Jason Hartman discusses some massive shifts he sees coming. He explains technological trends that will benefit real estate. The US is the best country for real estate investing, but he cautions investors on group funds. Control is the most important thing you can have, do not put it into other people’s hands. He reintroduces his 3rd commandment, thou shall maintain control.
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This show is produced by the Hartman media company. For more information and links to all our great podcasts visit Hartman media.com.
Announcer 0:09
Welcome to this week’s edition of flashback Friday, your opportunity to get some good review by listening to episodes from the past that Jason is hand picked to help you today in the present, and propel you into the future. Enjoy.
Announcer 0:25
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it on Now, here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 1:15
I am in beautiful Portland, Oregon. Yes, Portland, Oregon. I’m here for a conference. And I tell you one thing this state did right. You know what I’m going to say that right, libertarian Jason, one thing they did, right? No sales tax, as left wing as this state is, it is a great place for shopping. So if you need some retail therapy, no sales tax is quite a good deal. Quite a good deal. Hey, so today we’re going to take a call from a caller and just talk a little bit about investing in funds. And I gotta tell you, it boggles my mind people. It boggles my mind. How many smart, sophisticated people will go into deals, just not really even knowing what they’re getting into. And this is not rare. You know, this is done probably 10s of thousands of times every day, maybe hundreds of thousands. I don’t know, I’ll venture to say it maybe millions of times around the world each day, that people do things like this, just really knowing so little about what they’re getting into, you know, they just don’t talk much about it. And it’s amazing that people will go in and they will invest in some sort of pooled money asset, whether it be a stock or real estate fund, whatever kind of anything where you pull the money together any kind of fund a general partnership, but in LLC, whatever the vehicle, let’s not complicate it. With that. Let’s just call it a fun And they’ll do it and get a lousy return on it. Or they will even lose money. They’ll be susceptible to one of the three major problems might be investing with a crook might be investing with an idiot, assuming they’re honest and competent, taking a huge management fee off the top for managing the deal. I’m going through that quickly, because you already know commandment number three, but it just boggles my mind. I got pitched last week by a friend of mine who syndicates hotel and apartment deals. I said look, send over your documents, I’ll take a peek and probably nine attachments to one email with monumental amounts of reading that have to be done to look into the deal. And still when you do all that reading after you’ve done all of that, you still really don’t know what you’re getting into. It is mind boggling. And I have to tell you, this of course, as you know, is one of the reason And I started the venture Alliance, because I want to do some bigger deals. And I’ve done some big deals myself and, you know, with with a couple of different clients, you know, they’ve worked out fairly well, I definitely would say some have worked out very well. But, you know,
Jason Hartman 4:19
I, I think the thing is, when you when you want to do everything as a direct investor, that’s great for the vast majority of people, the vast majority of our clients, being a direct investor, and buying 510 20 houses over the course of, you know, maybe quickly depending on how much you have to invest in terms of capital. Maybe you do that over the course of several years. It all it’s all different for everybody. No problem there. But, you know, the one downfall it has is you can’t have access to big deals, necessarily by yourself, right? So it necessitates making This choice. And I say, the fund choice where you’re doing it with a bunch of people you don’t know. And you’re basically giving your money to a fund manager, you don’t know, that is not a good choice. And above that the bigger bigger choice is the sort of the Wall Street type choice. And that’s a really bad deal. And below that, if we’re looking at amounts of capital, by the way, that’s how I’m kind of ranking that, you know, you’ve got the big wall street stuff, the huge stuff, you know, all of their different funds and pooled money investments, even stocks, private equity, hedge funds, whatever we’ll call that, the sort of the Wall Street category, and that stinks. We all know that, okay. It’s great for the insiders, but it’s terrible for the average investor. And then below that, we’ve got the people that are out there, you know, syndicating hotel or apartment deal or whatever. You know, those are, I don’t know, they’re all Different, but maybe they’re raising $10 million to buy a hotel or an apartment or something like that. Those deals usually stink to, okay, because you’re doing it with a bunch of people you don’t know. And you’re just likely to get burned at some level with the three major problems. then below that, in terms of amount of capital raised is getting together with a few people, you know, like and trust hope, well, you don’t even have to like them, just know them and trust them. And in there, you’re basically going in on a deal together. Now, I’m not sure how it might be structured, you can structure it a lot of different ways. general partnership, limited partnership way, lots of different ways.
