Jason Hartman: Welcome to the Creating Wealth show. This is episode number 281 and this is your host Jason Hartman. Thanks so much for joining me here today and I have got a guest just real quickly for a couple of quick comments here on the line, who was on before and I think it was episode number like 169 or something but you all seemed to love that episode and that’s with my Mom, Joyce. Mom, how are you?
Joyce: I’m fine, Jason.
Jason Hartman: Good. So, you happened to call me and I happened to mention since you now live in Alabama having moved from Los Angeles. I mentioned that we are just opening up Birmingham, Alabama and you instantly said what, do you remember what you just said?
Joyce: Yeah. That’s the financial capital of the whole state, that’s where the industries are and the high salaries.
Jason Hartman: Fantastic. Yeah, I think Birmingham will be a good market for us. I don’t think it will be one of our big, big markets like Atlanta or Dallas or even St. Louis or Indianapolis for that matter or for Phoenix but I think it would be a good solid market, I mean the rental value ratios are great and our local market specialist there just uploaded really cute house today with a cap rate of over 10%, pretty good stuff there but I wanted you to just tell that story if you would about that property that you have in Moreno Valley, California and several months ago you had told me about how long – I was bragging about I had a tenant once in a property for nine years, that’s what my longest tenant ever but you have blown that record away and I just couldn’t believe it. Tell us about this property, when did you acquire this property, back in the 80’s?
Joyce: Yes in the 80’s and I just had one tenant there always. The tenant has lived there since 1989. I don’t remember the month. I have to look at the lease.
Jason Hartman: That’s close enough. So 1989 so we had just finished with Ronald Regan as president in 1988 and this guy moved in the following year under George Bush’s president. The first George Bush, George Bush Senior and he’s still there since 1989? You’ve got to be kidding.
Joyce: He’s still there. He’s never moved out. They’ve said a couple of times that they were going to move and one time he started jacking around and not the paying the rent and I went through all the eviction process with them and he had to pay the eviction expenses and he decided to stay and now they absolutely pay the rent beautifully on time. No problems at all.
Jason Hartman: You kind of like showing him who’s boss sort of thing. That’s amazing. So, this house that have this tenant it’s now – by the way for point of reference of folks in case you’re listening to this sometime in the future it’s now 2012 and we’re talking about a tenant my Mom has had in one of her houses since 1989 and you’ve been raising the rent the rent all along, right?
Joyce: Yes.
Jason Hartman: And have you raised it every year or maybe didn’t do it whatever.
Joyce: Well at first I didn’t know much about being a landlord so I didn’t rise for a long time but anyway the rent is $1595. I always just stuck under that big upper number 1600. It’s not a great rent but I have had practically no expenses all of these years and there’s never been a time when there has never been no rent on the house which is steady, steady, steady income.
Jason Hartman: So never a vacant seat since 1989 to 2012 totally amazing. Now, you’ve never changed the carpet in the property or painted it and what have you done to that since 1989.
Joyce: They’ve asked if they could paint it and they told me the colors they wanted to paint was yellow in one room and I think they wanted to use a very, very light pink in another room, the white like in the room that she get her artwork in because it was bright. No, they asked me and went there one time and I said sure go ahead.
Jason Hartman: Unbelievable. So, they’re painting your house for you that you haven’t given them new carpet since 1989 and you’ve been raising the rent all along although you could get much better RV ratio by the way, rent value ratio outside of California for sure but for a California property back in the day when you didn’t know much about investing as you say and so you just bought properties so close to home, we do it in a more sophisticated way nowadays but that is pretty darn good.
Joyce: The only expenses that I ever pay there was – I thought the outside unit for the air conditioner the compressor because he used to let his dog sit in front of the air conditioner and it will get fill up with the dog’s air so I had to buy a new compressor one time.
Jason Hartman: Alright, that’s not too bad. So, what would you attribute to, why does someone stay in a property, let’s just count 1989-1999 that’s 10 years and then 2009 that’s 20 years. They’ve been there for 23 years now. Why does someone stay in a rental property for 23 years and not buy a house? What are they thinking?
Joyce: I don’t know. He is a truck driver. He belongs to a union. There had times when he hasn’t had a lot of hours so to speak. I mean that’s what they’ve told me. I don’t really know. I have no idea. I guess well they like dogs and they have a large backyard and I never complained about the dogs and the dogs are beautifully taken care of. I mean I petted them and the fur is so soft and clean.
Jason Hartman: Mom, this isn’t a show about dogs although we’re both dog lovers.
Joyce: Well, they have those great big dogs that I love especially.
Jason Hartman: Big fluffy dogs. Any big fluffy dogs my Mom wants them. That is incredible. Now, one more thing I wanted you to talk about is you just got back from Los Angeles or actually Orange County in Santa Ana where you own a property that we used to live in when I was kid or well not a kid, I was like 17 or 18, I guess when I live there or 18 to 20 probably.
