Jason invites Ian Kimball to answer some his question. Ian has been a Creating Wealth listener for quite some time and asks Jason on how to successfully screen a good management company, owning apartments versus single-family homes, and much more on today’s episode.
Key Takeaways:
[1:35] Jason talks about some of the upcoming episodes you can expect.
[4:40] The mastermind group last weekend was a great success.
[10:10] Zimbabwe is the perfect example of what happens with bad governance and central banking.
[12:50] Jason invites a listener, Ian Kimball, to the show.
[16:20] If Jason purchased a property later in life, he would have missed out on a great learning opportunity.
[17:00] Apartments are complicated, but they’re still do-able.
[23:40] How do you protect yourself from liability when you’re young?
[32:35] Have a separate bank account for your real estate investing activities
[34:05] Should you get a real estate specific resume?
[38:48] What are the best ways to screen property management companies?
[47:00] Should you go out and physically look at a property?
Mentioned In This Episode:
http://www.venturealliancemastermind.com/
Tweetables:
“Get ready, we’re going to have inflation in the US.”
“I would recommend a separate bank account for all of your real estate investing actives.”
“95% of our clients do not go to look at their properties before they buy them.”
Transcript:
Jason Hartman:
Welcome to the Creating Wealth show. This is your host Jason Hartman. This is episode number 529, 529. We’ve got a good listener Q&A show for you today. Our listener Ian is calling in with some questions. We’re be with him in a moment, but first a couple of things on upcoming episodes. Wednesday will be a tenth show and we will have the world famous Bob Proctor, author of a few great books, very big on the speaking circuit, was also in the very famous little short film called The Secret and you’ve all heard of that. His latest book is the ABCs of Success. He’s also author of You Were Born to Be Rich.
So, he’ll be on Wednesday and for Flashback Friday, we’re going to talk about multi-generational wealth preservation with Catherine McBreen, author of Get Rich, Stay Rich, Pass It On. Monday next week we’ll have yours truly talking about something or other. I haven’t exactly decided what and then the following Wednesday for episode 533, the famous economist Laurence Kotlikoff is back on the show with us to discuss Social Security, how you can maximize that, and it’s kind of amazing.
You know, this is not something I think about at all, really, just knowing that Social Security won’t be there for any of us in any legitimate way. I know we have to kind of think that way because it is so mismanaged along with our government in general. You know, he’s got a New York Times bestselling book right now on maximizing Social Security. There really are some interesting tricks of the trade on that that I was certainty not aware of.
I don’t think much about it at all because I think, God, if I actually need Social Security when I eventually some day do qualify for it, I am not doing very well. I plan to be extremely wealthy by then not having to think about Social Security, but interesting point and he’s also, of course, going to be with us. He’s done the most extensive studies, really, on the 210 trillion time bomb. So, he’s going to talk about that and then the following Friday for episode 534, we’re going to talk about some interesting Wall Street stuff, the collapse of Bear Sterns.
Look forward to those shows, but as we dive into today, first of all, I am not broadcasting from my closet. The place with great sound with padded clothing everywhere that makes the sound really good. I am broadcasting from my guest bedroom. How does it sound today? I am not on my good microphone, so of course it won’t be as good in that respect, but I think the acoustics in this room are fairly good given that I am sitting on top of the unmade guest bed with those egg crate memory foams, so that’s got to be fairly decent for sound even though I am not using a good microphone for this one.
I was going to record this introduction last night and I just wanted to kind of sleep on it and process my thoughts and emotions a little bit and I just got to tell you. We finished last night or yesterday afternoon our inaugural kickoff for the Venture Alliance Mastermind group. I just got to tell you, I am so honored and I am so moved by the people that we had attend this last weekend. It was really just a phenomenal, phenomenal weekend and what was interesting about it and, you know, I never really do events like this where it was a really, just a very intimate event.
It was a very interactive event. It was not the usual thing where I am giving a presentation. This one was much more interactive, of course, I presented a few times on a few things, a few different investment deals. We had our analyst come up, the analyst Oliver for the Venture Alliance who is analyzing deals and looking at them.
We had hot seats, that was really one of the highlights. People, investors, come up and talk about whether they want to get out of the corporate world or they want to increase their real estate portfolio size or how to manage their real estate portfolio better. A couple of them even talked about starting a business so that they could supplement that with their real estate portfolio and really, we just went over some very interesting ideas.
We had a guest speaker come in. Really our very first, I think, our very first paid speaker at any event who did a really interactive exercise to help everybody get to know each other better with some very telling questions and that was really good. Friday evening, really before all of that, we ate dinner at just a fantastic restaurant that is 50-years-old. It’s called Mister A’s and it’s at the top of a highrise building in San Diego and it was amazing. You know, all of us real estate investors were thinking, well, this restaurant is a tenant on the top of this building. It’s been there for five decades.
