Introduction:
One of the core concepts that we communicate to our investors is to “Refi Till Ya Die” with your rental property portfolio. While this description may sound a bit snarky, it is a very powerful strategy for multiplying your wealth over the long-term.
The most unique part of this strategy is that it stands in stark contrast to the popular strategy of ‘flipping’ properties by buying and quickly re-selling them for quick profits. The strategy that we recommend is the exact opposite of this. At Empowered Investor, we advocate buying and holding prudent rental properties over a long period of time. This enables investors to build real wealth, instead of constantly churning properties. (And creating taxable gains)
There is another very powerful force behind our strategy of buy and hold investing. That power comes when the rents and value of your property increase over time. Typically, an investment property will start with low cash flow, and will grow in profitability as tenant rents are increased. This increase in revenues carries with it a tremendous tool for growing your wealth.
The way that you employ this tool is to refinance your property for more than your original purchase price, based on the increased cash flow. This will allow you to re-invest the amount of your loan that exceeds the original purchase price. And here comes the kicker . . . these net proceeds are not taxed!!!
The reason that you will not owe taxes on the re-financing of your properties is because loans are not taxed. Since you are taking out a loan instead of selling the property, no taxable transaction is triggered. (Granted, capital gains can be deferred via 1031 exchange, but you will still lose 5% to 6% of the property value off the top from realtor fees. Thus, investors can “Refi Till Ya Die” and legally avoid paying taxes on the increased loan amount of their properties. (In addition to this, the increased interest payments from your new loan will reduce the tax burden of your regular cash flow)
These strategies can super-charge wealth creation by allowing investors to capture their equity growth for re-investment. These perpetual re-investments accelerate the natural compounding of your investment portfolio. It also carries the benefit of consistently increasing your use of fixed-rate debt as a shield against inflation. Prudent investors realize the incredible power of this strategy, and should seek to capitalize on it to build their wealth during these increasingly difficult times.
Key Takeaways:
(2:40) Some thoughts on the Federal Reserve
(8:29) The business of real estate: what we do here at JasonHartman.com
(16:10) Refi ‘Till You Die loan rates
(19:35) Why people rent when they should be buying
(21:31) The three basic types of markets
(26:09) Jason plays a segment on the Refi ‘Till You Die strategy from a past live event
Links:
For more information visit our blog archives: www.JasonHartman.com/Blog
Audio Transcription:
ANNOUNCER: 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 walks 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: Welcome to the Creating Wealth Show. This is your host, Jason Hartman, this is episode #408. 408. Thank you so much for joining me today. I’ve got a few things for you, before we get to not our guest—well, I guess we do have a guest today, actually. Our guest today will be Jason Hartman. Yes. He’s been on the show before. And we’re welcoming him back to the show today. We are gonna talk today about Refi ‘Till You Die. And what I’m actually going to do, is just play a live clip from one of my live events, one of my live conferences, where I talk about Refi ‘Till You Die. And this is one of those core, fundamental strategies. And I’m gonna share some statistics with you, before we get to our “guest” today. These will blow your mind.
When we talk about the importance of Refi ‘Till You Die, and I was talking with one of the lenders today that I will soon have on the show for you to talk in more detail, who is filling the gap with what Fannie Mae and Freddie Mac and the conventional financing market is not doing very well at all, and that is financing investment properties. And this is such a big market, of course, free enterprise is rushing in to fill the gap. They can’t compete with Fannie Mae and Freddie Mac on rate and price directly, because of course, Fannie Mae and Freddie Mac, just like Obamacare, has an unfair advantage. They are backed, the only agency in the country that can legally counterfeit money: the government. And the Federal Reserve. I put those two in one, because they really are one, even though technically the Federal Reserve is supposedly a private corporation. But it’s not very private, on one hand. But on the other hand, it’s not very federal.
Some thoughts on the Federal Reserve
JASON HARTMAN: What some of my guests have said about the Federal Reserve before is, the Federal Reserve Bank, our central bank, like the ECB, the European Central Bank, or any of the central banks in any other countries—our Federal Reserve is about as federal as Federal Express. But it still is definitely in cahoots with the government and the Treasury Department especially in setting monetary policy. So, they have an unfair advantage in the conventional market with Fannie Mae and Freddie Mac financing. Because of course they can lose money, and still offer loans on properties that are really below the rates they should be. They’re not market interest rate loans; they’re artificially low.
