Jason Hartman brings on one of the network’s Florida market specialists to discuss the Jacksonville market. They break down a pro forma for one of the available new construction properties and talk about why Florida has become such a hot spot.
Investor 0:00
I think when you combine the concepts of this inventory shortage, the fact that there’s still a runway and the fact that you can’t use a standard tool to really figure out what the heck of the price of the value of a house is. And when it’s really good that you’ve got those investment counselors that can kind of help you navigate the waters because as much as we’d like to just automate everything, it really does take knowledge experience, and an overlapping of, you know, some some helping hands if you will, to make sure that you’re investing in the right way.
Announcer 0:32
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 over 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. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 1:22
Welcome to Episode 1329 1329. And I am still coming to you today from Puerto Rico and have more mastermind meetings today and tomorrow, and then headed back to the Sunshine State of Florida. And speaking of which, we have a guest from Florida here with us. You’ve heard him on the show before. Let’s talk about the migration trend and how it is continuing. I got a question for you. And this is strictly an impression. It’s not a data driven thing that I’m about to say. But years ago, we were always talking about how this huge migration trend was moving toward the big state, the Lone Star State. It was all the discussions were about Texas, Texas, Texas. And I used to say on the show, maybe you heard it years ago, I would say things like, if Texas were to secede from the union, it would become the Hong Kong of the United States. You know, in other words, as Hong Kong is to China, Texas would be to the US right now. It seems to have shifted just it’s just my impression. Everybody’s just talking about Florida now. Is it just me or is that what’s going on?
Frank Gallinelli 2:43
Yeah, no, I’ve seen the same thing. I think it’s interesting. You know, the further we get away from the meltdown, for the most part, Texas kind of set it out because they were in the you know, the 86 meltdown. They were on the forefront but with ours, California, in Florida, obviously Canada. Morning was way out of favor, Texas was in great favor during the meltdown. And then all of a sudden now as things are starting to turn and recycle, it’s kind of slowed down the growth focus on Texas and it’s come to Florida. I’ve seen the exact same thing.
Jason Hartman 3:14
Yeah, it really feels like there has been a shift in the sort of the public discussion about, you know, the hot state where the growth is where it’s business friendly, where there’s just this huge amount of migration. And a lot of these Texas markets have gotten more expensive. I mean, yeah, you know, we used to sell really inexpensive properties in Dallas, even Austin, which Austin’s way too expensive to wake up now. You know, in 2004, we were doing a lot of business in Austin 2005. The prices just continued to increase. And then we did a lot of business in Dallas, San Antonio, of course, Houston, we’ve done hundreds of transactions in the cities. Now. It really I don’t know if it’s because you know, when you live somewhere, I mean, I’ve only lived in Florida for less than a year and a half. You become more conscious of it obviously because you know, it’s your home. But really, that just seems to be the hot discussion. Everybody seems to be going to Florida, you know?
Frank Gallinelli 4:13
Yeah. Well, I mean, look at you and I are just to test subjects really when you look at it. You were a little tired of California. And I originally came from the northeast and both those areas when it comes to the affordability index, just the the costs the lifestyle, it’s losing the draw. And Florida is really starting to net in not only from the west coast, but the Northeast. A lot of people I’m seeing a ton of people where it’s same stories as you and I Oh, we were out there and just made decide to make a change. We were up in the northeast decided to make a change. And there’s some real reasons behind that drive. Yeah, yeah, There sure is.
Jason Hartman 4:52
You know, Florida has always had that draw for the northeastern states for New Yorkers. I mean, you know, Seinfeld episodes back, you know about his parents lived in Florida and so forth.
Frank Gallinelli 5:05
They’ll both go to Boca Vista.
Jason Hartman 5:07
Is that a real? Is that a real place? By the way?
Frank Gallinelli 5:10
No, I think there’s ones really like it. The Dad, I’ve looked it up before I have not found a double mistake. You actually Google that? I mean, back in the day being a Seinfeld fan. Yeah.
