Jason Hartman invites Randy on to the show to talk about mortgage financing and lending. In the show, Jason talks about having a Chicago market specialist be the guest for today’s episode to talk about what’s happening in the Chicago real estate market, but listeners can expect to hear from that guest on Wednesday’s Creating Wealth show instead. Jason and Randy sit down to talk about the real estate market, the differences between FirstKey and B2R, and a lot more on this exciting Creating Wealth episode.
Key Takeaways:
3:20 – Randy talks about FirstKey and B2R and some of their benefits versus Fanny Mae/Freddie Mac.
10:10 – Randy compares a FirstKey/B2R type loan to a Fanny Mae/Freddie Mac loan.
15:00 – What about the underwriting?
19:00 – Indianapolis ranks number one for the best convention city.
26:00 – Randy shares his thoughts on Douglas Andrew’s strategy.
33:30 – Most people don’t understand the value of leverage.
36:10 – Nothing in this world is truly passive income. You always have to work for your money.
40:45 – What happened to the day trader?
42:00 – Look forward to next Wednesday’s episode with the Chicago market specialist.
Tweetables:
Mentioned In This Episode:
Missed Fortune by Douglas Andrew
Missed Fortune 101 by Douglas Andrew
Irrational Exuberance 1&2 by Robert Shiller
Transcript
Jason Hartman:
Welcome to the Creating Wealth show, this is your host Jason Hartman. We are at episode number 484, 484. Hey, I hope you liked our flashback Friday episode where we talked about the ultimate investing equation. What’s interesting about these flashback Friday episodes is number one, you get to hold me accountable, see what I said is true. It came true or not true, you know, I make predictions.
I interviewed an interesting guest today for a future episode that we have coming up who is the author of a book called the Wealth of Nature, not the Wealth of Nations, that would be Adam Smith. The Wealth of Nature, he’s a really interesting guy and he said, “What do you call an economist who makes predictions? Wrong.” That’s what you call them.
An economist that makes predictions is wrong. So, that’s what you get to do with my flashback Friday episodes. They are raw, they are unedited, so whatever I publish years ago, you’re going to hear it on every Friday for flashback Friday. Today to help me with the intro portion before we get our guest on who’s going to talk about Chicago, yes, Chicago, the windy city. One of our newer markets. We’ve got a lot of interesting, a lot of activity there. A lot of our clients buying there, so we’ll talk about that in a few minutes, but first we’ve got my friend Randy who is our mortgage expert who has been on the show before. Welcome Randy, how you doing?
Randy:
I’m doing great, Jason. How are you today?
Jason:
Good to have you and I’m really glad you came on the show. You of course spoke at our Meet the Masters event just over, well, a little over a month and a half ago now. We’ve talked a lot about B2R, which stands for Buy to Rent, buy to hold and rent as an investor and FirstKey, which are two companies who are offering some unique mortgage financing. They’re really kind of filling some of the gaps. You know, I’m pretty excited about some of the programs and I wanted to have you on to talk about that as well as any other mortgage financing and lending related things we might talk about. So, what’s going on with FirstKey and B2R, Randy?
Randy:
Well, Jason, first of all thanks again for having me on. I always appreciate the opportunity to talk and regarding FirstKey and B2R, again, just for people that aren’t familiar with them at all. In between the world of Fanny Mae and Freddie Mac, which would be our preferred lending and the other end of spectrum being, which would be like your private money lending, now we have this more like portfolio type operation where these particular lenders are recognizing the value of real estate as a security and the value of real estate owners as being good borrowers, so they’re offering unique programs to allow properties to be finance inside of LLCs, which can’t do it with Fannie Mae or Freddie Mac loan.
It’s allowing people to bundle properties into a group, one bigger loan, which gives you some simplicity, if you will, instead of having a bunch of little loans, and it’s giving people and opportunity to get cash out of properties that they may have paid cash for or they’ve appreciated, right. You’ve sold in a lot of markets, home values have gone up. So, doing all kinds of things to really help real estate investors.
