Join Jason Hartman for this three-part episode covering several topics, including:
- Self-Directed IRAs (SDIRA) and pension plans
- Home Owner Associations
- Jamie Dimon and JP Morgan’s Toxic Financial Waste – The largest multi-billion dollar fine in history
- Properties in Austin and Memphis
- Controversial future guests Noam Chomsky and Bill Ayres
- Direct investing
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: Welcome to the Creating Wealth Show. This is episode number three hundred and forty-one, #341, and this is your host Jason Hartman. Thanks so much for joining me today. We have got three areas, or three sections of this show today, rather than the usual two. And first of all, I’ve got Steve here, welcome Steve, how are you?
STEVE: Hey! Pretty good! Recovering from eating way too much barbeque on the Austin property tour. I’ve been in a meat coma for a few days.
JASON HARTMAN: Yeah, well, you really missed Saturday night. I went to dinner with one of our clients, and boy, this Brazilian restaurant—oh my gosh. You would have been in a meat coma all year, you’re such a carnivore. You would have been in one for a long, long time. Man, I’m actually still full from that meal [LAUGHTER].
STEVE: I believe it, yeah.
JASON HARTMAN: And it’s Monday afternoon [LAUGHTER], and that was Saturday night. So, anyway. But yeah, so we’re going to talk, or recap on the Austin tour. We gotta talk about JP Morgan, we’ve gotta talk about some amazing upcoming guests that I’ve got coming. Boy, I mean, you listeners, you’re gonna think, what happened to Jason, when I tell you who these guests are. I mean, this is mind-boggling, who we’ve got coming on.
STEVE: Jason’s driving on the left side of the road now.
JASON HARTMAN: [LAUGHTER]. Don’t worry, I haven’t fallen down the rabbit hole. But anyway, so, I’m gonna mention that. We got two quick properties to review, and then we’re going to talk with a guest that I interviewed at the Equity Trust conference in Orlando, Florida about a week and a half ago about self-directed IRAs. That was kind of an interesting discussion. And then we’ve got one of our clients, Neil, who is going to talk about homeowners associations. So, let’s get to it! Steve, so, should I spill the beans on who the guests are?
STEVE: Yeah, you might as well get it over with, you communist.
JASON HARTMAN: [LAUGHTER]. You know I’m not going to live this down. If you’re a regular listener, you probably know that I’m pretty libertarian in my political leanings. But I’ve got Noam Chomsky coming up, and the reason I requested that we invite him onto the show—for those of you who don’t know who Noam Chomsky is, he’s an MIT linguist—I think a professor linguistics at MIT—really bright guy. And he’s written all sorts of books. Very critical of American foreign policy, and a lot of it I agree with. But I saw an interview with him and Julian Assange, of WikiLeaks fame, on YouTube. And it was fascinating, something he said, and I just can’t wrap my head around this.
But he said, Steve, that the concept of democracy and capitalism going together and being one and the same thing, are relatively recent phenomenon. And I cannot for the life of me figure out how he’s right about this, but I want to ask him about it on the show. And what he said is that the concept of free market capitalism and democracy—those two were tied together intellectually, and marketed as part of US propaganda during the Cold War, against the Soviet Union and other communist states. And I’m like—really? Because, to my thinking, you can’t have freedom without property rights. Those two are inextricably linked in my mind, because the effort of our lifetime is what we spend doing our work, right? And our work pays us, and with that, we create wealth, and we create capital formation, which is very good for an economy, and those two go together! And I’m sure you would agree, they go together, right? But Noam Chomsky said they don’t. And I just got really fascinated with that statement, so heck, we booked him on the show.
STEVE: Okay, let’s ask him. Maybe it’s because we’re automatically associating say communism with the Soviet Union, because, yeah, the people didn’t really have a say in the Soviet Union, and there was no free market. There was central planning—this is how many cars we need—
JASON HARTMAN: Listen, I hate central planning.
STEVE: Yeah, so I can see how he would say it was that, that it was propaganda during the Cold War. But I’m sure he has plenty to say beyond that, so, looking forward to it!
JASON HARTMAN: Yeah, yeah. So, remember, I do have an interview from a long time ago, and it was an awesome interview, with Pat Buchanan. So I’m just trying to balance things out for you, folks. But I’ve got another one of these types of guests coming up. This one’s going to blow everybody’s mind when I say it. But he is a longtime friend; possibly a best friend, I don’t know, of our emperor—our comrade Obama. Barack Obama. Yeah. And that is Mr. Bill Ayers, is going to be on the show. Whoa! Hello!
STEVE: So you gotta get Sarah Palin the week after that, if you’re getting Bill Ayers.
JASON HARTMAN: [LAUGHTER]. Yeah! I gotta get Sarah Palin or Mitt Romney after that to balance things out!
JASON HARTMAN: Yeah, but don’t worry, I haven’t fallen down the rabbit hole. But about three years ago, maybe four years ago now—it was fairly shortly after Obama was elected the first time. And I want to say Obama was selected more than elected, but that’s another discussion. Because, how does a guy with such a little resume and a mysterious past just come from nowhere and become president twice in a row? I don’t know. But anyway, I saw a really interesting documentary on Bill Ayers and the Weather Underground—that is the Bill Ayers we’re talking about here—and he’s got a new book entitled Public Enemy: Confessions of an American Dissident. So, I mean, regardless of what you think of him, he’s going to be a fascinating interview. And heck, it doesn’t get much more controversial than that, does it Steve?
STEVE: Oh, wow, during that first election, he was all the rage for quite a while. That’s why I joked about Sarah Palin. But, about alleged terrorist activities by Bill Ayers, and the president’s support of him, and whether or not Bill Ayers officially helped him launch his campaign—there’s a ton of controversy surrounding this guy, so it’ll be really interesting having him on the show.
JASON HARTMAN: Yeah, ton of controversy, but I can’t wait to talk to the guy and see what he says, and as you know, my guests, you know, one of—I had breakfast yesterday with one of our faithful listeners—she was on the property tour, and I know this person will not want me to mention her name, so I’m not going to—
STEVE: I know who you’re talking about!
JASON HARTMAN: Yeah, you know who I’m talking about. She won’t be in any pictures, and I’m not going to mention her name. But she said, Jason, one of the things I really like about your shows is, you actually let your guests talk. And you know, I really do! Because I want to learn from them. I want to hear what they have to say. So, we’ll see what Bill Ayers and Noam Chomsky have to say, and let’s get some people on the right to balance it out pretty soon. But there you go! So that’ll be coming up. What shall we dive into now? You want to talk about Wall Street or Main Street? Let’s talk about Main Street first.
STEVE: Yep, Main Street.
JASON HARTMAN: Main Street is getting burned constantly by Wall Street, and that’s why we don’t want to invest on Wall Street. We want to invest on Main Street. But we did Main Street this weekend with the Austin property tour, right?
STEVE: Yeah, yeah. It was a great time, great neighborhoods, newer construction properties, out in the suburbs of the Austin, Texas areas. Because Austin itself is just too expensive.
JASON HARTMAN: Well, downtown Austin. I just couldn’t believe it. I looked at places—you know, I’ve always kind of thought about moving to Austin, for about 15 years now. Never did it. Got close a couple of times, and so this time, for kicks if nothing else, I spent Friday afternoon and a little bit of time on Sunday afternoon looking at some apartments. I love being a high-end renter. Love renting a high-end property, and buying a lot of low-end properties that I rent to other people. It’s awesome. Highly recommend it, folks, for all the reasons I’ve discussed on prior episodes. And I looked at some myself, and I can’t believe the prices, Steve! I mean, downtown Austin is expensive! I mean, it’s not quite on par with downtown LA or Westwood Village, which is a Los Angeles area. It’s not as expensive as New York, or even maybe, you know, I’m kind of assuming, although I haven’t shopped there much lately—I don’t think it’s as much as Miami, probably. But it’s not cheap. I mean, if you want to rent a 1500 square foot swanky high rise condo, you’re going to pay $45, $4600 a month.
STEVE: That’s crazy.
JASON HARTMAN: And believe it or not, as nutty as that sounds, that is still a bargain, in my opinion. Because to buy that place, in terms of an RV ratio, it would probably cost you a million, a million five, to own it. And so 45, $4600 a month, that means you could buy $460,000 worth of real estate through our network and get a 1% RV ratio that would generate $4600 a month. It’s a much better deal to buy those properties and rent those to other people, and rent your own high end property for yourself, as nutty—everybody on its face, Steve, they would think, you gotta be crazy throwing away, they’ll say, “throwing away” $4600 a month in rent. But it’s much better than owning it. And never—listen to me, folks. I don’t think there will ever be a time when I recommend buying a high-rise condo. Because those things—they’re just plagued with problems, and I’ll tell you my own horror story in the future about Las Vegas and how I lost a fortune there, before I knew any better. This was in the old days when I was stupid, but I’ve learned my lessons. The School of Hard Knocks is an expensive education, but unlike college, and paying for a beer pass in college for four years—a beer drinking pass—these lessons you remember.
STEVE: They stick with you, you don’t have a choice.
JASON HARTMAN: Yeah, they really do. Hey, so, a little bit more on Austin property tour. One of the things—well, there were two things that were discouraging about this tour, and those of you who’ve been longtime listeners, you know I try to be very transparent with all of our stuff. We tell you the problems, we tell you the good side, we tell you the bad. The good, bad, and the ugly, as it were. And this Austin property tour, we made a mistake on it, I mentioned this before. We thought we’d offer this executive tour concept, and, because we frankly, we found it hard to book a seminar room in Austin. Everything was so booked up! And you could see that. We stayed at the Hyatt Regency, Austin. And that hotel was packed! And you had to wait in line to park your car, and it was just impacted! I mean, the hotel was full! It was unbelievable!
STEVE: It was a zoo.
