In spite of the Coronavirus impacting our everyday life, income property continues to proves to be the top asset class in the world. Jason shares a new commandment of the Ten Commandments of Real Estate Investing with commandment number 22. In the second half of today’s podcast Jason brings on guest Evan Moffic as they discuss how to return property. Their advice is to always have a high loan balance. It is the best insurance.
Jason Hartman 0:00
Working with the local market specialists went really well feel like I was able to get the type of property that I wanted and happy with with the price and the rehab job and the tenants have gone well.
Announcer 0:16
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it on now. Here’s your host Jason Hartman with the complete solution for real estate investors.
Jason Hartman 1:06
Welcome to Episode 1414. Wow. 1414 Yeah, that’s catchy. Huh? 1414 Okay, folks, as you know, there is so much news coming out, no one could possibly keep up. Certainly not little me. It is just amazing that we see this stuff going on in the world. My old hometown, Orange County now has shelter in place measures. And that’s interesting to see what the government considers essential versus non essential services. In reading that. Friends in Puerto Rico have sent me screenshots of their phone. Kurt, you’re one of them. I know you’re one of our listeners. So thank you for that showing the curfew, notifications, those come through like amber alerts on your smartphones. There’s no opt out or anything. You have to see them. It’s really incredible, but no one could possibly keep up with all this news. It’s absolutely staggering. It’s a standard thing. It’s impossible. It is what it is. But some of the news that applies to this episode has really developed because today we are going to talk about the return policy for real estate. I’ve long said that if you don’t like a deal you make with an income property, you always have the opportunity to renegotiate that deal through time. But you also actually have the opportunity to return it. Yep, you can return it just like you can return things you buy at a store. Well, if there are any stores actually open. I know. It’s crazy. But this return policy for real estate is really interesting. Now, it’s something that many many millions of people did during the Great Recession. And speaking of recession, there are people out there, there are people in the news, there are people in the lamestream media, otherwise known As the mainstream media who are actually saying the word if we enter a recession, or they are saying that we will not enter a recession due to the economy going into hibernation mode,
Jason Hartman 3:16
they are lying, folks. There is a 100% chance we will go into a recession. Okay. It’s pretty easy to predict. Okay, I’m gonna just take that easy one and make that prediction. We’ve already begun the recession, I would say right now. Okay, let’s get that out of the way. But does that mean there are opportunities? Does that mean there are silver linings to the cloud? Oh, it sure does. In fact, I will make another bold prediction for you. I predict that through this entire crisis, income property will be the best performing asset class with the possible exception of Clorox sanitizing wipes, and Toilet paper, those might outperform income property, but even then probably not because they’re not multi dimensional. They’re simply one dimensional, right? buy low, sell high, whether it be the product, or the stock. Yes, either one income property with its beautiful, wonderful multi dimensional characteristics, I think will be the best performing asset class. And by the way, I have history backing me up for that, you know, the old saying and investing past performance is no guarantee of future performance. Well, that’s true, but hey, what else can you go by? During the Great Recession? I remember maybe 11 years ago, 10 or 11 years ago. I remember showing a PowerPoint slide at one of our meet the masters of income property events way back then, and the time when I had a lot more hair. Yes, that time, and I was showing the slide and demonstrating how income property As devastating as the economic news was, I compared it to precious metals. I compared it to stock markets all around Planet Earth and showed the returns of these different asset classes and showed how income property was the best performing asset class in the world. And I predict that will be the same this time around. Now, there will be restrictions. Well, there already are in some very left wing cities, restrictions against evictions during the corona virus pandemic, because hey, look, think about it, evicting someone, when there is a shelter in place or a quarantine law. Okay. That’s sort of hard to work that problem through, isn’t it? Yes, of course it is. But the other interesting part of it is the bailouts are already coming our way. He Mitt Romney says we should send everybody thousand dollars, which is like, you know, even if you’re a minimum wage worker, if you’re in the working poor $1,000 is only going to tide you over for about two, three weeks. Okay? So that’s only the first of many things now, Andrew Yang, presidential candidate Andrew Yang, who has of course, been a guest on this show. Oh, and by the way, speaking of all our fantastic high profile guests we’ve had over the years, yesterday’s interview, got some