Jason Hartman 5:21
It was the best written sitcom ever. Really great. Great. By the way, you know, funny aside here, I had the opportunity to meet Jerry Seinfeld a couple of years ago, or you can see the picture of it. Jason Hartman calm and the about section. What I didn’t realize about him. I got a couple of photo ops with Jerry after his show in Las Vegas. And what I didn’t know about him is you know, he is worth Well, according to the internet, not that you can believe what’s on the internet, but his net worth is 920 $5 million. He’s almost a billionaire. That’s Wow, that’s incredible from being a comedian you know, Yeah, wow that is an accomplishment and making people laugh is a lucrative businesses skill I didn’t get but some people have any more thoughts about that and you do a lot of business in the Jacksonville market and St. Augustine, of course, a lot of our clients have purchased properties that you offer through our network. You know, give us some insights into what’s going on and you’ve got some inventory in Jacksonville you want to talk about right,
Frank Gallinelli 6:27
yeah, and the overall Jacksonville market, you know, kind of our central hub market. I’ve been here for almost 17 years now. And coming out of the way correction, Jacksonville’s continued to be the steady Eddie nothing like I huge bounced off the steady Eddie continuing to climb. And there’s great fundamentals. So like we were ranked this year number six by US News for best place to retire, which is fantastic. We were ranked number nine by best large city to live in by Money Magazine. And we’re ranked the Again year after year, the number one affordable large city in Florida. So when all that migration is coming, it’s coming our way. In fact, we had a 9% increase in population. And when people start to review it, they say you just have miles of Riverfront and beachfront living that attract people in. And that affordability index, which you brought up before. Jason, why are people leaving California? Why are they leaving New York? Well, because of that, and if you can get the lifestyle and the affordability and the jobs, it’s really important. In fact, they said job growth here through 2022. And this is interesting, is supposed to be continued to grow to 7.7% increase. That’s fantastic. And we know when people have good jobs, they can pay rent. And the tech industry, believe it or not, is a big draw here. People don’t think of Jacksonville as a tech industry. You know, they have a large port industry, the medical community, the universities, that the tech industry here is really growing and that’s a big drop all of it, which brings younger people right now the average age and Jacksonville’s 46 actually which is the golden Seinfeld themes, Very young, but a lot of that drive of the lifestyle tech industry, the numbers and the stats continue to be healthy for Jacksonville. What I like best about it, Jason, is that solid core of affordability and coupling that with our new construction model, it’s been a really good combination, because the need is there. We’re having such good performance on this new construction model. Because it’s in high demand, we’re able to start right from scratch and I’ve done rehabs for over 20 years. But we found the new construction starting from scratch really gives ourselves and investors we work with such a powerful grounding and a long term approach with lower maintenance and repairs. In fact, looking over our whole portfolio of hundreds of properties, new construction, do you know that the overall maintenance repairs, these are properties that you know have been out there for a few years, you know, so that would include terms and that is about $360 a year. Okay.
Jason Hartman 8:56
You just passed over something really quick and I want to make sure people Get it. So you’re talking about the maintenance costs and maintenance and repair costs for these properties that investors own in your portfolio that they Well, it’s their portfolio, but properties they purchased through you and your affiliated company manages them. So this is brand new construction. And when you said turns human 10 and turns right when that
Frank Gallinelli 9:22
kind of turns Yeah, exactly. So that in maintenance repairs combined, we sat down and we and we averaged out all the numbers to my property manager, partners, kind of a spreadsheet geek, which is great. And we went through all of them. And the average price per house for the year was around $360 365 to be exact. So one of our goals was to curb maintenance and repairs because nobody likes to deal with especially looking long term. So that is a phenomenal number that we’re seeing with the new construction because we’re able to start from scratch. There’s a to 10 warranty into place and It just really gives people a power position.
Jason Hartman 10:03
Okay, now to 10 is an actual company name, that’s a home warranty company. Okay, so I just wanted you to know what that means when he says that. So I’m looking at a performance of one of these properties and the projected maintenance and repair cost is $504 per year. So you’re actually coming in under that so far at $360. That’s great. And let’s just go over the property. So we’ve got in this one, okay, this is just 114 hundred and 59 square feet. purchase price. 177 nine, so that’s 122 bucks a foot for brand new construction, projected rent of 1400 dollars per month. Is that all correct? Yes, sir. Okay, great. projected positive cash flow of $149 per month on new construction. Okay, now I know you can beat that on older renovated properties, but new construction that’s pretty good. The overall return on investment is projected at 27% annually with a real estate appreciation rate projected at 6% vacancy rate 8% or one month per year management fee 8%. And then maintenance of 3%, which actually performs worse than the reality in the case you just mentioned.