Jason Hartman 6:49
But you’re doing it with some people, you know, and all the people in the deal, or at least the vast majority of them, you know them so you’re really keeping an eye on it. It’s almost like being a direct investor. And then the level below that in terms of, you know, overall capital raised for the deal is where you’re just doing it yourself. You’re being a direct investor and, and, you know, I mean, we all know people who have started with very little and created some really nice wealth for themselves, just buying some houses. I mean, it’s so simple. And as humans, it’s funny how our nature is that we want to just overcomplicate everything. I do it myself all the time. And, and I see other people doing it and it’s, it’s a lot easier, I guess, you know, certainly to critique what other people are doing than to look in the mirror and to critique myself. But you know, I have this tendency to I certainly overcomplicate things a lot of times when the best things are really pretty simple. So, something to keep in mind there. So we’re going to take a call and talk about Pat today, I think it’ll be educational for you and enlightening. So we’ll get to that in a few minutes. But as I’m at this conference, you know, I, I’ve been hanging out with Doug, you’ve heard Doug on the podcast, he lives up here in Portland. Tomorrow, I’m meeting with one of our lenders. The conference ends tonight. And you know, these conferences, I really have expanded my horizons, my network a lot, you know, the past couple of years, I’ve really made it a point to attend a lot of conferences and get out there and see what’s going on in the world. And, you know, I’ve done this over over the course of years, but I don’t know I guess it was a little conference rut for a while where I wasn’t really going to too many things. You know, this has been a fairly interesting event. It’s called the world domination summit. Kind of a funny name. Definitely skews left wing for sure. I mean, heck, we’re in Portland. Okay. And it just always amazes me how inefficient conferences are, you know, I mean, it’s great, you get inspired, you learn some things, you meet some great people and stuff. But someone has got to do an expose a, really someone needs to take this on, and it’s not going to be me. Okay, so, so listeners out there, maybe you’ll do it. But someone has got to do an expo say, I never see anybody talking about this on these conferences, and the environmental impact of them. I mean, you know, this conference there, they’re talking about, you know, how we need to take care of the environment, all this kind of stuff. And, you know, when I was in Europe, a month and a half, two months ago, I was in Croatia, another conference, the same type of drivel, you know, we got to take care of the environment, but people are traveling to these things from all over the world and making a huge environmental impact. Now, I don’t think, you know, I think people are a resource. You know, I don’t I don’t think that’s all that bad. I think we should be good stewards. I think we should be conscientious about things. But I don’t think we should view ourselves as like this elite class and get up on stage and say that the rules apply to all of the little people out there yet they don’t apply to us, right? And that’s just what I hear over and over at these some of these left leaning conferences, and I it’s just really annoying to me. But anyway, enough of that. So the debt crisis. Wow, you know, we’re watching the news about Greece, it continues to unfold. Do you know that in Greece, over half of the population under age 34 is unemployed? And over half are Oh, sorry. No, it’s more than half. I can’t remember the number but it’s like a really high percentage. I am gonna, I’m gonna botch this one. I bet I just want to say it’s like 70% of the population under 34 lives with their parents in Greece and Spain is almost exactly the same, right? In terms of those numbers. Do you know that for 90 years, Greece has been an irresponsible debtor, they’ve basically been in a debt crisis for nine decades. Half of the time, they’ve been independent. It’s just it’s mind boggling. When you look at this stuff. And you, you look at what’s next and the domino. And I constantly am talking about this about, you know, the US and how much debt we have and how many unfunded mandates we have, how many obligations we have that we cannot possibly meet. Unless one of the six things happens, the six things I talked about, and just to highlight a couple of those, I’ve talked about them before. They’re Jason’s six ways to escape the debt disaster. One is to have garage sale. Another one is to increase taxes, not enough tax money to increase to solve that problem. Another one is to have technological innovation that is America centric. And you