great feedback on that aynsley talk about a person in the know, right, chairman of Lehman Brothers holding company to deal with distribution of all the assets during the Lehman Brothers bankruptcy. President and CEO of Sotheby’s you know, Wow, what an amazing guy. All of the knowledge he has and can share with our audience. Got a lot of nice feedback on that interview. So glad you liked it, and we’ll keep them coming. Of course we will. Of course we will. That’s what we do here. But we can’t get to all the news because we just don’t have enough time and You know, and oh, Kathy was saying I’m sick of hearing about Corona virus. Okay, Kathy? Yeah, well, you know, it is only the biggest story of the century. And why do I say that? Look? I am not when I say that. I am not talking about whether the reaction is an overreaction or an under reaction. Or I’m not making a judgment on that. What I’m saying there is a reaction. So judge, what’s an over reaction or not, you know, fine, but that’s not the question. The question is, and you always got to ask the right question so you can get the right answer, right. The question is, what is the impact for investors? What is the impact on our lives? Okay? Yeah, a lot of people scoff at and they say, This is ridiculous. People are going crazy. It’s they’re out of control. It’s nuts. Okay, fine. But that’s not the right question. What we’re here to do is help you survive and thrive through the changes that are happening and will inevitably happen in the economy. And there are some really good opportunities on the doorstep here. We are going a little long on this intro, but I did promise that I would tell you about the new metric that I have developed for analyzing a real estate deal. And it also includes a new commandment. commandment number 22. Yes, the 10 commandments of investing are now at number 22. And this is something that I actually predicted many years ago. But when I predicted it, I was relating it to autonomous vehicles to the future of the self driving car. And that was the rise of suburbia, the rise of suburbia. So what is commandment number 22 in the light of virus concerns and contagions and this won’t be the last one. It’s not the first it won’t be the Last, there’ll be another one, you know, just wait another year, wait two years, we’ll have more. Okay, so this, this is our future, it’s just going to happen as mankind pushes more into the wild environment and comes in contact with wild animals that aren’t affected by viruses that affect us. They jump, they’re what’s called zoo. What are they called? Zoo zoonotic? Right. They’re zoonotic when they jump from animals to humans. And not all things do that, thankfully, but, but some do, and there will be more outbreaks. So commandment number 22.
Jason Hartman 9:35
Thou shalt invest in low density living, thou shalt invest in low density living. Why? Well, hey, I predict a migration out of high density living environments. New York City would be the prime example. But Los Angeles, downtown Seattle. Whatever right San Francisco. quite obvious. We don’t want to miss that one. Hey, downtown San Diego, you know, any places where you have high density living, I think for another generation, a generation, okay? People are going to remember this, they’re going to be thinking about it. People want to have a little bit of distance. Now they don’t they want to live in a single family home and Indianapolis or mobile or little rock or Atlanta or Memphis, or any of the markets you can find at Jason Hartman calm slash properties. And having that single family home or even even an attached townhome type environment that’s low density, much safer environment. Okay, much safer environment and people are going to be looking for that. So after they are allowed to leave their home again, their mindset over the next weeks, months, maybe a year or two is going to be Hey, you know, I want to change my life. Abed, I want to live in a lower density environment, it’s a lot less expensive. It’s more pleasant. There are plants around. People aren’t pushing and shoving. Everything’s less expensive, not just the real estate. That’s going to be the desirable commodity. That’s my prediction. Mark my words I created a new commandment for commandment. 22. So there you have it. And what is the primary metric by which you can judge whether or not you’re following commandment number 22. About the low density investment opportunity? Well, the primary metric is something that could even happen in suburban markets. I’ll take Phoenix as an example. But any suburban market around the country, you will always see the typical three or four or five storey apartment complex. And what does that three or four or five storey apartment Complex have, especially if it’s newer. It has something that starts with any that thing that starts with he has its ups and downs. It’s an elevator. And if it has an elevator, you’re probably not abiding by commandment number 22. Because you’re probably talking about a high density environment. In fact, the elevator button itself is one of the biggest places that germs switch to new hosts. Okay, so don’t touch that elevator button. I know we all have to develop OCD in today’s world. Yes, we do. See this, you know, they have that old movie, I think in the 80s called Revenge of the Nerds. Then we saw the rise of Bill Gates. And you know, he’s the quintessential nerd