Jason:
Yeah, I mean, that’s one of the big ones. We’ve had a lot of our clients, especially the ones who had the guts and courage and faith to buy in 2008, 2009, and even 2010. They’ve all realized some really nice appreciation on their properties. So, they want to pull that equity out, engage in what I call equity stripping, which is a really good practice as long as you can do it well and get some good rates, fixed rates, pull that equity out and use it to acquire more properties and grow the size of their portfolio so they can control more real estate, which, I mean, I don’t want to say for sure, but should lend to more wealth creation for them and more semi passive income, nothing is truly passive.
So, that’s been a really exciting thing for many of our clients. You can take and potentially buy many more properties when you can refinance them. So, tell us what the rules are or the guidelines here for purchased money loans, which means money being used to purchase property and refinance loans where you can refi and get cash out of the properties. Give us some of the guidelines. They’re pretty good, I mean, this is not bad at all.
Randy:
Well, there are pretty good and back to your point just a minute ago, this is what we were talking about at the Meet the Masters was using leverage, remember the title of my presentation was debt is not a four letter word and basically when you refinance and take equity out of the property, you’re shifting more of the risk of owning that property to somebody else, to this third party, because you took the equity out. That’s the part of risk that you own. So, really, this is just a smart way not to only just to grow your real estate investment portfolio, to leverage that portfolio to give you a great return, but also actually reduce your risk. It’s just a good strategy all together.
Now, specifically to your question, we can do properties that are one to four units, with these types of lenders, these are one to four unit type properties, not apartment loans. We can get up to 75% loan to value on these properties both on the cash out and on the purchase, by the way. So, 75% on loan to value leaving only 25% equity.
Jason:
Again, not bad at all. If you bought a mutual fund or a stock, you’d be putting 100% down. Here you only have to put 25% down or you can get cash out, you can get 75% of your cash out of it. So, that’s phenomenal.
Randy:
Like you said with the mutual fund, you’re 100% at risk with your money, now you’re going to be 25% at risk, but you get the benefit of owning 100% of the asset. You get 100% of the rent, you don’t have to give away 75% of that to the lender, so yeah, it definitely is something that works for the investor’s benefit. The B2R program, initially it started out at $500,000 was the minimum loan size. They are about to lower that to $300,000 and a lot of people go, gosh, I own properties that are worth $100,000-150,000, how would I ever get that loan? Well, this is what I meant by bundling, because we can take 5 or 6 properties worth $100,000 and then at 75% that would be, let’s say, $500,000, 75%, we would have, what? $350,000. That would satisfy now B2R and we can get one loan for all those properties.
Jason:
So bundling the properties and now they’re allowing even a smaller bundle, so the bundle doesn’t need to be half a million of dollars worth of property, it can be just $300,000 worth of property, right?
Randy:
That’s with B2R. On FirstKey it’s even lower. You can actually have a smaller loan amount, you can have a smaller value property as well. So, all of these things are very specific and I don’t want to necessarily get into all the detail, detail of it. If someone body has a question, they can reach out to us. We can fill it in to specific to their situation, but the point is they’re getting better and they’re getting more flexible and they’re getting more available to more people, because they’re doing all the right things.
Jason:
I want to ask how hard the underwriting criteria is, which isn’t too bad either, but before we get into underwriting criteria and those kinds of hoops the investor has to jump through, what about the rest of the terms? I mean, 75% loan to value ratio, that’s pretty darn good. What is the interest rate? What is the term of the loan, the length of the loan? Points? Fees? Anything else someone should know.
Randy:
Okay, so the loans can be adjustable loans ranging from three, five, to seven years.
Jason:
Which is the fixed period, right?
Randy:
Fixed period of time, yes, so the interest rate is fixed for three years, fixed for five, fixed for seven.
Jason:
Up to seven year fixed, okay.
Randy:
It’s not amortized over five or seven years. It be amortized over 30 years, so the payments are lower. You just have the interest rate that’s fixed for the three, five or seven years.
Jason:
So, is there anything longer on the fixed rate or is seven as far as it goes?
Randy:
No, actually with one of our investors, which is FirstKey, FirstKey offers the full 30 year product.
Jason:
30 year fixed rate?
Randy:
Uh-huh.
