The Hartman Risk Evaluator™ is a concept Jason Hartman created to evaluate the risk level of income property investments in different real estate markets. In summary, it states that income property is not a single thing, but two distinct components, the land and the improvements.
Linear markets have lower risk to the investor because the land to improvement value ratio (LTI ratio) is lower. Even during a recession, the value of income properties in linear markets will not decrease much compared to properties in cyclical markets.
The following quotes and podcast episodes provide more information about The Hartman Risk Evaluator™:
What it took me 19 years to discover is that you should be investing in low land value markets because you don’t have that type of volatility. The Hartman Risk Evaluator™ is a very, very important concept to understand and mitigate risk when investing. You want to invest in these basic linear markets.
The Creating Wealth Show, Episode 966
With my Hartman Risk Evaluator concept, you can dramatically limit downside risk when investing in a real estate deal. You do that by not being a real estate investor. An odd thing to say when you’re listening to a real estate investing show, right?
The Creating Wealth Show, Episode 1018
I like linear real estate markets, where the cost of living is reasonable, the cash flow is good, and the LTI (the land to improvement ratio) is favorable to us as investors. Use The Hartman Risk Evaluator™ to reduce your risk dramatically when you invest in those markets.
The Creating Wealth Show, Episode 638
I will tell you that my prediction for the next five years for our type of real estate investing which means linear markets, mostly suburban-style real estate. It definitely means favorable LTI or land to improvement ratios, meaning that the land values are low. And the improvement values as a component of the entire investment are high as a ratio. So you’re maybe 70 to 75, maybe even 80% improvement value, the house sitting on the land, versus the land value being only 20 or maybe 25% of the sales price of that property. This is a low-risk investment. This is a linear market. And I think these will fare very well.
The Creating Wealth Show, Episode 969
Separating Real Estate Investment Into Land Value and Improvement Value
When you look at a property, you can’t quantify it or understand it as a single entity. You must understand it as it least two entities, land value and improvement value. The land and the house, or whatever structure is sitting on that land, are two very distinctly different value drivers. Land is the entity that is more susceptible to violating my new commandment number 21.
When there is a mania, it is the land value, not the improvement value that is susceptible to the big swings. The land value is high in cyclical markets, and it’s low in linear markets, and it’s in the middle in hybrid markets.
The cost of construction is going to go up a little bit, but your real big crash is going to come in your land values. So if you want to have you have a secure future, where you are not a speculator and not a gambler, and you are obeying commandment number five, Thou shalt not gamble, then invest in linear markets with low land values.
The Creating Wealth Show, Episode 1203
Invest in Single-Family Homes with Good Land to Improvement Ratios
Buy properties with cheaper land so you’re essentially a commodities investor. Because the high land value markets are the cyclical markets, the ones with the big shifts, where the prices are high and low, and they are the roller coaster ride. I don’t like that as a conservative, prudent investor. I like reliable cash flow mailbox money. That’s my view of it.
The Creating Wealth Show, Episode 1044
I don’t like condos as you know. Avoid condos and get yourself single-family homes, or get yourself apartment buildings, but not condos. Unless you control the homeowners association, which you’re probably not going to do. Forget about condos, forget about vacation properties, and forget about high priced speculative properties. Income-producing real estate, the non-sexy stuff with good land to improvement or LTI ratios is the thing to do.
The Creating Wealth Show, Episode 936
Interestingly, the landlord unfriendly markets tend to have very poor cash flow. They have very bad LTI ratios, land to improvement ratios. They really don’t make sense in any way at all.
The Creating Wealth Show, Episode 1426
Listen to episode 1373 and 1374 of The Creating Wealth Show by clicking play on the YouTube videos below. Jason explains The Hartman Risk Evaluator™ in-depth and how it can help investors make prudent decisions on which income properties to buy.