CW 363: Income Property Management & Tenant Self-Sufficiency with Jason’s Mom + Scott Shellady SVP of Derivatives for the Trean Group

Returning for an encore interview in episode #363 of The Creating Wealth Show is Jason Hartman’s Mom. From the friendly environs of her newly completed McMansion in lower Alabama, the talk turns to fostering an ownership mentality with tenants.Whether you self-manage or go the property management route, this is a critical concept to understand. In short, the trick is to get your tenant thinking of the property as his/her house and to take pride in ownership. In nuts and bolts terms, it’s the difference between getting a call at midnight asking to have a light bulb changed or having the tenant in the mindset to do it themselves.

When it comes to tenant self-sufficiency, you might find it difficult to beat one of Mom’s tenants. This incredible guy has rented the same place for 25 years. Present and future landlords looking for income property investing success should take this case study to heart. He spent $1,400 to seed the lawn. $3,000 to build a brick wall on one side of the property. And when the hot water heater goes out, he’s willing to install it himself. This tenant has the ownership mentality down to a science.

The second half of the show features guest Scott Shellady, Senior Vice-President of Derivatives of the Trean Group. Wait! Don’t click away. Too many people think they can’t understand derivatives, and we’re here to prove you wrong. Listen to Scott break the idea down into layman’s terms. You may not want to invest in them but you need to understand what they are and how they fit into the greater financial world scheme.

Mr. Shellady also devotes time talking about the reality of retirement for Generation X in today’s goofy financial climate. It’s too risky to divide your portfolio into an even 50% split into stocks and bonds, so what do you do?

In This Episode:

* Jason and Scott exchange dueling definitions of derivatives. Is it like trading insurance or “the thing about the thing?”
* What are the one-percenters investing in right now?
* What SWAGER means to your investment strategy
* How to profit in the face of the manufactured stock rally
* What’s killing the financial future of the ninety-nine percenters
* Why Gen Xers should figure on working longer before retirement
* How to calculate a security deposit
*Why being too friendly can cost you money
*Even better than an extra deposit is to charge monthly pet rent
*And much more…

Links:

www.TreanGroup.com
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-three. And I want to apologize in advance if the audio quality isn’t as good as usual today, because I am recording just simply directly to the computer. I’ve got a special guest back for the third time, and that is—my mom! We’re here at her McMansion, this ridiculous McMansion terra in Alabama, and I was at a conference in New Orleans, as you know, on the last episode. And so I’ve been here for a couple of days, and I know you regular listeners and attendees of my seminar have been interested in hearing the story about how she built this house.

But we’re going to talk about one of her tenants today, and some of her different property management experiences. And we’re going to play for you an almost hilarious phone message that she got from one of her tenants. And what I really want to focus on with you today, before we get to our guest—who, by the way, is Scott Shellady, talking about derivatives. I’m not sure if I mentioned that or not. But anyway, that’ll be our guest here in a few minutes. But, what we want to talk about today is fostering an ownership mentality with your tenants. And what I mean by that is this. Sometimes you have to train your tenants; sometimes you have to train your property managers. And that, of course, depends if you’re self-managing your properties or if you’re using managers. But you have to ultimately train either the manager or the tenant to understand that when people rent a single family home, or a unit in a duplex or a fourplex, or even in a large apartment complex that you might own, we want to foster a mentality of ownership.

Like, they’re the owner, and they should be doing a lot of things to the property, and you shouldn’t have to deal with every little thing. I remember, one of my property managers in a Pensacola, Florida property that I owned emailed me and they said, there are ants. Will you authorize paying for an exterminator to come over to exterminate the ants? And I’m thinking—no! This is ridiculous! I mean, that’s a ridiculous request! Now, just so you know—I gave up ownership of my own home about two and a half years ago, and I rented a really swanky, high-end penthouse in the Phoenix, Arizona area when I moved. And you know, I kind of like being a renter in a lot of ways! Especially from a large institutional landlord, where if a light bulb burns out, they come and change the light bulb for me! Isn’t that crazy, mom?

JASON’S MOM: Ridiculous.

JASON HARTMAN: Yeah. So—but that’s not the kind of experience I’m going to provide for a tenant who’s renting a single family home from me. I want them to act like a homeowner. I want them to take care of things and fix things, and not call me for every little thing. And when I’ve talked in the past about the idea of self-management at a long distance, which I have successfully done, and my mother, who we’re about to hear from, has definitely successfully done for many years. I understand that self-management is not for everybody. It’s only for some people. The rest of the people will want to have a property manager. But in either case, it’s important to train the manager, or train the tenant, so that you are not bogged down with little tiny issues, okay? And this is easy to do. It’s not difficult to do at all. So, here’s my mom, Joyce, and, how you doing?

JASON’S MOM: Fine, Jason.

JASON HARTMAN: Good. Well, I’ve enjoyed staying here at your McMansion for the last couple of days, and I’ve told our listeners—and I’ve learned my lesson from you—that I never want to build a house [LAUGHTER]. It’s a ridiculous project, and since many of the regular listeners—they kind of ask about your house all the time here. How long have you been building this place? Three years? Four years?

JASON’S MOM: The original builder started at the end of 2008, and then we had a parting of ways at the very end of 2009, and I came down here and I had to find everybody to do everything, because a couple of days ago I was going through old pictures, and I happened to find a picture of this house as it was turned over to me after he left the job. All it had was drywall.

JASON HARTMAN: Yeah.

JASON’S MOM: So, you obviously know, it did have plumbing inside of those walls, which leaked like crazy one time and destroyed a whole bunch of stuff. Anyway, that’s why it has taken me so long. Because obviously I’m not a builder.

JASON HARTMAN: And you’re a perfectionist, and you want it a certain way, obviously. This has always been your dream—to build this southern mansion. But I tell you, when I owned that traditional real estate company and we served a lot of wealthier clients in Irvine, Newport Beach, California, Southern California—we’d see—actually, it wasn’t funny, it was tragic—but we would see these couples who were wealthy people—they’d buy a very expensive lot on, say, Newport Coast, California, with the intent of building their dream mansion. You know, the whole project all together would probably cost $8, $10 million. And invariably, that is something that will massively increase the divorce rate. Because building a home is not for the faint of heart. What would you say about that?

JASON’S MOM: I would agree with you 100%.

JASON HARTMAN: Would you do it again?

JASON’S MOM: No. I would take any house and rip off the front, do whatever it took, but I would not go from scratch again.

JASON HARTMAN: So, it’s easier to fix something up and rehab it than to build it from scratch.

JASON’S MOM: I think so.

JASON HARTMAN: Okay. Well, what I really think, as I’ve talked about on the shows before, and I’m trying to convince you of, is that, you know, if it’s an expensive home—it’s just such a better deal to rent it! Because the rent elasticity is just not there. A $2 million home can be rented for $4500 to maybe $5, $6000 per month. So that’s about a quarter of a percent rent-to-value ratio. When you’re a tenant, it’s favorable to you to rent the high-end home. But if you invested $2 million through my network in the different areas that I’d recommend people invest, ideally they’d get 1%, if not even a little bit better than that. So they’d get $20,000 per month. So, sometimes it’s better to rent than own. That’s been my philosophy since I found that swanky penthouse bargain in Phoenix. Because you know, I sold my home in Southern California—it was in Orange County—and I sold that house for just under a million dollars. Of course, it was a pretty down time in the market. And I thought up putting it up for rent, but the most I could have gotten for rent, for that house that was almost a million, would have been about $4000 per month. Maybe $4200 if I was lucky. And I thought gosh! If I just wanted to deploy a million dollars through our network, and buy 10 $100,000 houses, they’d rent for $1000 a month each, it’s better to rent my high-end home for myself and rent a lot of lower-middle houses to other people, right?

