ANNOUNCER: Welcome to Creating Wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing. Fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine self-made multi-millionaire who not only talks the talk but walks the walk. He has been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it. And now, here’s your host, Jason Hartman with the complete solution for real estate investors.
JASON HARTMAN: Welcome to the Creating Wealth Show. This is your host, Jason Hartman and we are in episode #326 today. Thank you so much for joining us and we’ve got several things to talk about. We won’t actually have a guest on the show today. I am just doing the show today with Steve. Steve, how you doing?
STEVE: I’m feeling hardy, Jason, I’ve got an eye patch on right now.
JASON HARTMAN: Yeah, I know, I heard about your eye patch, so you, you seemed to have scratched your cornea somehow, huh?
STEVE: I seem to have, I, I don’t know how this happened but it is definitely scratched and I went to the doctor today, he said here’s an eye patch and some medicine, you’re a pirate over the weekend, so that, that might be slipping into my speech, you know. You dress the certain way. You started behaving that way.
JASON HARTMAN: Yeah, that’s right [LAUGHING], it is a pirate language. You know, I remember several years ago when I had that same thing happen to me, I was, I was laying on the beach in Corona del Mar, California and you know another hazard of the beach besides skin cancer, right, I don’t know, maybe I’m just getting too conservative with my old age but I was laying on the beach and this wind kicked up and blew sand on my eyes and I, I went, my mom took me over to the ER, I remember she came by later that day and she said no you better go check this out and so she took me to the ER, not the ER but the private-like walk-in clinic and the doctor practically had to have two people hold me down because he had to touch my eye and it’s like your reflex does not want to let anybody touch your eyeball, right? [LAUGHING].
STEVE: No it, it does not.
JASON HARTMAN: You’ll punch them, you’ll throw them off, [LAUGHING] you will do whatever, you know –
JASON HARTMAN: And ah, and that, and that was hard to do. Still I’m allowed to do that.
STEVE: Yeah, yeah. He had to flip my eyelid up and look under there to see if there is anything in there, wasn’t, wasn’t a pleasant experience so hopefully, it’s all healed up come Monday and I don’t have to go see the specialist because that’s not going to be cheap.
JASON HARTMAN: Yeah, I hope, I hope it’s a no big deal problem for you and I’ll tell you though just be grateful that you don’t live in Canada or England or somewhere where there is Obamacare, oh wait we are going to have that here to.
JASON HARTMAN: Or you have to wait four months to get in to see the doctor and –
JASON HARTMAN: And another five more to see the specialist.
STEVE: I totally jumped on a joke with a receptionist as I was checking in. She was like can I see your insurance card, I said, oh no just send the bill to 1600 Pennsylvania Avenue and –
JASON HARTMAN: [LAUGHING].
STEVE: [LAUGHING] She looked at me and like huh.
JASON HARTMAN: Did she know what you meant by that?
STEVE: She didn’t. I told you I bumped. I thought it was funny but she didn’t. [LAUGHING]
JASON HARTMAN: For those who may not know, those who aren’t following my advice, that’s the address of the White House, folks [LAUGHING].
STEVE: Send all your medical bills to the White House and they’ll get in paid net 30.
JASON HARTMAN: That’s right. That’s right but ah, hey it is kind of cool. I, I just told you before we started recording here, change your Facebook to pirate and, and folks, you may not know that you can do this but you know, you can put your Facebook page in any language you wish, right, it could be French, Russian, German, Spanish but it can also be pirate. That’s kind of fun. Just try that out, folks.
STEVE: Yeah, I just posted something in our internal content page and I was just notified that Jason Hartman was scrolling about my flap and my gums or something.
JASON HARTMAN. [LAUGHING].
STEVE: Pirate like that [LAUGHING]
JASON HARTMAN: There is pirate language for you, pretty cool. Well, hey let’s get down to business here, you, you only need uh your mouth and ears for this, no eyes, Steve but what do you want to talk about first, we got several things to cover today, not the least of which is good old Mr. Warren Buffett, I, I have like a love-hate opinion of that guy but, depends on what he is talking about, there’s really three Warren Buffetts, just so everybody knows and we talked about –
JASON HARTMAN: That in my shows, there is not just one Warren Buffett, there is three of them.
STEVE: There are three of them and he has a secretary too, from what I hear of it that, that pays a lot of taxes but –
JASON HARTMAN: Well, he does not pay or not?
STEVE: Well, yeah but I doubt he has raised his pay, I mean she pays too many, too much in tax that drove me crazy during the election, I don’t want to get off on that.
JASON HARTMAN: Okay whatever.
STEVE: That’s better. [LAUGHING]
JASON HARTMAN: Let’s move on.
JASON HARTMAN: [LAUGHING].
STEVE: I did just buy the Essays of Warren Buffett book, I am looking forward to reading that.
JASON HARTMAN: Well, you know what I love, I do really love about Warren Buffett. Is that the whole concept to being a value investor, what I liken it to income property investing. There are those people we all know these people, maybe a few of them are listening, hopefully not, but they’re get-rich-quick types, you know, they are the people that are forever chasing the end of the rainbow and they almost, almost, almost never ever find it because this is the great thing about getting a little older, like the wisdom that comes from time and experience is just, you can’t, you just can’t impart that to people. You, you just got to do it yourself and you see all these people that they’re all in this different multilevel marketing programs or they’re doing this, and they’re doing that and they’ve always got some deal of the month that they’re approaching me with and they’ve always got some deal of the month and they, they just, you see them five years, 10 years, 15 years down the road and they’re still broke. They’re still struggling and they’ve always got some great deal, I mean, I guess humans are just incredibly optimistic or they just have incredible delusions of grandeur, maybe a little of both, I, I don’t know but you know, they all just keep pounding away at the deal-of-the month deal rather than being kind of like the Buffett philosophy of being the value investor, right? And, and when you likened that to income property, the buy and hold mentality. That’s the one that really works. It’s the tried and true proven thing and I know, you know, everybody wants to chase the bright, shiny objects and the end of the rainbow and get the get-rich-quick scheme by just the good old boring buy it and let your responsible government be on your side because it creates inflation and that inflation pays off your debt, it increases your rents, it increases the value of the property. It just does wonderful things for you. Everything gets on the side of the value investor.
STEVE: Yeah. That’s, that’s a good, a good point and, and that is one thing that we can all certainly appreciate about Buffett. You buy a good company at the right price and it’s just like buying a good income property at the right price. Everything else could go wrong but you’re gonna be okay because you, you purchased in a smart way but when you’re chasing the shiny object, sometimes you get them and they are great but it’s never a long-term solution to anything.
JASON HARTMAN: It, it’s so where that you get the bright, shining objects. The, the context of a real wealth creator is, is the tortoise, not the hare, the person who is willing to roll up their sleeves and suffer through a few hassles, delayed gratification, and you know, before they know it, they’re rich, I mean, –
JASON HARTMAN: That’s, that’s just, the, It’s, I saw my mother do it and it, it was just a great example, you know, just keep plugging away and, and wow! just, you, you let a few years go by and the, the compounding effect of, of being patient and delaying gratification and doing the right investments in the right vehicle are great. The problem is that since Buffett started so long ago, Wall Street has become such a crooked thing nowadays and, and until really, I guess, the early 90s, it was, it was much more legitimate because the CEOs and the boards of directors and, and the other execs, they weren’t ripping off the shareholders as much as they are today and, and so like I had a guest on recently that said Warren Buffett, I don’t know who that was but I, just in the interview last week but it will be posted soon and you can hear it yourself. I can’t remember. This is how it goes with me. It’s like a blur. I interview so many people –
STEVE: [LAUGHING] Yeah.
JASON HARTMAN: And for all these different shows but he, he, he’s really a demographics investor, almost more than a value investor because when you look at demographics and you look at a company like Coca-Cola, what is the chance you would lose on that kind of an investment at that time? It’s, it almost nil, right? That’s, that’s the whole thing but I like Buffett in that regard. I think he is good.
STEVE: Yeah, definitely, agreed.
JASON HARTMAN: Well, hey, let’s play a short video. This is only a minute and a half and I know a lot of you probably heard this and it’s interesting to look back on it. It’s maybe I want to say about a year and a half old. Steve, would you concur it’s about that old?
