The 20th Meet the Masters of Income Property event has come to a close. In this episode of the Creating Wealth podcast, Jason Hartman wants to extend his thanks to those who have attended the event, from the guests to the speakers.
Presented in this episode are key clips from speakers on the third day of Meet the Masters. Featured in these speech clips are Jason Hartman, Brian Smith of Ugg Boots, Gary Pinkerton, Andrew Zatlin of Moneyball Economics, lender Aaron Chapman and Joe, a panel composed of investment counselors, and a Q&A with Jason Hartman’s mother and aunt.
Meet the Masters 20th Event
Hartman starts the episode with a recap of one of his speeches, stating that the biggest shame society faces is for someone to have an ability that they don’t share with the world. When this happens, the whole world is denied something valuable. With music, there are many talented musicians that never become famous, and because of this, many of them give up despite their talents.
He references Mark Victor Hansen and his struggle to get the Chicken Soup for the Soul books published. His work was denied thirty-nine times by various publishers, but that didn’t stop him from selling almost half a billion books in the franchise.
Hartman states that they key to success is to keep going. When you’ve got a skill and you want to share it, you have to decide that you won’t be denied. Whatever your endeavor is, a real estate portfolio, a business, a talent, understand that you’re probably going to have problems but that you have to keep going. The person who makes a difference is the one who will not be denied. When obstacles come toward these people, they move those obstacles out of their own way.
Brian Smith, Founder of Ugg Boots
Brian Smith, the founder of Ugg Boots mentions the theme of being unable to give birth to adults, stating that you’re going to be hit with the resistance of infancy and advising listeners to work through it.
He mentions the beginning of his business with Ugg boots, when things were not going well. He couldn’t give up, though, because he still had 480 pairs of boots stored in his home, and investors’ money to worry about. He felt stuck, and was attending flea markets, swap meets, and even selling boots out of the back of his van in Malibu.
He enjoyed that outlet, but notes that sales were very small that season, at only $5,000. The following year, he decided to try advertising. He hired models and did a beach-themed advertisement, and in that season, he had $10,000 worth of sales. He knew that his sales should be much higher but didn’t know where he was going wrong. Another summer came, and Smith states that he hired better models and had a more expensive photographer to produce a better ad, but only made $20,000 in sales.
Smith recalls having a beer with a friend at a surf shop, and the friend called a handful of preteens over to ask them what they thought about Ugg boots. The kids didn’t like the advertisements, thought they were too fake, and that it was obvious to them that those models in the ads had no interest in surfing.
It was then that he realized he was targeting the wrong market. He decided to take photos with his own camera at Black’s Beach in La Jolla, as well as Trestles Beach, two classic surfing places. He ran ads knowing that he wanted to capture the essence of surfing with these young people, and after those ads ran, he made $240,000 in sales that season.
He advises listeners to advertise the benefit of their product, rather than the product itself. Encourage viewers to develop a feeling toward your product, and make advertisements bring about an emotional response.
Gary Pinkerton explains that nest eggs never get a person to safety. When he was a young man, going into the Naval Academy, he thought that if he made $50,000 he’d be set. Later, he moved that number up to $500,000 because he was single and didn’t think he needed much money. He then got married, and he and his wife Sue hadn’t had their first child yet. He states that he wanted to make a million dollars, and halfway through his career, he set a goal of $5 million. He states that it took him a long time to realize that it was not the number that made a person safe.
He references his father-in-law, who retired right at the dot com era. He had over $5 million in retirement, and for it to work well for him, he had to take $200,000 a year from it. This worked until he met the wrong guy and within two years everything changed. He lost a lot of money and is now in the same position as many baby boomers, trying to make his money work for him again.
Pinkerton mentions that Henry Ford brought cars to the world, Thomas Edison lit up the planet, Mother Teresa gave care to millions of people, and Gandhi brought a billion people into freedom without the use of force. Walt Disney created a vision and inspired imagination for children and adults alike. However, he was only able to create Disneyland because he borrowed from the only person who believed in him, himself. He borrowed from his life insurance policy.
With these examples of success, Pinkerton states that there is a path that we’re all on, and that some of us know that we’re on the wrong path. Sometimes things happen to wake us up. The path he works toward isn’t a difficult path, he says, it’s just uncommon. The other path is well-worn, the path that most of America is on.
He notes that in his simplified version of Maslow’s Hierarchy of Needs, everyone wants to be higher up on the pyramid. If success isn’t planned right, though, there is a risk of falling off and having nothing. Pinkerton advises having things on the bottom of the pyramid to prevent the fall. He explains that it was the things at the bottom of the pyramid that helped him get beyond falling. He then met Jason Hartman, gained some passive income, and earned some of his time back.
Moneyball Economist Andrew Zatlin
Andrew Zatlin explains that he never sits on an earnings call and has people talk about hiring, but he notes that the focus on hiring is important. If a business is truly thinking about expanding, they’re going to be hiring more people. Zatlin states that he looks at the hiring rate of a company and then reverse engineers what the revenue expectations are.