JASON HARTMAN: And it was very difficult to find a seminar room, so we decided, well, let’s just do something different! People just want a tour. So let’s just offer a tour only. We’ll just have breakfast together, get a bus, do a tour, and have lunch together, and then we’ll adjourn! And people can fly in and out on the day, and you know, a lot of you said, hey, if I’m gonna travel to Austin and come on your tour, I want to get the Creating Wealth seminar. So, we didn’t have the Creating Wealth seminar. So, you know, our turnout was a little lower than expected, for sure. We usually have 40, 50 people on these tours, and here, I don’t know. I think we had like, 18, or something like that. And so the turnout was a little lower, and then another disappointment with this tour was that—our poor local market specialist, Kevin. He worked pretty hard, and so I thank him for that. But the day before the tour, he called to check availability on the properties, and this is one of the challenges we face. And of the—I think he had 12 properties lined up for us. 6 of them sold. SIX! Half the inventory was sold.
STEVE: In one day!
JASON HARTMAN: Yeah. It’s just really difficult and discouraging. But he worked hard, burnt the midnight oil, got a few other properties, but of course, not as many as we wanted to see. But you know, we still saw a good number of properties, and some good properties, surprisingly, given the inventory shortage problem. But, what were your impressions, Steve?
STEVE: Well, I seemed to like the north side a little bit better. The Hutto area, and Pflugerville. I liked those better. Of course the properties down on the south side in Kyle were great too. A lot of people were asking, so who lives out here in these suburbs? And the answer is, people who don’t want to pay the outrageous prices in Austin, but that work there.
JASON HARTMAN: A lot of H-1 visas in those areas. Those people are the techie people, the really, really smart people that work at places like Dell Computer, and so forth. And they’re great tenants, because they’ve got money, a lot of them they’re not there—well, if they’re on a visa they’re not there permanently, or at least they don’t think so in the beginning, so they rent. And there you go, you got a great tenant pool.
STEVE: Yep. And there are properties typically built 1995 and newer. You usually buy these things for somewhere in the low 100s, and then our local market specialist helps you complete the rehab after the fact. So, it requires, I guess as a percentage, a little bit more cash to get into the deal, but that’s how we can make Austin affordable. Because in the commandments, the deal must make sense today. We want cash flow today. And you don’t want to—because Austin is such a hot market, we don’t want to get caught up in that euphoria of oh it’s going up! It’s going up! I’ll buy just to buy! Nope. It has to cash flow today, and there are very few neighborhoods where you can be in a good neighborhood, get a good quality property, and get cash flow. And that’s why it’s so tough for Kevin, our local market specialist, to source these things. There’s not a lot of those properties left.
JASON HARTMAN: Well, Austin’s one of these markets that’s sort of a hybrid market, like Phoenix, like Atlanta, where it’s tough to make the cash flow work. Because the appreciation potential is greater in these markets than it is in the very linear markets like Indianapolis; Little Rock, Arkansas; Memphis, Tennessee; I guess I don’t have to say the name of the state, do I? People probably know where these cities are.
STEVE: Memphis, New York?
JASON HARTMAN: Well, you know, there are duplicate names of things.
STEVE: Yeah, but I don’t think—
JASON HARTMAN: I think they get it.
JASON HARTMAN: Elvis Presley, you get the idea folks. Graceland, etcetera. Anyway, those are the very linear markets where the cash flow is better, and it’s a little easier to find inventory, for sure. But again, if you want to lean more on the speculative side, although not really truly speculative—it’s not like you’re doing on the coastal properties where they’re really expensive and the cash flow just never works.
STEVE: Or it’s negative! On the coastal areas it’s negative!
JASON HARTMAN: Yeah, so that doesn’t work. But yeah, good. So it was a good tour. And you know one of the things I loved about this tour? Is because we had a smaller group, it was really really nice getting to talk to people more individually, and hear some of their ideas. You know, I talked to one of our clients who wants to file for a patent on a really interesting construction process, so I heard all about that. We has another group of clients there that was a family, and you know, I’m sure all these people are listening to us talk about them, so we don’t—we won’t mention a name, necessarily. But they’ve got a bunch of properties in Northern California that they’re doing 1031 exchanges, and they’re getting out of those.
They want to get into properties that are in better neighborhoods, number one, and have better cash flow, and you know, hopefully better potential for the future. And so—they want to diversify. And so, they’re looking at some of these other markets around the country, so it was great to talk to them. And just really great to get to know some of the clients more; with the smaller group you have the opportunity for that. And I gotta tell you—we have, without a doubt, and I constantly hear this from our local market specialist, the different developers and builders that we deal with—you know, in our business it’s a cottage industry. We have really almost no competition. It’s a pretty unique kind of business model. But, you know, we do have other groups out there that are sending investors to these different cities.
And I constantly hear—and I’ve heard this for years, this same thing—Jason, your clients are so sophisticated. And they are such a pleasure to work with. Because they are educated, and some people in the old model of salesmanship, the Glengarry Glen Ross model, I know you like that movie, Steve. Coffee is for closers! You don’t bring coffee! [LAUGHTER]. That was a pretty good movie. But I know you’re a big fan of that movie. And, you know, in the old model of sales, the idea was, you want to work with sort of a dumb customer, a customer where you can pull the wool over their eyes, and be a timeshare salesman, right? But in my opinion, working with a smart customer is much easier, because #1 they don’t ask as many questions, so, they’re not like, taking a lot of time to manage. You know? They get it! They come to the party with an education. And that’s why we do this podcast, 341 episodes in already—so that we can have people educated in advance. And they’re just a pleasure to work with! They’re just easier, better clients. Just a better, classier, more sophisticated clientele. So, I think it’s a wonderful—
STEVE: Yeah, I agree, and I was actually going to say that, but you did first. Because when you’re with a small group like that, you get to know them. And these are smart people. They know how to do their homework, they’ve been listening to the podcasts, they study investing, and it’s great. Many of them have purchased properties in our network already in other cities, and it’s just cool to get to be around people that share your same mentality. And that’s one thing that I heard from all of them. They like meeting other investors that think the way they do, and are using the same strategy they are.
JASON HARTMAN: Yeah, absolutely. And the other thing that we are constantly doing, Steve—you, me, the other investment counselors in the company—we are learning from our clients, and assimilating the learnings we get from our clients, and then sharing them back to the other clients. The rest of the group. So, that’s one of the things that we constantly want to do on this show. That’s one of the things we constantly want to do for our members who have joined Jason Hartman University for a whopping ten bucks a month, and that’s about the cheapest university ever, isn’t it, Steve?
STEVE: You’re not going to have to get a federally insured student loan to join www.jasonhartman.com.
JASON HARTMAN: The one that’s not dischargeable in bankruptcy, that makes you a debt slave for life.
STEVE: If you’ve gotta go bankrupt over ten bucks, you’ve got bigger problems.
JASON HARTMAN: There you go, absolutely. Well hey, you want to jump over and hear from some of the scum of Wall Street?
STEVE: Yeah, let’s give up the feel-good stuff and get all fired up talking about Wall Street now.
JASON HARTMAN: Here we’re going from Main Street—that’s the real economy, the tangible economy. Let’s take a walk over the Wall Street and the smoke and mirrors economy built on a house of cards, and let’s hear these people who call themselves journalists in the mainstream media—this is a CNBC interview, but, I’m not blaming CNBC in particular, because it really could be anywhere. And they call themselves journalists, but this should really just be called advertising. I mean, it’s mind-boggling the way they’re defending Jamie Dimon and JP Morgan—I mean, it’s just shocking.
STEVE: Yeah, see if you can tell who’s paying the bills at CNBC.
JASON HARTMAN: Yeah, see if you can tell who’s pandering to the advertisers, or, I don’t know how exactly JP Morgan and the other Wall Street cartel is part of the vast Wall Street conspiracy or supporting CNBC, but we know they certainly are. But it’s so complex, because these companies have so many entities under which they do business, and so many—they just have so much influence, it’s—
STEVE: It’s that cronyism. You don’t want to spend too much time ragging on Chase or JP Morgan, because then they won’t advertise with you, and it’s a circle. It’s just—yeah.
JASON HARTMAN: They’re not advertising on the Creating Wealth Show, are they?
STEVE: No, they aren’t.
JASON HARTMAN: I guess not. Okay, well, we don’t plan to get them as advertisers anytime soon, because we’re not being very nice to them. We’re being kind of critical. So, here you go. This is a 6-minute interview. We’ll cut it up with a few snarky comments here, but, listen in.
MARIA BARTIROMO (CNBC ANCHOR): Busy week for JP Morgan, huh Scott?
SCOTT WAPNER (CNBC ANCHOR): Yep, absolutely. That stock’s down over 1% this week, Jamie Dimon looking to end government probes into its selling of potentially shoddy mortgage securities. He was at the Justice Department yesterday working out the particulars on a possible $11 billion settlement on both federal and state levels. So, why is the firm getting so much heat from regulators?
MARIA BARTIROMO: Salon journalist Alex Pareene is with us. He says Jamie Dimon is the reason, and he’s doing more harm than good to JP Morgan. Fortune’s Duff McDonald could not disagree more, and here we are talking about this. Alex, to you first. Legal problems aside, JP Morgan remains one of the best, if not the best, performing major bank in the world today. Do you believe the leader of that bank should step down?
ALEX PAREENE (SALON): I think any time you’re looking at the greatest fine in the history of Wall Street regulation it’s really worth asking should this guy stay in his job? In any other industry—I can’t think of another industry. Can you imagine it was a restaurant, and it got the biggest health department fine in the history of restaurants—nobody would be like yeah, but the restaurant’s making a lot of money—there’s only a little bit of poison in the food.
MARIA BARTIROMO: So, who has the qualification better than Jamie Dimon to run JP Morgan?
JASON HARTMAN: Great line, right?
STEVE: Only a little bit.
JASON HARTMAN: Did you hear the way Marie Bartiromo teed that up? Saying how great the bank was, and blah blah blah, and now she’s just gonna tear what he said apart.
STEVE: Yeah, he’s not cooperating with the tee-up.
JASON HARTMAN: Exactly. It’s mind-boggling. So, we’ll go back on.
MARIA BARTIROMO: …qualification better than Jamie Dimon to run JP Morgan in your view?
ALEX PAREENE: I think the bank might be too big and too complicated and at this point too corrupt for anyone to run, but we could just give almost anyone else a shot and see if they could do better.
SCOTT WAPNER: Too corrupt is a bit hyperbolic, perhaps. Duff—you agree or disagree?
