Happy Financial Independence Day! Jason answers some very important fundamental questions from Ken, a longtime podcast listener.
Announcer: Welcome to Creating Wealth with Jason Hartman, President of Platinum Properties Investor Network in Costa Mesa, California. 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 multimillionaire, 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: Good afternoon and welcome to another edition of Creating Wealth. This is your host, Jason Hartman. I want to wish all of our American listeners around the world and especially in the U.S. a very happy Independence Day. Tomorrow is the July 4, the American Independence Day. And let’s talk about on this podcast financial independence. Isn’t that what we’re really here for, listening to the Creating Wealth Show, financial independence?
Money is really, in today’s world, the most powerful force on Earth and it is so critically important that we become financially independent. It is so important when you look at what’s going on with the government in the U.S. and really most governments around the world. Most governments are literally bankrupt or on the verge of bankruptcy because they have fiat currencies, currencies that aren’t backed by real assets, No. 1, and they have inflation, and most all governments around the planet spend more than they earn in one way or another.
So what does that mean? In order to get out of debt, they inflate their currencies and devalue them, and we as smart listeners to the Creating Wealth Show know how to get around this and we know how to actually have this benefit us. But financial independence is very important. If you are in the U.S. and you are expecting Social Security, don’t hold your breath. If you are expecting Medicare, it’s even worse. So as we grow older, the problem in today’s world is we are going to outlive our money. We are going to have too much life at the end of our money. So we’ve got to really, really take responsibility for becoming financially independent.
So for our American listeners, Happy Independence Day. For all of our listeners, let’s make this financial Independence Day, and keep listening. Go back and listen to our old shows and learn about financial independence. And more important than just learning about it, Nike has a slogan: Just do it. If you don’t take action, listening is no good. The world belongs to those who act, so make sure you act on this knowledge and pile up on good, high quality, investment-grade debt, and let inflation pay it off.
Next week, we’re going to talk about some new interesting concepts that you will really, really like, but before we get into today’s show where we will do a Q&A with one of our clients, I want you to hear. I think he had some interesting questions that will illuminate a lot of what we’ve been talking about on the show, and went to the Ask Jason section of the www.jasonhartman.com website and had so many good questions, we decided, hey, let’s just interview him and get him on the show. So we’ll go to that in a moment.
But we have two events coming up. Hopefully, you can join us. People fly in from different parts of the country for our events and, of course, if you’re local here in Southern California, be sure to attend our GoZone seminar, where we talk about the Gulf Opportunity Zone on Tuesday evening. And then our following event is our next Creating Wealth 202 event, which is on July 19. And more information about the events are at www.jasonhartman.com. Click on the Events section and now, let’s go to a discussion we had with one of our clients, kind of a Q&A, and the reason this is important is a lot of you I know have the very same questions. So let’s go to that now and we will look forward to talking to you after this, the following week.
So Ken, first of all, I want to thank you for being on the podcast.
Ken: I am ready.
Jason Hartman: Well, you and your wife, Dawn, came up with some good questions for us. Tell us a little bit about how you found us and what your background was. I think you said you’ve been listening to the podcasts for about a year, right?
Ken: About a year, I’ve been listening to this podcast. I was on iTunes and noticed that you were up there in one of the top 20 podcasts in the business investing section. And I’d never done any real estate investing in my life. I’ve always been in the stock markets, so I was curious. So I started listening to you and it just makes a lot of sense.
Jason Hartman: Fantastic, and where are you located, Ken, just so the listeners have a point of reference?
Ken: Sure. I live up in Rockland County, New York, about 25 minutes north of New York City.
Jason Hartman: Excellent, excellent. Well, we’re glad you listen to the podcast and glad you enjoy it, and you had some good questions here and I just wanted to go over and answer those for you and I thought those questions are so salient that a lot of our listeners would have the same exact questions. So we thought we’d answer them for you and Dawn, but also for everybody else, so we appreciate your participation. So what is your first question, Ken?
Ken: Okay, my first question is what happens if a tenant doesn’t pay the rent? I mean I’m managing properties that are hundreds or thousands of miles away from here, so that’s always a concern for a landlord that some of his tenants just might not pay.
Jason Hartman: Yeah, that’s a great question. Here’s the situation. Whenever you’re in a business relationship, you’ve got to expect the other party to perform. When you have a tenant, you’re basically in a business deal with them. You’ve got to have them perform to make the deal work, and you know when you loan money to someone – I know a lot of people who invest in trust deeds and notes and mortgages and they’ve got to get the borrower to pay them back.
So certainly our whole plan depends on tenants paying rent and I can tell you that I’ve been an investor myself for 21 years now and I’ve only had one instance where I’ve had to evict a tenant, and I haven’t counted the exact number of tenants I’ve had, but there’ve probably been well over 100 of them now. And you know if they don’t pay rent, you can evict. You, as a landlord, have rights.
And one of the things we really look for, Ken, is we look for investing in areas where the laws and the customs and the regulations are pro-landlord to the extent possible. And two areas of the country, and there are more areas than this, but two areas of the country that are typically pro-tenant are New York and California. So we avoid those areas, No. 1, because those markets aren’t very good markets right now in which to invest, but also because they tend to be pro-tenant areas rather than pro-landlord areas, and we want to be in areas that are friendly to our cause as landlords.