Joyce: You didn’t want to go there. You just protested.
Jason Hartman: I did? I don’t remember that but okay. That’s on Freemont Avenue in Santa Ana, California and that property – you were just have that property for a while because you are the ultimate do-it-yourselfer – you never have property manager, you manage everything yourself.
Joyce: I’m so happy I got rid of my tool what we’re at that time out of state property manager the one in the Mississippi and the one in Alabama. I will never go back to property managing again.
Jason Hartman: That’s so interesting. So, you’re the ultimate self-manager. You don’t have any property managers for any of your properties, right?
Joyce: No.
Jason Hartman: Okay and you own properties in four states, I guess, Mississippi, Louisiana, Alabama and many in California.
Joyce: No, three states. Mississippi, Alabama and California.
Jason Hartman: And so no property managers, everything is self-managed and I’ve talked about on prior episodes about how I really kind like self-management and many of my properties, most of them have managers. I’m not a do-it-yourselfer like you are but you’re a total do-it-yourselfer but I mean when you go between tenants like in your properties in California, now that you live in Alabama and you don’t live in California anymore, you fly out to California and you’re such an elbow-grease type do-it-yourselfer, you put up sign, you go the hardware store, you buy signs, you get a big marker and did you even use Craigslist to rent your properties?
Joyce: Never. It’s very simple. It’s so simple and this is what you try to do – first you suggest to the tenant that you will reimburse them for the last week of their month’s rent because everybody makes a decision in the last week of the month to move and if your tenant will work with you, you fly in that week and your tenant must get out of the way and be out of there and so that you can paint, do whatever has to be done all in that week and you immediately line up the painters and whatever else you think you might even though you might not need it, you just get those guys there. The day you arrive and you look at everything and you hire them what needs to be done especially get the outside looking good so you can immediately post your signs. You just go to Sign Smart, you get those 18×24 inch signs, get a black magic marker or black marker and you say home for rent, the address of it and in big letters numbers your phone number, put up 25 signs and the phone will start ringing before you get 10 signs put up and people will just come in and drove and you have that house rented within three, four or five days. It’s very simple.
Jason Hartman: Now, I just want to say something. So, I would also definitely recommend using Craigslist or when I do my self-managed properties I don’t go to them, I don’t do all this. I think you work too hard. I think you think there’s like some kind of urge in working hard, I don’t.
Joyce: I just thinking I don’t know how to do anything myself. I hire it done but I do put up my signs because I do know where exactly to put them.
Jason Hartman: Well you mean you don’t do anything yourself when you’re talking about like the work. Yeah, you hire the work done by contractors when you needed to work on your properties but you rent your own properties yourself.
Joyce: Sure of course.
Jason Hartman: Most people listening don’t do that. You don’t think its work even, you’re so funny. But the thing is like for just people listening if you want to employ some of Mom’s strategy here, you can actually do this from a distance, you just use one of these what they called bootleg or bandit sign companies and they’re all over the country and they are really, really cheap. They called them bootleg and bandit because it’s not exactly legal, you’re not exactly following like the sign ordinance of the city but big real estate developers use this all the time. It’s a common practice. I’m not saying it’s totally on the up and up. I’m just saying people do it constantly. You see this little ugly signs by the side of the road and that kind of stuff all the time so those are bandit signs or bootleg signs.
Joyce: People compliment me I’m good at advertising. Thank you. They really say wow you do great advertising.
Jason Hartman: I believe it but I doubt the sign patrol guru at the city is going to compliment in your advertising.
Joyce: Once in a while they’ll send you a letter and you have to pay $100 or something like because of the sign you put up, so what you have the place rented within the week.
Jason Hartman: Well that’s true. That’s a good point. It’s worth thing to find sometimes to just get the thing done. It gets it done so quickly.
Joyce: Then the other thing is then you pull your sign to down right away because you have the house rented and then you just store your signs in the garage for the next time that you have to rent the house but this house in Santa Ana, that tenant was there 12 years so that’s a very good record too.
Jason Hartman: That’ good. Nine years is my tops. I mean I never had one stayed longer than nine years. Everybody listening, we performed one month vacancy per year so if you can keep your tenants there longer, definitely do that. Let me tell you, my Mom doesn’t get great RV ratio because she’s got a lot of California still in her portfolio but she does raise the rent. I mean I would prefer to say you’re definitely a rent raiser, would you agree with that?
Joyce: Yes definitely.
Jason Hartman: But I mean you raise them.
Joyce: Every time I get the chance.
Jason Hartman: Yeah every time you get the chance you raise the rent.
Joyce: Every year I tried to.
Jason Hartman: Yeah right. So, any other things you want to talk about how you self-managed your properties.