know, that, I don’t know, you know, it’s a wild card because nobody really can analyze the impact. It’s, it’s impossible to tell. But as you know, and I’d love to have some listeners come on the show and talk about this with me because I am wrestling with this big time. I really, you know, I, I like to make predictions. I like to think of myself to some degree as a hack economist and a hack futurist. And in doing that, you know, I’m talking to all these people all the time on all of my shows, not just the creating wealth show, about scientific advances about technology and in doing that, it is a Huge wildcard as to what technological innovation will mean to us. But if America is at the center of some of these things, and certainly the whole world will benefit from them. That could save us all. technology could save us all in the thing I’m really wrestling with specifically as it comes to technology is the subject of robotics. And the way they will displace workers in virtually every industry, the transportation industry, the I’m gonna say it, don’t laugh when I say this, but the poetry industry, yes. You didn’t know there was a poetry industry, did you? But computers and artificial intelligence can write songs. It can write poetry, they can write books. Do you know some of the stuff you’re reading now, is actually written by computers. It’s written by machines. Genes? Yes, it is. There are now algorithms and you know, the the burgeoning field of AI or artificial intelligence. That is literally writing some of the articles you read. There’s a company who does this I I actually talked to them on the phone about a year ago, and communicated with him. And for example, if you need an article, if you’re a media outlet, and you need an article on a sporting event, or the financial markets, think of it, it’s really not that complicated. For a computer to write about this stuff. You have an event, and with that event, you had certain numbers occur yesterday, you know, the Dow went up, the Dow went down, the NASDAQ went up or down or the s&p went up or down the Russell 2000 went up or down, you know, the the Nikkei index went up or down and in what happened, you know, that’s just some data. Those are just data points and you can put that into English, or any language for that matter with a machine? I mean, Google has made incredible advances in understanding natural language. And if you look at the apps like Siri, on your iPhone, or the, I guess there’s a similar product on the Android, I don’t know, I’m not an Android user. But this morning, for example, I said, on my phone, I said, Siri, tell me a story. And, you know, it came back and said, you already heard that. Or I already told you the story. And then I asked a few more times, and then it really did tell me a story was kind of funny. So try that on your on your iPhone. If you have one. ask Siri to tell you a story. So when you look at that, maybe this will save us all. But overall, as far as the debt crisis goes, and being the you know, the best house in the worst neighborhood. I think the United States has definitely eaten that seat because I’m We’re looking at a Business Insider article now of 14 countries that are spiraling towards a government debt crisis. This articles by Heather Stewart from the guardian. And let me just share with you a little bit of these lists. Okay. And you know, you think Greece is bad you think the US is mismanaged? And you know, we’ve got a lot of debt in the US. Certainly, you’re right. But the US happens to have the reserve currency. And like I always say, the military to keep it that way. So forgive me if I’m pronouncing some of these country names wrong by the way. They’re, some of them are rather small countries. Okay. Boo Hatton. Cape Verde, Dominica Ethiopia, Ghana allows mera Tanya, Mongolia, Mozambique Samoa. sao Tomi principie. I don’t know how to say that Senegal, Tanzania, Uganda. Those are countries that all have a very high risk of a government external debt. crisis. And these countries are currently in a government external debt crisis Armenia believes we use we’ve talked a lot about Belize over the years. Costa Rica. You know, many people think let’s just go invest in Costa Rica. Are you kidding me? Have you been to Costa Rica? Have you tried to drive on those roads in Costa Rica? The potholes are like the size of VW bugs. Sometimes it’s insane. Croatia I was just in beautiful Croatia, external government debt crisis already. Cyprus, you know about that they had the haircut where they just swiped a bunch of money out of the bank accounts. The Dominican Republic or the Dr. El Salvador, Gambia, Greece, of course, Greece, Grenada, Ireland, I was just in Ireland, Jamaica, Lebanon, Macedonia, the Marshall Islands, Montenegro, Portugal, Spain, Sri Lanka, St. Vincent and the