Five decades! And that building obviously has been there more than five decades, couldn’t be less, right, because the restaurant has been at the top. Real estate is just so wonderfully stable. That building has been sitting there producing income for five decades for its owner. Just think about that. You know, these rental properties, they are such a stable, wonderful historically proven asset class.
The most historically proven ass class in the world, so that was really great. Really nice, beautiful view of San Diego, San Diego harbor, the city lights, etc. You know, Saturday we had our presentation that I already talked about. I’m kind of jumping around here. Saturday afternoon we had a couple of hours of free time. People went shopping, hung out by the pool, whatever, and then Saturday evening we met and got on a beautiful brand new, I mean, not completely brand new, we weren’t the first people to ride it, brand new, but pretty much a brand new beautiful sailing yacht, a 55ft beautiful yacht.
We had some food delivered by a professional caterer. We ate and we drank and we talked and we cruised around San Diego harbor where there was almost no wind, just very dead, but we did actually have the sails out and we motored for a little bit of it and sailed for a little bit of it, then we went out on the famous Gaslamp district, did a little bar hopping, that was fun.
Sunday morning we met again, had breakfast together, did some presentations, I talked about a few different things. We did a couple of hot seats and we were going to go paragliding, but once again, the same thing with sailing, there wasn’t enough wind! So, instead of doing that, we went for a Segway race. You know, the famous Segway scooter. We road around on La Jolla, beautiful La Jolla on those and then we went and had lunch at George’s, which is the George’s Ocean Terrace, just a spectacular view of La Jolla and La Jolla village and the harbor and the ocean.
That was great and then we walked down to the park, did a couple more hot seats and shared some great ideas and then talked about our next meeting for the Venture Alliance, which is tentatively, we’re thinking tentatively the last weekend of September for that and we were talking about different places we might go and difference locations for the Venture Alliance meeting and so, I’m just honored and moved, you know, the people are the ones who make it work and we have such wonderful clients.
You know, they are so bright, they’ve got so many great ideas, they’ve just got so much to share. They’re such sharing, giving, helpful, wonderful people. So, I just want to thank everybody who attended for being there. It was a fantastic kickoff. It really couldn’t have been better except for the weather. You know, San Diego and its June gloom, that could have been better, I would say, but otherwise it was just a spectacular, phenomenal, excellent, wonderful weekend.
So, thank you to everybody who attended and made it happen. If you’re thinking about the venture alliance, check it out. We do have a formal application that we finally created. Go to Venture Alliace Mastermind and check out what we have to offer there, maybe we’ll see you in September at the next meeting.
So, Zimbabwe, you know Zimbabwe, of course. The poster child for bad central banking and government. Well, their exchange rate now is 35 quadrillion Zimbabwe dollars to one US dollar. That’s how bad their inflation was. Now, remember, the Zimbabwe dollar and the US dollar when it began were near parody, they weren’t far off from parody, which means you could exchange one Zimbabwe dollar for one US dollar. Now, it’s 35 quadrillion, okay, that’s quadrillion. I don’t exactly know how much that is, but is that a thousand trillion? Is that what a quadrillion is? It’s a big number, okay. Amazing. That’s what happens with bad governance and with bad central banking.
An amazing story there and get ready. We are eventually going to have some real inflation here in the US. I’m looking at a 2009 article that I posted in one of our groups. It is from 2009 from the Wall Street Journal. It’s got a picture of a helicopter Ben, our former federal reverse chair, Ben Bernanke. The article is entitled back in 2009, six years ago, “Get Ready for Inflation and Higher Interest Rates.”
Now, we certainty had some inflation since 2009, no question about it, but it got relatively tam the last couple of years, but it’s just, we all know its got to be baked into the equation and as prudent real estate investors we’re going to profit handsomely from that from what I call inflation-induced debt destruction and in addition to the inflation-induced debt destruction, we’re going to profit from the packaged commodities investing aspect as well or the assembled commodities investing aspect, which I also talk about. So, income property being a multidimensional asset class provides so many wonderful opportunities for that.
Without further adieu, let’s get to our listener today who has got a few great questions that I tackled with him. Let’s go to Ian and Wednesday I will look forward to talking with you as we have Bob Proctor on for a 10th episode show where we talk about a general success and better living topic, not specifically about real estate, but a general better living topic. So, that’ll be Wednesday. Let’s get to our listen with a call-in and some good questions here and let’s talk to Ian. Here we go.
This is Ian Kimball, a show listener, calling in with some real estate investing questions. Ian, welcome, how are you?
Ian Kimball:
Thanks Jason. I’m doing great. How are you?
