On this Flashback Friday episode, Jason Hartman interviews highly acclaimed financial advisor, New York Times best-selling author Ric Edelman. Ric shares his thoughts on the economy, stock market, and inflation. He also reiterates the importance of diversification and being responsible for your defense. Lastly, they talk about his DVD titled 10 Reasons To Carry A Big Long Mortgage.
Announcer 0:00
This show is produced by the Hartman media company. For more information and links to all our great podcasts, visit Hartman media.com.
Jason Hartman 0:09
Hey, this is Jason Hartman, thank you so much for joining me. Do you know what day it is? Yes, it is flashback Friday, where you hear the best of the creating wealth show and you hear some good prior episodes, some good review. Remember, we’ve got almost 500 episodes out. And you know what? iTunes doesn’t even hold them all if you’re an iTunes listener, if you are listening on Stitcher, thank you for joining us. So we want to bring you some good review stuff. Now. What’s interesting about flashback Friday, it’s a little scary for me. I got to be very, very candid with you on that. Because you the listener, you get the chance to hold my feet to the fire. Did I make any predictions? Was I right? Was I wrong? I’ve been right about a lot of things, but I’ve been wrong about a few. So you can give me a hard time about that if you wish. But it’s flashback Friday, and we will give you the uncensored Best of the creating wealth show with a prior episode. So let’s dive in. Here we go. Remember, this is not current. It’s flashback Friday.
Announcer 1:22
Welcome to the creating wealth show with Jason Hartman, you’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur whose own properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions, this program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it on Now, here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 2:11
I just got back from New York City and big trip to a whole bunch of other places. Well, let me see that was two days ago. And now tomorrow, I’m off to Austin, Texas, and Dallas and Chicago and a whole bunch of other places. So probably get a chance to go over to Indianapolis from Chicago and check out our market there. And that kind of stuff. A lot of you ask, why is it that at various times, we recommend one market over another and then we kind of stopped recommending it. I’ve talked about this before. But remember, we are area agnostic and being area agnostic is the seventh commandment for successful investing of our 10 commandments. And when a market stops making sense. And when we just can’t source good inventory there, we really kind of stopped talking about it. And this is the case with Austin, I’m hoping to find something different because I think Austin is a fantastic city. But again, is a fantastic place to live, it’s a little bit expensive. And when we get properties there, we put them up on the website. Sometimes they generate a little bit of interest. But again, from a pure cash flow return on investment perspective, we’re just not sourcing the inventory as well there as we used to. But I am going to take a look see what I can find. I talked to our local market specialist there just yesterday, and I’ll be there Friday looking at properties. So I’ll let you know what my findings are. I wanted to talk to you now about a new source that we have in the Phoenix market. And we seem to be getting some very good properties from this particular supplier. And we’ve got a property here in Buckeye, Arizona, and that’s a phoenix suburb, and it’s 1500 and 60 square feet, it’s $69,900. Again, this is built in 2001, three bedroom, two bath perfect little cookie cutter type rental house only $45 per square foot and projected cash flow of $263 per month, which brings you a cap rate of 10% and a projected return on investment of a whopping 35%. And when 18% cash on cash return is what we’re looking for in this property. And now this isn’t really any pie in the sky big expectation because guess what the property is already rented. So this is a pre rented nine year old property and the tenant is in place you can just buy it for $17,000 of course subject qualifying for financing and your projected return on investment here is 35% annually. Pretty incredible.