But if you’re one of those people like me who has more than 10 properties and can’t get financing, or if you’re one of those people who wants to finance through an IRA, or some kind of retirement plan that’s self-directed, or if you are a foreign national like so many of our clients that is really, really wanting to buy American real estate, and rightfully so; the deals are fantastic here. If you don’t fit into one of these boxes where Fannie Mae and Freddie Mac can finance you, then you’ve gotta look for other alternatives. And I’ll tell you, the other alternatives have never been great. They’ve never been able to compete with Fannie Mae and Freddie Mac in the conventional financing world. However, they are getting much, much better.
A few episodes ago we talked about B2R financing, which is one of the big private equity groups out there that offers financing. There are two other major players in this market. They’re starting to get better and better. You know, at first when they came out, they said they would do loans, but they really didn’t in practice, and some of our clients can tell you this first hand, and I’ll have some of these clients on the show, hopefully, to talk about this too. It really wasn’t very easy to get the financing offered. It’s one thing to say, hey, we’ve got all this financing available, but it’s another to actually close a loan. We know there’s quite a difference there sometimes, unfortunately.
First of all, I want to talk to you about the size of the marketplace here, and then I want to talk to you about some specifics in terms of financing available, and then, of course, on a future episode, we will have more and more of these people on to talk about the financing they offer, so you can hear it right from the horse’s mouth. Doesn’t it make you wonder where some of these sayings come from? I know there was a movie with Ed, the talking horse—or was that a talking donkey?—an old black and white movie, or television show. Anyway. Before my time, thankfully. But I remember seeing like a rerun of that, or hearing about it at some point.
The size of the market—there are approximately—now, these are all very rough numbers, of course. But there are approximately three trillion—that’s trillion with a ‘t’—three trillion dollars’ worth of single-family rental properties out there in the market. That’s not all single-family homes; that’s just the rental properties. About three trillion dollars’ worth. This is about 14 million properties. And yes, folks, I tried to actually do this on my calculator, but even my trusty HP-12C, the good old fashioned calculator, for those of us old timers that learned on the HP-12C many years ago—even my trust HP-12C, which is a fantastic calculator, it has a lot of zeroes—it doesn’t do trillions. You know, the new version of the HP-12C, because the government bailouts, and so forth, and now, and the deficits—we talk in trillions nowadays. Not millions, not billions. Those aren’t enough. We gotta talk in trillions.
I tried to do the math for you, because I wanted to know the average price of those rental properties. And I’m sure I could do it if I learned how to use my calculator a little better, or went online and found one. But what is three trillion divided by 14 million? Because I was dying to know what’s the average price of those rental properties. So, I do not know that, but I’m sure one of our dear listeners can tell me the answer to that question, or spending just a couple minutes on it I’m sure I can figure it out myself. So, three trillion dollars’ worth of single-family rentals. 14 million properties. And guess what? This is unbelievable. And that is why I wanted to share this segment on Refi ‘Till You Die, my trademark phrase, about how you should manage your investment portfolio over time. 80% of those properties are free and clear. Wow. That’s a big number, folks. That is a big, big number. 80% of them are free and clear. Now, these people who own those free and clear properties, I think they are either really wanting to change that, or they are just really uninformed people that don’t know that they should be refinancing those properties as a way to use their wealth better, through the process of what I call equity stripping.
Income property is the best investment in the United States. It’s the most historically proven asset class in the United States. Bar none! Nothing holds a candle to income property as a wealth creator. You know, when you look at the stock market and compare it, where are all the stories of the people who started with $10,000 in the stock market and made a fortune? Guess what, I’ve never heard one, and I bet you haven’t either. That’s because they don’t exist. Where are all the clients’ yachts, as they say? It’s an insider’s game, it’s a scam, it’s the modern version of organized crime. Then you look at other investments, you look at starting your own business. That could be good. It’s certainly a lot more complicated. You could get into the business of real estate. And I want to make a distinction here. The business of real estate is different than investing in real estate.