Jason:
Okay, great. How high is the rate on that? By the way, this is all subject to change, of course.
Randy:
Yeah, I was going to say. It’s February 27 right. It’s the end of February in 2015, because this is going to be on the internet and live forever, but on the 30 year fixed rates you’re looking at the mid 7%.
Jason:
Give us a comparison, I mean, what could you get for an investment property, not an owner-occupied property. What could you get for an agency loan, a Fanny Mae, Freddie Mac type of loan that you just get from a bank?
Randy:
Sure, in same day, same time frame, today we would be looking at maybe 4.5%, so we’re looking at 250 basis points higher interest rates, because of the uniqueness of this loan. Again, it’s that world in between the agency Fanny/Freddie and the private money loans, which are going to be more like 9-10%, 11-12% interest.
Jason:
That’s pretty darn good. I mean, you know, remember the comparison we have here listeners is we have hard money or private lending type of financing. That’s all we had before. You know, now, it’s really nice to see there is, there is a lot of money here that is kind of filling this gap, so this is not bad. This is not a bad deal at all.
Randy:
I also see a big benefit that people that have taken the extra steps for asset protection, to have their properties owned by an LLC. These lenders are willing to make loans directly to the LLC and Fanny/Freddie just won’t do that. If you have, you know, corporations, whatever type of entity, they’ll lend to those entities where you can’t do that with an agency loan. They’ll also do loans for people that have properties in self-directed like retirement plans, 401ks or IRAS that are non recourse. So, that’s also available through these types of programs as well.
Jason:
Just out of curiosity, will they even finance owner-occupied homes or are they strictly for investors?
Randy:
you know, I guess they would, but again, given the choice, why would you if you didn’t have…if you could get an agency loan and the interest rates are 250 basis points lower, you don’t want to go that route.
Jason:
Oh, no, I agree with you, but I’m just kind of curious as to what their mindset is. They really do cater to investors, you know, the fact that you can use entities and they don’t have a problem with it where as we’ve always in real estate been trying to trying to make the square peg fit into the round hole in that we’re using residential type products that are not really designed for investors or investment properties and we’re using them to finance them, but these companies are really totally catering toward investors.
Randy:
They’re built and designed for investors and to answer your question, I don’t even for certain that they would lend to somebody with an owner-occupied property. I don’t know if it even fits their guidelines. These are made for people that own investment properties for financing investments. That’s what they’re doing.
Jason:
Good, good deal. Okay, so, tell us more. We talked about the rates, did you want to talk any more about the fixed versus adjustable or do you want to jump into the underwriting criteria?
Randy:
Well, I think I’d like to go to the underwriting criteria a little bit, because I want to talk about this thing called debt coverage ratio. We mentioned that before.
Jason:
The DTI as it’s known, the DTI, the debt coverage ratio, yes. Okay, go for it.
Randy:
So, DCR, actually. Not DTI. Debt To Income versus Debt Cover Ratio. So, you know, a lot of times I ask people, tell me about the properties and they’re all happy that, oh, these properties cash flow. Well, cash flow to some people is not the same as what these lenders are looking for in terms of, they don’t want to see breaking even, they want to see positive cash flow and they want to see typically about a 120% of the income after the expenses, not including the mortgage, to cover the mortgage debt.
So, if I have a $1,000 mortgage payment, I want to have $12,000 of net income after paying property taxes and insurance and setting aside money for property management and vacancies. So, the debt cover ratio is very important and you can fix that if you find yourself with a cash flow that’s not quite rate by borrowing less or having more equity in it, but on a Fanny Mae loan, they don’t care. They’ll let you have negative cash flow, right. These loans you can’t. You have to have a positive cash flow, it has to be positive by 20% more than the mortgage payment itself.
Jason:
Basically that means that the, if someone goes to JasonHartman.com and looks at the proformas in the property section, when you look at the debt coverage ratio and you see 1.2 in their or you see 1.4 or 1.5, which you will see in a lot o our properties. That’s just a totally easily financeable deal, right?
Randy:
That’s absolutely right and if you happen to see..I don’t think you have any of these right now, but if you happen to see one that was like 1 or 1.1, all that would mean is instead of putting 25% down, you may need to put 30% down or 31% or 32% or whatever the number is to get the..