By the way, it’s got a really nice lot size 7300 square foot lot a spacious corner lot. So that’s on our website at Jason Hartman calm with a lot of other properties. And I just wanted to also highlight here before we start today’s show and get into the meat of our content. We’ve got some great stuff in Indianapolis still again, India’s that perennial market that we always talk about because the cash flow is so good, the cash on cash return is so good and it’s just such a good stable linear model. But again, some of our properties in Indy are a little bit more complicated because you have to rehab them. And we have made this as easy as possible. But remember, you’re putting your downpayment on the property, many investors are just paying cash on properties there. But then you’ve also got rehab costs that most of the time cannot be financed into the deal. So again, fantastic cash on cash returns in Indianapolis, and overall ROI of anywhere here, I’m looking at our website between 26 and down to 20%. Well, actually, we’ve got some as low as 16%, projected ROI, up to 26% of the top right at this moment as I speak. So phenomenal opportunities. And again, on these ROI projections, I just always say like I’ve said before, if it doesn’t go as well as planned, say you only receive 50% of the projected ROI, you’ll be looking at 13% annually, for example. I mean, where are you going to beat that, you’re certainly not going to beat it on Wall Street, I’ll bet you’re certainly not going to beat it in the bank, that’s for sure. And I just don’t know where you can come close income property is the most historically proven asset class in America, which by the way, brings me to another point while I was away, I was in the airport in Puerto Rico, and I happen to pick up a copy of Time Magazine. And you should read this time magazine article where it talks about homeownership being sort of a thing of the past, which is great for us as investors, isn’t it? This shows that we landlords really, really have a very, very nice bright future, because what the article talked about is how homeownership actually paralyzes workers.
And if you think about this, one of the key things in in an economy like we’ve got today, where many people are kind of lucky to have a job, one of the key things you want is mobility. And we as investors can offer this mobility to our tenants. And if we look at some of the markets, we’ve really liked over the years, whether they be Charlotte, Houston, Indianapolis, Phoenix, a lot of these markets have a fairly transient tenant base. And what I mean when I say transient is not people running nightly, weekly or monthly, but people that will come to a place they’ll come to Indianapolis, they’ll come to Houston, maybe they’ll work in Houston for one of the big oil companies, maybe they’ll work for one of the big hospitals or in the healthcare industry. And they’ll stay there for one or two years, not quite long enough to lay down the roots, buy a house and and really get that kind of ball and chain, if you will, of owning a house, they just want to rent for a year or two. And that makes a fantastic tenant. These are bright educated people that have good solid corporate jobs, they’re usually fantastic tenants, and they’re not ready to buy because they came there to work for a large company. If it’s in Indianapolis, I mean, the university, Eli Lilly, Rolls Royce, etc, etc. And they’ll work there for a year or two and kind of see where their career leads them. And we can offer this mobility to them. And that is a great asset. And I think this is all leading to one thing, we’re going to see a lower rate of homeownership in America. And I think that’s good, because I think some people just can’t handle owning a house. And I think the financial crisis has definitely shown us that but also, as we see a lower homeownership rate, and we see a growing population. What does that mean? It simply means there are more and more tenants and as landlords, as investors, as income property owners, following all of the proper prudent rules of investing the 10 commandments of successful investing, we can really provide a great service to people who want to maintain flexibility and mobility so that they can go where their career leads them, and be only committed one year at a time to a property. So that’s a great, great thing. So check out that Time magazine article.
There were two other real gems that I took from the article, by the way. One is that they showed an interesting graph in the article that showed in areas where the homeownership rate is high, you also had high on employment. And I don’t think this is quite as simplistic as they made it out to be in the article because being an expert and being in this business for a long time, there’s a little more to it than that, but I definitely saw that logic playing out. And one of the other things they talked about is how renters are typically excluded from living in the nicer areas of any city because of zoning ordinances. A lot of cities they don’t really want apartment buildings being built the rental properties typically lower end property and we get this nice middle class base, the sort of yuppie tenant if you will, the young urban professional type and it doesn’t need to be a yuppie type tenant but you get my drift, the educated mobile good solid A type of tenant that wants to live in a good suburb in a good area where they have a safe environment for their family for themselves for their belongings, so forth. They don’t want to live like a renter, but they want to live with the mobility of a renter, when you’re buying single family homes, duplexes for plexes, you’re providing a fantastic service. And I think there will be more and more demand for that service in the coming years. So I think you’re really in the right place. And of course, you’ve got all the other factors going for you you’re buying properties for far below the cost of actual construction, or below the cost of replacement. You’re a packaged commodities investor, as I always say, and you are locking in on 30 year fixed rate mortgages. And that’s just a fantastic opportunity, some really good opportunities there.
