sustainability is what concerns me because at a certain point, as I said, this is going to go up in value so much that he’s going to raise the rent, or he’s going to sell it out from under me, I won’t be able to replace at the same price. At that point. What would your plan become
Jason Hartman 48:43
if the rental goes away?
Steve G. Jones 48:45
Yes.
Jason Hartman 48:46
If he if he gives you notice, and says, Hey, you got to move? Well, number one, if you like the place, try and negotiate yourself a lease, like I’ll give you an example, on the lease, I’m negotiating. It’s a one year lease with the option my option to renew for a second year for 100 bucks more a month. So my rental go from 4000 to 4100 a month, if I want to stay another year. So you know, that’s pretty good. I mean, you can do a two year lease. I mean, landlords do those all the time. In fact, some of our investors really recommend that as a way to manage their own properties, just because, you know, you don’t have turnover expenses and any vacancy in between. So
Steve G. Jones 49:24
yeah, I don’t want to go too long with here but this person will not do a lease because then you’d have to report the earnings to the whatever I need to get charged $900 a month extra. So I actually have month to month, but I don’t have a signed lease. Oh, because because it’s a condo hotel.
Jason Hartman 49:40
That’s a unique situation. Yeah, I know. I know what you’re talking about.
Steve G. Jones 49:43
Yeah. So so we look at the sustainability of this. We realized that plotting it out over even five years, it’s not sustainable at this price. Either. The market will go up and they’ll sell it or he’ll realize that my rent is too low and they’ll raise it. So at that point, what would your reaction be? Well,
Jason Hartman 49:59
I just find another one. rental,
Steve G. Jones 50:00
okay, just a higher price rental and just keep going up over the next.
Jason Hartman 50:04
I mean, look, if you don’t need something, it’s a waste of money at any price, right? But you know if you enjoy it and need it and get a lifestyle benefit from it sure. You You know, financially, you will generally almost always really get a better deal if you increase the the property that you rent, because the Delta keeps getting bigger as prices go up.
Steve G. Jones 50:30
Okay. Excellent. So So you mean if I pay more rent, I’ll get something much nicer.
Jason Hartman 50:34
Yeah. Yeah, you should, you know, I mean, long as you shop around and just, you know, act like a prudent good business person, which I’m sure you will.
Steve G. Jones 50:41
Yeah, yeah. As you as you know, I asked a lot of questions. So sounds good. Thank you, Jason. I appreciate it.
Jason Hartman 50:46
All right. Hey, thanks so much for being on Steve. I really appreciate it. And if you have any more questions, listeners, feel free to call into the show. Because all of the questions Steve asks, I know that many of you have thought of those and ask them over the years to so you’ve helped a lot of other people understand this stuff, by coming on and talking about it, Steve. So thanks for joining us. Thank you, Jason.
Announcer 51:07
What’s great about the shows you’ll find on Jason hartman.com is that if you want to learn how to finance your next big real estate deal, there’s a show for that. If you want to learn more about food storage, and the best way to keep those onions from smelling up everything else, there’s a show for that. If you honestly want to know more about business ethics, here’s a show for that. And if you just want to get away from it all and need to know something about world travel. There’s even a show for that. Yep, there’s a show for just about anything, only from Jason hartman.com or type in Jason Hartman in the iTunes Store.
Announcer 51:47
This show is produced by the Hartman media company All rights reserved for distribution or publication rights and media interviews, please visit www dot Hartman media.com or email media at Hartman media.com. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax legal real estate or business professional for individualized advice. opinions of guests are their own. And the host is acting on behalf of Platinum properties, investor network, Inc, exclusively.
