Jason Hartman discusses the two California city bankruptcies that occurred in just one week. Both Stockton, California and Mammoth Lakes are seeking bankruptcy protection. Jason has been predicting municipal bankruptcies for about six years now noting how big government simple does not work, more to come.
Airbus is investing several hundred million dollars for a new manufacturing plant in Mobile, Alabama in hopes that the Airbus A320 can better compete with the Boeing 737 in the American market – this is good news for income property owners; however, it will take a few years to materialize.
Jason reviews investment property proformas at https://www.jasonhartman.com/properties/ in a few of his recommended markets, here are some enticing projections:
Atlanta, GA (Stone Mountain area) $99,000 cash-on-cash 19%, overall ROI 37% annually
St. Robert, MO (Fort Leonard Wood) $215,000 cash-on-cash 22%, overall ROI 48% annually
Bartlett, TN (this was an example of a MISLEADING proforma showing a 114% annual ROI)
Memphis, TN $56,900 cash-on-cash 16%, overall ROI 29% annually
The cost of homeownership has dropped dramatically over the last 20 years and housing affordability is skyrocketing to an all-time high and Jason reviews a study by The Joint Center for Housing Studies at Harvard university with sources including: Primary Mortgage Market Survey; US Census Bureau, American Community Survey; Moody’s Analytics, JCHS tabulations of National Association of Realtors®, Composite Affordability Index (NSA) and Existing Single-Family Home Sales via Moody’s Analytics; Freddie Mac, median household income estimates.
Be sure to join Jason and his team this fall for the Atlanta Property Tour and Creating Wealth Boot Camp.
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ANNOUNCER: Welcome to Creating Wealth with Jason Hartman! During this program Jason is going to tell you some really exciting things that you probably haven’t thought of before, and a new slant on investing: fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self-made multi-millionaire who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it! And now, here’s your host, Jason Hartman, with the complete solution for real estate investors.
JASON HARTMAN: Welcome to the Creating Wealth Show! This is episode number two sixty-six, and I am your host, Jason Hartman, and a good morning to you from Phoenix, Arizona where it is 8AM and it’s 88 degrees! But it’s a dry heat, as they say. Hey, so today we’ve got a great show for you. We’ve got a client interview; you’ll hear from one of our clients, a doctor who is investing in real estate, and just out of medical school fairly recently, and going down the right track. Some say doctors are people who pay attention to their profession but not their investment portfolio, and not the business side of their life, because they’re scientists, but this one is!
And I gotta hand it to him. He’s gonna do a great job and have a lot of success, I can just tell, with his real estate investing. So you’ll hear about that in just a few minutes. And gosh! Today. Well, what do you want first, the good news or the bad news? Well, there’s always a way to make bad news good news. Well, I guess not everything. But most of it! At least, most of the stuff I talk about here. So I guess I’ll start with the bad news: California, my old home, the Socialist Republic of California—two bankruptcies in one week! Now, these aren’t bankruptcies for people or businesses, mind you. These are bankruptcies for cities. Yes, two California cities have gone bankrupt in just one week. One of course you’re probably familiar with; there has been much written about this one, and much media attention, and that is good old Stockton, California.
I’m sure that one doesn’t surprise you. This is from a Newser article—and by the way, thanks to Kyle for recommending Newser to me a couple years ago, one of our listeners. I like Newser because it’s just short and quick. In fact, their tagline is “read less but know more.” So, basically, two paragraph news stories really gets to the point quickly. Remember when you were in school, and you probably learned a little bit about the way journalists write, with that inverted pyramid format? Well, the important stuff is usually pretty much at the beginning of the article anyway. It allows you to read a lot more stories. But sometimes you want more depth, and you can always click on the link for the full article if you want to hear all about it. But this one’s interesting. So, this is the biggest city bankruptcy in the United States so far, and that is Stockton. California city expected to file paperwork today, and that was a June 27th article. The city of Stockton, California will file today for bankruptcy protection, becoming the largest city in the US ever to do so.
The San Francisco Chronicle reports, Stockton, a river port and agricultural city of nearly 300,000 people, about 90 miles east of San Francisco, because a victim of California’s housing crash. During the mid-2000s economic boom, the city, long mired in poverty, attempted to reinvent itself, building a new marina and sports complex, a fancy hotel, new housing tracts, and a promenade, on credit. Today, these posh areas are blocks away from dangerous, violent neighborhoods the Los Angeles Times reports, and the rate of foreclosure is the second highest in the nation. “All that’s left is sadness,” said the town’s retired fire chief, after last night’s six-to-one city council vote in favor of bankruptcy. The city cut the police department by 25%, and last year saw a record-setting 58 homicides.
Can you imagine that? 58 murders in a town of only 300,000 people. That is pretty scary. This is what happens when bad, bad economic times hit a city. It’s really instructive. By the way, that’s me talking. I think you can tell where my comments are thrown in. There have been 31 homicides so far this year, the BBC reports. The fire department was cut by 30%, and other city employees cut by 40%. Employee pay and benefits, once perhaps overly generous—I’m sure they were—were also cut. Stockton also has the state’s second highest rate of violent crime, and an unemployment rate higher than 15%. Now, all you listeners to the Creating Wealth Show know that that 15% is the way the government understates and calculates it. So, when you see 15%, that probably really means about 25-30% in true unemployment. Many city buildings have been repossessed, including city hall.
