Jason Hartman continues a discussion on due diligence with investment counselor Adam. They both give valuable tips and share tools and resources to understanding a property before purchasing it.
Investor 0:00
Well, you’re gonna laugh, but because of your podcast, we’re positioned. Well, I don’t know how else to thank you. But thank you, your podcast and your services are amazing. And I wish I could do more as far as working with you guys, but I haven’t really but maybe in the future, obviously. But once again, our family is grateful to you and your services. And your information is priceless. Thank you so much.
Adam 0:28
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 who’s owned properties in 11 states had hundreds of tenants and been involved in thousands 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. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 1:18
Welcome to Episode 1378. And part two of our conversation about due diligence for real estate investors so that you do not get burned, and yet take care of business. We’re going to play the second part of that conversation today. And that was, of course, of course was with Adam yesterday, and I’ve got Adam here with me, Adam, what should we add to that rather long due diligence conversation we had? I think we should talk a little bit about insurance, right? Absolutely. So this is one thing that the numbers are going to be a little different depending on what company you go through. But I was actually surprised whenever we started this about how cheeping your you’ll see some numbers on the pro forma Look low, but surprisingly, aren’t whenever you start pricing around insurance for investment companies. Now we have one company that we’ve worked with for years that will offer you a quote on investment properties around the country. And there’s one spot you can go to, you don’t have to find a local agent to do that. So we would highly recommend getting a quote from them. But then also, you know, go online, look at your state farms, your all states, any of the big companies out there and just find a local agent and call them up and say, Hey, I’m wanting to get insurance on this house. Give me a quote. And they’ll, they’ll call you back real quick or get an answer to you real quick because they want your business. And, you know, I’ve found that they’ve always been a little bit pricier for me, but you never know. Not all they’re constantly competing. Yeah, it really does vary. It really does vary. Now, you know, we talk a lot in my 10 commandments of successful investing. One of those is down diversify. And we want you to diversify into three to five markets be at least three markets, not more than five, you’ll probably only have to do this three times, okay? Because you’ll be in three markets. And if you buy, say, three or four properties in each of those markets, maybe you don’t buy them all at the same time, but you’ll already have an established relationship. You can just shoot them an email, say, Hey, I’m looking at this property at 123 Elm Street. Can you give me a quote on the insurance for it, and you’ll already have some established relationships there. So you’ll have maybe one outlet for National Insurance opportunities. And be careful because there was one company we profiled before that we were very unhappy with. We had many complaints about them on the show, so talk to the investment counselors, and they did do Nationwide Insurance and sadly, that one, we just got too many complaints on it. So we have We did the opposite of recommending them more and recommending them. So be careful. And then you’ll have a couple of local contacts. So you can do this much more easily on property number two, number three, number four in that same marketplace. Much easier. What else? Yeah.
Adam 4:15
So as you as you go along, kind of continuing your due diligence, don’t forget every couple of years, just contact the other companies again, and say, Hey, what are you offering? and just see, you know, you can get some quotes from them and take them back to your current insurance agent. And, you know, maybe you say, Hey, I’m getting lower rates from other places, and you need more competitive, you need to be more competitive and see if they’re willing to negotiate with you. So don’t just take their first quote and just use that forever. You can always double check on it, triple check on it down the line.
Jason Hartman 4:47
Yeah, good, good stuff. All right. Well, Adam, why don’t we get into that conversation from yesterday, and remember, insurance is part of it. But here is part two of our due diligence discussion.
Adam 5:00
The other thing we wanted to talk about with home inspection is outside of other people. There’s a wonderful company that Jason loves with all of his heart. And that’s Google. And you can go on Google Street View. And by the way,
Jason Hartman 5:11
that by the way, those greedy bastards at Google invading everybody’s privacy, they just became a trillion dollar company. So they are now one of the three, Amazon, Google and Apple, you know, sometimes moving in and out of that trillion dollar market cap, but, but they just made it.
Adam 5:28
So you can hop on those and look at the properties around yours. Look at the businesses that are around with, you know, Google Earth and Google satellite, and just get a general idea for the neighborhood. And at least what the surrounding houses look like, within the last couple months or a year, however long it’s been since Google Street View has been by the area, but that’s just an outside source that you can get, because, you know, your home inspection isn’t going to say your home looks great. The one next to it is falling down and terrible, right? They’re not going to mention that. So you know, look at their surrounding area. Make sure that you’re comfortable with that.