Jason:
Yeah, that’s fantastic. Wow. There’s some good opportunities here people. This is nice. Now, what about the underwriting though after that? I mean, are they going to ask for your credit report? Are they going to nit pick every little thing in your file or are they going to be easy to work with?
Randy:
I mean, everything changed in 2008 and whether, this is a product designed for a purpose and if you fit the box and fit the purpose, it’ll work and you’ll get the loan, but if you do that round peg, square hole, whatever, it isn’t going to work again. This is not a fog or mirror type of loan, you still have to qualify for it and the property has to qualify for it. There’s underwriting criteria, but if you fit, it’s a fantastic opportunity.
Jason:
Are both lenders pretty much mirroring each other? I mean, there are some slight difference, but would you say overall they are pretty similar?
Randy:
I’d say they’re similar in that they both lend to investors, but beyond that I think the products are very different. Again, B2R has a minimum of $300,000, FirstKey doesn’t have that. FirstKey has a loan designed just for fix and flips, which B2R doesn’t. They are more the buy and hold. So, yeah, there’s nuances are subtle. There’s product differentiation, which you want and that’s again why you gotta really sit down and find out what it is that you need to accomplish and then we can find the right program and lender to fix that scenario.
Jason:
Any other advice or tips that you want to share on lending in general or borrowing I should say more than lending?
Randy:
Well, we are once again in a super, super low interest rate environment and everybody should be looking at refinancing anything they can right now, because this opportunity, you know, we said it wasn’t going to come along again and it did, but it’s just not going to last forever. This is not normal and to get 30 year financing at these low 100 year interest rates, if you will, and be able to lock in that interest rate for 3 decades in the future, this is going to pay off in spades if you can take advantage of it today.
Jason:
It really is. It’s an amazing, amazing time. Any thoughts on when interest rates are going to go up? I was reading an article two days ago and it talked about how Janet Yellen was kind of setting the path for rate increases, but still inflation is very low. What are your thoughts on this?
Randy:
Yeah, I think that’s a really great question, because fundamentally we look at all the money that’s been pumped into the system through the federal reserve since the financial crisis and everybody’s just waiting for this inflation to happen. Now, I have an opportunity as a lender, of course, to see what’s going on with rates going down, but I am also a financial planner and I work with life insurance and notice the other side of the equation, if you will, right, and so I’ve been seeing interest rates being lowered on the pay outs from the insurance companies.
So, we’re looking far into the future as possible, they basically, they’re saying, hey, you know, in the near future, I’m not talking like the next six months or a year, I’m talking like years, they still don’t see a big raise in interest rates ahead of us, because the world..the cold that we caught back in 2008, the rest of the world forgot it now and they got to get over it.
Jason:
Right. It’s contagious. Economics are contagious no question about it. I wanted to just mention to our investors before we jump into our guest and hear a little bit about Chicago, in addition to that, Indianapolis, I mean, wow. A lot of our investors, I mean that’s just been a perennial market for us. We’ve got some different providers there. We had problems with one of our providers and we’re really kind of phasing them out and welcoming some more business with some of our other providers there. There’s just a lot of great metrics about it. US dubbed it the number one convention city in the US.
Now, when I hear that, I say, what about Las Vegas? Well, it says, but according Visit Indy, 62% of visitors to Indianapolis came to see family members and friends. The number has risen from the 50s in recent years. They’ve got just a ton of good things going for them. The New York Times said hey listened it as one of 52 places to go in 2014. Now, you know, there’s just a lot to brag about in Indianapolis. It’s kind of surprising. I mean, the reason I’m saying this and surprised about it is that I would never really consider Indianapolis a tourist destination unless I’m going to go see the Indy 500, right.
I’m looking at this ranking right now from USA Today in terms of the best convention cities and here they are, in order, according to USA Today; Indianapolis number one. Boston number two. Nashville number three. Salt Lake City, four. Atlanta, one of our markets, five. Denver, another one of our markets, although kind of expensive, we can’t do much in Denver because of the prices. New Orleans, number seven. Denver was six by the way. DC number eight. Minneapolis, nine. Chicago, another one of our markets, that’s number 10.