So if the tenant doesn’t pay rent, we can get them out swiftly and quickly. And it doesn’t cost very much to evict a tenant either. In this area, the laws and the eviction fees vary from state to state, but it’s usually around $200.00 or so that you evict a tenant, and so your risk is limited to a few things. No. 1, the tenant could not maintain your property correctly. You’ve got a security deposit for that, but of course, they can damage it to an amount higher than the security deposit. That is a risk you have as a landlord.
No. 2, the tenant cannot pay rent and you have a time risk. So for example, you’ll get a security deposit. You’ll get first month’s rent. Rent is paid in advance and so it might take a month to get them out of the property and you have some time risk for the time that they may not be paying you rent. And then the third risk you have is eviction fees, so you might spend $200.00 with an eviction service, which is basically a local lawyer in the area that handles the eviction for you. Of course, you can do it yourself, but you wouldn’t want to. It’s not worth your time.
And your property manager – remember we interview, pre-screen, and recommend property managers to our clients, so that property manager will be on top of it. They know the eviction services that are good at their job in their local area and they know how to manage this process.
So again, you do have some risks. There is no risk-free investment on Earth.
Ken: I know that in the stock market.
Jason Hartman: Yeah, you know that with the stock market, but really, the riskiest investments, frankly, are things that appear risk-less, like savings accounts because you know you will lose investing in a savings account or a mutual fund usually because by the time you pay for taxes and inflation, you’re pretty assured to lose money. Does that answer that question or is there more to it?
Ken: [Inaudible]. I don’t want to go off on a tangent here, but that’s been the biggest revelation from your podcast is most of us grow up with the education from family and everyone that debt is bad, that you’ve got to save money in a savings account, develop a budget, be disciplined, and what you talk about in all these podcasts is that the dollar obviously is getting weaker and weaker, and with a weak dollar, making 2 or 3 percent in a savings account, obviously, you’re losing money. The dollar’s becoming cheap.
Jason Hartman: Yeah.
Ken: And what you’re saying is a mortgage is great because, for example, a 30-year mortgage – my father took his mortgage out in 1969 and money he borrowed in 1969 was worth a lot less in, let’s say, 1984 while he was paying off the loan on his house.
Jason Hartman: Right.
Ken: And it’s such a revelation. It’s a whole different way of thinking.
Jason Hartman: You know, Ken, that’s a good point. Remember that inflation, which is what we have now and what, in my opinion, is going to get a whole heck of a lot worse in the future, which is an opportunity for us as prudent investors, but inflation basically redistributes wealth. And here’s how it redistributes wealth. It redistributes wealth from creditors to debtors, so lenders lose money with inflation and borrowers gain wealth through inflation because the amount of debt they have is destroyed by inflation. And inflation is really a wonderful benefit as long as you are a borrower, a debtor, and you owe money to somebody else. The person you owe that money to is getting really hurt by inflation.
And that brings me to kind of another tangent on your first question. What happens if the tenant doesn’t pay rent? See, remember virtually any other investment you have in some way or another, Ken, someone owes you money. If you have a business and you sell widgets, you’ve got to get paid by your customers. If you buy a bond, a bond is basically a loan. If you deposit money in a savings account, you’re basically lending it to the bank, assuming the bank will pay you back. And of course, you have FDIC insurance on the first $100,000.00 and a lot of banks are really on very shaky ground nowadays. I mean we are going to see, in my opinion, several bank failures over the next few years.
Ken: Funny you say that because there’s a rumor going around on the web that, for example, this Wachovia might be taken over by Wells Fargo. But these are rumors and nothing would surprise me.
Jason Hartman: Yeah, I agree with you. It wouldn’t surprise me either and you’ve got to remember something, everybody listening, is that FDIC insurance first of all, only works for the first $100,000.00, but No. 2, in a really disastrous scenario, I have heard – and I am no expert on this – but I’ve heard that FDIC, even if they pay your claim for your first $100,000.00 sitting in that bank account getting eaten up by inflation and taxes, and remember the IRS doesn’t recognize inflation, so they penalize you on inflation, okay, unless you’re a borrower. The FDIC has a long time to pay you back is what I have heard about those FDIC insurance policies, so something to keep in mind, but it’s a whole other tangent.
So in every scenario like that, you’re depending on someone paying you and the worst scenario is being a lender. See, I also, Ken, have invested in notes where I have purchased trust deeds on properties and essentially stepped into the position of being the lender. And in being the lender, I was told by the person who sold me the note that I would get 19.99 percent interest. A second trust deed, subprime borrower. Well, guess what happened. When I bought this last note that I purchased, which hopefully will be the last one I ever buy in my life – when I purchased that note, just a little over a year ago, there was about 28 percent equity in that property. The loan to value ratio was 72 percent, so I thought, hey, I’m pretty protected. Well, guess what? I’m not protected anymore because there’s virtually no equity left in that property now, okay?
And I hardly ever get paid and if I do get a payment, it’s for a fraction of the full amount. It’s almost never on time. I would much rather be that person’s landlord than be their lender because if I were their landlord, I can kick them out much faster than I can being their lender. So it’s just a better deal to be the landlord than it is the lender.
Okay, your next question.
Ken: Yes, my next question. What happens if the property is subject to natural disaster? I mean, obviously, I know you have insurance, but what does that mean? You have insurance. Is it going to cover everything?
Jason Hartman: Well, maybe or maybe not. That’s a great question so let’s kind of examine that one. First of all, I want to start off by saying that the best insurance when you own a property is a high loan balance. What do I mean by that sort of tongue-in-cheek answer? Well, this is what I mean.