The business of real estate: what we do here at JasonHartman.com
JASON HARTMAN: And I’ve alluded to this many times before on prior episodes, but you know, some people confuse what my firm does, okay? And let me just say what we do here at JasonHartman.com. What we do, is we help investors. Those are typically entrepreneurs or business owners, or corporate people who are professionals that have a day job, and many of them want to leave that day job and become financially independent, and they want to use real estate investing as the way to do that. They want to build a strong portfolio of income properties that make sense, so that they can ultimately retire. But not really retire, as you know from what I said on a prior episode. I don’t really believe in retirement completely. Now, you might believe in it, but I think retirement, if you will, is really about doing what we want to do. That’s what success in life is.
You know, to me at least, it’s not about laying on the beach working on my skin cancer, okay? It’s about doing something, and being actively engaged in life, and what we’re passionate about. So, maybe if you have that corporate job, if you’re a cubicle dweller, you want to use income property as the vehicle to set you free from that so you can do something you’re passionate about. Maybe it’s a charity. Maybe you want to get involved in politics. Oh God, I don’t know about that one. Maybe you want to start a business that is more in line with your passion. And maybe you want to start that business in a way that you’re not pressured to make money from that business. Maybe you want to start it as a business that’s more of a social entrepreneurship venture. You know? Maybe you see something in the world that you want to change. A cause, you know. Whatever it is. And income property is no question about it, the most historically proven vehicle to do that in America, if not in the entire world. We’ve got 80% of these $3 trillion worth of properties out there, these 14 million investment properties that are free and clear, and only about—
By the way, we’ve talked a lot on prior episodes, and I know there have been a zillion articles on this topic, and that is about how institutional investors have come into the marketplace. And folks, I think I’m gonna be right about another prediction. You know, I’ve been right about like every prediction I’ve made except one. And that is interest rates. I have been wrong on interest rates, and I like to freely admit and be totally transparent. If you asked me five years ago, I would have told you I thought interest rates would be higher today. Actually, I thought they’d be substantially higher. What is the reason I’ve been wrong about this one prediction, and right about everything else? The reason is, it’s illogical, and it’s not about the math. And all of these people that I interview on this show, and a lot of them on my Holistic Survival Show, and maybe some on the American Monetary Association Show—they talk about the demise of the dollar. Well, you know, I used to kind of believe in that line of thinking too, but I don’t really believe in that; I think it’s not about math. I don’t believe, really, in the demise of America. You know, I think it’s going in the wrong direction, I think the dollar’s going in the wrong direction, but do I think America’s going to collapse, or the dollar’s going to collapse? No, not really. I find these theories very interesting. I love talking about them. One of the reasons I’m single—because monetary policy is not exactly the best first date conversation, as I like to say. You know, I love talking about this stuff. I think it’s fascinating stuff. There’s a lot of interesting theories out there.
But it’s not about the math! If it were just simply about math, the dollar would have collapsed by now, the United States would have collapsed by now. We would have 20, 30% interest rates on home mortgages by now. I did say that correctly. 20 or 30% interest versus 4½% interest. And you know, we saw this due to the Jimmy Carter economic disaster; we saw very high interest rates. People with home mortgages in the late 70s and the early 80s before Reagan kind of fixed the Jimmy Carter hangover—who had mortgages anywhere between 16 and 20% on their home, so that’s certainly possible. And if the mathematicians were right, and all the economists out there who just believed in math, that’s what we would have now. we would have 20-30% interest on a home mortgage. Rates would even be higher than that for credit cards and auto loans and other types of financing. Student loan debt, the next big bubble that will probably pop in some way or another. We would have hyperinflation!
But the fact is, it’s not just about the math. It’s not just about, what is the amount of the deficit. How much is the Fed pumping into the economy. What does QE mean? Quantitative easing, aka money printing, money creation. It’s not just about that! A long time ago I had Chris Martenson on the show, and I’ve asked my guest bookers to invite him back on the show. Super smart guy, very interesting to listen to, but he’s been wrong so far about this topic! And you know, it’s not just Chris, I don’t mean to pick on him. I like his work. But so many economists have been just massively wrong about this, because it’s not just about math. What else is it about? It’s about the American brand name; it’s about the power of the American military; it’s about the interconnections in the global economy, and the way that China—China would have just basically given us the finger by now on buying our bonds, if we weren’t their best customer.