STEVE: Yeah, it, it is and kind of listen to it with the mindset of is this all still applicable?
JASON HARTMAN: Yep.
STEVE: Is all this still true?
JASON HARTMAN: What, what is and what isn’t. There’s one thing here that’s not true and there’s one thing here that still is true in my opinion, of the big things he talks about. So, –
JASON HARTMAN: We’ll play it just a minute and a half. Here we go.
MAN’S VOICE ON VIDEO: Equities are still cheap, relative to any other asset class.
WOMAN’S VOICE ON VIDEO: But they’re not –
MAN’S VOICE ON VIDEO: I didn’t say the single time, [INDISCERNIBLE] my homes are cheap now too.
WOMAN’S VOICE ON VIDEO: You would?
MAN’S VOICE ON VIDEO: Yeah, single-family homes, it, but if, if, if I had a way of buying a couple of hundred thousand single-family homes and I can, had a way of managing. The management is enormous. It’s really a problem because they’re one by one. They’re not like a apartment all of a sudden but I would hold up on that and I would, I would take more riches out at very, very low rates but, but if, if anybody is thinking about buying homes, five years ago, they couldn’t buy homes fast enough because they’re probably going to go up but now, they don’t buy it because they think they’re going to get down. It frustrates the high rollers uh, it’s a way in affect to shorten the dollar because you could, you could pick up a real mortgage and if it turns out your interest rate is too high next week, you re-finance lower and if it turns out, it’s, it’s too old, the other guy stuck with it for three years so it, it’s a very attractive asset class, though.
WOMAN’S VOICE ON VIDEO: If you are a young individual investor at home and you have your choice between buying your first home or investing in stocks, what would you tell someone who is in the benefit?
MAN’S VOICE ON VIDEO: Well, if I thought I was going to live, and don’t worry, it is going to last, I want to live the next five or ten years, I would buy, I would buy a home [INDISCERNIBLE] with a 30-year mortgage. It is sure a big deal to edify literally if I would be an investor that was a handy type which I’m not. [LAUGHING]
WOMAN’S VOICE ON VIDEO: Yeah.
MAN’S VOICE ON VIDEO: And I could buy a couple of them at distressed prices and, and find renters uh, I think that’s it. And, and again, check the 30-year mortgage. It’s, it’s a, a leverage of owning a [INDISCERNIBLE] from now on, you know I, I think, I think that’s probably the distraction of investment if you have been negative –
JASON HARTMAN: Well, there you have it. So what’s true and what’s not true in there? [LAUGHING]
STEVE: I would say that equity being price low is no longer true.
JASON HARTMAN: Yeah. It, it, it probably was when he said it obviously.
STEVE: It probably was –
JASON HARTMAN: The market could go up, so –
STEVE: But a lot of monetary morphine later it, it, is not true.
JASON HARTMAN: Yeah, monetary morphine or you know, you want to say morphine, doesn’t that make you tired and put people to sleep, I mean I’ve never had morphine, thank God but –
STEVE: I think it makes you feel good no matter what reality is. [LAUGHING]
JASON HARTMAN: Okay, oh, I get it. I get it. I, I would say monetary caffeine. How’s that?
JASON HARTMAN: Monetary Red Bull.
STEVE: Wait until –
JASON HARTMAN: The energy drink and –
STEVE: Maybe they just invented an illegal drug caffeinated morphine.
JASON HARTMAN: Hey, let’s just think about. [LAUGHING]
STEVE: [LAUGHING] I’m sure they’re listening to us.
JASON HARTMAN: But you know what Buffet says was pretty, pretty good. He talked about obviously the value is still in those single-family homes that you talked about. He explained the reason that institutions stay out of our business as I always say embrace the fragmentation, he can’t do it. He is too big. Institutional players are most of the time too big and Steve, I know that you represent a couple of hedge funds that are buying properties through our network and they’re playing the game but I have long predicted that they aren’t going to like it. They aren’t going to do well with it except as speculators. They will not be buy-and-hold investors, comments on that, Steve?
STEVE: Yeah, well, we’ll make hay while the sun shines is with them but I saw a cartoon that I’ll tell you about and it’s, we could easily substitute something in here but there was a cow and on one side of the cow, there is a guy pulling on the, the leash or whatever you want to call it. The rope around the cow’s neck, like you know, saying mine, and on the other end, there was a guy pulling on the cow’s tail. It’s hard to see who could be saying mine. They’re clearly fighting over the cow.
JASON HARTMAN: So they’re fighting over the cow, one-on-one and saying mine, pulling that way and the other one on the tail pulling the other way, my, my cow, my cow, okay.
STEVE: Correct and, and in the middle is a lawyer on a stool milking the cow.
JASON HARTMAN: [LAUGHING]
STEVE: So –
JASON HARTMAN: I get it.
STEVE: I, I think you could put Wall Street in the place of the lawyer.
JASON HARTMAN: Yeah, that’s very true because the cow represents actual intrinsic value, right? As a grazing tool, as beef, and as milk, right?
JASON HARTMAN: And so, so that’s actual real value. So the company itself in which uh, you know, an investor might invest has real value, right? But Wall Street and I wanna include in that is, you know I call this, yeah, they, they talked a lot about economics, people, and financial people talk a lot about something called counterparty risk. And counterparty is where, you know you might be the seller and you got the buyer and what’s the risk if the buyer won’t do the deal, right? Or if they won’t pay the price you want. That’s counterparty risk, right? But I call this intermediary party risk. In other words, they are your counterparty but there is really, most people just look at the, the opposite side of the transactions to counter party. And what I say is these intermediaries are your counter party. Their agenda is exact opposite of yours. So that means your financial advisor, the person that Merrill Lynch Wall Street itself generally and the person could have been anywhere, I just said Merrill Lynch as an example by the way. Their agenda is different than yours. Okay? It may seemed like it’s aligned but I say that it’s not aligned at all and then, you look at the C class, you see in the company in the Board of Directors and all of those people, they’re all looking to milk that cow just like in that example of Steve. Their all taking all the money out and the retail investor, they, they just get nothing. It’s a terrible deal.
STEVE: Yeah, and they, they structure it based on transactions cause these guys get paid, when there’s a trade made, when there’s acquisition made, when a, when, when, when an asset is sold, whether that’s the most efficient long term return for the owner of the investment is irrelevant. You know they want to move money because they get fees. They’re fee-based. And, and that’s ultimately why I think that some of the funds have pulled out. Others, you know some are doing an okay job. You know none of them are going to get the results that I think that they thought they were going to but I, I know the market in, in an Indianapolis pretty well you know, I used to live there. I know there is a fund there right now, that is responsible for probably 50% of the volume in that market, in this rental grade price range. Obviously, they are not buying the half a million-dollar house. They’re buying the, the $50, 000 or $100, 000-house but what they’ve done is they’ve hired these two guys on the ground to make their acquisitions for them and they say, we need to spend $10,000,000 this quarter and so what did those guys do? They spend $10,000,000 in that quarter [LAUGHING]. It’s not done intelligently. They, they looked it okay, well, I’ve got to buy a house. So, whereas an investor, like you or me or myself, we’re at the auction and we know that there is a maximum amount that we can bid on that property. These guys don’t really have one because they were going to get paid, in fact, they’ll probably get paid more if they spend more on the house.
JASON HARTMAN: Well, that’s the thing, you know. It’s, it’s, it’s nobody’s money. It’s, it’s not their money. [LAUGHING].
STEVE: One of the clients that I, I’ve done some work with, you know, when I, careful I won’t say any names but we were supposed to be closing on a package of homes and there were some delays on their end, so, myself and our local market specialists were getting a little concerned and out of the chief operations officer’s mouth said well, we’re a hedge funds which means we don’t really have any money. We just have other people’s money. [LAUGHING] so, they were having trouble getting this money together, and you know, all of this because it wasn’t really theirs.
JASON HARTMAN: This is why you should be a direct investor and only invest in things you actually own and control, a piece of property maybe but not as good, a mortgage on a property, something that you actually own, that you own and control. Your own business. Although business is far more risky because they have lot of moving parts and but you’ve got to be in control of your investments. Every day amazes me the degree to which people relinquish control to somebody else and it, it, I mean, it’s just, just silly.