If you have a low loan balance on the property and you have a lot of equity or if you own the property free and clear, God forbid – I hope no one listening owns their property free and clear because you have a lot of risk when you do that. When you have a low loan balance and you have a lot of equity, basically what happens is you get hurt the most in the case of a natural disaster. And remember that every area around the globe has some natural disaster risk. We’re based in California, of course, so people come to our live educational events here and they say, well, gee, I don’t want to invest in the Gulf Coast area, Mississippi, Alabama, Louisiana, which we particularly like at this very moment in time because you have the risk of hurricane.
But in California, what did we have in the last year? We had these huge wildfires. We had thousands and thousands of houses burned down in Southern California. In Northern California, as we speak, Ken, we are having a huge wildfire problem. We have earthquakes here.
Ken: It just seems like global warming is causing more and more wild weather across the whole country. That’s why this question came to mind.
Jason Hartman: Yeah, well, I’m not sure I agree with the whole global warming thing. There’s a lot of debate on that subject, but not withstanding, we do have natural disasters virtually everywhere. Some areas have flooding. Some areas have extreme cold or extreme heat. Some areas have fires. Some have hurricanes. Some have tornadoes. Some have earthquakes. You have a natural disaster risk everywhere.
But here is the point. When you own a very small fraction of the property, in other words, your lender, in essence, “owns” because they have a high loan balance, they own in a way most of the property, right? They are your advocate in the case of a natural disaster. If you have a property that is wiped out by flood or earthquake or hurricane or whatever, your lender goes to bat for you. They become your advocate, your partner, your friend in the case of a natural disaster. And Countrywide or Wachovia or B of A, they go to your insurance company and they say, hey, look, pay this guy’s claim because this is our collateral.
Now, who do you think, Ken, is more likely to be taken advantage of by an insurance company who is reluctant to pay a claim? Do you think they would take advantage of you or me or your lender with their battery of lawyers?
Ken: My lender, obviously –
Jason Hartman: Your lender is going to protect their collateral. They have a battery of attorneys that will go to bat and fight to get that claim paid. If you are the owner, if you have big equity, if you have free and clear property, you’re on your own, buddy. You gotta call your lawyer, pay your lawyer, manage that whole process, and believe me, insurance companies love to collect premiums, but when it comes to paying claims, they are reluctant to pay.
Let me give you one example of this. In areas that are prone to hurricanes, this debate came up with Katrina, Rita, and probably virtually every other hurricane in history. There is a question as to whether the property damage was caused by wind-driven rain or flood. And many people have the hurricane insurance, but they don’t have flood insurance. So the question is what really damaged the property? Was it wind-driven rain or was it flood? And this debate is something that rages on between insured and insurance company. I don’t even want to go there. I don’t even want to have this debate with my insurance company. I want to let my lender debate this with them on my behalf, and my lender becomes my partner.
The other thing that happens is after Katrina, I believe it was the state of Mississippi and I’ve got an article that I will find and post to my blog at www.jasonhartman.com, actually sued several of the big insurance carriers for bad faith, for not paying claims, or not paying them quickly enough. So the point is if you have a high loan balance on your property, as we recommend because that benefits you in a whole bunch of other ways with inflation and so forth, you will be less likely to encounter problems.
The other part of this I want to address is the quality of construction issue. These new homes – we are mostly recommending brand new properties, new four-plexes, new duplexes, new homes – these new homes are built to a much higher spec level and a lot of these old homes that were destroyed in the last round of hurricanes – and I hate to sound callous when I say this or uncompassionate – but really, they should have been destroyed. What I mean by that is this. These were junky, old, little beach cottages built in the 1930s and 1950s and they were just crappy little houses. And the new construction that they’ve replaced them with have 140 mile an hour roofs in a lot of cases. They are built solid, so you can huff and puff, but you’re not going to blow these houses down very easily, okay?
So there are many issues to it, but natural disaster is not something I worry about at all because No. 1, I have adequate insurance through conventional means. No. 2, I have the high insurance of a high loan balance. No. 3, I’ve got a high quality construction property. And No. 4, I diversify. I don’t own homes just in these areas. I own homes all over the country in many, many states, so if I have the tornado disaster in one of my properties, I’m only susceptible to the hurricane or wildfire disaster in another one, or the flood disaster in another one or the hurricane disaster in another one. There is no area that is completely immune to the prospect of natural disaster, but there are ways to virtually eliminate or at least mitigate a lot of the risk. Answered that question?
Ken: Very good. Very good. It definitely gives me more peace of mind to the natural question. Okay, let’s go to No. 3.
Jason Hartman: Sure.
Ken: Obviously, you have to pay taxes on any property you own and taxes keep increases with state governments that are in need of money. Now, could these costs – the taxes or the maintenance you have to do on the property – could these costs greatly increase and cause potential problems to you as a landlord?
Jason Hartman: Good question. Now, this depends on the laws in the local area where you’re investing. California does have one very good thing going for it. It has a declining market. We are not recommending California at this time as a place to invest, but California has one great thing from back in the ’70s. A guy named Howard Jarvis introduced something called Proposition 13 and he made it very tough for the state – well, virtually impossible for the state to increase taxes. Now, there are loopholes in this and we won’t go into that tangential issue, but property taxes in California are pretty darn low. Some areas around the country have some of these laws, which make it hard for states and municipalities to increase taxes. Some do not.