Think about it; in business, if you’re in business, who wants to destroy their own customers? That’s not gonna be good. We’re all interconnected in this interconnected world nowadays. That’s the problem with looking at just the math and just the empirical, analytical, linear thinking. There’s way more going on in the world than what a brilliant PhD statistician could tell you. There’s just a lot more to it than that. This huge market of $3 trillion worth of single-family home rentals—that doesn’t include apartment buildings, by the way. That’s single-family homes. This is a giant market for Refi ‘Till You Die. Only 2% of them are institutionally owned. That prediction, how I started that last tangent with—I know, I tend to go off on tangents—institutional investor thing.
My prediction was that the institutional investors, the private equity groups, Wall Street, the hedge funds—they will not like our business, and they will not stay in our business, because our business is very fragmented. And I always say, embrace the fragmentation. Fragmentation gives us the opportunity of playing a field that institutional investors don’t want to play in. So that’s very important. Here is an example of one of these types of loans that is available to you, and we will do a more detailed show on this very shortly, where you can basically do the Refi ‘Till You Die plan, and it’s pretty darn good. If you have—and I know many of our clients listening do—have a bunch of income properties, they purchased them through our network, and they’ve been buying over the last couple of years, and they’ve been buying with cash, and they would love to engage in equity stripping, they would love to engage in the Refi ‘Till You Die business plan that I talk about, and have been talking about for many years, and they’d love to strip the equity out of those properties, do a cash out refinance and buy more income properties. And that would be a phenomenal business plan.
Refi ‘Till You Die loan rates
JASON HARTMAN: But let me whet your appetite. Here are the rates in terms of these loans. On one of them, and this is for a low volume program. If you qualify for a higher volume program, the rates get even better. But I’m gonna give you the worst of the deals, okay? The better one will come up on a future episode very soon. 6.25 – 6.75%, 30 year amortized loan. I know that’s not as good as Fannie Mae Freddie Mac, but that’s pretty darn good. And you can do this with a 620 minimum FICO score, and you can get a minimum loan amount of $75,000. You can finance up to—I hope you’re sitting down, because this is gonna make you fall off your chair, and it’s gonna make you smile at the same time—up to 25 properties on this program. You can finance up to 25 properties. And I know a few of you by name who are probably listening to this episode, who have 25 or more properties that you bought from us free and clear, and you can refinance those. Refi ‘Till You Die, okay? Great business plan.
You can refinance them on a cash out refinance of up to 75% loan to value ratio. So, if it’s a $100,000 property, you can get $75,000 cash out on 25 of those properties, and you can go buy a whole bunch more properties. now, by the way, on the same program, on purchases, they don’t give you quite as high a loan to value. On a new purchase, 65% loan to value ratio. And I thought, you know, that’s kind of backwards when I was talking to this gentleman this morning about the program. I thought, that’s kind of counterintuitive, because usually you’ll get a higher loan to value ratio on an acquisition, on a purchase money loan, as it’s called, than you will on a cash out refinance. But in this case, they actually like to refinance the property better than they like to help you acquire the property. And their thinking is this. And it does make sense to me. Their thinking is that you’ve already owned the
property for a while, and you know the property, and you’re comfortable with the property. So they’re gonna give you 10% more on a cash out refinance than they will on a purchase. So I thought that was kind of interesting.
And this is the worst deal they offer. They have an even better deal than this if you’re financing a higher amount or more properties. So I just thought I’d tell you about that, and the Refi ‘Till You Die, one of the great things. When we were on the last episode, #407, and I was talking to Matt, in the intro of that section, as I was doing my moment of stupidity, and I didn’t realize that the mic was not plugged in as I was rambling away—you can tease me about that one later. I’m sure I’m gonna get some flak about it. When I was talking about that, I talked about the affordability in different markets. I compared, I believe it was, San Francisco, Atlanta, and Denver, in that example. Markets that make sense to invest in, markets that don’t make sense to invest in. And I was talking about, what is it that in these very affordable markets, why is it that the rental rates are so high? And by rental rates I mean number of people renting. Of course the rent-to-value ratios are very high in these good markets as well. But why do so many people rent, when it actually would make sense for them to buy?