JASON HARTMAN: Note that they just paid what, an $11 billion fine. And too corrupt is hyperbolic?
STEVE: Yeah, [LAUGHTER].
JASON HARTMAN: It’s like man, these guys are just totally defending them! It’s amazing!
STEVE: $11 billion!
JASON HARTMAN: The media—is it supposed to be a watchdog? I mean, that was my impression. Media’s supposed to be a watchdog of government, of big business, etcetera. But here, the media’s a lapdog! I mean, they’re a friend of the company they’re covering! It’s amazing.
STEVE: That’s a bit hyperbolic, don’t you think?
JASON HARTMAN: Oh, sorry [LAUGHTER]. You got me there, right? Here we go.
DUFF MCDONALD (FORTUNE): Absolutely not. It’s—he obviously got attention with this article. It got your attention. It’s preposterous. The stock’s touching a ten-year high. It’s a cash-generating machine. Sure, they’re—they’ve had their regulatory issues, but he’s looking to settle them expeditiously, which is everything you want out of the CEO. It’s an absurd suggestion.
JASON HARTMAN: All they’re talking about, by the way, is the shareholders. Isn’t that interesting?
STEVE: That’s all they care about.
JASON HARTMAN: There are other stakeholders in the company, because they’re the ones that have been just dumping toxic waste—it’s just like polluting a river. Dumping toxic waste on the entire planet with these crappy mortgages and CDOs and CDSs, these Collaterized Debt Obligations, I mean, this is just—this is toxic junk. It’s poison. Like the first speaker, the first guest said. And all they talk about is, well, the executives and the shareholders are making a profit.
STEVE: It’s a cash-generating machine, like he said, so, why are we even talking about this? That’s the tone that he’s taking on.
JASON HARTMAN: If they were in the manufacturing business, and they made batteries or they extracted oil out of the ground, they would be like the Gulf Oil Spill, right? It’s the same thing. They’re just polluting the world with toxic junk, and it’s just a financial instrument that bankrupts people, companies, and countries like Iceland, rather than poisoning them and giving them cancer. We need an Erin Brockovich of the corporate world, don’t we?
STEVE: Yeah, I don’t think that’s going to work.
JASON HARTMAN: Of the financial world, I mean.
STEVE: That would be nice, that would be nice. But yeah, if you were to apply this same logic to manufacturing, or something else, people would be pulling their hair out!
JASON HARTMAN: They’d be going to jail.
STEVE: But because it’s a complicated product, most people don’t know. What’s a CDS? They don’t get that. So, this is why they can skate by with this stuff.
JASON HARTMAN: It’s unbelievable. Anyway, it gets better, so let’s keep listening.
SCOTT WAPNER: Maybe we should pose the question, does Jamie Dimon want to go? I mean, given everything that’s been going on around this company, it seems like he’s taking arrows from all sides. Almost every week at this point. Maybe he doesn’t want it anymore! And within a year he’s not even going to be there, who knows?
DUFF MCDONALD: I doubt he’s interested in leaving. For one, he probably wouldn’t want to leave on a low note like this. But, you know, he’s expressed a desire to stick around for quite some time. The only thing that’s going to have him leave is the board, or shareholders, basically showing him the door. And you know, despite suggestions that he should leave because they’re paying a fine, you know, no major shareholders are calling for his departure.
MARIA BARTIROMO: So, should we talk about the financial strength of JP Morgan at this point? I mean, even with all of these losses, the company continues to churn out tens of billions in earnings, and hundreds of billions of dollars in revenue. How do you criticize that?
ALEX PAREENE: Well, I think a lot of their earnings and revenues we’ve seen have come from really shady dealings.
MARIA BARTIROMO: Oh, come on.
ALEX PAREENE: They have!
MARIA BARTIROMO: Name three shady dealings.
ALEX PAREENE: Alright. Bribery in China, hiring based on nepotism—
MARIA BARTIROMO: You shouldn’t be saying things that you can’t prove.
ALEX PAREENE: Well, the nepotism, hiring the children of prominent Chinese officials is not something I just made up.
MARIA BARTIROMO: Have they been charged?
ALEX PAREENE: They haven’t been charged, but it’s a fact, it’s in the news. Everyone knows about it.
MARIA BARTIROMO: What’s a fact?
ALEX PAREENE: The fact that they hired the children of prominent party officials and there’s a spreadsheet on which it connected the deals they were trying to do in China!
MARIA BARTIROMO: I don’t like you spewing things that are not actual facts on this program.
ALEX PAREENE: Anyone can just Google China and JP Morgan and see this! I mean it’s not—it was in the New York Times!
MARIA BARTIROMO: Oh, the New York Times! Okay.
DUFF MCDONALD: You know, it’s never been a crime—
JASON HARTMAN: Isn’t that unbelievable?
STEVE: That’s crazy!
JASON HARTMAN: I mean, did you hear her? She said oh, the New York Times! Oh!
STEVE: Who I’m sure she cites as fact whenever it’s convenient.
JASON HARTMAN: I mean, this is just unbelievable, the way these—they call themselves journalists! They’re advertising salespeople, that’s what they are. They’re advertising reps. And I mean, this is—this is toxic waste. This is the toxic waste of the financial world. That’s what it is.
STEVE: That’s what it is, and I just keep getting over that New York Times comment. And they’re just considered to be so credible, within most of the media.
JASON HARTMAN: Well listen, I have my qualms about the New York Times for sure too. But the fact is, she’s using it so selectively, you know?
STEVE: That’s what I mean. That’s what got me all mad about it. Oh, it’s not convenient for you now, is it Maria?
JASON HARTMAN: Exactly. Okay, here we go, a couple—there’s like two more minutes.
DUFF MCDONALD: —never been a crime to hire the children of connected people, and I’m not sure it’s going to become one just because Jamie’s done it.
ALEX PAREENE: No, it’s not a crime to do so, but it’s just shady.
SCOTT WAPNER: Part of the point Maria makes when she cites the performance of the bank, I mean, shareholders have no reason to want this guy to leave. Stock is up 18% year to date, he’s considered to be one of the most respected CEOs on the street, sometimes in some forms even mentioned as a possible Treasury Secretary somewhere down the line—
JASON HARTMAN: Oh, just what we need. The guy who dumped the toxic waste of the financial world on the entire planet Earth should be Treasury Secretary! Hmm, sounds like TurboTax Timmy, the guy who can’t do his own income taxes and didn’t file, or whatever his exact violation was—he becomes Treasury Secretary.
STEVE: Well, we had to have him. He was critical. He’s so talented.
JASON HARTMAN: Yes, of course [LAUGHTER]. I mean, this is—I mean, I don’t know what to say. Maybe he can be the next Federal Reserve chair, if not the Treasury Secretary, right?
STEVE: I guess so. Because you know what these clowns do, is they run these banks, they become the Treasury Secretary, and they have incentives to create an economic climate where the Fed will give them unlimited backup. The government will make them too big to fail so that they can keep dumping toxic waste, and much of that toxic waste comes in the form of mortgages and easy credit for housing, because that’s the only thing that has any positive news in the economy right now, on any kind of large scale. So, as investors, like you’ve said many times, all we can do, I guess complain about it a little bit like we are right now, but take advantage of it. Because it’s not going to change.
JASON HARTMAN: That’s a good point. What this is all about, every time you hear me whining or complaining or you know, talking about how corrupt the system is—the whole point of that is—there’s a few points. #1, be a direct investor, and only invest in things that you directly own and control so you don’t leave yourself susceptible to the three major problems of violating Commandment #3, thou shalt maintain control. Be a direct investor. So that’s one. And then the other thing is, understand that the system is just designed for inflation. And invest for inflation. Invest in a way that is going to help you basically game the system, where you’re going to benefit from all this massive stupidity out there, and when these banks are too big to fail, and the government bails them out, and the only way they bail them out, obviously the government has no real money, so they have to print a bunch of fake fiat money.
And that makes all the money in circulation less valuable. And that makes the value of the mortgages that you owe less valuable, which is a benefit to you, because you’re paying back in cheaper dollars, and it makes the commodities that those mortgages are attached to—the houses that are made out of lumber, energy, petroleum products, copper wire, glass, steel, etcetera—it makes all of those things more valuable, okay? And it increases the price of rents, in nominal dollars. But at least it’s indexed to inflation, okay? So, you benefit in so many ways by this absolute stupidity. All we’re doing here is telling you how to do what the bigwigs do and game the system like they do. You just do it on a smaller scale.
STEVE: That’s exactly right. So they can have their apologists over at CNBC and have a round robin of Treasury Secretaries that go back and forth between there and whatever investment bank they were back, or going to be at. And they print, print, print, create these derivative products, so that they can keep churning out fees, because that’s what they do, and taking advantage of these mortgages and housing is probably one of the very few ways that you can get out in front of that.
JASON HARTMAN: That is very true. It’s definitely the best way. There are a couple second and third choices, but they’re—they just don’t even come close. They don’t hold a candle to owning income properties.
STEVE: Buy gold!
JASON HARTMAN: Yeah, right. We’ve debunked that myth about a thousand times on the show [LAUGHTER]. And it’s down a lot today, too, by the way.
STEVE: What does gold rent for per square foot?
JASON HARTMAN: Zero. Zero. It produces exactly zero income. I have yet to meet an—we ought to start a whole nother podcast. We’ll call it the Gold Show. And we’ll see if we can get people to rent out our gold and silver.
JASON HARTMAN: How many takers do you there’ll be? Yeah, I don’t own gold, but at least I rent some, so I’ve got some.
STEVE: I should mortgage my gold.
JASON HARTMAN: Yeah. Yeah, see what kind of financing you can get [LAUGHTER]. Good luck.
STEVE: Oh, you know what? By the way, I talked to somebody at the Equity University conference, and I need to track him down. Because he’s claiming—I don’t think that this can actually happen, but how cool would this be, Jason? That there’s some bank here in the US, probably JP Morgan, that will allow you to get a Japanese Yen-based mortgage on your US real estate.
