Jason begins the show with in-house economist Thomas as they discuss a new tax law and its impact on tax brackets. They look at the government’s interest in keeping the official inflation low and how it hurts most citizens. Later on the show, Jason plays a clip from 2010 Meet the Masters of Income Property discussing the different aspects of self-management. Investment counselor Drew discusses the 8 properties he’s self-managing and brings up different issues he’s had.
Investor 0:00
Well, I like real estate just because I like the benefit of being able to have a mortgage pay off real estate over time so that when I retire, I have something I like the fact that it’s boring. I want to be able to be entertained and travel and do a lot of things in my retirement. And that boring investment of real estate allows me to do that.
Announcer 0:24
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help You follow in Jason’s footsteps on the road to your financial independence day. You really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 1:14
Welcome listeners from 165 countries worldwide. Thank you so much for joining me. By the time you hear this episode 1179 1179 I will be in either China or South Korea, one or the other Seoul, South Korea or somewhere in mainland China. So greetings, greetings. Anyway, we will have a guest today but for the intro portion of the show, I’ve got our in house economist Thomas here, and we want to continue our discussion on some of the finer points of inflation, deflation, good or bad, good or bad for whom, and kind of dissect this issue a little bit more. We want to talk also about the the official rate versus the unofficial rate. And so let’s dive into that. Thomas, welcome back. Good to be with you. Good to have you again. So a big overarching question. I think our listeners know the answer to this, but I’ll just phrase it just in case, do government’s benefit from inflation? Is inflation a good deal for governments? And since we’re talking about governments and they’re so closely related, although not directly related in the US, at least in theory, central banks like the Federal Reserve, or the European Central Bank, or the central banks of any countries right now, the US is in a distinctly different position than every other country on Earth, for the obvious reasons, largest economy, most powerful superpower, etc, etc. Biggest brand the name, nobody mentions that but yours truly. But also, of course, the US has the reserve currency of the world, the dollar and I think it will stay that way for many, many decades to come. There are those who say different, but they always seem to be wrong. We’ve got understand that the US is in a very different situation than other governments. Same with the Federal Reserve versus other central banks. But the overriding question, do governments benefit from inflation? Take it away?
Thomas 3:19
Well, before answering that one, I thought that was interesting. You mentioned central banks in the context of inflation. One of the headline articles was about Trump’s appointment or proposed appointment of two individuals to the Federal Reserve Board, Herman Cain and one other and they will likely be dissenters to
Jason Hartman 3:42
higher interest rates there. There’s an interesting thing, right? You know, Herman Cain, and I don’t know who the other person is, offhand. But Herman Cain, obviously much more famous because, well, hey, he ran for president. He was the folksy guy with the funny sayings. So that’s sort of like Trump that’s kind of Trump like, but remember last year when the Fed was raising rates so aggressively, that Trump was really criticizing how and the rest of the Fed for trying to ruin the party, if you will. And he was right, it didn’t seem like they were being overly aggressive. I think even they agreed with that. And they put that on the shelf for the time being. Ultimately rates do need to go up so that when the next cycle hits, the Fed has ammunition to deal with with that cycle and one of the big ammo is lowering the rates, right to stimulate things. But Trump wants to get some people in the Fed who are not going to ruin the party for him. Right.
Thomas 4:42
Yeah, theoretically, they’ll be more favorable to the current administration. What I thought was interesting is that, you know, Trump’s trying to get some dissent on the Federal Reserve Board. You can probably guess economists tend to vote together. There’s very rarely a dissenting vote among the federal Open Market Committee, and he’s trying to make it more of a debate trend and make it less of a groupthink type of situation. And then this morning, the IMF released a note cautioning that central banks should avoid any political influence in their decisions. You kind of see the two opposing views happening right now with the Federal Reserve. I don’t think the IMF is happy with the two new appointees to the Federal Open Market Committee.