Joyce: Well, I always tried to be very kind and very business-like. I tried to be understanding but I am not going to be taken advantage of and when that tenant does not pay the rent, I do not give a five-days grace period. I give zero-days grace period. The rent is due the first day of the month, I tell them that I am retired, this is my paycheck and I want that rent there. If they do not pay, if they pay late they have to pay a $60 fee and on the third day if that rent isn’t there, I immediately have a process server served a three-day notice to pay rent quick. I don’t fool around.
Jason Hartman: And where do you get the process server because your houses are in several different cities even though you have bunch of them in California but they’re spread way apart. They are on four counties.
Joyce: Well, I have a process server in – you need to line yourself up with an eviction attorney and learn the rules for eviction in whatever area you’re in and sometimes the attorney automatically does the process serving, sometimes the attorney does it and you hire a separate process server. The cost that you usually around $45.
Jason Hartman: Good. It’s really cheap to do it and do you prepare that document that three-day notice to pay or quit or did they prepare it?
Joyce: Yes because I have a special situation my tenants all deposit into my bank account and you have to put the address of the closest bank. So, I prepare the three-day notice myself and I just immediately faxed it to the process server and that way it is done 100% correctly.
Jason Hartman: And they just served it for $45 for you, yeah good.
Joyce: Yeah.
Jason Hartman: Good stuff. Well, you’re tough I didn’t know you were quite that tough. You give no grace period. In the movie, it’s a wonderful life, you would be Mr. Potter but that’s what you got to do.
Joyce: I’m kind. I understand things but I don’t like to be taken advantage of.
Jason Hartman: Right. I don’t blame. Well good stuff. Well Mom, thanks for coming on to talk about this. We’re going to kind of an update here from our local market specialist about Birmingham. We’re going to talk about Birmingham a little bit here and then we are going to take a caller and I know that a lot of you have called in to the show and we will get your calls out. They are in the line-up, they’re in the cue and we’ll try to get those out over the next several episodes and so you will hear yourself on the show and please be sure to call in to the show because we love to get your questions and a lot of other listeners have the exact same questions. So, we appreciate your call-ins and let’s hear about Birmingham as a marketplace now and the investment opportunities there and then we’ll take a caller and we will be right back with that in just a moment.
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Jason Hartman: It’s my pleasure to welcome Jeff to the show. He is our local market specialist in _____ [0:17:03] haven’t heard us talk much about and that is Birmingham, Alabama. Jeff, how are you?
Jeff: I’m good. How are you?
Jason Hartman: Good. Welcome. Well, my Mom loves Alabama. As our many of our listeners know, she is building her Southern mansion in Gulf Shores, Alabama and has been for few years, it’s taken quite a while. I don’t think I build a house any time soon. That seems like a giant household to me but tell us a little bit about the Birmingham market and why an investor would want to consider it?
Jeff: Yeah absolutely, thanks, Jason. The Birmingham market is really prime for investment property. Right now, we are seeing an increased in monthly rents. We have an abundance supply of renters. Our last statistic that we saw was about 49% of the population of Birmingham. Greater Birmingham area are renters versus owners so we have a very abundant pool of applicants that want to rent properties from us and those tenants want single family homes that have been renovated and are rent ready and so that’s one of the things that we, as a company, provide for these individuals’ high-quality homes that they can rent for good rates.
Jason Hartman: Sure and one of the things we should mention is that when you say that that’s really just for the long term because the properties that are investors would buy from you they are pre-rented, right?
Jeff: That is correct. Each of our properties comes with the tenant already in place. Most of our tenants are already signed to a two-year agreement.
Jason Hartman: Okay, good. So, two-year lease in place most of the time and why would someone want to consider Birmingham other than the large renter population? What are the industries there and what’s the economy like?
Jeff: Absolutely. Well, Birmingham is the largest and most populated city in the state of Alabama. It’s also one of the most affordable cities in the US to live in. Our current cost of living is about 13% below the national average. So, that definitely shows that the homes – the cost of living is really desirable for individuals that moved in to this area. The other side of that is that our home prices are currently historically low levels with rent rates being rising and the cost of the house is being down and that makes a very attractive from an investor’s standpoint because it elevates your cash flows each month.
Jason Hartman: And why are there so many renters though?
Jeff: We have a very big university population. We have UAB Medical Center which is one of the nation’s most respected medical facilities and it also has attached to a large university and so we get a lot of renters through the local schools. We also have a lot of blue collar working environment here. A lot of the industry that is here is such we have the Honda Manufacturing Plant here, we have the Mercedes Benz Manufacturing Plant and so a lot of those workers chose to rent house given the economic situations that we’re facing nationally – most individuals are choosing to rent now as opposed to buy.