JASON HARTMAN: Yeah, that’s interesting. I remember talking about that when we were there in Florida, and it’s an interesting idea. So what you’re betting on there, is that the value of the Yen will decline faster than the value of the dollar. Look, it’s a race to the bottom with all of these fiat currencies. So, it’s a race to the bottom. But, you know, I would say that if you could pull that off, it’d probably be a good deal, because I’d say that the Yen is worse off than the dollar, wouldn’t you?
STEVE: Well, yeah. I’ve heard—I don’t know this first hand, but the money printing in Japan dwarfs the US money printing, so, they’re very committed to this race to the bottom.
JASON HARTMAN: They are, they are definitely committed. But see, the thing is, the US can do it in a much more “sustainable,” in quotes, fashion. Because we have the reserve currency. So it’s like, when we have the big military, and all of the other things we’ve discussed.
STEVE: You are turning into a leftie.
JASON HARTMAN: Yeah, right. It’s sustainability! Of completely stupid economics, right? Yeah. Okay, let’s get back to our video. We’ve got just a couple, minute and a half or so here.
SCOTT WAPNER: —even mentioned as a possible Treasury Secretary somewhere down the line if he so chooses and is so asked. I mean, why would shareholders want this guy to go?
ALEX PAREENE: I think that because he’s a PR nightmare for the bank. If you look outside of the financial media, if you look outside of CNBC, like every time JP Morgan’s been in the headlines for the last year, it’s been for terrible news! It’s been bad PR for the bank. And I think that maybe there is a bubble you can be in in which you never hear anything negative about them, you hear he’s the smartest guy on Wall Street, but like out in the rest of the world, it’s nothing but bad PR from Dimon and for JP Morgan.
MARIA BARTIROMO: Duff, what about that? I mean, it feels like, you know, this, this, it feels a little like a witch hunt, frankly. Because they’re constantly talking about charges, and there’s numbers that are mind-boggling in terms of settlements; that’s sort of what sets the tone for these negative articles.
DUFF MCDONALD: Absolutely. Alex is right about the fact that it has been a PR nightmare. And the London Whale is a complete and total embarrassment. So are the, you know, the regular—
JASON HARTMAN: By the way, folks. The London Whale is the trader who lost something like $2 billion in about a day. That’s what he’s referring to. You can look it up. But, Steve, you know what this reminds me of? It reminds me of the late, great Stephen Covey. And his books, but the most famous of which is The Seven Habits of Highly Effective People. And you know, Stephen Covey—I’m a big student and fan of Covey, and I actually got to meet him on a cruise in Russia once, many years ago. Wish we could have gotten him on the show, but unfortunately, he passed away prematurely. But, he used to write about the concept of the two types of trust: character trust, and competence trust. And here, all they’re talking about is Jamie Dimon’s competence, right?
He’s the smartest guy on Wall Street, etcetera, the shareholders love him, even though he’s a complete financial polluter of toxic financial waste around the world, right? So, it’s like, well, he may be competent. There are many people that you deal with in life that are competent. But they’re character is the question. You’ve gotta have—you’ve gotta be striking on both cylinders here when you deal with someone. They’ve gotta be competent, but they’ve also gotta have good character. They’ve gotta be good people; they’ve gotta have integrity, they’ve gotta be decent people that will do what they say, and tell the truth and all of that, so it’s competence and character—two types of trust here. And all they’re talking about here is his competence.
STEVE: Right, the most competent operator of a Ponzi scheme ever was Bernie Madoff. He was great at it!
JASON HARTMAN: Yeah, he’s a fantastically competent guy.
STEVE: There’s nobody else I’d want to run my Ponzi scheme.
JASON HARTMAN: Former president of NASDAQ, by the way.
STEVE: Yeah, but there are other things that go into the equation, like Dr. Covey, like he used to teach.
JASON HARTMAN: Absolutely.
DUFF MCDONALD: So are the, you know, the regulatory issues are a big deal. But they’re trying to address them. But that’s hardly a reason to want to fire your CEO, especially if, you know, they’re doing the 99% of their job that they’re supposed to do, which is running the institution as effectively as he has.
MARIA BARTIROMO: And by the way, this is just the second quarter, but for the second quarter, net income was $6½ billion, just for the three month period, compared to net income of $5 billion in the second quarter of 2012. I’m just trying to figure out from a shareholder’s perspective, who would be doing—I mean, do you have ideas, if you’re saying you want this guy out, who do you think is equipped—
ALEX PAREENE: I already said I don’t think anyone is equipped to run a bank that is that complex. But I really think that this guy’s track record at this point means they should just go with anyone else available.
SCOTT WAPNER: I mean, you’ve gotta—I don’t know. We could sit here all day—
MARIA BARTIROMO: [LAUGHTER]. Anybody else who’s available? Hey, are you available?
MARIA BARTIROMO: Sure, I would do it. I could do just as well at ignoring the London Whale.
SCOTT WAPNER: But I mean, if you’re talking—it’s almost ridiculous to even have this conversation. But if you’re talking track record, the guy has a great track record.
ALEX PAREENE: Of making money for JP Morgan, not at managing the bank in a way that has been good for the economy as a whole, or in a way that has—
JASON HARTMAN: True.
ALEX PAREENE: —avoided these massive fines and—
JASON HARTMAN: True.
ALEX PAREENE: —numerous charges.
MARIA BARTIROMO: What do you think would happen if JP Morgan were not among the banks that actually alleviated things for the 2008 financial—
ALEX PAREENE: They alleviated things by unloading toxic assets on investors! They unloaded assets they knew were toxic on investors! That’s how they got through! That was the brilliant risk-taking—brilliant risk-avoidance strategy.
DUFF MCDONALD: That is not how they got through the crisis.
MARIA BARTIROMO: That’s not how they did it at all.
DUFF MCDONALD: That’s ridiculous.
MARIA BARTIROMO: It’s just not true.
JASON HARTMAN: It is exactly how.
MARIA BARTIROMO: We really—we really need to stick to the facts here. Thanks so much for joining us.
ALEX PAREENE: Alright. You’re welcome.
JASON HARTMAN: Yeah. We really need to stick to the facts, Maria, because—and she had to cut that interview short, obviously. You can tell it was cut short, because of course she has a lunch date with Jamie Dimon, probably.
STEVE: That’s right [LAUGHTER].
JASON HARTMAN: I mean, this is just insanity.
STEVE: She’s gotta go ask him—hey, how did you avoid the ’08 crisis again? Because this guy told me about something else, unloading mortgages? And that doesn’t sound right.
JASON HARTMAN: And here I thought the media pandered to Obama. I mean, this, folks, is the lapdog media. These are literally advertising reps who are selling advertising. They’re not journalists, and they’re certainly not investigative journalists.
JASON HARTMAN: So, what do you say, put John Stossel on. He’ll tear them apart. I mean, John Stossel is great.
STEVE: He’s great.
JASON HARTMAN: Yeah, he’s awesome. But okay, Steve. Now that my blood pressure is up about 20 points, let’s go back to Main Street, because Wall Street is just—I can’t handle it. You got two properties for us to talk about?
STEVE: I’ve got two properties.
JASON HARTMAN: And then let’s get to our two different guests we’ve got today.
STEVE: Yeah. These are great to get financing on, so that Jamie Dimon can buy your mortgage and slice it up a hundred different ways, and make a bunch of credit default swaps.
JASON HARTMAN: And sell it to 30 different buyers even though only one buyer really actually got the note and the legal obligation for you to repay your mortgage. But 30 fools bought his toxic crap. That disgusting toxic waste.
STEVE: If you are going to buy stock, you should probably buy it in JP Morgan.
JASON HARTMAN: There you go.
STEVE: Because he’s great for the shareholders, I’m told.
JASON HARTMAN: There’s an old saying—well not really, though! Because the other investors that bought the toxic crap, they all lost fortunes, you know? A lot of people, that was their life savings! I mean, is someone going to ever report on how many suicides happened because of these Wall Street crooks? Why aren’t they responsible for like, involuntary manslaughter or something, at the very least? Or maybe voluntary manslaughter, actually.
STEVE: Look for a quick piece from Maria Bartiromo on that coming up shortly.
JASON HARTMAN: Oh, yeah, I’m sure.
STEVE: I’m sure she’ll cover it.
JASON HARTMAN: I’m sure I’ll get that, yeah.
STEVE: Well, okay. We have a couple of properties to take into—to look at here. And because we just got back from Austin, I found one that we really, really like. It is in Pflugerville, Texas, which is up by Round Rock, Texas.
JASON HARTMAN: I own in Pflugerville. What a funny name.
STEVE: Yeah, it is a funny name.
JASON HARTMAN: It’s a funny name, but good place. You know what I realized on this tour? I never even thought about it, but you know, I think that property in 8 years—have I owned that 8 or 9 years? I think 9 years now. And that property’s only been—it’s only had two tenants, I think! In all that time.
STEVE: That’s great.
JASON HARTMAN: I could be wrong; it could be like three. But it’s been a pretty low number. That’s the one where I had a fire. I had a fire. That’s the only time I ever had a fire in one of my properties. But it wasn’t any big deal. At first I thought oh my gosh, a fire! That’s my first fire! And apparently—I told this story on a prior show. But the tenant was using some—it wasn’t a barbeque, but one of those things where you have the oil, a fryer—
STEVE: A deep fryer.
JASON HARTMAN: Yeah, a deep fryer. Those things are dangerous. Don’t use those things; they’re just dangerous. And it was on the back patio, under the patio cover, and there was like a ceiling fan out there—it’s almost funny to see the pictures, because the blades of the fan were melted down. I think I actually put the pictures on the website. I did a blog post about that at www.jasonhartman.com
STEVE: Yeah, I saw those, it was pretty gnarly.
JASON HARTMAN: They were pretty funny. But the tenant did get some burns, but the tenant’s okay, and the insurance paid for everything. It was only like $2700 in damage, it really wasn’t a big deal.
STEVE: And I should add that because you owned in landlord-friendly Pflugerville, there was never even a question as to whether the tenant would sue you because of this.
JASON HARTMAN: Right, right. If that were in California or New York—oh my gosh. Of course it would have been my fault that the tenant had a deep fryer. I should have known better.
JASON HARTMAN: Yeah…
STEVE: Well, this property is—there’s a reason I like it. Well, a couple of reasons. It’s 3300 square feet, it’s a huge property.