Wells Fargo took over a few parking garages the city owned as well. Says one local, “Now they own the building that the city hall is in. You might as well call it Wells Fargo Town.” Wow. And it’s interesting to see, sometimes—they tend to be so snarky and pessimistic, but sometimes they’re accurate. I like to read the comments on some of these posts. And one of them says, “now you liberals see, we don’t need to get violent or upset, because in the end, your handouts, cultural diversity commissions, Coastal Commissions, and massive pension programs, will implode on themselves. Socialism and liberalism will always fail. Call it what you want. It’s going to fail.”
Well, I agree with that. By the way, do you know what the Coastal Commission is? I had a few different dealings with the Coastal Commission over my years in the real estate business in coastal, Southern California. And I tell you, the Coastal Commission has got to be the biggest business chaser away—if that’s the proper way to say it, I’m sure it’s not—California has. One of the biggest. Because every time someone wants to build anything you can see from the coast—so, if you were out on a boat in the water, and you could see it—the Coastal Commission just makes it virtually impossible.
I remember I was doing a real estate deal in Malibu, years ago, and had this client who wanted to buy, I think it was at the time, a $2.2 million property. Probably in today’s dollars that would be somewhere around $6 million, I would guess. With true inflation rates, and I’m also kind of taking into account real estate inflation rates. They wanted to buy this property, and it killed my deal. The Coastal Commission just killed my deal, because the developer of the property didn’t quite get the permits done properly, and I mean, look, folks, it was a beautiful home on the coastline in Malibu, California! And just destroying economic activity at every turn.
Okay, well, that’s the bad news. But again, always a way to turn bad news into an opportunity, which by the way reminds me, our next show, episode #267, we will have the author of Abundance: The Future Is Better Than You Think. You’re gonna love this one. I hope you got that book, as I had recommended before. It’s fantastic. Peter Diamandis and Steven Kotler have done a great job telling us how incredible our future really is going to be, and there are so many reasons to be so, so optimistic. Before I jump into the next story, which is good news, I want to just tell you about a couple of properties here. We have been able to get some really, really long-awaited, much needed, outstanding inventory, recently. And if you’re a regular follower of the show, if you’re a client of my company, you know that inventory has been extremely, extremely scarce for us.
So I’m glad to say it’s gotten a little bit better just recently. Here’s one in Memphis, Tennessee. 29% projected ROI, and look at this property, okay? $56,900—so, very inexpensive. $44 per square foot, subject to qualifying with 25% down, all you need to get into this property, including your closing costs, is about $17,900. And let me just share with you the rest of the projections, and I’m gonna share some on a few more properties here after the next story. Projected rent, $850. Projected positive cash flow here, of $234 per month, or $2800 per year, which leads you to an overall cash on cash return of 16% annually.
Now, remember, cash on cash is assuming there’s no appreciation. In fact, if the property goes down in value, and it’s only worth a dollar, as long as you maintain that income and expense ratio, you’ll produce your cash on cash return of a whopping 16% annually. And the overall return on investment here of 29% annually. Pretty darn phenomenal, to say the least. Now, Alabama—Mobile, Alabama. A market that we did some business in a few years back, and I own property in myself—this is really good news. I remember they were talking about this. Well, it looks like it’s finally, finally happening here. Airbus plans its first US assembly plant in Alabama! Okay?
Now, Airbus, of course, the airplane manufacturer—Airbus plans to invest several hundred million dollars in a new plant in Mobile, Alabama, which would be the European plane manufacturer’s first factory on US soil, sources tell The New York Times. This move would ramp up its competition with Boeing, which has been the only company building large commercial aircraft in the US since 1997, Flight Global notes. The assembly line, which is at least three or four years away from starting operations, could annually produce dozens of A320 jets, the bestselling commercial jetliner in the world.
Airbus currently holds only 20% share of the American market for single-aisle planes, which are increasingly replacing older aircraft that are not as fuel-efficient. Although globally its share is about even with Boeing’s, the plane maker expects that the A320, made in the USA, would be more competitive with Boeing’s 737, while also lowering production costs. But some in Europe will likely be concerned with the overseas plant, although it could eventually create about 10 European jobs for every one in Alabama. Airbus also has strong ties to Mobile, the Press Register reports, and currently has 200 employees at an Airbus engineer center there. Anyway, so that’s interesting.
Now, what’s interesting about that European comment about outsourcing. We have largely been making that same complaint of the US for many years, now—that the jobs are going overseas. Well, one of the comments at the end of this blog post here is, jobs outsourced to the United States from overseas? We’re being third-worldized, by subsidized industries from other countries. Interesting. [LAUGHTER] That is interesting, by the way. Very interesting comment. You know—well, I’ll get to that in just a moment. I want to tell you about another property here, but I want to share with you in a moment the most amazing thing about housing cost. You are not going to believe this. Just another property here. Again, some great inventory lately. This one in Atlanta, Georgia, okay? The Stone Mountain area.
By the way, you can find these all on our website at www.jasonhartman.com, of course. But this property, 2200 square feet, beautiful property, get this—the price is only $99,000, and it’s $45 per square foot. Total cash needed to buy based on qualifying for an 80% loan-to-value is just over $23,000, and here are the way the numbers look here on the pro forma. $1250 per month rent, $375 per month positive cash flow. That’s almost $4500 per year, and a cash on cash return—get this. Are you sitting down? This is going to blow your mind. Cash on cash return of 19% annually. And an overall return on investment at 37% annually.
