In this Flashback Friday episode of the Creating Wealth podcast from February 2016, Jason Hartman started during the Venture Alliance Group trip in Dubai. He introduced one of the first ever Venture Alliance members, Gary Pinkerton and the pair discussed what drew Pinkerton into the world of real estate investment, as well as the importance of surrounding oneself with like-minded people.

Naresh returned to the show to ask Hartman various real estate investment questions, one being about commercial versus residential investment property. They also covered topics of single-family homes, how the need for residential properties is never outsourced to other countries, and how the oil industry is affecting US oil towns.

Intro with Gary Pinkerton in Dubai

Hartman introduces the Creating Wealth episode in Dubai of the United Arab Emirates, during one of the Venture Alliance group trips. Four weekends out of each year, Venture Alliance members travel to interesting new places. He introduces Gary Pinkerton, an attending member and one of the first members of the Venture Alliance group.

Pinkerton states that, like many, he read Robert Kiyosaki’s books and wanted to get rid of his W2 job. He has always been inspired by great architecture and enjoys interesting buildings. He notes that he wanted to apply his interests and create a passive investment. Through owning properties, he has moved from being an employee to a business owner after he first started listening to Hartman’s podcast in 2011.

He mentions that he grew up on a farm and might differ from the standard investor in a way, because he enjoys working with his hands. He thought about rehabbing properties initially and has worked on some of his own properties. Pinkerton states that he wanted to consistently increase his net worth and cash flow, so he wanted to leave the stock market. He moved from mutual funds to real estate investment because he wanted to invest his money into something that moved predictably.

Pinkerton explains that he loves the Venture Alliance group and has learned a great deal at the events by surrounding himself with other people who have taken big leaps financially. He states that he finds it rewarding to learn from others about their businesses and their experiences.

Drawing Inspiration from Those Around You

Hartman recalls a saying by Jim Rohn, that the amount of the money a person earns will be the average of the five people that he spends his time with.

Pinkerton mentions how important he feels it is to hang around with like-minded people in an informal environment. It’s a benefit to be around people that are going in the same direction you want to go and notes that we really have to make an effort to choose our peers. As we get older, we need to choose who we want to be around for our own benefit.

He mentions that it’s helpful to be around people who inspire him to do more. He states that he wants to follow through on his challenges when the people around him do the same. In this sort of environment, you’re accountable for the things you seek to do.

When it comes to tips and advice, Pinkerton states that he has made mistakes, sometimes expensive ones, but there’s always something to learn from them. One of the biggest lessons is to move forward and not get creative. By this he means that it’s important to look at the market rent when looking at an investment property. If you can get appreciation from the property, that’s great, but don’t expect that you’re going to always get rent rates that are higher than the 1% to market value.

Is Renting a Waste of Money?

Naresh joins the show again, and has real estate questions for Hartman to answer.

He explains that before getting into investing, he frequently heard the mantra of people wanting to buy a property because they believed renting to be a waste of money. He states that he’s read articles and listened to interviews Hartman had where professionals have broken down the math between owning and renting, but he still hears this same claim.

Hartman answers the question about rent being a waste of money by asking if buying food was a waste of money, or if having a car that you pay a lease or finance payment on is a waste of money? He asks if the money is actually going down the drain.

In this sense, he points out that having a place to live is necessary. We all need a place to live, but is it more economical to own a place to live or to rent a place to live?

He explains that there are a lot of people who don’t get it. It’s better to rent than to buy in most cases and he gives the example that, if you’ve got a property worth more than $250,000 you can take that property value and buy two homes for $125,000 each and rent them out. If you rented these two properties, you could likely get $2,500 a month for them together.

If you can rent for less than 1% of the value of the property and use the capital to acquire other properties for 1% per month, you’re arbitraging that expense. You’re usually better off renting than owning.

Hartman explains that if it’s a cheaper house, at $125,000 or less, own it. You’d pay about the same in rent than you would owning the home and paying a mortgage.

Naresh states that he rents in Tampa, Florida and percent-wise, he pays less than .6% of the property’s value. He asked the landlord for the purchase price of the property and she told him. After figuring out the math, his rent is about .6% and getting a great deal.

Hartman explains that if Naresh owned the property, it would be an expense. People will always need a place to live. It’s just a good idea to get that place to live in the cheapest way.

Poor Communication in Writing

Hartman mentions communicating through writing and explains that our creator did not intend for us to communicate with each other by written text. Even letter writing is not the way we are meant to communicate. Years ago, when he was picturing his future and thinking about his success, he didn’t envision success as being seated in front of a screen reading things all day.

He explains that we are meant to communicate by voice, as there is more data to voice communication than there is in written text. Speaking has tone, inflection, and cadence. He mentions that we have all experienced losing friendships over written text, because if you write something in text and someone misinterprets it, they get angry.

He refers to a statement by Steven Covey, who says that we judge ourselves based on our intentions, but we judge others based on their actions.

Hartman surmises that written text is a low-quality method of communication, and that Voxer is his solution for it. You can contact Jason Hartman through Voxer by his username, JHart88.