So, some of this stuff actually kind of surprised me. Does that surprise you, Randy?
Randy:
It does surprise me. I wouldn’t think of going to Indianapolis on vacation either.
Jason:
But for a convention center, you know, it’s like it gotta be a lot less expensive for companies to have conventions there than in Las Vegas, right? So, I think that’s one of the reason it’s just really attractive. I mean, whenever I go to Las Vegas, I just feel like everybody is in my wallet, you know, everything cost money there. It’s just mind boggling how expensive that place is now. I mean, I remember in the old days Las Vegas, you know, they used to have $1.99 buffets, what happened to all of that?
Randy:
That’s why they have all those big beautiful casinos there now. I had to say the one thing I love about all of these types of properties in these communities is that the land to value ratios. When you look at say coastal properties like California where 80% of the property value is the land and 20% is the property, you go to Indianapolis, it’s completely the opposite and what a difference that makes on the net cash flow, like money you get to keep after uncle Sam. It’s huge. It’s just huge. You take the same dollar value and move it from the cost, one of these communities, and you’re going to increase your income by 100%.
Jason:
Well, Randy, that harkens back to one of our clients, Dave and Rebecca that you referred to us and we did that fantastic exchange together with them and by the way, I have to tell you, I was just at one of my mastermind groups and one of their brokers came up to me and said that they brought up our names. I just hurt this the other day and, you know, I thought what a small world it is. Here’s this guy is 3,000 miles away across the country and and he says, oh yea, we were buying properties through Jason Hartman’s company and we got a whole bunch of them and they bought one locally through him there in Pennsylvania, so he just said, “What a small world, I’m going to see Jason next week.”
Randy:
Yeah, that was quite the exchange. That was what? A 3.7million dollar property and to, I think we ended up with 27 single family residences that we…
Jason:
No, I’m going to correct you. Well, I don’t know. Maybe, I could be wrong, but I thought it was a 2.7 million dollar beach property in like San Clemente and I think they bought like 36 or 37 properties with that exchange. Could be wrong.
Randy:
You know what, you might be right, but the point was, we did all of this in 45 days. We closed them longer, but 45 days we identified that many properties that worked. It was fun.
Jason:
It’s really just phenomenal. You know, that’s really and Randy, you’ve heard me talk about it enough times, it’s the Hartman risk evaluator. There’s just so much to that. I mean, if you want to be a real investor and not a speculator, buy the commodities, the packaged commodities, buy the structure, the house sitting on the land, because that’s going to give you two things, it’s going to give you much better cash flow and it’s going to dramatically reduce your risk. There’s no question about it.
Randy:
All good. All really good. That was quite the experience. We have to do that again sometime.
Jason:
Absolutely. We will. Hey Randy, I notice we’re going a bit long here, so I think we’re going to run Chicago on the next show. Why don’t we just talk for a little bit longer for the listeners. I just want to ask you another question. Remember Douglas Andrew?
Randy:
Of course.
Jason:
Or Doug Andrews? He wrote a few great books, one that I read maybe 11 years ago called Missed Fortune and then he wrote Missed Fortune 101 and it’s kind of like, I loved half of his philosophy. I didn’t like the other half. I talked about it on the show many times before, especially in the old days, maybe some of our listeners on one of my flashback Friday episodes will catch some of those interviews, that guy’s whole concept was half great, I thought. Have you kept up with him? Whatever happened to him and his stuff? Is he still around or what’s his thing nowadays?
Randy:
He’s definitely still around. The concept is still around sort of and just again for the listeners that don’t know what we’re talking about, basically the book was about taking the equity in your real estate that, in Doug’s words, was not safe, not liquid, provided no greater return.
Jason:
And I couldn’t agree more. By the way Randy before you go on, you know, there’s a metric and I’m sure you’ve heard it, it’s called ROE, not ROI like Return On Investment or Return on Inflation as I’ve coined, but ROE, Return On Equity. I say Return on Equity is bogus. There’s no such thing. There is no actual return on equity and that is a metric that, especially commercial real estate people use it all the time, return on equity, you know.