You know what I always say, folks. Even if it doesn’t work out this well, it’s still pretty darn awesome. Even if it only works out half as good as this, take 37% and divide by two, and your return on investment is still phenomenal at just under 20%. I mean, you can’t beat that. Now, let me tell you about a property that I noticed when I was printing these off to talk about on the show today. On our website—and this is one of the big, big mistakes that people can make. Our local market specialists upload properties to our website. This one is in Tennessee. And you know, we try to catch all of these. We don’t catch all of them, we’re not perfect. And I caught this one, and we will of course take it down.
In fact, I believe it’s already been deleted, so you can’t look at what I’m going to tell you. But here’s something that shocked me. I was looking for properties to talk to you about on the show, and this one said, total return on investment: 114%. Well, I knew that was patently ridiculous, right? Because one of the things I do not allow our local market specialists or out investment counselors at my real estate company—what I don’t allow them to do is make the initial market value different from the purchase price on the pro forma. Because this is what happens. Now, let me run through this one with you, because it’s a good lesson in how you can be mislead as an investor. But first, I want to say—look. Do you sometimes buy a property that is below market value? Sure you do.
We’ve had many instances where properties will appraise much higher than our client is purchasing them for. We’ve had numerous incidents—in fact, this probably happens almost every time, and I don’t even know about it—where the insurance is basically saying, the insurance company is basically saying, you’ve gotta insure this company for a lot more than you paid for it, because it would cost so much more to rebuild the property than our clients actually purchased them for. Well, this property—here is $100,000 is what the local market specialist, although contrary to our instruction, put the property on the website for.
And they said, you can purchase it for $81,900. So, look what happens here when those numbers are askew, when they are not the same. We require all of our local market specialists to have the initial market value and the purchase price number be the same. In other words, they cannot say, or represent to you, our client, that you are getting that property below market value, even though many times, are you? Yeah, I think you are. And many of you listeners have already experienced that yourselves first hand. But so, running through this pro forma, you see the difference in purchase price versus initial market value. That’s what just really jacks up the return on investment, inaccurately in my opinion.
So, positive cash flow here, $300 a month, or $3600 per year, and just going down the pro forma, cash on cash return, 16%. It’s still a great property. But, when you get to overall return on investment, it’s project at 114% annually. Well, that’s just too high. That’s unrealistic, in my opinion, and we’re not going to let people play with the numbers like that. We’re just going to assume that you’re paying market value for the property. If you get a better deal, hey. That’s icing on the cake, so good for you. Okay.
Two more things, before we go to our guest today. The cost of owning a home—did you see this in the media? This is phenomenal. This is from the Joint Center for Housing Studies of Harvard University, and this is going to just amaze you, what I’m about to say. There is a table, and on the table, it’s pretty simple. It’s four rows down, and three columns wide. It shows that in 1990—now, these numbers are adjusted for inflation, but of course, remember, they’re adjusted for inflation I’m sure on the “official” statistics. If you want to learn more about that, listen to the show with John Williams of Shadowstats. And because John Williams is such a brilliant guy, but a little harder to listen to, I’d say, on that show. I think that was show #251.
We actually posted the transcript of that show, if you’d like to read it, on the blog at www.jasonhartman.com, and just click on blog. But, understanding inflation and so forth, John Williams. Very good at helping people understand that. With his website, www.shadowstats.com, but here, look at this. Amazing numbers. In 1990, the median mortgage payment was $1183. And the payment-to-income ratio—so, they took the median payment, median house, and the median income—and it was 0.28. That was the ratio. 0.28. The payment-to-rent ratio back then was terrible! It was 1.45. Now, terrible depends on who you are. Are you the investor, or are you the tenant? Depends, right?
Well, let’s talk about that in just a moment. But first, let’s go through the rest of the numbers. 10 years later—fast-forward 10 years to 2000, the year 2000. The mortgage payment in 2011 dollars—is $1125. The payment-to-income ratio is 0.24, and the payment-to-rent ratio is 1.37. Now let’s fast-forward again, but this time only 6 years. We’re going to take a middle-of-the-decade thing. And this is instructive, because it really looks at the hot, frothy, crazy market we had. And so, let’s look at 2006. That mortgage payment was $1240. And payment-to-income ratio was 0.28, just like it was way back 16 years earlier in 1990, but the payment-to-rent ratio was 1.44.
Now, this is where you need to be sitting down, because this number is just going to put the biggest smile on your face as an investor. It is unbelievable. It really, really shows the incredible opportunity we have right now at this very moment to lock in our cost of ownership and our cost of financing for three decades. Well, cost of ownership is locked in forever. The cost of purchasing it. The cost of financing for three decades. Listen to this. But this also brings something bad with it too, because what this means—because there is so much imbalance—beneficial imbalance—to us, the investors, in this market—this means that it will start to adjust, it will start to adjust out of our favor, and I say, as we predicted about two years ago, that this is about the very best point, right now, and maybe over the last 6 months.
That’s why business is so good! That’s why so many investors are buying up everything they can get. In 2011, that mortgage payment number: $669. Wow. It’s about half of what it’s been anywhere since 1990. You look over the last 21 years, that median mortgage payment is about half of where it’s been. And get this—the payment-to-income ratio, to show you how incredibly affordable housing it—it is by far the best it’s been in the last 21 years, at 0.15. 0.15. Remember, in 1990 it was 0.28. And then in 2000 it got better, it was 0.24. Now it’s 0.15. Again, about half. And look at the payment-to-rent ratio. This is the part that will adjust in the future, out of favor for investors, I believe. That’s my prediction.
