CW 362: Single Family Residential Property Investing with Jason Hartman and Kerry Lutz of the Financial Survival Network

The tables have been turned on Jason Hartman during Episode #362 of The Creating Wealth Show. Normally Jason asks the questions, but today, host Kerry Lutz of the Financial Survival Network sets the agenda. What transpires is a nuts and bolts crash course in the exact reasons single family residential properties are Jason’s preferred form of investing, bar none. Better than the stock market or gold by a long shot, and safer than apartment complexes or commercial properties. If you have an interest in a better understanding of the kind of investing that creates actual wealth for the long term, don’t skip this show.

About Kerry Lutz

Kerry Lutz has been a student of Austrian Economics since 1977. While attending Pace University, he stumbled upon an extensive cache of Austrian Economic Literature in a dark, musty, abandoned section of the school’s library. After graduating from The New York Law School, he became an attorney and life-long serial entrepreneur. His diverse career has included: running a legal printing company, practicing commercial law and litigation and founding a successful distressed asset investment company.
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In 2010, Kerry gave up most of his other interests to pursue his long held desire of becoming a radio show host. Thus the Financial Survival Network was born. Its mission, much like that of Jason Hartman’s, is helping you to survive and thrive in the New Economy. He has done hundreds of interviews with such financial luminaries as Peter Schiff, Harry S. Dent, Martin Armstrong and Peter Grandich. Kerry now appears on 1230 WBZT, in West Palm Beach, FL, every Sunday from 9am-10pm EST.

In This Episode, Jason Addresses:

Is the dollar collapse real or fiction and why it might not matter
Why math math is irrelevant when it comes to the economy
Where Chinese millionaires want to live
Why residential property investments beat multi-family and commercial
How you can tell if your real estate portfolio is diversified
What’s wrong with most real estate gurus’ and their promises
much, MUCH more…

Don’t miss Jason’s monologue, which leads off this episode. He discusses the recent merger of eLance and oDesk, the scam of life insurance as an investment,why college no longer makes financial sense, and what Steve Jobs told President Obama about creating more jobs.

Links:

The Financial Survival Network
Check out this episode!

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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 episode number three hundred and sixty-two. And today, after a very brief monologue from me, I will be playing a radio interview that I recently did on the Financial Survival Network, and I wanted to play this for you on the Creating Wealth Show because these are some common things that you listeners are asking of me rather frequently. And one of them is the debate, or the dilemma, between what is the better investment: is it single family homes, the good old standard dependable single family home, or is it apartment buildings?

Now, if you’re a regular listener you certainly know that I like housing. Housing is my favorite. I like it much better than, you know, any form of what most people call commercial real estate, which is somewhat of a misnomer in a way, but office buildings I’m not fond of. I’m not that fond of retail centers. I’m not that fond of industrial properties. I like housing, because no matter, as long as the population is increasing, everybody needs a place to live. They need a roof over their head. And the can work at home!

Now so many jobs are outsourced, home-based nowadays, it is just amazing. I’m actually in New Orleans, Louisiana right now; I just got here yesterday, and I’m at a conference. And today, one of the speakers was talking about the companies that you may have heard of, called Elance and oDesk. And these are two companies that—well, I guess they merged, I think one bought the other recently. I’m not aware of the details of that, but that’s what I heard. And Elance, of course, is a place where you can go to find people to do various tasks for you, and projects for you and so forth.

And I hired an economist off of Elance once, to help do some research for this show. And it’s a great service, fantastic, very convenient. And the other one, oDesk, is a way that employers can keep track of their contract workers. And, you know, sort of track their time, and make sure they’re really working. All sorts of great tools for this. But the speaker today was talking about Steve Jobs, the late Steve Jobs’ last conversation with Obama. Before he passed away he talked to Obama—I’m not sure if he was invited to the White House or if it was just a phone conversation, but Obama said, what can I do to bring the jobs back? A typical question any president should be asking.

