Catherine McBreen is the President of Millionaire Corner and the author of “Get Rich, Stay Rich, Pass it On: The Wealth-Accumulation Secrets of America’s Richest Families”.
The U.S. is now seeing record numbers of millionaires. McBreen explains the effect stocks have had on this run-up. She recently released a service called “Find an Advisor,” and discusses how it helps people find the best financial advisor for them. She also analyzes investment newsletters in lieu of financial advisors. McBreen finally talks about the effect money has on happiness and marriage relations.
Visit Millionaire Corner at www.millionairecorner.com.
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ANNOUNCER: Welcome to Creating Wealth with Jason Hartman! During this program Jason is going to tell you some really exciting things that you probably haven’t thought of before, and a new slant on investing: fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self-made multi-millionaire who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it! And now, here’s your host, Jason Hartman, with the complete solution for real estate investors.
JASON HARTMAN: Hey, thank you for joining me today. This is Jason Hartman, your host of the Creating Wealth Show, and this is episode number three hundred and thirty-six; glad to have you today. So, I’m going to record an incredibly short intro. It’s because we’ve got two guest segments today. We are going to talk first with Aaron, one of our lenders. We’re going to talk about mortgage stacking, something I have also referred to as mortgage sequencing, and I guess you could call it either one. But what it talks about is really, how to maximize and strategically plan your financing, which is more important than ever, nowadays!
Because the number of loans you can get it limited. However, there are things you can do in the secondary, or private market—I shouldn’t say secondary market, because that has a double meaning. Fannie Mae is a secondary market. That’s kind of confusing. But there are things you can do to get past your 10-loan limit and do more; you’ll hear about some of those today. And we have talked about some of them on prior episodes. And so, we’ll talk about that. And then we will have our guest guest, if you will, and that is Catherine McBreen, who is from Millionaire Corner, who will also talk about some very interesting things. I guess the only thing I want to say before that is, if you haven’t registered already for our Austin Property Tour, be sure to do so at www.jasonhartman.com, and you get a free copy of the Creating Wealth Home Study Course.
And of course, Austin is just such a fantastic market. By the way, I was looking over my portfolio, and I know the property taxes are higher in Texas, obviously. But it’s just amazing to me how easily this passes through to the tenant, because the rents are higher too! And Austin is just such a phenomenal city. I’m so glad to be back in there doing business again. And we will have our tour at the end of September there. So, be sure you join us for that. Don’t miss it. Also, we’ve got the contest for that, and a whole bunch of you have entered already. And that is available at www.jasonhartman.com/contest, and we will pick our winner soon for that. But if you enter the contest and you win that contest, and you register for the tour, we will promptly refund your money of course. So, either way you win. Register for the tour at www.jasonhartman.com in the events section, and also enter the contest as well, at www.jasonhartman.com/contest. And let’s go to Aaron; let’s talk about mortgage stacking, how you can maximize your financing potential, and then we will have Catherine McBreen from the Millionaire Corner! Be back with that in just a moment.
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JASON HARTMAN: It’s my pleasure to welcome Aaron back to the show! He’s been on before. You’ve heard him speak at our Meet the Masters events over the years. And he is on today because I want to ask him some questions about how you can get past the 10-finance property limit through mortgage sequencing, or mortgage stacking. Depends how you look at it, but either of those terms might apply properly. And you’d need to do this with some degree of strategy, working with your investment counselor, and if you’re not working with an investment counselor at our company yet, go to www.jasonhartman.com, contact us through the website so that we can get an investment counselor helping you in making these decisions. I definitely have seen people go out and sort of not have a good strategy, and they really limit the amount of investing they can do because of this. So, Aaron, welcome back. How are you?
AARON: I’m really well, Jason. Good to talk to you.
JASON HARTMAN: Good. So, mortgage sequencing, as I have called it for a while now, and mortgage stacking, is also a good term for it. What’s the rule now? I mean, it used to be, well, let’s just give a little history here. It used to be, get as many mortgages as you can qualify for. And literally, before the financial crisis, there were people that had hundreds of mortgages. It was absolutely crazy. And then the financial crisis hit, and it went down to four finance properties. That was the rule—you could just have four, that was it. And now it’s pretty much back up to 10, in most cases. But if you’re creative, and you plan it right, and you use a strategy, you can really go up to what, 19?
AARON: 19 as we have it set today.
JASON HARTMAN: Yeah, and that’s today. And of course this is subject to change. And hopefully it will become more liberal, in the sense that you can qualify for more mortgages. That remains to be seen. The bankers are still pretty stingy with their lending. But kind of outline just really quickly here a little strategy for this.
AARON: As you mentioned, it wasn’t that long ago people could just go crazy and get all kinds of financing as long as they qualified. Well, with things going sideways, as they did, or downwards, however you want to look at it—the sting that came from somebody having a financial crash personally and having 20 or 30 mortgages and now they can’t pay any of them—that sting still exists. That wound’s still healing. But we have found that utilizing Fannie Mae, and utilizing those conventional processes to do those first four, and then that next six, and most of the time, in most cases, the person’s capped out. We put together a partnership, if you will, to where we can utilize the capability to go do four more, and then another five beyond that. So we have to actually do them in different segments, if you will.