Jason Hartman: And that’s really helping investors quite a bit and I think that’s only going to get better. I mean I just said on one of the other episodes that this is probably the strongest demographic movement in the history of the world maybe and of course I cant really say that in full facts but I’m just going to throw it out there but probably in America in terms of renters because right now, we’ve got Generation Y, the largest cohort in American history 18 million strong, bigger than the Baby Boomers by slight margin and they are saddled with major student loan debt and they’re marrying later, they are having kids later, some of them are choosing not to have kids possibly and that means more likely they’re going to be renters and then you add to it the economic woes and I’ve always said the best thing you can have on the resume nowadays – it’s not necessarily experience, it’s not necessarily education, you know what it is, it’s mobility –the ability to move to a new city to get a job. Tenants have mobility. They can sign a one-year lease and the next year they can do something else and they can follow opportunities. Unlike homeowners who are saddled with having to stay in one place. It’s much harder to move if you own than it is if you rent, right?
Jeff: Absolutely and that’s exactly the type of feedback that we’re getting from the individuals that work with us on our properties.
Jason Hartman: What else should people know about your operation and why you are a good place for an investor to buy?
Jeff: First of all, we’ve been doing this for a long time. The three individuals that our partners with myself, we’ve been doing this and we’ve been working in the real estate and development arenas for about 50 years combined so we’ve done over a couple of hundred projects from start to finish in our careers. We know the markets that we are in and we’ve put in a very good efficient system and being able to acquire properties, get them renovated timely and get tenants place as well as start helping investors get cash flow immediately and so at the end of the day that’s really what’s about it, making sure that the investor gets a good high-quality investment property and then at cash flows conservatively high for them.
Jason Hartman: One question to ask is what is it that you like and why is your company geared toward helping investors buy income property versus just selling the properties that you rehab and then resell to homeowners to regular occupant homeowners I mean.
Jeff: Well some of that goes back to the fact that my background is I’ve got 18 years of financial advising experience in addition to the real estates. So, I am in tune with the investor mindset so I know the possibilities are greater in this environment now as opposed to any time ever before to really get the types of returns that people need on investments these days as opposed to like going in to the stock market or things of that nature and so we see this as really an opportunity not only our market but obviously US wide to take someone that wants to earn an above-average rate of return and get a very quality product that down the road will appreciate in prize and pay them back second time.
Jason Hartman: Yeah, you’re right and also it’s a very conservative investment much better than those Wall Street assets. They exercise no control over. So, you were in the world of being a financial advisor. Tell us a little bit about that because I constantly talked about that industry and Wall Street in general on the show. Give us a little background if you would.
Jeff: Absolutely. I worked for some of the largest banks in the US and Canada as well and basically my job, my role was to work with large institutional buyers and the CEOs of those companies in handling their investment accounts and one of the things that I noticed as I dealt further into their investment process is that you look at these individuals and you get how does these individuals get to where they are and where the hell they accumulate the wealth that they have and it boils down to – they’ve all either started with or done the bulk of their wealth through real estate.
Jason Hartman: You know what’s interesting I just got a comment on that because the friend of mine who’s in Young Entrepreneurs Organization, a group I was involved with for many years YEO now called EO or Entrepreneurs Organization, but what was interesting is one day I asked them I said because his father had like semi-conductor business and he was very successful, had homes all over the place, and high, high end-homes all over the place that he owned and just used for himself basically and his family and I said to him one day I said, “Pat, how your Dad gets so successful, I mean, what was his secret in business of being so successful?” and he said “Well you know what it wasn’t really the business itself it was all the real estate he bought along the way, whether it be commercial properties that the business operated out of where houses like manufacturing facilities and then residential properties that he invested in as well and it’s really the real estate that did it for him”. And I thought isn’t that interesting. Most people think it’s the business because that sort of the brand they think, what business is this guy and well he is in the semi-conductor supply business, right?
Jeff: Right.
Jason Hartman: People don’t see that behind that it’s the real estate and auto dealerships are great example because auto dealerships, you think they make money selling cars but a lot of those guys got really, really wealthy because they own such big pieces of land that their dealership operated on and the business just basically became the tenant. Like in our properties, we have tenants. We outsourced our debt to the tenants and that’s a great business model. You don’t get in lots of debt if you don’t want to pay your own debt, that’s wonderful. You have someone else to pay it four you and that’s what we do with our real estate investments but the business basically just becomes the tenant of the real estate and it’s the real estate that is the real wealth creator behind the whole thing, isn’t it?
Jeff: Absolutely. I don’t any of the individuals that I worked with over those 18 years that didn’t build their true wealth through a form of real estate investment.
Jason Hartman: Amazing thing. Well, what did you see when you were investing the money for these institutions and these very successful CEOs? Did you find there was a lot of crockery on Wall Street? I’ve never discussed this with you, by the way Jeff, but I’m constantly talking about on the other show.