And Steve Jobs answered, well, the jobs aren’t coming back. And in that, he was saying, you know, the world has just simply dramatically changed right under our noses. And of course we’ve talked about this on many prior episodes. And this has pretty big consequences also for us as investors in this sense, although this is not directly what I was meaning to say by bringing this up. And what it is, is, of course, independent contractors and freelancers—well, those career choices, or default career choices, maybe they’re not by choice but by default, whereas someone might rather have a traditional corporate job, but because those jobs just aren’t there like they used to be, they’re doing freelance work, or contract work.

And that could provide a great income, and it could be fantastic. It could be a fantastic way for someone to run their own business, have control over their time. There’s lots of benefits to it. But one of the disadvantages of it is that it is very difficult as a contractor, as a freelancer, to qualify for what? A mortgage. And so, that means more renters for us, for us landlords, right? That’s one important factor to consider. And you combine that with the unemployment problem with college graduates—of course, these people are unfairly saddled with massive amounts of student loan debt. I believe that number now is about $1.1 trillion, with a T. $1.1 trillion. A mammoth bubble in student loan debt, that probably will have no other choice than to pop, because colleges prepared people for jobs that don’t exist anymore. And God forbid, especially if they got a liberal arts degree, that is of very little use.

If you have college age children, or children approaching college age, the first thing I would ask is, does college even make sense anymore, at its current prices? There’s lots of other ways to become educated nowadays. We’ve got the Internet, and we’ve got Khan Academy, and we’ve got even online free universities. So there’s lots of other choices. But a recent article—and we’ve talked about this phenomenon before—was in Zero Hedge, and it was entitled The True State of the Economy: Record Number of College Graduates Live in Their Parents’ Basement. Now, what they’re saying here is that this is just bad overall for the economy. And certainly, if we have a generation of Gen-Y-ers, or Millenials, that cannot find adequate employment, that are highly college-educated, and they’re working at Starbucks, or they’re under-employed pretty dramatically, this is not good. It is definitely a problem.

However, it also represents a shadow household issue in a good way. And we’ve talked about this before, but that is the issue of household formation that should have occurred—that otherwise would have occurred—in past years, but isn’t occurring now, because these kids in the boomerang generation are living with their parents. Either coming back to live at home with their parents, or just staying with their parents longer and longer and longer. And of course, they will eventually marry, although they will do it later than prior generations, and they will eventually move out, although they will do it later than prior generations. But, it represents a lot of pent up demand.

And if anybody tells you different, don’t believe it. Because this will be household formation, ultimately. It will definitely be household formation, so there’s no question about that. So, some very interesting stuff there. Now, I want to just talk to you—oh gosh, what about. I have a couple of other things before we get to this interview, which I think you’ll find interesting, talking generally about the economy but also about houses versus apartments. And I think you’ll like that. Oh, did you see in the news, there are quite a few charts floating around, stock market charts, recently, showing this scary ominous parallel between 1928 and 1929 and present-day? And it’s showing the Dow Jones Industrial Average, and how this chart almost exactly correlates to the chart we had right before the Great Depression with the stock market. And of course they’re saying stocks are extremely overvalued. And things are very different than they were 75 years ago, right? Obviously they’re very different. But it’s interesting nonetheless. So we’ll kind of watch that one and see how it all plays out.

Another interesting thing that I noticed recently while walking my dog—and I have talked about this on prior shows before, but not for a while, so I just want to raise this one again. And it’s about the concept of insurance. Especially life insurance. And I’d like to kind of pick on life insurance, because it should only be considered life insurance. And if you heard me before talk about this, you know my belief—that if you need life insurance, which many people that buy it don’t even really need it—best way to insure is almost always, but not always, to self-insure, or at least partially self-insure.