So, to accomplish this, it really takes us to sit down with each individual who wants to go down that path, and see if they have the financial [unintelligible], because it does take a little more down. We’re looking at a 65% loan-to-value. So, 35% down on each transaction. On top of that, there are some points involved, because people are not going to go to this extent for free. They’re going to take advantage of the system that exists now with the government putting that cap on things, and the banks, and the investors capping it at sometimes four, many times 10. So they’re going to try and gather a couple of points to frontload their risk. And you’re also looking at a slightly higher interest rate—somewhere closer to 6. And maybe a little over 6% in many cases. So, a lot of people ask me, why such an expensive rate? Well, let’s look at this historically. Historically, 6%’s a phenomenal rate.
So when you’re looking at the ability to go beyond what has been out there, as far as the availability of funds, and you’re still paying a very reasonable rate considering it historically, there’s really not a whole lot to dig your heels in over. Especially if you are looking at things and penciling it out to where it’s going to make a return on investment. Now you said in the past, if it returns, great. If it doesn’t, it doesn’t; don’t step into it. So it’s a matter of finding those markets which your team has been able to almost pinpoint what market would work well for something like that. Finding those that are at a particular price point with a specific rental capability to continue to cash flow, and you’re talking about an interest rate of 1½ to 2% above the norm right now.
JASON HARTMAN: And those are still very low rates. What people need to keep in perspective is number one, they’re not paying that rate. The tenant is. You outsource your debt to a tenant, and so the tenant is paying hopefully all of it. Hopefully a little extra to you in the form of positive cash flow. But if they’re not, they’re paying most of it, and what they’re not paying is deductible on your taxes. And so then when you take all of that into account, and then you add inflation into the mix, where I believe—and most people that are, you know, informed, agree with me that inflation is currently about 9-10%, and the likelihood is it will get much higher in the future.
You’re still getting paid to borrow, because you’re borrowing at a rate lower than the rate of inflation. And with that said, you’re not paying the rate anyway. So, it’s like you get this double inflation arbitrage, I call it. Where you outsource the debt to another party, you get the rental income from them, hopefully the rental income pays more than the actual debt; even if it doesn’t, the rest of it is deductible, so the government’s gonna take about 40% of that, depending on your tax bracket, and what state you live in, off your load. And then the rest, inflation is paying for it. Because you’re borrowing below the cost of inflation. Even if you kept the property vacant and paid all the debt yourself, you’re probably still getting paid to borrow, as long as inflation is higher than the debt.
AARON: Exactly. It’s a matter of a person’s philosophy. What is it—how do they see things? If you want to focus in on interest rate, and that be your main focus, this may not be the arena you want to play in. But it seems like those people that listen to the podcasts, that talk to your investment counselors, and that speak with you, this makes a lot of sense for them. And a lot of them have looked at it and said—this, when it pencils out with their philosophy, they’re running for it, because this is an opportunity that doesn’t exist anywhere else.
JASON HARTMAN: Yeah, it sure is. Okay, so, just go through it again, if you would—how do you stack up or sequence up to 19 mortgages? You go and you get 10 Fannie Mae mortgages, right? The traditional mortgage.
AARON: Let’s start that actually a little bit before the 10. When we’re talking about an individual wanting to get into the game, and wanting to utilize the leverage to their advantage, most people are going to have their primary residence, and most of them have them financed. So that’s gonna be their 1. They have the capability to do basically 3 more up to 4 finance properties, at a specific loan-to-value, and a specific rate bracket. Because those are—those fall under their own type of lending. So we take advantage of that, because those first 4 financed properties, or those first 3 investments, are gonna give them a little bit of an LTV break—loan-to-value break—and a little bit of an interest rate break. So we want to take advantage of those.
And most of those that I’ve worked with like to put in the most expensive ones into that place, because that’s where you’re gonna get your best rates, best loan-to-values, less money out of your pocket as far as your down payment, to save for the future purposes. Then we go into 5-10. Those ones require about an additional 5% down. The rate’s slightly higher; it’s very negligible when you look at it on paper, but it’s still there. So that’s also something that we want to look at, and we want to pause between #4 and #5, because you want to let things settle before you jump into that next bracket of financing. Many people get very impatient, and they want to finance 10 right now. But because they do that, they lose out on the little benefits that come between 2, 3, and 4. Because if we decide to buy 4 at the same time, and you have 2, 3, 4, and 5, the lenders that are looking at that saying hey, these people are trying to finance up to 5 finance properties, including their primary.
We have to count all of them as if they’re in that higher bracket, and bump up all their loan-to-values, bump all their loan-to-values down by 5%, increase their down payments by 5%. So we have to keep that in mind. Then when you start doing 5-10, we again, want to stay where we’re not jumping over that 10 right away until we get it all settled out. Those are other ones you want to do some of your more expensive properties at. Of course there’s gonna be cash flow, but that’s when we look at that. Now, once those are all settled—
JASON HARTMAN: And let me say something about that. A couple things here, just hold that train of thought, okay?
AARON: Okay.