Now, we’re going to kind of switch gears on the show, because on this show, I interviewed Ric Adelman, and Ric Adelman is a very well known author of many, many books, probably a dozen books or so. And he’s a financial advisor who has a radio show where it airs in many parts of the nation. And I’ve been a fan of his for a long time. As you know, I’m definitely not a fan of Wall Street. He’s a wall street guy. And he sells stocks and life insurance and that kind of stuff. And I don’t like those things much at all. But what I do like is Ric published a great DVD. And we give this DVD away a lot at our live events, and so forth. And it’s called 10 great reasons to carry a big long mortgage and never pay it off. And this is something you should really see or hear because it offers some great insights into my philosophy. And of course, I’ve added a couple of I think, really good points to that philosophy as well. But having that mortgage in future years, as long as it’s a prudent fixed rate mortgage on a prudent property that made since the day you bought it, that mortgage is really a big part of the income property asset. So we will go to the interview here with Ric Adelman in just a moment.
But before we do that, I want to remind you, the Masters weekend gathering of experts is coming up here in Irvine, California, Southern California, we’re having it at a gorgeous hotel, the Hyatt Regency in Irvine, which is just a beautiful venue rooms are very inexpensive, I think you can get a room there just call the hotel directly for about 99 or $109 per night. It’s a very nice hotel, very nice accommodation, great restaurants, on site, and so forth. And we’re doing something different. As you know, we are doing the creating wealth bootcamp on Friday before the Masters weekend, and then we’re doing the Masters weekend on Saturday and Sunday, this is going to be the best masters weekend we’ve ever had get in on the early bird pricing. Again, the pricing escalates as we get closer to the event. So be sure to register at Jason hartman.com immediately Do not wait. And here is a another way to come without paying, we have a little contest that we’ve done that’s very unique. Now I’m going to play for you a one minute and 32nd little audio track from a video that I recorded while on vacation on the beautiful island of St Maarten, and that was in the Caribbean. And this is a very unique contest. Now this is going to be interesting to you from two perspectives, not not just one because if you are a business person, and you have been interested at all in the internet marketing topic, and the holy grail of Internet Marketing is viral marketing, viral marketing, meaning you get something that is passed around something that is contagious, something where people on the internet do the work for you, rather than just your own efforts. And that’s what this contest is. So from one perspective, you may be a real estate investor or an aspiring real estate investor who wants to attend the Masters weekend. Well, that’s a great opportunity right there. But from the second perspective, look how we do this contest and make it a viral marketing contest, which has huge benefits to the person holding the contest. So you may want to consider something like this for your own business. And of course, you should enter just to get the chance to win free tickets for the Masters weekend as well. So listen to the short track, and then we will be back with the interview with Ric Adelman. It’s just a minute and 30 seconds. We’ll be back with Ric right after that. And here we go. Remember, you’re listening to flashback Friday. Our new episodes are published every Monday and Wednesday.
It’s my pleasure to welcome Ric Adelman to the show. He is a highly acclaimed financial advisor. I’ve been a fan of his for many years. And I first discovered him when he published a fantastic DVD that you may have heard me talk about before, which is entitled 10 great reasons to carry a big long mortgage and never pay it off. And he has a New York Times best selling author. He has five books on personal finance and it’s just a pleasure to have him on the show. Ric, welcome.
Ric Edelman 14:50
It’s my pleasure to be here. Thank you.
Jason Hartman 14:51
So Ric, what is going on in the in maybe you want to start with some general thoughts on the economy and where we are and where we’re headed.
Ric Edelman 14:58
Wow. If only anybody knew. And that’s part of the dilemma. We have been experiencing an array of emotions over the past couple of years that are unprecedented. It began, of course in oh eight with shock and fear. And that morphed into anger as people became very, very unhappy with what was going on on Capitol Hill. And I think there still is an awful lot of, of anger about what’s happening in Washington. And now, the emotions have turned in a bit into confusion, as people are really confused, not knowing what’s going to happen next, what’s the direction going to be with tax law, with regulation and legislation? Where’s the economy going? What’s next for the stock market, there are so many different pieces of news coming in all different directions, there’s a lot of confusion out there. And what we are finding is that people are getting so caught up in the day to day activities of the economy, as well as the markets and on Capitol Hill, that they’re missing the big picture. And as a result, people are unnecessarily confused because we think the picture is really remarkably clear, we are in a period of volatility. And that’s not a bad thing. People tend to think volatility is bad, but it’s not. Volatility is simply a period where prices are rising and falling. That’s what volatility means volatility doesn’t mean prices are falling, that would be a bear market. And we know what that’s like back in 2008. A period of volatility is where they’re falling, yes, but they’re also rising just as much. And we just have to recognize that’s the way it is, it’s not good. It’s not bad. It simply is. And so rather than getting obsessed with the fact that we don’t know what’s happening one day to the next, we should do something very different, we should be looking 10 years down the road, I’m willing to predict where we’ll be in 10 years, I’m not willing to predict what will be in 10 months or even in 10 weeks. 10 years from now the economy will be much stronger, the stock market will be much higher, affluency will be much greater. And therefore, if you’re a long-term investor, trying to get your kid into college over the next 10 years trying to prepare and safely run retirement in 10 20 30 years, you can be very, very comfortable, very, very confident about what’s happening right now.
