Income Property: Beating Wall Street for Decades

Jason Hartman and frequent co-host, Steve, go it alone without a special guest for episode #326 of The Creating Wealth Show. Instead, they toss around familiar topics regarding the suitability of income property investing versus Wall Street stocks. Near the end of the show Jason helps a caller decide which markets to focus on and how to decide what her investing style is.


As they show goes live, we learn that Steve has recently suffered a mysteriously scratched eyeball and now wears a protective eye patch, which gives his comments a decidedly piratic bent. It turns out to be impossible to resist Obamacare jokes, so Steve gets it out of his system quickly by recounting how he told the doctor’s office receptionist that she should send his medical bills to 1600 Pennsylvania Avenue in Washington DC. For the solitary listener that didn’t get the joke, that is the address of the White House. Where President Obama lives. The author of the boondoggle healthcare system we currently live under. Get it?

Warren Buffett is an Old Style Value Investor

Jason loves what he calls “value investing” but isn’t fond of the stock market, leaving him with contrasting opinions when it comes to billionaire, Warren Buffett. The stock market has been exceedingly kind to Buffett over the past half century. With a wealth measured in many billions, he finds himself regularly in the top five of lists of richest people in the world. And though Buffett calls himself a value investor, Jason points out that a large chunk of his fortune was made prior to 1990, when Wall Street was a very different beast.

Buffett Likes the Demographics of Single Family Residential Income Property

Today’s stock market is largely driven by seemingly nonsensical swoops and swoons driven by the 24 hour news cycle and investor speculation. The bulk of Buffett’s fortune rests in old style blue chip stocks like GE, Fruit of the Loom, Duracell, Walmart, Coke, Proctor and Gamble, and a hodge podge of commodity and banking stocks. Exciting? No. There’s nary a tech or social media stock to be found. But these companies represent value that was established long before there was a CNN, MSNBC, or Fox News to keep investors frothing at the mouth, ready to click that buy or sell button in fevered frenzy at the latest morsel of meaningless news.

The funny thing is that, in recent years, Buffett has taken to announcing that he would invest in single family residential homes if he could figure out how to efficiently manage them. He sees them as having great value. Well, it just so happens that Jason Hartman has figured out how to manage income property like Buffett talks about. He calls it embracing the fragmentation.

Institutional Investors Buy Real Estate at Their Own Risk

What investors of all sizes don’t always realize is that hooking up an income property to a long-term, fixed-rate mortgage is the best strategy to leverage investment assets. Let’s take a closer look at how an investor like Warren Buffett measures the term “value.” At its essence, value can be defined by controlling the highest dollar value of assets while expending the least amount of capital. That’s why large investors like Buffett and a slew of hedge fund operators look longingly at real estate, even if, like good old Warren, they don’t actually pull the trigger.

Here’s the secret fuel that makes the process run like a Cadillac. When you buy a piece of property with a house on it, under present market conditions, you’ll only have to come up with about 20% of the property’s value in cash as the down payment. Your lender fronts the rest. Compare that to the stock market. Let’s see you try to make a stock buy and only pay 20% of the exchange-listed price. Go ahead and call your broker with that proposition and see what he says. We’ll wait.

The previous paragraph was a simplified explanation of why real estate has made a great number of people very, very wealthy.

Appreciation vs. Cash Flow: Fragmentation is a Good Thing

A few paragraphs back we mentioned “embracing the fragmentation.” Here’s what we were talking about; it’s the reason Warren Buffett hasn’t dumped his billions into income property. We’re simplifying matters, but in real estate there are two ways to make money – cash flow and appreciation. Big hedge funds that dive into real estate tend to be attracted by the dazzle and get rich quick possibilities inherent in timing the market perfectly, buying near the bottom and selling near the top. While some managers manage to pull off the feat, it’s more a matter of luck than anything. The dirty little secret in real estate investing is that cash flow is king!

Forget Picking Tops and Bottoms

If we can tear your attention away from the shiny sparkles of appreciation for a moment. The problem with trying to pick a local real estate market’s tops and bottoms is that usually the market is depressed for a reason and is liable to stay that way for a very long time. Need an example? Southern California. More than one hedge fund manager has gone belly up in SoCal waiting for the market to rebound, taking a hit every single month because rents are not sufficient to cover the mortgage payment.

That’s upside down no matter which way you look at it and a bankruptcy waiting to happen. That’s why Jason pinned down the caller to answer a single question. Are you investing for appreciation or cash flow? If you’re interested in cash flow, as Jason always suggests, your task becomes to find which cities provide high enough rents to cover the mortgage?

Find that and you’re golden. Luckily, the process of market selection is as simple as visiting and feasting on the free information found there. (Image: Flickr | DonkeyHotey)

More from Jason Hartman:

Financial Planning with the Author’s of “The Nerd’s Eye View.”
Ending Middle Class Poverty; “War on the Middle Class” Review

The Creating Wealth Team