In today’s Flashback Friday episode of the Creating Wealth podcast, from Episode 176 published in July 2010, Jason Hartman provided his commentary on the Gulf oil spill and the effect it might have on real estate in the area, presented information about self-managing properties, and discussed buy and hold investing.
He then spoke with Steve Dexter about his book, Real Estate Debt Can Make You Rich, and the influence Dr. Schumacher had on his work before he passed away in 2006. Dexter covered the step-by-step techniques that can work in any market, slow or booming; for new buyers or seasoned investors.
Dexter covered information he presented in his updated version of Buy and Hold Forever- How to Build Wealth for the 21st Century as well, a book which he co-wrote with Dr. Schumacher, the ‘pope’ of real estate investing.
Loan Modification Success
Jason Hartman begins the podcast stating that business is booming on the real estate side of things. In the recommended markets, people are sensing a bottom or near-bottom. He mentions an investor who bought a property during the peak of the market, and though he was complaining that the value went down, he noted that his income was still the same. It’s an excellent bond investment, and when you consider it an income property bond, the ROI is still good. Hartman explains that we are recovering from the worst economy now than we have been in seven decades, but with real estate being multidimensional, the deal might still be good if you can properly keep score.
Hartman mentions that he has been successful in modifying eleven of the loans on his properties with a modification called the 80/10/10. He explains that he put 10% down, had 10% from the bank, and financed 80%.
He states that he spoke to a man today that wanted to pay cash for his properties, but Hartman advises that if you’re going for an income property with self-liquidating debt, then your debt is sustained by the property as long as your evaluation is realistic. Unless you’ve got to, don’t pay cash. If the numbers look good, Hartman would rather finance.
The DIY Loan Modification Kit
He notes that he started modifying his loans about a 1.5 years ago and since then, he has gotten good rates and the process was very successful. Afterward, he created the Do-It-Yourself Loan Modification Kit, a $47 kit containing an audio and PDF file explaining the process of modifying your own loans.
Hartman explains that regarding the kit, some people have asked why it doesn’t directly address investment properties, and this is because there is no program Hartman knows of that are intended specifically for investment properties. Some lenders will try to state that they won’t modify investment properties at all, but that isn’t true.
Recently, Hartman has successfully modified three more of his loans, though he mentions that these three were not as easy as the others. They were Bank of America loans and despite their past issues, they seem to be getting their act together, Hartman says.
One of Hartman’s properties in greater Houston had a decent return and was doing well enough at the time. After the loan modification, Hartman states, the property was transformed into a highly positive cash flowing property. The interest rates as a result of the modification were cut in half for five years. Though there were still property taxes and insurance to pay, after the mod, the property was much more positive.
Leverage Over Property Managers
Hartman explains that when it comes to property managers, there are some that work well, some that are mediocre, and some that are terrible. He states that for the opportunity to get leverage on property managers, it’s wise to diversify your portfolio. Own properties in a couple of different cities. When you hire property managers, your property is often not a big account to them and as a result you may not get the attention you want.
Hartman states that if his company referred the property manager and you’re having a problem, call his office and his team will get contact your property manager on your behalf.
He mentions that he had one property manager in San Antonio who got out of the business. He sent Hartman a letter explaining that he was leaving and recommended another property manager. Hartman states that he called the recommended manager, then went online to look for other potential managers. He never signed an agreement, he says, and the tenant eventually called and asked where he should send the rent check.
Hartman notes that he offered the tenant his own mailing address and has been managing the property on his own since that time. He explains that it’s working quite well, and he may consider self-managing more properties.
He also states that there are ways to remedy issues that come up. Hiring a new property manager or eviction attorney can be done in a day if needed. Hartman advises experienced investors to give self-managing a try but recommends new investors to avoid it for now.
The Gulf Coast Oil Spill
Hartman mentions the Gulf Coast oil spill in the news and states that he is concerned about the effect the disaster will have on Gulf properties. While there is the issue of pollution and rain, he notes that it looks like that part is getting under control.
Hartman states that there should never have been drilling so deeply, and that there are plenty of other places that are not a mile below the ocean’s surface with a well that is two miles deeper.
He notes that he is thinking about the oil spill’s effect on the economy. It’s going to be bad for tourism and fishing but will be good for clean-up. BP is also expected to cover losses of income for those effected. Hartman wonders if the real estate market will improve due to the new attention to the area, but he advises against buying properties in the Golf Coast until the effects are well-known.
The Rate of Inflation
Hartman explains that several people commented on the episode where he interviewed representatives from the National Inflation Association. He notes that he read a paper on the 2010 inflation report and was in agreement with their interpretation of the current inflation rate listed at 5.2%. Many people think we’re in a deflationary time, and while it’s true in some situations, look at gas, electricity, or food and one can see that inflation is over 5% annually.
This means that if you have $1 million in self-sustaining real estate debt in real dollars, you’re going to have your debt repaid by $50,000 per year with inflation-induced debt destruction. Hartman mentions that a good deal of people think that hyper-inflation is coming in the next few years. There’s a chance we might see it soon. When we have up to 25% inflation, think about the debt destruction you’ll incur. It will practically pay your debts forward.
Steve Dexter, Dr. Schumacher, and Building Wealth With Buy and Hold Investing
Hartman welcomes Steve Dexter back to the podcast, as he was a guest during the first ten shows. He’s the author of three books, as well as the co-author of the updated is Buy and Hold Forever: How to Build Wealth for the 21st Century with Dr. Schumacher on buy and hold investing.