Jason:
Good. It’s good to have you on the show. Thanks for sharing your questions with the listeners. What we always find is that, you know, when one person as the question, usually a whole bunch of other people do too, so I appreciate you be willing to put your questions out there and we can educate a broader group of people too. So, fire away!
Ian:
Absolutely. I mean, the biggest struggle I would say I’ve been having lately is listening to another couple podcast recently by Kevin Bupp and he had one person on his show. I forget the name off hand, but he essentially said, you know, rather than jump right into real estate feet first with whatever it is that you can afford just for the sake of getting a deal done, you know, it’s better to wait a year or two and really secure that deal that’s going to make a big impact on your life and kind of give you that initial leg up.
So, he kind of used the analogy instead of, you know, buying maybe that single-family property for that $15,000-25,000 down payment, you should be looking at a even a 12 plex or 20 unit. I know for some people it’s —
Jason:
Oh yeah, okay. That’s a great question. Okay. So, first of all, before I answer that question I want to give the listeners a little background. So, you heard me on another show, you heard me being interviewed on Kevin’s show and then you’ve been kind of, you said, binge listening to my podcast, right, and really learning a lot from that. So, that’s great, thank you for listening. Gosh, I think that, you know, I thought you were going to say it was a question of, you know, do I buy my first single-family home as an income property now or do I wait and keep looking for a better deal, okay.
Now, that question I think would have been a little harder to answer than the actual question, which is, you got this advice from someone or you heard this other guy talking on the show saying, you know, don’t do a single-family home, just search around, save some more money and wait and try and buy a, you know, a 24 unit apartment complex instead. Is that the question, basically?
Ian:
Yeah, yeah. More or less.
Jason:
That’s easy. That’s a terrible idea, okay. I mean, that is a terrible idea! Talk about, have you ever heard the expression, baptism by fire?
Ian:
I have.
Jason:
That’s exactly what that will be, okay. You know, listen Ian, I started out with. Well, I started out with a condo, a little crappy one bedroom condo, that’s how I got started when I was 20-years-old, my first property, and I’ve told this story on the show many times, so I won’t bore everybody with it, but suffice it to say, you know, it was kind of a bad experience in a way, my first deal, because I had to evict the crummy tenants that I had in there and, you know, I didn’t know anything and know how to do it then and I just kind of, you know, I learned by on-the-job training, if you will, but had I gone into, say I waited till I was 26, okay, and I purchased a 16 unit little apartment complex or something or even a fourplex, you know, I would have missed out on all that inexpensive education.
What I mean is that, you know, the size of your mistake is limited on a single property. The size of the mistake can be really big on an apartment and the other thing I would say about and you know, not only that, the opportunity cost missing the return on investment I would have made on those single-family properties I did earlier in my career, in my investing career, apartments are complicated.
I mean, they are a different animal and I actually did an episode, I’ve talked about that subject many times, but I did a full episode on it where I was actually interviewed on someone else’s show, but I played it on my show, on the Creating Wealth show, where we compared single-family homes to apartment buildings. Believe me, you can make money in both of them, but the apartments are like running a business. They are complicated. There’s just a million little moving parts, you know, there’s just a lot more to it, okay. Good old single-family home is a pretty simple concept and it’s a pretty reliable investment. Of course, you know, you gotta buy it right, you gotta buy it in the right area, you gotta, you gotta know what you’re doing a little bit, but does that make sense what I’m saying so far?
Ian:
It does, it does. That’s kind of the struggle I had been faced with is – the bigger units you can get the economies of scale and if you 25 doors to single bigger apartment building, that’s only, you know, one roof you have to replace every 30 years versus 25 roofs you have to replace. I know you had talked..
Jason:
Yeah, but that one roof is a bigger roof and it’ll cost you a lot of money, okay. It’s not that simple. See, one of the things you gotta remember when you’re thinking about apartments and listen, I like apartments. I have made a lot of money in apartments too. I’ve got a lot more experience in single-family, maybe that’s why I kind of like it better, I don’t know.
The thing you gotta remember in apartments is you’re running a business and every business has a reputation and your apartment building has a reputation. People will go online and they’ll right reviews on Yelp about your apartment complex. In a single-family home, nobody does that, okay, they’re not going to say, I live at 123 home street and I think the manager is a jerk, you know? It doesn’t happen, but your apartment is like a complicated enterprise, okay. You’ve got all these people that are right next door to each other and they’re talking to each other and they’re talking about the management and they can do rent strikes and they can kind of gang up on you. It’s a different animal.
It’s a really different dynamic in an apartment, okay, and they are just – you know, the laws that protect you in the world of single-family homes, because when you’re one to four units, which is what our government considers to be a commercial property is anything four units or above four units, I should say, five units and above, and a residential is four units and under and when you’re in residential, you’re not expected to be an expert. You’re not expected to know what you’re doing, you know.