Jason Hartman 5:31
Okay. So just dissect that a little bit more for us. Most people really don’t think about the FOMC. And the finer points of that unless they’re in the business unless they’re a commentator or, you know, newsletter writer or whatever, or an economist. They just think about, oh, hey, Jerome Powell. He’s the chair. But there are what seven member banks, right. There’s a lot to this. It’s obviously a big organization. It controls the money. Planet Earth mostly, to a larger or lesser degree, just takes down that rabbit hole a little bit more, if you would,
Thomas 6:07
yeah, the Open Market Committee, they set policy for the Federal Reserve, and they’re voting members and non voting members. Some members are appointed by the president and other members come from the member institutions. And the group actually votes on what the target federal funds rate will be. That’s what most people I think call is the interest rate. And they also vote on the asset purchases or the Federal Reserve and any policy that the Federal Reserve adopts the Federal Open Market Committee. They’re like the board of directors, the Federal Reserve. Sure.
Jason Hartman 6:43
All right, so back to our larger question. Governments, like everybody, you know, have they have two sides of the ledger, right? They have income taxation, right? And expenses, entitlement programs, debt, etc. Now, what’s interesting is that when you Look at the expense side of the ledger, the same way we do with an income property. Remember if you go to Jason Hartman calm and you look at any of the performance we have, you will see something called n o i net operating income net operating income or noi. And noi leaves out a very significant element that is an expense, it leaves out something called debt service. So your mortgage payment on that property is not included. It is not deducted from noi noi or net operating income only includes the operating expenses of the property, not the debt service. Those are different concepts. Why would this be that way? And this goes back, Thomas to what we’re talking about here with governments and how they benefit from inflation or not, because the debt is considered a different concept than the actual Spencer’s so on a property for example, if you refinance the property, or you have an adjustable rate mortgage and your debt changes, it, probably almost almost never would it change the operating expenses of the property, right? So you’re, you’re still going to have maybe the same property management fees, the same maintenance expenses, etc, but only your debt services change. So debt service needs to be viewed as a distinctly separate category. And when we calculate cap rates or capitalization rates, a metric, I don’t think is very good. It’s okay. But it’s not great. But it’s commonly used in commercial real estate circles. When we calculate cap rates, they are based on noi, they don’t include debt service, so very important thing there. So whether a government benefits from inflation or not, it depends. We have to categorize its income and expenses, and it’s Types of expenses differently, don’t we?
Thomas 9:01
Yeah, you know, on the revenue side of the balance sheet, the federal government wants revenue to be higher. And the way to get it there is to have actual inflation be higher than what’s reported inflation. So, taxable income times the rate when that’s growing faster, entities get more money on the expenditure side, the net interest cost of the debt when inflation is higher, the value of that debt goes down.
Jason Hartman 9:29
Right. And then that right there is an example of what I call inflation induced debt destruction. So the cost of repaying that debt gets cheaper in real dollar terms, and that’s wonderful for governments, right? That’s a huge, huge benefit. So they have an incentive to create inflation from that perspective, but when they receive income, they also have an incentive to see inflation right Thomas
Thomas 9:59
Yeah. Because income tax or corporate income tax, they are linked to the inflation rate. And when the inflation rates higher, more money comes in.
Jason Hartman 10:09
Okay, so more money comes in. But you could argue that in real dollars, it’s not more money, only a nominal dollars, right? Because even if the tax law stays the same, and no percentages of tax do or difference in deductions happens, then you still have this situation where, because it’s a higher dollar amount, because everything’s inflated, the government will receive a larger chunk of money, but they pay their debt at a cheaper rate because of inflation induced debt destruction. Now, what about non debt expenses? What about entitlement programs? What about government workers and their wages? Those are typically adjusted for inflation, aren’t they?
Thomas 10:56
Yeah, that’s the case where in this case, the federal government hasn’t incentive to have the reported inflation rate to be lower than what the actual inflation rate is? Because right Social Security goes up by the rate of inflation and when inflation is 2% versus 3%, that makes a big difference on how much is going out the door.