JASON HARTMAN: Yeah, and it’s an REO. It’s a bank-owned property.
STEVE: Yeah! And you can buy it for $157,000. That’s 3300 square feet in Pflugerville, Texas.
JASON HARTMAN: This is mind-boggling, that it’s only $48 a foot, in an Austin suburb.
STEVE: Right. You’ve gotta add—there’s a projected other closing costs and fix up, the rehab is about $12,000 on this, but that’s not gonna take your cost per square foot up much at the end of the day. It’s very little. So, the projected rent is $1800 on this property.
JASON HARTMAN: Wow.
STEVE: Yeah. It’s a big, big property. Imagine what 3300 square feet’s gonna cost in Boston or Los Angeles.
JASON HARTMAN: Well, Steve, don’t say it’s so big, because I’m sure it’s a lot smaller than Jamie Dimon’s home. Or one of his probably 11 homes, I’m just guessing. We know it’s a lot smaller than Al Gore’s house!
STEVE: Yeah, oh geez. Don’t do it. Don’t go there.
JASON HARTMAN: Now that I got Noam Chomsky and Bill Ayers, I need to get Al Gore on the show.
STEVE: Oh, you’re losing your mind. I think this is where I get off.
JASON HARTMAN: Alright. Okay [LAUGHTER].
STEVE: Anyways, the property in Pflugerville, just to let everybody know, your projected cash on cash return is 8%. That’s very, very good for the Pflugerville area.
JASON HARTMAN: Oh, yeah, yeah.
STEVE: That’s good. And I should add, too—we need to talk about this tomorrow, Jason. But, the interest rates have gone down. This is assuming a 5% interest rate, and with the Feds meeting, they’ve dipped. It’s now very realistic for you to be anywhere from 4½ to 4.875 range.
JASON HARTMAN: It’s a funny thing, when you print $85 billion of completely unadulterated fake money every month to buy your own bonds back, it makes the interest rates lower.
STEVE: Yeah, that’s funny. That’s funny. So….
JASON HARTMAN: But it makes your currency a lot less.
STEVE: Yeah, get your hands on some of that for the next 30 years. It’s a good idea. So, we’ve got another one coming up. This one is in the Memphis, Tennessee area, and the purchase price on it is $84,900. There’s no rehab, this comes fully turnkey, rehab done, tenant in place. It is projected rent of $1050.
JASON HARTMAN: And the overall cash on cash projection is 12% annually, and the overall return on investment’s projected at 34% annually. That’s pretty awesome. You didn’t mention the overall return projection on the Pflugerville property—
STEVE: That’s 27.
JASON HARTMAN: Right, 27%, yeah. And that’s annually, folks. Okay? Hey, this Memphis house is a really good-looking traditional ranch-style home.
STEVE: Yeah, it’s a good-looking house. I like it. I like it. Let your investment counselor know if you want to learn more about that house. But, I wanted to kind of wrap up that with a conversation I had. I had to leave the tour a little bit early and go to the airport with one of our clients, and he’s awesome. We had a great talk on the way down, and he kept saying something that I agreed with, because he had his parents on the tour with him. These are the people that had invested in California many, many years ago, and he said to me, he said, you know, my parents have done such a great job investing. They’re doing better than most of America today because they did it over the long term. And I think they probably overpaid. They made some mistakes on the way. But real estate, if you have staying power and hold it over time, is so forgiving.
JASON HARTMAN: Yeah.
STEVE: Because the rents keep going up, but the mortgage stays the same. These deals—they get sweeter over time, because of these kinds of things.
JASON HARTMAN: Well, you know what I used to say? I remember when I was—we probably all remember this, when you were very young, and young love is like such a great thing. And a couple of girlfriends that I had when I was very young, and I remember after the break up I was really distraught about the whole thing. But I always remember that time heals all wounds. It really does. Time really does heal wounds. I mean, losing my dog last year, of course I think about it all the time still. But it’s not as bad as it was at the time, obviously. Right? You do start to heal over time. And real estate is also just like you say, Steve, it’s very forgiving. But the key is, you’ve got to be able to stay in the game.
So if you can stay in the game, staying power is the key to success. And how do you get staying power? You either have a bunch of money in reserve, and you’re very wealthy to start with, but that’s not necessarily the case with some people. With most people. And so, the way you stay in the game is you buy properties that make sense the day you buy them. You follow the Ten Commandments. And that’s what allows you to cover problem. When you have challenges, if the cash flow works, even if you have a vacancy for a while, it’s made up for on either side of the vacancy. Before you have the vacancy, you had cash flow, right? And you still have a low cost of ownership that you can afford to manage. It’s manageable. And after your vacancy is cured, or maybe a repair problem is cured, you’ll have cash flow again. And so, you can heal those wounds.
STEVE: You can, and I have a client, and if he’s listening, he knows who he is, and I tease him about this—
JASON HARTMAN: You know who you are.
STEVE: You know who you are. But we’ve been talking for well over a year, and he’s always had a reason as to why to not do the deal. And many times it would come down to, he thought the pro forma was off by $25 over here, or that this was a little off over there. Well, while he was hem hawing about this for a year, prices went up how much? And think how forgiving the deal would have been if you get in, you do it the right way, you’ve got cash flow today, okay. Maybe you paid $25 less. Or maybe more. But, over time, just like when you see a chart of a stock that’s going up, it’s not always going up. It has these short term dips and things, but the general trend is positive, and I think that’s what Daniel was trying to tell me in Austin. It just, it really resonated, because it is so forgiving over time.
JASON HARTMAN: Yeah. Yeah, it really is. That’s the beauty of—it’s the beauty of income property done right. It’s a really good marriage. It really is. So, yeah. That’s good. Good to know. Okay Steve, well, shall we get to our first guest?
STEVE: I give you permission to go to the first guest, yes. Go ahead.
JASON HARTMAN: Alright. Well hey, let’s talk to one of the team members with Equity Trust, he’s got some very interesting things to say about investing, about self-directed IRAs. This is a relatively short talk, and then we’ll go to one of our clients, Neil, who wants to talk about homeowners associations, and we will be back with that in just a moment.
JASON HARTMAN: So I’m here with John Bowens at the Equity Trust Equity University event; it’s their annual event, and this is a fantastic thing. They are the largest IRA provider for self-directed IRAs in the country, and they’ve got about 25% of that entire market—about $13 billion, with a ‘b,’ in self-directed accounts here. And the self-directed account really offers some phenomenal features. So I’d like to just have John tell us a little bit about what it is Equity Trust does, and talk about the overall marketplace in general, and some of the benefits. John, welcome. How are you?
JOHN BOWENS: Thank you Jason. Great to be here.
JASON HARTMAN: So, tell us a little bit about the company, if you would first, maybe, just for a few seconds here, and then we’ll move on to how investors can actually use this.
JOHN BOWENS: Absolutely. So, like Jason had said, we’re a self-directed IRA custodian. We are the nation’s largest provider, and what we specialize in is helping investors use their IRAs, 401(k)s, and various other tax-exempt retirement accounts to purchase real estate and various other real estate-based assets. Most importantly, alternative to stocks, bonds, and mutual funds, which we know have failed so many Americans in the past number of years. And so we have customers that are buying single family homes, multi family homes, they’re purchasing mortgage notes and trust deeds, lending to other investors in their particular marketplace, investing in tax liens, in tax deeds, and other more exotic instruments like tropical tree farms and alpaca farms. So really, you’re only limited by your own creativity as far as using your IRA to invest in alternative assets.
JASON HARTMAN: Some of those, John, are rather exotic, I will say [LAUGHTER]. But yeah, one of the things we say is, we say that someone should be a direct investor. So that they get control of their financial future, and they’re not left to the winds of Wall Street. The Wall Street brokerage firms do a fantastic job of extracting money from investors. And the investors don’t tend to get any really good returns. So this is about control; it’s about having control over your financial future, and making decisions that will benefit you, because one of the things that I think a lot of Americans are looking at nowadays, is you know—and it’s a good problem to have, nonetheless—but having too much life at the end of the money. And so, we’ve all got to be responsible. We know that the government probably isn’t going to be there for us, and we’ve gotta plan for our future, and just be really diligent and really prudent about it. So, in terms of some of the investments you mentioned—those are great, and real estate has been the most historically proven asset class in America. Tell us how someone actually does this. I mean, if they have an account now that’s a regular IRA account at one of the big brokerage firms, Fidelity or whatever—I’m just throwing out their name as an example, it could be anywhere—you know, what do they do to get control of their retirement account?
JOHN BOWENS: You know, it’s extremely simple, and essentially what our customers are doing, they’ll have an old 401(k) or IRA with another custodian bank, brokerage, that’s only allowed them to invest in stocks, bonds, and mutual funds. You had mentioned Fidelity, and Schwab, and some of the other big brokerages—we commonly see that customers have accounts with those institutions, and it’s as simple as transferring or rolling over the funds from the IRA with Schwab or Fidelity or whomever else it might be with, into an Equity Trust IRA. And one of the common questions I get is, well John, when I move it from one account to another, am I taxed and penalized? And the answer to that question is absolutely not.
JASON HARTMAN: It’s a rollover, right?
JOHN BOWENS: That’s correct. A rollover, or a transfer is the terminology, and the IRA with Fidelity or Schwab or any of the other brokerages is really no different than the self-directed IRA. Self-directed is just an industry term. Now, Equity Trust—we’re one of the few custodians that actually allows you to invest in real estate, so it’s not a matter of legality but rather a matter of choice. Equity Trust, this is what we specialize in. The other banks and brokers, that’s not what they specialize in. They specialize—and they have an incentive to help their customers only invest in things like stocks, bonds, and mutual funds. So the customer would transfer or roll over their funds into an Equity Trust IRA, and then they would simply put a property under a contract just like you put any other property under a contract. The only difference here, it’s in the name of the IRA account. The IRA now owns that property. Most importantly, in the acquisition phase—
JASON HARTMAN: So you mean, the individual investor’s IRA owns it, not you guys. I just want to kind of clear up some of the distinction about that. They own the property via their own personal IRA account.