Grenadines, Tanzania. Ukraine, Sudan, Zimbabwe. Okay. All of these are already in a debt crisis. The world is in a debt crisis. I mean, in those are just the high risk countries. There’s a lot of lower risk countries as well. I mean, look at what is going on around the world. I mean, China is an I had just had Harry dent, I just recorded an episode with Harry dent again last week, and that will air soon. You know, that’s, I think his fourth time on our show. And China does not look good. Okay. Russia does not look good. I mean, it this is a matter of relativity. Okay. It is relativity. So when we look around the world, there’s there’s a lot to consider. And when we look when we look at real estate investing, the United States has a very special real estate market. Very special, very unique characteristics. That are unrivaled in the world, having been to 78 countries myself, and some of those countries I’ve been to several times, okay, it’s not just a one visit, in many cases, I tell you, the US has got some pretty good real estate deals for sure. But if you are interested in this topic of robotics, and robotics, replacing jobs, and what that means to the economy, call into the show, leave a comment, go to Jason Hartman calm and just press that little leave a voicemail tab there on the right hand side of the website at Jason Hartman Comm. Leave your comment about what you think about robotics displacing jobs about the future. There’s an interesting Mises Institute article that I want to share in a future episode. Maybe we’ll have another we’ve had some Mises Institute guests on the show before over the years, you know about robotics and about how it’s it’s great news Because we don’t want jobs, we just want wealth and prosperity. Well, maybe that’s what the future holds. Maybe we really are moving into a state of utopia. Maybe we are, we will see. Remember, you’re listening to flashback Friday. New episodes are published every Monday and Wednesday. Or maybe we’re going to see as some say, 47% unemployment around the globe. Of course, we’ve already got that in Greece and Spain and, you know, many other countries like that that are close to it. In the United States with these minimum wage increases in the movement to increase minimum wage. We’ve got that in some minority communities. I mean, I think that’s just downright cruel. You increase minimum wage and you basically put people out of work. By the way, we haven’t talked much about it lately, but certainly, we had john Williams on Before from shadow stats, calm, very interesting insights into what’s really behind the government statistics. And we’ve talked about the unemployment rate, the inflation rate, how all of these things, the GDP, how they’re all manipulated, okay? Now, they’re talking about how the unemployment rate has fallen to 5.3%. That is totally bogus on so many levels, because it doesn’t take into account the labor participation rate, the much more important metric. And it doesn’t take into account the types of jobs. So we’re seeing, of course, manufacturing jobs disappear. We’re seeing many white collar jobs evaporate. And part of this is the alchemic economy. You know, part of it is robotics at some level. And when I talk about robotics, I don’t just mean some machine You know, building cars on an assembly line. Robots come in many forms. Okay. Some of them are just circuitry, nothing actually moves. They’re solid state robots, right? They they think they do high speed, high frequency trading. The robots are on Wall Street. Okay. They’ve displace jobs to their, and they’ve certainly displaced investor profits. We all know that for sure. So let you know what will this mean? I’m really struggling with it. I do not know I can’t quite formulate my thinking around this. But I think it’s critically important because I’ll tell you why folks, this is imminent.
Jason Hartman 22:41
It is like three years away five years away. By 2020. We are going to see massive shifts in the economy. We’ve got to be thinking about this. It is hugely Significant, and it doesn’t just affect the US it affects it affects the entire world. So a lot to think about there and a lot to talk about. So if you want to call into the show, and you know, talk to me real time about it, I’d love to have you do that. Just go to Jason hartman.com slash Jason, if you want to be on the show book a time with me real easy to do that there. And, you know, make some comments in there, so I know what it’s about and so forth. If not, just go to Jason Hartman calm and leave a comment on the voicemail. We’d love to hear from you. And those of you coming to our Chicago tour, look for an email in your email box. We’re going to be touring Chicago, Grand Rapids, and if you want, join us for our little side trip to the poster child for big government disaster, Detroit, okay.