Jason Hartman 11:16
Okay, so expenses, non debt expenses, I would argue that it’s really the same as debt, or is it different? It has inflation induced debt destruction too, doesn’t it? Even if it’s adjusted for inflation, and here’s, here’s where it gets really important. By the way, we might as well bring this up. Now, here’s the part that gets really important. You’re listening listeners, you’re paying attention right now is the time to listen. If your mind is wandering off when you have the official rate, or the stated rate, the consumer price index, for example, versus the real rate of inflation. We’ve talked many times about how that’s manipulated. How the official rate in the real rate are two different worlds. But if they say the official rate is 2%, for example, then they increase the entitlement program or the government wages with a cost of living increase of 2%. But what happens when the real rate of inflation is for example, 4%. That’s the unofficial rate. It’s the real rate. So the government is benefiting in a huge way they’re right, because they have a very big incentive to understate the rate of inflation. Because if they can pay back in dollars that are 4% cheaper. Well, they’ve only given a cost of living increase of 2% because that’s the official rate. They’ve got an arbitrage don’t take Thomas. And just
Thomas 12:47
Case in point this let’s see this year. 2018 was the first year of the new tax reform and I
Jason Hartman 12:54
love it, I see a bundle. So Trump,
Thomas 12:58
it definitely saved large portion of the population a good amount in taxes, one of the provisions in it did play around with the inflation rate it changed. Let’s see the inflation measure used to calculate the income brackets, their tax rate brackets, right you pay 3%, you pay 10% on the first X amount of income and 15%, then, you know, you go up to the top marginal rate and those brackets rather than being linked to the CPI, they are linked to the chained CPI, which is a lower inflation rate. So individuals because their income typically rises faster than the chain cpi, they’re more likely to fall into a higher tax bracket because their income will grow faster than tax brackets,
Jason Hartman 13:49
right. So that’s another way that they can really manipulate it because if the official rate is stated it in that example 2% the unofficial rate is really for percent income is inflating, you’re paying a higher percentage, right? But it might kick you up into another bracket. And that’s huge. That’s a big big deal, isn’t it?
Thomas 14:13
Yeah. If you’re in the 35% bracket, you know, it’s a chunk of money.
Jason Hartman 14:18
Yeah, no question about it. Okay, Thomas, we got to get to the rest of our show. But let’s wrap it up.
Thomas 14:23
What else? What else? Do you want to tell the listeners? Oh, inflation is a great thing if you take advantage of it.
Jason Hartman 14:29
Yeah, no question about it.
Thomas 14:30
It’s bad magic, if you don’t
Jason Hartman 14:33
love it. I love it. Yes. So take advantage of inflation induced debt destruction, the best way to do that is with the most historically proven asset class in the entire world. And that is none other than income property, because of its very special multi dimensional characteristics that allow you to really, really take advantage of inflation and make it benefit you. So let’s get to the rest of our show. In conclusion of our self management week, we go back to the 2019 meet the masters of income property event, where drew Baker gave his presentation on self management.
Drew Baker 15:15
So there’s stuff on the phone that you’re able to deal with that the property manager is never going to take care of this type of stuff. And so you’re just noticing these sloppy oversights, you know, dirty closets. Still stuff that’s simple to anyone that just walks through the property will notice. So after 10 years, I kind of came to the conclusion that my property is on life support for Dummies. And, and so it’s no dig on any vendors here. I haven’t used none of the vendors here. I used as managers. So this is my experience. And if you find a good property manager, please tell them about me. We don’t invite these bad. Oh, yes, yes. So part of the best Benefits of self management is step one, finding a leasing agent, finding someone in your market that knows what they’re doing what’s renting currently and how to successfully find a good tenant.