JOHN BOWENS: That is correct. We do not assist in the acquisition phase, other than actually sending the funds from the Equity Trust IRA to the title company, under the direction of the customer. But it is the—to your point, Jason, absolutely. It’s the IRA that owns that property, and the sole beneficiary. Equity Trust has no interest in that property. The sole beneficiary is the account holder. So, once the property is purchased, in place of the cash, there is a property within the IRA account. The actual asset that we see, it’s a deed. So the deed is in the IRA account. That’s what’s in custody. So, it’s really no different than buying stocks. When you buy a stock, cash leaves the account, in return for the cash is a stock certificate.
Many would argue it’s an intangible asset. Our customers take a little bit different approach. They’re acquiring a property. Cash leaves the account. And in return for that cash is a deed, tied to a tangible property that many would argue is a hedge against inflation, and that’s why many of our customers are looking to utilize the types of investments. The exit strategy from there—they might rehab the home and resell it, wholesale it, or they might buy and hold for cash flow. We’re seeing a number of customers that are taking that approach, where with today’s real estate market they’re looking to acquire income-producing properties and hold those properties for 5, 10, maybe even 15 years. Generate the cash flow, hopefully regain the appreciation that’s expected in today’s market, and then upon the sale of the property, there’s absolutely no capital gains tax, because the IRA is tax exempt, and then most importantly, recaptured appreciation, you also don’t have to take into account, because the IRA is tax exempt.
JASON HARTMAN: So, you’ve got a tax efficient vehicle, here. Now, one of the things I wanted to ask you, John, is that some people really like the concept of what’s called checkbook control in their IRA. So, they can do this one of two ways. Once they have a self-directed account with Equity Trust, they can do what’s called a Buy Direction Letter. So, for example, they’re buying a property, and they instruct you, your company, to go and transfer the funds to buy this property, right? But they can also set up an entity or multiple entities inside of the IRA, is that correct?
JOHN BOWENS: It is possible to set up multiple entities, but we certainly do not advocate that type of structuring. And the reason for that, and you had alluded to that just a moment ago, and that is the checkbook control IRA. And we absolutely do not advocate a what they would call single member checkbook control IRA, and the reason for that is because there are really rather a number of legal issues, and in particular, the IRS—their intent was to never allow an individual American to use an IRA account to buy into an LLC, have checkbook control, and then have sole discretion over the recordkeeping, the reporting, and all other investment activities within that account.
The IRS, as explicitly stated, they prefer to have a custodian in place that can monitor transaction, that can prevent against prohibited transactions in some cases, not in all cases, but in some cases they can. And make sure that they’re handling all the recordkeeping and all the reporting. A few years ago, a number of companies, they were using a—well, what we would consider an ambiguous case to set a precedent for justifying these checkbook control IRAs, but we know that it has a very weak legal basis, and for that reason, Equity Trust Company, as we’ve been advised by our legal counsel to not allow our customers to invest in again what they call checkbook control IRA. We handle everything internally for the customer. We allow the customer to direct their investments. The customer contacts our offices and says, Equity Trust, I need you to send $100,000 to this title company for this purpose; with all the supporting documents in place, we can process that transactions. We have not a physical checkbook for you, because again, the IRS, their intent is for you to not have a physical checkbook.
JASON HARTMAN: And the reason—I just want to explain to the listeners the IRS’s logic for that. The point of the IRAs is supposed to be an arms’ length—it’s like a separate entity, until you start taking distributions at 59½, or forced at 70, I believe. And that’s why—that’s interesting, I never heard anybody really speak out against the checkbook control LLC, but what you said makes a lot of sense to me. I guess that was a rather tenuous basis a lot of other promoters are out there recommending it, huh?
JOHN BOWENS: Yeah, absolutely. We’ve been doing business since 1974, actively assisting customers investing in real estate since 1983 when we became an IRS-approved custodian. The checkbook control IRAs came about many years thereafter. And really, what it is, to provide a simple explanation, is they’re exposing these checkbook control administrators are exposing a loophole in the letter of the law. And we know the IRS doesn’t like loopholes, right? And the IRS—and this comes directly from the IRS—back in 2008, November, there was a publication called the Tax Exempt Entities Division Publication, the Employee Plans Newsletter.
JASON HARTMAN: Now that sounds like really fascinating reading.
JOHN BOWENS: Oh, yeah, absolutely. Do a Google search, or you know, you can let me know, and I can send that to you directly. I’ve read through it thoroughly.
JASON HARTMAN: If anybody has trouble sleeping, this sounds like the thing for you.
JOHN BOWENS: Oh absolutely, a cure for insomnia, without a doubt. And so, this Employee Plans Newsletter explicitly states that they consider these particular structures—they actually refer to them as robs—r-o-b-s, so certainly a negative connotation there—so they explicitly stated that these considered these to not be a “bona fide employee benefit plan.” So it’s not as if they’re saying they’re illegal—and I would never make the claim that these particular structures are illegal. But many argue that due to the ambiguity of these particular structures, that it’s certainly not prudent for an investor to be investing through a checkbook control IRA. Many of the companies that advocate and actually implement these for individuals, they are not IRS-approved custodians; they’re administrators. So they have no state and federal banking regulators that are actually overseeing their operations. They leave a lot of the responsibility to the customer to make sure that they’re staying clear of prohibited transactions, and our firm is obviously a bank-regulated institution, and we provide education to our customers so that they can avoid prohibited transactions.
JASON HARTMAN: Very interesting, very interesting. And you know, like you alluded to, John, you’re not saying it’s necessarily wrong, or it’s illegal—it’s just, the IRS could attack and give you a problem, right? So, that’s the thing. Well, that’s quite interesting. We kind of glossed over a little bit when I asked you about the history of the company, but what’s really interesting is that the founder of Equity Trust actually was the pioneer of this whole concept of self-directed IRAs, I believe way back in the 70s, right?
JOHN BOWENS: Absolutely. We were founded in 1974; it’s really an interesting story. In fact, Mr. Desich came out of retirement this weekend at the Equity University Networking Conference and actually told this story, so it’s fresh in my head. He was a stockbroker for a number of years. He started his own company in 1974. Coincidentally 1974 is when the ERISA Act was passed, which actually gave birth to IRAs and 401(k)s and other retirement accounts, so it wasn’t until 1974 that you could actually do this.
JASON HARTMAN: Explain to the listeners ERISA. That’s an acronym. What does it mean, and what is the ERISA Act?
JOHN BOWENS: Sure. So, the ERISA Act, back in 1974—it’ the Employee Retirement Income Securities Act. And essentially, what the federal government recognized is that Social Security and defined benefit programs in the United States—so that would be like pension plans that you have from a large corporation—were in dire need of financial reform, and many would argue are still in dire need of financial reform.
JASON HARTMAN: I just gotta interrupt you there. That is unbelievable, that back in 1974 the government was responsible enough to say that the Social Security system was in trouble and it needed reform. And we still got it nowadays, and in fact, our friend Bernie Madoff, who made off with about $60 billion in peoples’ money in his famous Ponzi scheme—who, by the way, I always say to investors, never really trust a résumé. Trust ideas that make sense over a résumé anyway, because Bernie Madoff was president of NASDAQ! Jon Corzine with MF Global was governor of New Jersey. How much better does your résumé get than either of those things? And both of those guys turned out to be bad apples, okay? So, that’s quite interesting. But, wow! So, they realized it back then, and the reason I mention Madoff is because he claimed that he thought of his idea for his Ponzi scheme from the Social Security system. The government inspired the idea. I guess it’s legal for the government to do a Ponzi scheme, but not individuals, right?
JOHN BOWENS: Right. Absolutely. You know, we know the Congressional Budget Office has stated that by 2030, 2033 ish, that the Social Security fund will be insolvent. They’ll only be able to pay out 75% of the benefits to recipients. So one of two things will happen. Really probably both. You’re not gonna get money till you’re 90 years old, and you’re only going to get $50 a week, right?
JASON HARTMAN: And not adjusted for inflation.
JOHN BOWENS: Exactly, exactly. And you know—
JASON HARTMAN: This isn’t funny, why are we sort of giggling about it? You know why we’re sort of giggling? I mean, it’s really sort of a travesty. We’re giggling because it’s so ridiculous. I mean, this is so ridiculous, the kind of stuff that has gone on in our country. But you know, it brings home the point, we’ve gotta get control over our financial future. We’ve gotta self-direct our IRA. We’ve gotta make prudent decisions, and that math that you just mentioned—I mean, look. It’s 2013 is when we’re recording. So, you say 2030, that’s 17 years away. Well, less than 17, based on the month of the year. If you’re planning to get Social Security in 17 years from now, you’re in trouble.
JOHN BOWENS: Absolutely. I’ve been paying a Social Security fund since I was 15 years old. I never expected to get a single dime, and I still to this day don’t expect to get a single dime. And that’s why—you know, the education that Equity Trust Company can provide is extremely powerful. In particular, purchasing alternative assets outside of the stock market within self-directed IRA accounts. And it was interesting, you asked me before about Mr. Desich, the pioneer of this self-directed IRA industry.
JASON HARTMAN: He was a stockbroker. Okay, so what happened?
JOHN BOWENS: He was a stockbroker, founded the company in 1974. At the time we were Middle House Securities. 1983 we became an IRS-approved custodian, and that came about because Dick recognized that there were a number of investors out there that are paying too much in taxes, and he worked with a lot of these investors, and he could leverage their IRAs to finance his real estate acquisitions. And so, he put together one of the first deals. It was a landmark investment, if you will, for this industry. And it was a discount drug mart right outside of Cleveland, Ohio.
JASON HARTMAN: Was that the real estate, on the discount drug mart? That’s a store, I guess? Or was it the business opportunity?
JOHN BOWENS: Well, it was a little bit of both. What he had done is, he actually bought the property, and he raised money from 100 IRA investors, and I believe it was 160 units that he had sold, and so he raised the money to finance the acquisition, and on a triple net lease over 19 years, Dick made thousands of dollars and each one of his investors also received hundreds of thousands of dollars on the transaction using their IRA account and of course it’s all tax free, because it’s within a tax exempt realm.
JASON HARTMAN: Actually, technically shouldn’t we say tax deferred? Until you start taking distributions much later, probably?