Jason Hartman 16:59
Well, that’s a good point, you think it’s pretty easy to predict 10 years from now, but the hard part is two years from now. I agree with you there. Your latest book is entitled rescue your money. Is that the latest one?
Ric Edelman 17:10
It is.
Jason Hartman 17:10
Okay, good. In there, you talk about the two major obstacles that people will face. Iaxes and inflation eroding their buying power. How would you say someone should be addressing these two big obstacles right now, Ric?
Ric Edelman 17:22
Well, these are the huge issues that nobody is really paying attention to Jason and this is just so incredibly important, because we tend to be worried about the latest crisis do your. What we don’t realize is that taxes are always with us, and so is inflation. And over long periods of time, they will severely erode your ability to achieve financial success. It’s not what you earn that matters, it’s what you keep. And if you’re going to lose a third of your profits to taxes, and if inflation is going to erode the value of your assets over time, we’ve got to pay close attention to those. And this is why I’m far more scared about people who have their life savings and bank accounts that are paying less than 1%. I’m far more worried about them than I am about people’s or investing in a broad array of stocks through stock funds or exchange traded funds. So we have to recognize that people tend to fail because they take too little risk, not because they take too much risk. And that is very pervasive in today’s economic environment.
Jason Hartman 18:20
That’s a very good point. That people who are playing not to lose usually end up losing just because of the sort of static position they hold. Well, taxes are increasing around them, inflation is eroding their buying power. And we’ve just got to get to the mindset of playing to win. I remember hearing you on the radio, Ric, when the financial crisis first hit, and it was really gloomy out there. I mean, people were very scared, yours truly included. And you kept saying don’t look at your financial statements. When you get them in the mail, your brokerage account statements and so forth. Just don’t look at them. Am I reiterating that correctly? That that was the advice?
Ric Edelman 18:55
You’re absolutely right. Because when prices were going down so steadily in 2008, and to early 09, and people were looking at the value of their account, not just every month on their statement, but every day by going online and looking. All it was doing was it was breeding fear and anxiety, and it was freaking people out and encouraging them as a result, to sell out of worries that prices would fall even further. Nobody was worried about it when the Dow went from 14,000 to 12,000. But by the time it hit 10,000, and then 9 8 7 thousand people were downright panicking and what does it translate to? They sold after losing 40 or 50% of their money, which was the exact worst time to be doing it. Everybody is an emotional creature. We all love. That’s how we’re wired. And as a result, we tend to want to buy when prices are high, and we tend to want to sell when prices are low. It’s the exact opposite of what we’re supposed to do, but it’s emotionally how we’re constructed. So by looking at your statement, by looking at the account value every day, all you’re doing is encouraging yourself to do the very wrong thing at the very wrong time for all the wrong reasons. So my attitude is very simple. Stop looking. I mean, imagine the farmer to plant a seed in the ground, would he come back the next day, if he wants to see how it’s doing what he dig it up to check it out, it doesn’t make any sense. So the farmer knows you plant the seed, you come back in six months, and you harvest, that’s what investors have to do. We have to take a long term focus, plant the seeds in the ground, invest the money today, come back in 10 or 20 years, if your kid is five years old, and you’re saving for retirement or rather for college for that kid. He’s five years old, you’re saving for college and another 13 years, what does it matter how the accounts doing today? Come back in 13 years, we’ll talk about it. And that’s the that’s the approach that people need to be taking. It’s not about what’s happening today. It’s where we’re going to be in the future that counts.