So, when it comes to life insurance, if you have people that you care about, children, a spouse, maybe especially a non-working spouse, or a spouse that’s been out of the workforce for many, many years and has not kept their career skills current in this fast-changing world—well, and if you don’t have assets, and if you don’t have wealth, then you’re probably a younger person. Heck, if you’ve got children and you don’t have anything to pass on to them, then if you haven’t set up proper structures to pass that on, ideally a living trust, very inexpensive to do—you can do that online for very, very low prices.

Doesn’t offer any asset protection, but if you die, it does save your estate from probate, potentially. So that’s wise. That’s just good simple estate planning. But what I can’t stand is how these financial advisors sell life insurance, as though it’s not insurance. As though it’s an investment. As though you should buy a whole life policy, a universal life policy, at these really high prices. And of course the insurance company has engineered these policies, in my opinion, so that you really will very rarely ever win by getting one of them. Just buy a cheap, simple term life insurance policy, and have life insurance! That’s it. Not an investment. And the interesting thing is, it was so ironic that I was walking my dog and I saw in front of this big, gorgeous newer office building, marble and glass, a big “for lease” sign.

Of course, office spaces have huge vacancy problems now. And retail centers, shopping centers do too. Another reason I like housing for sure. But, it’s this big “for lease” sign, and it had the commercial brokerage, I think it was CB Richard Ellis was the real estate firm, and it had the names of the agents there that represent the property and so forth. And then, right below it, at the bottom of the sign, it said MetLife Real Estate Investors. MetLife Real Estate Investors. And just make sure you connect the dots, and you understand that this is full circle, folks. Because that is exactly what your insurance premiums go to. They help these companies invest in the same thing that I recommend: income property. Drum roll please. Income property.

So why not just get the minimal amount of insurance so that you’re being responsible, and then take that excess money that you would have spent on over-insuring, and buy some income property yourself? Because that’s just total hypocrisy, right? So, it’s just funny, you know. You may see one of those signs yourself, in your town or city. Anyway, that’s interesting. But, before we get to the interview here, let me just talk to you about some great upcoming episodes we have.

Our next episode, #363, will have Scott Shellady on to talk about derivatives. Of course, we always talk even if the subject of the guest is not directly on income property, we always talk in the intro portion of the show about income property, and more specifics, and how-to tips, and things like that. So next episode we’ll have Scott Shellady on derivatives. And then episode #364 we’re going to talk about reverse mortgages, and some interesting ways in which you or your elders may use reverse mortgages, and you can also use those to invest in income property, or for other prudent things. And then, episode #365 we’ll have Tom Antion on to talk about these ridiculous scams in the seminar world.

And it just blows my mind. Now, I’m at a marketing conference here, and an entrepreneur conference, in New Orleans. And I tell you, tomorrow when I see all the speakers, I will have my BS meter well tuned. Because you’ve got to be able to sort the reality from the hype, right? But, Tom Antion started this new project, it’s going to be a reality show called Seminar Scammers. And I think you’ll really find some of this stuff very interesting. You may have seen the 60 Minutes episode that I did not see, by the way, but I’ve heard about it from several people, featuring our friend Robert Kiyosaki, who again, I’ll state my opinion on Kiyosaki—I love his books, I think they’re fantastic. But he’s—he licensed his name out, and he’s got this coaching program. And I guess 60 Minutes did a—when 60 Minutes comes knocking on the door it’s usually not good news, it’s usually bad news.

And they did a pretty scathing exposé and then I went online and tried to find it, and of course Kiyosaki’s people optimized against it, so that when I Googled “60 Minutes Robert Kiyosaki,” a bunch of his material, not the 60 Minutes episode, came up, and it said, “60 minutes to getting rich with Robert Kiyosaki,” and a whole bunch of videos there, rather than the actual one I was looking for. I’m still looking for that. If you happen to have that clip, please send it over to me, I’d really appreciate it. and you can of course do that through our website at www.jasonhartman.com, shoot us the link.

