A recent report on existing home sales may sound bleak at first blush, but you can leave it to real estate expert Jason Hartman to read some silver lining in the report’s cloudiness. The report in effect bodes well for you and other rental-property investors, because it means there will be both rental-market and new-housing demand for many months to come, Hartman notes.
The National Association of Realtors reported last month that existing home sales dropped 1.8 percent in June to a seasonally adjusted annual rate of 5.52 million units. A steep shortage of properties has hampered monthly sales to the point that buyers now are getting into bidding wars, which have culminated in house price increases outpacing wage gains, according to the report. The median house price, the report said, jumped 6.5 percent from a year ago to an all-time high of $263,800 in June. It was the 64th straight month of year-on-year price increases.
Hartman is the founder of the Empowered Investor Network and became a multi-millionaire at a young age by investing in real estate. His “Creating Wealth” podcasts have inspired investors in more than 160 countries. In his most recent podcast, the NAR report from last week had him harkening back to his early days as an investor, as well as reaching into his mailbox to answer questions about his best and worst deals.
First for you: The NAR report and what had Hartman harkening back to his early real estate salesman days. And then, you will learn about the best and worst of his deals.
Once There Were First-Time Homebuyers Aplenty
Hartman in the podcast plays an MNBC clip that reports on the NAR’s findings from last month. An MNBC anchorwoman comments that first-time homebuyers “are so desperately needed in this market,” because they only represented 32 percent of June’s existing-home buyers when that number “should be about 40 percent.”
Hartman called that observation “fascinating.”
When he first started as a real estate agent in Irvine, California, he “farmed” or tried to get listings from sellers in a community of townhouses that was designed for first-time homebuyers. His first sale was a condo for $125,000, even though “it’s worth a lot more than that today.”
“It is in a cyclical market, it has been up and down over the years,” Hartman says, “but I go back and look at these old sales (of that same townhouse) on Zillow and here’s what I’ve always noticed. The people would sell their first home, their entry-level home, to first-time homebuyers who had to come in and buy those homes, and that would start this domino effect.” The initial, first-time buyers now turned sellers would “take the $125,000 townhome and they would move into a $215,000 single-family home … and then it would trickle up.”
But in today’s market, he adds, “It’s different—famous last words of the investor, right?”
Today’s market is “different in the respect that there aren’t as many first-time buyers driving the market” as there were at the turn of the century. And that’s significant, Hartman says, “because a lot of those would-be, first-time buyers are staying in the rental market.”
For you and others in Hartman’s Empowered Investor Network, which specializes in rental property investments and the real estate world in general, that means there will be demand for rentals for many months and, perhaps, years ahead
Those choosing to stay in the rental arena are “the Gen Y people with massive amounts of student loan debt” who also saw their parents get burned in the housing market 10 years ago, Hartman says. They’re probably single, mobile and want to have choices while they’re getting free rent by living with Mom and Dad.
“For the next 10 years,” Hartman says, “we have phenomenal demographics coming at the housing market, actually from both perspectives—the rental properties perspective and the buying perspective—because if they move out of Mom and dad’s house and they get married, they will say, ‘We’re going to buy a house.’”
Along sort of those same lines, the fact that the world population continues to rise and doubtfully will decline anytime soon also bodes well for tou as a real estate investor for months and years to come, Hartman notes.
“When you start hearing that we have population declines, then we are in trouble,” Hartman says.
“As I have said before, with every theory I talk about, with every observation I have on what you should do to be a good investor, it is predicated on population stability or growth. If the population declines, everything changes. Now, we have not seen that yet, but if some day we do, then we will talk about it long before it hits.”
Statistics in general are “broad, sweeping generalizations,” Hartman says, but what’s unique about population statistics is “you can tell a good 18, 25 years in advance” whether there will be demand for property or product — “maybe not 18 years, because people may be in student housing or something like that, but maybe it’s 24, 25 years” before they decide to rent or buy a home.
With the NAR report, Hartman adds “the three dimensions of real estate concept are at play here — prices are up, interest rates went up a little bit, and demand is curtailed, but it’s very slight.” He urges you and other podcast listeners to find more about those “three dimensions” of which he speaks by searching other podcasts and other resources on his website.
One of those resources, a glossary on the Hartman site, expounds on the three dimensions for you a little further:
“Three Dimensional Real Estate Investing™ – in evaluating the relative merits of a real estate investment, three primary parameters must be considered: (1) price, (2) financing and, (3) cash flow (income). This helps ensure that investors do not focus on only one aspect (such as price) and miss out on a great opportunity (such as historically low mortgage interest rates).”
Jason’s “Greatest” … Er , Actually Two “Good” Deals
In the podcast, a listener named Mike asks Hartman, via mail: “What is your single greatest real estate transaction, and what is your biggest real estate failure?”
“Like a good politician, I am not going to answer your question, I am going to answer my own question,” Hartman replies with a laugh. “I don’t know I can say what my single, biggest, greatest or single worst or biggest failure was. I’m just going to share with you a good deal and a bad deal and not saying ‘best’ or ‘worst.’”
A good deal: The first property Hartman ever bought was from a client when Hartman was age 20. It was a one-bedroom condo in Huntington Beach, California “which is still there by the way.”
“I had what most people would consider a bad experience on my first deal. It was bad, then it became good. I bought the property with almost no money down from a client who purchased a few properties from me. He wanted to sell this one (on the market), but I bought it from him.”
Later, Hartman had leased to some “bad tenants who didn’t pay and I had to evict them.”
“And they really thrashed the property … they really destroyed it.
“You know, that could have destroyed my whole real estate career if I did not, at age 20, keep my emotions in check and look at the big picture, and I did. I ended up selling that property and made a decent profit on it. I sold it to another investor right after that who was doing a 1031 exchange.” (A 1031 exchange is a real estate deal that allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes.)
A second deal Hartman likes, and it actually was his second-ever deal, was closer to home in a sense, because it involved his grandmother. He was “farming” for listings in a certain townhouse community again and decided to buy a two-bedroom, two-bathroom condo for himself and live in it.
“I was 22 when I bought it,” he says. “I financed 90 percent of the purchase price, and I borrowed 10 percent from my lovely, late grandmother and owned that property for 11 months. It was during a booming market, so the price went up a lot when it was under construction … sometimes, this can really work to your benefit.”
He sold the property 11 months later for $159,000. He figures that after closing costs —and also accounting for the fact he lived there for 11 months —that deal worked out to be a profit of $50,000, or 500 percent return on investment.
OK, There Can Be Some ‘Bad’ Deals, Too
“My worst deal I’d say is what I chronicled in episode 417” of the “Creating Wealth” podcast, Hartman says. “This was the tax-lien deal, where I bought these real estate tax liens from this company and I claimed they ripped me off. I still haven’t had any satisfaction on that deal.”
In short, that deal, known as “the potential PIP West Scam,” was complex and sounded too good to be true; it fooled not only Hartman, but other investors as well.
Hartman says it offers an important lesson for you and other investors.
The deal led to Hartman devising what he calls the real estate “KISS principle”: “Keep it simple, salesman”—as opposed to the common KISS principle of “keep it simple, stupid.”
You can read more about Hartman’s bad tax-lien deal here.