Jason Hartman 6:02
Yeah, so more on that, not just Google Street View, just But do remember something with Google Street View, you can go down the street. You know, a lot of people don’t use it that way. Or even know you can do that, you know, just like you’re in a car, you can move your mouse and go down the street up and down it, rather than just looking around the circle. So know that and also use Google Earth and look at the satellite images. Look down on the property from above, and see what’s around, get a feel of it. Are there railroad tracks? Is it backing up to a freeway? Is it going to be impacted by noise? Is there a big industrial site, a prison, a landfill, a sewage treatment, plant? These kinds of things. You just
Adam 6:44
want to know what’s around? Absolutely. And it’s quick and easy. I mean, that’s five minutes, and you’re done there. Right? Right.
Jason Hartman 6:49
And this is the great thing about technology. You know, it’s pretty darn easy nowadays to be a remote investor. In the old days. This was really tough. You didn’t have all this Information at the tip of your fingertips. Yeah,
Adam 7:02
I think that’s all we have on home inspectors and home inspections. So you want to move on to rent or property management.
Jason Hartman 7:08
I think we should talk about rent. In other words, rental values, right? So there’s two places we’ve already mentioned before, and that’s your MLS and Zillow again, your MLS, you’re gonna you can just sort it by homes for rent instead of for sale. And you can get a general idea for how much is this running, even if it’s not the same size. You can look around and see what’s the rent per square foot and then kind of work off that or you can go on Zillow, and see there is estimated rent, or even homes that are for rent on Zillow. Or you can go to craigslist even and look and see if there are any people trying to rent their homes out on Craigslist, how much they’re asking for it. You can also go to sites like rent a meter or red range. And again, these sites definitely have their problems. Okay. They’re computer generated opinions of rental values. And there’s just a lot more detail to it than that. But again, it compared to what, right? They’re better than what we had before, which was nothing. So it’s just another source. You gotta use your own mind to reason through all of this. And that’s why computers have not yet replaced humans.
Adam 8:23
Yeah, yeah. And you you also as as you know, it won’t show you how much people actually got for their rent, you know, based on Zillow or the MLS or anything like that, you’ll see what they’re asking. But you can get a general feel, if you’re pro forma says it will rent for $1,000. But all you’re seeing around the neighborhood are six and $700 rents. And maybe you want to adjust your expectations accordingly and see if the deal still makes sense. The other thing you can do is you can google property management companies around the area and just call him and say, Hey, if I had a three bedroom, two bath 1200 square foot house in this general area, how much You think you could rent for, and a lot of them will help you out and give you a range that they think you could rent for. And you can get the idea that
Jason Hartman 9:06
way. Yeah, absolutely. That’s good. And remember, when you talk to property managers, which we recommend, of course, talk to the property manager that we might refer you to, but also talk to some others and look at the whole marketplace. Just remember, they have conflicting motivations. Many of them have real estate companies, or they sell real estate themselves. And so they will be motivated to maybe talk you out of a deal so they can sell you another deal they have, just understand that it’s capitalism, everybody’s looking out for themselves. So take everything with a grain of salt, every piece of advice, but as you talk to people, you can kind of sort out the truth from fiction. And most of the time,
Adam 9:47
you get enough numbers you can calculate a midpoint. Yeah. So all data, joys of data. Yes, absolutely. And speaking of property management, Let’s believe the last thing we want to touch on Today, and the first place you can go is the property management company that we’re working with in that market. You can talk to them, see if there’s somebody you’re interested in, they are going to be the management fee that you’ll see in the pro forma. So whatever that company charges is what you’re going to see there. So the other thing you can do those, you can just hop on Google or Bing or DuckDuckGo, whatever you use, and search for property management companies in the area, call around interview them, you are not tied to any one particular management company for most of our properties, some of the new construction you are for, I believe it’s around two years, but 98% of our properties are not tied to any one particular property management company. Or you can do what Jason says and self manage hybrid manage and and go about it on your own take shot that way.
Jason Hartman 10:54
And for more details on that, of course, I’m a big proponent of it because you know, we’ve we’ve had some good success stories with it and definitely should consider that option go to Jason Hartman, calm, use the search engine there type in self management. We have just a massive amount of content on that subject. Lots of good lessons there. So check them out. Adam, are we finished with this topic? Oh, we only have one more thing. And that is a property. That’s what I wanted to say. So here’s a here’s a real life example.
Adam 11:26
Okay, a real life example this one just got put in our system the other day, it’s a three bed one bath in Merrillville, Indiana. And they are asking $120,000 to get a property that is expected to rent for $1,250 so it meets the 1% Rv and with the assumptions put in which is an 8% vacancy, 10% management and 8% maintenance. You are looking at a cash flow of $205 for a cash on cash return of 7%
Jason Hartman 12:01
You, Adam, you gotta say a projected projected cash. This is this is what the performer says. Sometimes it doesn’t work out that well, sometimes it actually works out better. So both things happen and a projected total return on investment of 30%. And understand that this is these are performance numbers. And so that’s all in again, if you think oh, that’s crazy 30% you know, you obviously are new to the show. But income property, multi dimensional asset class, and you can earn those kind of returns, millions of investors have over the years. Just make sure you understand how that’s calculated. And you’re getting a return on investment from multiple sources with a property. That’s one of the beautiful things of it. So that’s the overall projected return. And was that exactly 30% of
Adam 12:51
according to the Performa they’re expecting right at 30%?