Why people rent when they should be buying
JASON HARTMAN: Now, there are many reasons for this, and many years ago we came up with a big list of maybe, I don’t know, 10, or a dozen reasons that people rent when they should be buying. And I’ll just share two of those with you today before we get to our guest, who’s gonna talk about Refi ‘Till You Die—our guest, yours truly—but many reasons people do this, but let me just share two of those with you today. First and foremost, financial immaturity. Financial immaturity. The first reason that many of your tenants don’t buy. And financial immaturity is that process of not being willing to delay gratification for a longer term bigger goal. And that is obviously a bad thing. Now, the 80/20 rule applies here again, because 80% of the people in the world will, unfortunately, just not get very far in life. And 20% will. They will experience real success, however that’s defined.
And with that financial immaturity issue, if you want to buy, it requires discipline. It requires you to delay gratification. I’m speaking from the tenant’s perspective now when I say this. They have to save up some money, they have to prepare to buy a home, they have to take a step back, to take two steps forward, because almost always they can rent something a little nicer than they can afford to buy. So that’s the first thing: financial immaturity. The second thing is urgency. There are three basic types of markets out there, when you look at the almost 400 MSAs, or metropolitan statistical areas in the United States. And by the way, the very, very incomplete, woefully incomplete Case-Schiller Index that is cited all over the media, only covers 20 of these nearly 400 MSAs. So, if you’re using that to make your investment decisions on how the real estate market is, you’re gonna be very, very
uninformed. Case-Schiller is a tiny little sample.
The three basic types of markets
Well, the three basic types of markets are: a linear market, #1. A cyclical market, #2. A hybrid market, #3. So, three types of markets. The linear market, those are markets I like generally. I mean, there’s more to it than just whether or not it’s linear. I mean, Detroit is linear, and I don’t recommend Detroit. At least not yet. Probably won’t. But you know, I’m constantly monitoring what’s going on, and some of these markets do from time to time surprise me. Detroit has not surprised me yet. So that’s a linear market, but I wouldn’t recommend it. Our markets—the markets we like—are linear markets. Then there is the cyclical markets. I don’t like these markets, because they’re always too expensive, and they always have bad rent-to-value ratios. Bad RV ratios, where you don’t get enough money per month, like on the episode with my mom two episodes ago. She was talking about one of the properties she owns, and she has properties in linear and cyclical markets, but her old stuff is from cyclical markets like California. Doesn’t make sense in California. Doesn’t make sense in New York City. Doesn’t make sense in Miami. Those are cyclical, high-risk gambler-oriented markets where you’re expecting appreciation to solve all your problems, because cash flow certainly won’t.
Now, a hybrid market. The hybrid market is the blend of both of these markets. And there aren’t that many hybrid markets. But the market in which I happen to live now, is a hybrid market. And that is Phoenix, Arizona. Phoenix really was before the last two boom cycles, it really was a pretty linear market. But in the last couple of cycles, as the news about real estate investing became more and more widespread, we saw investors going out and buying properties from neighboring states and neighboring areas. And a lot of them jumped into Phoenix, because Phoenix was hot. Not just in temperature. It was hot in 2002, 2003, 2004, 2005, in investing. It was getting a lot of appreciation. And way up in that appreciation cycle, you could still get decent cash flow, much better than, say, pretty much any market in California. Phoenix was pretty desirable. And so, Phoenix was a hybrid market.
Now, we very wisely pulled out of Phoenix, and recommended our investors to pull out of Phoenix, if they didn’t already own and already have a stabilized property. We stopped recommending that they get back into the Phoenix market when that first cycle happened. So, you know, it ran up, and it had the highest appreciation rate in the country in 2005, and then, boom. It fell like a rock, just like cyclical markets always do. And so, the Phoenix market was in big, big trouble for many years. And then we, to our credit, saw that, and we saw that the prices were down, and it was in a lull, and you could get good cash flow and good rent-to-value ratios again, and we started recommending Phoenix. And many, many—maybe to the tune of hundreds, of our clients, got into the Phoenix market. And guess what? The same thing happened again, showing its true colors as a hybrid market. Prices went up, our investors made a lot of money on appreciation, and they got nice cash flow, because they bought in when it was a linear market. Then when it went cyclical on them, they rode the wave up and made a bunch of money.