Okay? It’s very good right now, very desirable right now, but that imbalance in the market will start to right itself. And you’re already seeing this where properties are appreciating in price, and rents are still escalating, but that imbalance ultimately will correct itself. The reason rents are escalating, and we’ve talked about this many times before, is because although this is so incredibly imbalanced, it would normally adjust much faster, but we have some special circumstances! It’s very hard to get a loan, okay? So, you can’t get the financing. It’s great if you can, that’s why if you’re not obtaining all the financing you possibly can now, you are missing out on a huge opportunity.
But number two, and this plays into that number one reason, is that so many people during the last several years have really destroyed their credit. Either by choice, through strategic default, or just through general economic hardship, and the circumstances. So the payment-to-rent ratio right now, again, it’s about half of those prior numbers, at 0.77. 0.77. This is a phenomenal, phenomenal opportunity. And here is another illustration of that. You know, we’re very much about real-world here on the Creating Wealth Show. Well, here’s another illustration of that. This is a fourplex in the market that is under the radar that you shouldn’t forget about. It is good old St. Robert, Missouri. I have a property here myself, and this has been a great under-the-radar market, the one that nobody’s really paying much attention to. And this one, $215,000. It’ll take, subject to qualifying for the financing outlined at www.jasonhartman.com in the properties section, it’ll take about $31,000 to buy it.
But look at the pro forma here. Projected rent? $2620 per month. That leaves you positive cash flow of $557 per month, and an overall cash on cash return at 22% annually. And an overall return on investment of 48% annually. Wow. Again, even if it only goes half as good as the pro forma says, your cash on cash will be 11%, and your overall return on investment would be 24%. Income property. No wonder it is the most historically proven wealth creator in history. Because it has such unique multi-dimensional characteristics. It is phenomenal.
You know, I has another argument last weekend—I shouldn’t call it an argument. I’ll call it a debate. On good old Facebook again, okay? If you want to see these, you can find me on Facebook and look me up, and of course we’ve got all our pages with a lot of our free content, and you can look those up on Facebook as well. But this one was with a gold bug again. We were talking about income property compared to gold, and he said, well, gold has outperformed real estate!
Well, of course you’re not taking into account the special characteristics of real estate. Because of course, you don’t just look at appreciation. You look at appreciation, leverage, tax benefits, income, cash flow the property produces, and nothing even comes close, folks. And we all know that, if you’ve been listening regularly. So, happy investing to you. Here is a case study story of what one of our clients is doing, and we are glad to have so many of these case studies on the show. We’ve got several more coming up for you. And we will go to that here in just less than 60 seconds!
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ANNOUNCER: What’s great about the shows you’ll find on www.jasonhartman.com is that if you want to learn more about investing in real estate in different markets, there’s a show for that! If you want to learn 17 ways rich people think and act differently, there’s a show for that! If you want to know how to get paid to borrow, there’s a show for that! And if you’d like to know why Amsterdam doesn’t take dollars, or why pools are for fools, there are even shows for that. Yep! There’s a show for just about anything. Only from www.jasonhartman.com. Or type in Jason Hartman in the iTunes store!
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JASON HARTMAN: Hey, it’s my pleasure to welcome one of our clients to the show! We’re very grateful whenever we can get a client on the show, and you can hear their first-hand experiences. As the saying goes, from the horse’s mouth, as it were. And my pleasure to welcome Tap to the show. He lives in Venice, California, and I actually went to Venice High for a year, so, I know that area well. And Tap, it’s great to be talking with you, how are you?
TAP: I’m great, Jason. It’s great to be on.
JASON HARTMAN: Great, well, my pleasure. So, you are a physician, and you’re recently out of medical school, or I guess out your residency, I should say, right?
TAP: Right.
JASON HARTMAN: And tell us a little bit about your story, as maybe just go chronologically. Where’d you go to medical school?
TAP: Yeah, so, I went to University of Pennsylvania, on the east coast. And I went to med school residency and fellowship all over there in Philly. I’m from the east coast. Grew up North Jersey, near New York City, and finished my training just under two years ago, and I decided I wanted to live near the beach. I’ve lived in Chicago and on the east coast, but I’ve never lived on the west coast. So I hopped in my car, drove across country, and found a job in Southern California, where I wanted to be. And then, as some people may know, as soon as you get out of training as a physician, your salary kind of goes from very low to pretty comfortable if I spent several months living the good life, spending money, I’d not had before. And you can spend money in Southern California without too much trouble.
JASON HARTMAN: That’s pretty easy to do, yeah.
TAP: Yeah, whether on taxes, or good and services. And after like 9 months, it kind of occurred to me that I didn’t really care about all of these things. And I figured out very quickly that making a lot of money doesn’t actually make much difference in your happiness, apart from having some financial security and some independence, and so I decided I wanted to get into investing. I enjoy investing, I enjoy business. I just had never had an opportunity to do it before. And I kind of got the idea that I want to—if I practiced medicine, or do research or whatever, I’d like to do it on my own terms and not really do it for the money, but to have some other sources of income. So about a year ago I started researching investments. Everything, you know, angel investing, real estate, notes, stocks, everything.
