On this show, Jason and Steve discuss property pricing, how to avoid bad areas, and a market update.
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ANNOUNCER: Welcome to Creating Wealth with Jason Hartman! During this program Jason is going to tell you some really exciting things that you probably haven’t thought of before, and a new slant on investing: fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self-made multi-millionaire who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it! And now, here’s your host, Jason Hartman, with the complete solution for real estate investors.
JASON HARTMAN: Welcome to the Creating Wealth Show. This is your host, Jason Hartman, and this is show number three hundred and something. Hmm. I guess I’m not keeping track anymore [LAUGHTER]. I’m here with Steve, and we’ll explain that in just a moment. Three hundred and something, episode number. And Steve, welcome. How are you?
STEVE: Hey, I’m good Jason. When you have more than 300 shows, you’ve earned the right to not have to say what number it is every time.
JASON HARTMAN: Hey, look, our clients, since they are prudent real estate investors, they depend on our ability to do math. And we can count—we can count. But we’re changing up the format of the show a little bit, so that we can get shows out to you listeners more often, more easily. And one of the things we’re going to do there, is not do big long intros before a guest. We’re just going to broadcast the guest without a big, long intro, theoretically. And that will mean that sometimes we don’t say the exact episode number. So let’s just look at this, Steve, like government accounting. It’s like three hundred and something is the episode number, and that’s good enough for government work.
STEVE: Yeah, you could put a bunch of zeros on the end of that, and you could be the chairman of the Fed.
JASON HARTMAN: Hey! It’s show number three hundred trillion [LAUGHTER].
STEVE: Yeah! Yeah, this is called quantitative podcasting.
JASON HARTMAN: Yes, not quantitative easing—quantitative podcasting. Otherwise known as money printing, or in this case, podcast printing. Creating it out of thin air, which is exactly what we kind of do. No we don’t. But we’re just being a little bit self-effacing here with our humor.
STEVE: Today’s the day we have gone off the episode number standard. We have a fiat podcast now. It’s not tied to any number.
JASON HARTMAN: It’s like 1971 is to the gold standard. October 2013 is to the podcast standard. The episode standard. Good stuff.
STEVE: Exactly.
JASON HARTMAN: Well hey, it’s show number three hundred and something, folks, welcome, thank you so much for joining us today. Steve, we’ve got a bunch of things to talk about. Let’s dig in! Where do you want to start?
STEVE: Let’s dig in. I think we should just start with this thing on the pricing of properties that are on our website, because it’s a question that we’re getting over and over again, and if we get it over and over again we like to just bring it to the podcast so everybody can hear.
JASON HARTMAN: Absolutely, absolutely. Well, I know that everybody listening, their favorite real estate and financial website is www.jasonhartman.com. At least I hope it is. And what about the properties on our website?
STEVE: So, when you go to www.jasonhartman.com, your favorite real estate website, you will see a tab there that says properties. And you can look at pro formas—these are projections of what returns could look like on properties that are available to invest in through our network. And one of the key factors, one of the key figures you’re gonna look at on those pro formas is the price of the property, duh. And when somebody is thinking about investing in a property, I almost always get the question, Steve: is this price negotiable? So they want me to dispense some wisdom on them about the seller and how negotiable they are on a given property. And I typically don’t know that.
JASON HARTMAN: And the answer is: sort of and maybe.
STEVE: Sort of and maybe.
JASON HARTMAN: Yeah.
STEVE: Because—I won’t get into the mechanics of this, but the way our local market specialists buy properties, they have certain costs, and they have things they need to accomplish, like any business. And so, because if the market has been going up, the amount of money they’re making has been going down. But granted, on any given property they might make more on one than they’re going to on another. Sometimes they don’t make anything on properties—they just post them to our network because they just want us to be happy, they want to be able to keep presenting properties to you guys, the listeners.
JASON HARTMAN: Well, that’s just sort of a business decision too, I mean, it’s not like they’re doing this as a charity. But you don’t necessarily in business make money on every deal, but you’ve got to keep the machine rolling and keep the machine going. And that just reminds me, Steve, because I just—it almost demands a comment. For those of you that purchased in Phoenix, we had big problems with one of our Phoenix benders on this. Because they were so greedy, for lack of a better word, but they just wouldn’t be willing to not make money on a deal from time to time. It’s like, every deal had to have a margin—and a good margin—and we just kind of got sick of working with them, because our clients really weren’t really getting a good enough deal, I didn’t think. And part of it’s the market—it’s not all them to blame, and I may be throwing them too much under the bus. But I don’t know, maybe I’m not.
STEVE: Well, the client’s not gonna take a crappy deal and say, yeah well, this deal’s really bad, but you’re going to make money, so I’m okay with it.
JASON HARTMAN: I’ll tell you, as a businessperson for so many years now, I do lots of things that aren’t profitable—but it’s for the greater good. I used to say in my old real estate company, which was very hard to manage, because that industry’s just kind of a disaster—I used to say yeah, we lose money on every deal, but we make it up in volume.
STEVE: [LAUGHTER] Yes, isn’t that the postal service? That’s somebody’s slogan.