He presents an example regarding Delta Airlines, detailing a chart composed of a red line and a blue line. The red line is his prediction and the blue line is Wall Street’s prediction. In that chart, Zatlin’s number is a bit higher than Wall Street’s. He notes that this is because Delta Airlines has been hiring more people than they would be if their numbers were closer to the blue line.
Zatlin states that his prediction was right, and because of his correct predictions, stock traders want his numbers. His clients make their money because he predicts investments incredibly.
Starting last year, Zatlin explains that his predictions have been meeting the stock market. He notes that with Moneyball Economics, he takes the obvious, the hiring, and works with it. If a company is hiring, they’re expanding. He looks at the data presented and applies it to reasonable investments.
He also mentions that jobs matter in terms of where investors plan to buy properties. Jobs pull people into areas and encourage them to set up roots. In places with good job markets, people can afford rents, and when they can, landlords can raise rents.
Referencing his charts again, Zatlin explains that because location is an important factor, there is going to be some disparities between the six home-builder charts he shows. He explains that there is a regional pattern where the Northeast and Mid-Atlantic housing market is struggling, so NVR isn’t doing well on the chart. There are regional variations even in homebuilding.
He advises that if home-sellers are thinking that they’re in a great market, it might be wise for investors of rental properties not to go to that area.
TurnKey Lender Aaron Chapman
Aaron Chapman reminds listeners that if they’ve run into a problem, it doesn’t have to be solved in a conventional way. There are tools to remind you to take a problem from another angle. People have the power to do this. Sometimes, a problem is seen, realized, and a person ends up laying down as a result. Chapman mentions that he often feels that he’s running away from the giant foot trying to kick him down all day.
He states that sometimes he gets caught by the giant foot and it catapults him a little higher, but this is only if he stands up to take a look. If you stay laying down, you’re going to remain there, he says. It’s likely that you’re going to find yourself in a world that’s much worse for you due to that one transaction that didn’t go well.
He notes that at the end of the day, when you pick up a lighter or a bottle of whiskey, it’s going to remind you not to lay down. Don’t take what life hands you, he advises. Add your own pressure so that life bends to your design. You do not have to be the smartest, strongest, or fastest at something. All you have to do is be able to last longer than those who are.
Aaron Chapman continues by explaining what can be expected with a TurnKey purchase, cash flow and business being two key pieces. He supplements this by saying that 72% of the United States GDP is consumption, and that 19% of the world’s economy is United States consumption.
He explains that this is why consumers usually think about spending money and the risks of going into debt. This is why their first questions are usually about rates and costs, because they’re concerned about their debt.
Chapman states that the way he sees it, with a TurnKey purchase, you’re getting a cash-flowing business for the market value of its sole asset. He explains that if you graduate from medical school, buy a house in a certain area, you might want to open an office nearby. You might see a corner that would be perfect for your practice, but there is already an office there.
He then states that you start researching what the building is worth, as well as the equipment inside, desks, supplies, and personnel as well. Once it’s totaled up, you walk into the office and make an offer.
The owner might not like the offer, stating that they’ve had the business for twenty years, developed a cash flow and client base. The owner wants a new offer, so there would have to be a debate in the values. Chapman explains that in this situation, you’re purchasing a cash-flowing business with a finance and operations division for the market value of the building.
He mentions that there are three values to the property: market value, cash flow value, and replacement value. Market value is usually the lowest on an appraisal. Considering this scenario, buying the business that cheap is to your benefit. Chapman states that you’re getting it for 20 cents on the dollar, because with TurnKey, they send a business partner to you that’s willing to put up 80% of the capital for the business, and they only take 5% of that 80% of the capital back in installments.
He explains that you don’t pay the partner back with the installments if you have the right operations division. If you’re doing your process correctly, you can have someone else pay the partner back and write it off as if you did it.
Jason Hartman’s Technical Questions
When referring to some of the more technical questions, Chapman’s business partner Joe explains acceptable ways of making down payments on a property. He states that there is the ability to take a loan from an investor’s own 401k, and in a sense, you can finance 100% of your investment property. He notes that you can put the 20% down for the payment by borrowing it against your own 401k to pay yourself back, and then take the other 80% of the finances from Fannie Mae.
He explains that there are also times when down payment money has to have time to season in a bank account before it can be used. Seasoning is usually greater than 60 days, so that lenders do not have to trace where the money came from.
Joe explains a situation involving married couples, stating that gift funds are not allowed for down payments on investment properties. If the husband takes money out of his 401k and puts it into a shared account so that his wife can use that money for a down payment on her own property, it’s considered a spousal gift. It isn’t an acceptable way to make a down payment, as it has to be seasoned for at least 60 days to be acceptable.
He explains that it’s also possible to use a home equity line of credit, or something that is secure. You can borrow against your own money, but gifts are only acceptable in down payments for residential property.