JASON’S MOM: Yes, just because the expenses of fixing up the lower end houses don’t cost as much. When you have repairs to a high-end house, those repairs are expensive.

JASON HARTMAN: Yeah, I mean, all the fixtures, and the fittings—this is the first time I actually stayed here. I saw your house before as it’s been in the various stages of its long construction project. But, you’ve got 14 foot ceilings, moldings that are about a foot thick, I don’t know if those are like—

JASON’S MOM: All dentals.

JASON HARTMAN: Yeah, dental moldings…it’s just incredibly, the amount of money you’ve spent on this. I think you’ve over-improved, would you agree with that too?

JASON’S MOM: Well, not in my mind.

JASON HARTMAN: But I think you have. You’ve got 9600 square feet here, and we’re sitting on the back patio now, looking at the unfinished backyard. Now, when are you going to finish the backyard, mom?

JASON’S MOM: Well, I had to do the inside stuff first. Now, tomorrow my chandeliers are arriving, but you will be gone.

JASON HARTMAN: I’ll be gone. So anyway, interesting. Well hey, anything else you want to mention about why people shouldn’t build a house, or this experience? But then let’s talk about the tenants, and investing.

JASON’S MOM: I just think it’s better to have some very good builder do all that stuff for you, rather than you get involved.

JASON HARTMAN: And it’s better to buy it on the resell market and then fix it a little bit the way you want it. But even better than that is just to rent it.

JASON’S MOM: Yeah, I would agree.

JASON HARTMAN: You’d agree, okay, good. Well, so, you’ve had some long-term tenants in your properties. The longest one you’ve had has been there a quarter of a century. Yes, you did hear that right—25 years—since 1989, you’ve had this one tenant. We’re about to play a phone message from this tenant, which I think you’ll really get a kick out of, listeners, because you have really fostered a culture of—an ownership mentality, with the tenant, where he’s doing all kinds of stuff to improve the value of your property! It’s amazing! Maybe we should just start out by playing the phone message.

JASON’S MOM: Yeah, I was amazed with what he had done.

JASON HARTMAN: And then tell the background. But you know, he’s been there, this one tenant, 25 years. You’ve had other tenants for 7, 8, 9 years, I know. Maybe you can give a little more detail on that. But here’s the phone message, okay? Just listen to this. I think you’ll all get a kick out of this.

VOICEMAIL (TENANT’S VOICE): Ah, where do I start. Okay—

JASON HARTMAN: So, just so you understand this is the tenant, calling my mom, to give a report on what he’s done to improve her property. Okay? So that’s just giving you a little context. Here we go.

VOICEMAIL (TENANT’S VOICE): Front yard in. It cost 1400 bucks.

JASON HARTMAN: He put a front yard in for $1400.

VOICEMAIL (TENANT’S VOICE): Because you said we couldn’t grow grass there. Just threw some seed down, let it grow. Well, it wouldn’t. So anyway, that’s in, and I just cut it right now. Also, put a brick wall in on the west side of the house, because the neighbors had pit bulls, and the fence that was up there—they wouldn’t fix. We couldn’t take a chance on their dogs getting over in our yard, and when I’m not there and attacking our dogs. So, that cost 3 grand.

JASON HARTMAN: So your tenant put in a $3,000 fence at his expense [LAUGHTER].

JASON’S MOM: I nearly fell over when I heard this phone conversation.

JASON HARTMAN: This is amazing. And he’s giving you a full report. I just love it. Okay, let’s go on.

VOICEMAIL (TENANT’S VOICE): Replaced the sink faucet in the kitchen, the one that you had the guy next door do, because it wouldn’t stop leaking. That cost 50 some bucks. The mailbox, I haven’t—I got it, but I haven’t put it in yet. And there’s one or two other things—oh, last but not least, there was an earthquake, I don’t know, I guess two weeks ago, and it looks like it damaged the water heater, because now I’ve noticed I was back there cleaning, and there was water leaking out of that room. So I opened the door and it looks like the water’s leaking out from the water heater, it’s dripping. It’s not pouring out, it’s just a drip. We haven’t noticed it because—so, haven’t been back there.

But I went back there today and I noticed it. So, that’s what’s going on. I don’t know what you want to do about it, or how you want to deal with this. But water, probably going to need a water heater. So, I can put it in if you get one. I put the last one in, so, shouldn’t have too much problem. So, it doesn’t have to be today—I’m pretty sure, we haven’t noticed a loss of water or anything, so it can probably be the weekend or something. The truck has got a dead battery in it, I tried to get it started today and it wouldn’t start, so, I had to go get a new battery for it today. So I ain’t gonna be able to do it today anyway. Patty’s at the hospital, so I’m on my own. So anyway, that’s what’s going on. I thought I’d let you know. Have a nice day, tootaloo.

JASON HARTMAN: I love the tootaloo at the end! That is funny! He’s a funny guy. So, he replaced the last water heater for you, and now he’s replacing the new one for you.

JASON’S MOM: Yes, I mean, I was going to have, you know, someone do it! And he got anxious and he says, oh, I’ll go pick it up and do it myself.

JASON HARTMAN: Isn’t this great? So how do you—I mean, I’ve had some tenants, like I remember I think one of my best people was my guy in Houston, in one of my Houston properties, and he was—I talked about this on a prior episode. He was an engineer, and he helped design oil drilling platforms for one of the oil companies. Now, Houston is—Houston’s a great place to invest. I love Houston, because it’s got that transient, highly paid tenant base, where they move there for a couple years, and then—this guy, that guy I’m just talking about—I think his name was Paul. Yeah, Paul was his name, I’m pretty sure. And he was married, and it was just he and his wife in the property. But he got shipped off to some foreign country—I think he’s in the Middle East now. He helps them design and maintain these oil drilling platforms.

But he was so handy, he did everything for me! It’s like, he moved in with a couple things that were unfinished. And I didn’t have a property manager—I was self-managing that property. And listen, I lived nowhere near Houston, okay? At the time I lived in Southern California, or maybe I’d just moved to Arizona. It was about 2, 2½ years ago. Anyway, he got my quotes, and fixed a bunch of stuff. There was only one thing he couldn’t fix, it was an electric thing he couldn’t figure out. He tried to figure it out, and he just couldn’t figure it out. But he was fixing all kinds of stuff for me. I thought, this is great! And look, folks, this is what people should expect. A lot of life comes down to setting proper expectations, right? And in a single family home type of rental scenario, it’s not like you’re gonna come out and change the light bulbs for them, to use that metaphor, or spray for ants, I mean, if someone calls me and says there’s some ants, I say, you go to the supermarket and you buy some Fogger and some Raid or Black Flag spray, and—I mean, this is not like this, it’s not like being in a hotel, or an apartment building, okay? What do you say about that?