But that’ll be interesting for you. And then episode #366 we’re going to talk about Open The Books, which is a really interesting project on government spending that is the most detailed analysis and exposé of government spending at every level from federal, state, to local government, with over one billion, yes, that’s one billion line items. One billion with a B, line items of government expenditures. You will not believe what you hear. I’ve already recorded all of these episodes, so, they’re coming up. And #367, I’m going to do a segment from our recent Meet the Masters event that I think you’ll like, I’ll replay one of those. And then #368, Po Bronson will be on to talk about Top Dog, and who wins and loses in life.

I was going to run that as a 10th episode, but I decided to run it because it was related enough to the subject matter as a regular episode. And then #369, I’ll have Craig Smith from Swiss America talking about the economy, the potential for economic collapse and devastation in different parts of the world, you’ll find that very interesting. And I think for #370 I’ll have, although I haven’t decided for sure, but—probably going to be Janice Dean, the chief meteorologist for FOX News, to come on and talk about weather, and some aspects of how it relates to the economy, and the whole idea of do we have global warming or global cooling, and how do we predict weather, and I’ve just never done a show on that. I’ve got the chief meteorologist from FOX News, and heck, she was a pretty interesting guest. So I think we’ll run that as episode #370. But without further ado, let’s get to this recent radio interview I did where I talk about the potential for collapse, and then comparing houses, single family homes, duplexes, fourplexes, to large apartment complexes. So, we will be back with that in just a moment.

[MUSIC]

JASON HARTMAN: I’m here with Caeli Ridge, and one of the things, Caeli, that investors are constantly disappointed with, is that they’re quoted a rate in one place, or they look online and they see a rate for a mortgage, and then they’re switched, and it’s kind of a bait and switch. And they find out they have to pay a higher rate. What’s going on with that?

CAELI RIDGE: I get this question almost every day. They’re looking at the difference between owner-occupied type rates and non-owner-occupied type rates, and the one is always going to be less than the other.

JASON HARTMAN: Investor mortgages are just a little bit more expensive, folks. But remember, as an investor, you don’t pay your own mortgage, your tenant does. So it’s a pretty great thing. Caeli, where can they find you?

CAELI RIDGE: www.ridgelendinggroup.com.

JASON HARTMAN: Fantastic. And if you forget that, you can contact your investment counselor, at www.JasonHartman.com.

[MUSIC]

KERRY LUTZ: So, when is the collapse coming? Is it coming? And if it doesn’t come for another 10 years, you’ve gotta have income, and you’ve gotta have it now, which is why we’ve got our prime sponsor, Jason Hartman of www.jasonhartman.com on with us now. Jason, welcome back.

JASON HARTMAN: Hey, thank you Kerry, good to talk to you again.

KERRY LUTZ: You too. So, we’ve got this quandary. Some of us, like myself, believe that this merry-go-round can’t keep on spinning forever. Others believe that it’s gonna go on for quite a while longer. We don’t know how long. And you’ve gotta figure out a way to make some money, and hopefully give as little away to the tax man as you possibly can. And that brings us, of course, to real estate, right?

JASON HARTMAN: Well, it does. I think it’s the most historically proven asset class in American history, if not world history.

KERRY LUTZ: Yeah, and for obvious reasons. And you happen to be in the former camp; you don’t believe there’s going to be a collapse, do you?

JASON HARTMAN: Well, I used to believe that for many, many years. And I would still believe it, Kerry, if the US did not have a particularly interesting and advantageous set of circumstances, including but not limited to, to sound lawyer-speak [LAUGHTER], how’s that sound? Including but not limited to the largest military in the world, which allows us to bully other countries around. And this whole thing is predicated on the fact that if we want to keep spending like idiotic drunken sailors, which we do—and I don’t condone any of this. I don’t agree with any of this, I’m just telling you the way I see it.

