In this Flashback Friday episode of the Creating Wealth podcast, Jason Hartman revisited an in-depth Q&A session from January 2016.
Along with his guest Oliver, an investment counselor, Jason Hartman answered questions that listeners have asked in relation to investment properties. Throughout the episode he encouraged listeners to focus on buying properties before worrying too much about real estate asset protection. Getting started can be the most difficult step for real estate investors, but Hartman warned that putting off decision-making may also put off creating a financially-free future until the day comes that it’s too late. Hartman also mentioned the help provided to investors through his team, the leverage that stands to be obtained, and the interactions with seasoned professionals.
Hartman begins the episode by letting listeners know how much they’re appreciated over the ten years that he’s been conducting podcasts. He states that he wants to start off a great year by answering some questions about real estate investment with his guest Oliver. Hartman recalls meeting him several years ago, and having both Oliver and his wife as clients before Oliver became an investment counselor.
Oliver offers a bit of background information as to how his professional career started. He states that he started his career in geology after attending college in Canada. He worked mostly for mining exploration companies that led him to remote areas to find traces of precious metals and stones. Oliver states that he also worked in research ventures that had him climbing volcanos. He recalls that he often listened to Hartman’s podcast while he was in the field, though he would have to put listening on hold at the dangerous points higher up the mountain due to the climbs requiring full focus.
He states that work involving the volcanos was research-oriented, as volcanos are often indicative of gold and copper deposit. His other field work involved drilling in the -40-degree weather of northern Canada. He notes that field work would have him in the middle of nowhere for long periods of time, anywhere between 30-45 days to 90-100 days on site. He was on call all day, every day.
Familiarity with Real Estate Investment
When Hartman asks what got Oliver into real estate investing, he mentions that one of the main factors was the cash flow. He recalls that for a lot of his work, he was a contractor. This means that he went to work for several months, and then would have a few weeks of no work to relax. During these rest periods, he was not paid for time off. He mentions that he was not a fan of this and began researching ways to create income while he was on vacation and real estate was the best method he discovered.
Hartman agrees that income property is the most secure and reliable path to financial freedom, and owning one’s own business comes in close second. He states that with owning a business, a person can leverage time, and with owning real estate, a person can leverage money.
He compares this leverage to a quote by Greek mathematician Archimedes,
“Give me a place to stand, a lever long enough and a fulcrum. And I can move the Earth.”
Oliver mentions that he noticed that a lot of people don’t really know about income property, and it’s baffling. He tells the people that he meets, and they often think that it’s too good to be true. Income property is a good thing, he mentions that there are a lot of benefits to it. When talking with people, he lets them know that it’s possible to gain financial freedom, being that he started out as a listener until he built his portfolio, as well as attending events and meeting new people.
Hartman states that the reason that so many people don’t know about investment property is that it doesn’t have a giant organization or big advertisement pool. Investment property is a relatively quiet industry and doesn’t have a big television channel dedicated to it like the stock market does.
The size of the real estate investment market in the United States has about 14-million investor-owned single-family homes in possession, and there are millions more in duplexes, triplexes and multiplexes. It’s a large but fragmented industry, which is why Hartman states that he tries to bring it into the mainstream.
Questions and Answers
Oliver states that his greatest piece of advice to offer people is to become their own insider. If you’re feeling envious of anything in life, do the things that you desire for yourself.
Hartman agrees and states that the best revenge to take on someone you’re jealous of is to live well. Be what you want to see yourself become.
Oliver shares a story about how he convinced his wife to travel a long distance to meet for their first date. The pair met in Thailand. Oliver’s wife was from California and in Bangkok volunteering for an elephant reserve. Oliver was backpacking from Canada and they met at a rooftop bar on the 82nd floor of a hotel overlooking the city. Two weeks later, they met again at Niagara Falls for their official first date.
Hartman compares this story to the concept of being your own insider. As a direct investor, you have the opportunity to truly be your own insider, especially when it comes to real estate asset protection. He mentions that with this, you don’t have to work on envying other people, you get to accomplish something for yourself, work for your own accomplishment. If your neighbor’s grass is greener than yours, make the effort to make your own grass just as green. Work at it and in a few short years, you’ve got a future.