Commercial VS Residential Investment Property

Naresh states that he realizes that Hartman focuses on residential investment property but asks if he has any views or opinions on commercial real estate.residential investment property

Hartman explains that there is a big misnomer to commercial real estate, and that a residential investment property with more than four units is viewed as commercial property by lenders and real estate laws. He explains that he isn’t a big fan of commercial real estate in the office space setting. They’re complicated to manage, and the leases are complex. He mentions that he has signed several commercial real estate contracts for his own business over the years.

He notes that there are a lot of pages in the contracts, and that the offices are usually built out custom. There are parking considerations to make, and a lot of time needed to figure out the leases. Lawyers often negotiate the lease, which can end up costing a lot of money. Contractors are sometimes tearing out walls and it can lead to construction issues. There are also issues where landlords can be held liable for the cost of repairs to the buildings, or injuries incurred. Hartman notes that the returns aren’t that good either.

Large Investors Accept Less Returns

Hartman explores the reason why there are office buildings still being bought, and the reason is that large investors with a lot of capital to deploy have to put their money somewhere. Often, big offices and industrial buildings are owned by insurance companies. They love real estate investing, but they often accept less returns than a smaller investor would.

Hartman explains that one would think that if you’ve got a lot of capital, you’d try gaining the best deals. It’s the opposite sometimes. With large investors, Hartman states, when it’s someone else’s money being used, smaller returns are accepted.

He mentions that personally, he would rather buy homes. Housing cannot be outsourced to other countries like work can. Everyone needs a place to live, and his plan will work as long as the population of a specific market doesn’t decline. Population decline is something to watch out for.

Outsourcing Business and Commercial Real Estate

Hartman points out that unlike residential investment property, commercial uses can be outsourced to other countries.

Naresh agrees, explaining that he has a couple of businesses and almost everything is outsourced overseas. It’s not just e-commerce work that’s outsourced anymore, stating that he knows radiologists that can work from home. There are radiologists in India that are evaluating the charts of US patients. It’s much cheaper to hire in India than it is to hire in the United States.

Even in retail, we think we need to physically go to the store to purchase clothes, but there are online marketplaces. Naresh mentions that some stores won’t need office spaces, while some still may.

Hartman explains that he does a good deal of his buying online, as the internet lessens the need for physical retail markets. Outsourcing and hiring work-at-home employees or contractors also lessens this need. Still, people will always need physical places to live, he says, especially if they work from their homes.

Don’t Get Ripped Off by Gurus

Naresh reflects on last time he spoke with Hartman and the two discussed the basics of getting started as a real estate investor. He mentions needing money to start in an ideal situation, like 25% for a down payment and 5% in reserves. He asks what his options would be if he didn’t have any money and was poor but desperate to invest.

Hartman explains that this method, having no money down, is a lot harder to go. It requires a lot more work, like soliciting partners or finding creative deals. He advises listeners to be very careful not to get ripped off taking this route. There are a lot of gurus that claim to help in these situations, and they can be very sleazy. It’s best to educate yourself as close to free as you can. There are a lot of creative opportunities and Hartman mentions that something can be done with only 20% for a down payment and 3% for closing costs. There are ways to work creatively to get some of these sums included in the deal.

Is Deflation a Big Threat?

Bringing focus to the economy, Naresh recalls a debate that he and Hartman had on the Fed rate two years ago. He states that he still thinks that deflation is a huge threat to the US. He explains that we are not in a deflationary period right now, but it’s still more of a threat than inflation. The most recent inflation rate was negative.

Hartman explains that trying to time inflation, deflation, and stagnation is a fool’s errand. The point is, he says, to get your money in and get into the game. In a deflationary environment, everyone is looking for yield and it’s hard to find. If you’ve got 2% inflation and $1 million in real estate loans, you’re getting about $2,000 a month paid off. You’re also getting the yield.

He also mentions that depreciation tax benefits are 25% better on residential property than they are on commercial property. Even in deflationary environments, rents still go up. The rent income component has bucked the trend, he says.

Naresh explains that he fell into a trap of the beginner in real estate investing mindset. He states that he was looking at the US as a whole and the market as a whole. He notes that it’s important to look at individual markets and once Hartman told him this, it changed the way he looked at real estate.

Oil Exploration Cities

Naresh notes that the price of oil dropped to $30 a barrel and asks Hartman for his thoughts on what’s going to happen to oil cities.

Hartman states that they are not immune to the oil price crash. If you have an economy based on oil exploration, and the price of oil becomes cheap, exploration dries up. It’s a delicate component. Oil is still high in demand, he says. If you have 15% of the given economy based around oil exploration, though, and there’s a trickle-down effect, it’s significant. In places like North Dakota, where there’s more oil exploration, there could be a real issue.

Hartman mentions that there are concerns about Houston. There are some signs of issues but not a great deal. There have been rounds of layoffs in the oil industry, but oil exploration is still delicate.

Naresh reminds Hartman that he’s from Houston and grew up around the energy corridor. There have been rounds of layoffs occurring in the oil industry since 2014. He mentions that when he was a small child, he was affected by the oil bust. The public schools went down the drain when people were leaving the area and as a result, he had to go to private school.

In wrapping up the episode, Hartman reminds listeners to visit for valuable and informative courses on real estate investment, as well as visiting for more information about the Venture Alliance group and what benefits are included with membership.