Jeff: There are definitely. Wall Street has its level of ethics that they tried to portray – a lot of that is front talk and there’s a lot of behind-the-scenes that is really all about what do I get paid on this deal and what is this mean to me? It’s never really about what does it do for the investors. Is this the right option about the investor? Obviously, there are good people in the investment world as well and people who want to do right about their clients but at the end of the day what I ultimately found was that on the majority of the time it was all about really what investment avenue gets me the most return for myself, not for my investor.
Jason Hartman: I couldn’t agree more and a lot of people who were in that industry like yourself, they just couldn’t do it with what the conscience after years of doing it. They just saw too much fraud, they saw too much greed, too many scandals and some of level too, too much incompetency. It’s like I go to this financial advisor firms occasionally, sometimes I interview with them just for fun nowadays just like sport and they all have the same stupid theory, they all following modern portfolio theory and they show me the same damn pie chart. It’s like what is original about any of this stuff. It’s the same formulaic junk that doesn’t work. Nobody listening, I bet you nobody listening to the show right now can show me one none insider person who is actually become wealthy of those kinds of investments. I always say how many people do you know who got rich in stocks, bonds and mutual funds?
Jeff: Well, I know individuals who short-term rich but they didn’t get wealthy and that’s really what it boils down to, in my opinion and the reason why we do what we do is because what we look for and what we want to do is build long-term lasting wealth that’s will pay you and your children down the road and not something that just because something happens in Greece it cause your portfolio to blow up.
Jason Hartman: And so what you’re talking about there, you’re referring to the speculators and I like in those to the house flippers in our industry because I’ve noticed over the years that people who flipped houses they have spending money but people who buy and hold properties they have real wealth and it’s just different. It’s like that speculator mentality, that gambler mentality. It’s really interesting there but going back to your market in your company, some of our vendors are what we called vertically integrated companies where they have kind of maybe a couple of businesses in one sort of thing where they have their own property managements, some outsourced that to other property managers, some have their own construction companies, some outsourced that. Tell us about your system and the way it works in terms of the various activities you’re engaged in.
Jeff: We like to consider ourselves to be a full service and when we sat down and really put this model together we took our experiences and what we all seen in our environment, in our industry over the last 50 years and basis that how do we put this together to wear at the end of the day we give the most value to the client and the only way that we really kept coming back to – we have just to do this in-house and we’ve got to manage and oversee each of the processes of the turnkey process and so what that means to the investor and how we structured our company is that we have division that is solely responsible for going out and acquiring properties and once those properties are acquired and they meet our criteria and then we’re trying to go to other division which handles the renovation piece so all of that is handled in house with us. We also have our own property management company who at the same time that we’re renovating those properties is out working with our clients and from a renter perspective to have that property rented by the time the renovation steps are completed and then we offer for the investor obviously the ongoing management. We looked at doing an outsourcing originally of the property management side. The property management is one of those things that nobody wants to do just because of the time and the commitment that it takes but we saw that when we looked and interviewed other outside property manager we never got the feeling that they had our best interest in mind or clients interest in mind, it’s all about more of just getting properties filled, not necessarily with the right tenant or somebody that would be a long-term, good tenant and so worth though even at the right prices. They would definitely want to look at let’s just get it filled and it may not necessarily be the right price that we feel like was due on that property. So, we brought that in house and we basically handled that. We think that it adds the most value for our clients to really do all the processes ourselves.
Jason Hartman: So you have full control over every process and the nice thing about hearing that is you’re not going to pass the buck when there’s an issue with the client, right? The bucks up here.
Jeff: Absolutely. Our clients would be handled, get a specific rip that will be their main point of contact and any types of issues – that person will be in cost and contact within to let them know how their properties are doing, how their income is coming along. They’re going to be in conscious, what’s going on on a regular basis so we’re very hands-on with our clients.
Jason Hartman: Good stuff. Well, anything you’d like to say in closing, Jeff.
Jeff: Basically, I decided that Birmingham the market is really kind of the best that I’ve seen. We looked at a lot of different markets but based on the prices of the homes that we can acquire and the volume that we can get here, the returns that our clients are getting – it really is kind of one of those perfect storm environments for us and when you coupled that with the level of service and client respect that we offer, we feel like we’ve got an excellent product here for individuals that are looking to build long-term wealth through the real estate portfolio.
Jason Hartman: Thank you so much for joining us today and telling us about this and if any clients are interested you can see properties at jasonhartman.com. In the property section, there will be performance and so forth about the properties that we’re talking about here in Birmingham and you can contact investment counselor through the website in many places at jasonhartman.com and they’ll be happy to connect you and help you acquire properties in this area. Thanks again Jeff.
Jeff: Thank you.
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Jason Hartman: Hey, it’s my pleasure to welcome, John. He lives in Dayton, Ohio metropolitan area and he is currently calling us from Detroit. John, how are you?
John: I’m very well Jason, how are you?
Jason Hartman: Good. Thanks for calling in to the show. We really appreciate it. I guess you’re a new listener, right?