And so, if our government wants to keep spending like drunken sailors, the business plan has to be that we force our ever-devaluing debt onto other countries. Like China, most specifically. So that we can keep spending. And in order to do that, we need to have the bully pulpit. And I say we do, for better or worse, fair or unfair, it’s the way it is. We’ve got the largest military in the world by a huge margin. We’ve got the largest economy in the world by a huge margin, even though it is built on smoke and mirrors. But other economies are built on smoke and mirrors too; we’re not the only one that does that. We’ve got the reserve currency of the world—I know many countries would like to change that, but I don’t think they’re going to be able to, for the reasons we’re discussing now.

We’ve got the largest brand name in the world. And, recently, we now know we have the largest energy reserves in the world. Which is our new, huge, huge advantage. And that one actually is real; it’s not bully pulpit, it’s not smoke and mirrors, it’s not fuzzy math, etcetera. But for those reasons, including the brand—and some people, when I said that, may not have understood what I meant, so let me just elaborate on that one. The others, we all know we’ve got the biggest military, etcetera. But still, when you look at studies of China, for example. You’ve got all these people, and I’ve got a friend who is very knowledgeable, very interesting guy, who lives in China and is constantly talking about how great China is, and what a disaster America is, and you look at the press freedom index, which just recently came out, and China, along with Saudi Arabia and some other ridiculous countries—North Korea, are at the bottom. They’re the worst. There’s just almost no press freedom, right? US isn’t so good either. The Scandinavian countries are great, by the way. But Chinese millionaires—they want to move to the United States! It’s not the other way around. Now Jim Rogers—he’s an exception, and I’m a huge Jim Rogers fan, had him on the show a couple times—

KERRY LUTZ: He’s in Singapore though. He’s not in Beijing or in Shanghai—

JASON HARTMAN: He’s in Singapore, I know he’s in Singapore, and I’ve had him on my show a few times, I know you have too. And he’s a big proponent of China. But see, all of these economists out there, they’re doing something called math. And what I’m saying to your listeners, Kerry, that math doesn’t matter that much. And I don’t think that’s right, I’m just saying it is the way it is. It doesn’t matter that much when you’ve got the big military, got the big brand, when you’ve got the reserve currency, and the means to maintain reserve currency status. If it was just about math, the country would have collapsed by now! The reserve currency status would be gone by now! But the fact is, it’s not just about math. It’s about all of these things. And America is in the very enviable position of having the bully pulpit! If you will. And I say, we can keep this charade, this house of cards, going for decades to come.

KERRY LUTZ: You really think so, huh?

JASON HARTMAN: I do, I do. I think so. I don’t think we will have a collapse, as long as we can force other countries to buy our ever more worthless debt. And I think we can keep that game going for a long, long time. Am I crazy? I don’t know. Tell me. Pick at my idea.

KERRY LUTZ: Well, I just think—I see a lot of flaws in the Chinese economic model, as do you. Their military’s coming up pretty fast, but their pollution—all their cities are contaminated. And if you—I was there 17 years ago, and every young person I met there wanted to get the hell out of there and come to Flushing, New York. And San Francisco. They wanted to come to America. And you know, even if they’re making more money, they still want to get out of the place. It’s unhealthy, and from my way of thinking, like you said—the Chinese billionaires, they’re buying up property in Vancouver, in Australia, in New York, in San Francisco, in Miami, and interesting thing that’s overlooked in all of these real estate reports—they’re always saying, cash sales are huge, bigger proportion of sales than ever in real estate. They’re always attributing it to investors. That’s only part of the story, because international buyers, when they buy real estate in foreign countries, are cash buyers. So when they look at that statistic, they get the wrong conclusion, they draw the wrong conclusion, because the international buyers are becoming a bigger part of the international markets. Which are generally the ones you stay away from, by the way.