Randy:
It’s kind of like the opposite of opportunity costs. So, if you finance 100% it costs you x, if you finance it at 75% that savings would be your return on equity, so you could argue it. I was just having that conversation today. If you have a home that you pay cash for, you go, oh, I have no mortgage and so I have a $500,000 house. I pay cash for it, I have no mortgage payment, true, but you also lost the opportunity to earn let’s say 5% on that $500,000 dollars. So, it’s still costing you $25,000 a year to own that home free and clear, right. That’s kind of the opposite the return on equity, but back to our point, Jason. So, Doug’s theory was let’s take the equity out of your house, that’s the part that you did like, and then the part you didn’t like was he was putting it in equity indexed universal life insurance policies. You would have advocated putting it in real estate. I still would love to have that debate, not today, because it’ll take some time.
Jason:
It’ll take a while.
Randy:
It’ll take awhile. So, now fast forward, he wrote that book I think back in 2002, so we’re looking at 13 years later, I would say that people that follow that strategy and didn’t panic when the home values went down and they had negative equity possibly and the stock market went down, if they held on, they probably did really, really well. Those insurance contracts made lots of money, the equity in the real estate, you know, sure it went away, but so what? They had it in another place making money as well and you fast forward 13 years and now probably the equity is back, the returns inside the investments have done well as well. It’s a good, the point is that the equity in real estate is just the part that’s at risk. So, who do you want to own that risk? Do you want to own it or do you want to let the bank own it? It’s much better to let the bank own that risk.
Jason:
Right, you can basically outsource your debt obligation to the tenant, you can outsource your risk to the bank, you can outsource your tax liability to give that back to the government instead of it being on your head if you can qualify for all the deprecation and so forth. I mean, it’s just the best thing going. It’s just amazing. Why don’t some people get it? I mean, you work with a lot of people, you got a financial planning practice in addition to your mortgage practice, how is it that some people just get it about this real estate thing and some just don’t?
Randy:
Well, if they get on the internet or they’ll listen to the popular gurus, whether it’s Suze Orman or Dave Ramsey.
Jason:
Well, Dave Ramsey owns quite a lot of real estate, but he loves to brag about how it’s all free and clear and I mean, that is just idiotic. I’ll tell you two things I wanna say about this. Number one is that I had Dave Ramsey number two guy, he would not come on my show, Dave, okay, but I had his number two man on the show, I can’t remember exactly his title, like the CEO of his company or something or maybe the CFO, not sure.
Anyway, he was on the show a while ago and he talked about how, well, the reason Dave doesn’t like debt is because he had all this real estate and his loans were recalled. I said, that’s impossible. You can’t.. They changed that law in the depression. No lender can call your loan, okay. If you’re making payments, they can’t call loan. If you’re not making the payments, heck, they can take the property, great. That’s the implicit exit option is you can let it go, okay, so it’s just amazing how people don’t get that.
Now, fast forward today, I was doing an interview with a very bright author and she was an anchor on CNBC and on a lot of things, but it’s not our fault, she just doesn’t understand real estate, right? We were talking and this interview will be published soon, by the way, and she was saying that people shouldn’t view their home has an investment. Now, of course, I agree with that. Your home is an expense, it’s not an investment. We’re all, in the final analysis, we’re all renter. We don’t own anything, we’re not taking anything with us out of this life, right. There’s no suitcase on the hearse, okay. There’s no suitcase rank on the top of the hearse, okay.
So, we’re not taking anything with us, we’re all renters, we just have our house that we use for utility and that’s all there is to it. There’s nothing more to it. So, you’re either going to pay rent or you’re going to pay a mortgage. Now, if that property is a $100,000 property and that means it’s a lower end of the spectrum then, you know, you should own that property, You should buy that property. You should not be paying rent, but if it’s a million dollar property, you should rent it. You would be much better off renting it, because you can rent that million dollar property for a lot less than you can get the return back from a millions dollars invested in other properties that are rentals.