JASON’S MOM: Well, that’s absolutely correct. And there’s nothing that would bother me worse than having some tenant call me up and tell me that the light doesn’t work, and what it really needs is a light bulb, a new light bulb. I mean, that is just ridiculous. So, you kind of have to set that pace with a tenant the day you sign the lease. And I always inquire as to whether or not they are kind of handy. That really helps me know what’s going to happen in the future. But with this tenant, that has done so many things—now, none of these things that he called me up and talked to me on the phone that he had done—the $3000 for the fence—

JASON HARTMAN: $1400 for the front yard—

JASON’S MOM: For the front yard.

JASON HARTMAN: And the faucet was 50 bucks.

JASON’S MOM: Yeah. We had not discussed any of these expenses beforehand, so by rights, I would not have to pay any of these expenses.

JASON HARTMAN: Because they were—yeah, right.

JASON’S MOM: I mean, he went ahead and did them entirely on his own, and believe me, I am highly appreciative of what he has done. But the water heater I will gladly take care of.

JASON HARTMAN: Sure.

JASON’S MOM: There’s just no problem with that.

JASON HARTMAN: Right, but all you’re going to end up doing—and when we were at the movies yesterday, he called just before the movie started, I remember. What did we see, A Winter’s Tale?

JASON’S MOM: A Winter’s Tale.

JASON HARTMAN: Yeah.

JASON’S MOM: Good movie.

JASON HARTMAN: It was pretty good. Anyway, he called and he said that he was doing the work—are you just going to pay for the parts? Is he going to do all the labor?

JASON’S MOM: Well, he will pick up the water heater, so I won’t have to pay the store to deliver it. And if he needs any parts, of course I’ll pay for them.

JASON HARTMAN: Yeah, yeah. But he’s doing the labor! You get free labor!

JASON’S MOM: Of course.

JASON HARTMAN: Wow, that’s fantastic. And by the way, this tenant, we should mention, is a truck driver.

JASON’S MOM: Yes.

JASON HARTMAN: Okay. That’s one thing—that’s setting expectations, when you have the tenant, kind of set the pace, as you say. But what if you have a property manager? Let’s talk about training them a little bit. Now, I have some tips on that. I think what’s really important with a property manager, and with most things in life, is the way you begin the relationship. That sets the tone, usually. And you can fix it later if you didn’t begin the relationship right, but it’s a little bit harder to do that, because it’s kind of an uphill—you’re swimming upstream, if you will. So with a property manager, what I do is, I’m always careful whenever I have a new property manager—and keep in mind, just so you know—some of my properties I’m self-managing, from a distance, and some of them are 1500, 2000 miles away from me, and I’m self-managing.

But sometimes, I have a property manager. And my rule on that again, and I’ve talked about this at length in other episodes, so, look back in the archives and listen to some of my talk about self-management if you’re interested in that. But, if there’s a property manager, I make it a point to really, really look carefully at their statements in the very beginning of the relationship. Especially that first three months. I want to look and I want to nitpick and I want to be picky and I want to email them and call them out on every little thing. Even if I don’t actually object to it, I’m going to make up a fake objection so they will know I’m paying attention. They’ll know I’m not a client who’s a pushover, and that’s what I want them to know. Any thoughts, mom?

JASON’S MOM: Absolutely. Because with one of my tenants—this is before I started managing everything myself—

JASON HARTMAN: Yeah, and by the way, we should say, you’re 100% self-managed, and you have properties—and oh, I gotta tell another funny story. I took a picture of this. You picked me up in New Orleans, which is about 3 hours away from here. You know what I’m gonna say, right?

JASON’S MOM: [LAUGHTER]

JASON HARTMAN: And where were we driving by? We—you drive through Mississippi to come here, and you have a property in Gulfport, Mississippi. And what did we have to do, mom [LAUGHTER]?

JASON’S MOM: We had to just take—we had to stop at this exit, because people keep calling me about this sign, and I’m sick of answering the phone, or not answering the phone, which is the rude thing to do, you know, because you never know. Maybe you want to rent to that tenant, eventually. Anyway, I had to stop and go take the sign off the telephone pole at Wal-Mart.

JASON HARTMAN: It was a Home Depot.

JASON’S MOM: Oh, Home Depot, yes.

JASON HARTMAN: So, basically, we had to get off the freeway in Gulfport on the way here, because she had one of her for-rent signs still on a telephone pole there. And—I love how unprofessional you are [LAUGHTER]! What I mean by that is, you take a big, thick magic marker—a sharpie, you know, a big thick one—and you take plain corrugated plastic signs—

JASON’S MOM: 18 x 24.

JASON HARTMAN: 18 x 24 inch signs, and you write in your own hand—home for rent, I think is what you said. You didn’t say house, you say home.

JASON’S MOM: Home for rent.

JASON HARTMAN: Yeah. And you write the address.

JASON’S MOM: Yes.

JASON HARTMAN: And you write—

JASON’S MOM: Telephone number.

JASON HARTMAN: Is there anything else? I can’t remember.

JASON’S MOM: Nothing.

JASON HARTMAN: So I got out of the car, and I tore this sign off the telephone pole, and two nails in it. And you just go out and do that all yourself, don’t you [LAUGHTER]!

JASON’S MOM: But it’s so inexpensive to do that, and it’s so convenient! You don’t have to take stuff to a print; you know, they make mistakes in your phone numbers, they charge you a whole bunch of money to do that. All you do is find a local printer who will sell you these little corrugated 18 x 24 plastic things for 99 cents.

JASON HARTMAN: So you buy these white signs for 99 cents each, then you write on them with a magic marker. Folks, I just gotta tell you—I’m not like this. My mom is the ultimate do-it-yourself-er. She really is. And I don’t necessarily recommend that for you, but—

JASON’S MOM: I’m a hands on person.

JASON HARTMAN: Yeah, [LAUGHTER], you really are. So, we had to take down the sign, because people kept calling about the house for rent, and it was already rented, right?

JASON’S MOM: Yeah, but the point is, when people start calling on your house for rent—on your home for rent signs—always ask, where did you see that sign? Because then you will know the most profitable places to put the signs up in the future.

JASON HARTMAN: Right. Good point, good point. Okay. And, what else should we say about setting the tone, or setting the expectations with either your tenants or your managers?

JASON’S MOM: Well, this manager went out and replaced the outside light bulbs, you know, and so anyway, I said, I am refusing to pay for that. So they took it off the next month. You just have to let them know that some of these things are absolutely ridiculous. Now, the tenant is responsible for replacing the light bulbs, whenever they burn out! Whether they’re inside or they’re outside.

JASON HARTMAN: This is not—these are not 300-unit luxury apartment complexes where it’s treated like a hotel would be treated, right? If I was staying at a hotel, I would certainly expect them to replace the light bulbs. In my apartment building, the built-in lights—if one burns out, I just email the landlord, and they come and replace them. Which is—you know, I would never expect that if I was renting a single family home. It’s just not what we do.

JASON’S MOM: The other thing is, you need to instill a sense of pride in that tenant. For example, if the dishwasher goes out, if that person is handy, I say, I am happy to buy you the new dishwasher to make it convenient for you and your wife, so you’re not dealing with an old, incompetent dishwasher. But you put it in! And I’ll be happy to buy one for you.