If you get into a problem on a commercial property, hey, you’re a business man, grow up. It’s like the judge will not care, he will not listen to your sob story, but in a residential property, you just got a lot more rights. There’s a lot more disclosure obligations. It’s just a really, a much simpler type of investment, okay.
Ian:
Make senses. Absolutely.
Jason:
Now, can we rephrase your question, because he’s what I thought you were going to ask me when you started to talk. I thought you were going to say, well, I’ve got the money to buy my first property today, should I buy it or should I wait until i can find a better deal or wait until I can save a little more money or wait until I can get a little more educated and he’s the way I was going to answer that question.
Number one, I can’t really determine how educated you are, but if you have the money to buy your first property and you have at least 4% of the value of the property in cash reverses that you’re not going to touch, that’s your emergency fund, okay, you don’t use that, to, you know, cover little things, you’re going ot keep it in the bank, not spend it on, you know, paying for something in your regular personal life, you know, you’re ready to go.
I wouldn’t wait because when you wait, you’re making a prediction on what’s going to happen. Will prices go up, will they go down, will interest rates go up or down, will rents go up or down, and the likely hood is you’re going to get left out in the cold with that, that debate, okay. So, that’s what I thought you were going to ask me when you started.
Ian:
Yeah, absolutely. That totally makes sense. I know I’ve seen things in the news that suggests, you know, rates could be getting higher again in the not so distant future and obviously money is pretty cheap to burrow for the time being and so, I definitely had been looking at some properties on the site in kind of the Memphis and Little Rock region in anywhere from $80,000-$150,000 region. I’m always open to any class, but I’m sure it’ll be easier to start in kind of the A or B class out of the gate, but definitely makes a lot of sense.
I guess from, you know, the way that people typically structure, I know there’s been a lot of podcasts that talk about setting up entities or LLCs or just having umbrella coverage than I had been calling around to a couple of insurance companies and brokerage company I worked with in the past and I think for $150,000 property in Memphis’s with like a one million dollar liability policy they quoted me at $1,300 or $1,400 a year all in, including the property insurance.
Jason:
Right, right. The real question is do you even need that much liability insurance? I bet you could kick that bill down to $700 or $800 per year. I mean, I haven’t shopped for insurance there. Well, I actually I have. I just bought two properties in Memphis. What am I talking about? See, this is what happens when you get so busy that you don’t even remember what you did two months ago. Yes! Two months ago. I bought a couple of properties in Memphis, but I don’t honestly remember what my insurance cost was on them, but you know.
This is another thing that I kind of find. I think you might be falling into this like, it’s kind of a trap, frankly, Ian, where you know, everybody’s like telling you, oh, well you gotta setup a couple of LLCs and you gotta get all this insurance and I mean, you’re a young guy, right? I mean, aren’t you in your 20s? Did you tell me that?
Ian:
I’m 28, yep.
Jason:
So, you probably, I don’t know, I could be wrong, you could be, you know, you know, the founder of Facebook, I know you’re not, but you know, but you could have a ton of money, right, but probably at your age you don’t have that much to protect yet, okay, and granted, what I just said there is kind of a specious argument anyway, so I want to point out the error in my own statement and that is that if you got a judgment against you, it goes into the future, okay.
So, you don’t want to get a judgment against you, okay. I have a personal experience with this and I’m kind of fighting a battle like that right now over a developer that I sued, actually, and lost the first round. I am fighting with them, it’s on appeal now, but that’s another complicated story for another show. So, you don’t want that to happen, but I will tell you that, look, I’ve been in this business for well over 20 years and everybody talks about, oh, you know, the slip and fall lawsuit where the tenant slips and falls and they sue you. I have never heard of that actually happening in real life, ever. Like no client of ours have ever told me, you know, the tenant is suing me really over anything. I mean, I’ve never had that happen to me.
You know, there are only really – if you have good insurance and you make sure your insurance doesn’t laps, in other words, the policy doesn’t expire and you forget to renew it, right, there are really only as far as I can tell and, look, I’m not a lawyer, I have to make that disclaimer. I am not an attorney, so I don’t know every little in and out of the law, but you know, just from my own experience and from what I hear from clients, there are really only two major areas where you could really create liability for yourself owning properties outside of, you know, outside of this stuff you can easily ensure around, okay, here they are as I see them, this is my opinion, there could be something else I’m not thinking of, but here’s the way I see it.
Number one is discrimination. Of course, we have fair housing laws in the United States and you can not discriminate against people. There are what’s called protected classes of people, you know, there are things like race, age, family structure, sexual orientation, you know, things like this. All the stuff that’s kind of obvious right that most people wouldn’t discriminate anyway, hopefully they wouldn’t. You know, discrimination is something that occasionally landlords get sued for and if you’re using a property manager, you’re one step further removed from that kind of liability and you gotta use a reputable manager, okay. So, that’s one area.