STEVE: It’s extremely rare that your interest would line up perfectly with somebody else’s on the day with –
JASON HARTMAN: They never do.
STEVE: I mean.
JASON HARTMAN: They never do.
STEVE: Yeah, I guess extremely rare, rare was the strong word.
JASON HARTMAN: You know, I, I tell you, our Phoenix provider, that we really haven’t been doing business with lately, they, um, we had our share of struggles with this company and they’re now promoting a fund, okay, and they’re promoting it to our clients and every time one of clients calls me and says hey, should I do this? I say, well, look, what’s commandment number 3, thou shalt maintain control, and some of the corollaries that are fools are for fools. If you put your money in an investment that the, the general partner regardless how the entity’s structured exactly lately, the concept of the person running the deal, managing the fund, the general partner of the fund manager, whatever you want to call it, the person in that position, they’re going to be in control of the money and they’re going to spend it on all sorts of silly things sometimes and I’ll give you a great example, okay. This provider is in that apartment deal. The big apartment that I own part of here in Phoenix area and I remember when we were refinancing a property about a year and half ago, the general partner in this example, now, this is only a couple of partners, so it’s not like a big partnership or anything but they found the deal, so they got into it too. They got equity just for funding the deal without putting money into it, okay. And, and he says to me, hey, I think we should buy gifts for the lawyer and the title officer, and the escort officer and all the people that work so hard to get this deal done before the end of the year, before New Year’s because they were rushing and I would like to take about $2,000 to $3,000 out of the bank account to buy them gifts and I said no freaking way, are you kidding me? You’re not taking our money out to buy gifts for your vendors. They are going to, first of all, he is going to get all of the credit for it. I mean, it’s like, it’s like they’re not going to be involved in my transaction and you know these people, I mean, can you imagine someone saying I’m going to buy a gift for my lawyer who charges $400 an hour? [LAUGHING] it’s, it’s insane but of course he thought that way. It’s not his money. What does he care?
STEVE: It’s not his money.
JASON HARTMAN: You know, what does he care?
STEVE: You know, gift needs to be other way around. [LAUGHING]
JASON HARTMAN: Yeah, I mean, I mean if, if they could justify it, there are probably all kinds of little things like this that I know nothing about. Little expenses that are being allocated to the partnership that you know are being run through the deal but you know I can’t keep track of them, I know nothing about, okay. It’s almost impossible to really know but, I mean, if they could do it, and there was some excuse to travel, oh we are going to buy first class airline tickets and then we got to go out to dinner on the partnerships bill and have $300 dinner at the, the nicest restaurants in Scottsdale. I mean folks, when you do this kind of thing when you invest in someone else’s deal this is why you’re susceptible to. There is always someone skimming on the cream off the top of the deal and it just, it just doesn’t work. I mean, I, I would say that the outlier, the exception to this rule is the one who doesn’t. [LAUGHING], I’d say most of the time, someone does it. It’s just, it’s just human nature to stick your hand in the till.
STEVE: That people, people are so, I don’t know what the word is, but they don’t want to feel the bumps. They would almost rather lose money than feel where the bumps that comes from maintaining control.
JASON HARTMAN: The bumps are so minimal. They are just no big deal.
STEVE: They are but people perceive them to be a big deal so that is why these fund managers fleece them.
JASON HARTMAN: Yeah.
STEVE: That’s why they get away with it.
JASON HARTMAN: They are getting totally fleeced. I mean you know and then, and then on their real state deals, they don’t know how to keep score properly and do the math, they are not using Property Tracker, some software to tell them what the math is really like, like I’ll give you an example of the kind of things that would derail most people. I’ve got this one property in Charlotte, North Carolina and I’ve had it for I don’t know, 9 years now. Right, it has pretty much been a great property. All, all things considered, but you know like in the last two weeks, I’ve got hit with two things on it and you know, I am writing those back to the manager. You know who is taking care of the repairs, that one I don’t self-manage.
JASON HARTMAN: Some I do. You know, there is already, but you know I write emails back like this property, what is next you know, I hate it, making them think, I think it is such a terrible to be alright.
JASON HARTMAN: But really I’m kind of laughing all the way to the bank. I think it is some actually pretty good deal, all, all things considered when you put the tax benefits and so forth but the –
JASON HARTMAN: But the two things that happened to me are number one, the garage door came off the track and they send me these pictures that look horrible, like I thought, oh my God, what is this going to cost. It turns out, you know what the cost was 230 bucks. No big deal.
STEVE: To get the garage re-mounted.
JASON HARTMAN: Yeah. Yeah. To get it remounted and all fixed up and tuned up and everything like that. I think it was like 230, I don’t know, might have been 280. I, I might be forgetting but close enough, nothing, nothing much. Right? And then like right around that same time, a tree branch fell off the tree, okay and it is a pretty big branch and it fell onto the yard. Right? And so these tree branches are getting removed that was going to be like another $250 or something like that because they got to come in and cut it up and remove it. You can hire someone on Craig’s list with no insurance do that kind of stuff but a guy operating or a couple guys operating chain saws on my property with no proper insurance, that doesn’t make me feel really good.
STEVE: Not to a fussy guy.
JASON HARTMAN: Yeah [LAUGHING]. You know it is a little dangerous.
JASON HARTMAN: So these were the things that derail most investors. There is at least little pebbles in the shoe, these little bumps in the road in the big scheme of being they are just no big deal.
STEVE: Yeah. Exactly. And that’s what Buffet is talking about. Because it is hard to do that in math. That is why funds are bailing out because they run these huge vacancy rights. Of course, there are not getting the return, I mean we have historically higher rents right now. We have low prices and they are not getting the good returns. I mean, we all know why it is because there is a vacancy problem and they are buying too many properties too fast.
JASON HARTMAN: Yeah and well, when you say there is a vacancy problem, what you mean is you mean a lot of the hedge funds buy for pure speculation. They don’t even try to fill the properties. They just keep them vacant, right?
STEVE: That, that’s exactly right? They are just buying, you know ride the market up and do the best that they can there and when you just buy that many, that fast, you just don’t have a prayer.
JASON HARTMAN: Yeah, it’s crazy but remember folks, if you don’t follow commandment number 3, the three things you’re leaving, you’re susceptible to is you might be investing with the crook, you might be investing with an idiot, and assuming you’re honest, assuming you’re confident, the third problem is the one I just talked about. They are skimming the money off the top of the deal. I was just floored when that Phoenix provider said, Let’s spend 2,000-3000 dollars buying gifts and I’m like why do I, I have to seem like a bad guy, right? I got to seem like screwed –
JASON HARTMAN: Here it is right after Christmas and I guess I’m screwed because I said no way. You’re not taking our partners’ money so you can go in and bring them a gift and look like this great guy. It is ridiculous. I don’t know, maybe I’m like that episode of Seinfield where George buys a salad for Elaine or something and someone else hands it to Elaine and I think Jerry hands it to her and, and, and Elaine says, thank you, like Jerry bought it, and George didn’t get the credit [LAUGHING].
JASON HARTMAN: That was so funny [LAUGHING]. He was so mad.
STEVE: And the whole episode was George having a coronary over that, yeah –
JASON HARTMAN: Oh, George, what a jerk that guy is. He is, he is a great character really. Jason Alexander, does a great job playing him. They need to bring Seinfield back, that show was really the best written sitcom ever I think.
STEVE: They should but they quit while they were ahead, you know.
JASON HARTMAN: Well.
STEVE: That’s what, that’s everybody had fond memories. You know, it is not one of these that you’re going, “When is this going to be over with?” You know, they left when everybody wanted more.
JASON HARTMAN: Well, that’s, that’s the way you the leave them wanting more, right?
STEVE: That’s right.
JASON HARTMAN: But I guess the same is true of the show 24, another great show but hey let’s talk about the government wasting our money.
STEVE: Yeah. I’m sure everybody wants to hear about that.
JASON HARTMAN: Well, well, Steve I, I am curious. Can you tell me why the US government spent $2.6 million to train prostitutes to train Chinese prostitutes’ mind you, not just US prostitutes, to train Chinese hookers to drink more responsibly [LAUGHING]
STEVE: [LAUGHING] Well, maybe to be able to get them out of the embassy –in a more orderly way, I guess, I don’t know.