JASON HARTMAN: First of all, so, on the more expensive properties, remember. We’re only talking about residential-style loans here. And residential is considered anything 1-4 units. So, you might buy a fourplex, so that you use a higher loan amount—because they’re only counting the number of loans, not the amount of money you’re borrowing. Of course, you don’t want to go buy a property that doesn’t work in an expensive market like California. That doesn’t make any sense. But you might want to buy a four-unit building, rather than a single unit, in a market that works and makes sense, and has good cash flow. Because then you get to accumulate more real estate, a greater number of units, or doors, if you will—four doors instead of one, in that example. And you’re still using only what is considered one loan. So that’s one thing. The other thing I just want to say is that none of this is meant—I don’t want anybody to get the wrong idea here. None of this is meant that you should not disclose to any lenders you’re working with about other loans that you have in process, or other properties that you own. Of course they can find out on your credit report. But if you’re in process, it hasn’t hit your credit report yet. You need to always be up front and make sure you’re disclosing this to the lenders. And if you don’t, not only could you get in trouble for it, but you could lose the opportunity to close, because some people out there are doing sneaky things, and they’ll find out all of their loans will be cancelled! And it’s a big problem. So, better to just do things by the book and do them right, but use good strategy. That’s what we’re saying.
AARON: And I can’t agree with you more on that one. Even if you try to hide something that may be going on with a different lender, or another loan you’re trying to do, it’s gonna get found. There’s almost no way to hide that anymore. So disclose everything you’re doing, and let the people you’re working with help you strategize it to make sure it’s to the point where you want to go.
JASON HARTMAN: Yeah, we have people that come in and try to play games once in a while, and that just never works.
AARON: It’s not worth it. You’re not going to get—all you’re going to do is add more complication to your transaction, and future transactions, and also it ends up weighing on the trust factor. If there’s anything—if there’s only one thing that we can have in this process, it’s to develop trust with somebody and never violate it.
JASON HARTMAN: Yeah. Absolutely. Okay, go ahead with what you were saying.
AARON: So now we’re going into—we hit #10. The individual has been able to take that institutional money, that Fannie Mae money, which is down right now in the mid 4% without any extra points. Sometimes you can get a little lower depending on other factors. But you’re at that premium money.
JASON HARTMAN: Hey, one more comment, Aaron. Sorry, I got another comment for you.
AARON: No problem.
JASON HARTMAN: Folks, you see right there, what we’re talking about it, those 10 Fannie Mae loans—those are like gold. Because real estate in America has been subsidized by the government since the Great Depression through Fannie Mae. And this is why it just makes so much sense to do this here rather than in foreign countries. As I’ve talked about on so many of my shows, I’ve gone to 64 countries, some of them several times. I’ve looked at real estate all over the world, and we just haven’t found anything more exciting than American real estate. If we had, we’d be talking about it, because we can sell that too, we can recommend that too, and put that into our referral network. But it just doesn’t work. The American stuff is the best. And look at those 10 loans! Look at the unbelievably good interest rates on those first 10! And look at the great loan-to-value ratios on those! Subsidized by the government. The other countries? They just don’t offer that.
AARON: Like you said, those are gold. And so, it gets right—just to step back a couple steps, and say about being very forthright on what you’re doing, and being honest about what you’re trying to put together with somebody—you don’t want to lose the opportunity on those loans, because they are gold. So work with somebody that’s gonna help you with a strategy to get those taken care of, and then move forward from there. So, going forward to that loan #11—we have another bracket of 11-14 loans that we want to focus on. Because we’re trying to distribute this. Even though we have lenders, or hedge funds, however you want to reference them—there’s investors out there that say, we’ll finance about 10. Those entities really only want to have a certain amount of exposure to one person. So, one of them, they’ll have an exposure up to 4 transactions for them.
There’s another that’ll have an exposure up to 5 transactions with one person. You know, one of them says they’ll go up to 20 finance properties, but they don’t want a 5 loan exposure with one individual, so in reality, we have to work in tandem with someone else. So, we have the entity that’ll go up to 4 finance properties. That’s where you start getting into the 6½% range. You start also getting into the point that you have to pay to frontload the interest to make it make sense for the investor to do the transaction for you. So you do those next four, all in succession. Now you don’t have to do them all at once; do them in whatever succession, but don’t go beyond 4—don’t go into a commitment, as far as contracts or anything to that effect, beyond that 4, until they’re all closed and done. Then you can start looking around for the additional transactions to bring you up to 19. Then you have a little bit more freedom to just go out there and run and do all of them at once if you like. But we really try and preferably be very cautious between that loan #1 up until loan #14. Do it in order, and do not start going out there and writing contracts before you start—before you’ve settled out the other ones in these brackets. Because even if you’re writing contracts—not even applying for financing. Just writing contracts, you’re putting a date somewhere that you had an intention.
JASON HARTMAN: Oh, yeah, that’s a good point.
AARON: And intention—you know, intent has been argued in courts of law for hundreds of years. So, we have to take that into consideration, what your intent is. Well, right now we need to make sure that there’s nothing out there to show what your intent would be.
JASON HARTMAN: Good! So what number are we at now?
AARON: Right now we’re on 15-19.
JASON HARTMAN: So now, we’re in the home stretch here, folks. And after this, you either gotta partner with people, or you gotta pay cash. Or you’ve gotta go get hard money, or private lending financing.
AARON: And what the whole goal is, is that if you’ve got 14 finance properties, that they’re able to yield you enough return on a monthly basis that when you hit that 19 mark, you’re able to have that cash flow come in, and you’ll be able to reinvest in your business, and start buying properties for cash. While you’re doing this, and building up this little empire—if the person you’re [unintelligible], reinvest it. Keep building your empire with the returns, so that way it’s feeding itself.