John: I am. I am a new listener but I’ve been able to get quite few the shows, driving back and forth from Detroit today so while I am new I’ve been able to catch quite a bit of your podcast over the past month or two.
Jason Hartman: Good. Well, we appreciate your listening. What was your question for today?
John: Okay so for any other listeners out there, I hope this is helpful. The question that I have is I don’t have credits so I don’t have establish credit and I’ve read and heard and Googled and looked for private money or hard-money lenders but I’m actually in that process and I’m struggling with it. I don’t know how to actually do that so how do I search for private money or a hard money loan or something like that.
Jason Hartman: Yeah good question. So what you need probably is first all I want to compliment you because you’re doing the right thing in terms of finding a partner that has something that you don’t have and you bring something on the table that that other person doesn’t have so you can go ahead and exchange some value there and form something bigger and better together so that’s good. And I do want to say one thing about partnerships, when my do my Creating Wealth Boot Camps I often quote my late grandmother who many years ago actually when I was kid told me, it was a great quote and I just want to share that with the listeners I probably mentioned it before but I say that my grandmother she is to say, “Jason, the hardship to sale is a partnership” and that’s kind a true but I say that using the example of investing in a fund with someone or going into business together with someone where you’re buying stock in their company or you’re just small investor in a pool of money and I don’t like that as you probably have gathered from the episodes you’ve listen to, but real estate partnerships I have several of them and I’ve had many of them over the years. I think the longest one I ever had was a 11 years long and I found them to work out pretty well as long as neither partner lives in the property and neither partner has any kind of emotional attachment to the property. If it’s just an arm’s length partnership, real estate is a pretty simple asset class and that’s one of the other things I love about them and so first of all when we were talking just for a couple of minutes off-air before we started, you were telling me about your partnership and I think that’s a great way to go what you’ve mentioned to me. So, that’s one thing, let’s get that out of the way but in terms of finding hard-money lenders, what you’re looking for is you’re looking for what’s called an asset-based lender. A lender that cares about the asset, in other words their collateral for the loan the property rather than you as the borrower and income properties is the most debt-favor asset class. So, if you listen to for example episode #241 we were talking on that episode to an asset-based lender and we’ve got another asset-based lender also coming up on the show that does hard money or private lending asset-based lending in many markets nationwide and this is the kind of thing you’re looking for as an asset-based lender. So they’re not looking to the borrower. They’re looking to the property as collateral for that debt and income property – lenders love it as collateral it’s just great collateral I mean try getting the type of loan you get for an income property even if it’s a hard-money loan with a higher interest rate and more money down, you can even come close to that for a business for example because the business is such a moving parts asset. It’s so complicated and it’s not as good in terms of collateral. So first of all that’s what you’re looking for. Now, there are many sources for these asset-based loans and there are a lot of hard-money lenders out there. Most of them want anywhere between 8 and 12% and they want a decent amount of money down so if you’re a borrower who doesn’t have maybe you’re Fannie and Freddie out and what that means you used that phrase and a lot of people used it nowadays – the maximum number of Fannie Mae and Freddie Mac back loans you can get is 10. So, if you’ve exceeded that and it sounds like you have, you’ve got to look at other options. So, episode number 241 if you haven’t already heard it could be valuable to you we’ve got more episodes like that coming up and more sources for this but if you want to look outside of what I’ve talked on the show, there are some other sources as well and I don’t have the name in front of me right now but I’m going to try just searching something for you online. Actually, it’s one of my friends on Facebook so I’m going to look him up and see if I can find it and I’ll mention that here on the air but does that kind of make sense what I’ve said so far?
John: Yeah, it does absolutely because that would be specifically my challenge when I looked at asset-based lending was they would lend towards an asset could only a very specific area and so that was one challenge being that is not wise to just pass in that one area so I would make some headway in reaching a local bank or maybe a credit union or something that affected then, you would end with well I can’t lend to that area or I won’t go that far or whatever nearly not be and also I’m glad because my other question that I had on the horizon was what should I expect so if I do go to the process everything looks great, the deal looks good, everything is great now and what’s that rate and what would be a cash that on and you already have said that 8 to 12%.