Jason Hartman 20:40
Ric, I definitely agree with what you’re saying the concept of let cooler heads prevail is a good way to put it because when the Dow hit 6400, and everybody was selling off like crazy, and all you had to do is wait a little longer. And you could have sold off at 8500 or 10,000. But if you look at the last 10 years, that argument doesn’t sit very well with a lot of investors today, because there’s been no nominal gains. And certainly there have been real losses due to inflation. What would you say to that is the future just a lot different than the past 10 years?
Ric Edelman 21:11
The last 10 years makes me very, very excited for one simple reason, Jason. If we take a look at the historical performance of the stock market since 1926, and we look at the S&P 500, there has been only three times since 1926, that the stock market has not made money in a 10 year interval, two of them occurred in the 1930s. And one of them occurred in these last 10 years. So you’re right. The last 10 years, the stock market failed to make money. In fact, the average annual return of the s&p these last 10 years was a point 5% loss. So it lost on average one half of 1% per year. Now that tells me two things. Number one, it is extraordinarily rare for the stock market to fail to make money over a 10 year period of time, it’s only happened three times since 1926. That gives me a very high degree of confidence that it is extraordinarily unlikely that I’m going to experience it again for a very long time. That’s number one. And number two, even if I do experience this, I think that a one half of a percent loss per year is pretty far and away something from a crisis. I mean, we have to get a grip, we have to put ourselves into practical context here and recognize that people who had invested in the stock market 10 years ago have not gone broke, they might not have been as profitable as they would have hoped. But their money is still essentially intact. And although they might not have earned the profits they want to do have earned, that’s a far cry from saying they just flat out went broke, like someone who invested in Enron did 10 years ago. So I’m feeling very, very comfortable because of the long term performance numbers rather than skeptical or nervous about it.
Jason Hartman 23:01
We’ll be back in just a minute. Just a reminder, you’re listening to flashback Friday. Our new episodes are published every Monday and every Wednesday.
Nowadays, investors Ric are so, they’re just so outraged at Goldman Sachs and it you mentioned Enron so it made me think of it in all of these scandals on Wall Street. Do you think Fin Reg, the new financial regulatory reform or any of these government, any of this government legislation is going to clean this mess up at all? Or do investors just have to sort of expect that there will be scandals and you diversify to prevent a lot of damage from any one scandal? God forbid those people that put all everything into Enron or WorldCom, or global crossing? Or the list goes on and on? What do you think about that? The just the malfeasance in general?
Ric Edelman 23:50
Well, your statement is correct on both counts. It’s not a choice of either-or. Yes, the government agencies are doing a fine job at making sure that what just happened doesn’t happen again. That’s the first answer. Now, as I mentioned that, I don’t want you to conclude that therefore there will never be another crisis. Every time this country has gone through an economic crisis. It has been unprecedented, meaning it has never happened before. And then the government comes in and changes the rules in order to make sure that that particular crisis never occurs again. Look at the crash of 29 and the Depression of the 1930s. The government created a wide series of rules, won’t bother going into them here, that are designed to make sure that that type of economic calamity never occurs again. And guess what, it has never occurred again, they fixed the problem. But then in 1987, we had another market crash, and it was caused by a totally different set of circumstances and the government came in and created a new set of rules to make sure that never happens again, and it hasn’t happened in the last 20 years. And now we’ve got a new economic crisis the past three years, the credit crisis, and the government has just released another new set of rules to make sure that never happens again, and it won’t. And now we just had the flash crash in May, which was another crash, this one only lasted 20 minutes, but it was still a big crash, the Dow dropped 1000 points and recovered itself in just 20 minutes. And the government in within two weeks created a new set of rules to make sure that never happens again. So we will never see again, what happened recently, because the government has created new rules to prevent it. But what it means is simply that the next crash will be for something totally different, something that’s never yet happened and something that no one has predicted. So the good news is, we won’t go through again, what we just went through for the same reasons, we will go through something different for a different set of reasons. So it’s a good news and bad news scenario, which leads me to the second point, which is what you made, you can therefore not assume that the government will protect you. Because the government can’t. The government is a reactive agency, not a proactive one.