Jason Hartman 23:50
You know, you may want to be packing heat for that trip. I don’t know. I haven’t been there in a while and here it’s pretty bad, but we’re gonna go kind of look around there. Just for a little while. And We will see you on what is it Thursday? Yeah, we’ll see a Thursday morning. We’re going to meet at 830 at our hotel, and then we’re going to our first provider, we’re going to have breakfast there. We’re just going to spend a great day together. So I’m really looking forward to it and look for an email with details about that. And you can get the full details there. But 830 Thursday morning, that’s when we need to meet you. So you know that that’s our little semi private Chicago, Grand Rapids and yes, Detroit. I can’t believe it. property to her. Hey, Detroit’s right there. We might as well go check it out. So it’ll be interesting to say the least. Alright, let’s get to our caller today and let’s talk about investing in funds or maybe why not to invest in funds. Here we go. Hey, we’ve got a listener call in and it is Andrew who I know through one of my mastermind groups. He’s looking at a real estate deal in Texas, Andrew How are you?
Andrew 25:00
I’m doing great. Thanks for having me. Jason.
Jason Hartman 25:02
Yeah, well The pleasure is all mine Tell us about your deal.
Andrew 25:05
Okay, so um it’s really in the very early stages but it’s it’s it came to me through a walk my brother who I trust and gentlemen have one of his close friends that he’s known for a significant period of time. who’s done from what he says very well in real estate and my brother has a lot of trust in him but he doesn’t have the time to really look into the deals do the due diligence and in be the competent investor that he wants to be so I’m, I’m I’m filling in for him and I’m going to be doing the investment well, potentially I’ll be the one doing the investment if everything looks good, so I kind of want to get your perspective on the the handful of details that I know and I’m going to be getting more information as, as as as we proceed down the line, obviously before I make any agreement. I’m gonna have more information than I have now. But I kind of wanted to run past you kind of information that I know so far. Okay, super.
Jason Hartman 26:07
So don’t tell us exactly where the property is located. But it’s a it’s a Texas property. And it’s two apartment buildings. Is that correct?
Andrew 26:16
That’s correct two apartment two buildings, which is attractive to me. I think that’s a better direction to go rather than just individual units. Both of the apartment buildings have 32 units.
Andrew 26:30
And they’ve done they said they’ve done due diligence on it. And there weren’t any surprises. And properties are an excellent, excellent condition. And they’re planning on. Well, do me redo some details on it.
Jason Hartman 26:46
Yeah, yeah. I’m going to ask you the income they produce, how old they are all kinds of stuff. Also, I want to get your take on why you think this is better than single family homes, probably because of the deal size, I’m assuming, but tell us what is the seller Asking for the property. And how much income does it produce every month?
Andrew 27:04
I don’t have those exact numbers in front of me, Jason, I would have to, I would actually have to, I would actually have to get some of that information from, from the gentleman that I’m talking to.
Jason Hartman 27:16
Okay. So that is obviously critically important, right? So first of all, do you have a price
Andrew 27:22
yet? Well, they’re breaking it up between several investors. So the they’re going to purchase the 232 unit buildings under a company, and they’re going to have multiple investors who are going to invest chunks of it. Who is they? This gentleman and his his partner who have approached me about the investment.
Jason Hartman 27:43
So what you’re saying is he’s not actually selling the property as one piece. He’s selling a bunch of little shares and basically syndicating it to investors.
Andrew 27:51
He’s not selling the property, he’s going to purchase the property with me as a partner so him and I would be partners along with maybe you One or maybe zero other investors, we would all put down chunks of money, you know, own different percentages of the two properties. Okay, so what’s the partnership structure he’s offering? Is it a true partnership? Or is it an LLC where you’re owning shares in it? Or, you know, all that kind of stuff? We haven’t gotten that far yet. And kind of one of the reasons I reached out to use because I don’t know the exact questions I need to ask in a situation like this, whether it’s a single unit, or a multi unit dwelling, I don’t know the exact questions I need to be asking in this situation. Okay.
Jason Hartman 28:29
So what’s the likelihood Andrew, of you doing this just with with him? Or, I mean, is it going to be many investors or you just have no idea yet?
Andrew 28:40
I don’t know yet. Exactly how expensive the the properties are, and how large his personal investment is going to be.