JASON HARTMAN: Let’s go 16, 17, 18, 19.
AARON: Well with that, being the fact that it’s going to still fit into that 15-19 bracket, really it’s at the pace that the individual wants to go at that point. We know that the cap is 19. We know that the entity that will fund that—they’re not discerning between 15-19. They don’t care how fast you do that, as long as they’re only exposed to 5. Then it’s really a matter of sitting down and penciling out what’s going to get you the best return for those particular lumps. It’s not something you want to go out and use that to buy a property that’s way too expensive based upon what your return’s going to be for your investment. You still want, I would imagine in some form, to be able to at least break even, or maybe get some cash flow. But that’s something your investment counselor can go over with you. And then we can look at it numbers-wise and see if it meets your goals.
JASON HARTMAN: Good, okay! What else should people know?
AARON: Really, best advice I can give to anybody that has even a remote interest in this is to talk to your counselor, get plugged in to those who would be able to put that financing together, and start mapping out a strategy from day one. Don’t go into this haphazardly; don’t just think that hey, I’m going to start buying and I know I can get to 19. There’s a definite strategy involved. Exercise patience, and set out a plan, and don’t deviate from it.
JASON HARTMAN: Good stuff. Well Aaron, thanks so much for joining us today, and talking about this very important topic. And we look forward to having you at another Meet the Masters event, and back on the show in the future!
AARON: Thank you, Jason. It’s always a pleasure.
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ANNOUNCER: What’s great about the shows you’ll find on www.jasonhartman.com is that if you want to learn about some cool new investor software, there’s a show for that! If you want to learn why Rome fell, Hitler rose, and Enron failed, there’s a show for that! If you want to know about property evaluation technology on the iPhone, there’s a show for that. And if you’d like to know how to make millions with mobile homes, there’s even a show for that. Yep! There’s a show for just about anything. Only from www.jasonhartman.com. Or type in Jason Hartman in the iTunes store.
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JASON HARTMAN: It’s my pleasure to welcome Catherine McBreen to the show! She’s president of Millionaire Corner, an interesting website that compiles research from the Spectrem Group, and I think she’ll have some interesting insights on the marketplaces to share with us today. Catherine, welcome! How are you?
CATHERINE MCBREEN: I’m great, thanks so much for having me!
JASON HARTMAN: Well good, good. And I will call you Cathy, throughout the interview.
CATHERINE MCBREEN: That’s fine.
JASON HARTMAN: So, we’re seeing—the US is seeing record numbers of millionaires, and I remember many years ago when I got into the real estate investing business, there were, I don’t know, almost a million millionaires in the country. And now there’s a lot more, but of course, to accurately evaluate that number, we would have to adjust for inflation. And I haven’t done that, actually. Maybe you guys have. But, we do have this sort of, what many have called—and I remember hearing that term for the first time about 12 years ago—the mass affluent population. And this is changing things! It affects the stock market, affects bond market, real estate market, precious metals, everything! What are your thoughts on that?
CATHERINE MCBREEN: Well, I can tell you, we size the market every year, so I can tell you that we believe that there are about 9 million millionaires today. So that’s a lot more than when we were younger. And there are about 14.3 million households that have about $500,000 net worth. So those are the people that I would call the mass affluent. But I have to tell you, I am a big proponent of the mass affluent, because I think the mass affluent people are the ones who have been, to be honest, the most, I guess, for no better term, screwed. In the last 5 years by the recession and by what’s just happened with the tax hikes, etcetera, because those people in that group are treated as if they are much wealthier than they really are. So, I mean, people are probably out there saying, she’s crazy—
JASON HARTMAN: Obama thinks anybody that makes $249,999 a year has a private jet. So….
CATHERINE MCBREEN: Yeah, exactly.
JASON HARTMAN: He’s out of his mind, obviously. But yeah, I would say the mass affluent, and the middle class, have been, for lack of a better term, screwed the most. But it’s interesting, because the mass affluent—if you’re saying what, $1 million net worth, is that what you’re putting in the mass affluent?
CATHERINE MCBREEN: We define the mass affluent usually as people between $100,000 and $1 million, and that’s net worth.
JASON HARTMAN: Oh, gosh. That’s not mass affluent!
CATHERINE MCBREEN: So that includes the middle class—a lot of the middle class fits in there. I mean, if you add somebody’s 401(k) balances, or those people who are lucky enough to have pensions, they’re definitely in what we would call the mass affluent.
JASON HARTMAN: Yeah, I couldn’t agree with you more. If you have a net worth of, say, we’ll take a middle number there. Of $500,000, and you live in an expensive place like California or New York City—you’re lower middle class. You know?
CATHERINE MCBREEN: Definitely.
JASON HARTMAN: That’s not that much.
CATHERINE MCBREEN: What we find when we do our surveys is that when we look at the people even in the millionaires—what we call millionaires are 1-5, and we call people with more than that a different vernacular—but 10% of those are schoolteachers, or households that include a schoolteacher, and that’s because they have a great pension. So, it can be people that live down the street from you that are actually wealthier than you think.
JASON HARTMAN: Yeah, interesting! Well, talk to us about some of the effects this has on the different markets.