Jason Hartman 26:03
That’s a great way to
Ric Edelman 26:04
It solves a problem after the problems have been identified. It’s not very good at anticipating problems. And as a result, you are responsible for your own defense. And how you defend yourself is stipulated in a single word and you used it, Jason, diversification. Even though I’m very optimistic about the economy. And I’m very confident that the stock market will do well over the next 10 and 20 years. That doesn’t mean I’m willing to put all of my money into the stock market, I don’t do it for myself, I don’t do it for any of my firm’s clients. Instead, we hedge our bets, I am not willing to make a big bet and gamble my financial security on being right. So we diversify. We have some money in stocks, but we also have some money in bonds. We also have some money in real estate, we also have money in gold and international securities on oil and gas, commodities, a wide variety of asset classes and market sectors to protect us against the risk that we might be making the wrong decision at a given time.
Jason Hartman 26:59
It’s interesting. I a lot of advisors and a lot of gurus and experts out there, it seems like they can sort of be categorized or cast into their inflation. Is there a deflation? Is there a gold bug? Their resources person or they’re a stock market? bull or bear? What sums up sort of the Ric Adelman philosophy if you will, toward investing
Ric Edelman 27:21
Three simple strategies. First is diversification, as we’ve mentioned. Second is to maintain a long-term focus, which we’ve also mentioned. And third is to rebalance that portfolio in order to make sure that you maintain the diversification that you’re desiring to develop. So that’s really it. Diversify long-term and rebalance the portfolio. And if you accomplish that, you’d be amazed how easy it is to generate above-average returns with below-average risk and below-average cost.
Jason Hartman 27:50
Good. Good point, would you consider yourself a contrarian?
Ric Edelman 27:53
To a degree, I think you can argue that we definitely do believe that most consumers make the wrong investment decisions at the wrong time. And we stand apart from that. So I do believe that to a degree, what we’re doing has a little bit of a contrarian element, we are not pure contrary. And I mean, there are some folks who deliberately and specifically make investment decisions that are the opposite of what the masses are doing. We don’t do that. But we do look with disdain at the general school of thought that most people emulate at a given moment.
Jason Hartman 28:24
One of the things I really love about your work, Ric, by the way, is that you really put it into very plain simple language that everybody can understand. And that really is it takes a lot of wisdom to do that. And my original discovery of you was the 10 great reasons to carry a big long mortgage and never pay it off. And I think you just start out with Reason number one, and maybe we’ll go through a couple of them, you can take your pick, but your mortgage doesn’t affect your home’s value. And that’s so interesting because the market will do what it’s going to do, it’ll go up, it’ll go down, but it’s not related to the amount of the mortgage, which it’s just so funny that people don’t see that sometimes.
Ric Edelman 29:05
You’re absolutely right. And in this past economic crisis with millions of people have lost their homes due to foreclosure. A lot of people are blaming the mortgage for all of this. And that’s not true at all. Nobody in the last several years has lost their home because of their mortgage. The reason they lost their home is because they’ve simply bought a house that was too expensive. Yeah, they couldn’t afford it. The mortgage had nothing to do with it. And we need to recognize that point because as you’ve noted, your house is going to go up in value or not, whether there’s a mortgage on it or not. The mortgage is not relevant to it. So people who fear mortgages, fear them unnecessarily and incorrectly. And that is why you’ve got a first step is to get comfortable with the fact that your mortgage is unrelated to the value of your home
Jason Hartman 29:47
And what’s interesting about what you just said is that no one really lost their home because of their mortgage. And I agree with you, Ric, and they lost it because they were living in a home that they could never afford in the first place. Many times or their circumstances changed and made it so they couldn’t afford, you know, job loss, etc. Right. But what’s interesting is the way the politicians you saw it with both McCain and Obama, the way they made this, this mantra of let’s keep everybody in their home, never mind the fact that someone who’s a schoolteacher and has a lower income is living in a house way beyond their means. Now, if they paid cash for that house had, if they had the cash, or if they put a lot down on the on the house, they still wouldn’t have been able to afford that. But they would have taken the hit to their their savings, their equity in the house themselves. Where is the lender many, many times took the hit through a short sale or a foreclosure. And it’s really odd how this becomes a political football when these people got the benefit of the bargain. I think, in almost every case,
Ric Edelman 30:49
It’s a very complicated situation, obviously, as to what the causes of the credit crisis, there are lots of guilty players involved, the politicians are guilty, so is the mortgage industry. So is the real estate industry, the appraisal industry, so are the consumers themselves, who insisted on buying homes that they couldn’t afford, and creating the demand to which the industries and the government responded, so everybody’s guilty in this situation. And I think we’re all simply hoping that we’ve all learned our lessons about this and that we don’t repeat it. We hope that the lending rules get tighter to prevent people from obtaining loans that they really frankly can’t afford. We hope the regulations are designed to prevent abuses in the industry. And we hope that consumers start to act a little more mature early, and not too demanding something that, quite frankly, is beyond their financial reach. So hopefully, there are lots of lessons learned in this economic crisis. Because we don’t learn the lessons, then we are simply doomed to repeat them.