Taxes can increase. Local governments can keep reassessing property. But here’s the thing: usually the reason they increase is because your property value has increased. So you’ve had a windfall and you’ve got to cut the government in for their fair share and you have due process. One of the great things we have in the United States is due process. And so you can appeal the tax increases. You can do a lot of these types of things.
Ken: That’s a great point because I look at my own house. I bought my house eight years ago and my house has gone up quite a bit in value and the taxes have gone up about 60 percent in eight years. But the property has gone up a comparative amount.
Jason Hartman: Yeah. So I can’t guarantee that you won’t have a tax increase, but if you do, the likelihood is it’s on the heels of a value increase and you’ve won that game anyway. So every government’s different and there’s no way I could answer the question for the whole country, but you’ve probably got a windfall, so give Uncle Sam – well, in this case, Uncle State, whoever that happens to be, whatever state your property’s in – give them a cut and send them on their way.
Ken: The other thing you brought to my mind by that is that you talk about the six-pack of houses in one of the podcasts. Let’s say you buy six properties that are worth $1 million, rental properties, and you put down about $135,000.00 and a 4 percent retainer, and let’s hypothetically say they increase 6 percent in a year, which is very conservative. So in 12 years, you have $2 million worth of property. And then let’s say you need the money. You were saying you can take, I think, 70 percent out, cash out.
Jason Hartman: Actually, 80 percent, but again, that’s a good point you bring up because I don’t know what the lending rules will be at that time. I can tell you today the banks are in the process of really over correcting due to the mortgage meltdown and I think financing will actually loosen up a little bit more than today. Hopefully, it won’t get as loose as it was two years ago, three years ago, which was irresponsible on the bank’s part. But yeah, so we’re suggesting that you may be able to, at the time, refinance for 80 percent loan to value, take money out. What were you going to say about that, though?
Ken: Well, if I’m so worried about taxes, so I’m not losing money, the money you take out of the property you don’t have to pay taxes on, which is really interesting because let’s say you’re saving money for your kid’s college education, and a lot of people save it in 401k’s or IRAs and the law’s changed now, so you can actually take money out of those plans to pay for your kid’s education. Now, myself, you have a traditional IRA, not a Roth. You’ve got to pay the taxes on that, ordinary income taxes on that money, and that could be huge.
Jason Hartman: Right, exactly. And there’s no tax on borrowed money and that’s why the way to create wealth with your real estate is to constantly refresh your financing every seven years or every 12 years or whenever the market sort of dictates – we’re just sort of suggesting a seven-year plan – and refinance them. Take a big chunk of money out tax-free and just live on that refinance proceeds. It’s really a great deal. We call that refi till you die.
Jason Hartman: It’s explained on two of the podcasts. Great, next question.
Ken: Okay. Neighborhoods can change. How do you keep up with knowing how the neighborhood is evolving? Let me just quickly elaborate on that. On one of your podcasts, I’d heard that what you want to do is you look at regions of the country and a lot of people are migrating south. You don’t want a property, for example, in Detroit, Michigan, because industry has left there. But if you go down South, Tennessee, Mississippi, Georgia, the infrastructure’s been built up. That area has a much greater likelihood to do well with the property versus up north.
Jason Hartman: Yeah, I think so and these are – let’s talk about the macro trend. Then we’ll look at the micro trend. So the macro trend is obviously, most everybody knows this, that people are leaving the Rust Belt, the old industrial-type areas, Michigan, and so forth, experiencing a lot of problems. And they’re generally moving down to the Southeastern United States and the mid-Atlantic. That’s where the real action is. Those are the areas around the country that we recommend investing in currently and we are area agnostic, as you know, Ken. So we may change our mind and that will be for good reason at the time.
But things do change. Now, these are big broad trends and they take a long time to change. Generally speaking, I think that the new version of the industrial revolution in America is in the Southeastern United States. And there are many reasons for this and you probably, and maybe your wife also, Dawn, has listened to our two podcasts entitled “The South Shall Rise Again,” which is about what the South really has going for it. And I think the South is the place for the next version of the U.S. Industrial Revolution, which there is a mini-version of the one that happened in the last century going on now.
And so that’s where we think the best places to invest are, generally speaking. We are in 37 markets. There are a few exceptions. Talk to us for more details on this.
But the other part of it is in your question here, you said that neighborhoods can change and you are absolutely right. You know neighborhoods can improve, they can degrade over time, and this is something you just have to sort of keep your finger on the pulse of, and that’s what we do. We may tell you that a property you buy today from us that seems like a great investment today, in five years, we might tell you to exit that area and sell that property, do a 1031 tax-deferred exchange, exchange that equity into new property, and that may be the advice we give you five years from today. We do not know.
But we will constantly, as long as we’re around and as long as we’re in business, we’re going to keep in touch with our clients, we’re going to monitor the situation, and constantly provide advice to you.
Ken: Okay, good. It’s so important because I don’t live down there. I’m not going to get to the property. I’m not going to be able to see the property. I mean once in a while, but not very often. That’s where the value of having your organization comes in.
Jason Hartman: Yeah, good, and one of the things we also suggest on that, Ken, is after you buy your property – of course, you may want to go see these properties before you buy them. Very few of our clients do, but we always welcome you to do that. We have clients that are from time to time being set up with the agents in our areas and going to look around at properties, and that’s all fine. We want you to do your due diligence so you have a good comfort level. But if you don’t see them before you buy them, you may want to over the course of time plan to sort of visit these towns and you can deduct a lot of those travel expenses when you go visit, when you own there. But if you don’t own or you don’t buy there, you can’t deduct it. So you can get some tax-deductible vacations out of it kind of, in a way, too.