CATHERINE MCBREEN: Well, one of the things that we’re finding—we’ve been doing a lot of surveying around how are people feeling now compared to a year ago, or how did they think that things are gonna go in the future. Because you know, as you see the stock market go up, everybody assumes that everybody is really positive, but this class—this group that you and I would call the mass affluent, or the people with $500,000, they’re really the ones that are th most distressed at the moment. Less than half of them feel like they’re better off than a year ago, and fewer than half of them also feel like they’re gonna be better off in another year. And part of that is because these people have to have, I guess, bills to pay, and they’re not the ones that are going to get financial aid sending their kids to college, and they’re ones that are probably helping an older parent, maybe, making it through to being retired.
So these are the ones that are getting hit very hard with what’s going on. And so, they’re very—they won’t be able to take a lot of their assets and put them into the markets. Our research shows that they kept a lot of their assets in cash for the last 3, 4, 5 years. And so, they weren’t able to put that back into the market and see the upkick like the people who had more money were able to do. So we see people who’re in the millionaire market and above that, they’re doing really well, because they’re really happy they were able to reinvest in the market. But these people were basically keeping money in cash so that they could meet their obligations that they needed, and they’re really kind of stressed at this particular point.
JASON HARTMAN: Yeah, so, I mean, the markets are up, but not in real dollars. I mean, I did a calculation from the prior peak, I think it was, and the Dow would have to be at 15,800, by my rough calculations, to equal where it was before the downturn. So, it’s always so misleading when you talk about nominal dollars and real dollars. But why do you say they’re stressed? I mean, I know from a political perspective, you know, as we both agree, we used the s-word. They’re getting screwed. Or they’re being threatened, at least, pretty harshly. But in terms of if they’ve just left their money in the market—
CATHERINE MCBREEN: But they didn’t.
JASON HARTMAN: Yeah, they got it out. So, when do you think they took it out? How do you know that?
CATHERINE MCBREEN: I think most of them took it out probably 2008 or 2009. Because historically when we look at portfolios of people, before 2008, most wealthy people, even people in the mass affluent market, would have 5-6% of their overall portfolio in cash or money market. Right after 2008, there were huge amounts—up to 30% of people—up to 30% of their portfolios were in cash. Today, still the people that we call mass affluent have about 19% of their assets in cash, whereas somebody who’s a millionaire, wealthier, they’ve gone—they still have more than they did before the recession in cash, but they still have only like 10% of their assets in cash. Whereas this mass affluent group still has about 19-20% in cash. In cash or cash equivalents.
So you know that that’s not getting any kind of return. And they’re hesitant, because they know that they’re going to be paying higher taxes, and so, I don’t think that they’ve really assessed what that means to them on a day-to-day basis. And they don’t get financial aid when they send their kids to college. And it’s a lot of all those different types of things—they haven’t been able to save for retirement, and a lot of that group is opposed to—a lot of the people that we see that are millionaires or even wealthy, are already retired. So they’re not worried about retirement; they’ve already faced that hurdle. Whereas a lot of these people are still working, they’re in their 40s and 50s and they’re contemplating retirement, and they feel like they’re way behind where they need to be.
JASON HARTMAN: And they’re the sandwich generation. They have parents who are still around, and they’ve gotta think about care considerations for those aging parents that are maybe right around the corner, and then they’ve got children too, so they’ve gotta take care of the kids that haven’t left the nest yet, and they’ve gotta take care of the parents that are coming back into the nest, if you will. Or at least into some sort of care situation. So, yeah. Lot of pressure, no doubt about it. You recently released a service called Find A Financial Advisor, and you had some interesting things we talked about off-air with the SEC that I found kind of fascinating. Tell us how this helps people find an advisor.
CATHERINE MCBREEN: So, we had created Find An Advisor as part of our Millionaire Corner site, with the idea that—I don’t know if any of your viewers are familiar with OpenTable, or Angie’s List, just something like—but with the idea that we could have people go and look on a survey site, and we would do a private survey of that advisor’s clients. So, the advisor couldn’t make it—they couldn’t make people say good things. If people said bad things it was going to record it just like the good things were on our site. And they would have a rating system—like, how proactive is your advisor, how knowledgeable is he or she, does he communicate with you frequently, that kind of stuff. And the SEC, because there’s a lot of compliance in this particular industry, we felt that it was best that we confronted it out front, and went to the SEC to try to get what they call a no-action letter. Because a no-action letter would say this is okay, this is good. We’re not going to come after you for doing this. Well, the SEC didn’t want to grant us that no-action letter, because they said that they don’t like the idea of an advisor being able to tout themself, or advertise themself, in conjunction with people giving testimonial about his or her services. And we tried to argue that these are not advertisements really, because there could be negative comments on here. But the SEC wasn’t quite ready to get to, I guess, [unintelligible] this new century. They’re still kind of back in the 1990s about this particular topic. So, hopefully in the future they will be.