In fact, a few of our investors did 1031 exchanges, got out of Phoenix just this year last year, and purchased properties in other areas that had linear markets that we recommended. So, this is always something moving back and forth. If you want more information on this, go purchase the Creating Wealth Home Study Course at JasonHartman.com in the products section, or, come to our Little Rock Creating Wealth Conference and Property Tour at the end of September. And you can register for that at JasonHartman.com in the events section. And we go into all this in depth, in a structured format. So, we’d love to see you there, we’d love to have you get the Creating Wealth Home Study Course, and you can learn a lot more about this stuff.
But without further ado, let’s go on to the Refi ‘Till You Die ideology here, and I think you’ll really get a lot out of this. we have covered this a long, long time ago on really old episodes, but I haven’t covered it lately. So, I want to just share with you this 16 minute segment from our live event that we did in California last June. Here it is.
Jason plays a segment on the Refi ‘Till You Die strategy from a past live event
JASON HARTMAN: Let’s talk about one of the game plans that we have talked about for many years, which is the concept of Refi ‘Till You Die, okay? Doesn’t this sound cool? So, I’m gonna give you two examples of how this could work, and they’re just examples, and they’re simplified, because of something called the Rule of 72s, okay? You’ve heard of the Rule of 72s, right? And that just means that things double, okay? And we’ll see how they double at different rates. So, in this example, let’s talk about, for just round numbers’ sake, a property portfolio where you’ve purchased, let’s just say it’s 10 properties in diverse markets. And say the properties were $100,000 each, and this is in your workbook somewhere. David’ll find it first, I’m sure, and tell you all.
So, you’ve got 10 $100,000 properties. To buy them, 20% down is $200,000. And then you’ve got closing costs. And I’m just rounding this off; it could be different. Hey Drew, how you doing! That’s about $35,000, and then you’ve got reserves—remember, I did say 4%? Here’s the first time that number’s actually on a slide. 4% of a million is $40,000.
So, $275,000 total, and one of the questions that people ask about this stuff is they say, hey Jason, how am I gonna get rich with $300 a month per property in positive cash flow? Well, that doesn’t sound like you’re gonna be rich. If you multiply that times 10, you’ve only got $3000 a month. But the real way you build wealth—a lot of it happens behind the scenes. Because income property—remember? It’s a multidimensional asset class. And so, in this Refi ‘Till You Die example, I’m gonna show you the money, as Jerry Maguire would say. And here’s how it works. You started with this $1 million portfolio. 10 properties, diverse markets. A lot of people ask, well, how diversified do I want to be? One of the mistakes that I made, is that I overdiversified. You know that intro for the Creating Wealth Show? 17 cities and 11 states? That was a mistake. I’m gonna take that intro off, because it’s actually not true anymore, because I’ve been selling some properties to reposition and consolidate my portfolio. I would recommend that you don’t diversify into more than five markets. Reason is, it’s just simpler to deal with fewer parties! Fewer cities, fewer tax collectors, fewer insurance agents, fewer property managers, so you might own 100 properties, and that’s 20 in each of 5 markets. 3-5 markets would give you a good enough diversification. You do not need to be like me, which was a mistake. It really became a hassle, being overly diversified. So, diversify, but don’t overdiversify. Maybe you’ve got two properties each, in five markets, or three and a third properties in three markets.
And so, the way it looks is like this. You’ve got your $235,000 initial investment. You’ve got loans for $800,000, or 80% of the value, and your equity is $200,000. This is how it looks when you start. Now, what happens when you move on? When 12 years go by, at that 6% appreciation rate, your portfolio’s going to double by the Rule of 72. It’s going to double. It’s going to be worth $2 million now. So now you’ve gone from $1 million to $2 million in 12 years. And I know you’re all thinking: 12 years is a long time. Not really! I’m having my 10 year high school reunion coming up. Just kidding. Now what’s happened in 12 years—think about this. Say you’re 40. 40 is the new 25. Really is. That is actually true. If you take care of yourself.