Jason Hartman 12:55
How do the taxes and insurance welcome at deal since this shows about due diligence Do those look reasonable when you’re eyeballing them? Or do they look understated?
Adam 13:04
You know, the property taxes are estimated at 20 $400 a year. So that’s definitely in line with what we’ve seen in other markets. It’s even a little on the high side compared to some of our other markets. We always
Jason Hartman 13:16
estimate high but hey, they’re salespeople. So they don’t, they don’t listen, a lot of times these local market specialist,
Adam 13:23
well, I found a lot of them. The couple that we bought the five or six we bought have been pretty much dead on property tax wise, and insurance. It has it $60 a month, which seems really low, but whenever you start talking to some of the insurance companies out there, that is a reasonable amount for $120,000 house.
Jason Hartman 13:42
Again, this deal, it’s $120,000. And what’s the projected rent?
Adam 13:47
1250.
Jason Hartman 13:49
Okay, so that’s more than the 1% rent to value ratio. That’s fantastic, actually. And what’s the square footage of that one?
Adam 13:56
It is, this one’s a pricey per square foot when it’s 800. 19 square feet. So it’s 146 per square foot.
Jason Hartman 14:03
Oh, that’s small that must be in like a really charming neighborhood or something that’s pretty good. Over $1 a square foot. And by the way, folks, this is just crazy. The institutional apartments do a good job of really, really squeezing the rent out of people. Many times you’ll see single family homes, with a yard that are renting for $1 dollar 25 a square foot. And there’ll be an institutional apartment building where everybody’s stacked in, like rats in cages, super high density, no yards, and they’re getting $2 to 50 even $3 a square foot sometimes for the rent, and that’s a per month number by the way. And it’s amazing to me that there’s always been there’s always been this disconnect where the single family home from private owners are always such a better value than the institutional landlords for the tenants. And that’s one of the things landlords, I think we got to get our act together on that. We’ve got to package our properties. Well, we’ve got to do what a lot of the institutional landlords do, we should be charging pet rent, we should be demanding more for our properties. Our properties are undervalued in the rental market. And that’s just an odd thing. Now, I think one thing is really going to help us on this. And I don’t think it’s anything we’re going to do. I think it’s these big institutional players in the single family home marketplace, like invitation homes, that owns just a massive number of single family home rental properties. And they are really trying to squeeze the numbers on those properties. And I think that will benefit us. in the marketplace, ultimately, because everything’s By comparison, and we should actually hope that these institutional landlord players grow in size. And there’s more of them in the marketplace. Because I think that will actually benefit us as they really, really learn how to demand more and have more pricing power in the marketplace. That I think that’ll be good for us as individual small investors. So that thing all right, Adam, Hey, thanks for sharing some thoughts on this topic with us today. Everybody, do your due diligence and happy investing. Go to Jason Hartman calm for more be sure to check out our YouTube channel and rate and like our podcast videos. One great thing about our YouTube channel is you can comment on things ask questions. We are very diligent about engaging and answering your questions and comments. Until tomorrow, happy investing. We will talk to you tomorrow.