Now, the other area, if there is a safety or security concern on that property. So, let me give you that example, if the tenant says, my door lock broke and I can’t lock the door and if you just kind of ignore that and you don’t do anything about it and someone walks into that house and robs your tenant or, you know, assaults your tenant, heck, you’re going to have a problem, okay, because you were negligent in your duty as a landlord to provide a safe, secure property, okay. You got to respond within a reasonable amount of time to take care of business and that’s reasonable, right? So, you know, just do those things and you’ll be okay.
Hey, I wanted to mention something before I forget. That, I think I found the episode where I talked extensively about single-family residential property investing versus apartments and that’s at JasonHartman.com it’s episode 362 of the Creating Wealth show. So, episode 362 and I’m pretty sure that’s the episode where I talked quite extensively on that top, okay. 362. Yeah, go ahead.
Ian:
Definitely be checking that out. So, on the topic of safety or security issues then, obviously seems like you’re a big proponent of third party management companies and I can certainty buy into..
Jason:
Well, not completely. Not completely.
Ian:
So, I mean, I guess in terms of who would then bear the brunt of that liability issue if a tenant did make it a case of some sort of security issue, you know, and the property didn’t handle as they should have, would that absolve you of some liability or as a landlord that still traces back to you?
Jason:
That’s a great question. I’m glad you asked. There’s something called and again, I’m not attorney, but this is what I know, okay. There’s something called the law of agency, okay, and your property manager would be acting as your agent and I just learned this in real estate school many, many years ago and the law says that the principle, in other words, the owner is responsible for the actions of the agent.
So, ultimately, yeah, you could be liable and that’s why you want to use reputable agents, okay, because if you have a really stupid agent or really reckless agent or a really fly-by-night agent, they might not care and they say, heck, I don’t like purple people or whatever and they could get you into trouble, but the likelihood is you’re going to have a reputable agent. The likelihood is they’re going to not want to lose their license, which they could for something like that.
They have a business that they want to run, they don’t want to get sued – they’re going to get sued too in that case, right. They’re going to get sued first and you’re going to get named as well in that lawsuit probably. You know, you’re just not going to have that problem, you’re going to may get arms length from you, so even technically you have that law of agency issue, I think, and you know, I’ve never litigated a case like this, so I don’t know, but you know, I think you do push that liability on to that agent to some extent, but ask a good lawyer.
Ian:
Right, yeah. Absolutely. Cool. So, you know, certainty another question I’ve been facing when it comes to, you know, I’m from New Hampshire area, but working in the sort of greater Boston market and obviously ruled out buying property up here a long time ago, so I certainty do see value in the whole rent to value ratios and some of the more untapped markets that you mentioned such as the Memphis and Little Rock and Indianapolis regions.
So, when it comes to working from that sort of long distance relationship, do you typically secure say, insurance or financing from a lot of local brokers or banks in the area and for someone like myself who is just starting out, do you have any recommendations when it comes to kind of establishing that trust or getting them to take that leap of face in you and you maybe don’t have the initial track record of half a dozen properties to kind of put in front of them and say, hey, I’ve done this before and been successful and turned a profit or a cash flow each month to pay my debt services?
Jason:
Is that for a lender you’re asking in terms of getting financing?
Ian:
Yeah, primarily for a lender and then I guess even for back to the topic of insurance and then to kind of fold a third question into that if you’re talking about multiple properties, would you recommend and I’ve heard, you know, even going as far as opening up a different bank account for each property that you buy to, you know, certainty make it easier to keep track of.
Jason:
I don’t know that you need to, you could if you, you know, that’s all kind of personal opinion how you want to organize yourself, right, but I would have, I would recommend a separate bank account for all of your real estate investing activities. Now, maybe you’ll have three properties or 20 properties and you’ll manage them all out of that same bank account. I would not co-mingle your property stuff with your personal stuff. It’s just. There’s no law saying you can’t do that.
I mean, in terms of your checking account, okay, you do have to keep things separate on your tax returns, but it’ll just make it easier when you go to do your taxes and, of course, income property is the most tax favorite asset in American, it’ll make it easier when you do your tax returns to kind of manage that and see the expenses, right.
So, that’s one reason now. Of course, if you do ultimately setup an entity and you have, you know, one LLC that owns one property or a few properties, okay, if you do that, you’ll be in a position where you have to have separate bank accounts, because every entity needs to have its own separate bank account, okay. That’s that question. Now, your other question before that was about, I think, it was a lender question about, you know, having a resume, if you will, in order to get financing? Was that your question? It seem sort of convoluted.