Initially, I was thinking about flipping houses in Southern California. I don’t know why; that’s just what people in real estate seemed to talk about. And after a few weeks of looking into that, I realized I didn’t have the time or the interest to be a house flipper. I’d much rather be a physician if I’m going to work that hard. And it wasn’t a great market, anyway. So, the more I did research, the more I realized I wanted to buy cash flowing, you know—I came to this conclusion on my own, really independently, before I ever met you, but cash flowing rental properties in certain moderately-priced good job markets, in cheaper parts of the country like the south—certain cities in the middle west, and I looked at a bunch of markets, and I started finding these sort of turnkey places—the ones that you work with—initially on my own.
And one day I just decided I felt very comfortable with a particular vendor and market in Memphis, and I purchased a property over the phone, which I never thought I would do. But it was a low price point, under $50,000, which I figured, if it went wrong I wasn’t going to lose my shirt. And that experience was so easy and so good that I bought another one with them about three or four months later. And so I had those two properties for about six to nine months, and I never even received one problem phone call. It’s been so easy. So then I started to diversify, and I kind of started researching more broadly. I already talked to a lot of turnkey places, and I started discovering networks like yourself, and you know, started going to meetings for those networks, and I have to say, they do a good service. They introduce you to good people, and sort of do a little bit of education, but I didn’t—I wasn’t very impressed with some other networks that I worked with, and I felt comfortable doing it on my own if I didn’t have a network.
But at some point, I talked to one of your investor specialist counselors, and she was just great. So I knew her personally, we got along great, and we still do. Then I came to your meeting, Meet the Masters, about three months ago, and it was just a totally different experience. It was educational, it was interesting, it was really nuts and bolts stuff, and what kind of sold me, apart from the fact that I thought everyone I met from your company was great, and very straightforward and very honest, and I thought the whole structure was very educational. I actually learned things. What I really liked, what kind of sold me, the lynchpin was when your market specialist came up to talk, you were happy to grill them on weaknesses in their market, where their model, just as much as you were sort of talking them up, you were not afraid of asking them tough questions. You aren’t really there to be a salesperson.
It didn’t seem like that to me, anyway. You were there to help the investors make a decision on what they liked and what they didn’t, and that was different. It wasn’t like a sales pitch; it was more that you were kind of on our side. So I liked that. And I bought two properties. I just closed on the first property in St. Louis last week, which is a duplex. And I have another single family in St. Louis through you guys that I am under contract, and I just flew to Dallas last week, and I checked out some properties down there, including with your market specialist in Dallas. Dallas or Atlanta is probably the next place I’m gonna go.
JASON HARTMAN: Yeah, I think those are good decisions. You know, Tap, one of the things that we’ve always done, and I don’t know why, it’s just sort of part of our company and culture, is, we fall out of alignment with our local market specialists frequently. In fact, we’ve been in little conflicts with them from time to time. Not usually the people we’re working with, but we’ve fired several of them. We had litigation with one of them, because we thought he was doing a bad job, and just not taking care of our clients. And we really—I think one of the great things about us is that we really understand who our customer is. It’s the customer—the client—you, not the local market specialist. And while they’re great, and we depend on their support, and we support them when they’re doing things rightly, we’re not afraid to really part ways with them and do our own thing, because we know that ultimately, we can get new suppliers. But if you burn a bridge with a customer, that’s just gonna ruin your business. The customer is king, as the old saying goes. Right?
TAP: Yeah. And you know, one thing you said at the Meet the Masters, which struck me, and I think kind of reaffirmed that—you actually visit these markets, you look at them yourself, and these are markets that you believe it. And you know, I didn’t get that impression—I kind of got the impression with some other networks, although very nice people, were a little bit of a pass-through [unintelligible]. They were just sending us the contact information, and they didn’t do the due diligence. I didn’t really see that there was due diligence with regards to…they had invested with those people, or they had really made sure that those properties and markets were the right ones. And so the fact that you were willing to pass up markets and opportunities to make money to just work in markets that you liked and believed in, that impressed me as well.
JASON HARTMAN: I tell you, if we were willing to work in Detroit and Las Vegas and a whole bunch of markets—and some foreign markets—one guy a couple weeks ago was pitching me on doing stuff in the Caribbean, and we could make money short term doing all those things, but the key is to really stick with your focus: cash flowing properties. It’s amazing to me how many people as investors think that—the definition of investment is such a broad definition. Sometimes it’s just, oh, this property is a good deal because it’ll appreciate. So they think. And we don’t believe in appreciation. It’s great when it happens, but we’re not investing for that reason. We’re investing for sensible cash flow things. So, you were living the good life initially, and you decided well, I better not blow all this good fortune, now that I’ve worked so hard to be a doctor. What kind of physician are you, by the way?
TAP: I’m an oncologist. A cancer doctor.
JASON HARTMAN: Okay, great. So yeah, you’re taking care of people in their time of greatest need, probably. And what were your thoughts about investing? I mean, was there like a first book that you read, or a first thing that you saw on TV, or something? What sparked your interest?
TAP: I think what sparked my interest was when I started getting into investing about 15 months ago, I had done a little bit of investing with friends. Not necessarily for the bread and butter investing, but for example, a couple of friends and myself started an art gallery in New York. It’s a small gallery doing surprisingly well, but that was kind of like an entrepreneurial thing. I did a little bit of angel investing. And then a couple of my friends were in real estate, and I started talking to them about it, and it just made—the numbers made sense. They, immediately, at a very visceral level, this just makes too much sense. And so, at first it was just conversations with friends that were interested. Then I just started reading books on Amazon, I forget the name of the books, but you just go on Amazon and Google real estate investing, and there are some books that get really good reviews, and I read a few of those, then I went to some real estate investment club meetings in Southern California, and I had—I would say there’s some good things and a lot of bad things about clubs like that, in my experience.
