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.
This show is produced by the Hartman media company. For more information and links to all our great podcasts, visit Hartman media.com.
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.
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
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
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
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
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.
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