JASON HARTMAN: So you sort of make a deal. And that’s another thing that I do, by the way. It’s not exactly like that, but another thing I’ve done—when there are sort of things that are like these borderline requests—like, the tenant would like to do—I don’t get as good a deal—nobody gets the deals you get, okay? But I remember one time they wanted to build a fence, or make a higher fence, or something like that. And I had a property manager on that one, and they said, you know, will you pay for it? And I said, no I’m not gonna pay for that! It’s not—

JASON’S MOM: Why should you?

JASON HARTMAN: Why should I? But I did offer to pay for a portion of it. I think I paid like 30%. And the tenant paid the rest! So, the tenant is paying to improve my property. And of course I always want to see pictures of before and after, and I want to see the actual receipts for any parts, or contractors—

JASON’S MOM: Oh, they must send the receipts.

JASON HARTMAN: Yeah, of course. And so, that’s what you need to do, okay? So, instill a sense of pride, a culture of ownership mentality, anything else?

JASON’S MOM: Yeah, you say, look at this as your home. Nobody is going to come and disturb you in your home. I don’t bother you, I don’t come around and plant new flowers and keep looking at what you are doing. This is your home, and you feel a sense of pride living in it, and obviously you should be taking care of it.

JASON HARTMAN: Yeah, good point. Any other tips you can give on—any property management things just anything in general? Or anything more on this topic?

JASON’S MOM: Just act in a very businesslike, professional way, always with your tenants. And be concerned about them. But don’t be overly friendly. It’s a business proposition. You expect your rent on the very first day of the month, there’s absolutely no leeway; three days, five days, anything like that, because it’s just like you’re receiving a paycheck. It’s just like when they receive their paycheck, if their boss tells them, gee, I can’t pay it till three days later, that doesn’t work with them. So therefore it shouldn’t work with you on receiving your rent.

JASON HARTMAN: Also, with that in mind—what do you do as far as—you’re managing all your properties yourself these days, and they’re scattered all over the country. These are not near you. You don’t own any in your city, right?

JASON’S MOM: No, thank goodness.

JASON HARTMAN: Oh no, why do you say that?

JASON’S MOM: Yes, I have a PO box that everyone mails to.

JASON HARTMAN: Yeah, oh, that’s what I was going to ask! But you have most of your tenants do deposit right into your bank account, right?

JASON’S MOM: Yes, that’s the convenient thing. There’s no longer anything—well, I put it in the mail…. Within seconds you know that deposit is there.

JASON HARTMAN: So they just walk into any bank—it’s a national bank, and they walk into a branch, and they deposit it, and you just look and see that that money is in there.

JASON’S MOM: Right.

JASON HARTMAN: And you always prorate for the first of the month, okay—

JASON’S MOM: Oh yes. That’s when they first move in.

JASON HARTMAN: Right, right. But they don’t always move in on the first of the month.

JASON’S MOM: That is correct.

JASON HARTMAN: So you make the proration. Now, talk a little bit about that, because that’s interesting. When you rent to a tenant, you always get certified funds, right? So they’re—

JASON’S MOM: Or cash.

JASON HARTMAN: Or cash. So you take cash, actually?

JASON’S MOM: Of course.

JASON HARTMAN: Oh, wonderful. Gosh. You’re something else. I can see you walking around with $3000 from the tenant.

JASON’S MOM: Well, you immediately get to the bank!

JASON HARTMAN: And deposit it, okay [LAUGHTER]. So, when you do the proration—say for example they move in on the 13th of the month, right? We’ll pick a lucky number. Lucky 13, right? And they move in on the 13th. How do you do that proration? You get the security deposit, plus do you get a full first month’s rent, and then prorate the second month, so that you get—

JASON’S MOM: You get—the rent goes from the 13th of the month they move in till the 13th of the next month. But then, on the next month, on the very first day of that month, they pay you that smaller amount of rent.

JASON HARTMAN: Right, so, up front—

JASON’S MOM: And it’s always based on 30 days. Don’t try to—

JASON HARTMAN: Yeah, prorations are always 30 days, whether the month is 28 or 31. It’s 30 days, is how prorations always work.

JASON’S MOM: Right.

JASON HARTMAN: But what I want to say is, you get a full first month up front, even if they moved in on the 28th of the month, and there were 31 days, you’d get a full month. Yeah. Good. Absolutely. Not three days, where some people—

JASON’S MOM: Oh, no. Oh no.

JASON HARTMAN: Okay. And then you get a full security deposit. Now, how do you calculate your security deposits, usually?

JASON’S MOM: Well, if the person would really have bad credit, and I would be leery of them somewhat, I would charge them more than one month security. And that came in good stead, recently, when I had to do an eviction in Long Beach. Anyway, always get at least a month. A minimum of one month.

JASON HARTMAN: Yeah. So you get one month security, plus a full first month’s rent, and you prorate the second month. Now, used to get sometimes, although I don’t do it all the time, but even more than one month’s rent.

JASON’S MOM: Well if you can, by all means!

JASON HARTMAN: For the security deposit, I mean.

JASON’S MOM: Oh, absolutely.

JASON HARTMAN: And I never collect last month’s rent. Because the thing that landlords need to understand—and of course, tenants need to understand—is that the security deposit cannot be used as the last month’s rent. That’s your security deposit. So, the tenant doesn’t get to, once they give their notice, say hey, I already gave you that security deposit for $1500, that’ll cover me—no it won’t! If you don’t pay the rent this month, I’m going to file an eviction.

JASON’S MOM: No, that’s a whole illegal situation now.

JASON HARTMAN: Of course it is!

JASON’S MOM: It’s first month’s rent, plus security deposit. There’s no such thing as first and last. That went by the wayside a long time ago.

JASON HARTMAN: Years ago. So never do that. Talk to us about credit? You said you would rent to people with bad credit—I want to talk to you about pets, because your tenant, when we played that fun phone message, did mention his dogs. So let’s talk about pet rent, let’s talk about credit reports. Because a lot of otherwise pretty good tenants have very bad credit, nowadays, because of the financial crisis, and you know, as landlords, we have to look at that from a positive perspective. That is going to keep them in the rental pool for years to come, right?

JASON’S MOM: [LAUGHTER] Touché. Absolutely. Don’t not rent to a tenant because he has bad credit. And I tell the tenant, look, we’re going to run a credit report. We’re not going to turn you down on the basis of that alone. We are interested in two things: how much you earn, and that it is enough so that you can pay your rent every month. And how well did you pay your last landlord? Those are the two things that I am most concerned with. The fact that the tenant has bad credit means that he can’t go out and buy a house and move out of your rental, by the way. And so, that bad credit is gonna keep him as a very good tenant for you, for quite a while.

JASON HARTMAN: So, what do you do with bad credit—do you really look at the FICO score, do you look at specific derogatories on the credit report—how do you make the decision as to how much the security deposit’s going to be? And I’ll give you an example before you speak, because I remember many years ago you gave me this idea. I had a tenant, and it was in a California property many years ago, which turned out to be not that great a deal, unfortunately. But anyway, I had this tenant, and he had recently declared bankruptcy. And the maximum rent—and I was just a kid back then, I didn’t know anything. But I just remember, I had to call and research and figure out—this was actually before the Internet, okay [LAUGHTER]? So I had to call and research and figure out that the maximum legal amount I was allowed to collect was three months’ rent on a furnished place, and two months’ rent security deposit on an unfurnished place. And this was unfurnished, and what you said to me is, you said to me—I came to you for advice, and you said, Jason, just have him pay rent in advance! And he did. He paid me—now get this, folks. He paid me 6 months rent in advance, plus the maximum legal security deposit. And after the 6 months was up, he just started paying. So it worked out. Yeah. What else would you say?