Frank Gallinelli 11:18
Yeah, sorry. Yeah, that’s the beauty of this where it’s, there’s just measurements that we can really follow with the new construction. That’s been easier. And it’s been a lesson for me because I own a lot of rehab home. But the new construction, you’re starting from scratch, you’re going you’re building that a newer model of home, when it’s more durable one that’s more set the tenants preferences. And it’s just it’s worked out for all involved.
Jason Hartman 11:42
Now, one of the things that a lot of people listening might be concerned about is they’re saying, Hey, I’m about to start the clock ticking on a 1031 tax deferred exchange, and we 1031 tax deferred exchange. There are some extremely strict Well, not extremely, they’re just are or They aren’t time limits, you don’t get any exceptions on these. And so you have to identify the property or properties you’re buying within 45 days after you close on the property you’re relinquishing to do the 1031 tax deferred exchange and I’m in one of these myself right now, as you well know. And I’ve got 190 days to close on the what’s called the upgrade property or the replacement property right or properties, you know, there could be several. And a lot of times with new construction, you can’t do a 1031 exchange, because you can’t rely on the closing to happen in time. Or you know, in advance it won’t happen in time because it’s going to take them too many months to build the property and complete it right. Now with these. This is only some of them. You’ve got you’ve got a few that you can do this with that you can do a 1031 exchange because you can watch closing date projected January, February.
Frank Gallinelli 13:02
Yeah, January, February. So we have a few when you’re finishing out developments, there’s always, you know, one or two properties, not a lot that can be built within a short timeframe. So that’s why it’s always good to stay in touch with your counselors. Because as these things start to come up, they move very quickly. But we always have, you know, one or two at the end of developments, we’re not talking a lot. But if people really want to get into a 1031 exchange with new construction in a growth area, we’ve been able to do that with our market. But you have to be kind of following pretty closely because we don’t get many of them. But yes, we can get them and like you said, a few that we have finalized now this year. Yeah, they’ll be able to close in January, February. So that’s very good timing for 1031 exchange, where you’re not flirting with that, you know, pretty serious deadline at all.
Jason Hartman 13:47
Yeah, so if you need a couple of more properties to complete your 1031 tax deferred exchange, go to Jason Hartman, calm. Reach out to your investment counselor, if you’re already a client or Working with an investment counselor at our firm. And if not, just go to Jason Hartman. com, fill out any web form or look at the property section and one of our investment counselors will reach out to you and they can help you with that. What else do you want people to know about the Jacksonville market, about these properties? Whatever,
Frank Gallinelli 14:18
I think it’s important to know we’ve we’ve been able to keep with our model, where 90 plus percent of what we did because 90 plus percent of what I did for myself is in solid, strong neighborhoods, as well be neighborhoods, you can build new construction houses in C minus d neighborhoods. But I just don’t believe some people thought that would you be able to with new construction track to be plus tenants to a D area and that I haven’t seen that. So we have been able to keep a model where most people who come to visit us for our tours and you’ve had a lot of, you know, people through the Hartman network comm they say we have a properties and be neighborhoods. So when we’re getting these numbers that we’re getting As well, we’re really picky. And as as you saw coming to visit and tour Jason, we have land guys out there with my building partner looking all the time we throw a lot out. If we can’t match that criteria of building and a property in a B neighborhood. That’s what we’ve stuck to with our new construction model. It’s really served everybody well.
Jason Hartman 15:19
Cool. Now, talk to us just briefly about I mean, it’s funny because in the two Florida markets while you’re in more than two Florida markets, really but in the two that we started with you in, you have the largest city in America, that’s Jacksonville by geography, and then and then you also have the oldest city in America and that’s St. Augustine where we have some short term rental properties through you. Do you want to mention St. Augustine or your Atlanta or Ocala properties or anything else?
Frank Gallinelli 15:50
One of the biggest draws to Jacksonville is St. Augustine. It’s a part of the greater Jacksonville area. As you know, Jason, we loved it. I tore it down to Augustine Yeah, yeah it’s just a Magic City for draws not only for the investment part of, you know, short term rentals, which we do some of but the Jacksonville, why are people moving to Jacksonville, they really love to have St. Augustine marriage next to Disney World. It’s the most visited city tourist wise in Florida just because of that draw. So it that is a huge draw there. And as you know, we’ve already we always try to look for the fundamentals of Jacksonville. You know, as we kind of branch out the web of what we’ve been doing it started with that core in Ocala and then Southwest Atlanta had just been such strong brothers and sisters to our Jacksonville market. That you know, again, I’m kind of that old dog and learned a new trick I’m really sticking with the new construction Jason just because the numbers and the stature in the started as an experiment almost five years ago, but they really do work we do the occasional turnkey still if I’m pulling something out of my portfolio, but normally the new construction is Jeff served everyone involved so well.