So, that’s one thing and then she said, well, it’s been shown over the years that real estate doesn’t really beat inflation and I agree with that, but Robert Shiller said that in his book, the famous Robert Shiller, the name behind the K Shiller index, the author of Irrational Exuberance number one and number two. He borrowed that phrase from Alan Greenspan and then wrote those books. I read the number two book years ago and I just thought, is the guy an idiot or is he a liar? It’s one or the other, because to say that real estate only keeps pace with inflation is true on its face, but the reality is that in practice, most people finance their real estate.
Say for example, inflation is 3% and real estate that same year appreciates at 3% or say inflation is 6% and the real estate appreciates at 6%, doesn’t matter. When you only have 10% of the money into the deal, you multiple that return by ten times. So, inflation did, in the first example or in the second example, 6% and the real estate did 6%, but your gross, you know, simplified return on investment is 60%, because you only have 10% of your money in the deal. I mean, that’s when home ownership, even when it’s your own home that you’re not renting where you’re paying the debt yourself, it’s still a phenomenal deal.
Randy:
And you still get the tax benefits that you can debt from it and you get the property taxes you get to deduct from it and that doesn’t even include that, you’re just looking at pure appreciation, so no with leveraged tax benefits, it’s hard to say how you can’t beat the stock market.
Jason:
Now, it gets even better, because then you add to it and you spoke about this at our last Meet the Masters event, you add to it, which one person argued with me that this is..you’re just talking about leverage, but no I’m not talking about leverage. Leverage is what happens on the top of the deal, right, so the $100,000 property goes up $6,000, if you only got $10,000 in the deal, then your return on $10,000 in gross numbers, admittedly, this is simplified is $6,000. You just made 60% on your money in one year, in one year, but if the inflation rate is 6%, then you take a $90,000 loan that just got debased or devalued by 6%.
Randy:
So it’s another $5,400
Jason:
Yeah! I mean, now you’ve more than doubled your money in a year. I mean, you take the leverage, which most people get the leverage concept except Robert Shiller and this lady didn’t wanna understand that, but fine and Jim Cramer doesn’t either, because Jim Cramer on Mad Money, I saw him talking about it or maybe this was on his radio show on KFI in Los Angeles, I’m not sure, but it was either on the Mad Money TV show that’s on CNBC or on his radio show and he was talking about how stocks out perform real estate.
Well, I mean, the vast majority of people don’t pay cash for real estate and the vast majority of people, I mean, the vast, vast, vast majority pay cash for stocks. So, that is a lie on its face. These people are just lying to the world. They’re just not telling the real story. I mean, Robert, the highly credible Robert Shiller, okay, who I mean, it’s amazing to me. So, you’ve got the leverage, then you’ve got the inflation induced debt destruction and we haven’t even talked about the other benefits. I mean, that’s it, right there, you’ve already doubled your money in that example, in one year.
Randy:
Just to bring you back to this like tangent here.
Jason:
You know me! Someone needs to buy me a shirt that says, “King of the tangent.”
Randy:
King of the tangent with a bunch of lines going all over the place. So, the question was why don’t some people get it and, you know, because I am a financial planner, I run into all different types of people and there’s certainly, we can take out the group that can’t qualify, that’s not about getting it, they just can’t do it, but there’s still a bunch of people that could do it that won’t do it and some of them are just fearful, some of them are just ignorant of all these things like we’ve been talking about, that’s certainly a part of it and frankly, Jason, some of them are just lazy, because real estate, you know, the IRS calls it a passive investment, but it’s the most involved passive investment you could ever own. Would you agree? I mean, you gotta find the property, there’s a lot involve. You take away a lot of the work, but buying real estate is not just like sticking money in the bank account, there’s stuff you have to do. That make sense?
Jason:
You do have to do stuff, but I argue and my listeners have heard me say this a lot is that there is no such thing as a passive investment and one of my friend who has owned over a thousand houses, okay, a thousand houses, he says the same thing, nothing is passive. Even if you put your money in the bank account, you’re subject to taxes and inflation, of course, but you’re also subject to, if you are really a doom and gloomer, you’re subjected to bank failure, so you can’t really say that even the bank, which would be considered truly passive investment is even totally passive, because you’re getting passively screwed.