JASON HARTMAN: Yeah, and you know, I’d like to make a comment on that. And if you have any thoughts, please share them on this. I don’t know if you’ll want to share them or not. But I think that the SEC in a way is really in cahoots with the advisors. They—it’s kind of like the large companies on Wall Street—they pretend to complain about all of these strict regulations, and yet, at the same time, they like them, because it limits competition, and it keeps new entrance out of the market. I mean, if a company is a private company and wants to go public, the compliance cost in doing so is massive! So, that creates less competition in the IPO market, you know, and for investor dollars in public markets. So, if you’re already in the game, and the inner circle, and you’re already public, are those regulations really so bad for you? They’re keeping the competition low. They make a high barrier to entry for competitors. So, in that way—I mean, I believe that is something that goes on. But in this way, when it comes to regulating advisors, I can’t tell you the number of times advisors have been pitching me, pitching me, pitching me—oh, invest with us, my group, my team at Merrill Lynch, or my team at Ameriprise, or maybe they’re independent Edward Jones, whatever their company is, doesn’t matter—they’ll be pitching me on why I should do business with them, telling me how great everything is, how their clients are making so much money, and yet when I say something so simple like, just send me the performance. You have model portfolios for your clients; just send me the performance of your model portfolios for the past 3 and 5 years. Oh, we can’t do that. The SEC won’t allow it. I can’t give you anything in writing. And I gotta just think that that regulation is benefiting advisors!
CATHERINE MCBREEN: Well, I do think that it is time for the SEC or other government agencies—I don’t know whether there’s a new consumer protection division—but I mean, this would be a perfect kind of tool for consumers, because what we are trying to say is, we’re trying to disclose, in a way that investors understand. In most cases, investors really don’t understand what’s going on in this industry, and it’s because it’s so shrouded in secrecy, or compliance, or whatever. It’s just like you said—if my advisor can’t show me how he or she’s done in the last few years, well, why is that? And I mean, I understand why to some extent, because of the intricacies of all of the different type of returns, etcetera. But at the same time, this would provide a tool for people to say, gee, this is somebody I’ve trusted or not trusted. It’s good or bad. We even offer to add as part of the overall review before we would let somebody onto our site, because first of all, we wouldn’t let anybody onto our site if they had any SEC violations or FINRA violations, or any kind of regulatory violations. And we are going to review their material. So, disclose your materials, and give those a rating on our own. Like, does this advisor provide—disclose his fees clearly for investors, and give him a rating of 1-5. And they still didn’t go for it. So, it would have been a great tool for investors, and we’re really disappointed.
JASON HARTMAN: I mean, does the SEC keep people from going on Yelp and rating their advisor?
CATHERINE MCBREEN: Exactly. Well, that was what we tried to explain to them, and they said the difference was that an advisor doesn’t pay to be on Yelp, and an advisor would actually pay to be in our service, because we’re promoting him or her. Not promoting in the fact of endorsing, but like, it’s almost—it’s more, I guess, we’re providing these services for the advisors, so he’s paying us. So, you in essence could go—if you had an advisor across the street from you that you’ve hated and competed against, you could go on Yelp and say bad things about him or her.
JASON HARTMAN: And that happens, no question. People know that that goes on.
CATHERINE MCBREEN: And the reality is, you don’t know whether that’s true or not. And everything we were doing was very driven by—it s going to be 100% a client that has validated and all that stuff.
JASON HARTMAN: Kind of like Angie’s List. I mean, that’s what Angie’s List claims to do. They’re actual clients, people can’t go and write a bunch of fake reviews. And Amazon has done that in recent years with the Amazon verified purchaser, which certainly the competitor could purchase the product on Amazon and write a negative review about it—that’s not hard to do, especially if it’s a $20 item. It’s much different than taking half a million dollars and giving it to an advisor that you don’t like, that’s your competitor.
CATHERINE MCBREEN: So we thought they would like this, because it’s a really highly regulated way to get feedback on these advisors, as opposed to things like Yelp. But, apparently they weren’t ready for it.
JASON HARTMAN: Well, the SEC is in the Dark Ages, what can we say.
CATHERINE MCBREEN: Well, most of the government is, right?
JASON HARTMAN: I’ve heard it called the Scoundrels Encouragement Commission, the SEC. I like that acronym, it’s pretty cool. Good! Well, what are your thoughts on investment newsletters? I mean, there’s so many. That’s such a big business. They are not advisors—just newsletter publishers, making millions and millions, and tens of millions of dollars a year, just publishing newsletters! What are your thoughts on that whole cottage industry? It’s not really cottage anymore, but….
CATHERINE MCBREEN: Well, personally I think our investment website’s the best, personally. And ours is free. But what I would comment on is, I think that what we’ve found—so, we do all this research with investors, and what we’ve found that a lot of times is that the newsletters that you might get from your own advisor, or which you might get from somebody you might have an account with, whether it’s a big bank, or a big brokerage firm or whatever—those types of newsletters aren’t very appealing to investors. And we’ve researched it. And the reason is because one, sometimes they’re afraid that they’re being pushed a product. And if you read some of these newsletters, they are saying—they’ll give you a long, long explanation around what ETFs are interesting, and at the end telling you that you should invest in them, and then saying oh, by the way, come to us to buy them. So, investors don’t really like that. But the other thing that they don’t like is the fact that—you know, they come home after work, after a long day, whatever it is that they do. And most investors don’t want to read college-level types of material when they come home. They want to read something that explains a little more clearly, a little more light, and a little more interesting. So a lot of these really in-depth investment newsletters are only appealing to those people who are really, really into investing, as opposed to those who are just kind of trying to keep abreast of what is going on, or learn interesting things. So.
