Have you ever compared the benefits of real estate vs gold investments? In this Flashback Friday episode of the Creating Wealth podcast, Jason Hartman and several-time guest Naresh discuss the experience Naresh had working on Wall Street, as well as some of the challenges of investing in precious metals and a beneficial strategy for investing in real estate.
Naresh tuned in from the Tampa area of Florida and noted that the summer weather has been pleasant. Though Florida sees a good deal of rain, especially during the summer, Naresh stated that the humidity hasn’t been a challenge. It isn’t brutal, contrary to popular belief. Hartman agreed that Florida is very desirable for a lot of reasons, especially the fair weather. When compared to California, the warm summer weather is present, without the high cost of living. In early August, the temperatures rest around 60 degrees at night. Winters are only at around 50 degrees most of the time. The state is full of beautiful places to live and visit.
Naresh and Wall Street
The conversation gives way from discussing the beauty of Florida to covering a piece of Naresh’s past and business experience. He attended Duke University, and after graduating, he worked on Wall Street for a time. He illustrates that living in that area painted a much different picture for him at the time. College students and graduates are recruited and exposed to that business sector when recruiters from large companies come into colleges and talk about how much money could be earned, as well as boasting a pleasant work and home balance.
“When you just live in that area, I guess it doesn’t even matter where you go to school, but when you live in that area, you kind of get brainwashed. You’re introduced and exposed to the financial industry.”
It’s easy to understand, though, why every business student dreams of working on Wall Street. There’s an air of glamor and an appealing lifestyle that’s perceived about those working for such big names in the industry. The glamor presides over the money when it comes to a student’s reasoning for their desires to be in this elite business sector. They have the opportunity to work with big names in business, being affiliated with massive corporations like Goldman Sachs, Morgan Stanley, and the Lehman Brothers.
Naresh notes that working with any one of these major companies is a very competitive process. Interviews are stringent and involved, sometimes hundreds of candidates are applying for the same position. Up to ten different interviewers can be on the roster for one company, meaning that a candidate is likely to be interviewed by ten different people before being considered for a position.
Super Day at Morgan Stanley
Naresh took part in what was referred to as a Super Day at Morgan Stanley, interviewing for a fixed-income sales position. After participating in a standard phone interview, Naresh was invited to the Super Day. The company paid for his travel expenses, the flight to New York City, his hotel visit, and food. He stayed in the Hudson Hotel, in a room that costs around $500 per night, and the morning of the Super Day, he took a cab to the company and sat in a waiting area with around fifteen other young candidates. It was a diverse group, from many different schools and many different majors.
In talking about the different majors, Hartman was reminded of a line from the film Margin Call, featuring a young risk manager who discovered a serious problem in a large corporation loosely based on the Lehman Brothers.
“That was such a great movie, by the way, folks. You should all see that movie.” Hartman advises his listeners.
The protagonist of the movie met with the CEO of the large company and explained that a financial disaster is quickly approaching due to the company being over-extended. After meeting with him and discussing the issue, the CEO asked the young man about his educational background and qualifications. The protagonist explained that he studied rocket propulsion in college and did his doctoral thesis on the topic.
The CEO asked if this meant that the protagonist was a rocket scientist and he confirmed, stating that, “the money is just so much better on Wall Street.”
Hartman expresses sadness, noting how unfortunate that quote was, because this character essentially gave up an amazing passion of his in pursuit of money. He states,
“That, to me, is a sad thing. Rocket scientists actually invent things and do real, tangible things that move humanity forward. Wall Street just plays with things.” Wall Street is good at one thing, financial innovation, a phrase that Hartman warns against, deeming it a rather dangerous trait that should have sensible people running for the hills. Wall Street moves money from one place to another.
Kids Don’t Aspire to Work on Wall Street
In agreement with Hartman’s statement, Naresh points out that the Wall Street investors that he knew didn’t aspire to be in that industry when they were children. No child considers the future and dreams about working in the big business industry, because it isn’t a fun job. It’s a career path that young people find themselves groomed into while they’re in college. Recruiters do their jobs, recruit new talents, and offer six figures directly out of college. Money comes into people’s lives, and it changes who they’re set to become. It’s difficult to say no to $80,000 base pay for an employee’s first year, as it was Naresh’s first year, along with up to $70,000 in bonuses. Naresh further explained that as a third-year associate, the pay takes a leap from $180,000 during the second year, to nearly $250,000 annually.
We Sell Out When We Become Adults
Hartman agrees that kids don’t typically have the desire to work in a field that doesn’t encourage them to make something valuable of themselves. He comments,
“No kid says that they want to go work on Wall Street, because the innocence and purity of a child…they want to make something. They want to do something, I mean, every kid says, ‘I want to be a firefighter,’ at least every boy kid…or an astronaut.”