Jason Hartman 16:56
Great. Good stuff any the other markets you want to mention.
Frank Gallinelli 17:00
kalaa has been really good market for us. Again, we saw, as you know, Jason the first group of duplexes that we closed on earlier this year, we had projected the year before that they would be renting at a certain level, all of them rented at $75 more per unit. The average days on market out in Ocala was 22 days on market for all units and single family homes for
Jason Hartman 17:24
rent or purchase. That’s for rent.
Frank Gallinelli 17:27
For Rent. Yeah, that’s for rent. So the rentals are coming in strong. So yeah, it’s we’ve really been happy with the sister companies and the Atlanta townhouse project in southwest Atlanta, which is one of the hottest areas with a lot of younger kind of hip growth there. We’re really excited about that complex that’s coming together quite quickly and a number of your people already involved with that.
Jason Hartman 17:49
Good stuff. Alright. Thanks for joining us on this again. If you’re interested in any of these markets, or others around the country, go to Jason Hartman calm and we will be happy to help
Frank Gallinelli 18:02
And we’re going to wrap up today’s show with a lesson from Frank belinelli, founder and president of real data about financial terminology. We’ve had Frank on several times before on the creating wealth show. We’ve given you some of his excerpts before, but today we’re going to focus on financial terminology. Here’s Frank.
Frank Gallinelli 18:28
If you’re thinking of purchasing an income property as an investment, you’re going to want to do some financial analysis, some projections, but the potential financial implications of owning that property, you’re going to want to ask yourself questions such as well, what is a fair price to pay for this property? Or what kind of a return can I expect from my investment capital? And to do that sort of analysis, you’re going to begin as we discussed in the previous lesson, with a process that we call due diligence, and as we discussed in that lesson, that digital begins with collecting data. Data about the market in which this property resides. And about the property itself. The market data would include items such as market rents, competition for tenants, vacancy rates, cap rates, financing terms, the general condition of the local economy. Well, the property data should include the actual lease contracts, the history of occupancy, operating expenses and improvements, as well as your own estimates of items such as maintenance and repairs and perhaps costs that have been left on mentioned it once we have that, we want to go on to the next step in our analysis process, which is the building of what is effectively a profit and loss statement for an income property, something that in the industry is called in a pod and you will property operating data it will be talking about that a fair amount in our upcoming sessions. Now in order to begin that a pod that profit and loss statement, we have to be sure that we understand the terminology That is specific to real estate and real estate investing. Real Estate Investing like other businesses, other professions has its own special language, its own terms, which people who invest people do the lending and so on, are familiar with are comfortable with and all understand to mean the same thing. It’s surprising really how many beginning investors I’ve seen who don’t make the effort to learn this terminology and do themselves a considerable disservice. At least two problems arise from not understanding the vocabulary. One of them in the words of Cool Hand Luke is what we got here is a failure to communicate. If a buyer is trying to explain to a seller for example, why the property should be worth x rather than y, but does so with non standard terminology. Well, the message just doesn’t get across. Or if you’re trying to get a mortgage to finance the purchase of a property and you make a presentation to a lender that has terms that’s simply don’t exist in nature, at least don’t exist in the business. The lender looks at you and you’ve just lost your credibility. So it’s really important, I think to make sure that you understand the basic terminology. We’re going to start with a little subset of that terminology right now, the terms that are necessary for building that a pod that profit and loss. Okay, the first of these terms is gross scheduled income. And that’s the total annual rent value of all units in the property. This amount includes the actual rents generated by occupied units as well as the potential rent from vacant units. Essentially, this is the top line on your p&l on your on your a pot. And by the way, this has several terms and in real estate do this as an alternative name. It’s also called potential gross income. Okay, so that’s our top line. The next item is vacancy allowance, which is also called sometimes vacancy and credit loss. Now this is usually expressed as a percentage of the gross scheduled income. And as its name suggests, it’s an estimate of the amount of potential income that will be lost due to vacancy. Credit loss, by the way is when the unit is in fact occupied. But the check is no good. There’s a loss there Do not to the lack of occupancy, but the lack of of good funds. So some investors do indeed prefer to call this category vacancy and credit loss allowance, so that accounts potentially for the uncollectable rent, as well as the missing rent from vacant units. The third item is simply the difference between the first two and this is called gross operating income. That’s the gross scheduled income less the vacancy allowance. And this one has a second name as well. It’s also very often called effective gross income or AGI.