Jason Hartman 16:12
Okay, so let’s let’s talk about a leasing agent for a moment. What do you mean when you say that? Do you mean a realtor? A regular realtor who will do leases now? Yes, a lot of realtors and a lot of markets do leases some don’t? Yeah. And so, this is not a property manager offering an unbundled or all a cart service, right? Just and let me just define it. So you know, the property management thing has usually been throwing in multiple activities together. One, you know, marketing and, you know, handling the lease, writing up the lease, screening the tenants, and then putting the tenants in the property, managing any repairs or fix up and then collecting rent each month. So what you’re doing is you’re saying hire a real estate agent. Yeah. And they do the least Stop, right? How much do you pay them?
Drew Baker 17:01
Well, that’s the next thing. Part of my reservation about going with a leasing agent, a realtor to do the lease up is it was, it was a property versus a property manager was it was more expensive. It was about one month’s rent, not half rents month worth of rent. But the reason for that is the property manager gets all this back end money that you don’t really think about. And so, yeah, you got a great deal on a cheap haircut, but then you look in the mirror and realize you’re an idiot, you know, and so part of the problem here is I’m negotiating up front, someone to, you know, take a good amount of time to take quality photos, market the property, go there and meet with you know, plumbers to deal with little issues. And they’re on the hook for getting me to the finish line to find a good tenant. And, and then also, you kind of have some say about what type of tenant you’re going to get in terms of Hey, do you want this tenant over here that has five kids and works on cars in the driveway? Or do you want this family that has, you know, to I mean, and I sell just kind of briefly look over and kind of come to the conclusion of what she thinks, and we’ll figure out what makes the most sense for the property. The next thing is whoops, is building a network. And so I’m I think that building that network of support in the local area, is what helps me ultimately find good vendors. So this list on the left is something that the leasing agent gave me that said, Hey, here’s everything you got to do to the house, replace the porch post, I think you have a problem with the front porch. And the you know, you have to deal with this thing in the kitchen and this thing in the bathroom. So I went on Yelp and I found a contractor that got highly recommended. I called around to a few people kind of got some references in the area and the thing is that Nice’s a leasing agent lives in the market. They get homes ready to be sold or rented. And a lot of times they know people in that area that can do the work. So you can kind of lean on them to find people to help you. So this porch post right here was being was rotted out and showing signs of decay in the attic. The I got the licensed contractor to go out and give me an expert evaluation of the house. He looked at at the roof. He looked in the attic noticed that the dryer vent was not connected and it was billowing into the attic. So this was a fire hazard and a safety hazard on the front porch that I had to dress immediately whereas the property management had made this rent ready. And so I have control over what type of mailbox post I want to use. He said Are any of these pillar posts interesting to you via text while he was at Lowes, I said nope. Go to the ARDS. So, so he gave me the ability to choose, I said, I want to have it look like it is in the neighborhood. I don’t think this isn’t going to work for me. So, so I saw the job to completion through his text messages. And so you can see this was rotted out. This was taken by the agent. And so you know, we were worried about this pillar post, because I’m like, Is it a leak in the leak in the roof? Is it What’s going on here? So he was able to identify where the leak was coming from that little gap that he cocked in and put in a new porch post. And what’s funny is he took me a took the photo on the left showing me the job being complete, and my tenant took the photo on the right saying, Ah, he forgot to come you got to have him come back. He forgot to connect the gutter extension. So he came back the next day and came back the same day actually, and got a complete. So I want you guys to guess kind of what the labor component was to do. Replace All this stuff. It was 500 bucks, took them about a day to do.
Jason Hartman 21:06
So what do you say that would have cost with her?