Ian:
Yeah, basically, along those lines of, you know, even if you have the cash and the credit score, you know, kind of come into them with that blank slate so even if we are talking about, you know, only a $100,000 property.
Jason:
Right, right. Okay so here’s the thing about that. Since the financial crisis, since the mortgage meltdown that we had, what, eight years ago now? I can’t believe it’s been that long already. It’s kind of amazing. It’s really the first time I saw lenders putting a lot of stock in the concept of the owner’s or the investor’s resume. With that in mind, there’s not much of a resume issue in terms of buying single family homes and getting normal.
Fannie Mae, Freddie Mac type financing, but you do, like, if you’re going to buy an apartment building, especially if it’s an out of state apartment building, they’re going to ask for your resume. They’re going to want to know have you managed property from a distance before, have you managed an apartment building before. You know, what kind of, they really will ask for your actual resume. You’re thinking, gosh, this is like a job, you know.
The lenders, you know, they want to know that the person they’re loaning the money to has some experience and that’s why it’s good sometimes to partner with people, because when you partner with people, you can either ride on the coattails of their experience and that’s how you can get your own, kind of being a protege and having a mentor, right, or they can ride on yours and you sort of add to each other and compliment each other with kind of your combined experience, okay.
Ian:
Yeah, do you have an opinion on any of the CCIM courses?
Jason:
Ian, don’t worry, I have an opinion on everything, okay. I’ve been known to be slightly opinionated, I think. So, CCIM is a series of courses that standards for Certified Commercial Investment Manager and I, when I was 19-20 years old, I actually started down the path of I wanted to get my CCIM and I started taking courses like that. I remember one of my instructors, I think his name, gosh, it was awhile ago, I think his name was Dennis McKensy and he wrote some of the real estate text books for CCIM and some of them for the state of California test prep and continuing ed and that was really fascinating to me. I did learn a lot by doing it, but I gotta tell you something. I think, it’s just sort of funny.
Commercial real estate, that world has this image of where you think that, oh, these commercial real estate brokers and by the way the (#36:40?) course is for brokers. It’s not really for, it’s not really for per se, although investors would learn some stuff from it, you know, it’s a designation that you want to get if you are a broker, a sales person, okay, selling those properties and the image you have, Ian, as a – you know, I was a real estate agent, well, I still am, but back that I was really aspiring to be a successful real estate agent and the image you have is, oh, I’m going to do these huge deals. I’m going to be selling giant hotels for $85 million dollars and huge shopping centers for $46 million dollars and all this kind of stuff, you know what most of those commercial people really do?
Ian:
I can only imagine.
Jason:
They show crappy office spaces and retail spaces for people to lease.
Ian:
I love it.
Jason:
And they really, you know, a lot of them just don’t make that much money at all. I mean, it’s funny, when I lived in Newport Beach, I would say I had about probably 60 friends in the commercial real estate business. 60, I would say something like that, and a lot of these guys are living in Balboa Peninsula, which is an area in Newport Beach that’s kind of like the party zone and they’ve got three roommates, they all drive like Jeep Cherokees and they’re broke! It’s like, when it comes their turn to buy a round of drinks, you can’t find them anywhere. You know? It’s not what it seems, I’ll put it that way, but you know, of course, I mean, that said, there are commercial real estate brokers that do very big deals and make lots of money, but the law of averages, right. The 80/20 rule, the pareto principle.
Ian:
Definitely. Definitely. Cool. A couple of, you know, remaining questions, one being in terms of your sort of recommendations on screening property management companies. I would imagine some of your investment advisers, you know, advisers for some of the different cities you guys are working would have kind of preset list of their own, but when it comes to looking at the vacancy rates of some of these management companies or the clauses that they use in their contracts to make sure that any, you know, old money passed the 30-day window becomes their liability and not yours and making sure they don’t sneak in sales commissions in to the contract, that you’re only paying them on the gross collected rent, not on any vacant units. Do you have sort of a guideline that you like to work off when it comes to making sure you an trust the people who really are going to be that face to your business for a lot of your tenants?
Jason:
Well, yeah, that’s a hard one and look, I will be the first to tell you that property management, it’s the hardest part of this whole thing, okay, and talked on the podcast before. Fernando and I trying to develop a, kind of a software and a system that will help people self-manage their properties and you can self-manage pretty effectively, you know, for our members that pay a whooping a $120 a year, okay. I’ve, I do a monthly members-only call. We gotta raise the price of that thing, seriously, 33 cents a day is a little cheap, okay. Anyway, we do member calls and we’ve done a couple of calls and they’re all archived into the members section at JasonHartman.com where I’ve talked about how to self-manage your properties. I have also talked about it on the podcast too. It really can be done, but the thing when you are dealing with a manager is number one, read the contract, the one part that bugs the heck out of me is these discretionary repair issues.