JASON’S MOM: You can do that.

JASON HARTMAN: You can accept advance rent in most places, probably, I’m not sure. Laws vary from city to city, state to state, so…

JASON’S MOM: I think I actually did that also. I don’t remember the details, but they had bad credit, and I don’t remember the circumstances, but I think I did accept about 4 months’ rent in advance.

JASON HARTMAN: Four months’ rent, plus the maximum allowable security deposit. So that’s one thing you can do. I mean, some of these tenants, oddly, almost have enough down payment for a house. To buy one. But their credit won’t allow them to buy one, so that makes them a great tenant for you. It’s a win-win situation, because they need housing, and they can’t do it any other way, and you’re going to provide it for them. Just make sure the deal is equitable, of course. Now, let’s talk about pets. We both are animal lovers, you and I, and I remember when I was a kid, I had a couple of cats, and then dogs, and we both liked those a lot. But we’ve never seen them improve the value of one of our properties, have we?

JASON’S MOM: [LAUGHTER] Not exactly.

JASON HARTMAN: So what do you do about pets? Now, what I try and do—and some property managers, frankly, think this is like a crazy foreign idea, and I, again, have to educate them. I charge pet rent. And institutional landlords do this all the time; they’ll charge $40 a month if you want to have a dog, and they’ll limit the weight of the dog, usually, to 30 or 40 pounds. They just do it by weight. And they also say, it can’t be younger than one year. Because then, you know, with a dog, you’ve got a puppy, who’s obviously gonna go to the bathroom—

JASON’S MOM: Everywhere.

JASON HARTMAN: Right. So, what do you do about pets, mom?

JASON’S MOM: Well, until I had a conversation with you earlier today, I was just charging—

JASON HARTMAN: Yeah, you were charging a security—a one-time fee for the pet.

JASON’S MOM: Correct.

JASON HARTMAN: But I said, charge it every month!

JASON’S MOM: Yes! I’m going to do that now.

JASON HARTMAN: [LAUGHTER] Okay, well I taught you something! Good, good. Any other things you want to close with before we get to today’s guest, which is Scott Shellady, to talk about derivatives?

JASON’S MOM: I just think that it’s easy to manage your own properties. The longer you do it, the easier it gets, and why pay all that money to a manager? But I know some people aren’t as hands on as I am.

JASON HARTMAN: Yeah, and in the interest of full disclosure, we should also say—you are retired. You don’t have a day job anymore. This is your day job, right? Is managing your properties. So, managing your properties and building this house, which is a kind of ridiculous project. So, if you’re working full time, which most of our clients are, use a property manager. Now, I’ve self-managed from afar, and done it successfully without—in some ways, and I just want to say this one thing before we go. I have mentioned it on past episodes. But in some ways, oddly, and it took me doing this to realize what was going on, what the dynamic was. But in some ways, I think that when there’s not some amorphous company managing the property, the tenant sort of wants to maintain a good relationship with the owner, and they don’t ask for a lot of stuff.

When they gotta come to you directly, you know what I mean? They don’t bug you. They want to maintain a good relationship. When it’s a management company, it’s sort of like the government—it’s like, what I always say about government—when it’s everybody’s money, it’s nobody’s money. Nobody cares, right? So, they don’t care. They will just ask for everything, and they’ll just bug the manager incessantly—you gotta do this, you gotta do that, spray for ants, I’m not going to lift a finger type of mentality. Change the light bulbs. But when it’s a person, and they’ve gotta call a person, or email a person, they kind of don’t ask for as much, a lot of the time. Would you agree with that?

JASON’S MOM: I think so. I think so too. When it is someone impersonal out there, like the property manager—like, who is he?

JASON HARTMAN: Right, who’s this company, where it’s a big company, right?

JASON’S MOM: Yeah, but when you have to personal, one-on-one with someone, then you’re a little bit shyer, I think.

JASON HARTMAN: I agree with you, I think that’s true. So, some good tips on management, whether you use a property manager or self-manage. We have a lot of content on past episodes for that. And in the members section at www.jasonhartman.com, we have even more, because we do those monthly conference calls where we’ve talked about property management and self-property-management as well. So, without further ado, let’s get to our guest, and we’ll talk about derivatives, which I affectionately and kind of call in a silly way, I call them the thing about the thing. That’s a derivative. How do you like that for a high-tech sophisticated MBA from Harvard explanation, right? The thing about the thing. That’s what a derivative is. And that’s what we’re going to talk about with Scott Shellady. And we’ll be back with that in just a second.

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JASON HARTMAN: I’m here with Missy, our newest provider, and she has a great, free offer for you. Missy, what is it?

MISSY: Jason, it’s a copy of my manual, Landlording Without Losing Your Mind.

JASON HARTMAN: Fantastic. What does Landlording Without Losing Your Mind teach our listeners?

MISSY: It’s a great tool for teaching them how to pick out great rental properties, and how to make sure they cash flow.

JASON HARTMAN: And it’s free, and it’s available at www.jasonhartman.com/cashflow. Again, www.jasonhartman.com/cashflow.

[MUSIC]

JASON HARTMAN: It’s my pleasure to welcome Scott Shellady to the show. He is Senior Vice President of Derivatives for the Trean Group, and trean is Irish for ‘strength.’ He’s coming to us today from the greater Chicago area, and Scott, welcome! How are you?

SCOTT SHELLADY: I’m good, thanks for having me.

JASON HARTMAN: Well good, good. It’s a pleasure to have you on the show. Just in our little discussion before we started recording for the show, I can tell this is going to be an interesting interview. And maybe I’d like to start off first by asking you—people talk so much about—at least the doom and gloom-ers talk so much—about the derivatives bubble, and how there are hundreds of trillions of dollars in derivatives out there, and I have never reconciled my mind as to why that is a doom and gloom scenario, because there is a counterparty to every transaction. And you had a great way of explaining that, so first of all, maybe Scott, do you know the estimated size of the derivatives market?

SCOTT SHELLADY: I think it’s hard to even estimate, because there’s a lot of OTC transactions that aren’t registered, or at least listed exchange. So, hundreds of trillions is right, but the total size is gonna be very difficult to get your head around.

JASON HARTMAN: I was just going to ask you also, and I probably should have asked this first. Maybe you could just explain, what is a derivative? I mean, I kind of simply say it’s a thing about a thing. It’s the thing about the thing, not the thing itself. Just sort of jokingly. But explain to the listeners, what is a derivative?

SCOTT SHELLADY: Well, you’re right. It’s a thing about a thing. The best way to explain it would be, if you’ve got, say, corn—there’s derivates on corn. You could trade puts, and calls, and those things are kind of complicated, and they get more complicated than that. But you can buy the right to buy, or buy the right to sell—so although they can be very difficult, but a lot of times, it’s just like trading insurance. So I can buy something that protects me to the upside, or I could buy something that protects me to the downside. And every product out there, whether it be fixed income, commodities, or even equities, has something like that. And maybe some of them actually have a derivative of a derivative. We won’t go into that, that gets more complicated. But really, it’s just kind of like insurance, but a lot of people use it as a way to add more return, or create more return for what they actually have in their portfolio.