JOHN BOWENS: Correct, correct. Tax deferred. There are tax deferred and tax free accounts. But what’s really important and powerful for people to understand is that the IRA, and any retirement account, is tax exempt. And so what that means is that in each incremental year, as you’re producing income, whether it be through the rental of property, rehab and resale, you avoid ordinary income of short term—long term capital gains tax on all of your investment returns, and with the 3.8% medical surtax that’s just been enacted, that’s powerful for a lot of our investors. Especially our more higher net worth investors. And so, a lot of clients are now sheltering their income within retirement accounts. That is, their investment income, and real estate, and other alternative assets.
JASON HARTMAN: Yeah, fantastic. And, with anything, if you’re going to receive money, it’s better to receive it now than later. The time value of money. And if you’re going to pay money, it’s better to pay later than to pay now. So that’s really what an IRA does for you. You postpone that payment for a long, long time, and the investment inside the account, or the money inside the account, gets to grow tax-free until you eventually take distributions.
JOHN BOWENS: Absolutely. As an investor, you really have to look at the effects of taxation on your overall return. The diminishing effects of taxation on your overall return. Just to put it into perspective for your listeners here: if you start with $50,000 today, and you’re growing it at 10% per annum for 20 years—20 year return—you would have just over $330,000 saved. Now, we didn’t factor in taxation in each incremental year. So let’s factor what I would consider a modest 28% marginal tax rate. Alright? Now, we do the same numbers, factoring a 28% marginal tax rate. We would have paid $130,000 in taxes over the 20-year term. So what our clients are doing is they’re increasing their wealth, and they’re accelerating the growth within that account by eliminating taxation from all their investment returns.
JASON HARTMAN: Right, and so, just understand that it gets to grow—you get the compounding effect of a larger asset, or a larger account balance that’s—you don’t have to have the taxes taken out of it along the way incrementally each year. So, really you do the math and project that forward 10, 20, even 30, 40 years, and wow. It’s a big difference.
JOHN BOWENS: Absolutely. And for instance, with a Roth IRA account—didn’t come about until 1997, 1998, when William Roth from Delaware enacted the legislation, but, the Roth IRA is an after-tax account. So if I put $5,000 and do a Roth IRA today, and let’s say I’m wholesaling properties and then I move on to buying and rehabbing and then buying and holding, and I have this rental portfolio of 40 properties, and I’m 60 years old and I have, let’s say one and a half million dollars in that IRA—I can take a one and a half million dollar distribution and not pay a single dime in taxes, and I never pay taxes on any of the income that I receive throughout all of those let’s say 20 years.
JASON HARTMAN: Yeah, yeah. Phenomenal. Well, what else should we know about self-directed IRAs? Maybe one of the questions—and you might not want to get real specific about this, and I understand, because you probably don’t have the schedule in your head. Although you’ve got a lot of other very technical stuff in your head. But, what does it cost to do this? People are probably asking that question as they listen to us.
JOHN BOWENS: Absolutely. Usually when I tell my customers, or potential customers, what our charges are, the first thing that comes to their mind is, how do you guys make money? We have a simple $50 setup fee, and we have an annual maintenance fee depending on the portfolio value of the account. For instance, if you have between $100-$200,000 in an account, you only pay $440 a year. It’s an all-inclusive fee; it includes all transactions and investments and recordkeeping, IRS reporting, any ongoing consulting you need to do with us—can I do this or can I do that, how do I structure this—we handle all that for you. Once your account grows to a million dollars and over, and I usually make a joke, I say, my goal is to charge you $1,850 per year. And they look at me kind of funny. And I say, if you have an account over a million dollars, you pay $1,850. And that’s it. What we’ve done is we’ve developed a fee schedule which is hassle-free. We don’t have ancillary fees or transaction fees, and most importantly, as you increase wealth—as you get closer to that million dollar mark—on a percentage basis it diminishes. So, on a dollar basis we charge a little bit more, but again, on a percentage basis it diminishes, and it’s far less than one percent. So certainly much more competitive than any mutual fund or any other traditional security, if you will.
JASON HARTMAN: Yeah, and it’s sort of the inverted version of our tax code that punishes success, because it’s “progressive.”
JOHN BOWENS: That’s right.
JASON HARTMAN: It’s ridiculous, yeah.
JOHN BOWENS: And that’s one of the reasons why we have the Equity University Networking Conference. This gives us a chance to really be able to advocate what we do, spread the word about self-directed IRAs, and in particular, we have an incentive here. Because if our customers come to this event and they learn from other investors, or they develop a relationship, or they find the next big idea to make the next big deal, and they grow wealth within that retirement account, well, next year we get to charge them a little bit more. And then maybe they realize that it’s not just a traditional or Roth IRA that makes sense for them—maybe it’s a small business plan, or it’s a Coverdell Education Savings Account, or it’s a Health Savings Account, or another product that we—
JASON HARTMAN: So you do HSAs and all that stuff too?
JOHN BOWENS: Absolutely. Solo 401(k)s, any retirement account—and there aren’t many of them—any retirement account that you can open up with any other financial institution, you can open up with Equity Trust Company. And most importantly, it’s self-directed, so you have control, as you had mentioned before, Jason. You’re the one that’s in the driver’s seat and decides okay, this is where I want to put the money. And we even have customers that are using monies from multiple sources. They’re taking monies from their IRA, and then they’re taking monies from their business, their LLC. They’re partnering those two entities together to acquire a property, and then when they sell that property, or as rental income come backs in, funds are flowing to and from those particular accounts or entities. So, the possibilities are endless, and there’s so many different ways to get creative.
JASON HARTMAN: Actually, that’s one more thing I want to ask you before we wrap up here. Partnering with one’s IRA: so, someone asked me that question the other day, and I remembered—I thought you could do it, and I just want to clarify this, because maybe there’s a nuance. You know, all of this stuff gets sort of complicated and nuanced. But, say for example someone has $50,000 in their IRA. They’re just starting out. And they want to buy a property that costs $100,000. Can they put $50,000 in as an individual and partner with their IRA, and their IRA puts up the other $50,000, for example?
JOHN BOWENS: Absolutely. In fact, a number of our customers are doing just that. Especially on a great deal. One of the challenges that a lot of investors have is they say, well, I’m doing all of my deals in my IRA. I can’t touch it till I’m 59½. I’m trying to build my real estate enterprise. How can I build my real estate enterprise while also growing wealth within my retirement account and deferring taxes and hopefully transitioning income that would have otherwise been taxed, into a retirement account? And one of the methods is just that. Taking let’s say $50,000—and of course I’m going to have that in my LLC, so—John’s LLC is going to partner with John’s IRA. So on title it’s going to state, Equity Trust Company for the benefit of John’s IRA, as a 50% partner, and then John’s LLC as a 50% partner. So, at closing, I’m going to take $50,000 from my IRA, send it to the title company, I’m going to take $50,000 from my business, send it to the title company, now the deed is recorded in the name of my business and my IRA account, and then going forward, all expenses are getting paid 50/50, and then most importantly, all returns from the rental or sale of the property are going to flow in accordance with that ownership interest. And it doesn’t have to be 50/50. It could be, you know, 75/25, it could be my IRA and my wife’s IRA account, it can be my IRA, my wife’s IRA, and my personal money.
JASON HARTMAN: So, I think maybe the nuance and the distinction was, what if the investor has their IRA, the $50,000 that we mentioned, and they don’t have another entity? They just have them as an individual. There’s no LLC, there’s no corporation. Can they as an individual partner with their IRA? Or do they need to set up that entity so the entity partners with the IRA? That might be the nuance.
JOHN BOWENS: Yes. They don’t have to. You can personally take title to that property if you like.
JASON HARTMAN: For 50% ownership, in that example.
JOHN BOWENS: Absolutely. You know, you could personally take title to the property. The reason why I mentioned an LLC is because many investors prefer that. I’m not providing legal advice—
JASON HARTMAN: No question, I understand that.
JOHN BOWENS: Yeah, yeah, but you know, for asset protection purposes, clients will set it up in an LLC, and then of course, the LLC will partner. But, to answer your question, Jason, by all means you can personally take title of that property in that fashion.
JASON HARTMAN: John Bowens, thank you. This has been very informative. Thank you very much, that was an excellent interview. Any closing comments you want to mention?
JOHN BOWENS: You know, the only thing else I’ll say, you know, again, thank you, Jason, for the opportunity here to provide some information and education. There’s a lot we can talk about self-directed IRAs. There’s a lot of nuances and creative strategies, and for the callers here, my last remark should be, take advantage of this opportunity. There’s less than 2% of Americans that are doing this. It is growing in popularity; with the real estate market where it’s at now, from a macro perspective, there’s never been a better time to get involved with this self-directed IRA. And in particular, the fluctuations and the turmoil in the stock market—again, there’s just never, there’s never been a better time.
JASON HARTMAN: You will get zero argument from me on that one, John. I think the stock market is the—well, I just think it’s the modern version of organized crime [LAUGHTER]. It makes, you know, Al Capone look like Mother Theresa [LAUGHTER]. It’s pretty bad. So, get control of your financial future. I think the self-directed IRAs, it’s just a no-brainer, as they say. So, good stuff. John Bowens, thank you so much for joining us today.
JOHN BOWENS: Thank you, Jason. Appreciate it.
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JASON HARTMAN: Hey, it’s my pleasure to welcome Neil back to the show! He’s called in a couple of times before, and he’s got a very good question today that I think affects a lot of you. So let’s dive into it! And Neil’s calling from Wisconsin, just actually on the border outside of Minneapolis, Minnesota, so. Neil, what’s going on?
NEIL (CALLER): Hey Jason. Well, listen, I’ll give you the short version, and I can expound if you want. Basically, my question is: what is the process for somebody to put a lien on a property? How easily can they do that? That’s my basic question. The background is this. I’ve got a property manager, an association manager actually, basically not doing a very good job, and I’ve just decided I’m going to withdraw from the association and I’m not going to pay them anymore. So I’m late one or two months now, and he finally wrote me a letter and said, I’m going to place a lien on the property because you’re not paying. And I just wanted to know how easily he can actually do that.