right. And all the nerds took over the world. The movie really was, was very predictive of what was about to happen. Revenge of the Nerds, the nerds became the super rich right? Well, now We have Revenge of the loners with OCD, because those are the ones that are not getting sick. Okay, so it’s a good time to be a loner with OCD, right. There you go. Okay, so commandment number 20 to remember it. If it has an elevator, proceed with caution or don’t proceed at all. Alright, let’s get to Part One of the return policy for real estate. And by the way, since we recorded this, this segment, Italy has now put a moratorium on mortgage payments. Articles are coming out left and right. We’ll try to get into some of those in a little more detail in part two tomorrow, talking about the bailouts, which which this this interview was recorded just a week and a half ago. And now, there’s just so much more evidence for how true what we’re about to talk about how much more true it is, okay? Do I mean you know, it’s all it’s all coming down? Right now right here, okay, reach out at Jason Hartman calm contact one of our investment counselors at one 800 Hartman and we will be happy to help you do a portfolio makeover and position your assets to survive and thrive in pandemic times. Let’s get to Part One of the return policy for real estate.
Jason Hartman 14:24
Welcome, welcome. Welcome and Evan motherfuck. Our client is here with us, Evan, welcome back. Thank you. It’s always great to be with you. And last week was an exciting week for real estate for stock market. There’s just a lot going on a lot to think about. Well, you say that as though it’s a positive I guess you’re an optimist but the world is in the grips of possible epidemic. With this virus alert and stores are sold out of water and toilet paper and pasta and rice and Campbell’s soup stock is soaring. So it’s, it’s a crazy time. Also zoom, the company that helps you hold virtual meetings, their stock is way up and boy, it’s way overvalued. It looks like it’s gonna take a long time to grow into those earnings. I tell you,
Evan Moffic 15:15
and it was a cartoon on I saw it on Facebook. I think it’s from the New Yorker was like a robber, you know, in a mask, stopping someone on the street and saying, Give me your hand sanitizer now,
Jason Hartman 15:24
right? Yeah, that’s a new paradigm, isn’t it? And people wearing masks and all it’s crazy. But the virtual home based worker, this is the time and the interesting thing is, it’s kind of like that cliche, that metaphor of letting the cat out of the bag. Once an idea is sort of out there. It’s kind of just out there. And I think this is really showing how valuable the home is, and how not so valuable, the office space or the commercial spaces. And I’ve been telling you all that for, oh, going on 17 years now that it’s all about housing, they can outsource the factory jobs to china, the workshop of the world and no, you know, at least for now, and they can outsource the call centers to India and the Philippines, lessening the need for office space. And the factories of course, lessening the need for industrial space. And they can outsource the sale of products to the internet. But at the end of the day, everybody needs a place to live, and let them rent that place from you. And that’s what we want to talk about. But we want to talk about kind of an interesting aspect of that today. And as consumers, we all go out in the marketplace and we buy things from, you know, retail stores or we buy stuff online. And one of the things that makes us feel comfortable about buying is when the merchant has a good return policy. policy, a good return policy. And so what I want to talk about today is, what if you as a customer, as a consumer, buy a property and you’re unhappy with it and you want to return it to the store? Right? You know, most of you don’t think you can return your real estate and we’re going to talk about that today. Also, of course, you know, you can exchange your real estate, right? Some merchants say, well, we accept returns and we’ll just let you return it will give you a refund, we might charge you a restocking fee. So they might charge you a little feed or return it maybe 1015, even 20% restocking fee to take the item back. They also say, well, we don’t take returns. We’re not going to give you a refund, but we will give you an exchange. Right. So you all know about the 1031 tax deferred exchange. Change one of the several tax benefits that makes income property, the most tax favored asset class in America. But what about a return policy? Can you return your real estate? Say this happens, right? Say you are super motivated, like many of our clients are listening, I’ve been getting like, the messages, the emails, the calls, and just hearing the interest from all of you listening, how you want to lock in on this free money. I mean, the rates are so low. In fact, Freddie Mac came out and said, we now have the lowest rates ever. Yeah, that’s just kind of unqualified as ever. So is that long enough for you? And you want to take advantage of that? You want to get some of those awesome mortgages, which are a big part of the asset. But then, you know, you’re thinking in the back of your mind. What is the market is going into a tailspin. What if we are on the verge of a black swan event? What if we are on the verge of a nother global recession? It could happen.