JASON HARTMAN: That’s Obamacare.
STEVE: I don’t know that they are even bringing in any money. From what I hear, it’s all frozen up, and nobody can do anything.
JASON HARTMAN: Hey, folks. I hope you’ve—I love these people that get into these arguments on Facebook with me about how great Obamacare is. And then I ask them the zinger question: have you signed up? Long silence here. Nope. They’re not going to sign up, because they’re in the elite class that has private insurance, of course. And…I’ve gotta just say, not to get on a tangent here—if you haven’t seen it, look up the Jon Stewart blasting Obamacare. It’s pretty good. He just brings ‘em. And Jon Stewart I’m sure is a liberal, he’s gotta be a leftist.
STEVE: Oh yeah, he’s a total—
JASON HARTMAN: Sometimes I have a little more faith in him, and I think he’s a little more legit. Because he does attack the left. And I know, almost anybody in the media is a liberal—
STEVE: And he’s an entertainer, though. He has to be a contrarian, he has to make fun of who’s in charge, or he has no show.
JASON HARTMAN: Exactly, exactly. Well, enough. Back to pricing on the website, I guess is what we were actually talking about.
STEVE: Yes, we were, and it’s tempting to just unload on that Obamacare thing, but I’ll refrain—
JASON HARTMAN: It’s such an easy target.
STEVE: Yeah, it is. Wow. Talk about low hanging fruit. So, the pricing on properties on the website. People ask me all the time, hey Steve, is that negotiable. And I tell them—and everybody listening, if you’re thinking about investing in a property through our network, just ask. Just say, hey, is this the best you can do on price? And they want to move properties, they depend on volume, and they’ll tell you if they’re going to be able to do that. Granted if you’re a cash investor you’ve got more leverage there. That’s an easier transaction to complete. But what I hear—
JASON HARTMAN: Well, you’ve actually got less leverage if you’re a cash investor. By definition.
STEVE: Oh, okay. Hardy har.
JASON HARTMAN: Because you’re not leveraging the financing. But you might get a better deal. There’s an old saying that you can either get price or terms, right?
STEVE: Yes, yes.
JASON HARTMAN: If you’re not taking terms on the deal, and you’re getting price, it’s more likely that you can get price.
STEVE: Right, and I guess leverage was a poor choice of words.
JASON HARTMAN: I just had to give you a hard time on that.
STEVE: Thank you. Anyways, it can be negotiable, but what I hear when somebody says, is the price negotiable—ultimately the concern there is, I live far away, I’m in Irvine, or I’m in Manhattan, and I’m buying a property in Memphis. And I wouldn’t have the first clue if I’m totally getting taken for a ride on price here. I have no way really of knowing, that maybe I’m paying $30,000 too much. Now—
JASON HARTMAN: Well, you have more way of knowing than you’ve ever had in human history, because you have internet tools, and those again—we’ve talked about Zillow, and Trulia, and take all of that with a grain of salt, because this is the reason that the real estate business can not be commoditized successfully. Like the travel industry, like the stock industry. Because those are very perfect markets, and what I mean by perfect markets doesn’t mean that it’s good—it just means that the price is very set and understood. On the stock exchange at any given time you can look up a stock and see what it’s trading for. It’s a perfect market in that way. An airline ticket: it’s sort of a perfect market. There’s very little play. There’s a little more play on the travel side than there is, of course, on the stock side. But because you might go to one website and get a better deal than another, but the deals won’t be that much different, okay? We all know this. But with real estate, every house is very different, even if they’re right next door, right across the street from each other. This is the reason that this industry can not be commoditized. And it’s also less commoditized, I say, than the commercial real estate industry. And therein lies the opportunity: that imperfection is where opportunity lies for the prudent, sophisticated, smart investor who is willing to learn something about the business, and that can help you as a buyer, but it can also help you as a seller, because as a seller you can exploit those imperfections, and as a buyer, and during the process of ownership for the years along the way that you’re just exploiting the cash flow and tax benefits of the property, those imperfections can benefit you too.
STEVE: Correct. Correct, and so what I’m getting at here is that a client, or one of the listeners here, they might feel like they have no way of knowing, because that’s kind of the reaction—is it negotiable? They’re wondering if they’re overpaying. But they have resources. Even though you’re 2,000 miles away, you can be protected on price, and that’s one of the positive side effects of what Jason always talks about on the show, and using leverage. Any time you’re going to get a conventional mortgage with Fannie Mae ultimately underwriting it, they’re going to want an appraisal. And that means an independent third party who gets paid whether you close on the deal or not, is going to go out there, and they’re going to give an appraisal of what they think the property is worth.
JASON HARTMAN: Very good point—the appraisal is a safeguard for you as the buyer. You have more to say about that, and I have more to say about that—
STEVE: Yeah, I did. It’s a safeguard, so you’re thinking, am I paying too much? It’s okay, because the appraiser is gonna go out there, and he’s gonna tell you: this appraises for $110,000, or $95,000, and so, a great protection that you can tell the local market specialists—and some of them are going to hate me for this—is to make the contract subject to the property appraising for at or above the purchase price. And that way, if for some reason the appraisal comes back and it’s too low, you can back out of the deal if you want to. They’re not going to be able to hold your feet to the fire. Not that our local market specialists are known for doing that. But it’s a great protection for you.