JASON HARTMAN: Just so you know, the business model of those clubs—and it surprises me! Some of those clubs make a lot of money. There’s an organization that’s sort of the national organization—REIA—Real Estate Investor’s Association—and basically the business model of those clubs is that there are speakers that are on the circuit of doing REIA clubs, and what they do is they go in and they have a product or a coaching program or something like that to sell, and they give 50%, generally that’s the model, 50% of that revenue to the REIA club.
And so they’ll come in and they’ll sell a $700—a very typical deal is the $700 price point—and they’ll sell a $700, sometimes more, sometimes $3000, product or a service, maybe teach people how to buy at foreclosure auctions, or whatever it is. There’s a zillion different products like this out there. And they’ll give half to the people who host the group. And every month it’s a different speaker, and every month it’s a totally different philosophy, and there’s just no real business model there except to just make money by having speakers come in, and now it’s even more competitive for the speakers, because they will give more than 50% a lot of times. And 50% I think is darn generous.
And so, you know, they’ll just raise the price of the product, because on educational products the price has no particular meaning, right? It’s just a sort of an ambiguous number. But think about it. If they put 50 people, or 100 people in a room, and they hear someone talk about their $800 course—so, the club’s going to make $400 a head—it can be quite a lucrative thing for one evening’s worth of work. It’s a pretty great deal. Some of those clubs are very, very lucrative. I’ve been to—I was a member of national REIA before, and I’ve been to the national meetings where they all get together and all these people from REIA clubs talk, and it’s interesting to hear what they say. I never really went into that business, but I guess I was a little bit envious [LAUGHTER]. I think they’re making a lot of money without working very hard, to tell you the truth.
TAP: Yeah, my experience was that most of these are just kind of used car salesmen. I think there’s a grain of truth in what they teach, and they may themselves be able to pull it off, but they know 99% of people that buy their course are not gonna be able to do it.
JASON HARTMAN: We call it bookshelf decorations, and doorstops. That’s usually what they end up doing, yeah.
TAP: What I’d recommend to anyone doing one of those now, and what I would do—because you can learn from those things—just do not bring your money, so you can’t buy anything.
JASON HARTMAN: Right, leave your credit cards and your checkbook at home.
TAP: Totally.
JASON HARTMAN: Yeah, they’re pretty good salesmen there. Some of them are very good closers. Well, Tap, did you have any particular questions when you started? I know that you originally purchased the one-hour consultation with me, and I really wish we would have recorded that and used that as our show, because that was a great discussion with you. But what questions did you have then, or do you have now, that maybe might be common to the other listeners too?
TAP: Yeah. I think one question that’s high on my mind right now is, what’s a better investment? Going with the upper—a little bit higher rent areas where you’re looking at properties between $100 and $140,000, and the rent might be 12-$1800, or going in the kind of working class neighborhoods where the properties are $50,000, and the rent’s $750, and the cash flow is higher, your ROI cash flows, ROI’s better, cash on cash seems better, but you may have a little more trouble with tenants, there may be more turnover, maybe less long term appreciation, maybe more hassle factors? I’m trying to figure out—I want a low hassle, but which way—whether I should be focused on one or the other, and what the tradeoffs are? And that’s kind of what I’ve been thinking the last few weeks.
JASON HARTMAN: Yeah, that’s a great question, and let’s discuss that now. So first of all, it depends what city you’re talking about, because price is a moving target, of course. So if you were talking about one city that’s a lower-end city—and those would be, in our market, the only two that we do are really Indianapolis and St. Louis—that are lower priced. Those markets, you would be $50,000 or $70,000 means one thing, whereas in higher priced markets like Dallas and Phoenix, it means another thing, right? So that’s the first thing to have, is identify the segment, particularly—I mean, particular to that market. Because it is a bit of a moving target. But generally speaking, Tap, on lower priced properties, you have something called economic vacancy. And that’s different than physical vacancy. So, physical vacancy is when there’s no one in the property and you’re not getting any rent.
Economic vacancy is when there’s someone in the property, and you’re not getting any rent [LAUGHTER]. Many argue that that’s worse, okay? Economic vacancy is worse. And generally speaking, the lower-end properties have more economic vacancy problems. Because you get a lower quality of tenant. Many times that tenant’s credit is already quite damaged, and they don’t really care about it. They don’t view themselves as having a lot to lose, or having a big future ahead of them. Whereas people that have something to lose, and people that think they’ve got a good future ahead of them, they generally will be more careful, more prudent, and more responsible, and I think you’d probably agree that makes sense.
The other problem you get is this. It’s sort of the, what is worth the cost of going after a tenant? So, the numbers will generally look much better on lower-end properties. So, if you have for example a property that’s—and you can even do less than $50,000. Say it’s $40,000, and the projected rent is $700. Great RV ratio, right? The problem you’ll have there is if the tenant doesn’t pay, to some extent, there are flat fees involved, in terms of how much you have to pay to hire an eviction attorney, to collect, to pay court fees and so forth. And at some point, you know, and I think a lot of them know this—it’s just not really worth going after them. And so, that’s one of the other problems you have.