JASON HARTMAN: Oh, You mean, if they are too drugged, yeah [LAUGHING] God.
STEVE: That’ the only possible way that I agree with it but this, this pretty insane are –
JASON HARTMAN: Folks, this, this, what we are talking about here is an example of
intermediary party risk again because that’s what the government is, they’re the intermediary. When you are investing “by paying taxes to the government,” you are trusting the general partner to use your money wisely, that’s exactly commandment number three, thou shalt maintain control, you have no control over where your taxes go, and here are some great examples of that.
STEVE: Yup, yup let’s see what the general partner did. We picked a few of them here, this is 60 different things that are for entire [INDISCERNIBLE] over zero hedge has come up with ah, for us.
JASON HARTMAN: Yeah, actually 66.
STEVE: Okay. Number 5, this is a good one to start with. The National Science Foundation has given $384,949 to Yale University to do a study on “Sexual Conflict, Social Behavior, and the Evolution of Waterfowl genitalia,” try not to laugh but much of this research involves examining and measuring reproductive organs of male ducks.
JASON HARTMAN: Well there you go, I’m glad my, I just sent the IRS a bunch of money now, I know, what they are going to be using it for. Wonderful.
STEVE: Yeah, well there are also, the US government is giving 16, F-16 and 200 Abrams tanks to the Muslim brotherhood in Egypt even though the new president of Egypt, Mohammed Morsi constantly makes statements such as the following: Dear Brothers, we must not forget to nurse our children and grandchildren on hatred towards those Zionists and Jews, and all those who support them.
JASON HARTMAN: Unbelievable.
STEVE: [LAUGHING], I know this is crazy. Heavy topic for today.
JASON HARTMAN: Yeah, really just disgusting, you know.
STEVE: Yeah, here’s a good one.
JASON HARTMAN: Give me a couple more examples here.
STEVE: During 2012, $25,000 of federal money was spent on a promotional tour for the Alabama Watermelon Queen.
JASON HARTMAN: Well, the Alabama now that one is actually worthwhile, right. The Alabama Watermelon Queen deserves it.
STEVE: It is by far in a way the most worthwhile of what I’ve read so far.
JASON HARTMAN: So far you might be right [LAUGHING].
JASON HARTMAN: Yeah. [LAUGHING]
STEVE: [LAUGHING]. It is not even a contest.
JASON HARTMAN: Oh my God, unbelievable.
JASON HARTMAN: Okay, alright, keep going.
STEVE: The US Government spent $500 and $5000 to promote specialty hair and beauty products for cats and dogs in 2012.
JASON HARTMAN. Oh, so oh, so I can get some specialty beauty products for my dog, Coco huh.?
STEVE: That’s what I was going to say, did you see any of that? Cash [INDISCERNIBLE]
JASON HARTMAN: No but when I said that she just looked over at me, you know.
STEVE: [LAUGHING]. There’s going to be some kind of form online, you can fill out and a check will just show up.
JASON HARTMAN: Yeah, you know it’s amazing, right. I’m sure the form will take you three days, you will have to hire a grant writer to help you fill it out to get your government aid for your dog’s beauty products.
STEVE: Yeah, it will be an absolute train wreck to fill out that form, I don’t think it is going to be worth your time. [LAUGHING]
JASON HARTMAN: Unbelievable, I just, just, this is insane. Okay, we got anymore?
STEVE: I got two more. The, I’m sorry with the pirate I have to kind of squint here, maybe they’ll spend something on pirate eyes but okay, #21, the US Government is spending approximately 3.6 million dollars a year to support the lavish lifestyles of former presidents such as George W. Bush and Bill Clinton. [INDISCERNIBLE] there for everybody, it goes both sides of the aisle on that one.
JASON HARTMAN: Hey, look at this one Steve, the federal government recently spent $484,000 to help build a Mellow Mushroom pizzeria in Arlington, Texas.
JASON HARTMAN: Now, what business does the government have building a restaurant?
STEVE: Uh they think they have business in everything, that’s, that’s completely insane.
JASON HARTMAN: Unbelievable. Unbelievable, oh, well, well, here’s one, we started off with, with the oldest profession in this discussion, right, prostitution –
JASON HARTMAN: Number 57, the National Institutes of Health once gave researchers $442,340 to study to behavior of male prostitutes in Vietnam.
JASON HARTMAN: I mean, you know, folks, this is so absurd like I understand that not that I even agree with it but I understand there is some, you can make a case that the government needs to spend money to study social problems, right?
JASON HARTMAN: But for God sake at least make them US social problems, I mean why are we, why we are doing this in Vietnam, we got our own problems at home.
STEVE: Yeah. At least send us the results of the study, I mean, let’s us know what you found out about the male prostitutes. [LAUGHING]
JASON HARTMAN: In Vietnam.
STEVE: [LAUGHING]. Yeah, right. [LAUGHING].
JASON HARTMAN: [LAUGHING]. Unbelievable. Okay.
JASON HARTMAN: I mean on the government, the politicians there are the biggest prostitutes of all [LAUGHING].
STEVE: [LAUGHING]. Oh man. This is one that’s everybody’s money is nobody’s money, I mean they’re really and, and when you hear about the, the deficit, this makes your head explode, I’ve got our closer here, are you ready?
JASON HARTMAN: Yeah, go for it.
STEVE: Okay, $10,000 of US taxpayer money was actually used to purchase talking urinal cakes in Michigan.
JASON HARTMAN: [LAUGHING], Look at that one #26 [LAUGHING] so they talk as the guys, they’re doing his business in the bathroom, I guess this urinal cake.
JASON HARTMAN: Not just deodorizes but talks.
STEVE: They’re, they’re pulling out all the stops to make Michigan a more attractive place to live. You, you just need some company while you’re at the urinal, I guess?
JASON HARTMAN: Steve, doesn’t this just back up the point that I just mentioned about intermediary party risk?
STEVE: Yeah, yeah.
JASON HARTMAN: When, when you’re, this – Paying taxes to the government is a violation of Commandment number three, thou shalt maintain control because, what are the three problems, right? You might be investing with the crook [LAUGHING] wow. Certainly, we can argue there’s a lot of crooks in government, right? You might be investing with an idiot. Certainly, there’s a lot of stupid people in government and assuming they’re honest, assuming they’re competent, they take a huge management fee off the top for managing the deal. In other words, they waste your money, right? And, and look at, look at the IRS and all the fire they’re coming under right now, for, for the money that they had spent on the most ridiculous things, not only of course is Obama having them target political groups that disagree with him like tea party groups and so forth but the way they’ve spent that money, I mean, everybody saw the news, you know, about the parties the IRS has had. It’s just, it’s just unbelievable.
STEVE: I saw on the news last night. Usually, when I see a congressman holding a hearing and asking somebody questions, I just roll my eyes and change the channel to the Food Network or something more interesting [LAUGHING] because it’s, it’s almost always grandstanding, you know, I remember when they, a bunch of congressmen dragged Mark McGuire and some major league baseball players to Capital Hill to ask him about steroid use in baseball and I, I just couldn’t get over the fact that congress cares.
JASON HARTMAN: You know what, I never understood that either like, I, I mean, I’m not much of a sports follower but that blew my mind. I mean, you’re, you’re a total sports fan. What, what does congress have to do with steroids and baseball?
STEVE: That’s, – It has nothing to do with it. That’s why we have a local police department.
JASON HARTMAN: Yeah, I mean, does, do the police even have anything to, I mean, I guess they’re really illegal, okay, like drugs are but –
STEVE: Yes. So, the local drug task force would go arrest Mark McGuire. That’s how we do this but it, it’s just – they think that I, I get – It doesn’t really say much about what they think about the voters because they’re trying to get TV time to say “Look, I care about an issue that’s supposedly important to America that – ” last night, I, I saw a clip of Paul Ryan, the former VP candidate, and he was taking this interim IRS commissioner because the other one resigned but he was taking this guy to the woodshed and I was loving every second of it because they were asking for billion dollars to hire more agents and he is saying “You, you have the nerve to come in here and ask the American people for money when we’re hearing about all thess lavish parties and you want more agents?” and, and he made a point. It just resonated with me, said, “This is people’s pay checks. They go to work. They work hard and they get paid and there is a big chunk taken out of there that they don’t get and to give you one red cent extra of that is absolutely insulting.” I was actually clapping and my wife said “What game is on?” I said “Oh, it’s just congress, you know.” [LAUGHING]
JASON HARTMENT: [LAUGHING]
STEVE: Me hating the IRS.