JASON HARTMAN: The ones we fired are known for doing it.
STEVE: That’s a great way to get fired. In fact, we have one that called me saying hey, I haven’t seen many referrals from you guys. And I’m going, are you kidding? Do I really have to explain this to you?
JASON HARTMAN: Guess what, Mr. genius market specialist. Treat our clients well, and you can make about a million dollars a year off of our referrals, potentially. But don’t treat them well, and guess what you’re going to make? Big zero. So, that’s one of the benefits we offer our clients—because of our volume, we’re aggregating all of the business of so many investors from around the world, and because of our volume, we can throw our weight around a little bit, and we can get these local market specialists, these providers, these property managers, these sellers of property—to jump through some hoops to give you a better deal and a better experience. And not all of them play ball. Not all of them see the vision. Some of them don’t. And they are cutting off their nose to spite their face, most assuredly. I’d love to just go back, and we need to start rubbing it in their face a little bit more. Like, hey, remember us from two years ago? Here’s what you could have had. As we get these 1099s from the local market specialist, and the 1099 are for maybe hundreds and hundreds of thousands of dollars in a given year, right? Which is only showing what they paid in referral fees, right? But what they made in business from the clients that we referred to them, could be well over a million dollars annually, easily. And you know, these aren’t big giant companies—these are mom and pop-ish type small companies with maybe a few to a dozen or even two dozen employees, or contractors. So, that’s a good amount of money to them. It matters.
STEVE: Yeah, it does. And the really good local market specialists, and we of course have them, they’re the ones that understand, okay, I’ve got a contract on a property that came in, and it’s subject to the appraisal. They know I’ve gotta product properties for at or below the appraise price. That’s what I’ve gotta do. I’ve gotta be able to make money, because that’s what the client expects. The client needs a good price on the property, and a good return, and they understand that sometimes you get a weird appraiser. That happens. In fact, you pointed out a couple years ago, all the appraisers were weird, and they were coming in too high during the bubble—
JASON HARTMAN: Well, first of all, let me catch you there. You just said at or below—you meant at or above the appraise value.
STEVE: That’s correct, excuse me.
JASON HARTMAN: Now, here’s the big however to what we’re saying, okay? However, the appraisal isn’t always right. Okay? And that’s why you need a team to help you make these decisions, a team with good judgment. There have been many instances where the appraisal has come in below the purchase price, and the client will just decide, hey look. If I’ve gotta pay $10,000 extra for this property, I think it’s a darn good deal, I think the appraiser’s out to lunch, and I’m going to throw in an extra ten grand and get the property. Or they may use that as a way to negotiate a little bit with the seller, the local market specialist, and maybe the seller will come down $5,000, the client’ll throw in an extra $5,000, they’ll meet in the middle. So there are things you can do here, but this is the reason this cannot be commoditized very well. And Steve, let me just talk a little bit about that point I made earlier about commercial real estate, because I don’t think I really explained it. I talked about exploiting the imperfections in the markets, and that—therein lies great opportunity for investors. And in the stock market, of course, there’s very little imperfection, because you know, of course companies and stocks have a “story” to the, and maybe there’s a deal you can get here and there. Some things may be considered undervalued, the earnings multiple blah blah blah, but overall, Wall Street’s just a big scam, and the only people really making money are the insiders, we all know that by now. Hopefully we’ve—we don’t have to learn that lesson again, any of us, okay?
STEVE: Something tells me we will. At least society will.
JASON HARTMAN: People have a short memory, that’s for sure. But in the commercial real estate market, there you’ve got a more sophisticated industry. And you’ve got people that use numbers and metrics exclusively on deals when they look at them, whereas in the residential world, they kind of do and they don’t. And there—the residential market, meaning homes, single family homes, duplexes, triplexes, fourplexes, apartment buildings—those are sold with much less sophistication, much less math. Even if an investor buys them, I mean, God knows. Look at the investors that buy properties in places like California and New York, expensive high-priced markets that just never make sense the day you buy them. They’re purely gambling, and sometimes gamblers win, I’ll be the first to admit. I’d rather be lucky than good any day of the week. But the commercial real estate market is a more perfect market than the residential market. And of course you’ve all heard me talk in the past three hundred and some odd—but we don’t exactly know the number, because we don’t know what episode number this is—of episodes, talk about how investors can exploit this, and how housing is by far the best investment in my opinion, because it can’t be outsourced the way office space can, the way manufacturing and thereby industrial properties, the need for them can be. And the way retail can be “outsourced” to the Internet. These are far more volatile things. Whereas, everyone needs a home. It’s just pure and simple. At the end of the day, you’ve gotta have a place to live and a place to sleep.
STEVE: Yeah, so, the appraisal is gonna come in typically in the ballpark, so I think people from afar, they’re going okay, how do I know I’m not paying $100,000 for a rundown meth lab, right?