JASON HARTMAN: Okay, so let’s make sure a couple things are clear to the listeners. So first of all, this is a homeowners association, and it’s the association management company, which is different from your property manager, if you have a property manager. Now, is this a single family home, or is it a condo, or what’s the configuration of the property?
NEIL: This is a triplex building, and it’s—I own all three units of this triplex.
JASON HARTMAN: And all three of those units, plus other triplexes, and in a homeowners association, right?
NEIL: Yeah, there’s 31 units total, of which they built 11 buildings. Most of—actually, all of them in this association, are either duplexes or triplexes or quads.
JASON HARTMAN: Okay, and you bought this property before you became our client, right?
NEIL: I did. I kind of had it in the process, and I had a pipeline of products that I was kind of following through, and it happened to pop burst, so. These were my first three that I purchased. And then the other two—actually three units that I’m working with you guys right now.
JASON HARTMAN: Fantastic. So, the process for placing a lien on a property is really, that’s a pretty much a legal question, so, you know, I always have to make the disclaimer, I’m not a lawyer. And this works differently in different jurisdictions. But, homeowners associations in most places have a lot of power, and I’m not too keen on homeowners associations. Especially—I don’t mind the associations where you have like a single family home, and the association fees are very low, they’re make 30, 40 bucks a month, no big deal. You usually pay them annually, you know, $300, $360 a year or something like that. And it’s a low amount of control that the association exerts over you and your property.
But even in those cases, they can place a lien on your property, and they do have, in most jurisdictions, or at least in some, foreclosure rights. So you want to be really careful of these. There are many homeowners associations that are rather crooked, and what they do is they run up a bunch of legal fees and late fees, and suddenly your dispute, or the bill you forgot, or the bill that they conveniently mailed to the property address rather than your address where you receive mail—yet they knew before they had corresponded with you at your address—you know, this is kind of a scam, I think. A little bit of a conspiracy. Because they somehow—you didn’t get the bill, and so they never got paid. So, this is another reason I just have to say it, to use PropertyTracker, so that you have these dates, and you know when things are due, and you can track them easier, okay? But for whatever situation, you know, in your case, you’re saying that the homeowners association is really lame, and they’re not doing much, and you just don’t want to pay them, right? Is that the essence?
NEIL: Yeah, and this call’s probably maybe for the benefit of others in case they go through this. But this guy, he wasn’t running it very well when we came into it, and I knew that. And the year that I’ve owned these properties, I haven’t had a single profit loss statement, or any type of communication whatsoever. He’s never held a meeting. And the process is kind of eroded. I took the high road, and I sent him an email and said hey, I’m new, and I’d like to be involved, obviously, so here’s my information. Please send me the quarterly statements, or however you do it. Never heard anything. And then I did that a couple of times, and I got to the point where he would email me and say, don’t email me. Put it in writing
JASON HARTMAN: What a jerk.
NEIL: So I did, I put it in writing, and he didn’t respond there, and then I sent certified mail, and he didn’t respond to that. It finally got down to the point where I came and visited him. I just walked into his office. And that startled him a little bit. I said look, I’m not here to cause a problem with you. But I have tenants that are complaining, they’re paying $80 a month for nothing. Virtually, it’s what they feel. And we need to step it up and take care of the situation. I’m glad to pay, but we need to have the services. So it just got to the point where I just said look, I don’t know if this association is run well, because I haven’t seen any finance statements, I’m not going to see a problem that may be there. And I’m almost to the point where I’m gonna say, take me to court. Let’s go to court, I would love to do that, get a lawyer that will represent the association so that I can say, fine! Show me where the money’s going. I want to dig into it, so.
JASON HARTMAN: Yeah, absolutely. And there’s a very good chance in a little Podunk association like this that’s not very corporate, if you will, that this guy, with his 30 units, he was the developer—that he is not doing things correctly, not having meetings, and he may well be ripping you off. And the other homeowners as well. And this is some small operator; it could easily happen. It happens all the time. So, the first thing is, I’d like to say, this happened to me! Not exactly like this, but it was the old didn’t send the bill to my correct address scam. And I didn’t know a bill was due, and I didn’t pay it, and suddenly a $500 association bill ran up to where they wanted like $1900, and then I got really upset about the whole thing and I told them to go jump in a lake, and they told me to jump in the lake, and the fees keep running up—I think they even technically started the foreclosure process, where they sort of filed a lawsuit, in just the lower level of court, and this was in Texas, and I put an ad on Craigslist, and I hired an attorney right off Craigslist, which I’ve done before—it’s hit and miss, you gotta be careful of that one too—but I happened to get lucky, and I got a good attorney, and he just killed them!
As soon as they saw that we were actually going to—they weren’t just going to roll over me, and I was going to stand up for my rights. Basically what they settled for is, I told them, I said, look. I will pay you the back dues that I legitimately owe you, because, you know, I didn’t get the bills, so I didn’t pay it. And I’ll pay you $500. Versus, they wanted like three or four thousand dollars, in addition to the $500 fee. I mean, it’s just absurd. Eight times the amount in legal fees, as the actual collection amount. So it’s absurd. And they settled for that. And I ended up paying the attorney about, I don’t know, $1200. So it wasn’t like I felt I had a huge victory here. But at least I felt that they didn’t get to take advantage of me.
NEIL: Yeah, a moral victory, maybe.
JASON HARTMAN: Yeah. Moral victory, not a financial one. And so, I don’t know. You know, I can’t tell you if you should really go to court with the guy. Going to court is usually a waste of money and a waste of time, and usually the only people who win in court are lawyers. This could probably be litigated in small claims court, although if they go through—depending on how it works in that particular jurisdiction, if they go through the court process, they’re going to be filing first. And so, they might be able to choose the venue, and it probably won’t be small claims court.
NEIL: Well you know, I’m at the point where I’m considering hiring a lawyer on behalf of the association, and the lawyer will represent the association, but, where is the money come from the association? So it would be my own, probably, because I don’t know if there’s even money there.
JASON HARTMAN: You can’t hire the lawyer on behalf of the association. You’re not running the association. So, but he is. Well, you’ll hire it on behalf of yourself, and what you’re saying is, if the other homeowners are getting ripped off, then the lawyer could potentially do, like, a group of plaintiffs, not just you. Other plaintiffs could come in. They could cover some of the legal expense, or the lawyer could potentially even get it certified as a class action, which is probably not that likely for such a small association, but again, I don’t know. A class, from what I understand, does not have to be a particular size, necessarily, but that’s a whole special area of law that is really specialized. Anyway.
NEIL: My issue there is that most of the other people aren’t owners. They—at least the three in mine, they’re tenants, so they have no rights at all. Two of the units, or three of the units, are actually his family members. And the balance is left over on a few people I’ve talked to that are very upset as well. And so, you know, you can’t—the tenants can’t stand up, because they don’t have any rights. The owners could stand up, but there’s no money to get a lawyer from the association. The rest of the units—actually, they’re lots—are owned by a local bank, and I’ve gone to them and said, can you help me out with this? And show me the books, and make requests? They basically have turned a blind eye.
I tried to buy a couple other lots, I was going to develop a fourplex, and so I got—the bank’s actually selling these lots to me, so I got their realtor to get on this, to ask this property association manager for the documents. She got nowhere. She got ignored. And it’s at a complete standstill, so I’m really down to the point where, well, I have the money. I put it in a separate account. I keep sending checks, and I have no idea what I’m getting for that. The grass doesn’t get mowed, the snow doesn’t get removed. Nothing gets done. They even removed the insurance on the buildings. They no longer insure—I insure the entire structure.
JASON HARTMAN: Okay, which isn’t uncommon in a triplex, because that’s a single structure, so. That’s not totally uncommon. But here’s the moral of the story. Let me ask you one question, and then we’ll see if we can get the conclusion here. How much are the association fees?
NEIL: $80 a month.
JASON HARTMAN: $80 a month, per unit? Or for the entire triplex.
NEIL: Per unit.
JASON HARTMAN: Per unit, okay. So you pay 3 times $80 a month. Now, in my eyes, that’s really more expensive than I want it to be. You know, especially for a triplex type unit. Really, ideally, if you’re going to have a homeowners association—I don’t love associations. It’s kind of a love-hate thing. But there is an argument for them. Many people think it keeps the values of the properties up, and that may well be true. I like those associations that are $25-$40 per month for a single family home. Not 3 times $80. So that’s the type of stuff that I really think you should be looking for in your future properties, okay? Because, you know, you got this guy who’s running a little Banana Republic. He doesn’t have to really be accountable to anyone. That’s not a big corporate type homeowners association, which would probably be a little more legitimate.
NEIL: Yeah. Well, if you have any lawyers listening out there that want to come to my rescue—I’m really in a pickle. I almost want to just not pay him and say fine, I’ll meet you in court, and then I’ll ask all the hard questions that you don’t want to ask. And you’ll have to produce documents, and I have the money in a fund, and if I have to pay, I’ll pay it. I have it. But….
JASON HARTMAN: I don’t know. Stay out of court if you can, but it sounds like this guy—if he’s not even giving you documents, he’s probably not complying with the Department of Real Estate rules. Anyway. I don’t know what to tell you there, but, try to avoid getting liens on your properties, that’s for sure, okay? You don’t want to go there.
NEIL: Well, yeah. I don’t want that. But the profits that I’m making off these is worth the hassle at this point, so. Maybe it’ll work out in the end.
JASON HARTMAN: Alright, sounds good. Well, thanks for calling in to the show again, Neil, and I’m sure you’ll be calling again. We appreciate your calls.
NEIL: You bet.
JASON HARTMAN: Congratulations on the investments you’ve made, too. It sounds like overall you’re doing pretty well.
NEIL: Yeah, I almost got 10 in two years, so I’m doing well.
JASON HARTMAN: Awesome. Well hopefully now is it going to be 10 more property next year?
NEIL: After that I think I’m going to do the one a year. We’ll see. I don’t know. Every commission check I get from work, I’ll look at buying a new property, maybe.
JASON HARTMAN: Awesome, well good for you. Alright, thanks for calling.
NEIL: Alright, thanks.
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 Platinum Properties Investor Network, Inc. exclusively.
Transcribed by David
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