JASON HARTMAN: Well, they’re all trying to, like make themselves look like they’re actually doing something important and, I don’t know how many employees the federal government has but whatever it is, I bet you could cut the size of government and I kid you not, by 10% per year for the next seven or eight years and the whole country would transform into this far more prosperous place where people would feel better about themselves, people would be better taken care of, people would become productive members of society that aren’t now. My mother – it’s kind of odd that I, I have these kind of beliefs because, you know, my mother graduated from Berkeley, you know, very liberal school in the 60s.
JASON HARTMAN: A very liberal time and she got a degree in social welfare and she, she quit after doing that for a year and went to work for the Muscular Dystrophy Association and then the Leukemia Society and then finally got into business and that’s when she made a lot of money but, but you know, she did all those jobs all these years and she said I just couldn’t be a social worker because I had to go to people’s homes and look at their situation and dole out government aid to them and I saw that as I would give them aid and go and do followup meetings and check back up on them, it may them worse. They got weaker. They, their life was worse with the government aid and I’m not saying this is true in all cases. Certainly, there are legitimate people that need legitimate aid and a prosperous society should help those people. There is no question in my mind about that but, you know, now, we just got like everybody is milking the system. These people are all on “disability” which is massive amounts of fraud. There are massive amounts of Medicare fraud going on, I mean, it’s just, it’s just become ridiculous.
STEVE: It is, you talked about that with George Guilder a few episodes ago and, you know, how so much of people’s time is, is spent on gaming the system and filling out forms –
JASON HARTMAN: Right.
STEVE: And doing nonproductive activities when the power of the human mind is, is very. It, it’s amazing and, and you’re just putting all of that human capital on the sideline –
JASON HARTMAN: Yeah.
STEVE: When, when it could be doing things that are so much more productive and how much of the economy and how much per population has to service this totally unproductive sectors.
JASON HARTMAN: And Steve, it’s, yeah, you are absolutely right, I mean, I, I remember when I was in Romania about five years ago or maybe four years ago, four to five, probably five years ago. I, I did an Eastern European tour. I went to five eastern European countries. I looked at real estate in all of them and by the way, I got another European trip coming up. We should talk about that and my plans –
JASON HARTMAN: To look at real estate there, but I remember I was with this one guide in Romania and she was a very interesting lady and she was a, she was a journalist like for the government news agency. I, I mean Romania was part of the Soviet Union but I don’t know, I don’t think she worked for the news agency. That was like the Soviet Agency . I guess the, the other former countries that were part of that union have their own news agency, I don’t know how they work but, but anyway, she was, had like a prestigious job because when you were working for the news agency, you were like a prestiguous person, right? And, and she told me about how when, when they would hear about a story getting a shipment of shoes, they would line up to get shoes and they would stand in line for like 36 hours, a day and a half. They would wait in line to get shoes and by the time they got to the front of the line where they got to actually get the shoes, they were all out of their size. So they just took any shoes they had, right? And said I’ll just take this even if they’re not my size and then –
JASON HARTMAN: And they will try them and trade them with people for the shoes that are their size. I mean look at all that productive time spent just completely wasted doing a totally unproductive thing when that’s what happens government gets involved. They just, it just diverts attention away from the main thing as Stephen Covey says in the “7 Habits Of Highly Effective People,” the main thing is to keep the main thing the main thing.
STEVE: [LAUGHING] Yeah.
JASON HARTMAN: And, and, and you know the government is, always distracts you from the main thing, granted we need a little bit of it otherwise we have anarchy and that’s no fun. I don’t want to live in Somalia anytime soon, anarchy is no good. We need the state. We need government but it needs to stay in its proper role and that’s what so important, but hey, we’ve heard of this enough. I have a feeling the listeners will be a little tired of this so. [LAUGHING]
STEVE: Yeah, we, we do that a lot but uh, we, we have other topics we wanted to –
JASON HARTMAN: We do have other topics.
JASON HARTMAN: Hey, let’s go, let’s go, um, lets hear from Mr. Rick Edelman for a minute here, okay? And then lets talk about a couple of properties because I’ve talked about the 10 great reasons there, you know I guess it’s 11 great reasons. Maybe he added one, the [Indiscernible] [0:37:55] that you never pay it often and so I found this, this video recently on YouTube and I think it’s just being something worth commenting on and then lets tied it in with these properties we’re gonna talk about, Okay?
JASON HARTMAN: All right, here we go.
RIC EDELMAN: We’re talking about the 11 reasons to carry a big long mortgage. Reason #10. Mortgage just gives you a greater liquidity and flexibility. To help you understand this, let’s pretend that you and your neighbor are both find a $250,000 house. You each make 75 grand a year and you each have 50 grand in savings. The neighbor hates mortgages. He takes out the 15-year loan with the fixed interest rate 6.75. He uses this 15 grand as a down payment and then he sends in an extra $100 a month to pay that [Indiscernible] [0:38:34] more. Unlike your neighbor, you know that mortgages are a great tool. So you take out a $237,500 loan, turning your fixed rate mortgage at 7%. You invest the difference. You never make extra payments. Compared to you, the neighbor has smaller mortgage, shorter mortgage, a lower interest rate, he’s adding money to every payment. You got a smaller payment though, 1600 bucks, most of which is interest. Assuming you are in the 25% tax bracket, that means your payment cost you $1200 a month. The neighbor pays almost $1800 a month but less of it deducted. His actual tax cost is $1500 and this is where your smart come through. Every month, you pay $300 less than your neighbor. You invest that much instead of sending the money to a lender with an extra $100 a month, you invest that too and after five years, let’s say that you both lose your jobs, uh, your neighbor has a big problem. Even though he owes less on his mortgage balance, he doesn’t have any money in cash reserves to help him make his current payment but you don’t have that problem. With the money you invested every month and the money you invested instead of spending it on the down payment, you’ve got a nice edge over that 80 grand, assuming your hypothetically great percent of return on your investments. You can afford to make your mortgage payment for a year even without a job. It doesn’t matter if you owe more on the total mortgage balance. When you keep control over access to your money, you maintain liquidity. When you give your money to your lender, you lose control. If you give your money to your lender, the only way to get the money back is to sell the house, and nobody would let you refinance, you are unemployed with no assets, so stop listening to those who pretend that the only thing that matters is paying off the mortgage. Life is more complicated than that but realizing this, you see that trying to pay off the mortgage is actually the worst thing to do. So, instead, a smarter, safer approach is to carry a big long mortgage, that’s the difference and don’t bother trying to be in a hurry to pay it off.
JASON HARTMAN: Great advice Ric, that’s Ric Edelman. He has been on the show before and you should go back and listen to my episode with him. Remember you can always use the Google search for it, jasonhartman.com and you can just find anything real fast that way. The show, the transcript, whatever. Great tool there, but Steve, Ric Edelman was back on episode 186 by the way. I just looked it up and what do you think about that, I mean, isn’t it, isn’t he just so right? It’s better to keep control of the money.
STEVE: He is and it’s so counterintuitive to, to, you know, what we’re taught, you know, listen to Suze Orman or Dave Ramsey. Who Dave Ramsey, actually recommends Ric Edelman a lot but that’s a big fundamental difference that the two of them have –
JASON HARTMAN: Oh sure.
STEVE: In belief. You know, they want the 15-year mortgage with it. You know, Ric’s point is that you’re giving that money away as fast as you can to somebody else. What happens if you need it later?
JASON HARTMAN: Yeah, exactly.
JASON HARTMAN: Now, you, you, ah like, I would like, I always like to say I guess my commandment number 3 applies to this concept as well, thou shalt maintain control. When you put the money all in the property, you lose control of it to some extent, whereas if you keep it outside of the property, you regain control of it and I always like to say income property is, in my opinion, obviously the very best investment. It just blows the, socks off of anything else, okay? Income property is the best investment but it’s a mediocre bank, it’s not a very good bank.