So, now your properties double. You’re 52, and you’ve got a million dollar gain already, and you stopped. You just did the 10 and you quit, and then you just let it ride. Million dollar gain, you go to the bank and you say hey, I’ve got equity in here. Jason told me I don’t want equity, so I want to pull my equity out, I want to engage in something I call equity stripping. You have the properties, you own the assets, but you strip the equity out of them. So, basically what happens here—you still own the asset, but you got all the money out! And so you still control it, and you’ve got an asset, which is awesome. So, then the bank says, okay, your $2 million portfolio, 80% of that we will loan you that. So, we’re gonna give you loans totaling $1.6 million. And now your equity has doubled to $400,000—difference between $2 million and $1.6 million in financing. So, $400,000 in equity. And you’ve got $800,000 in cash that you can now stuff under your mattress.
You can go to Las Vegas and gamble it away. You can do whatever. For the next 12 years, if you just take this $800,000 and divide it by 12, and you don’t invest it, you stick it under your mattress, it earns zero return, you have $67,000 here, almost, $67,000 here, tax free. Why? Because there’s no tax on borrowed money! This $67,000—I’m rounding a little bit. $67,000 tax free is equivalent to—well, it depends on your tax bracket, but let’s say it’s equivalent to about $100,000, that’s about $100,000 taxable equivalent. Of course, during the 12 years, maybe inflation has happened. Probably, because your property portfolio doubled in value. These are nominal numbers. They’re not real numbers. So, granted, $2 million, you can say 12 years later, ain’t what it used to be. $67,00 ain’t what it used to be either. But it’s still money. It’s still something.
So, let’s go to the next cycle. Let’s go another 12 years. Now, remember. You’re only 52, and you’re now living on this tax-free money every year. Another 12 years now, you’re 64 years young in my example, and 64 is the new 40. Just wait till you start listening to my Longevity Show. I’ve been interviewing people—I know I’ve been a little slow to launch that show. But it’s pretty incredible what’s happening in longevity sciences. Now your property portfolio’s doubled again; it’s worth $4 million, based on the Rule of 72s at 6% appreciation, and you’ve got a $3 million gain from your original $1 million investment. And you go to the bank and say, hey, refinance me 80% loan to value. Okay, we’ll give you $3.2 million in loans. Your equity has now doubled again to $800,000, and you’ve got $1.6 million in cash. Now granted, hopefully what you really did the first time is you took that $800,000 and invested it, and you’ve earned a return on it. But we’re not even counting that. We’re not even counting the tax benefits. We’re not counting the positive cash flow. We’re just talking about very simple, simple, simplified math here. It’s just, properties double every 12 years, end of discussion.
Now you’ve got $1.6 million, and for the next 12 years, just divide it. Don’t invest it, don’t earn anything on it. Stick it under your mattress. You have $133,000 a year to spend, tax-free. That’s probably equivalent to about, you know, nearly $200,000 a year in taxable. So, you’re 64. Now, let’s go 12 more years, and now how old are we? We’re 76 years young. 76 is the new 55. And now our portfolio’s worth $7 million. We refi, we get $6.4 million in loans, we have $1.6 million in equity; our equity has quadrupled. Or no, more than that. It’s gone up eight times. What’s that, quintuple? What do you call that? Anyway, it’s a lot. So now we’ve got $1.6 million in equity. We’ve got an asset worth $8 million, a $7 million gain, and we’ve got $3.2 million cash out tax-free, divide by 12, we’ve got a quarter million dollars a year tax-free to live off until we’re 88.
And 88 will be the next 68. Your loan balances will be going up. I don’t know what the interest rate will be. Nobody does. I don’t know what the refi rules will be. They might say, we’ll only give you 50% loan to value. They might say, we’ll give you 135% loan to value. They actually do those things sometimes. We’ve certainly been through those cycles. The question is, if my debt keeps going up, then my payments probably keep going up. Absolutely right. We know historically that rents adjust for inflation. So, the rents go up to keep pace with housing prices and general inflation. We don’t know this’ll happen for sure. We do know for sure it’s happened historically.
There’s something I call the three dimensions of real estate. I’ll talk about that in a bit, because what you see is that there are all these correlating and non-correlating indicators, dependent upon the interest rates, the ability to qualify for loans, the housing prices, the Housing Affordability Index. We’ll get into that, okay?