Ken: Right, right.
Jason Hartman: And again, I have to make the disclaimer I’m not a CPA. Check with your accountant for the exact rules on that, blah, blah, blah. All right, what’s your next question?
Ken: Okay, my wife mentioned No. 6. We need to be sure we’re getting ROI, return income. We don’t want to risk our entire future for the present, but I’m sure you’re not saying put all your eggs in real estate. It should be part of a well-balanced investment portfolio.
Jason Hartman: So your question is portfolio diversification and balance. There’s a couple comments on that. The first comment is, generally speaking, diversification perpetuates wealth and concentration increases wealth and that’s a very broad, general statement. But I think it was Andrew Carnegie who has a great quote and he certainly knows about creating wealth in his day. He said, “Put all your eggs in one basket and watch that basket.” Put all your eggs in one basket and watch that basket.
Now, when it comes to investing in income properties, let me explain what I would say about that to really provide some detail to it and sort of fill in the blanks. I would say that you should put the vast majority of your eggs in the income property basket. However, you’re not going to do this in any one area because remember all real estate is local. So you’re going to diversify amongst many different cities and areas so that all your eggs really aren’t in one basket. They’re just in a philosophy of investing, which is what we talk about on the almost 60 podcasts we have out there now and at our seminars and so forth.
But put them in the real estate basket. Remember that you’re using mostly someone else’s money. It’s not your own money. Maybe 10 or 20 percent of it is your own money. Most of it is the bank’s money.
So if you have, for example, $1 million in which to invest, if you take $500,000.00 of that, that will buy you two and a half to $5 million worth of income property. But you’re really only using half of your net worth, $500,000.00. The other $500,000.00 of your net worth you can do a diversified portfolio of precious metals, stocks, mutual funds, and I just have to say I’m pretty much a hater of bonds and savings accounts. So I’m just generally going to say, although I’m not an investment advisor in that field, I think bonds pretty much stink. I think they’re a lousy investment. And savings accounts pretty much stink, too, because there, you are definitely playing to lose. By the time you impute inflation and taxes, it is in almost all cases a sure loser.
Ken: There was a philosophy, though, with like 20 percent stocks, 80 percent bond portfolio, giving you an almost 10 percent return over time because the bonds that balance out the risk with the stocks, but you can do better with real estate.
Jason Hartman: You sure could and you know it’s not really real estate we’re investing in. It’s more specifically income properties, financed with someone else’s money who the tenant pays back. And you know, Ken, I call this the ultimate investing equation. Think about it. You exchange evermore worthless, declining value dollar bills for commodities that have universal need in the form of a house built on very cheap land. The whole deal is financed 90 percent or so with someone else’s money, meaning the bank, the lender that finances it, and after that happens, you stick a tenant in there and you tell them to repay the bank on your behalf. And the government gives you huge tax benefits and the debt is constantly being reduced through the wonderful benefits of inflation and that’s what I call the ultimate investing equation.
All right, Ken, your next question, No. 8.
Ken: Should someone use non-risk money for the investment?
Jason Hartman: All right, so to answer that question, basically, remember that when you buy a property, you must always have some amount of money in reserves in the bank. And what we promote as the minimum amount is 4 percent of the property value. Now, the reason that we came up with that is because – and it varies a little bit – but generally speaking, 4 percent of the property value, if you’re buying in the markets we recommend and financing the way we recommend, 4 percent will generally cover four to six months of caring costs on that property. And you should never have a vacancy this long.
So the minimum of 4 percent of the value of the property, so if you are buying $1 million worth of property, that’s going to cost you $100,000.00 down, subject to qualifying at a 90 percent loan to value. Your closing costs will be about $35,000.00 and you should have an additional $40,000.00 in reserve in the bank liquid. So that means $175,000.00 safely, prudently, and conservatively buys you a sustainable portfolio of six properties in diverse markets that make sense the day they buy them for $175,000.00.
Ken: It’s amazing the leverage you have.
Jason Hartman: Yeah, that’s the great thing about income properties. And the other thing to remember is that you will lose the most money in life – and this has been demonstrated over and over again – by playing not to lose. Everybody listening needs to start playing to win, so playing not to lose means putting your money in the bank, buying bonds, these lousy investments that for sure will lose through taxes and inflation. Okay?
Ken: I wanted to reiterate on that because you and I had talked about the money that I’ve made and if I kept that small amount of money and rolled into a mutual – I had it in a 401k, could have easily rolled it into just a mutual fund and left it there and those mutual funds, in 30 years, maybe that money would be worth $70,000.00 – $80,000.00.
Jason Hartman: Versus the $600,000.00 it turned it into, yeah.
Ken: Right. I mean it’s just I understand exactly where you’re coming from because the power of compounding is just an amazing concept, the Rule of ’72.
Jason Hartman: Yeah, and remember inflation compounds either in your favor or against you, depending on whether you’re a creditor or debtor. That’s why it’s so good to be a debtor. So sometimes the biggest risk in life is to not take the risk. That’s the biggest risk really.
Okay, the next question you asked is can I have a list of the local participants that we provide in our service? Well, we will put you in touch with each person individually in each area in which you buy, or each firm I should say, each property manager. We will recommend lenders to you if you need help on financing. You may have your own sources for that. We’ll recommend property managers to you. We’ll recommend real estate brokers in local areas. We don’t just give out a whole list because that’s kind of like our whole network, our whole business, but each individual area, sure. Of course, we put you in touch with the person you need to be in touch with.