JASON HARTMAN: Yeah, yeah. It’s okay as a bank, you know like, it even makes sense to buy these properties with cash. It’s just not as good. I mean if you have to buy more cash, look I’ve been buying properties with cash, I don’t like it but it’s still better than anything else I can do with that money. Even better than loaning the money on a hard money loan. As long as I’m willing to deal with these management issues that are minor that most people think are of a big deal. I, I just don’t see them as any big deal. Respond to an email that took me 32 seconds.
STEVE: What a hassle.
JASON HARTMAN: You know, that’s such a hassle, oh my God. [LAUGHING] but it’s just not that difficult. So, any other thoughts on that than leverage?
STEVE: No, no, we beat that drum pretty consistently. I think everybody that listens to us agrees with that, that’s why they’re kind of listening to us. [LAUGHING].
JASON HARTMAN: Hey Steve, what’s the temperature there in Utah?
STEVE: Oh, I think we’re about 100 right now.
JASON HARTMAN: Well, it is supposed to be 118 in Phoenix today. Oh my gosh. It’s that mind boggling so I looked it up and I, I wanted to know the highest temperature ever occurred on earth. I wondered if any of our listeners know this, the highest temperature recorded on earth, ever, 134 degrees. [LAUGHING] Wow.
JASON HARTMAN: And guess what the place is called Steve. You’re going to love this.
STEVE: What’s it called?
JASON HARTMAN: Furnace Creek Ranch in Death Valley, California.
STEVE: [LAUGHING] Furnace Creek Ranch [LAUGHING]. You don’t even need a grill there. You could just smoke a rack of ribs right out in the middle of nowhere.
JASON HARTMAN: You’re kidding, you got 134 degrees, that is pretty normal and today they said Death Valley, that same place, will be 129. So, there is a heat wave. No question about it.
STEVE: Yeah, it’s a 100 here in Utah, that’s pretty hot. We’ll, we’ll hit 100s usually in late July or early August. It’s not too common that we hit them right now. It’s hot.
JASON HARTMAN: Yeah, yeah. It’s, it’s so sticky, but hey, talk to us about a couple of these properties that you wanted to talk about because we’ve got to get to our caller.
STEVE: Yeah, let’s, let’s talk about a couple of properties where it gets, it gets hot as well and it’s humid, so that adds, you know, 5 to 10 degrees. One of those being Indianapolis and we haven’t talked about it indeed for a while on the show.
JASON HARTMAN: That’s the place I met you, well, no, I met you there the second time and you used to be a local market specialist in Indianapolis when you lived there.
STEVE: That’s correct. Yeah, I lived out there, so I know the market pretty well in Indianapolis and we’ve had a hard tough time getting newer what I called Tier 1 properties, stuff built in the late 80’s, 90’s, 2000’s, you know, just because of what I talked about earlier, a couple of funds are buying all of them. They are way overpaying, but our local market specialist there does pick one off from time to time and they’re just great steady ATM cash flow machines and this one is built in 1989 and it’s three bed, two bath, it’s a $97,000 purchase price and just a couple of highlights, it rents for 1100 bucks a month. So, we’re a little bit above the 1% RV ratio, ever so slightly which is common on Tier 1 in Indianapolis right now and our cash on cash return is 11% and our total return is 42%. This is on a newer property.
JASON HARTMAN: Right, right. Now, we, we’ve got to say, also this obviously, these are all projections on the pro forma.
STEVE: That’s correct.
JASON HARTMAN: But the property is not pre-rented, right?
STEVE: This one is not pre-rented. I –
JASON HARTMAN: That’s, that’s why I want to make that clear because it is not rented for –
JASON HARTMAN: $1100 a month, yet but we’re, we’re really pretty good at these projections. You know one of our local market specialist to?
STEVE: Yeah, we have to go low on the rent here and try to put the lower end to the scale and it’s summertime. It is not hard to get a good solid rental amount as, you know, it is when most people are moving so this is a projection but it could end up being better, maybe they get 50 bucks more or something, maybe they get a multi-year tenant so –
JASON HARTMAN: And have no vacancy even though you have got one month for your vacancy projected in here.
STEVE: Yeah. That’s, that’s exactly right. You know, we’ve also got leasing on advertising fees built in to this pro forma so I think it is conservative and plus we have it at a 5 percent interest rate and you know, taking into account the recent bump in interest rates, so –
JASON HARTMAN: Right, right.
STEVE: So it is a conservative, sturdy profit either that will perform for you very well on the west side of Indianapolis in what are called Townships schools. Those were the schools that are more desirable for tenants so we yeah, we really like this one.
JASON HARTMAN: Okay, so the overall cash flow is projected at $2300.26 per year and that will provide a debt coverage ratio and we talked about that on the, a lot of the metrics on the members’ only conference call just a couple a days ago but that, that coverage ratio is 1.4 percent, if you put 20 percent down and qualify for that loan and the total cash on cash return is that 11 percent annually, so remember the property could drop in value though still might be 11 percent as long as you maintain the income and expense ratio and the overall return on investment, Steve, what is that number looking like?
STEVE: 42 percent.
JASON HARTMAN: [LAUGHING] You can’t beat that with a stick. [LAUGHING] You know that’s a phenomenal deal.
STEVE: We have very conservative assumptions in this pro forma, you know with maintenance and you know, management fees, vacancy rates it’s all in there. I mean we are not pulling these numbers out of the hat. This is, this is what you get in Indianapolis. That’s why we love it, that’s why we’ve been there for so long.
JASON HARTMAN: And like I always say, I won’t say it today because you’re getting sick of me. So I think you know, the old Jason Hartman saying even if that only goes half as well as projected [LAUGHING]
JASON HARTMAN: In this case, you get 22 percent, or 21 percent sorry, 21 percent annually but let’s say it only goes 1/4 as well as projected. You will get 10-1/2 percent annually with only 1/4 as well as you project. [LAUGHING]
STEVE: In this day, our property is going to march alone, it will likely appreciate within a couple of points of inflation, involve the, the BS inflation of the government plus the CPI. [LAUGHING], so it, it, it will just march right along, if the economy’s doing badly, if it is doing great. This thing is just a consistent performer. If you are not an investor who is very, doesn’t, if you don’t like volatility, you will like this investment. It is just very steady.
JASON HARTMAN: There is a lot to like in these linear markets like Indianapolis that are just these sort of, I call them kind like work horse markets. They just chug along and do their thing and churn out returns. It is like a long distance, you know cross country runner who can run long distances at 26.2-mile marathon for example, right versus a sprinter who runs a 100-yard dash and that is spectacular, that’s the person that cannot win that race as easily or have an accident because the running is so quickly. It is just a risky deal. We like this long distance runner type thing. Life is a marathon, not a sprint, who cares how much money you make in the next three months? What I care about is what is your return on investment going to be consistently every year, year in, year out and that’s the key. Okay. What is the other property, Steve?
STEVE: So we have another work horse market in Memphis.
JASON HARTMAN: Memphis, Tennessee.
STEVE: Yep, Memphis, Tennessee. I’d like to call Memphis land of the Tear, too.
JASON HARTMAN: I’d like to call Elvis but okay, go ahead.
STEVE: Yeah, you do.
JASON HARTMAN: Elvis Presley, Grace land.
STEVE: I know. Yeah [LAUGHING]. Well the Memphis market, you know, it turns out a lot of these properties were built in the late 60s through the early 80s, you know and I call those year [INDISCERNIBLE] they rent for the mid-800 to low 900. There is just a very consistent cheap property right there in a sweet spot. This one is very inexpensive – $68,500. I love this property, $825 a month rental amount. Right and you get your debt coverage ratio on this thing, that is 1.8 and your capitalization rate is 8.8. You know, we’ve talked about. That’s the cash measurement 8.8. If your cash on cash return with financing is, is at 15 percent, so we really like this property. It is going to be a very good return for you. Off of that, let’s see, your initial cash out of pocket is going to be about 17,000 to 18000 dollars and after that, you are making 222 dollars a month positive cash flow or 2700 a year.
JASON HARTMAN: Phenomenal. That’s just, that’s just phenomenal. So what is the overall return on investment there?
STEVE: 44 percent.