Andrew 28:51
So what makes you
Jason Hartman 28:52
interested in this deal? I mean, there’s so little information about it. I know that you’ll get more information, but what why are you interested in it? I mean, there’s a zillion deals out there.
Andrew 29:00
I want to do business with somebody I trust, obviously, but I’m really looking for the questions that I need to ask before I even consider the deal. All that I have right now is very basic information, and they’re going to be giving me more information in the future. But I don’t know the proper questions to ask.
Jason Hartman 29:15
Well, there’s definitely no shortage of deals. Okay. I mean, you know, deals are all over the place. But I should actually clarify that whether they’re actually a quote, deal unquote, is quite another question because most of them aren’t very good deals. So you know why I’m saying you can buy properties you can buy into syndications and partnerships quite easily. Those are plentiful, but most of them aren’t very good deals. So the first thing we’ve got to do is we’ve got to get a price. We’ve got a we there’s just a zillion details. We need to know what do you know you said you had some information you wanted to share about it.
Andrew 29:52
Yeah, I can give you I can give you the outline as it’s been given to me. They’re going to be running This is a single entity, because they’re adjoining apartment complexes. Their conservative five year projection is returned 100% in five years. Their Class B properties built in 1986 in a in a great location in between two major freeways in the sub market and the properties are already stable, meaning that there’s no vacancies and the rents for class B properties in this area are increasing more than in any other class. From their analysis. They say that they’re planning a $3,000 door in rehab, which will be completed as units become vacant. And the rehab is virtually offering interior improvements because there’s very little required on the exteriors. The interiors are in excellent condition and are easily rented as they are due to the location in excellent condition. The property management company does not even need to market or advertise and they have absolutely no issues renting the units.
Jason Hartman 30:58
Did you say they were 100% occupied? Had no vacancy at all?
Andrew 31:01
Yes, that’s correct. They’re 100% occupied at the moment. Okay, that’s that’s pretty awesome. Okay, go ahead, and once they take over in the unit’s become vacant, they’re gonna make improvements to update with newer fixtures, lights, kitchen backsplashes interior paint. In some cases, they’ll also update the flooring. Now based on their market their market analysis, they should be able to get into additional 20 to $25 a month in rent, if they do not make any improvements just by raising the price, but if they make some minor improvements, they should be able to get an additional 50 to $75 a month. If they do the full upgrade, including floorings, we should be able to get an additional 75 to $100 a month. So from their pro forma they’ve only bumped the rents rents up by $25, which they say is conservative, and they use a economic vacancy of 10%. But the management company who conducted the market survey believes that 8% should be achievable. So 10% This conservative is what they say. And they did not increase their their other income but they’re they’re considering charging for covered parking Patrick cable test in trash which will result in even better returns. Okay, great.
Andrew 32:14
Well, you know, I think like,
Jason Hartman 32:16
Look, you know me I mean listening to the show I don’t like funds or really investing with with groups unless you really know the people. I mean, obviously if you’re going to be a direct investor and everything, you know, it’s going to keep you small. If you want to do something big, eventually you’re going to have to partner up with someone probably right or it’s going to limit your growth. So I can totally understand that. If this is a fund type deal with a bunch of investors. I would I would definitely shy away from that as as you probably know, without me even saying that.
Andrew 32:49
Hey, Jason, can I ask you a question on that? So, um, what in particular about that specifically, makes you want to shy away from it is it is it just having that many people involved makes the deal complex can introduce a known legal issues. What is it would make you shy away from something like that?
Jason Hartman 33:09
Oh, yeah, great question. Well, you’ve heard me talk about my 10 commandments of successful investing. And number three is thou shalt maintain control. And you know, whenever you relinquish control of the investment to somebody else, you leave yourself susceptible to the three major problems. Number one, you might be investing with a crook number two, you might be investing with an idiot, assuming they’re honest and competent. The third hurdle is they take a huge management fee off the top for managing the deal. And most of these guys running funds or partnership type investments of any kind, are usually just looking to skim money off the top of the deal, and that’s that’s how they make their money. A lot of them are involved and engaged in the construction themselves. You know, they have these like vertically integrated businesses, and you just really don’t know what you’re getting until later, unfortunately,
Andrew 33:58
okay, that that makes sense. So that should be one of the questions I asked is, is they? Are they taking a management fee or a cut? Because they’re funny, they’re, they’re spearheading the deal.