Ken: And the other thing I heard on your podcast is that the people that work for your organization you tell them if they’re going to recommend a rental property, let’s say in Kansas City, that they need to invest in a rental property in Kansas City.
Jason Hartman: You got it. We put our money where our mouth is.
Ken: That’s integrity.
Jason Hartman: We practice what we preach and I have a four-plex in Kansas City and I love it. I have properties in most of the markets we recommend. Not all of them, but each area manager is required to buy in that area in order to recommend it to you. Okay, so then your next question is who manages your nationwide property portfolio? Well, we have different managers, again, that we interview, we meet, we prescreen, in each area and that’s different. It’s local in each market. Great, next question.
Ken: Sure. Who would fix any problems that could occur in the property, like maintenance?
Jason Hartman: Yeah, good question. Remember the first thing, Ken, is you’re starting out, in most cases, most of our properties are brand, spanking new. They come with one-year warranties and you’re going to start with a clean slate in most cases. Now, after three, four, five years, seven years, ten years, of course there will be maintenance issues and they’re relatively minor and we have pro forma-ed into our estimates for the future a 2 percent maintenance budget. But who fixes them? Each property manager that we recommend to you in each area will have their own list of handymen, contractors, heating, and air people that will help you with the maintenance.
Now, the question a lot of people ask here is will they rip me off? Well, certainly, they could rip you off. Now, the nice thing about our investment is there’s not a whole bunch of middlemen in the middle of the deal. When you buy stocks, you got a whole bunch of middlemen in the deal, when you buy stock in someone else’s company, and they skim a lot of the money off the top before the investor ever sees the return.
When it comes to property managers, some property managers have been accused of taking kickbacks from repairmen and things like this, and you know luck. In the real world, this can happen. We don’t think our property managers do it. If we find out that they do it, we’re going to fire them and they’re going to lose a lot of business from our network.
But look, if they do, the question is what is the matter of degree to which you could really be hurt? It’s so minor, it’s negligible. I mean anybody listening to this podcast, who would potentially be a real estate investor, knows that a garbage disposal does not cost $2,000.00. If the garbage disposal is $100.00 to replace, what are they going to do? Mark up the bill $25.00 and pocket the money? They could do it.
Most property managers give you copies of receipts automatically without you even asking. Yeah, they could have a deal with the plumber that, look, if I refer you to my accounts, give me a little spiff on the back. This can happen. I don’t want to deny that it could happen. We’ve never seen it happen, but it could. But the amount of damage that could be done is so minor, it’s just almost irrelevant, okay? So it’s just not even anything to worry about.
When you let someone else do things for you, look, they can benefit. They can benefit more than they’re telling you they can benefit. Is it legal? No. Could they do it? Sure, they could. It’s just something to be managed. Not something to worry about. If they take $25.00 extra or $100.00 extra away from you per year in bogus repair bills, big deal. It’s hardly going to even cause a blip on your radar in your investment portfolio. It’s just insignificant. Don’t worry about it.
Ken: I totally understand where you’re coming from. Okay, my next question, Jason, is why do I need an organization like yours? Why can’t I go research and find a property myself? I have the computer and the internet. I can easily go on and do the research.
Jason Hartman: Yeah, great question. So certainly you can, but you can’t do a very good job of it individually with your resources on a nationwide basis. Of course, you could do this near your home and you could probably do a pretty good job of it. But even if you do it near your home, you’re probably going to use a local real estate agent and you’re going to buy the property, if it’s new property, from a developer. Now, you’re going to pay the same price even in your own area that you would pay going through us, in almost every case, unless the builder has two-tiered prices, which they really shouldn’t do. But I’m not saying it could never happen, okay, just like the property management thing.
But you’re not paying us for our service. The way we get paid is we get a referral fee from the local broker or the local real estate developer where we refer you. And we have a big organization that has been doing this for a long time, that has been studying this, that studies markets, that researches markets, and we have no attachment to any one area. So remember if you talk to the local real estate broker in your town, they have an attachment only to your town and they’re going to recommend a market that may be at the wrong timing cycle to you, whereas we have no attachment to any market. We just go anywhere. We’re completely disloyal to markets. We’re area agnostic and it doesn’t cost you anything to use our services.
Ken: You drew an analogy in saying you know how some of these big brokerage firms have these research departments to recommend stocks, but on the other hand, they’re promoting the stock because they have an interest in the company.
Jason Hartman: I know. That under the whole stock market debacle and all the fraud that’s still going on, but was going on in the worst-case scenario.
Ken: Usually what I do with a stock – I’m going off on a tangent here – but there was a stock that I owned a couple years ago, Cyber Key, CKEY. I got a letter from the U.S. Department of Justice. They assigned me a victim identification number and a P.I.N. number because the president of that company was indicted. He was issuing false press releases about products they had that they never really had. It was just a scam. So it really happens. There’s really legalized corruption in the stock market.
Jason Hartman: It is unconscionable and I’ve done other podcasts on that and I tell you something. A business is such a complex creature. There are so many side door/backdoor deals in companies. I just look at my small company. I’m the only shareholder in my company, but if I had other shareholders, I look at all the stuff that goes on. You could, if you wanted to, if you were a crook, you can cheat investors out of tons of stuff. You can make side deals with vendors and it’s unbelievable. Businesses are so complex. You just want to get into simple, direct investments where you own them, you control them, you’re not investing in a fund. The person who’s managing the fund is not taking a huge salary. They’re not flying around first class on your airfare budget. Just do your own thing. That’s my philosophy, Ken.