JASON HARTMAN: Yeah, interesting. I wish all these advisors and newsletter writers just had to publish their results in the same exact format. And the same thing with people in real estate. I remember the founder of RE/MAX, many years ago, Dave Liniger, he was trying to get a law put into effect, or you know, because he didn’t do it from a regulatory side—he wanted to do it just from a competitor’s side, by just issuing a challenge to his competitor, saying, I dare Coldwell Banker and the other companies to publish the number of sales their agents make every year. And of course, that doesn’t mean that the agent is good, just because they have a lot of business, necessarily. But it’s an indicator that the marketplace will figure them out. It’s not perfect, but it’s better than nothing, maybe. And I just wish with advisors, and newsletter writers, that there was a standardized format, and everyone had to be using this standardized format, and people could just go and look it up! And they would know!
CATHERINE MCBREEN: Right. They like to compare apples to apples. Because this industry has so many different kinds of fruit, I guess would be one way to say it. It’s hard for them to understand what they should really be looking at, and why one thing seems to be important in one newsletter, whereas another one has a totally different spin.
JASON HARTMAN: Yeah, that was a pretty brief answer. Yeah. I mean, yes. It’s apples to apples, you’re right. There’s so many different kinds of fruit. Great metaphor. But apples to apples, pears to pears, bananas to bananas. It could be done, right?
CATHERINE MCBREEN: Right. You know, the thing that people find interesting, and that investors get frustrated with, is that they don’t really understand how different financial advisors are different from each other. And in their mind, they’re just going to somebody that they want to have help them manage their money and do the best for them as a person. And then they find out that, well, this advisor is really focused on selling you insurance and products, and this advisor is really focused on selling you equities or whatever. And they really don’t—unless they go to a true financial planner, they don’t realize that they’re not going to get a financial plan; their financial plan is going to be geared around doing specific things. So they really get confused about, why are all these advisors so different, and why can’t somebody just help me with all these things that I don’t understand? And we find in our research that that’s one of the biggest challenges that investors have. They want somebody who can answer all of their questions, and that’s why there’s a lot of lack of trust.
JASON HARTMAN: Yeah. Sure is, no question about it. We’re talking about money here, and a good question to ask is, how much does it matter? People would be naïve to say it doesn’t matter; it does, in a modern society, for sure. But how much does it matter, and what effect does it have on one’s overall happiness? What effect does it have on their marriage? On their children? And how much is enough? Is there a right number? And I have some thoughts on this too, but I want to ask yours first.
CATHERINE MCBREEN: Well, we did some research about a month ago, and I’m not going to be exactly specific about the percentages, because I don’t have it in front of me. But we asked people overall the questions, do you believe money makes you happier? And if you have money, has it made you happier? And those kinds of things, to equate, does money really make you happy? Because we always assume that money buys happiness. Well, of course the people who had less money believed that the more money you have, the more likely you were to be happy. And the people who were wealthy were less likely to say that money buys you happiness. So, overall, when we asked people: what do you think? How much money is rich? How much money do you have to have to be rich? Well, people really don’t think a million dollars is enough anymore.
JASON HARTMAN: It’s not.
CATHERINE MCBREEN: That’s not surprising. But as far as income levels, they think that if you make over $500,000, then you’re rich.
JASON HARTMAN: And a lot of this—a lot of this, Cathy, depends on where one lives.
CATHERINE MCBREEN: Exactly.
JASON HARTMAN: Because the major cost most people have is housing. And if you live in an expensive housing market—by the way, where are you located?
CATHERINE MCBREEN: We’re located in Lake Forest, Illinois. So, suburb of Chicago.
JASON HARTMAN: Yeah, yeah. Not tremendously expensive. But, if you live in a tremendously expensive housing market, like a couple of areas in California, or New York City, then you’ve gotta just adjust those numbers so dramatically for that amount. But, your survey said $500,000 a year. And, in net worth, did you have a number?
CATHERINE MCBREEN: That was in income. Net worth, people thought that if you had like $2 million you were wealthy.
JASON HARTMAN: That’s pretty interesting, because I’d say that’s probably pretty accurate. And the survey, I assume, was nationwide, and you had people in different markets?
CATHERINE MCBREEN: Yes, it was.
JASON HARTMAN: I remember reading an article in one of the financial magazines, and I’m guessing here the year, but I’ll just share it with you. They talked about, can money buy happiness? And they found that there was a certain number that pretty much did the job. And you know, I’m gonna just guess, Cathy, that that was way back in 1991. So, it was a long time ago. But while you were talking, I just did a little inflation calculation, and the number they mentioned that was the number that sort of bought happiness, was $1.5 million net worth. Which comes pretty close to your survey, because adjusted for the official rate of inflation, which of course I think is understated, and you probably agree with me. But just based on official numbers. Today is $2,490,000. So, not far off, huh?
CATHERINE MCBREEN: Yeah, and even those people who had that much money were quick to say then that money just can’t buy you happiness. Obviously there are other things that make you happy—your family, and your relationships, and all that.
JASON HARTMAN: Sure.
CATHERINE MCBREEN: But I think that it’s a lot easier with somebody who doesn’t have money to say, if I had more money, I could be a lot happier.
JASON HARTMAN: Right, right. But then you get those other people that don’t have it kind of dissing the whole subject, saying oh, it doesn’t buy happiness! And all I’d like to say to them is that, it doesn’t buy happiness. It just buys more than poverty does, that’s all.
CATHERINE MCBREEN: Exactly.
JASON HARTMAN: So it does matter.
CATHERINE MCBREEN: It makes things a little easier.