Drew Baker 21:09
Oh, I mean, first of all, I don’t think they would have done half as good a job. And it would have been three times more money. And I would invite in my name is a little time, I’m finding that the vacancy loss by getting the tenant turn quickly and getting someone in there on those eight properties turns out to be about $100 extra month. And then if three of the properties, let’s say, come up for lease renewal year, and that’s, you know, that comes out to about $125 a month cumulative for all the properties that I’m saving, it really adds up repair market fees. You know, this is about $150 a month, cumulatively that I’m keeping and then the management fees themselves is $625 a month for the for these portfolio in the market. And this as Up to 1600 bucks, believe it or not. And the last point that gets us there is scheduled rent increases. And I’ll show you kind of the strategy that I’ve increased rents, by giving tenants notice these property managers, they send you a letter in the mail and you go, oh my goodness, like, there’s no planning, there’s no expectation they feel in the dark. They don’t know what’s going to happen. rents been the same for four years. I didn’t get a heads up, they’re not prepared for it. They’re paying late anyways. So I’m sort of cultivating my tenants to get prepared if something’s coming down the road. So there is this this slide my wife put in because she’s like, you can’t talk about picnics and butterflies and rainbows right right. You gotta Yeah, she’s she’s gonna get up here and start heckling me. She’s gonna go Oh, my gosh, I’ve seen
Jason Hartman 22:49
she’s, she’s in Katie’s employer.
Drew Baker 22:52
So I’m getting calls all times a day is this is part of the problem. And I you know, the other thing is, is this is Indianapolis. The timezone difference is Three hours away. So, you know, when tenants there are messaging me at, you know, before they go to work, I’m, you know, sound asleep and it’s you know, four in the morning. So a lot of times I’ll wake up and have to kind of dig myself out of a inbox, but it’s not too bad. You know, maybe I’ll get a text message every other day. And right now I’m kind of in full blown maintenance mode trying to get everything squared away. So it’s smooth sailing into the future. So right.
Jason Hartman 23:28
So an important thing I think, to understand is that you’re you are spending a bit of time on this now. Yeah, but you’re looking at is like you’re just fixing a lot of things from the past. We get this kind of smooth out. What do you think your your, the amount of time you’re going to spend managing eight properties now? You’ve got more properties in a whole nother market in Memphis? Yes, I know. But you are you self managing any Memphis I You are so
Drew Baker 23:56
that property in that market. I I’ve had mixed success. And I went into my portfolio and looked at it and said, which one of these properties is going to give me the less least amount of trouble? And I let the property manager know is going to let them go? They said, Oh, no, no, once you just take one of them and see how it goes, and I didn’t even tell him I was going to self manage. I just said, I’m gonna let you guys go. So I took that property over, you know, the tenant called me last week and said, the furnace went out. I have a friend that lives in Memphis, And hey, if you know someone that’s good at h back, please let me know. He gave me two referrals. I contacted them on Friday afternoon and said, Hey, on Monday, can you schedule to go out and take a look at this, and it was not that hard. And, you know, I looked at the performance of that one property. And I had seen the last previous years, they had not had one service request. So you know, I picked a property in my portfolio that I thought was going to be low, main While I work my way into that market to build my network of vendors and support before I let the other people let the other properties under mint under management myself, so I’ll give you an example. I had, I was at a wedding in Arizona, and I got a call, the tenant said, Hey, I’m looking at the invoice here, and it says there’s a pet rent. I’m paying 950 a month, and I should be paying, you know, 1050 a month, but I’m paying 950 a month and this pet rent here we gave away the dog long ago. So this should be taken off. Well, I had to have the uncomfortable conversation of telling them, Hey, no problem. I’ll remove it. I know in a year in six months, you’re coming up for renewal. I’m planning on going through fixing all these things getting it improved, but just so you know, at the end of the six months, it’s going to be adjusted to market rent, when we get this place up for for rent, so they kind of work uncomfortable called me back or a bit flustered because they didn’t, they had just been charged for this pet, they didn’t have any more. And they heard they were going to get a running, please. So