Adam 17:01
packaging your commodities commodity investing through residential real estate. For most people, it is difficult to read through a financial newspaper or watch late night TV without seeing repeated possibly obnoxious exhortations to invest in commodities such as gold or silver. The logic of these advertisements is frequently sound since it is certainly true that government irresponsibility is leading towards the currency collapse and massive inflation. What frequently gets left out of the analysis is the other options available for investment that offer far greater prospects for return than gold or silver. At the financial freedom report, we are in absolute agreement over the prospect for commodity price inflation in the future. We are in absolute agreement over the massive deficits, crushing debt and lacks monetary policy of the government. Being a harbinger of runaway inflation over the coming decades, we are also in agreement over the diming long term prospects for the stock market. Since there does not appear to be a new pool of investment capital to propel the stock market into an upward spiral, like the one experienced over the last 25 years. The strategy that we advocate at the financial freedom report is to use the attributes of rental real estate to invest in the commodities used for home construction. By following this strategy, we gain ownership of valuable commodities such as wood, concrete, petroleum products, and other building materials with the advantage of leverage from the bank and tax advantages from the government. we affectionately refer to this phenomenon as packaged commodity investing because the commodity products are packaged into a residential home instead of sitting in a warehouse. The combination of this strategy lies in the fact that commodities packaged into real estate investments can be rented to tenants as an investor. This allows you to purchase commodity products while outsourcing the interest payments to a tenant and hedge against inflation with fixed rate debt while delaying the payment of taxes through a section 1031 exchange. The way that this strategy ultimately plays out is that the packaged commodities produce rental income through your property, while inflation pushes up the cost of materials and the cost of labor. Over time, these increases in construction costs will generate a rising tide that drives up market values. The cost of construction for new homes is split between materials and labor roughly even with a contractor profit margin, right around 11% of the construction cost, as the cost of materials And the cost of labor rises, it is likely to drive increases in replacement cost since the contractors do not have the ability to absorb large cost increases into their profit margins over an extended period of time. In practice, this will result in cost increases being passed along to the consumer in the form of higher prices. Furthermore, it is important to consider the fact that many people need to be paid from the contractor profit margin on new construction. This makes homebuilding an inherently volatile industry. Since profit margins can expand or contract vary dramatically, depending on the market cycle. Because of this, we advocate a strategy of purchasing attractive rental properties from somebody else instead of moving into the home building business ourselves. This strategy allows us to outsource the risks of new construction and focus on finding tractive deals. An example of how this dynamic plays out is illustrated in the theoretical graph comparing market values against replacement costs. in an environment where the market value exceeds the replacement cost for new construction, it will trigger new housing starts by builders that recognize the opportunity for profits in excess of normal market conditions. In the case of a speculative bubble, like the one that recently collapsed, huge amounts of resources pour into the home building industry to pursue the large profits. As this shift continues, the market will eventually become overbuilt with inventory, resulting in downward pricing pressure as builders attempt to sell off their inventory at discounted prices. Once the market value falls below the replacement cost in a given market, it will create a sharp decrease in new housing starts the reason for this phenomenon. Is because people will be able to purchase existing homes for much less than the cost of construction from individuals that need to sell or from banks that are attempting to liquidate foreclosures. During this time, builders will find themselves in a terrible financial bind. Since the market prices will not be high enough to profitably build new houses. In many cases, builders will have to operate at a loss for an extended period of time, while they build out on permits and lots that have already been purchased in an attempt to recoup some of the costs over time. If the market values inflate back above the replacement cost, it will trigger another wave of building as this boom bust cycle plays out. astute investors will have tremendous opportunities to profit. The most pronounced to these opportunities is to buy when prices are depressed and sell when prices are inflated. On the surface this sounds very simple to do. But it is an extremely difficult strategy to execute, because it requires prospective investors to move contrary to the prevailing market forces. During speculative booms or value rallies, the pressure on everybody is to buy and buy fast. When values are going up, up up, there is no shortage of people who are willing to pay SILLY PRICES on the belief that they can always sell for profit. Conversely, when values are depressed, it can be very difficult to get the necessary investment capital for financing purchases, there will be more sellers than can possibly be imagined, but buyers will be extremely scarce. At the financial freedom report, we advocate a strategy of counter cyclical buying for long term cash flow and appreciation. We prefer to target properties at prices below the replacement cost that generate attractive levels of cash flow. This produces a two headed benefit of residual cash flows from rental income that can be used to pay for the mortgage and a naturally low purchase price that is likely to become very attractive when market values eventually regress back toward the replacement cost. The key to this strategy lines and being able to wait out the market gyrations with strong cash flow. By avoiding large amounts of negative cash flow, investors will remain solvent so that when inflation pushes up the replacement cost for their property and market values regress back to equilibrium, it will create attractive gains in value. It is unfortunate to think about the way in which the government has created speculative bubbles and inflation. We would all prefer to live with a responsible government. But that does not appear to be a realistic possibility at any point in the near or distant future because This prudent investors should position themselves to take advantage of government irresponsibility. The best way to accomplish this goal is by capturing attractive purchase prices from deflated bubbles. And by riding the wave of inflation as the cost of materials and the cost of labor push up the replacement costs for properties. By engaging in this strategy for wealth creation. It will place astute investors in control of real assets that produce real value for real people. Over time, this will allow you to sidestep market manipulations and speculative bubbles while providing for the needs of yourself and the people you care about.
Jason Hartman 25:47
Thank you so much for listening. Please be sure to subscribe so that you don’t miss any episodes. Be sure to check out the show’s specific website and our general website heart and Mediacom for appropriate disclaimers. And Terms of Service. Remember that guest opinions are their own. And if you require specific legal or tax advice, or advice and any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to iTunes or Stitcher Radio or whatever platform you’re using and write a review for the show we would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.