Evan Moffic 19:13
Right? It could. Yeah, I could. I just saw there was a an essay posted on CNBC about Sequoia, the venture capital funder that sent a letter to all of its companies. And they the letter starts off talking about this is our 2020 Black Swan event. Yeah, so it is it’s came out of nowhere. That’s good.
Jason Hartman 19:32
Now, one of the things that actually you just made me think of something, I think venture backed companies and tech companies should be viewed similarly to let’s make the comparison to real estate. They should be viewed like the cyclical real estate markets, the high flying markets, right? The volatile markets, tech companies, volatile Very overvalued, and then people realize the emperor has no clothes, and then the stock crashes.
Evan Moffic 20:08
Well, in the site always make money. You know, the venture capitalists, I mean, they, they lose money sometimes too, but they usually end up getting out before it really crashes. So right, yeah, your markets the insiders making. And the reason the insiders always make money is they often sell before a company goes public. So for example, for Uber, even before it went public, even though the stock went down, or Lyft, when the stock went down, the people who had invested earlier the sequoias and so forth, made all their money probably connect their money before it even went public. So, you know, we have to take some of their words with a grain of salt, but they do have a pulse on what’s happening in the high flying stocks. But again, as Jason’s pointed out, those high flying stocks are the equivalent of the cyclical markets. It’s that we don’t invest in, we focus on in some ways, if you want to compare it to a stock, we focus on kind of the tried and true the coal gates and the General Mills. And and the American Express’s, you know, these kind of thing kind of companies, Warren Buffett, Coca Cola, same kind of companies, Warren Buffett focuses on that are consistent cash producers. Now, the disadvantages in a bad market, even those consistently profitable stocks go way down. Whereas, because they’re so tied up with the market, whereas in a recession, houses in Little Rock in Memphis, they may not appreciate but they’re not going to have the big drops, that even the value based consistent stocks would have.
Jason Hartman 21:44
You know, Evan, that’s such a good point because in Benjamin Graham’s book, and Benjamin Graham is the mentor for Warren Buffett. Okay. He basically says that same thing you’re saying about the property markets, the linear boring markets Being the the better markets in which to invest. He basically says that these sort of boring, staid companies that aren’t sexy, the ones that just chug along and make money, they’re undervalued because they just don’t get the attention that the high flying stocks get. And same with real estate. They don’t you know, the linear markets don’t get the attention. Those high flying cyclical markets get on the west coast and they expensive Northeastern areas, or South Florida, or around the world in Paris, London, Dubai, Hong Kong, right. They’re just not sexy, but they’re just stayed good conservative markets.
Evan Moffic 22:39
I remember, I don’t know if it was you who was teaching this or a guest on the show. But someone pointed out that a lot of the cyclical markets around the world actually have around the same RV ratios, that there’s actually this consistency like Paris Wi Fi ratio is New York. Absolutely.