JASON HARTMAN: And so, estimated size of the derivatives market—I know it’s hard to tell, because some are over the counter transactions, but any thoughts on the size?

SCOTT SHELLADY: Well, I think you said something like 500 trillion, or something like that.

JASON HARTMAN: I’ve heard as high as 700 trillion. And just to put that in perspective, of course—a billion ain’t what it used to be. Now we talk in trillions, absurdities, thanks to the omnibus bailout programs, that’s how we have to talk nowadays. Just to give the listeners some perspective, I mean—the GDP, the Gross National Product—or, Gross Domestic Product of the United States of America—the largest economy in the world by far—is about I don’t know, $12, $13 trillion, maybe. The GDP of the entire planet every year is about $60 trillion. Our unfunded mandate, or our unfunded entitlements, looking forward about 20 years, has been estimated between $60 and $200 trillion. So, I’ve heard derivatives market as high as $700 trillion. That’s just insane; how can we even think about this?

SCOTT SHELLADY: Well, I think the reason the derivatives markets are there is in order to create leverage, and boy they have done that. That’s been their namesake, and they’ve been successful in doing so, and there’s been a lot of money lost and won on both sides of that. So yeah, that’s what they’re there for—better return, and maximized return, and somehow get some more bang for your buck for your portfolio.

JASON HARTMAN: Should people be worried about—when you’re worried about the broader economy, should you be worried about how many derivatives are floating around out there? Or is it really a red herring?

SCOTT SHELLADY: Another good question. I would say, as an old trader would have said to me, if you bet on the sum exploding, and you win, what do you really win?

JASON HARTMAN: [LAUGHTER] Good point.

SCOTT SHELLADY: So I think that maybe you can get really worried about the size of the derivatives markets, but also I think you’re probably better served if you just go with the flow and manage your own finances with it. Because you’re just going to be a fly on the windscreen of the derivatives market if you decide to kind of try to get in front of it. So, it’d be safe to say that it’s better off seeing what you can do and how you can make money living with it rather than kind of putting your head in the sand and trying to fight it. So it’s something that we—yeah, it’s big, and it can be very ominous, but at the same time, it can also allow a lot of investors to add more and more money to their portfolio. So…

JASON HARTMAN: Okay, so it shouldn’t be something that people spend a lot of time worrying about, is that correct?

SCOTT SHELLADY: Yes. I think you’d probably have more of a—you’d better start worrying about getting in a car or an airplane every day than you would about the size of the derivatives market.

JASON HARTMAN: We talk about derivatives and a lot of people view those as like, these thin air sort of smoke and mirror asset classes. Where should people start when investing in tangible assets?

SCOTT SHELLADY: Well, tangible assets, there’s kind of two different questions there. Tangible assets—a lot of times, people would be as simple as saying, there’s things that hurt when I drop them on my foot.

JASON HARTMAN: That’s a good way to look at it.

SCOTT SHELLADY: And those are the things that would be deemed inflation-proof, or inflation hedges, against the dollar losing its value over years. Against the Fed printing more and more money. So, it’s something that I’ve talked about with other people, but I’ve got a little acronym called SWAGER—and it’s silver, wine, art, gold, energy, and real estate. And all of those things would be inflation hedges. And you started to see some of them bubble up recently in some of the press, and I just actually looked up what the wine market’s doing, and that’s on fire as well. So here we sit worrying about how many dollars are being flooded into the market—and it’s $85 billion a month, according to the Fed—and that’ll be a trillion dollars a year we’re adding to that balance sheet to try to stimulate growth in the economy with really no growth around the corner.

But when we do start to see that growth, that’s when this inflation will start to take off, and that’s why some of these investors have started paying record prices—i.e., $140 million for a Francis Bacon painting a week or so ago—and that’s going to continue, because that can be a good store of wealth. At the same time, you can actually have the object you bought go up in value. Now, you mentioned something earlier before we went on about, they’re also very liquid. So it’s something that you have to be very careful about. But going forward, we’re trying to inflate our way out of this problem, and in doing so, hard assets are going to gain in value, as well as stocks. The two things that have been gaining in value because of this Fed’s inflationary pumping of money have been the real estate market, and equities. So, keeping that in mind, there’s a few things other than real estate, like silver and gold. Which, gold and silver both come off as of late that those inflation hogs are still there to buy it. We’ll continue to rally over time when that dollar starts to lose its value, because we’re printing so many of them.

JASON HARTMAN: Yeah, no question about it. And so, real things—I mean, what I always say is that, things matter. They have intrinsic value. You know, money—or we should say, currency, to be more accurate—is just a symbol of value! And it’s backed by nothing anymore! So be careful of it. Own and control things that have universal need, intrinsic value. Those kinds of things are good. Now, you have this interesting acronym—SWAGER—can you tell us about that?

SCOTT SHELLADY: Yeah, it’s silver, wine, art, gold, energy, and real estate, and those are the things that you just mentioned—those things have value, those things, maybe a store of value for folks that have extra money and are a little bit say weary of the stock market here. But it’s also a way that—really any one of those things if you dropped it on your foot may hurt, depending on how big your silver and gold bars are. But that could be a way of hedging yourself against a devaluation of the dollar. And why would the dollar devalue?

Well, the dollar devalues when we continue to print so many of them. And then internationally they don’t look as attractive, just because of simple supply and demand on our own currency. So, with our currency being flooded with new currency, or new dollars, these types of things are a good store of wealth, or a good store of the dollar value, because, quite simply, if I paid $10 for that bottle of wine and the dollar wasn’t worth $10 anymore, the dollar was worth 50 cents internationally, then it would cost me $20 to buy that wine. Well, 10, I sell it at 20, I make money that way. See, it’s a store of wealth. That’s pretty much why you’ll see folks diving into that art market.

You see gold bugs diving into gold. You see real estate people—both farmers and real estate speculators—hoovering up land, because they think that the dollar is stronger today—so they’ll be able to buy more with it today, then they can next year, or in 5 years’ time. So those are the types of things that a lot of people that have the extra money or want to—maybe say they’re worried about their dollar being worth less in the bank in 5 years’ time than today, they’ll buy something where they can store that value.

JASON HARTMAN: Yeah, very good point. Well, a lot of people are arguing about whether we will have inflation or deflation. I mean, the vast majority of people say inflation, and I happen to be in that camp, but do you need a recovery to have inflation? I say you don’t. Because if you look at inflationary economies throughout history, I don’t think anyone would argue that Zimbabwe or Argentina or Hungary or the Weimar Republic were really recovering economies! But they still had massive inflation, right?

SCOTT SHELLADY: And ultimately you can argue that it led to their decline.

JASON HARTMAN: Of course!

SCOTT SHELLADY: And you’re right, so, you don’t—recovery is not a needed part of that recipe. But what is needed is a rampant printing of money where this loaf of bread—and we’ve all heard that, the German—the load of bread is a dollar today and it costs me $100 next month—that’s rampant, rampant inflation. And if you own that bread, rather than the dollars, you’re going to insulate yourself from that devaluation, and that’s what a lot of people are doing with SWAGER. And you’ve seen that happen both in the gold market—big reality now it’s come off a little bit, but definitely with real estate, definitely energy prices, and as well as the art market.