JASON HARTMAN: It sure does. Well, any closing thoughts? The website is www.millionairecorner.com. And yeah, any closing thoughts you have for us?
CATHERINE MCBREEN: Not really. We’d love people to come to our website. We’d love for them to send us emails or comments about what we could do to make it better, more interesting. Or even topics or ideas they’d like us to research, because we research topics every month. So, sometimes they can be a broad as—or a prissy as—do millionaires prefer dogs or cats? Or hopefully more of the things a little more in depth than that.
JASON HARTMAN: Right. Fantastic. Well and you know, Cathy, I forgot to ask you about one more thing. Real estate—you said a lot of people were coming to your site asking about real estate, reading real estate investing articles nowadays. Just quickly, what are your thoughts there?
CATHERINE MCBREEN: Well, we have found, even throughout the economic crisis, that real estate is an incredible investment that people have been interested in. And when we ask people what they want to invest in, people will say, oh I want to invest in alternative investments. But when we ask normal people what’s an alternative investment, to them it’s real estate. And even people in California, which, at the height of the recession we did a focus group there—we were interested in investing in real estate—and that’s such an up and down market in places like that. But yeah, we find that that’s something that people have continued to be interested in, and since the recession, we find more interest in the fact that people still feel like—even though they’ve seen their home values go down, or seen real estate values go down, they feel like it’s a more stable asset in the fact that they have it, you know? They own it. The other thing we’ve done is, we did a book a few years earlier, and one of the things that we found in households that had what we called perpetual wealth, meaning from generational wealth that they passed on, was they invested in income-producing real estate. They weren’t people who invested in a house, fixed it up and flipped it. It was people who would buy, you know, income properties, whether they’re apartment buildings or commercial rental facilities where they would eventually pass those on to their children and grandchildren, and thereby had an income stream that they were passing on, that kept their families pretty well protected going forward.
JASON HARTMAN: Yeah, I couldn’t agree with you more, Cathy. I like to say, whenever I do a seminar or talk about this topic, that I’ve seen the various real estate clients I’ve had over many, many years—the people who do the flipping and the buy and the sell, they have spending money. But the people who do the buy and hold of income properties over the long term—they have real wealth. Couldn’t agree with you more. I’d rather have real wealth than spending money any day. Although spending money is okay. But real wealth is much better. And for my money, I just like housing, whether it be apartments, or single-family—everybody needs a place to live at the end of the day. And you do make the distinction between income-producing real estate, and one’s own home. And Robert Kiyosaki does that very well, saying, your home is a liability. If you have to spend money to own it, it’s a liability. So, income-producing real estate is the way to go.
CATHERINE MCBREEN: Yeah. When we do net worth calculations, we take the value of your home out of that. Because like you said, that’s just something that—it can be a liability to you, and it’s not really part of something that you can rely upon if you needed.
JASON HARTMAN: It’s true, and you know, I gotta just mention one more point on that. I saw something interesting today. One of my friends who’s out house hunting posted this gorgeous home on her Facebook page today. And it’s in north Scottsdale, Arizona. And it was $2.4 million, and you get a lot for that out here, okay? Not as much in Newport Beach, where I’m from. But what’s interesting about it is, the posting said it was $2.4 million to buy, or you could rent it for just $5300 a month. So, I mean, that is a phenomenal deal, as a renter! We’ve all gotta live somewhere, so when you think of real estate investing, think of, if you can afford a high-end property—it’s almost always better to rent the high-end property and own a lot of low-end income properties you rent to other people, because the ratios are so much more favorable to the renter in the high-end property case, or to the owner, in the low-end property case. So, yeah.
CATHERINE MCBREEN: Now, we met a lot of people at the height of the recession that we were doing interviews with. And they would tell us things like, they may have had a beautiful mansion, but they decided to stop paying the mortgage, because there was one down the street that was better than their that they could pay cash for, and just walk away from the one that they had, because they were able to upgrade to something that had fallen so much in value. These people have enough money that they don’t have to worry about their credit rating, and not being able to get another mortgage in the future, that kind of thing.
JASON HARTMAN: Right, and what’s interesting about that, that’s what we call strategic default, and millions of people have done it, and millions are still doing it. Maybe not millions anymore—it’s probably lessened now. But lots of people do it! And you can make your own morality decisions on it. But from a strictly financial point of view, what you didn’t mention there is, many of those people lived in that house that they stopped paying on for a year, two years. If they were in Florida, maybe three years, and lived there for free, and then bought the place down the street for cash.
CATHERINE MCBREEN: You’re right, there is a morality decision. I see my grandparents flipping over in my grave….
JASON HARTMAN: I know, the old school would definitely not go for it. But if you think about it, the contract says, look. If you don’t pay, you give up the collateral. And they’ve given up the collateral. As long as they didn’t destroy it, or do anything evil, that is the business deal they’ve made with the lender, and they’re obviously gonna give up their credit rating too. So, those are the consequences. But very interesting stuff, Cathy! Thank you for joining us today! And again, the website is www.millionairecorner.com, and your studies are very interesting! Glad to have you on the show.
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ANNOUNCER: This show is produced by the Hartman Media Company. All rights reserved. For distribution or publication rights and media interviews, please visit www.HartmanMedia.com, or email [email protected]. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate, or business professional for any individualized advice. Opinions of guests are their own, and the host is acting on behalf of Empowered Investor, LLC. exclusively.
Transcribed by David
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