JASON HARTMAN: Projected it, 44 percent annually, if it only goes half as well you got 22 percent annually.
STEVE: Well, and I don’t know if it is necessarily projected. This one is already rented.
JASON HARTMAN: Oh, yeah, well, that is a good point. Yeah. As long as that tenant pays for that entire first year and everything goes as planned, and you know what does not to go as planned? There is some assumption for vacancy in there and maintenance and so forth, so you could, you can have a few problems –
JASON HARTMAN: And still come out with that same return.
STEVE: Yeah, the tenant leaves early or damages something, you get the security deposit that adsorbs much of the turn-over cost associated with it, you know but the point is, at this high, it has to go really, really far sideways for you to not win on this deal.
JASON HARTMAN: That’s for sure. Well, good stop, well, hey thanks for coming on and talking about this stuff, Steve, let’s get to our caller, we don’t have a guest for today show but let me tell you folks, we have gotten some phenomenal shows coming up. Let me just tell you some of those. We’ve got Jerome Corsi coming up. We’ve got senator, Byron Dorgan, Democrat Senator from North Dakota, I did that interview yesterday, James Altucher, the hedge fund guy who has written several books, really, really fascinating, you’ll love what he has to say, Robert Greene who you may have heard of, he is going to be show #330 and he has written several books, ones called The 48 Laws of Power. He wrote The 50th Law with the Rapper 50 cent recently, that was his latest book and then he wrote Seduction which is fascinate –
STEVE: The Art of Seduction.
JASON HARTMAN: The Art of Seduction, the fascinating book –
STEVE: Which I don’t read because I have an eye patch but we’re grateful that he wrote it anyway.
JASON HARTMAN: Oh I thought you are going to say because you have a wife [LAUGHING].
JASON HARTMAN: [LAUGHING] but I guess that eye patch is a new sexy thing, right, and was everything.
STEVE: Oh, yeah, you’re telling me.
JASON HARTMAN: Alright, got it. So Robert Greene, his books are fascinating because they are like, they got so much historical perspective, I’ve always loved his, his writing, it’s rather long, you know, his books are long and medium, they got a lot of content in them but it’s great so you will be #330. Meredith Whitney will be #331, you know, she was the one that basically called the banking crisis. Les Leopold will be back on the show, he talked about The Looting of America, all about 200 episodes ago, he was on, so we have him back to talk about hedge funds and some of the interesting stuff, you’ve learned about that.
STEVE: How did it spend looted by the hedge funds.
JASON HARTMAN: Yeah [LAUGHING].
STEVE: That’s the comment.
JASON HARTMAN: Here I go, well, maybe that is the followup.
STEVE: Yeah, [LAUGHING].
JASON HARTMAN: #333 Al Goldstein, un #334 Michael Kitces, #335 Katherine McBean will be on, and #336 Douglas Brunt who wrote the Ghosts of Manhattan, a really interesting book about the Wall Street and the economy. So a lot of great stuff coming up of course that’s all a little bit subject to change, once in a while we change the order a little bit but we’ve got all these shows coming up in case they don’t follow that exact order. Hey Steve, let’s go to our caller, okay.
STEVE: Let’s do it.
JASON HARTMAN: Be sure to call into The Creating Wealth Show and get your real estate investing and economics questions answered by me personally. We’d love to have you call in, share your experiences, ask your questions, and a lot of other people listening have those very same questions. So be a participant in the show at 480-788-7823 that’s 480-788-7823 or anywhere in the world via skype jasonhartmanROI, that’s jasonhartmanROI for return on investment. Be sure to call into the show and we are going to enter all of the callers in a draw-in for some nice prizes as well, so be sure to call in to the show and I’ll look forward to talking with you soon.
JASON HARTMAN: We have a caller with a question and that is Rachel from Los Angeles, my hometown where I grew up, how are you, Rachel?
RACHEL: I’m very well, how about yourself?
JASON HARTMAN. Well, good, good. Thanks for agreeing to come on the show, I know you were little reluctant, so [LAUGHING] let’s make it easy.
RACHEL: Little nervous.
JASON HARTMAN: Oh, don’t be nervous, it’s no big deal. Hardly anybody listens to this show anyway, just kidding [LAUGHING].
RACHEL: That’s not [LAUGHING].
JASON HARTMAN: What is your question?
RACHEL: So I’m using your website and I happened to found it just looking, Googling, and, and finding it and I found you about three weeks ago and since then, I’ve been listening to podcasts, almost, almost through all of them.
JASON HARTMAN: In three weeks, that’s fantastic. We are going to give you a free T-shirt [LAUGHING].
RACHEL: Otherwise, [INDISCERNIBLE].
JASON HARTMAN: Yeah, here you go, okay.
RACHEL: I’ve been to Atlanta and I had been to Missouri and I am also going to upcoming [INDISCERNIBLE] Memphis.
JASON HARTMAN: Oh fantastic.
RACHEL: And I’ve been running numbers in Atlanta, the Missouri properties, the Indianapolis properties and what I’m coming across is a lot of properties that give a cash on cash return of 5% to 6% and I said myself I wanted to find an 8% to 10% to start.
JASON HARTMAN: Yeah.
RACHEL: And I run my numbers pretty conservatively, likely more so than your pro formas, add 5% for taxes each year because I just, I see them going up and [INDISCERNIBLE] so they go up and I add a little bit more padding for maintenance and management and uh, I’ve been in real estate since I was 21. I bought myself a house at 21 so I just, I’ve seen the ups and downs of real estate. Now, I stay a little more on the safe side.
JASON HARTMAN: Okay. Fantastic.
RACHEL: So, –
JASON HARTMAN: So, that’s why, that’s why your cash, the cash-on-cash return numbers you’re coming up with are actually lower than ours. Now, most people, Rachel, say our pro formas are pretty conservative and they, I know they are compared to our competitors but you’re being even more conservative than ours and putting some higher expenses in there so that’s, that’s reducing your returns on all accounts, whether it be cash on cash, cap rate, overall return, etc. so, okay, good.
RACHEL: Slightly, but so, what I’m looking at is, is when I go to do the, the number even just the numbers that, for example, that, that one of the market, market specialist will give me, they’re still coming out below 8% and I’m looking at it while adding of course the loan cost and all that which are pretty expensive with some of the lenders and it, it’s just coming out but to 6%. What I’m trying to find out is, is, is that a good deal? Would you consider that to be a good deal? Would you go for it?
JASON HARTMAN: You mean a 5 or 6% cash on cash return?
JASON HARTMAN: Well, it depends what you’re comparing it to. Yes, I probably would; however, I think the returns will be better than that but you’re making the, the pro forma more conservative than ours so, you know, I guess you would have to just look at it, what are you comparing it with? And the other thing you need to remember is you’ve been in real estate a while so you understand it and cash on cash does not include any tax benefits or any appreciation or depreciation for that matter but I, I think we probably all agree that based on what’s going on right now, at least in nominal dollars, we’re going to see appreciation, I mean, that’s certainly the, the broad, broad feeling in the market place. The prices are going up. So, –
JASON HARTMAN: If you add some appreciation to that and you look at an overall return, even if you make the numbers a lot more conservative than ours by increasing taxes, lowering rents, increasing maintenance, whatever it is you want to do then if you look at the overall return, I mean, you’ll still be above probably 20% on, on pretty much anything that we have to offer and by the way, are you, when you’re doing this, are you doing it in the Property Tracker software, do you subscribe to that?
RACHEL: I, I do have the property checker software or the evaluator, the app, the property evaluator.
JASON HARTMAN: Right.
RACHEL: I’m not a big fan of it, I have to say because it, it won’t let you customize certain things but, but I do use that and I also run my numbers on pen and paper old school way.
JASON HARTMAN: Woah. You are really, not even excel, you’re really old school you are using pen and paper. I don’t, honestly Rachel, I don’t use the apps much myself either. I just like the website version and true also, it’s $19.95 a month. We don’t make a penny off it, you know, we don’t own that company. It’s just a client of ours invented it. We just like the software but the web-based version, I think, gives you a little more latitude for playing around with it and, and I’ve always just used the web version over the apps so, you know, you might check that out if you want a little more latitude in customization.
JASON HARTMAN: But, but, yeah.