JASON HARTMAN: But a meth lab would be great if you could get percentage rent.
STEVE: I know, you’ve always said that [LAUGHTER]. And you had no morals.
JASON HARTMAN: Hey, listen. Yes, of course you had no morals. I never got into that show Breaking Bad, but everybody talks about it and seems to like it. I just don’t like the subject matter, it’s too…it’s just too sleazy for my taste. But I hear the writing was very good.
STEVE: So you have implied that I am a sleaze, because I love that show.
JASON HARTMAN: Oh you do! I’m surprised you like that show. You’re such a good Mormon boy. You really watch Breaking Bad?
STEVE: I love Breaking Bad! You know it’s over now, it’s done.
JASON HARTMAN: I saw like one episode, and I just didn’t like it.
STEVE: Well, I was in Albuquerque—that’s where the show takes place—and I was researching that, to see if we could get some good deals there. And I saw a lot of the set, and a lot of the areas where they filmed it. But apparently—and this was on Newser the other day—the community in Albuquerque’s in an uproar, because a bunch of Breaking Bad geeks got together and had a mock funeral for the main character of Breaking Bad, Walter White. And this was at a real cemetery, and it’s kind of insensitive…it’s pretty ridiculous.
JASON HARTMAN: That’s weird, but I think the media encourages this type of behavior. They make it okay, and I think that’s bad for society.
STEVE: I agree. I’ve liked the show, but I will admit that I’m hypocritical to a degree there, because—a lot of these new series and things on TV, they make everything so morally relative. The stars in the shows you’re cheering for—I mean, in Breaking Bad, he’s a drug dealer! And everybody’s cheering for him!
JASON HARTMAN: Hollywood has learned, and they’ve done a very effective job of making the bad guy the hero. It’s just disgusting, in my opinion. But anyway. Let’s move on.
STEVE: Let’s move on. Let’s talk about something that is morally reprehensible, which are 911 landlord laws.
JASON HARTMAN: Yeah, so, this is really interesting. I remember reading about this several months ago, and this is a conflict of interest, and it’s unconstitutional, in my opinion, for sure. Where you’ve got tenants in a property now—look, we don’t deal in areas like this. We don’t recommend areas like this, and we don’t like the slumlord type properties, because—I’ve talked about it on prior episodes, but—the $25,000 house in Michigan or Ohio, these types of things, or really in any market, it could be in many places. These don’t work, in my opinion. And these are very low-end class C- and D type apartment projects, and housing areas where what we’re about to talk about applies, and also in landlord-unfriendly markets, and that’s one of our screens, is that we screen for landlord friendliness. We want markets that our friendly to our cause as landlords. So Steve, tell us about this recent article.
STEVE: Right. So this is centered around a city called Norristown, Pennsylvania, which is in the Philadelphia metro. And so this is no surprise, actually, to be a landlord—and I don’t know if it’s for government housing or what, but you have to actually have a license to be a landlord. And Jason and I were talking about this like, well, do we have to have a license in Indiana? Or Texas?
JASON HARTMAN: Listen, I’ve never had a landlord license anywhere.
STEVE: I haven’t either, so…
JASON HARTMAN: I hope I haven’t unknowingly broken another law.
STEVE: Yeah, it’s news to me. But, it’s not surprising that in Philadelphia you have to have a landlord license. So, what’s going on here is it’s just another symptom of how broke local municipalities are. Because what they’re doing with 911 landlord laws, is it means this. Landlords have to screen tenants for criminal background, which obviously you would do anyway. They have to screen them and put people with clean backgrounds into these apartments or into these houses. And if the police are called—not by the tenant, but if they’re just called, period, it could be by the tenant—more than a certain amount of times in a certain period, and that differs by the city, then the landlord loses their landlord license, and the tenant has to be evicted, and it’s a tremendous assault on not only property rights as landlords, but right to life and liberty by the tenant.
JASON HARTMAN: Yeah, of the tenant. Right. No question.
STEVE: Yeah, so, there’s a horrible story about a woman—let me see what her name was, I’ve got it right here. Lakisha Briggs. She is involved in a huge court case right now—
JASON HARTMAN: And I bet you Lakisha’s gonna be at the Supreme Court, and I bet she’s gonna win, and I hope she does.
STEVE: Yeah, yeah. And this is shocking, because the ACLU is representing her, and Jason and I are cheering for the ACLU—
JASON HARTMAN: Which is rare. But you know, sometimes I really love the ACLU. But it’s not that often. But go ahead.