So, let me just go over another quick example for you, okay? And remember, we didn’t count that all that time, if you bought the right properties, you had positive cash flow, you had tax benefits, you had some other benefits too. This is just simple stuff. We didn’t talk about inflation-induced debt destruction or any of that, which we’ll get into.
So, let’s say you want to do this faster, and you’ve got the 7 year itch, as they say, right? And so here, we’ll just take a portfolio that’s twice the size, to get there faster. It’s $2 million initially, and your investment to acquire that portfolio is $470,000. I’m just doubling the numbers here, that’s all. And your loans are 1.6, your equity is $400,000. The next round, only 7 years later. In this example you’re only 47, not 52. You’ve got a portfolio that’s gone up by 50%, because it goes up 50% in 7 years, or doubles 100% in 12 years. You’ve got a $1 million gain, 80% refi, $2.4 million in loans. I’m gonna go a little faster because you already saw the idea in the last one. $600,000 in equity, $800,000 in proceeds that equal $114,000 a year for 7 years tax-free. No tax on borrowed money. Because you’re only dividing this one by 7, remember? We’re on a 7 year cycle here. Now, it goes to $4.5 million. You’ve got a $2½ million gain. 80% refi, $3.6 million in loans, $900,000 in equity, $1.2 million cash out, tax-free, live on that for the next 7 years, you’re now 54. You’re only 54 years old. In the 40 example. So, $171,000 in tax-free income: boom, boom, boom. Over a quarter million in tax-free income in 21 years.
Now. There are a lot of assumptions we’re making here, obviously. Because, you know, as Yogi Berra said, the future ain’t what it used to be. We don’t know the future. Nobody knows the future, except Janet Yellen. Or Obama, because he’s God. Okay. So, anyway. Or, at least he thinks he is. So, in this example, on, you know, the rents adjust for inflation. The property prices adjust for inflation. We don’t know if 7 years, or 12 years, is the right time to refi. Like, maybe the climate won’t be good at that time. It’s just a concept, is all it is. You know, you might refi in 5 years, or 15 years. But the point is, to not kill the golden goose. The golden goose that lays the golden eggs are the properties. You don’t want to sell them. Selling is not the point, except for me—I know I broke my own rule with that occasionally, with that apartment building, because, I don’t know. A bunch of one bedroom units didn’t seem to me like they were gonna go to you know, an incredible price. I just wanted to move—I’m moving money around, okay? But I’m in the game. For sure. So, yes.
AUDIENCE MEMBER: What happens after you die? Do you expect your kids to keep doing this? Or your wife?
JASON HARTMAN: Absolutely, yeah. Or your mistress. You might tell your mistress that. Depends who you leave your money to.
AUDIENCE MEMBER: [indiscernible]
JASON HARTMAN: No tax. Under current law, as Randy said when he was up here, it steps up to current market value. So, your heirs, under—the law could change, for sure. But under current law, it steps up to market value. So, whatever the market value is at the time you pass on, you’ve left this to your heirs. Yes?
AUDIENCE MEMBER: [indiscernible]
JASON HARTMAN: No, depreciation has nothing to do with financing; it has to do with the IRS. So, the depreciation schedule’s 27½ years. So, you know how I said that I want you to buy and hold your properties? Actually, I take that back. I want you to buy and hold them for 27.5 years. And then, you buy new ones and start depreciating those again. Okay? So. Yeah?
AUDIENCE MEMBER: Are there lots of companies right now that’ll cash out refinance after [indiscernible]?
JASON HARTMAN: Oh yeah, you can get cash out refis. You’ve gotta have good credit, and the properties have to be rented, and performing, and things like that, but you can get cash out refinance, sure. And the loan rules may change. Like I said, it could be a different loan to value. There’s a million things we don’t know.
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ANNOUNCER (FEMALE): I’ve never really thought of Jason as subversive, but I just found that’s what Wall Street considers him to be!
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ANNOUNCER: This show is produced by the Hartman Media Company. All rights reserved. For distribution or publication rights and media interviews, please visit www.HartmanMedia.com, or email [email protected]. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate, or business professional for any individualized advice. Opinions of guests are their own, and the host is acting on behalf of Empowered Investor, LLC. exclusively.