JASON HARTMAN: So, you’re, you’re crunching the numbers, and it’s really good to be able to do that because that’s what I say to investors to look. You can try Property Tracker for a month for free and if you don’t like it, just don’t renew it. There’s no contract or anything like that and go in and play with the numbers. What you’re doing is excellent, excellent experience because then you can start to, to just kind of comprehend how all these numbers interplay with each other, I mean, what does it mean if your rent is $50 less per month? What does that do to your return on investment? What does it mean if, if your, your rent is lower, your maintenance is higher, your taxes are higher, your insurance is higher, everything is worse than you thought but the appreciation rate is pretty good. What does that do and, and that’s by crunching the numbers yourself rather than just looking at the static pro forma on our website, I think, I think it’s a really good experience for people. I’m, I’m, glad that we’re talking about that on the show because a lot of people listening need to hear that. I highly recommend doing what you’re doing. So, is, is, is that cash on cash return good enough? I mean, it, it’s probably better than pretty much anything else you’re gonna do but it’s not great.
RACHEL: Okay. So, so, in addition to that, now, I’m gonna use Atlanta as the market that I’m talking about for now because this is the market that kind of brought this up for me.
JASON HARTMAN: Sure.
RACHEL: So, so I went down there and I met with one of your market specialists and we went out and we looked at the properties and I saw, you know, the property did have the higher return, the 8 or 9% are really kind of scary neighborhoods for me and I, I don’t really want to invest there because I don’t ever want have to go there or have any, that’s the problems that go with this low-end property and the higher-end ones with the, the 5 to 6% but the issue that I also came across is that when I looked at the values on Zillow and other um, websites, such as Zillow, they came out to be half of what I’d been purchased for. And I used mint.com to track my net worth but I would like to see that when I put money out there, I have incidentally gathered than losing the money. And also, it’s, it’s a paper loss and, and it’s not, it’s not real loss but it’s just something that I track and then I, I like to see when I am investing in something.
JASON HARTMAN: Sure.
RACHEL: I’m used to it and something and then having the, ah, the amount that I invest double where I, where I currently invest, so that it is hard to, to take that step. So, I think that if it wasn’t that way in terms of the, the money I invest going down as well as the low return on it, as well as cash on cash return, it would be a different story but what do you, what do you recommend about that?
JASON HARTMAN: Well, okay. So first of all, your first observation is absolutely right, when you go to lower quality [INDISCERNIBLE] or C and D class properties, the return is generally higher. We don’t do a lot of those, but that generally gives you a higher return. When you go to higher end, nicer properties, your returns generally are lower, I mean, that’s, that’s really pretty much anywhere, because the nicer properties are just, the, the rent is, elasticity isn’t as good. The numbers are never as good on a nicer property as they are on a cheaper property in a crummier neighborhood. So that’s the first thing. The second thing is Zillow and Trulia are great resources. They are certainly better than nothing but they are way off a lot of times and what you’ve got a, really look at is, how close are you looking to that property? Are you looking at recent sales, road sales, or foreclosures? Were they rehab? Were they not? Generally speaking, and I, we’ve been very open about this, I’m sure you’ve heard and since you’ve listen to so many episodes, are rehabbers generally will make about 8 to maybe 14,000 dollars per house when they resell it to the final investor and so, you’re, they’re making some profit along the way, I mean there is no question about it to give a turn-key property and provide service, they are making money and that, that’s just the way it is going to be. If you were going to buy the property just foreclosure and you were going to take the risk of doing that, but you might get a lemon if you were going to manage the rehab and do the whole thing, you could make that money but the problem is you could never do it unless you were in the business, in the market, had a construction crew, had all the connections, knew how to source all of the, the improvement products and the labor extensively and properly, you could never do it under a one off-deal. You just couldn’t. So they’re making a margin for that and so when you see that and you look on a website like Zillow or Trulia, you know a lot of those properties are not rehab. There are special circumstances, I mean, you just got to really like, all I am saying is you need to look deeply into the comps and sometimes, also if it’s one or two blocks away, it’s a totally different neighborhood and a totally different story, okay, that’s the –
JASON HARTMAN: Other thing.
RACHEL: So, okay, ah, which one of your markets that you currently have up on your website would you recommend where I could buy with that higher cash on cash return and what’s the higher point at having some equity when I purchase a property?
JASON HARTMAN: Well, I, I mean, those, those markets are generally markets like Memphis, St. Louis, and Indianapolis. Those have the higher returns generally but the properties and, and, and the cities themselves don’t have a good prospect for appreciation. Because in Atlanta, Atlanta is like a flagship city. Atlanta, Dallas, Houston, these are leading flagship cities, I mean you go around the world and you say that city name and people know what it is. Memphis, it is more industrial, yes there is Graceland, where Elvis Presley is from but [LAUGHING] you know, that’s kind of fading from memory now, that’s a little bit old. And St. Louis, you know, it’s not a, it’s not a flagship city. It’s just, you’re just not going to get the returns in those, in those better cities and better neighborhoods within those cities. There are going to be lower returns but the way you might make it up, maybe you will make it up a lot more, it might, it may ultimately work out to be a far better investment over the course of 3, 5, or 7 or 10 years. Nobody knows for sure because the appreciation may be a lot better. Those are cities that have a lot better prospect for appreciation than do these cities with the higher cash flow. So the concept is you want a number 1, know what kind of investor you are, Rachel, are you an investor who is a you know, a cash flow investor that is simply like you would be the first –
JASON HARTMAN: Who would want a dividend paying stock or are you, do you use a stock market analogy, although you know, I hate the stock market, [LAUGHING] okay. But do you want a growth stock. Are you a capital appreciation type investor? Do you want the old Apple high-flying stock or are you going to stick with the, the old fashioned that I don’t even know the example in the stock market but maybe AT&T, that just spins off dividends when they do that and it is more of like a cash flow stock, but there are not big gains to be made and I don’t even know if that is a proper example, the AT&T but you get the idea. And, and you know, what I say for most people is, be a little bit of both, diversify your portfolio and have a couple eggs in the cash flow baskets and don’t expect those to appreciate real well, and then have a couple of eggs in or they have decent cash flow but they have a really good prospect for appreciation and if you wanted to go all the way to the extreme and be a complete speculator, you would be investing in a market, you know, like where you live, Los Angeles, where when, when the prices go up in California, generally speaking, because that is a very cyclical market, they go up a lot but the cash flow will stink all the way while you’re waiting for that to happen and you may become insolvent waiting like a lot of people did. [LAUGHING]
RACHEL: Yes, Mr. Hartman.
JASON HARTMAN: Does that make sense?
RACHEL: Yes, yes, they do. And, and I definitely think there will be cash flow investor and [INDISCERNIBLE] making money today [INDISCERNIBLE] rather than waiting and waiting and waiting and waiting to see some appreciation that you know might never happen.
JASON HARTMAN: Right, right. Eh, eh, appreciation is a speculative thing. I was talking with Doug whom we’ve had on the show a couple of times and at the last Meet the Masters in ah, Orange County, California, in January. I, I was saying, Doug, now that the market is changing, we’ve really got to work on a way that we can help investors who really want to take a little more risk or maybe a lot more risk frankly. And invest for appreciation for big capital gains. As I’ve done to some extent over the years in California and he just turns to me with this funny expression and goes “Jason, I’m not that good.” [LAUGHING] And what he was saying there and I agree with it is you, you just, you got to be lucky. Nobody can predict appreciation with any real degree of reliability. That is the problem.
JASON HARTMAN: So investing for cash flow is a very conservative thing. It is pretty reliable.
RACHEL: Yes. I agree.
JASON HARTMAN: Any other questions?
RACHEL: So, no more questions. Thank you, Jason, I appreciate it.
JASON HARTMAN: Alright, well thank you so much.
ANNOUNCER: This show is produced by the Hartman Media Company. All rights reserved. For distribution or publication rights and media interviews, please visit www.hartmanmedia.com or e-mail [email protected] Nothing on the show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real state, or business professional for individualized advice. Opinions of guests are their own and the host is acting on behalf of Platinum Properties Investor Network, Inc. exclusively. (Image: Flickr | Subconsci Productions)
Transcribed by Joseph
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