We become adults and we lose our passion. We sell out and spend our lives doing what makes us a profit rather than doing what makes us happy. Very few students consider the way that Wall Street works during their pursuit of material wealth. Jason notes, though, that he feels he has a mission in life and is grateful for it. He explains that his listeners don’t often feel the same way. Often, his clients are people that want to leave their corporate jobs to work for themselves.
“The reason I got into real estate is, I wanted to make money. I grew up poor. I didn’t like being poor. It was no fun…so, I wanted to make money. As it evolved, it became a mission, something that was really important to me.”
Venture Alliance Event in September
Hartman supplements his testimony by reminding listeners of September’s Venture Alliance event in Providence and Newport, Rhode Island with a side trip to Martha’s Vineyard. The events page at jasonhartman.com has more information available.
A client of Hartman’s at one of the previous Venture Alliance events talks about starting a business. He was passionate about his business ideas, purchased several properties, and talked about wanting to start something for himself. Hartman advises that, in order to have the desired business, investing money from your corporate career into a pyramid base is necessary. Income properties give you the foundation you need to start a business. It’s the most historically proven asset class.
Will Gold Continue to Drop in Value?
The two discuss at length real estate vs gold investments. In talking about valuable assets, Naresh explains that gold is currently valued at $1100 per ounce. The gold industry is still claiming that gold is worth between $2000 and $5000, but truthfully gold has been decreasing in value and has been for the past four years.
This might be because over 80 million Americans in the Y generation appear to care very little for precious metals. They’re far more interested in technology and real estate. In a way, at least according to Greenspan, gold has become somewhat of a relic. It’s not an industrial metal, and there are far more inconveniences related to gold investment than there are with real estate investment.
Jason references an article giving seven reasons why real estate is better than gold, available on his website. Some points he makes are, for example, gold doesn’t have financing, and bankers prefer to loan against properties. Gold has no tax advantages, as it is a highly taxed collectible at about 28%. There is no income potential with gold, and it is subject to confiscation. Hartman cites the Executive Order 6102 forbidding the hoarding of gold in 1933.
Realistically, the government can take what they want, but real estate is highly unlikely to be confiscated unless a world-ending event of anarchy were to take place. Even in that case, if you’ve got only 20% in the game, and borrowed the rest, you’d only lose a small amount of money compared with the banks. If the value of real estate was damaged, it would hurt the banks more than property managers. Since Wall Street runs the government, why would they want to do anything that would hurt the banks? In this unlikely scenario, your best insurance is a high loan balance.
Is Your Gold Hiding Offshore?
Scams involving the gold industry are a common occurrence. Though it’s possible to buy gold and keep it as a wealth preserver, there are a good deal of issues to address when doing so. It’s a physical asset, and a dangerous one. People tend to buy gold and store it in an offshore account, but how protected is this method? Hartman believes that it’s a dangerous gamble, being that you’re never certain that your gold is actually in the account.
“How the hell do you even know it’s there? Supposedly, you’ve got a couple of gold bars with your name on them in some co-mingled vault…If it’s the end of the world scenario you’re worried about, don’t you think these companies will just take that gold for themselves?”
Naresh agrees and mentions that gold is very hard to buy at stock price because dealers mark up their prices quite a bit. Storage is also an issue, like Hartman mentioned. There is the risk of theft from storage companies on one hand, and on the other, storage itself is very expensive. It’s also very unwise to store gold in your own home.
Jason’s Grandfather’s Home Invasion
Both Hartman and Naresh advise against storing gold in your home, because both have had family members experience home invasions related to gold theft. Naresh’s parents had their home broken into and robbed, and Hartman’s grandfather, a coin collector, had men with guns break into his home to steal his collection. Hartman’s grandfather was well-armed with a gun at every door of his home and still, men invaded the house, hit the dog on the head with a gun, and tied Hartman’s grandparents up while they made off with his collection. It’s very dangerous to store gold in your home.
Safety deposit boxes are not much safer, being that the government can technically confiscate items in the boxes, according to Howard Ruff. He (possibly jokingly) advises burying gold collections in your back yard.
Cash on Cash Returns
In stepping toward the topic of real estate vs gold investments and real estate being a smarter investment choice than gold, Hartman gives an example of a great possible gain with a property on his website. The property was listed at $68,900 and asked for 25% down. The projected rent for the property is $825 per month, with cash flow projected at $2,520 per month. This totals a cash on cash return of 12% annually, and if it appreciates at 6%, the return becomes 36% annually.
Real estate is a multidimensional asset class, including cash flow, leverage, appreciation, and tax advantages. According to Hartman, income property is the best thing since sliced bread.
Information on Future Episodes
Concluding the episode focusing on real estate vs gold investments, Hartman gives a preview into the subject matter to be discussed in future episodes. Gyrations in the market, market cycles, China, inflation and deflation, robotics and technology, government spending, and fiscal responsibility are all topics on the roster.