And that’s why I say be a direct investor and remember, of my commandments, Commandment No. 3 is thou shalt maintain control. I’m a control freak. I want to own and control what I invest, okay? I hope you do, too.
Ken: Yes, I do.
Jason Hartman: Good, good. Okay, so the next question you asked here is what is the time horizon for this investment? My kids – we need the money for college.
Ken: Right, 12 years is when my daughter goes to college.
Jason Hartman: Twelve years and your daughter goes to college. Good. So the time horizon it, of course, depends on the future of the economy, the future of the market, and everything, but in our refi till you die example, we show you that with just a very modest 6 percent appreciation rate, and I understand that many markets around the country are depreciating right now and we try to avoid those markets and invest in markets that are appreciating. But even if they don’t appreciate this year or they only appreciated a minor amount, over the course of time, historically, real estate has done about 6.4 percent around the country in nationwide markets. So the likelihood is that I think history will repeat itself, but it will even be better this time around.
And I know this may sound crazy to say this right now when you see all the negative headlines, but remember we don’t invest in those overvalued markets, like California, like the Northeastern U.S., like Florida and Hawaii and Chicago. We invest in markets that make sense, that never have big run-ups, that are stable and linear in nature, and I think that what’s going on now in India and China and Brazil and the rest of South America, I think the 6 percent number is going to be low in the coming years.
Ken: I copied down – I took your challenge. On your website, you said write down the number of people from the clock. So I did it on a Friday and –
Jason Hartman: Let me – before you say it, Ken, let me just tell people what you’re referring to. On our website at www.jasonhartman.com, on the front page, we have the world population clock and we just linked it into the U.S. Census Bureau because it’s on there. And it shows you how quickly the population around the world is increasing and also the population of the United States of America is increasing very rapidly. And so what did you do? Tell us what you did.
Ken: What I did was I wrote down the figure one Friday afternoon and then a week later, I looked at it again and it had dramatically increased by millions and millions.
Jason Hartman: Yeah, it’s amazing and what do all of those people have in common? They need three basic things.
Ken: They need food and shelter.
Jason Hartman: Food, clothing, and shelter, okay. That’s what every human being on this earth needs and I say let them rent that shelter from you, Ken.
Ken: Right. I like that.
Jason Hartman: So good idea. Time horizon, I think 12 years for your income property investment should be a pretty easy horizon to meet. I can’t think of a better college fund than owning several rental properties and just sit back, let time be on your side, start getting really happy when you hear the reports about inflation and overcrowding and an increasing population and the commodity prices going up because essentially, Ken, what we’re doing is we’re investing in a set of commodities when we buy these properties.
Jason Hartman: Yeah, so good stuff. These are great questions and I’ve got a few more things to talk to you about off the air, but are there any closing questions or anything else you’d like to say for the listeners of the podcast?
Ken: I would just recommend everybody to listen to Jason’s podcasts.
Jason Hartman: We appreciate you listening, Ken, and we will talk.
Are you ready to take the next step? Then join us at Platinum Properties Investor Network in Costa Mesa, California, for our next Creating Wealth Seminar on Saturday, July 19. As millions have discovered, you can become very wealthy by investing in prudent income properties. Jason Hartman and the rest of the Platinum Properties team will show you how to select the very best markets, earn returns in excess of 30 percent, and protect yourself from a loss of equity.
In this full-day educational event, you will learn all about Jason’s unique, conservative investment philosophy that works in real life with no hype. Seats are limited, so visit www.jasonhartman.com today to register. That’s www.jasonhartman.com.
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Jason Hartman: Attention agents, brokers, and mortgage people. Do you know that we cooperate? Do you know that our network is an open system, that you can refer clients and outsource your investor clients to us and receive passive income? It’s a really great opportunity. All you have to do is register your clients at www.jasonhartman.com and tell them to attend one of our live events, our live educational seminars.
Listen to our podcast, go to the website, and request our free CD at www.jasonhartman.com. And if they invest with us per the terms listed on the website, you will get a referral fee. We have lots of agents, brokers, and mortgage people that receive surprise referral fees that they weren’t even expecting. They get a check in the mail and they are just happily, happily surprised. It’s a nice extra supplement to your income. So be sure to take advantage of our broker cooperation. Agents are welcome. We cooperate with outside people and we’d love to help you with your investor clients.
I’m here with Nancy and wanted to talk to you about two of our fantastic markets. One is our tried and true market that we’ll talk about in a moment that is strengthening and has gotten better. And one is a newer market. Nancy, welcome.
Nancy: Thank you.
Jason Hartman: Tell us about Gulfport/Biloxi area and Long Beach area. That’s Long Beach, Mississippi, not California. We were there a few weeks ago. What’s the scoop?
Nancy: Yeah, we had a great trip. Jason always talks about out of a disaster comes an opportunity and I really believe that’s what’s happening in Biloxi. The economy there via the casinos and the major boom on the ocean, they are now allowed to build on land. Biloxi is now the third largest gaming revenue area in the country, behind Atlantic City and Las Vegas.
Jason Hartman: So what you’re saying is that before, the casinos had to be built on barges.
Nancy: That’s right.