Jason Hartman 22:56
Yeah, you can count it and you know, it’s like I’ve done on the show before with guests. Give me one number, and I’ll give you the other one. I just tell them, give me the the rent you’re paying. And I’ll tell you what the property’s worth. Or give me the property value. And I’ll tell you the rent you’re paying. You know, it’s amazing how easy that is and how consistent it is around the world. So like in the venture backed companies, the hot IPOs, the tech companies, all of these crazy stories, we hear the cryptocurrencies. Those are the cyclical markets, okay? We don’t invest in those markets. We don’t play like that. We’re not dumb, okay? We’re not gamblers, okay. I don’t mean to say that’s totally dumb to play that game. You can, if you’ve created some wealth, you know, you can take 1015 20% of your, your net worth and gamble with it and you might hit a home run once in a while. Okay, no problem with that. But by and large, the core of your portfolio that 80 to 90% of your portfolio should should be in the conservative linear markets in the dividend paying investments, the cash flow properties, okay? The, the properties that follow commandment number five, Thou shalt not gamble properties that makes sense the day you buy them. Okay? But even with those properties, if things get bad enough, okay, you might have buyer’s remorse, you might want to return your property to the store. Okay.
Evan Moffic 24:28
Do that. Jason, how do you return a property?
Jason Hartman 24:31
Yeah. How do you return a property? Well, it is what some might call the nuclear option. It is something that millions of people did during the Great Recession. And many of them really cut themselves quite a good deal doing it. And we profiled A lot of it on our shows way back then, in 2008 2009, even 2010 and we pray Valdis where people were doing loan modifications. They were doing strategic defaults. They were walking away. They were doing short sales, okay? And that’s basically the return option. Okay? Now you’re going to get charged a restocking fee. Most of the time, if you do a return like that, this is not a 30 day return policy. You could have the property for years and you could return it. Okay, you could do one of those options, you could do a loan modification, and the loan modification really isn’t a return but, you know, it changes the terms of the deal and makes them more desirable for you. So we’ll call that a, I guess we’ll call it what it is a loan modification. But you could do a short sale, you could do a strategic default and a walk away. And many times the banks were literally paying people to give the properties back. They were giving them if they were occupying the property, they were giving them cash for keys. saying, hey, look, you got to live in the property for two years, you didn’t make any payments. So you got a free house for two years. And now we’ll give you $3,000 if you’ll just move out within the next 30 days, try not to destroy the house and steal all the copper pipes when you go, you know,
Evan Moffic 26:18
like much smaller scale, but if you’re a landlord and your tenant, you know, doesn’t pay and you have to evict them, sometimes you say, Okay, I won’t file an eviction if you leave quietly, you know, you won’t, you won’t destroy their credit, right? If they do that this is a smart, much smaller scale version of that.
Jason Hartman 26:36
Yeah. In our culture in the US, that restocking fee is gonna be a ding to your credit report, your credit score is going to take a hit, almost always. Now, there have been times when the lenders didn’t even report, you know, it’s up to the lender to report the activity, whether it be you know, you missed a bunch of payments, or you had a foreclosure and sometimes The lender doesn’t even report it. Okay, there are people and, you know, stories I’ve heard where people just walk away from their properties. They kept receiving all the rental income for a year or two, they finally gave the property back to the lender, and the bank took it back, then they look at their credit report, and they think, Oh my God, my credit score, I can’t even look it’s gonna be it’s gonna be really beat up. And they look at it, there’s nothing. It’s, you know, they’ve still got that 700 FICO score, you know, great
Evan Moffic 27:29
system. I mean, that speaks, there are ways that you can repair your credit to Yeah, so it’s not guaranteed, right? There are a lot of ways so in some ways, your restocking fee can be minimized,
Jason Hartman 27:41
you know, your restocking fee definitely can be minimized. And there’s a lot of credit repair companies out there and credit enhancement, things and so forth. Some of them are marginal, some aren’t. There’s lots of stuff you can do. Okay, you can set up additional tradelines and, and pay them promptly so that you improve your score that way We’ve done lots of shows on credit.