John Hartman: Yeah¸ that will typically be the rate and a lot of them will look for like 50% down half. So, it’s a pretty significant down payment but I got to tell you folks let’s keep a few things in perspective with that. If you went in and you went which you sound like you’re way too smart to do this but so many millions of people do. If you walk in to Merrill Lynch for example or a _____ [0:41:00] or any of these Wall Street type financial companies, on any investment that they offer you’re putting 100% down. You want to buy a $100,000 worth of stocks, bonds or mutual funds, you give them a $100,000. There’s no financing. Now granted I you can buy stocks on margin and stuff like that but most of those things end up is really ugly bad stories okay so I’m not even going to go there. If you go around the world and you look at real estate around the world, you’re going to typically put a 100% down. Mortgage financing in the US is very, very rare and very special and that’s why even foreign investors who have to put 50% down on many properties on most types of financing in the US compared to what you can do in many parts of Europe, in Australia, in South America, 50% down. They think they’re jumping for joy. They think that’s a great deal. So, keep that in perspective. You open a business, you’re typically putting a 100% down. You’re not going to get financing for too many businesses if they don’t include real estate and what I mean by that is a business where you own a business property like the building that you’re manufacturing plant is in or whatever. So, the SBA (Small Business Administration) does offer some financing mostly when there’s real estate involved, that’s when they like it. So, real estate is the most debt-favored asset class. So, that’ one thing you can do and I looked up that contact I have and it’s not on his Facebook page anymore. I know it was there and I was just going to give you a general place to get hard money loans but let’s just do it together asset-based, I’m just googeling asset-based lending. So, the first thing the Wikipedia entry, the second thing is the Wall Street Journal has an article which says Asset-Based Lending Grows In Popularity here’s the company called First Capital, the third entry on Google that does asset-based lending and I don’t know anything about these companies but there are lots of sources out there that do this type of thing and I can get back to you with another one that I know does it directly on income properties.
John: Okay. Do you have time for one more question…
Jason Hartman: Sure.
John: In going a little bit further on that.
Jason Hartman: Absolutely.
John: Okay. Can that down payment comes from a partner and if so would it be a borrower, co-borrower circumstance and as a scenario we’re looking at a million dollar commercial property where negotiating 950,000 my partner had planned on putting just 100% down and buying it which is normally what we do with our properties because he pays for the deal, I find the deal and I’m a partner on that deal and I invest some sort of asset on some of them depending on my level involvement on this deal. There would be a cash involvement that great so what my plan was, was to try and search for this loan specifically or if the possibility to take a $500,000 down payments which would be the half you’re looking for but it would be coming from my partner and I would be leveraging the rest in my day. Is it that a possibility or have you ever seen a deal structured that way?
Jason Hartman: It is very much a possibility on an asset-based loan and on it because again they’re looking to the property. They’re not looking to the borrower. Now, there are varying degrees of these. Some of them looked to the borrower a little bit and mostly to the property and there are varying degrees. Some are pure asset lenders, some are sort of hybrids and there is everything in between on the spectrum there but yes many asset-based lenders will allow you to be far more creative than the conventional Fannie Mae-Freddie Mac type of financing so that’s a case by case basis. A lot of these lenders like the one I talked to on episode number 241 of the Creating Wealth show. They think – the nice thing is they will actually reason something out and they will think “Gosh, we’re not going to follow a strict under writing criteria. We’re going to think “Does this deal make sense?” So credit unions, hard money or private money lenders, asset-based lenders that’s kind of the same thing as the hard money, private money but even credit unions I find will make some thinking-based decisions because they viewed it more based on a relationship and I think credit unions are in – by the way let me just give a big plug for credit unions here and this is a general plug. If you need a car loan, if you need a banking relationship, if you want to get just better service in general, I think some credit unions out there are pretty great and they’re just a lot better than the big megabanks. I love to hate the big megabanks, most of America does nowadays, just generally speaking. Every listener should explore credit unions so you maybe in a certain affinity type group like a teacher or something or your spouse maybe a teacher or even military or you have access to credit unions but some credit unions they’re deal is we served the local area that if you live in our area you can be a member of our credit union and one that I used it the deal was if you live in Orange County, California then you can be a member. I’m not a teacher. I’m not in a military. I didn’t have any special affiliation. It was just where I live. So, check out our credit unions. I definitely think that’s a wise idea but again your question of can the money comes from another person? Many, many times yes. They will think it through if the deal makes sense. I got to ask you though. In your partnership, it sounds like you have a pretty awesome partner.
John: I do. It’s a fantastic situation and that I’m able to not only monetarily gain from it his down payments but also the education that I get is just absolutely fantastic and it’s tremendous and I’m able to learn from him. He’s been a mentor for years and we started working together again here as I said just back in January but he has been the sole, I guess I am dependent on him on certain deals and he also in the same manners depended on me to find certain deals.
Jason Hartman: So basically he’s got the money, you’ve got the time. Is that the trade in this partnership?
John: It is.
Jason Hartman: You’re out finding the deals.
John: And few other things but there in your podcast and that’s one thing. The most valuable resource beyond wire, beyond money or cash or anything is time and so for him I do have the time to assist with running his companies or but also to trust. The factor is that he has had dealings with people who has worked for him in the past and had not doubt himself to be trustworthy. So, we’re in line in several different areas of our likes and we’re able to trust each other and while protecting ourselves with documentation and other things _____ [0:48:21]. So yes the trust and the time is something that he is fine.
Jason Hartman: Yeah good. Well, that’s great. Now, let me also ask you what type of commercial property you’re considering for a million bucks.