Of course with a higher priced property, a vacancy is more meaningful to you. In other words, it hurts more, because you’re losing more money every month. But at least when it comes to the flat fees that you have to pay to go and get a judgment, and then later getting a collection agency to collect that judgment for you—if it’s a larger money amount, they’ll generally be more motivated to do it, and it’ll be more worth your time. Or your property manager many times will do all that for you too. So, that’s one of the things. Generally speaking right now, I would air towards the end of the higher quality, slightly higher priced property. Because remember, you’re still way below the national median price, with whatever numbers you just mentioned. So, I would think slightly below the median price is a pretty good place to be.
TAP: Yeah, and I’ll tell you what conclusion I’ve come to, which is pretty much what you said. I’m moving towards the higher priced properties, somewhere in between 90 and $140,000. It depends on what market. Sometimes 90 is a higher priced property in some markets, and sometimes it’s 140. But, for a couple reasons. One is, low hassle factor. For me, I have a busy job, and I have other interests in life that I want to spend my time on. I want as low hassle as possible, even if that drops my cash on cash return a little bit. And my second thing is, my first 10 loans, I’ve got a lot of leverage. You know, financing 20, 25%, and I can afford higher priced properties when I have that much leverage. When I get past 10, the terms are different. I have to put more down, or sometimes I have to pay all cash, and it’s hard for me to reach into an $140,000 property if I’m paying 30 or 40% down, and certainly if I’m paying all cash. So the time for me to get the higher priced properties are when I’m in my first 10 loans, and I’ll kind of see later on what I can do. That’s sort of my current strategy.
JASON HARTMAN: Right, that’s another very good point that you bring up. One of the big issues nowadays is the issue of what we call mortgage sequencing. And so it’s, where do you get your loans first? And we talked about that before, I believe, on our call. And how you sort of structure your loans, because you’re limited to 10 Fannie Mae loans. And so, you might as well get larger loan amounts, because that’s the other thing—it’s 10. If they’re 10 $50,000 loans, or 10 $120,000 loans, it’s the same to Fannie Mae. It’s just the number of loans. And so, you might as well get more leverage by getting higher loan amounts, higher purchase price. So, that’s another thing to think about. I don’t think that in any of our markets right now, Tap, you should have to be spending $140,000. That would be pretty high. You could be easily around $120,000. And below that, $90-$120 would be sort of our higher end, if you will. So, when we’re talking about higher priced properties, these are still very inexpensive. Well, other questions? Or thoughts that you’ve had? Maybe it’s not a current question, but it’s a past question that you were thinking about?
TAP: Well, I can update you a little bit. You and I were talking about how to get access to cash. I make a reasonable salary, and I get cash coming in—disposable investable cash—each month, but I want to kind of move more quickly. The faster I build up the properties, the fast I’m getting those returns, and I think, especially for people who are listening to you, they may be thinking about where they can get cash to invest. And I looked into things like active 401(k) loans, and cash value life insurance, and the active 401(k) is a great thing. I had all my money in my company 401(k) plan in stocks, because that’s all they offer. And the stock market’s going up and down, and I was kind of wanting to—I basically decided—you can take out up to $50,000 of your 401(k), and as long as you’re still working at that company, and you pay back interest, which is around 4%, to yourself. To your 401(k). So, it’s kind of circumventing the banks. You don’t have to qualify for that. It comes in like a week. So I did that, and that’s one of the ways I’m gonna buy a couple properties. And then there’s also cash value life insurance, which I think is a little bit more complex, and not everybody has access to that, or has that kind of policy, but I think being creative with the ways to get cash, without being foolish—being creative without getting in over your head, I’ve taken that up a little bit, and you and I talked about that on the call.
JASON HARTMAN: Let’s talk about that cash value life insurance thing for a moment. I just want to go on record once again—I think that’s a lame deal. I don’t like it. It looks interesting on the face of it, but I just think that the life insurance companies are hoping that nobody understands inflation. Because that’s how they’re gonna make all of their money. They pay back in cheaper dollars. And the other thing I’d really consider nowadays—and this is something we never touched on before three years ago. But many of these life insurance companies—oh, they’re AAA rated life insurance companies, they’ve been around for 200,000 years, and you know, nowadays, that’s a lot less meaningful than before! Because what we have learned from the last financial crisis that we’re still in, frankly, but when it really got severe three years ago—is that we’ve learned that these life insurance companies—number one, they can go out of business, unless they’re bailed out by the government, and I don’t think the tolerance for bailouts is there anymore. So I think next time around, I don’t think you’ll see so many bailouts, okay? Because people are just too upset about it. But number two, the ratings agencies—I mean, they’re just so crooked! They’ve just been so debunked as to how they do their ratings, whether it be Moody’s or Standard & Poor’s, people have just—they were just asleep at the wheel in rating all of these toxic assets last time around, so how can you trust them now?
TAP: Yeah, if I could make two comments on that. One is, one of the things that I love a lot about investing is that I have to understand how the world works. I have to keep learning in order to be a smart investor. So I have to understand what’s going on with the Euro, I have to understand how insurance works, I have to understand—you kind of have to be a broad-based learner. And the other thing about the cash value life insurance is, I agree with you. I would not start a cash value life insurance policy as a way of having access to cash and long-term death benefit, and all that. It just so happened that my parents had started one in my name for their own estate planning purposes, so I happened to have one already with cash value in it. So instead of having it sit there and do nothing, I’m using it as a way to get a loan and use that money; it’s almost like equity in a house.
JASON HARTMAN: Right, right.
TAP: But I would never start one now. It just so happened that it happened to be there, so I used it. I wouldn’t recommend it.