JASON HARTMAN: You know Kerry, I remember year ago in my creating wealth seminars, and on my creating wealth podcast—I used to discuss, and I should bring it up again because it’s interesting to look at things like that and look at them again now. Milken Institute report, where Michael Milken and Jeremy Siegel wrote a very interesting report about how we don’t have an asset surplus in the world. We have an asset shortage in the world. And when you look at all of these other countries that—we have more and more people around the world coming in to the middle class. Estimates say that globalization has lifted about 300 million people out of poverty, and certainly China’s the biggest place where that’s happened. And there are many environmental problems. And listen. I’m not moving to China, okay? You can’t access Facebook or YouTube in China! My God, are you kidding me? That’s absurd, okay?

So, as great as China is doing with a lot of this stuff—and then you add that to the demographic problem they have, which is an outgrowth of their one-child policy. In 15 years, China has a huge, huge demographic problem facing it. Meaning, that there just aren’t enough young people. You know, you’ve gotta have young people coming in to support the older people as they start to age and retire and you know, granted there aren’t—there’s not much in the way of entitlement programs in China like there are here. But as people age, and get out of the workforce, and need more medical care, what are you going to do with all these people? China has an incredibly big problem facing it. There’s a huge shortage of women over there. When you have a bunch of men who don’t have access to women, that’s like a prison situation! It is not good.

KERRY LUTZ: It’s like Alaska.

JASON HARTMAN: Yeah, it’s not a good thing.

KERRY LUTZ: It is. Bad news. So, I agree, the collapse, but it can happen anytime, just like in 1913, nobody expected World War I to break out 6 months later. And there it was. And then they thought it was going to end right away, it wasn’t going to go on for 4 or 5 years. And there it was, it went on for 4 or 5 years. These things happen, and they happen very quickly. But, onto the next thing: had a listener ask—her name was June—am I better off with multi-family housing, pooling up money with friends and family, buying a housing complex, 10, 20, 30, or even more units, than I am just buying up single family houses? And I’m sure that’s a question you get asked kind of regularly, Jason. What’s your take on it?

JASON HARTMAN: Right, right. Well, I like, when it comes to—I of course love income property. Any real estate that produces income, I think is far and away the best investment going. And then, within the income property category, of course Kerry, you could have office buildings, you could have retail centers, you could have apartment complexes, single-family homes. A bunch of other things, but those are the main ones. And so—I like housing the best, because at the end of the day, everybody needs a place to sleep. They say there are three common human needs at the bottom of Maslow’s hierarchy of needs. And those are food, clothing, and shelter. So let them rent that shelter from you. Housing is needed. They can outsource call centers to India and the Philippines, lessening the needs for office space in the US. They can outsource shopping, to some extent, and retail, to the Internet, lessening the need for retail properties.

And we’ve certainly seen huge impacts on shopping centers, you know with Circuit City going out of business, Best Buy on the brink, and JC Penny’s, Sears…I mean, of course this is always changing, and those problems are complex and multi-dimensional. But, certainly retail’s being impacted in a negative way by the Internet. Industrial properties, I didn’t mention that one. But of course they can outsource manufacturing to where? We were just talking about China, okay? But at the end of the day, the population of the United States is increasing. And people only have three choices. They can buy, they can rent, or they can be homeless. And when I said that during one of my seminars, someone—a smart aleck, a heckler, heckling me, they raised their hand and said no Jason, they can live with their parents. Okay, fine. That’s true…

KERRY LUTZ: More and more now, these days.

JASON HARTMAN: The boomerang generation is Gen-Y, right? But when it comes to single family versus apartments, the first thing you want to consider, Kerry, is diversification. There’s an old saying in real estate that all real estate is local. So, you want to take the most historically performing asset class—income property—but diversify geographically. So, if you were looking at a situation where you could only afford to buy one apartment building—and by the way, I should disclose to the listeners. I own single-family homes, and I own large apartment complexes too. Okay? So I do both. But you’ve gotta make sure first that you can diversify, in hopefully three different cities.