John: This is a school and church in fact and it’s a church that was going out of business but the church was squatting. They could no longer afford the property, the school had closed and a charter school is coming in and has signed – they’ve sent a letter of intent and is looking to make a lease agreement for 10 years and just the deal in its entirety is just fantastic.
Jason Hartman: And is it in Detroit?
John: It is not, absolutely not. It is completely on the other end of spectrum in Florida and so down the ways on that play a credit union was difficult because I am not military, I’m not teacher, I don’t live in the area and so a banker that I had that’s to do – when I was beginning, I won’t get too deep but when I was beginning in investing I had a house in Detroit area and I moved to Texas so that house became a rental property and I was very much under in it. It’s not a wise investment. I did a poor job throughout the entire process and it was previous to the crash, so then I moved to Texas, purchased the house there then I end up moving to Dayton, Ohio so then I had two investment properties, the Dallas property was performing, the Detroit property was emerging and being Dayton I needed a place to live so I contacted through a resource of bank president and he was able to look at, I guess you would say this possibly an asset-based lender, whatever it may or not maybe but he thought to the deal and helped me out quite a bit and we worked through the deal to make it work.
Jason Hartman: So, let me talk to you about this deal for a second okay. First of all, I want to consider there maybe two hidden pieces of value in your deal that you may not be thinking of. If you’re just buying the real estate you may be able to actually buy some other assets with the real estate and again I’m no expert on this but I’m making just a very general statement. That school may have a charter that you can buy. You may be able to buy the what’s left of the “business” of that church and school. You may be able to buy the entity also separate from the real estate and they may just throw that into the deal because it may be worth nothing to them and so if that’s school has an accreditation, if that church has an entity that’s formed, that’s a tax-exempt, those things could have some value as well so just be mindful of that that you might get those thrown into the deal and they might be worth something as well. I would kind of love to own an accreditation that a school has and be able to use for example my educational products and my teachings on the podcast, the other products that one of my companies sells that educate people on finance and sort of just buy from somebody that whole accreditation like an online college like the University of Phoenix which I hear is the world’s largest university by the way. So, there are some other opportunities there. They may come with that, government aid programs which I thoroughly disagree with almost every time but if I was benefiting from them, I wouldn’t disagree with them.
John: Absolutely right.
Jason Hartman: I’m just being self-serving and being honest about it. So, there may be some other assets there as well. Now, that’s the good side. The downside though is that these are very specialized type of properties we’re talking about so be careful. If you don’t know what you’re doing in these very special generally single-used type of properties there are a whole bunch of factors and economic pressures and motivations that you haven’t done this before and even if you have. If you haven’t done them a lot that you’re probably not aware of so of course the red flag of caution, I want to sale that very, very high because as you’ve heard and you’ve been listening to the show only for a couple of months but I love simplicity. Every time I get involved in something highly complex, the chance of getting burned is extremely high and that’s why I just love housing whether being in the form of single family homes the simplest of all, the most historically proven of all or apartment buildings my second favorite. It’s just simple. Everyone needs a place to live and that’s not going out of style. It’s interesting too because I was reading one of my email newsletters today and it’s talking about the hot new trend and investing in this and that and I’m thinking the whole world that seems like is out chasing this hot new trends whether it be the hot new business, the hot new stock sector, the junior mining sector for the gold bugs which zillions of dollars have been lost in that one. Okay, the junior mining companies you’ve heard these and it’s like my business – the hot trend in my business is that everybody needs to sleep at night and they need a roof over their head and that has not changed since the beginning of human history. That has been true for millions of years. For ions, people have needed to place to live. I just love it. I love the simplicity of that. So, I just want to caution you, of course, be very, very careful. You could hit a homerun and I don’t want to talk you out of it but those are highly complex generally single use deals and if you’re going to convert it to something else then it becomes a development deal and history is littered with broke developers. So, I just want to say be careful okay. That’s all I want to say.
John: I appreciate your time and my talking literally keep going on forever for the questions and I know that you don’t have the time for that but I greatly appreciate you, you’re pointing in the right direction and I will definitely go back and listen to episode 241. I’m actually not a part of your newsletter, you mentioned that. Just looking at these takeaways on my notes that I have there’s just a lot in here. So, I greatly appreciate it.
Jason Hartman: Good stuff. Well, hopefully you’ll join us for one of our live events sometime and we love to meet you. We just appreciate your listening the word about the show and thank you for calling in. Everybody listening, we love call-in. So, keep calling in. It’s interesting, I get to learn a lot and so do all the listeners. So, I really consider that a contribution when people call to the show. So, I appreciate your call and call in again with more questions, okay.
John: Thanks Jason.
Jason Hartman: Thanks John. (Top image: Flickr | sailorbill)
The Jason Hartman Team
Transcribed by: Renee