STEVE: Yeah, it happens. So, basically, in Norristown, PA, they had a three-strike ordinance from the city, where if the city were called to a residence three times, I believe in this case it was in three months, then you’re out. Landlord loses license, can’t get it back until you’re evicted, and he pays a fine, and you’re evicted. Well, she’s living here, and there’s an incident. She calls the police to her apartment. Strike one, right? And we don’t know why, but it happened. Well, then, a few weeks later, she’s having a barbeque at her place. And one of the neighbors doesn’t like it. I guess things were getting a little rowdy. And the neighbors call the police, unbeknownst to her: strike two. And then, finally, when she’s coming up on that final threshold, and it’s actually four months, I just saw in the article here, so—three strikes in four months—her ex-boyfriend, who was in prison for domestic battery, gets out of prison, comes over, breaks a beer bottle and stabs her, all while the one-year-old son is watching. And the neighbors call the police. Does she get strike three? Absolutely she does. And the landlord, who had vouched for her and said, I don’t want to evict her, she’s a good tenant and she pays her rent on time, she does well—he’s forced to evict her in order to be able to maintain his license. And she gets evicted because some psychopath came over to her house and stabbed her. And this is your classic example of—well, not just too much government meddling, but it’s just despicable, the fact that they’re trying to outsource their responsibility to police and make the city safe. I mean, disgusting.
JASON HARTMAN: This is absurd. Okay, so, the first lesson here for investors is, remember the old saying: when you lie down with dogs, you get fleas. So, don’t be in markets like this where you’re going to have these issues to deal with. Stay away from them like the plague! Just don’t get into this low-end stuff. I’ll bet you if we found out the address of her property, and looked it up and Google Mapped it, and compared the prices on the different websites, we’d see this is a low, low-end property. And these low-end areas, they’re just plagued with problems that you just don’t want to deal with. And this is one of them. Where the city is broke, the city is trying to outsource its responsibilities onto the landlord. Of course, they all do this under the guise of the public good. It’s always for our safety right? And it’s just ridiculous, and it’s not fair, and it always backfires. And virtually all of these laws that are meant to protect the little guy—it seems like they never do. They always backfire, they always have unintended consequences, or maybe even intended consequences, frankly. And it’s just a mess. I mean, Steve, this is just a mess. Is this going to the Supreme Court, in this case?
STEVE: I know it’s at least on the federal appellate level. She won recently, I guess the borough of Norristown, who is the defendant that she is suing, tried to get this thing thrown out, and the court ruled that nope, this can go forward. She’s got a case here. So I’m sure it’ll end up pretty far up the chain, if it doesn’t end up at the Supreme Court. But there’s just a quick conclusion to the article that I think sums up where this stands, if you don’t mind, I’ll let the listeners know. It says that under whatever name they occur, nuisance laws are an assault upon the property rights of landlords who are being criminalized for the actions of their tenants. In effect, landlords are being penalized if they do not assume the police duties of restraining violence and keeping the peace. Crime victims are also abused by the ordinances, which deny them protection from violence, by deterring tenants from calling for assistance. The police help crime to go unchecked, and crime rates to increase. And by enforcing the evictions, city officials contribute to homelessness and poverty among the most vulnerable of their residents.
JASON HARTMAN: Yeah, but they don’t care.
STEVE: Yeah. They’re saving money by not having to ship the police out so much.
JASON HARTMAN: That’s right, and they’re probably getting some kickbacks, too, somehow, under the table.
STEVE: Doesn’t it just smell rotten? The whole thing.
JASON HARTMAN: It does, totally. But the lesson there is, just don’t deal in these types of properties, folks. Steve, I think we talked about this after out trip to Orlando, when I spoke at the equity trust conference there. But remember that guy who came up to our booth, and he talked about—we’ve gotta get him on the show. He talked about how he manages these properties in these incredibly blighted areas, and I think he was in like North Carolina somewhere—
STEVE: Raleigh, North Carolina.
JASON HARTMAN: Right, he was in Raleigh. Which—Raleigh’s okay, I like Raleigh, but you know, there’s bad areas in most every city.
STEVE: According to this guy, yeah, there are bad areas.
JASON HARTMAN: Yeah, they sounded pretty bad. And he makes friends with his criminal tenants, and they’ve gotta protect him, and then his house got robbed as a revenge robbery—not because he did anything, it was just sort of a mistake. It’s because his name and address were on some legal papers that one of his tenants was dealing with. I don’t remember if it was a restraining order or what—
STEVE: I think it was an eviction, and he was on the summons. And so they sent people over to rob his house, and he goes over to the dealers after and says hey, whoa, whoa, big mistake here.
JASON HARTMAN: The drug dealer, you mean. His tenant.
STEVE: His tenant, right. And then his tenant was like oh, okay, you’re cool and you help keep the cops off of my back—I’ll call off the dogs, and sorry about that.
JASON HARTMAN: Yeah. I don’t want to be anywhere near this type of stuff, folks. I just like these areas that are below the median price in a given area, and will just not be—you just won’t be dealing with this type of criminal behavior. It’s just too dangerous.
STEVE: It is. And we asked him, it was funny. We said, so, what do you do? He said, well, I own rental properties. Low-end rental properties.
JASON HARTMAN: Yeah, and he was meaning really low-end.
STEVE: And we said yeah, okay, Section 8, right? No, no, below Section 8. My tenants are criminals, basically.
JASON HARTMAN: Yeah, it’s funny how matter of fact he was about the whole thing.