Frank Gallinelli 22:57
In my experience, appraisers tend to prefer the tournament Effective gross income, most investors tend to prefer the term gross operating income. But both terms can be used interchangeably, they mean exactly the same thing. And the short version is that this is the amount you actually collect. So this is the total potential income from the property minus what you’ve lost from vacancy and credit. What’s left over is the actual money that comes in, which is the gross operating income. The next item which would be subtracted from this are operating expenses. And these are items such as property insurance and taxes, repairs utilities management fees. Got there’s a more or less standard definition for operating expenses in regard to real estate and operating expenses, one that is necessary for the maintenance of a piece of real property and ensures its continued ability to produce income. There are some opportunities for confusion here that are totally understandable, because there are costs that we typically assume with owning property, but which may not necessarily be operating expenses. Perhaps the most conspicuous of these is your mortgage payment your debt service. perhaps the easiest way for me to try to explain that is to say you may indeed need a mortgage in order to be able to acquire a property. But you don’t need a mortgage to operate a property. Therefore, it’s not an operating expense. less obvious is the fact that the interest portion of that mortgage payment is also not an operating expense. And that’s particularly vexing because we know that mortgage interest is typically tax deductible in particular mortgage interest when the mortgage is against investment property. But the fact that something is tax deductible doesn’t necessarily mean that it is an operating expense. It could be an expense for tax purposes, but not something that we treat as an operating expense. In a similar fashion depreciation is a tax deduction. It’s tax deductible, but it’s certainly not an option. expense. This is a question of capital improvements is something that we spend money on, or repair or is it an improvement? And that’s a harder one, because to some extent that’s governed by tax law, not necessarily always by common sense. I had a student some years ago who raised a very good question with this example. He said to me, what if I own a five story office building, and it has a single elevator in it? And that elevator dies? It’s unrepairable? Isn’t the cost of replacing that elevator and operating expense? Because I have to do it in order to be able to maintain the revenue from that building. By fifth and fourth floor attendants are going to pay the rent if neither they nor their clients can get up to the offices. Unfortunately, although that makes perfectly good sense. In fact, it’s not going to work. If you have a face off with the tax auditor, that auditor almost certainly is going to say no, you can’t treat that as a repair. It’s got a long life expectancy. So perhaps The easiest way to try to understand what is likely to be legitimately an operating expense of repair versus an improvement is if it’s a cost of running the property on a day by day basis. Those kinds of costs generally like property taxes, property management, property, insurance, supplies, and so on those costs typically very clearly our operating expenses. I want to stress that this is not a semantic issue, whether something is an operating expense or not an operating expense. As we’re going to see, going a little further down the road here, it’s really quite essential that we are consistent with our use of this definition, along with other investors, with appraisers, with lenders, because these definitions are going to lead to some key metrics, which would be skewed if we didn’t stick with the same definition of what is an operating expense that everyone else is using. So keep that in mind. We’re going to see more of that as we go forward. Bottom line on our profit and loss statement on our a platform that we’re going to see in a while is a very important term, a very important metric called net operating income. And that is the gross operating income less the operating expenses. In other words, it’s what’s left over of your total potential income. After all the vacancy and expense items have been subtracted. And again, I want to remind you that mortgage payments, capital expenditures, depreciation, have no impact on noi net operating income.
Frank Gallinelli 27:37
So let’s wrap up this collection of definitions here, if you will.
Frank Gallinelli 27:41
We start with a top line, which is the gross scheduled income that’s all of the income that you might potentially get from the property it’s includes both the currently occupied units and the the potential rental, the vacant units you subtract for that was lost to vacancy and to credit and Becky You the gross operating income, then you subtract all the operating expenses and that gives you the net operating income.
Frank Gallinelli 28:09
That’s the basis for our profit and loss to our so called a platform.
Jason Hartman 28:15
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.