Jason Hartman: And when Katrina came along and wiped them out, the city said, hey, let’s let them build on land. Let’s change the law. And that made the casinos so much more substantial. They’re huge now. They’re like 50 – 60 percent the size of a big glamorous Vegas casino.
Nancy: Right and there are 11 casinos currently up and running and they’re employing about 17,000 people. That’s about 2,000 more than all the casinos that were open pre-Katrina.
Jason Hartman: Tell us some of the big corporate names in the gaming business who are in Biloxi. I mean it’s amazing.
Nancy: Yeah, Harrah’s is there right now with the Grand Casino in Biloxi and they’re also building a $700 million resort with Jimmy Buffet, the new Margaritaville Casino that will be open in 2010. MGM Mirage is there with the Beau Rivage, which is the sister casino to the Bellagio in Las Vegas.
Jason Hartman: These are all big corporate names and those casinos, we were there on that trip, and they are unbelievable how swanky and glamorous they are.
Nancy: The Hard Rock is there. Interesting tidbit about the Hard Rock: it was there before Katrina. The whole casino got destroyed. The guitar remained standing. It was the only thing on the beach that remained standing.
Jason Hartman: Long live rock and roll.
Nancy: And they are – they have rebuilt the Hard Rock and it’s just amazing inside there.
Jason Hartman: I mean that Hard Rock Casino is gigantic, five, six levels of parking outside. I remember going through that parking garage. It was packed. I mean it’s just huge inside. It’s amazing how much money they have dumped into this area.
Nancy: Right. They have actually inked about $1.3 billion in casino revenues last year. Prior to Katrina, the gaming revenues were about $800 million. So they’ve just almost doubled the revenues in just a couple years. They’re also, because of the casinos and the tourism, they do $100 million in golf each year. There’s 20 golf courses there. This industry is just spurring all kinds of job growth, not just from the casino workers, but also construction workers to build these places. There is a major military installation there with Keesler Air Force Base, the CB naval base, a couple Army and Navy National Guard installations and also the Stennis Space Center, which is NASA’s backup space shuttle installation. So there’s just a ton of activity there that we really think is going to make this one of our booming higher appreciation areas, and we’re very excited about that.
Jason Hartman: And a shortage of housing because we had to look around a lot for that, Nancy. That’s excellent. Tell us real quickly about one of our tried and true markets, the market where I own and the market where many, many of our clients have invested, and it’s actually improving in terms of the rental market being very, very strong. Stronger than before, and this has just been a real dependable market. What’s the name of it? Everybody’s wondering.
Nancy: This is Kansas City, Missouri, and Kansas City is the 13th largest metro in the U.S. The statistics in Kansas City are just excellent. This is a strong, stable rental market. We talk a lot about our rent-to-value ratios and it’s .7 percent being ideal. All of the properties that we have in Kansas City, we get at least a .8 percent RV ratio.
Jason Hartman: On my property, my four-plex in Kansas City, I’m getting about a .82 percent RV ratio, so it’s phenomenal. It’s just a great property.
Nancy: There are some positive cash flow opportunities in Kansas City, which we haven’t seen for a few years. So if you’re looking for a market with some positive cash each month and a .8 rent-to-value ratio, Kansas City is your market.
Jason Hartman: Excellent. Thank you, Nancy.
Hey, I just wanted to announce a couple of quick things for you. If you are able to come to one of our live events, we would love to see you and meet you in person. We’ve had people fly in from all over the U.S. for them. So hopefully you can join us for some of those events.
I wanted to mention to you that we have a new offering, a free CD, a free audio CD, that you will really, really like. We’ve had so many people that have given us really good comments about them, and you can go to our website at www.jasonhartman.com and just fill out a little quick web form and you can either download it or you can have the physical CD mailed to you in the postal mail. But get the free CD, especially if you are a new listener. You need this. And if you are a regular listener and you’ve listened to all the other old shows, you don’t need the CD so much, but it will be a nice review for you either way. But if you’re a new listener, you definitely want to go to www.jasonhartman.com and request the free CD.
Remember that Platinum Properties Investor Network has moved. We are in our beautiful new office in Costa Mesa, California, 555 Anton, Suite 150, in Costa Mesa, California, 92626, and we’re right by world-famous South Coast Plazas. So come in for a visit and a little shopping.
Also, we just uploaded another video podcast and I’d highly recommend that you subscribe to that. There’s some stuff that just lends itself better to video than audio. If you want to see what’s on that, subscribe to it, you can go to www.jasonhartman.com. If you use iTunes or an iPod and you’re an Apple person, then you can go to the iTunes Store, type in Jason Hartman, and two podcasts will come up, the video podcast and the audio podcast. And you’re probably already, if you’re listening, a subscriber to the audio podcast, so make sure you get yourself a free subscription to the video podcast as well.
And this particular one that we just loaded in the video podcast is about Naked Short Sales and what goes on with this short sale and manipulation of the stock market. It’s a very interesting report from Bloomberg News and I think you’ll really learn a lot from that. So be sure to tune in and watch that.
Be sure to see appropriate disclaimers and disclosures on our website at www.jasonhartman.com. Remember that we are not tax or legal advisors.
Anyway, we’ll talk to you next week. Thanks for listening.
This material is the copyrighted creative work of either Jason Hartman, the Hartman Media Company, Platinum Properties Investor Network, Incorporated or the J. Hartman Company, all rights reserved.
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Duration: 56 minutes