And my company helps people buy properties all over the country in markets that we like. So, if a typical person came to us and they said they had enough money to purchase $300,000 worth of real estate, we would say, diversify that into three different cities. Maybe Houston, maybe Memphis, and maybe Atlanta, for example. And those are just examples, we have other markets as well. So, buying one apartment building, where all of your eggs are in one geographical market, can be risky. Now, if it’s a wealthier client, and they say they have $10 million to invest, they can buy three apartment buildings in those three different cities. Three $3.3 million apartment buildings, in those three different cities. And they would be geographically diversified. But I want to hopefully see them investing in three different market areas, because one can have a downturn, while another is having an upturn.

In a country as large and diverse as the United States, there are about 400 local real estate markets. And there is no such thing here as a national real estate market. All markets are local. All real estate is local. So, the first thing is, can you diversify into three markets? That’s the first question. Whether it be huge apartment complexes in three cities, or three single-family homes in three cities. That’s one thing. Now, the next thing is, single-family homes historically tend to appreciate much better than apartment buildings do, because single-family homes are not sold, thankfully, based on the income they produce. They’re mostly sold by comparison. And comparison carry, when we did in one of these bubble markets, these feeding frenzies where rates are low and housing affordability is high—things start to get very illogical. And residential home buyers that buy single-family homes—they buy based on comparison, which can be way out of sync with income, and that can work for us as investors, because we can capitalize on seeing higher value appreciation in our properties, and maybe liquidate some of them and gain some nice capital appreciation at that point.

Apartment buildings, on the other hand, are sold based on the income they produce. So, there you’ve got a more perfect market, and a more educated buyer, and a more educated investor. And whenever a market becomes more perfect, if you will—and I sort of put perfect in snarky quotations, okay? Because Wall Street is sort of a more perfect market, and I hate Wall Street. I think Wall Street is the modern version of organized crime. But in a way it’s more perfect, because you have a stock exchange, and if you own shares in Apple, you can’t call your stock broker and say, hey, do some creative marketing, and try and sell my shares for more than they’re going for on the exchange. He’s going to think you’re nuts, right? Because you are nuts.

KERRY LUTZ: Can’t be done.

JASON HARTMAN: Yeah, the exchange dictates the price, period. It’s perfect in that way. But with real estate, you can add some creativity to the mix, and you know, a little bit of luck to the mix. And you can really enhance the value of a property. So, historically speaking, single-family homes, more appreciation that apartments. However, conversely—here’s an apartment advantage. With an apartment building, you can buy an underperforming building, and you can add value to it more so than you can with single-family homes. Here’s one example of that.

Say for example the apartment building has a laundry facility, but it’s not well operated. Not many of the residents in the complex use it, or whatever, right? You can go in, and believe it or not, just by improving the laundry facility, you can improve revenue there! And the apartment building is sold on a multiple of revenue. So if it’s sold on an 8x revenue model, for example—if you can add a $500 per month, that’s $6,000 per year—just for round numbers let’s say we’ll make that a 10x multiple, although not many are sold at 10x. You could add $6,000 times 10, $60,000 in value to your property, just on a little small enhancement like that.

Where you can’t do that in a single-family home. So, there are many differences to consider, there. Mostly, most of our clients are buying single-family homes. They’re simple, they’re easy to operate, they’re very easy to understand, they historically will appreciate better than apartment buildings will, the financing is better—and let me mention that one. One of the beautiful things about single-family homes, is that you can get a three decade long fixed rate mortgage for rates I say now, below the rate of real inflation. So effectively, you have a negative cost of borrowing. Meaning, you get paid to borrow. Because if you believe as I do, and probably you do, although I don’t know, that the inflation rate is higher than the government would have us believe—

KERRY LUTZ: Oh for sure, no question.

JASON HARTMAN: And in fact, if you believe that inflation rates are higher than mortgage rates—is the inflation rate higher than about 4¾%, which is the rate an investor can borrow at? Then you’re getting paid to borrow. But it gets even better. Because when we own income property, we don’t pay our own debts. Our tenants pay our debts for us. So we outsource the debt to the renter, and then we borrow below the cost of inflation, and we fixed that rate for three decades. So Kerry, imagine this. It’s February 2014. If someone borrows and buys a single-family home today, they won’t pay that loan off, potentially, until 2044.