When Hartman asks if the lenders have any tax-related tips for people who are self-employed, both in businesses that sell a service and investment businesses, Chapman explains that though this is a new tax season, he and Joe have a lot of experience. He advises listeners not to file a return until they’ve consulted with the two of them. They can look at the return and tell people which aspects they’re being too aggressive with. Saving a few dollars on one year’s return can end up costing tens of thousands of dollars later, Chapman says.
While you may want to write everything off, it might not be the best idea in the long run. If you’ve handled your write offs correctly, and expand your business well, you can build yourself up for better tax credits down the road.
Joe adds that most self-employed borrowers hire a CPA. They tend to want to see a draft of tax returns before they’re files to try to determine total buying power. The professionals can help you back into a good number for your business with tax advice. If you claim a little more income and a little less write offs, it shows more buying power.
Investment Counselor Panel
Hartman states that he’s been quoted before saying that he doesn’t even like real estate, and that he doesn’t think that real estate itself is a big deal. With real estate, people sometimes think about buying without thinking about financing, or they pay cash for properties. In these situations, Jim Kramer and Robert Shiller will lie to you by saying that real estate under-performs compared to the S&P500. The reason for this, he says, is because real estate will traditionally perform at around 6%, while stock will perform at 8-9%. However, they usually are not leveraging stocks, and even if they were, it’s only a 50% margin compared to the 80% margin from real estate investment.
Hartman explains that he cares about the characteristics available with real estate like special financing, tax deductions, outsourcing debt, leverage, and inflation-induced debt destruction. It’s those characteristics that make real estate good, rather than the real estate itself.
He refers to his Hartman Risk Evaluator, a process that took him nine years to discover, stating that in any property, there are two components: the house, and the land. Land does not go away, so the IRS does not allow depreciation on it. The house or building, however, is made up of commodities. The things the house is built from, concrete, glass, steel, are used worldwide. They have intrinsic value, unlike currency.
Regardless of what currency you use, people want these commodities, Hartman says. People want lumber for a house, even when they don’t want a currency. These commodities are thought to be the best assets against inflation. Your job’s income is supposed to come with a cost of living increase, but for a long time, Americans have not seen it. Income has not performed well. Stocks have a history of rising based on inflation, and they’re a medium asset. Cash is a low asset, as it gets depreciated through inflation, and bonds and pensions are awful against inflation.
Hartman mentions that with taxes, the IRS doesn’t understand inflation. Taxes are the single largest expense in our lives, so he advises getting interested in them now if you aren’t already. Depending on where you live, you’re going to give the government between 40-60% of every dollar you earn. He references a study that explains how a loaf of bread is taxed around 200 times before you ever purchase it at a grocery store.
Joyce & Aunt Joan
Hartman’s mother Joyce and his Aunt Joan explain that women in real estate face their own sets of challenges. Fortunately, the Meet the Masters event has had the highest attendance of women this year than it has ever had.
The pair explain that a lot of tenants think that women are weak, especially if the woman is managing her properties by herself. Tenants often ask if there is a company you work with or if you’re renting as an individual. If you’re individual, and a woman, tenants think they can get away with more than they could with a man.
Joyce and Joan explain that in their business, they inform tenants that their credit and W2 will be checked. They also have a list of rules, and that after going through four pages of it, tenants start thinking that these women mean business. For example, Joan mentions to tenants that if they plan on combing their hair over the sink, it’s only a matter of time before they’re calling for maintenance because the sink has been clogged. People think it’s funny at first, but it’s a valid issue and it lets tenants know that they’re paying attention.
Hartman mentions that his Aunt Joan used to give out colored greeting cards to tenants to let them know that rent was coming. This was because previously, she used to receive calls quite often with people inquiring about their rent amount. Her tenants paid rent, city utilities, and a garbage bill so rather than having them call, she would send the cards out with the totals included.
The Reluctant Investor’s Lament
In drawing the Meet the Masters event to a close, Hartman performs a reading, as is tradition, of Donald Weill’s poem, The Reluctant Investor’s Lament. Weill wrote the poem in 1977, and passed away in 2012.
I hesitate to make a list, of all the countless deals I’ve missed;
Bonanzas that were in my grip, I watched them through my fingers slip;
The windfalls which I should have bought, were lost because I over thought
I thought of this, I thought of that, I could have sworn I smelled a rat;
And while I thought things over twice, another grabbed them at the price;
It seems I always hesitate, then make up my mind when it’s much too late;
A very cautious man am I, and that is why I never buy;
When Tucson was cheap desert land, I could’ve had a heap of sand;
When Phoenix was the place to buy, I thought the climate was much too dry;
“Invest in Dallas – That’s the spot!” But my sixth sense warned me I should not.
The golden chances I had then, are lost and will not come again.
Today I cannot be enticed, for in 1977 everything is so overpriced.
The deals of yesteryear are dead, the market’s soft and so’s my head.
At times a teardrop drowns my eye, for the deals I had but did not buy;
And now life’s saddest words I pen, if only I’d invested then!