So, let me explain that. So, there’s a couple of layers to this. Let’s peel back the onion for a minute, okay, by the way, these are great questions, okay, so the first layer is that you got to understand that a property manager has a responsibility to protect your property, okay, so if a pipe breaks and there’s an emergency situation, they do have the right, without, maybe they can’t reach you, maybe they can’t get a hold of you, okay, and they do have the right to call the appropriate professional.
That case, the plumber and say, you know, stop the leak, get everything stabilized and then, you know, I’ll talk to the owner after that about, you know, how are we going to handle this and we’ll file an insurance claim, whatever, right, but you gotta understand the property manager always has the right to do emergency stabilization, we’ll call it, like that, to stop a leak, etcetera.
Beyond that though, the property managers all have this other discretionary repair clause in their contracts and that discretionary repair clause can say, you know, we have the right to spend up to $200 per month or $200 per incident, okay, now be careful here, because it could be per incident or per month and then the amount will vary. Some other property managers and I have fought them on this and I’ve told our clients not to do it and, you know, they’ve written long emails to me explaining, well, Jason, you just can’t tell the clients not to – yeah I can! Okay! I am on the clients’ side.
Look, we love our vendors, we’ve got to have good relationships with our vendors, but ultimately, the clients are what pay our bills here, okay, not the vendors, we can change vendors, but we got to have a loyal clientele that loves us. So, you know, I am here for the clients first and foremost. The vendors after the clients. The clients come first, though, right. So, They have a clause in there that says they can spend up to $400 per incident and I’m – are you freaking kidding me? I mean, that’s crazy! Now, you gotta understand and this is why I, you know, even a great manager has a bit of a conflict of interest and here’s why. They got to keep the tenant happy, they’ve got to keep the owner happy, and they’ve got to keep themselves happy, right, okay.
So, the problem you have when you’re a property manager is many tenants out there feel like they’re getting mistreated, okay. Generally the owner or the manager of the property kind of has the power, okay. So, tenants will feel week and they’ll feel like they’re being abused sometimes, okay, even if they’re not, they will just, you know, a lot of them will have sort of an entitlement Obama-voter mentality, how do you like how I threw that in, okay? This is why half the country hates me.
Okay, anyway, so they all kind of feel like that and, you know, they’ll go and they’ll write bad things about the management company online and of course, the management company hates that, because, you know, they don’t want their reputation to suffer and so to some extent, the management company will kind of sell the owner/investor down the road a little bit, because they’ll try to please the tenant and this is why, this is why I kind of just like self-management and in my own portfolio, I do both.
I self-manage some of my properties and I have professional managers for other ones. You want to know how I decide? I start with a manager and then when the manager does something bad, I get rid of the manager and I self-manage. I have some really good managers for my properties and a really good manager is worth their weight in real estate. I wouldn’t say gold, because gold isn’t a very good investment. It’s worth their weight in real estate, okay, and so a good manager can be awesome and then there are the mediocre managers and then there are the bad ones, okay.
You gotta to understand the manager has this natural kind of conflict of interest and it’s just part of the dynamic of everything. They want to make the tenant happy, they want to make the owner happy, sometimes it feels like they want to make the tenant happier than the owner and that’s kind of ridiculous.
Now, what you find if you self-manage your properties though is that the person, the tenant in your property doesn’t perceive you as some big company with an unlimited budget and they know that you are a regular human being and if they are a decent human being, which most of them are, the vast majority of people and tenants are very good people. They are some bad apples, certainty, but they will feel the pressure of having to maintain a relationship with you and that’s a good thing, because they will tend not to abuse you and ask for every little thing, but we’ve definitely found when there’s a management company, they ask for more stuff, okay. It’s just sort of like this is some big faceless company, what do I care? I’ve got some ants, call an exterminator, you know? You know, I’ve got, light bulb burnt out. I mean, I’m sort of over dramatizing it, okay, call someone to change the light bulb whereas if they’re dealing with you, a lot of times the tenant will do that stuff themselves.
Ian:
Yeah, that absolutely makes sense. You know, I guess along those lines for my last question or two to wrap up, when it comes to that long distance self-managment, you know, any property with a self-management or manged by a third property, would you always recommend still, you know, going out and seeing a property in person? Obviously, I know the importance of getting it inspected and before hand and all those other check lists prior to that, but do you still recommend seeing all of these properties in person before finally pulling the trigger?
Jason:
Yeah, great question. So, I’m always going to recommend that our clients go and look at the properties before they buy, but here’s what happens in practice, they just don’t do it. Okay? They don’t do it very much. I would say that 95% of our clients, just guessing, do not go to look at their properties before they buy them and, you know, when you get past this sort of traditional, local mentality that’s been around forever.