STEVE: Yeah, he was just so—you should have seen this guy. He was the exact opposite of what you would expect to be walking through these neighborhoods collecting cash rent.
JASON HARTMAN: He joked about himself, he says, look, I’m just a skinny white guy. But these tenants, I made friends with them. And we take care of each other. And look, there’s a code of honor in everything, I guess. They say there’s no honor among thieves, right, but maybe there is.
STEVE: Apparently there is a little bit, occasionally, when they feel like it.
JASON HARTMAN: There you go. There’s no honor among lawyers and government though, that’s for darn sure. And there’s no honor among Wall Street and bankers, that’s for sure.
STEVE: There’s only profit. Exactly.
JASON HARTMAN: Okay, what else you got?
STEVE: Well, there’s an interesting—while we’re kind of on the topic of poor tenants and such, I get a really interesting question a lot of times, and I was thinking about this, because I was out in the Bay Area last week, and I was looking at some property out there, and holy cow it is so expensive!
JASON HARTMAN: Are you kidding me? I can’t even believe you would bother to look.
STEVE: Well, there’s some background to that, I’ll tell you, but it is just a train wreck. It is so much more affordable to rent than it is to buy. It’s not even close.
JASON HARTMAN: Oh, hey, Steve—I tend to forget things sometimes, and I want to just mention something about Airbnb. I talked about this on a prior show. I’m sorry to interrupt you on this, but you just reminded me. We have some people that are being hit up for various funds and deals and pooled money investments, and you know my opinion—I don’t like pooled money. My saying is, pools are for fools. Commandment #3, thou shalt maintain control, be a direct investor, blah blah blah. You’ve heard it on the last three hundred and something episodes. But Airbnb, I’m starting to hear more and more, or read more and more, about how it’s having a big impact on the hotel market, negatively. Negative impact. And New York City—Airbnb is this website where people can go rent their own properties, or rent a room in their property. And it’s really big. It’s valued at like $2½ billion dollars or something like that. It’s been tremendously successful. There’s another company like that called VRBO, or something like. Anyway, if you’re thinking of investing in a hotel, you better be careful, because Airbnb is having a hugely negative impact on the hotel industry. And some of our clients have been hit up for investing in a hotel. And I don’t think we’ve seen anywhere near the last of this. I think we’re just at the beginning of it. New York City, there are movements to try to outlaw Airbnb, because it’s hurting the hotel industry there that charges an arm and a leg, and another arm and a leg—two arms and two legs—for a hotel room in New York City. So interesting side note there about that, and these new disruptive business models like that.
STEVE: That’s true, we’ll see what they do to the hotel business, and the fractionalized ownership businesses. Because yeah, it’s so expensive, and that’s just what I was noticing in the Bay Area—that I would rent all day long, because these houses are so expensive—
JASON HARTMAN: And the rents are so low, as a comparison! The rent-to-value ratio is very much in favor of the tenant in any expensive market around the entire planet. This is a global rule I have noticed. In 70 countries I’ve visited, and I’ve probably done some reasonable amount of property hunting in half of those, maybe 35 countries, and you can always, in any expensive area, you can always rent and have it be a much better deal than owning.
STEVE: Oh yeah, definitely. Definitely. And so, conversely to that, the markets that we tell our clients to invest in, it’s actually quite the opposite. Your payment, if you’re just looking at it payment-wise, is much cheaper to own than it is to rent, plus you get your deduction from the mortgage interest, and there’s a case to be made that you’ve gotta maintain the property and whatnot. But typically it’s much better to own, and I explain this to people, and they say well, why don’t these tenants just buy properties, then? And we’ve discussed that ad nauseam on the show. But an article that I saw in the Washington Post I thought was an interesting twist on this. It said that poverty strains cognitive abilities, opening the door for bad decision-making, a new study finds. And basically the crux of the article is that when you’re under financial stress, it uses up a lot of the bandwidth in your brain, and so, decisions that would normally be made that are quite obvious, are harder. And actually it showed that people who are under financial stress are making decisions at a rate about 13 IQ points than they normally would if they weren’t under that stress. So I thought, other than a few other factors that you’ve talked about, that’s another reason. These people, they’re tenants, they’re working hard, they’re under a little bit of financial stress in many cases. And that’s why they’re not buying, is because it’s just—they’re making bad decisions!