sometimes, you know, being friends with the people trusting people from afar, having a relationship with the tenants can be a downside and having them call you at all times of day. I agree. of the eight properties that I have here. Four of them are new tenants. So it’s not like some of them are new, some of them are not. The other downside is, and this might be kind of cuts both ways as I’m reinvesting my profits into the property to kind of give it a sparkle. So the way to realize is the tenants are your customers. This is a business and you have to think of it that way. You have to give good customer service if you want your tenants to be happy and stay. And so the property manager, the fridge, handled broke and they just tried to glue it back on and if They could after they tried to do that a couple times, I’m sure they would just replace the whole refrigerator. I went online, was able to buy two refrigerator handles, send it to the tenant, do research on the part I said take a photo of the serial number model number in the fridge. And I was able to send them to through Amazon Prime for $25. And they were a static and ironically, the fridge handle broke again and they had to put the other one on so no wonder they sell it as a two pack. So
Jason Hartman 27:28
here what you did is you actually they view your have this light and you actually shipped your tenant the ceiling fan right
Drew Baker 27:36
ahead of me here. Yeah. So now I’m going to talk about the ugly part the worst situation I’ve ever had and give you a chance to kind of see how I was able to problem solve. This was a sump pump that had gone out a couple years prior. The tenants don’t speak English well. They told the property management company property managed company did nothing for years. The tenant ended up ripping out the sump pump themselves once I sent a pump to them to pump out all the water took them. I took them I think like six hours to pump out all the water. I went on Yelp and not all people on Yelp are created equal. Got an estimate for $12,000 to fix this bottom sump pump, whoa. So I, I have an infinity pool in my basement want to come over. And so I decided, you know what, I’m going to go ahead and call Justin, the guy who really saved my butt on this property and say, Hey, do you have anybody you might recommend? And he said, You know, my cousin is a licensed contractor. Here’s his, you know, Yelp page. He gets great reviews on Angie’s List. Why don’t you give him a call. So guess how much it costs to replace this sump pump. It was $12,518 Well, he came in and sent one of his good old boys in and we did it for 637 no mold. It’s not a big deal. Wow. Then the polar vortex hits a couple months later. This is scary. My tenant calls me Early in the morning, of course and says, Hey, just to let you know, the pipe, the main pipe froze. And because the access door because we’re getting all this water in this access door is broken. Some cats who didn’t who wanted to survive the cold night came in and ripped all your ductwork open to crawl in and survive. So I called my friend of a friend, contractor guy who did the sump pump and said, Do you have anybody that can come help me do this? He said, I can do anything you want as long as I don’t have to come outside. So he sent one of his guys out there, did it, massage the water pipe back into into shape, and did it for under $1,000. We paid the guy 50 bucks an hour because it was 10 below and it was I don’t I don’t know how anybody did it. So kind of the last point here that I think it’s kind of funny, Jason go back is if you want when I did the remodel on that property that you saw where there was $100 bump in In rent, my handyman left all the boxes, the toilets all at the out in the front for their trash man to take. And I had my tenants texted me and said, Did you schedule with the trash man to pick them up? And I said, the handyman didn’t take them. Nope. And they’ve blown around in the cold and they’re all strewn across the lawn. I would really like to get them out. So I called the trash company. They said, Oh, well, today’s Tuesday, and we won’t be able to pick up till Monday. And each item is going to cost $20. So for them to pick up these, you know, five items, it’s going to be 100 bucks, and I just thought, Oh my gosh, that’s crazy. And I have to wait a week. It’s gonna sit outside. So I went I put a Craigslist ad and this is the problem solving aspect. I put a Craigslist ad I said, Hey $20 to the first person that comes and takes two free working toilets curbside, and believe it or not, everybody except Jason texted me and said I’ll be glad to come pick him up and the guy I didn’t even really The boxes were there. So he said, I’ll do it for 25 bucks. So now I have this guy. I paid him through Venmo. He came and picked him up the next day, and the tenant was going. So that’s it.
Jason Hartman 31:13
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