JASON HARTMAN: Right, and you mentioned that to me on a prior call. Now you’re just reminding me that you mentioned that. But you know, I would say that your parents—had they taken and invested that money, and done it themselves years ago when they bought that plan, they could have done much better with it. I’ll just—yeah.
TAP: Yeah, I totally agree.
JASON HARTMAN: And so, someone, some brilliant life insurance salesman a long time ago, figured out how you could rebrand life insurance as though it’s an investment, and that’s where—look, folks. If you need life insurance, get yourself a cheap term life insurance policy! Insurance is fine. I have nothing against insurance. But when you start looking at insurance as though it’s an investment, that’s where I just say, no way. You know? I’ve heard the pitch of the bank of you concept—you know Randy, who’s been on the show before—he loves it, and we argue about it constantly. He’s one of the people that we work with, and he refers business to us. And this is like our ongoing argument. He says Jason, some day I’m gonna convince you about this life insurance thing. And I say no, I don’t think you are, Randy. But…[LAUGHTER]. And you hear those commercials. Bank on yourself. The bank on you. Be your own bank. They’re all over talk radio all the time.
TAP: Yeah.
JASON HARTMAN: Those are just a lame deal. You know? If people really understood them, they would say—and there are books on it. Doug Andrews has written a book on it. One of my pet peeves. But yeah. Now, have you considered, Tap, any of the private lending or hard money lending, in terms of loaning out your own money, too? On a short term basis?
TAP: I’ve heard—I have looked into that, I’ve thought about it. I’m not doing it personally for two reasons. One is because I’m sort of in the wealth-building mode here, and I’m really kind of going after using the cash that I do have to buy rental properties right now, because the interest rates and the prices and whatnot, because the returns are so much better. And the second reason is that if I did those, I would probably want to do them in my retirement accounts, because they’re not as tax-favored as rental properties. What I am recommending those sort of private money loans who are doing the lending is to my parents, who have a very nice comfortable nest egg, but just sit on cash because they’re in their 60s, and sort of not really—they’re very conservative, and this is a simple thing. So I’m kind of suggesting to them that they look into, or that they consider doing some private lending. Although even with them, I’m kind of getting them into buying rental property, because I think that’s way better. But yeah, the lending, it’s down the line. I consider that a sort of wealth preservation, diversification type of approach.
JASON HARTMAN: Talk about your experiences with having properties that are far away from where you live. Have you had any problems with that? You probably had reservations with it in the beginning, I guess.
TAP: Yeah, I had reservations, and when I talked to some people around here, including at these real estate meetings, they were all kind of aghast at the idea of owning something that you couldn’t walk to or drive to easily. But I’ve had nothing but a good experience. I’ve had two properties for about six to nine months. Like I said, it’s been easier than owning a stock. I mean, it’s—there hasn’t been a single phone call or problem. I’m sure there will be, but it hasn’t been an issue. And I just closed on St. Louis last week. It was a little more work, cuz it’s an older property, so I wanted to get inspections, required a little more work. But I look at all of that as learning. You know, I get a chance to learn about how inspections work, and how to do these things from a distance. But it hasn’t been—it’s been easier than I expected. Very manageable. I expect there to be some ups and downs in the future, but I’ll kind of modify. If I find that something’s too much of a hassle, I’ll move away from that vendor, or that market, or that type of property. If I find it’s manageable, I’ll move more into it. But right now I’m kind of exploring different types of properties.
JASON HARTMAN: Right, yeah. So your focus is going to be on the higher end—now, how many cities are you in now?
TAP: I am currently in three cities, and I’m gonna pick a fourth. And we talked about this too. I’m gonna do four markets for my first 10. So I have three right now. One that you don’t like, but we’ll talk about that. One’s in Memphis, St. Louis, and Chicago. And my fourth was gonna be Atlanta. I like Atlanta, and I know you love Atlanta, but they’re just so tight on inventory in Atlanta that I can’t really get in. And I just kind of try—I just stopped trying, for now. I’m gonna do Dallas. And Dallas, actually cash flow’s a little bit better. So I’m fine, I’m kind of 50/50 in those two markets anyway. I could have gone either way. So Dallas is gonna be my fourth market, which I visited last week, and it’s awesome. It’s amazing. They’re just building down there, it’s like a different planet.
JASON HARTMAN: Yeah, yeah. Well, Texas is so business-friendly, you know. Like I always say, it would become the Hong Kong of the United States if it were to secede from the Union. Good stuff. Well, any questions or thoughts you want to wrap up with? I know you’ve gotta get back to work, and saving lives.
TAP: I would just say the two best things that I’ve learned about investing: it’s a lot of fun. You get to learn about a lot of things. You interact with lots of interesting people. Be careful and skeptical about really everyone at first, but you know, over time you develop relationships with people that you like working with, which is also great. And then, just speaking as someone who is a skeptic about everything before I get in, but, an enthusiastic skeptic—I can’t really see any—I’m recommending real estate investing to my friends and family, and I would never do that if—I just think on every dimension it makes sense. Including if you think that everything is gonna crash, because people still need a place to live. So for me, especially for residential real estate, it just makes so much sense. I don’t really want more competition out there from other investors buying properties I want, but it does make a lot of sense right now, and I’m enjoying the whole process. I’m having a lot of fun.
JASON HARTMAN: Good stuff. Well Tap, thanks so much for joining us today, and we’d love to have you back on maybe in a year or so, just to kind of look back on more of your experiences as they unfold into the future, okay?
TAP: Yeah, that sounds great.
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Transcribed by David
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