JASON HARTMAN: Yeah, so, what is going on in the art market? Is it going crazy?

SCOTT SHELLADY: Yeah, they’re seeing all-time record highs for art, and it’s partly because the 1%ers—and this is another big discussion. But, there’s a place that they can put—all the people that have that capital want to put it to store it, keep the dollar strong, or at least hedge themselves against an inflation, but at the same time, they’d also like to maybe benefit from a rising price, so there’s two things going on there. They so, only ever buy art if you really really like it, but I think that with some of the things I’ve seen being sold at some of the prices, I think it’s more of a store of wealth than something that’s actually pleasing to the eye. So, we’ve got a rampant art market, we’ve got a very healthy wine market—silver and gold have also gone up over time. They’ve backed off as of late. And energy, we all know what’s happening with those prices, and you’re a real estate expert, so those types of things are really what people are looking to continue to put their money, because they don’t trust the stock market, see. So there isn’t a lot of flow in that area, and that’s something that’s unregulated, and illiquid, so those things need to be put out there to be—those are danger signs, but at the same time they also could be very good places to put some of your money but not all of it.

JASON HARTMAN: And I think the distinction that has to be made in art is that it has to be really, to have liquidity, and the market is small for it, but it needs to be really exclusive art. There’s a lot of this middle-market art, there’s this huge middle area of art that just—it just really has no market. I mean, if you go to the website, like www.artbrokerage.com, you can see the same pieces that have been sitting there forever, offered by the same sellers. It’s kind of crazy. I just don’t think there’s much liquidity in that. The value—they say oh, the value for your painting is $30,000, but is there a buyer?

SCOTT SHELLADY: Well, that’s another old trader thing—nothing’s worth anything unless you’ve got a guy that wants to pay something for it. It’s only worth whatever the next bid is.

JASON HARTMAN: Yeah, exactly. That’s the ultimate appraisal. It’s not having an appraiser come over and speculate.

SCOTT SHELLADY: Right, so right now it’s going to be upper-end things. And you can go—even, it’s the LeRoy Neiman-ish things that might give a little bit of a bid that way, but you’re right, there’s a lot of stuff in the middle area that is either replicated or isn’t, is exclusive, but those are the types of things that can help—maybe the average everyday investor puts a little bit of money towards something like a Neiman, but at the end of the day, we are putting so much money to work here that maybe when this inflation does pop, it pops faster than we all think, or at least we don’t see it happening when it finally really does.

JASON HARTMAN: Very interesting. Well, what are your other thoughts on the economy in general? I mean, you don’t believe that we’re in a real recovery, do you?

SCOTT SHELLADY: No, and I’m kind of in my own camp on that—a lot of people really want to see the world through rose-colored lenses, and when we have one good jobs number last November the 8th, and we have a retail sales number that was okay the other day, and all of a sudden we’re on the road to recovery. Well, every other economic figure that came out was bad. It was worse than expected. So, we’ve got a situation here where we’re putting $85 billion to work—I’ve said it a bunch of times, but I want to stress how much money that is—and the best we can do is a 1½ – 2% growth rate? I mean, aren’t we embarrassed? If I would have told you the input about what we’re doing to stimulate this economy, and put you in a vacuum room, you would have come out thinking, we’ve gotta be growing at 5, 6, maybe even 7%.

JASON HARTMAN: But we’re not.

SCOTT SHELLADY: But we’re not! So we should be embarrassed. I mean, this talk of taper frustrates me, because we’re still on such dicey ground—

JASON HARTMAN: So what you’re talking about is the talk about the Fed tapering, that has been the theory or the threat, and they’re not gonna do it now. Now we’ve got a new Fed chair coming on board, and I want to ask you about Janet Yellen too, but, they’re not going to taper, are they? Anytime soon?

SCOTT SHELLADY: Well, the tapering is of the $85 million, are they going to pull that away, or how they’re going to pull that away. But if they pull the punch bowl away from the party per se, and we’re only managing 1½ – 2% growth now, the argument would be that the reason that they’d pull it away is that we’re doing better and the economy can stand on its own. But I don’t think anybody can sit here and say the economy can stand anywhere on its own, because of 7.3% unemployment rates, 48 million people on food stamps, I mean, we’re setting some records here, which are the opposite of the stock market record we set today. So we’ve got two different worlds we’re living in. And unfortunately, we’re trying to bring the gap between rich and poor closer.

But by accommodating the economy with this money that we’re doing in every month, the people that own stocks or the people that own real estate, or maybe the people that can afford to invest in SWAGER, are the ones that are benefiting from all this money being put to work. And I think it’s leaving a lot of other people behind. I think it’s leaving Main Street behind. And that’s why a lot of these economic figures are coming in so poor. Those are all Main Street numbers: foreclosures, I know that they’re declining, but that just means less people are going bankrupt; that’s not really a good thing. I mean it’s starting to re-heal a little bit, but you’ve got other economic figures that are showing, we’re just not really getting off of our chairs and getting this thing back to work. So, a large part of the economy, which could be arguable the 99%ers, still are feeling the doldrums of 2009! So we’ve got two economies happening here, and unfortunately what the Fed’s doing is really only benefiting one of them. Which is very interesting, about how that’ll all end in the next five years.

JASON HARTMAN: Yeah, that’s interesting. So, do you think Janet Yellen will be more loose than Ben Bernanke and Greenspan, the ultimate Keynesian? Well, maybe Ben Bernanke is, I don’t know who’s worse. But, do you think she’ll even be more liberal in her quantitative easing? Or do you think she’ll pull in the reigns at all? I mean just even a little bit.

SCOTT SHELLADY: You know, everybody wants her to pull the reigns in, and everybody thinks they know who she is. And I think for every Fed chair we all thought we knew who they were. But in the end, we didn’t. But I will say this. She’s entering—I mean, she’s entering a situation where, we haven’t even touched on—Obamacare is arguable between 18 – 22% of our GDP. If that doesn’t go well, she’s going to have 20% of her GDP take a little bit of a knock. At the same time, you’ve the high unemployment rate, maybe—we’re going to need to see a bunch of job numbers in a row to change any of these bad feelings. There could be a situation or an argument made that she might even put her foot on the gas and accommodate the economy more. Now, on a percentage terms basis, Japan’s putting more work in their economy, percentage wise, than we are for ours. So you’ve got some doves that will—doves are people that think hey, we can put more money into the economy, we can cut interest rates more—those folks think that hey, we can do just that, because look at what the rest of the world’s doing! All these central banks are on a race to cut interest rates to zero and accommodate their economy with all this cash. So, there could be a chance. I mean, there could be a chance. It’s not talked about wildly right now, because the market wants her to taper, or at least pull back on the money being put into the system. There’s a chance that she actually puts more in.

JASON HARTMAN: Yeah, yeah. So, that means more inflationary pressure, folks. You heard it right there. So, what do you think about the stock market? I mean, the Dow recently hit new highs. What’s such a joke about this, CNBC, and putting the big notices on the screens—they never adjust for inflation. It’s so ridiculous. I mean, when it just got over 15,000 I said, hey, nothing has happened yet! It’s gotta be at 15,800 by my calculations before you even break even!