Evan Moffic 28:03
When you first talked about this concept, I thought, but aren’t we supposed to pay back our home? Isn’t that, you know, in some ways, I started thinking about it on a moral dimension. But then I said, this is part of the deal. That’s when you take out a mortgage. It’s you either make the payments, or you return the house, right? I mean, so this isn’t it’s not we’re not, we’re not violating anything. It’s not this is not an unethical thing to do. It’s part of the deal, right? And hey, by the way,
Jason Hartman 28:29
you are something of a moral authority, you are a rabbi, okay. And you know, you you study this stuff and you deal with it. Now, it would be immoral. If you strip the house, took out all the faucets, rip the copper piping out of the walls, stole the air conditioning unit and took all the appliances out. Okay, that would be very immoral. You would be a thief and a crook. But if you simply follow the terms of the agreement, the agreement is basically And this is not a legal opinion. By the way, I’m certainly not an attorney or a tax advisor, okay? I’m just an investor with experience, okay? And, and lots of clients and feedback that I get from listeners and clients and so forth. But you know, you return the property to them if you don’t make the payments, and that’s the return policy and the restocking fee is the damage to your credit report. You might be able to recover from the restocking fee much more quickly than you think. Okay, so this is a nuclear option. Look, none of us want to do this. Okay. It’s not, you don’t want to plan for this. But you do want to understand that real estate, just like many other products has a return policy, in essence, okay. And there are many other things you can do to mitigate losses. I just couldn’t believe the stuff I witnessed in the 90s when there was a very big recession in Orange County and everybody He was doing short sales. Back when $75,000 was considered a lot of money. It still is, but back then it was a lot more than it is today. Just go adjust for inflation listeners, you know how to do that. We talked about that all the time. And I remember one time I This wasn’t my client, but it was a friend of mine, another realtor friend, his client sold a property in Tustin Ranch, which is on the Irvine ranch in Orange County, California. And they were $75,000 short, and the lender just reduced the loan balance by 75 grand, so they could move out, do a cooperative short sale, and just let the new buyer take over the property. And that was lagging a recession when values had gone down a lot. So it’s truly amazing how durable this asset class is, and how many ways there are to deal with issues and problems and setbacks. It’s, it’s multi dimensional, and it’s just absolutely beautiful in that way. Many people during the Great Recession, were literally getting paid. And Bank of America was one of the big ones doing this. Calling investors not even homeowners, investors who own rental properties, calling them up and saying, look, if you will do what we call a cooperative short sale, we’re going to make it really easy for you. You don’t have to supply us with any documents, no tax returns, no. In other words, what was happening to do short sales, in some cases was you’d have to do the opposite of qualifying for a loan, you’d have to qualify for a loan, you’d have to show the lender that you couldn’t afford Salone that it was a hardship for you. Whereas when you buy the property, you’re trying to show your best self it’s like being on a first date. Right? Oh, I’m so well qualified. And we’re responsible. And then, you know, five years later when you want out of the deal. You’re saying to the lender, I got a hardship, I can’t pay the payments. Let me go.
Evan Moffic 32:11
The reasons you teach that you should a high loan balance is great insurance. Yeah. Because the banks will work will work with you if you owe them a lot of money. Yeah. Whereas if you paid all their money back, they what incentive do they have to work with you
Evan Moffic 32:28
instead of ever work with you?
Jason Hartman 32:30
Absolutely true. Join us for part two of the return policy for real estate on tomorrow’s show. So the next episode, we’ll have part two of this, and we will dig in even further to this discussion. And we’ll also of course have another intro to update you on a lot of news and how it is affecting investors. We’ll talk to you tomorrow. Until then, happy in Esther thank you so much for listening. Please be sure to subscribe so that you don’t miss any episodes. Be sure to check out the show’s specific website and our general website Hartman Mediacom for appropriate disclaimers and Terms of Service. Remember that guest opinions are their own. And if you require specific legal or tax advice, or advice and any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to iTunes or Stitcher Radio or whatever platform you’re using and write a review for the show we would very much appreciate that. And be sure to make it official and subscribe so you do not miss
Evan Moffic 33:43
any episodes. We look forward to seeing you
Jason Hartman 33:45
on the next episode.