JASON HARTMAN: Well, it’s also—it’s just an issue, largely, of financial immaturity. And when I was selling traditional real estate years ago, I always noticed that people who were renting, and they were living in a nice place, they never wanted to take one step back to take two steps forward. It’s better overall to be a homeowner, usually. Except when you are wealthier and you can afford to rent a really high-end property, and get it for an incredibly cheap price, like my beautiful penthouse in Phoenix. I mean, this is a great deal to be a renter, but a low-end property—it’s better to own it. See, and also the question, like you said, clients always ask us: why don’t all the tenants in these markets just buy? Well, because they don’t want to sacrifice anything. They want to live for today. And I remember when I was growing up, one of my mom’s best friends was a woman named Kathy, and her son Tim was like my best friend, naturally. We’d hang out together all the time. And Kathy was like the opposite of my mom. My mom grew up on a farm in upstate New York, and she was poor. And she was frugal. She’s extravagant now, but to become wealthy, she was frugal. And so she would save money. Like, I remember the first new car that I think she ever bought, okay, when I was a little kid, was this totally cheap little Honda Civic. It was blue, and it was a little piece of junk. It had no radio. It had no air conditioning, of course it didn’t have power steering. Nowadays cars come with all this stuff standard. But back then you could buy it with nothing, right? I remember—I never had nice clothes growing up. I never had all the stuff I wanted. And Tim had all the goodies, and Kathy always had a nice new car, and she always dressed nicer than my mom, and all this kind of stuff. But hey, fast forward a couple decades and guess what? My mom’s rich, and Kathy’s still struggling with probably a lower middle class lifestyle. Not low class, but lower middle. And you gotta be willing to make sacrifices, and that’s why, in this article that you brought up about poverty straining cognitive abilities, is a perfect example. Folks, we’ve got listeners and clients that are all over the socioeconomic spectrum. Some people are listening to this show now and they just want to buy their first property, and they want to get started on the road to wealth, and that’s great. And some people own numerous apartment buildings all around the country, or they own dozens and dozens and dozens of single family homes, and they’ve made it. Congratulations. But the thing I have learned in my financial life, is that you want to keep your fixed expenses low so that you don’t have ridiculously high car payments, or ridiculously high mortgage or rent payments. You want to keep your core expenses for living somewhat low, so that if you encounter a bad time, you can weather the storm. And when times are good, hey! Spend money on things that don’t increase your fixed overhead. Look, I’ve owned—and I was just looking at old pictures last night in my iPhoto library. I owned a beautiful expensive yacht, I owned a big beautiful motor home, I bought a plane and the company went bankrupt and I lost a bunch of money on that—and I’ve done all of these stupid things. I had a BMW where the lease payment—because I had to bury the Range Rover, the prior Range Rover, which was a terribly depreciating car—
STEVE: Yeah, those are the worst.
JASON HARTMAN: Yeah, they’re bad. And I remember my lease payment were like $1700 a month, and I’ve had these gorgeous homes in the Newport coast, California, and you know my mortgages were well over 10 grand a month. Fixed overhead is just stupid. It just stresses you out. The point is, in business and in your personal life, when you’re doing well, it’s fine to increase your variable cost of living. Meaning, if you want to go on an expensive vacation, or buy something nice that is a consumer good—the appearances of wealth, the butter not the guns, which is certainly not where you want to spend your time and your life’s energy. But if you want to buy something, hey, buy it for yourself! You’ve earned it, congratulations! But keep your fixed cost low. There’s that old saying, if it flies, floats, or fornicates, it’s better to lease than buy. Sorry to be so crude. But you know, that’s kind of true. I mean, don’t increase your fixed overhead, your obligations, a lot. Just have it be your variable overhead. If you’re doing well, variable overhead—that’s fine, treat yourself to something. Go on that nice vacation, go on that nice cruise, whatever it is. But keep your core costs low. And this is one of the reasons that I really think people listening should strive, if at all possible, to live in cities that are nice, desirable places to live, that have a lower cost of living. Because oddly, some of those places are much more pleasant places to live. For example, my own life. I grew up in LA, and then spent my adult life in Orange County, the OC—very expensive area—in areas like Irvine and Newport Beach. Very, very expensive areas, and some of the most expensive real estate in the country. And I tell you, since moving to Phoenix, my cost of living has gone down dramatically, and not having that stress of those big fixed expenses, it’s really just a relief. I mean, it really is. You can make better decisions, and you can be a better investor and a better trustee from birth to death, of the resources that you’ve been given.
STEVE: I agree completely, so yeah, just another funny little angle to the why don’t these people just buy the houses question.
JASON HARTMAN: Yeah, financial immaturity, they don’t want to take the step back to take two steps forward. That’s what it always comes down to. Yes there are some explanations and events and things in there, but it always seems to come down to that as the core issue.
STEVE: Exactly right.
JASON HARTMAN: Well Steve, you got anything else for today?
STEVE: Well, yeah, real briefly. There’s a little bit out there about our—is the market slowing down due to affordability, right?
JASON HARTMAN: Yes.
STEVE: So, I don’t know. Do you think that it is?