SCOTT SHELLADY: You’re right. And I’ve been doing it for 26 years, and you know, in 1996 we heard Alan Greenspan’s irrational exuberance speech, right? Well, I’ve renamed 2013 Irrational Apathy. There were no media, there were no news trucks, we didn’t have anybody really cheerleading the rally, because a lot of folks, and rightfully so—they feel as though because of the money being put to work in the economy, and the money managers that have your 401(k), my 401(k), everybody else’s 401(k), feel this pressure to get involved in the stock market; they don’t want to be left behind. So we have this self-fulfilling prophecy of this rally to the upside. And it feels manufactured. And I think that’s what most people are really out there feeling. But just because it feels manufactured, and you and I both may think that, doesn’t mean it can’t continue on for another two years. So like I said about what we were talking about earlier, sometimes knowing what you think should happen versus what’s going to happen, you can save yourself a lot of money by trading what’s going to happen, or at least working around what’s going to happen, and trying to benefit from that, rather than being the fly on the windshield and be dead right.

JASON HARTMAN: Very good point, very good point. So, what do you think the strategy is for Baby Boomers and really, Gen Xers now need to start thinking about—I mean, if they’re older Gen Xers, they’re getting close to where they have to start thinking about getting serious with their money and protecting their retirement. What can they do to shore up their finances so that they’re not just left empty-handed at retirement?

SCOTT SHELLADY: Oh gosh, the answer isn’t one anybody is gonna want to hear, because it affects me as well. But at the end of the day, you know, I own a money management firm, and we talk to people all the time, and folks that are Baby Boomers are now starting to retire; and we’ve got a wall of Baby Boomers that are gonna be coming through, and they can’t really afford to have the stock market back up 20 or 30% on them and have some cataclysmic, catastrophic crash. So, they’ve been backing money out of the stock market, and really the only place they can put it to keep it safe is in bonds. Well, a 10-year bond is tied to the 2.8% for 10 years, which is still ridiculous, ridiculously low. And I’ve written a piece about this as well. Unfortunately, we’re going to see more 90 year olds serving us ice cream at Dairy Queen, and I might be one of them. But the best way to shore up some of these portfolios is that we’re going to have to work longer. I mean, there is no—there’s no easy way out. I can’t look a 70-year-old person in the face and say, I need you to be 50-50 stocks bonds. Because that would be just a disaster to their portfolio if we had a real big back up in stocks.

JASON HARTMAN: There are even people out there now, predicting Dow 2,000. I mean 2,000? That would be a complete collapse. I mean—[LAUGHTER] I don’t know. I don’t think they’ll ever allow that to happen, because they can just print more fake money! And you know, it might be 2,000 real value, in real dollars, but not in nominal.

SCOTT SHELLADY: And I mean, where those two lines cross, and those lines are this: when the government’s continuing with its accommodation versus when that growth comes. You know? So, they’re going to accommodate to some degree until we can finally see that growth, and then things’ll get safer, and then I can say to the 70-year-old, well you know what, you can have a little bit more in equities now because I think this is healthier. But right now, there really is no good answer. I mean, the best answer is that you’re going to have to put into your plans working longer. And longer than you ever thought, in order to save and in order to be okay in your older years. Because—and I’m one of them, I’m not trying to tell anybody that I’m not. I’m 50, so, we’re going to have to do that in order to stick around. Because I can’t really take a huge hit to my 401(k) if I’m getting out in 15 years. So, the kids at 20, 25, 30, but they don’t have a ton of money, but they’re the ones that are gonna be investing heavily in stocks right now. And there really isn’t a cheap answer except for, we’re going to have to work longer. And I hate to say it, but that’s….

JASON HARTMAN: You know, I really don’t think that’s such a terrible thing. I mean, the whole concept of retiring at 65 was created—it’s an industrial era, it’s an artifact. It shouldn’t be that way. People should be working longer. And I don’t say that as like an obligation—they should want to! You retire, you die! I mean, it’s proven that when people retire, they don’t have a purpose! They don’t have a sense of purpose. Usually. Now, sometimes they have some other big fulfilling sense of purpose. I mean, but the point is, to stay engaged, stay interested, and to work because you want to, not because you have to. Because it’s interesting, because you feel you’re contributing to the world, you’re contributing to yourself, you’re growing, you’re thinking, you’re engaged, and it keeps you sharp. Hopefully not because you’re an indentured servant and you’re a Wal-Mart greeter, okay [LAUGHTER]. That’s not—

SCOTT SHELLADY: And you know, to your point that industrial age retirement—as a percentage of life expectancy, we should expect to work longer, because we live a lot longer now. Back in the days when Social Security was put forward, those—we need to start making those expectations, and we’re building those into our customers’ plans as well, and generally speaking I think a lot of people have come to accept that anyway. So here we sit in an environment where we’ve got a manufactured stock market, we’ve got very very cheap money for ten years, so it’s going to be difficult for you to pile all your money into that ten year interest rate, and your bond lenders are going to look not good, so that’s going to be pretty much the commonsensical solution where you’re going to be able to store some wealth, maybe if you can afford it, buy some of the things we talked about with SWAGER, but at the end of the day you’re gonna have to work a little bit longer. You don’t have to work your 80-hour work weeks, but you’re gonna have to keep some income coming in. It’s not—it’s not something you’re going to have to have a ball and chain around your ankle, but you’re going to have to keep some income coming in.

JASON HARTMAN: Yeah, right. Exactly. Well, any other points you’d like to make? Predictions on the future, just ideas you want to close with, any other thoughts?

SCOTT SHELLADY: You know, I do think—I do think we need to talk about, and this could be another talk sometime later. But we need to talk about that inflation problem, which I think will rear its ugly head before we actually know it, because there’s going to be some point in time where things do catch fire, and maybe it’s three or four jobs numbers—three or four months of good jobs numbers, where that does finally happen—but people have got to be ready for that, a) in their borrowings, because a lot of people might be going month to month on some sort of interest rate, but you’re going to see those types of things—make sure your borrowings can handle a doubling of the interest rates. See, that’s a big deal. Percentage change versus the actual change. Well, 2 to 4% doesn’t seem like a big deal, but it doubles your payments, so you have to keep those types of things in mind. So keep in mind a sudden change to inflation, I think you’ll be okay, because that really is the thing I think that is going to erode peoples’ wealth going forward.

JASON HARTMAN: So, long term fixed rate debt, hopefully attached to some of the SWAGER items. I love it when it’s on real estate, because inflation actually works for you, it pays your debt off for you in that case. It devalues your debt, which is awesome. That’s what we want. But it’s gotta be fixed rate, folks, because it’s just too risky to have adjustable rates in this kind of uncertain market. Good stuff. Scott, give out your website, tell people where they can find you.

SCOTT SHELLADY: Well, we’re at www.treangroup.com, my face will be on the front page there. You can get in touch with me on that one. That’d be probably the best and the most easiest way.

JASON HARTMAN: And I just want to spell that for everybody. It’s www.treangroup.com.

SCOTT SHELLADY: Yes.

JASON HARTMAN: Good stuff. Well, Scott Shellady, thank you so much for joining us today!

SCOTT SHELLADY: Alright, thank you, Jason.

[MUSIC]

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

Transcribed by David

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