I mean, just comprehend that for a moment. Maybe there will or won’t be a total economic or dollar collapse by then. But certainly we all agree, there’s going to be a lot of inflation between now and the next 30 years! And that inflation is going to benefit us dramatically, because it reduces the cost of our debt. It pays off our debt for us. But it also increases the price, or the value, of our commodities! And what is income property? What are single-family homes and apartment buildings made of? They’re made of commodities! They’re made of petroleum products, they’re made of energy, they’re made of lumber, they’re made of concrete, they’re made of copper wire, they’re made of glass and steel, and all of these great things. So that’s the fantastic thing now—if you were to buy an apartment building, you can’t get a 30 year fixed rate loan. The longest you’ll get on an apartment building, and I have one of these on one of my apartment buildings—I have a loan amount that’s just over $3 million on one of them, and it’s fixed for 10 years, which I thought was about the most awesome deal ever in a commercial loan. Because typically you can only get it fixed for 5-7 years.

But my single-family homes, they have 30 year fixed mortgages. On the apartment building, it becomes adjustable after 5, 7, or if you’re really lucky like I was on this one deal, 10 years. So, much better financing on the residential, and less money down, too, usually. So, the answer to the question is that it depends on the investor. But you gotta make sure you can be in three different markets, three different cities. And that doesn’t mean that the city is a suburb of a main city. It means a totally different market. We say, diversify geographically. And we help people do nationwide investing. So, three markets. You gotta be able to afford to be in three markets at least, if not 4 or 5 even. And then all of the other factors that I mentioned; if it’s a wealthier client that has $10, $20 million, $30 million to invest, then hey. They don’t want to mess around with little single-family home. It’s just small potatoes for them.

KERRY LUTZ: Economy of scale.

JASON HARTMAN: Yeah, economies of scale. And they’ll take a lower return to have ease of management. And that’s what they all get. But if it’s the typical middle class person, and they want to buy 6 or 10 or 12 single-family homes for $80-$120,000 each—that’s the way to go. You can buy two single-family homes in three different cities, and you have a nice diversified portfolio, and you’ve got $600,000 worth of real estate working for you. And then, after that, try and buy two more every year, and by golly, in 5 years you got an empire!

KERRY LUTZ: Sure.

JASON HARTMAN: You know?

KERRY LUTZ: Makes total sense. You just keep reinvesting.

JASON HARTMAN: That’s what we help people do.

KERRY LUTZ: And…and that sounds like the way to go, because you can’t gamble on when this collapse—if it’s going to happen, or when it’s going to happen.

JASON HARTMAN: Unlike most people that are out promoting real estate—those are gurus, you know? They just go out and say, hey, buy real estate, buy my course, sign up for my coaching program. Well, we actually have properties that people can buy. We’re a real estate broker. So, what we say, has to be conservative enough to come true in real life. You notice we’re not talking about going out, buying a property tomorrow, flipping that property, and making $200,000 in a month. Okay? This is the long term, real way to invest. It’s not a bunch of hype.

KERRY LUTZ: So, if you want to get started in this, Jason Hartman University is really a great place. Just go there, a great place to get started, get your feet wet. And then, when you’re ready, you talk to one of Jason’s counselors, and you’re on the road. Alright Jason, hey, thanks for being on, as always, and we’ll talk to you again next month. You be well!

JASON HARTMAN: Sounds good. Happy investing!

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ANNOUNCER: This show is produced by the Hartman Media Company. All rights reserved. For distribution or publication rights and media interviews, please visit www.HartmanMedia.com, or email [email protected]. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate, or business professional for any individualized advice. Opinions of guests are their own, and the host is acting on behalf of Empowered Investor, LLC. exclusively.

Transcribed by David

The Jason Hartman Team