JASON HARTMAN: A little bit. I don’t think it’s very significant. The market has just been on a roar, a tear, for the past year and a half, two years. And it has been ridiculous. And I think it’s cooled off a tad. Not much, but a little bit. And you know, of course this all depends on location, because all real estate is local. And it also depends on price segmentation within each location. So, first you segment by cities, for example. And the Case-Shiller Index only does 20 cities, and 14 of those cities I wouldn’t recommend. 6 of them are pretty good. And so once you segment that way, and you look at—let’s take a good city as an example. Let’s take Houston. Just pick one out of the hat. One that we recommend and like. We like Houston a lot. Energy and medical business is great there, and a lot of great investment properties. I’ve had very good luck with my properties there. And so Houston’s a good market. But within Houston there are different segments by property type, different segments by price, so, the low end of our [unintelligible] in Houston, meaning the really cheap stuff in the bad neighborhoods, may be doing one thing, and the stuff that we like, those sort of tier one and two properties, and I guess in Houston that price would be—and chime in on this, Steve, because you’ve got more first-hand knowledge on this than I do, because you do it every day—but, that price would be probably $80-$140,000, maybe? Those are like, good markets. That’s what we like. They’re sort of pseudo-yuppie-ish areas, and that’s sort of the prime sweet spot in which to be investing. And then you’ve got high-end properties in Houston, you know, and a high-end property in Houston starts at $300,000. Now if you’re from California you think hey, that’s a little cheap condo! And then it goes up from there to multi-millions of dollars. And they’re all doing different things. So this is why you can’t read these statistics and just make a blanket thing. I mean, 400 markets in the United States, 400 basic market areas, and then within each of those markets you’ve got different prices, you’ve got different product types. There’s all sorts of things to consider, right?
STEVE: Right, right. Because this article was from CNBC, and they want to treat everything like it’s a Wall Street product.
JASON HARTMAN: Right, one blanket statement. Let me see, wait, they said something about the “housing market.” As if that’s one monolithic thing.
STEVE: Right, and they just take data, and they don’t read into it, because of course they’ve got one of the most affordable markets as Detroit. So, they’re implying yeah, buy houses in Detroit! It’s affordable!
JASON HARTMAN: Good luck, people, have fun.
STEVE: Yeah, have fun.
JASON HARTMAN: Have fun, bring your gun to collect your rent, and don’t let your tenants call 911.
STEVE: Exactly—
JASON HARTMAN: —need landlording license—
STEVE: —and part of it, the market’s slowing down a little bit, owner occupants are out, it winds down this time of year through early next. People just aren’t as ready to buy houses right now. If they’re owner occupants.
JASON HARTMAN: Yeah, the investors though, the smart investors are out, and they’re looking like crazy, because they want to be sort of opposite the cycle of the regular homeowner, the regular owner occupant.
STEVE: I told you a couple weeks ago that it’s allowing our local market specialist to sneak in and get a few better buys right now. And they’ll probably do that through the end of the year. So, the article’s implying oh, it’s slowing down a little bit—I think that’s a seasonal thing, and it’s going to continue to go up. Not drastically, because the economy is still very overrated. It’s nothing to write home about; it’s not like there’s roaring wage increases and things like that happening that are going to lead to lots of people buying like crazy.
JASON HARTMAN: Oh, you mean Obama hasn’t rescued us yet?
STEVE: Well, that depends on who you ask. But if you’re asking me, I’m going to say no.
JASON HARTMAN: Yeah, me too. Me too. The economy is still built, folks, on smoke and mirrors. And it is an illusion of prosperity. It isn’t really there. However, we may be able to maintain that illusion for the rest of your life, and maybe the rest of the next generation’s lifetime, because what do I say about that? The math doesn’t say that we will. It says the dollar is going to collapse. We’ll lose reserve currency status. The end of America, the end of the world, blah blah blah, but the reality is that the game is a lot more—there’s a lot more to it than just the numbers, you know. I’ve had so many guests on the show that talk about the numbers, whether it be—I don’t know, name any of them. Harry Dent, Steve Forbes, all the rest. Peter Schiff. But this stuff doesn’t really seem to happen the way that it would in a logical economic world, or a mathematical world. Because we’ve got the biggest economy, we’ve got the biggest brand name. Don’t underestimate the value of the American brand name, as bastardized as that brand is becoming, okay? And I think it is going down hill, but it still was up so much higher than so many other countries, that it’s got a long way to fall along with the rest of the issues of America. And we’ve got the biggest military, and we can throw our weight around. And I’m not saying it’s right—it’s a bit bully-ish for sure. But it’s reality.
STEVE: America is still the prettiest girl at the ugly dance.
JASON HARTMAN: Yep, there you go. Good point. Okay! Anything else?
STEVE: That’s it.
JASON HARTMAN: Alright! Hey folks, thanks for joining us today, and this is it! Just me and Steve—me and Steve. Oh my God. I never say that. These college kids, Steve, are rubbing off on me with bad grammar.
STEVE: Hey, I got accused of a spelling error in a recent email to someone, my client. So, we might be able to do math, but our grammar and spelling is definitely sub-par lately.
JASON HARTMAN: It’s going downhill, yeah. Yeah. Just Steve and I, this show. And we’ll be back with a guest on the next episode, and folks, check out www.jasonhartman.com, get the free resources there, and also, if by the time this show is broadcast, if there are any left, get a copy of our big sale on our Meet the Masters product, the physical product. And that’s at www.jasonhartman.com/sale. And we’re just blowing those out, because I don’t want them in my storage unit anymore. So check that out, it’s an incredible deal. Many of you have ordered those, and we’re going to get to shipping those here pretty quickly. So, Steve, thanks so much for joining me today, and listeners, thank you as well, and we’ll talk to you on the next episode.
STEVE: Thanks a lot.
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