Dexter explains that we all need mentors, and Dr. Schumacher was one for him. He started in real estate at a time when it wasn’t recognized or respected like it is now. From the 1950s to the 1990s, Schumacher bought properties. Dexter explains that his work was recommended years ago, and he met Dr. Schumacher shortly after. He was in his eighties at the time, but his mind was still very sharp. He had great strategies.
When Dr. Schumacher died about three years ago, his widow called Dexter, he recalls, and explained to him that her late-husband requested that Dexter update his book and add some of his own ideas to it.
Flash Money and Real Wealth With Buy and Hold Investing
Hartman mentions that he’s a fan of the buy and hold investing method. He states that he has watched his clients and notices that flippers have spending money but those who do buy and hold investing have real wealth.
Dexter explains that people tend to like the flash money associated with flipping and explains that he has done both. He flips houses to generate the cash one needs to buy and hold other properties. He states that landlords get the money, but they also put up with the most nonsense including laws and the government.
Throughout history, Dexter says, lords of the land are the ones who went out, and though they’ve paid prices along the way, they’re small prices. He notes that the biggest expense we have is the tax man, and states that real estate is the last great tax hedge for the middle class.
Hartman states that people will spend hours, days, weeks, and months looking for great deals on cars and TVs when their greatest expense is going to be their taxes. He explains that people have to learn about taxes in order to minimize it, legally lowing our tax liabilities.
Steve agrees that it’s not about trying to get out of your taxes, it’s about taking advantage of incentives and legally lowering the amount you’re expected to pay. He states that some people think it’s crooked and think investors should be paying full taxes, but real estate is a business. There are deductions and expenses to consider and claim.
Predicting the Value of a Neighborhood
Hartman mentions that in Dexter’s book, he states that he can determine the value of an area twenty to thirty years into the future and asks how this is done.
Dexter states that there isn’t one simple way to do so, but he mentions that Dr. Schumacher had the best definition of value. He asks, when you buy a home, what is value? Value is only the contemplation of anticipated benefits. He explains that if you look at neighborhoods that have value, ask yourself if it will be the same in the future. To determine that, Dexter states that there are inner city areas that were middle class at one time. Those neighborhoods age and lose value, but they’re redone sometimes. Harlem Heights is now a mecca of entertainment, Dexter says. Places like downtown LA have also gotten their energy back. It’s important to anticipate the factors that go into those neighborhoods.
Hartman notes that as populations move into an area with younger people, families are forming and settling in. Sometimes they age, and the area goes downhill but can still come back around when new shops and investments come in.
Overplaying Tenant Problems
He also notes that it’s amazing the number of people who have one bad experience with a tenant or have watched the movie Pacific Heights and overplay tenant problems. He states that he has had a lot of tenants over the years and has had very few problems with them. Some tenants have actually improved his properties or have stayed in a property for up to nine years.
Dexter mentions that his wife tends to think that tenants are out to take advantage of what they can, so she doesn’t deal with them. Dexter states that he likes people, and tenants are people. He has had a long relationship with them, and most of them pay their rent on time. In his next book, No Days Vacant, he explains how landlords can have properties with no vacancy.
Screen for Tenant Attitudes
He explains that a lot of decisions come down to screening, and it’s important to avoid the five deadly tenant attitudes, helplessness and entitlement being two of the five. If you can get the right person in your properties, your chances of success can be great. Tenants will test you upfront, Dexter says. Don’t be super nice to them right away. He notes that in his situation, he acts gruff at the beginning, and as the tenants prove themselves, he loosens up. He advises against being nice upfront and too assertive later, as this technique ruins relationships.
When being asked about his time management, he states that he has all the time in the world to manage his properties, but he needs time to focus on his writing as well. He has developed a system, he says. His tenants take care of most of their repairs, and they pay their rent. He will take care of bigger problems but notes that his tenants are basically on-site property managers.
Hartman on His Self-Management Journey
Hartman states that he mentions his own local properties as well and gives an example of how he got into self-managing. A property manager he had in Texas got out of the business, and while Hartman was looking to hire another manager, the tenant started sending rent payments by mail. He explains that he has been handling that property alone and though he hasn’t been to the place since the tenant moved in, it’s working out well.
He mentions that when the time came to renew the lease, the tenant asked for a garage door opener because his car was broken into when he parked on the street. Since the door opener was about $240, Hartman states that he told the tenant if he renewed his lease, he’d knock $20 off the rent every month and install the door opener.
Dexter mentions that there is information about remote property management in his book. He has an associate who self-manages, including her exotic vacation properties all over the world. She has a website and handles everything involving her properties on her own. He recommends self-management and states that in Las Vegas, he has five properties. Four of those properties are now Section 8. In the past, he didn’t like Section 8, but it is very popular in Las Vegas. He’s now getting $1250 in rent for one of his Section 8 homes.
Dexter’s Inflation and Foreclosure Predictions
When asked about his foreclosure predictions, Dexter explains that he went to a conference in Austin and learned that there are three million foreclosures happening this year and there are also about five million troubled loans. He predicts that there might be a downward trend if lenders don’t loosen up but notes that this is not on the rental side of real estate. There’s a lot of supply on the market.
He also predicts that there will not be hyper-inflation as some people have stated. He hopes to have some inflation coming on but doesn’t believe it will be big. The inventory is stale, he says, so this may be the lost decade for us.
Hartman references Japan, who has had two lost decades recently. Their population is declining while ours is increasing. Since Japan does not allow immigration, and they’re not having enough children, their population continues to decrease.