You know, as far as real estate, before the technological revolution that we’re in, you could kind of understand that, because everybody usually did things in their neighborhood, but the problem is their neighborhood may not be a good place to invest, their own city may not be a very good place to invest and even if it was the best place to invest, they still need to be diversified, okay, and so most of the clients don’t go and look at their properties, but heck, when they invested in the stock market, hopefully they’re not doing that anymore, they didn’t visit the company either that they were buying stock in, okay.
It’s really just about the numbers. What is that property going to produce versus what you’ll pay? That’s what it is about. I mean, I don’t much care what the house looks like. I just want it to be a rent-able, desirable property that is going to perform well and I can figure that out from a distance. I can go on Google Earth and I can look at the property from different angles, I can see what’s near the property and, you know, you should do all of that stuff and deal with reputable people and – we just haven’t had any big huge problems like that. We’ve had a couple over the years.
I mean, we’ve been doing this a long time, so you’re going to get a couple of things. I remember once years ago, a client who was kind of her own worst enemy, frankly, she was upset because she didn’t bother to look at the property on Google maps and it was like a block away from a train track, so there was some train noise, but you know, the fact was that there were maybe a 100 homes right in that neighborhood also close to train tracks, okay. It’s not like people didn’t live there. They even lived closer than her house to the railroad tracks, okay. Everything will rent at the right price, okay. It’s not a question of does that ruin the deal, it might just mean it rents for $50 less per month, okay.
Ian:
Cool. I know I could go on for hours and hours with questions, but those are definitely.
Jason:
And you know I could too, Ian.
Ian:
Yes I do, yes I do.
Jason:
We’ve been on 38 minutes and these are great questions, by the way. I think a ton of people listening had a lot of these very same questions as you did. So, they’re good questions, but you know, I’ll tell ya, had I not purchased that first property when I was 20 years old, there’s just something that happens by what we’ll call on-the-job training, because you bring a new, you bring a new person. You bring your A-game when your money is at stake and when your future is part of that deal.
So, just get your first property going. Heck, if it’s terrible, don’t buy a second one. You know? It’s not perfect by any means. There are problems, there are frustrations, it’s just better than everything else. I mean, I just haven’t’ found anything else that even comes close, you know?
Ian:
Absolutely. I will believe in that until the day I die.
Jason:
Yeah, well, hopefully you’ll keep believing it after you have your first ten properties or something, right?
Ian:
Exactly. We’ll see if it changes once there’s a couple of houses to my name, but hoepfully it stays that way.
Jason:
Good stuff, but hey, it’s great…When did you become interested in real estate investing? You’re 28 now and what do you do for a living, did you mention that?
Ian:
So I work at digital advertising agency in the Boston area and have been here for the last four years or so, you know, back to when I first started as a startup, but growing up my mom’s side of the family, her father, you know, when her relatives came over from Europe and built 30 or 40 plus 2 unit residences in the suburb just outside of Boston.
Jason:
Duplexes, right?
Ian:
Yeah. Over the years they had sold some off, but you know, even when I was in highschool they probably still had at least ten in the family and every couple of weekends I would be going down with them to help rake leafs or put down (#52:07?), you know, paint walls when tenants changed over, so it’s always been kind of in my blood and heard some horror stories, but also saw the checks coming in each month for the big lump sum and it will finally sell a property in an up market. So, it’s always kind of been in the back of my mind and I’ve dabbled in the stock market, certainty, since starting a job, but looking for something just more consistent and grounded and it’s appealing to say the least.
Jason:
Yeah, it definitely is. It’s the most historically proven asset class in the world. So, I am very glad you are discovering it at a young age and I tell ya, 10-20 years from now will pass, 10 or 20 years will pass in the blink of an eye. I warn you, okay. You know, just going, start building your portfolio, get your first property, and then get your second and your third, and it is amazing how fast you can grow your own mini real estate empire, so just get started and just do it, okay?
Ian:
Awesome. Sounds good to me.
Jason:
Good, alright. Thanks for the call, Ian. I’m going to end the tape now and we can just wrap up off tape here, but listeners, I hope you enjoyed this and that was Ian from New Hampshire, are you?
Ian:
Yeah, down in Boston now.
Jason:
Boston. Okay. Boston. Can you say park the car in Harvard yard for us?
Ian:
I can.
Jason:
Do it in a thick Boston accent. We want to hear it.
Ian:
Park the car on Harvard yard.
Jason:
Love it. It’s good. Alright, Ian. Thanks for joining us.
Ian:
Thanks a lot, Jason. I really appreciate it.
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 individualized advice. Opinions of guests are their own and the host is acting on behalf of Empowered Investor Network Inc. exclusively.