Okay, call it passive if you want. It’s like there’s this different things in life, you know, there’s playing to win, playing not to lose, and there’s playing to lose. If you put your money in the bank, you are most assuredly playing to lose. The only time that won’t be true is in an true inflationary environment where your cash becomes more valuable and in that environment I would submit that if there’s a significant portion of that environment, you run a very strong risk of bank failure.
Believe me, the FDIC and, Randy I’m sure you know about this, the FDIC does not have anywhere near the reserve to issue the banks, okay.
Randy:
No, they don’t. They don’t, but they also have the treasury to problem up if they, not the treasury, but the have the FDIC printing presses.
Jason:
You are right and they would print to make good on the loans, I bet, because they have that right, but guess what happens, see, the FDIC says that you’ll get your money back, they insure about to $250,000, right. So, they say you’ll get your money back, but they don’t say what the money will be worth when you get it back and what I mean there is the printing press is inflationary. So, they can pay you back in nominal dollars, but the value in real dollars is huge question mark.
Randy:
I guess my point is that if you’re willing to put a little time and effort into this, the returns are well worth it. So, if it’s fear or laziness, I don’t which or one or the other or both that are holding you back, you really just gotta think through that, what else could you do with your time that’s going to give you those kinds of returns?
Jason:
The funny thing is, you know, the people that are all into the stock market thing, they spend all this time, I know those people! I know lots of those people. They spend tons of time thinking about this stuff, they spend a lot of time watching Bloomberg and CNBC, listening to it on the satellite radio on their car, they read the Wall Street Journal and Investor’s Business Daily and all these publications. They have expensive newsletter to which they subscribe that they pay $2,000 a year. They look at the Morningstar reports. My god, do they actually think what they’re doing is passive? You know, they’re online trading stuff. There’s nothing passive about this.
Randy:
That’s how it works and if you listen to, again, the pundits on television, they’re talking the same thing, sounds like you’re at a race track. Do you ever hear that?
Jason:
Oh yeah, it’s like a total casino mentality.
Randy:
Totally.
Jason:
That is, I would submit to our listeners that CNBC and maybe to a lesser extent Bloomberg are designed, literally designed by psychologists the same way Las Vegas casinos are designed. You know, probably our listeners have heard about this stuff, they’ve heard about the way in these casinos they manage the lighting, the way they manage the ventilation, they way they pump extra oxygen in through the HVAC system, the patterns of the carpet, the colors on the walls, they move the needle on this stuff by just a little bit and that can mean millions and millions of extra dollars to them every single year and so I would submit that the set, the design, the talk, the voices, the modulation, all of that stuff on CNBC is designed to encourage people to invest.
Randy:
And it works.
Jason:
And it does work, because there are people who are just…I remember, remember when day trading was such a big thing years ago? Whatever happened to that I don’t know, but anyway, it was like a huge thing. Like every other person I met in New Port Beach was a day trader for a time there.
Randy:
Flash crash is what happened, Jason. Wow, I could lose that much money in a few seconds? Really?
Jason:
Yeah, then they were done with day trading, right? Well, I remember these people like literally, Randy, quitting their job and all they would do, like, you couldn’t talk to them during the time the market was opened, they would not talk to you at all, they would not plan anything, you couldn’t go to lunch with them, and they would sit there in their room with CNBC on the TV and they would just be watching it, watching it, and they’d have their computer in front of them and they’d just be trading stuff. I don’t know what people think. I mean, you compare all this stuff to income property and income property is really easy.
Randy:
All point of view, all a matter of perspective, right?
Jason:
It most definitely is. So, anyway, hey, thank you for joining us today and talking about this stuff. Folks, we will do the Chicago local market specialist on our next episode, which is just two days away, probably. I don’t know when you’re listening to this, but you’re going to hear this on Monday, it’ll be Wednesday. So, it’ll be right out, you’ll hear about Chicago, a lot of our clients buying there, lot of interest in that market. You know, I asked them some touched questions about the land lord friendliness, the taxes, the government, the crime rate, all of that stuff. You’re going to get all your answers to that on the next episode. So, again, Randy, thanks so much for joining us and happy investing to everyone.
Randy:
Thanks, Jason.
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