Jason Hartman 31:47
Santiana said that those who don’t learn from history are doomed to repeat it. But you you’re very right, Rick, that there were a lot of co-conspirators including the secondary market, the derivatives, pools, all of that good stuff in this whole thing. Tell us about those some of the other 10 reasons.
Ric Edelman 32:03
Well, another one that I really like is the fact that a mortgage will not stop you from building equity in your house. It’s really interesting that people fear that if they have a mortgage, it means they’re always going to owe a huge amount of money on their house, they’re never going to get rid of it. And that’s simply not true, because although housing prices have fallen over the past few years, that’s only because they had risen so dramatically in the several years prior to that, over long periods of time. 10 20 30 years, housing prices have always risen, and therefore because your house is going to grow in value at 3% a year, the house is going to double in value in about 23 years. So at that pace, even if you never make a repayment on your loan, your house will be worth twice as much as it is today. So clearly, the mortgage is not going to stop you from building equity in your house.
Jason Hartman 32:52
Very good point. No, it has nothing to do with it.
Ric Edelman 32:56
Another element that I like, Jason is that right now mortgage rates are at historical lows. They’re there around 4%, four and a quarter percent on a 30 year fixed rate loan, you will never see this. Again, we haven’t seen these kinds of rates ever. And as a result, you have to ask yourself a question. Can you invest money for a 30 year period of time and earn more than four and a half percent per year? The stock market’s averaged 10% a year since 1926. The bond market has averaged about 8% a year since 1926. The real estate market has averaged about nine and a half percent a year since 1926. So clearly, the opportunity to earn substantially more over very long periods exists, that doesn’t mean you’re guaranteed to do so it just simply means that historically, the potential has been achieved. So on that basis, the fact that mortgages are so incredibly cheap creates a wonderful opportunity for to help you build wealth. And of course, mortgages are tax deductible under current law, which makes that four and a half percent rate even cheaper. I mean, to be able to borrow on a 3% net of taxes rate is absolutely fabulous. And people should really maximize their opportunity to take advantage of it.
Jason Hartman 34:00
Let me take a brief pause. We’ll be back in just a minute.
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Jason Hartman 34:36
One of the financial advisors that we work with here, he always says most people think of it as the house is the asset and the mortgage is the liability when in some ways that’s reversed because the mortgage if it’s a 30 year fixed rate mortgage at a low rate that is really a huge asset and I would much rather see people lock up those long term Fixed Rate Mortgages on multiple properties. And then use that money in other ways rather than putting it into the property itself and use the borrowed money in the property as long as it’s long term fixed rate, low rate debt.
Ric Edelman 35:11
You refer to it as an asset. And you’re absolutely right, Jason, I don’t like debt. I’m no self respecting financial planner, whatever encouraged people to go into debt, I don’t like debt. Debt is dangerous. It’s very bad. And we’ve seen the big problems people have with payday loans, and auto titling loans and credit card loans, and things like that. But a mortgage is not a debt. A mortgage is a financial planning tool that can help you actually achieve wealth. Because if you have a mortgage, it means you didn’t give money to the bank when you bought the house. It means you were able to retain that money, would you if you managed to prudently and properly could have invested enabling you to create wealth that you otherwise would have been denied? So a mortgage is not the same as other debts? It is, in fact, an asset-building tool.