Jason Hartman 34:07
Right? And they will definitely take some kind of fee for that. But beyond that, Andrew, there are so many more subtle ways in which they do this. You know, for example, if you have an investment fund, and you want to bring other investors into the fund, even if it’s a small fund, like it’s you, the owner who’s doing the kind of the syndication deal, or the buyer, I should say, and they want to bring five other investors in, well, you know, do they have to go into wine and dined them? Do they have to travel somewhere, and all that’s happening on your dime most of the time, right?
Andrew 34:42
Yeah, right.
Jason Hartman 34:44
So I just, I just don’t like that. There’s also a lot of cookery that goes on and it may not be overt cookery in the construction side of the business. I will guarantee you that any of these guys that have big projects when they want another project done for Or they want their home remodeled or some favoritism from a lender, any party in the transaction. There’s so many people in the transaction, that they’re going to get some favoritism. And basically, that cost is going to be built into your deal. And so I There are just so many reasons, I just don’t I just totally believe in being a direct investor, you know, I mean, I have partners in some of my deals, and most of them have worked out great. You got to really watch them. And when it’s a bigger deal, and there are so many little subtleties, you know, you’re not going to have time to figure all that out, even if he can, you’re not a forensic accountant. And even if you were who wants to spend the time doing that,
Andrew 35:38
right. Well, and that’s that’s kind of sort of a catch 22 because, you know, one of the reasons a deal like this would be attractive to me is because I don’t have a whole lot of experience myself. I believe, you know, this is a personal family friend that’s been vouched for. So that inspires a little bit confidence in me. And I don’t have the time to manage it myself, but this is what they do full time. So I think the question is very good. Is there a management fee because that hasn’t been brought up at all? I because before you mentioned that I was assuming that they’re just looking for investors to fill out the remaining cash that they need to get a large property.
Jason Hartman 36:21
Just a reminder, you’re listening to flashback Friday, our new episodes are published every Monday and every Wednesday. Right? You know, usually the way this stuff works is if the deal is that good. They’ll just buy it themselves, you know, they don’t need to take on partners. Now granted, nobody has unlimited amounts of capital, so you can’t buy every deal yourself. Right? But if the deal is really good, and if they’re not looking to, you know, milk, the the partners and the investors, then usually they’ll just figure out a way to use bank financing or some other type of financing to buy the deal. Even if it’s hard Money financing. It’s cheaper than having partners and what I mean is hard money financing at high rates, you know, it’s it’s usually easier than actually getting real partners, you know, because partners are like the most expensive part, you know, for you to split the equity and the profits with someone if the deal is good. So, I mean, is this a Is this a big company Tell me a little bit about who the promoter of this deal is.
Andrew 37:24
Okay, so here’s I’m
Jason Hartman 37:26
just just always remember Bernie Madoff had tons of friends.
Andrew 37:30
Exactly. So they already own a properties. They’ve been doing real estate for a long time. But if done on smaller deals, such as one to four unit buildings, about two years ago, they started getting involved in larger complexes. Some are newer deals. And the deals they make are the deals. I’ll read what they’re saying the deals we are in either make or projected to make 10 plus percent cash on cash return year in double our money in Five years or less, a couple of the deals are already being sold again, because our five year projection has been met in two years. I would not say this is common though. For the sake of discussion, we project these two properties will make it 10 plus percent return a year on cash on cash and double money in five years or less.