Jason Hartman 35:56
I think that’s a great, great point, Ric, no question about it. The mortgage is a huge asset. And one of the other ways I like to say it is that a mortgage is self-sustaining, or better yet a mortgage is self-liquidating debt. So when it’s not against your home, when it’s against an investment property, that property should be self sustainable. And the property itself, the tenant pays the mortgage for you, you’re outsourcing your debt the same way large companies are outsourcing their call centers to India,
Ric Edelman 36:26
I just want to make sure that when you’re dealing with investment real estate that you have ample cash reserves.
Jason Hartman 36:31
Right.
Ric Edelman 36:32
In case you do have a problem with that tenant, because eviction is very, very difficult. You In the meantime, still have expenses associated with maintaining the property. So we just want to make sure that if people are going to acquire investment real estate, which is perfectly fine for a diversified portfolio, that you have sufficient cash reserves to be able to manage the property effectively.
Jason Hartman 36:52
Good point, no question about it. Ric, what are some of the other hot tips on these 10 reasons. And by the way, everybody, the website is ricedelman.com where you can find the 10 reasons and that’s ricedelman.com. And these are just great, but pick a few more for us, Ric.
Ric Edelman 37:08
Sure. It’s, the easiest way to spell it is rice delmon.com just call me, Rice. Easiest way to spell the website. Another reason that mortgages are favorable is because the payments get easier over time, if you get a 30 year fixed rate loan, you’re going to have a monthly payment and that monthly payment will never go up your P&I. Your principal and interest payment will be locked in for 30 years. But over that 30 year period of time, your salary will grow if only because of inflationary increases. So because your income is going to grow, and the payment does not the payment effectively gets easier and easier to make as you get older. People tend to struggle hard with their first few months of payments because they’ve applied all the available cash to the down payment and they’re not making a whole lot of money and they’re struggling, but 5 10 20 years out, that payment becomes very, very easy to make. So mortgages, which seem daunting in the beginning become a no brainer as you get older.
Jason Hartman 38:02
It’s interesting how that perspective changes. I remember when my mother Rick bought her first house in 1976, the payment, which I do remember as a child, her stressing about the payment of a whopping $416 per month for housing in a decent area in West Los Angeles. And over the years, she still owns that property, lived in it, rented it out later. And that payment seemed like nothing by the time you hit the mid 80s, the 90s it turns into nothing through inflation. So so that’s a very good perspective. One other tip on the mortgage thing, and then we’ll maybe wrap up here.
Ric Edelman 38:35
Another one is that by having a mortgage, as we’ve briefly covered, it enables you to invest money more quickly than you otherwise would. And by investing more quickly, you’re able to create more wealth. So all these ideas are talked about in greater detail at my website and in my book, the truth about money. The fourth edition is going to be published in December and all of these ideas are going to be there including a new 11th reason that I have figured out as a result of the credit crisis, we now have 11 reasons Jason why carrying a big mortgage is in your best interest.
Jason Hartman 39:05
I’m dying to know the 11th reason but I have a feeling you’re gonna keep it a secret, right?
Ric Edelman 39:09
You’ll find out when the books published in December,
Jason Hartman 39:12
Hey Ric, out of all of your books, which is sort of your flagship book, which is the one should people read the most recent one if they’re gonna pick one of them or one of the others?
Ric Edelman 39:21
Each book has a little bit of a different emphasis if you are struggling with confusion of or how you should manage your investments right now, then read my newest rescue your money. I wrote the book in response to the credit crisis on the current economic environment and it will explain in a very quick read, you can read it in a single evening. you’ll flip through it very, very fast. And it will tell you exactly what you need to be doing right now with your investments. If you’re looking for a more fundamental understanding of how money works, covering the entire spectrum of personal finance, then read my classic the truth about money and the new fourth edition will be out in time for Christmas. It’s greatly expanded and really looking forward to seeing that hit bookstores in December.
Jason Hartman 40:01
Excellent, good stuff. Well, Ric Edelman, thank you so much for joining us today. Anything else you want to say in closing to people just to kind of wrap this up
Ric Edelman 40:08
Just to recognize that the current economic environment won’t last forever. And you want to position yourself today to take advantage of what’s coming next.
Jason Hartman 40:17
Good advice. Well, thanks, Ric Edelman. And that’s Ricedelman.com. Ric delman.com. Thank you for joining us today.
Ric Edelman 40:24
My pleasure, Jason.
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