Jason Hartman 38:17
Wow, that’s those are pretty awesome projections. But remember, you’d be hard pressed to ever hold somebody accountable for projections. Okay. You know, you can’t sue a fortune teller. Okay. You know what I mean? You know, what I would definitely do if you really are, you know, dead set on entering into a deal like this, is you definitely want to talk with their investors who’ve been in their other deals, the ones that they claim more so good and so forth, and talk with a lot of them. And, you know, I kind of know your dilemma, Andrew, and although we haven’t totally, you know, really talked about it here, but I know you’re a very successful businessman, and you want scale, you probably kind of look at what we talked about on the show and think, you know, I don’t want to fool around With buying six houses, single family homes, right? Because it’s not, it’s not big enough for you, it doesn’t impact your net worth enough, right? I’ll tell you something, if nothing else as considering it part of your education, just having a few little houses, you’ll learn a lot, you know. And you’ll you’ll, you’ll just kind of get your feet wet with that, and you’ll kind of see how real estate deals work. So that training is pretty invaluable if you just consider it training. If nothing else, that’s a consideration. But I tell you, I just do not like funds. There’s just too many ways. And I’m not saying they’re illegal ways, but sometimes they are. There’s just too many little subtle ways that the investor is just losing out, you know, you’re just not reaping the big profits, the big profits or to be the promoter that you know, or just do the deal directly yourself.
Andrew 39:55
Yeah, that makes sense. That makes sense. So what would be the Go to questions I would ask to do the due diligence on this besides just know your you know, your two great pieces of advice to talk to the other investment investors in their other deals, if any. I’m not sure there are other investors and other deals since they were smaller. Ask him if they’re taking a management fee to handle the deal. What are the questions would you ask Jason
Jason Hartman 40:22
asked them to disclose all of their fees and disclose whether or not they own or are somehow involved with the construction company that’s going to do the rehabs. If they’re involved with any of the other parties in the transaction, okay. And say you want them to disclose any revenue they get from the deal or any benefits they get from the deal at all. But see, the problem with questions is, they don’t much matter because people can lie. They can spin doctor, you know, they can shade the truth. You know, what you really need to do is read document, read every word of their document with a skeptical eye. And just notice in that document how many disclaimers they probably have, how long it is, you know, good deals don’t need to be complicated and you don’t need super long documents. I remember one a buddy of mine who’s a really nice guy. He’s started a fund invest in real estate deals, and I just offered to kind of throw him a bone and say, Look at you know, what’s your minimum? He said, 25 grand, I said, Well, I’ll give you 25 grand, you know, just just to kind of be involved with him because I because I like the guy, right? Anyway, he sends me three, I think it was three documents. And the main document was 138 pages long. And you know what, I emailed back to him and I said, Hey, do you have an audio book version of this?
Jason Hartman 41:49
You know, it’s just absurd. You don’t need lengthy documents like that unless you’re just looking for ways to paper over things and Give yourself a bunch of outs, you know, people complain about the real estate contract, the standard forms, you know, being eight pages long, or whatever they are, depends on the state and you know the locality. read every word of the document, it’s much more important than the questions, the questions you ask them aren’t going to be that important. It’s the questions you ask their other investors, and try to really be somewhat suspicious about those other investors. You know, are they involved with him? Do they have an agenda in some way? Try and verify them from multiple directions? I mean, one deal that I invested in, I knew the other investors personally before investing before I was even approached on the deal. And that made me feel a lot better because I knew, you know, it would be really hard for them to be shills unless they were setting up this, you know, big scam from a long time ago, right, which certainly does happen. But that would have been much more complicated to do. So. It’s really nice when you can kind of like verify that from a third party. Okay.
Andrew 43:00
agreed and to be quite honest with you, this isn’t. This isn’t something that I would be interested in if it had just come out of the blue but it like I said it is a family friend. It’s somebody who’s vouched for and I trust. But I completely agree with you. And I promise I’ll have plenty more questions when I actually get a legal document from the good stuff.
Jason Hartman 43:20
Well, hey, let’s have you back on to look at that when you get some paperwork and you know, a whole private placement memorandum. You know, whatever you got whatever you get from them. Let’s talk about it on the show. Okay. Okay. Sounds fantastic. I appreciate it. All right, Andrew. Hey, thanks for being on. A lot of people have the same kind of questions you do.
Andrew 43:36
Thank you, Jason.
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