Oliver and Hartman take time to answer the real estate questions that they’ve been asked, and Oliver reads the first piece for Hartman to answer.
Should I Create an LLC for My Investment Property?
Hartman reminds listeners that he is not an attorney and is not allowed to give legal advice, but that he often sees investors put the cart before the horse. This means that many people worry about real estate asset protection before they have any assets to protect. He advises listeners to spend the first part of their career’s building assets and the second part protecting those assets.
He also states that if you’re getting traditional financing, you’re not likely to get it with an LLC. Income property insurance is generally very good, so there isn’t much of a reason to change to an LLC. He explains that, like many things, it’s complicated. Single rentals up to a four-plex market is not designed for entities. It could be changed to an LLC, but Hartman advises not to overcomplicate things.
Oliver adds that it’s best to go for a goal rather than being paralyzed by decisions that are not being made. He has seen it with clients before, kicking a decision around for months with worry and they don’t move forward.
Hartman also states that he has never seen anyone be sued because their tenant fell down and hurt themselves. The risk is not usually big enough to worry about an LLC, as the insurance does its job well.
What Happens in the Case of an Eviction?
When asked what happens in the case of an eviction, Hartman mentions that this question is impossible to answer with complete clarity. It’s a complicated situation. First, if you’re self-managing your property, it will be a little different than if you have a property manager. Property managers will handle evictions for you. You have the opportunity to outsource an eviction to an eviction attorney to handle the case for you as well.
The cost of an eviction depends on the jurisdiction, Hartman says. If you’re in a market like California or New York, you’re going to be perceived as a bad person no matter what you do. He advises investing in a landlord-friendly market. In these areas, evictions happen a lot faster, depending on whether the tenant contests the eviction, and the cost is usually between $400 to $650.
Hartman mentions that evictions happen pretty rarely. He had to handle an eviction with his first property, a 1-bedroom condo, at the age of twenty. It took more than twenty years for another eviction to come about. Most investors don’t have to evict very often, but it seems like they do only because as human beings, we notice problems and don’t celebrate when things go as planned.
What is the Best Market to Invest In?
Hartman states that it’s impossible to give a single answer to the question of the best market to invest in. It’s like asking a parent to pick their favorite child. It truly depends, and there isn’t really a best market with total clarity.
Hartman mentions that it’s important to consider the team as well as the investment market. He says that he would rather have investments in a B-rated market and have an A-rated team than vice versa. A good team can make up for a less-than ideal market.
He also notes that it’s important to gain leverage, and not try to self-serve with every aspect of the investment process. He states that his referral network provides leverage for investors. If you’ve got two or three properties, you’re technically a small client without a lot of leverage, but if there’s a problem, talking to one of the market specialists on Hartman’s team is a great idea.
He mentions a client, Kyle, that he had for many years. Kyle had an investment property in the Atlanta market and he was having a problem with one of his property managers. She’d worked well for a few years and suddenly became unresponsive despite him reaching out to her and asking him why she was not responding. Hartman recalls that Kyle included him in the email exchange, and Hartman copied a couple of other professionals. He asked if anyone was available to help Kyle and miraculously, his property manager responded.
Hartman refers to the Watergate Scandal and how one of the people who knew what truly happened, Deep Throat, said to follow the money. He advises doing the same, and explains how the business relationship between market specialists and investors is mutually beneficial. The help of market specialists helps investors avoid spending money on advertisement, and it allows them to increase the velocity of their machine.
If you’re buying and fixing properties, Hartman says, and you’re not turning them around quickly, you’re spending a lot of money to keep them. The goal is turn the table as quickly as possible. Turn properties around quickly and take on more. Hartman states that he can increase the property-turning speed by providing a waiting pool of investors. In this way, everybody wins.
Oliver adds that real estate websites often give a lot of information about the listed properties, sometimes including the prices for market specialists. At the sight of this, investors become envious at how low the rate was during that LMS purchase, and wonder why they’re having to buy at market value.
Hartman explains that, like with every product you buy, there’s a supply chain. There are always middle-men, and everybody gets a cut. For example, the biggest middle-man system is the government. The local market specialists (LMS) have a margin to handle. They have to make a profit, and if it’s a bothersome thing, listeners have every right to do it for themselves. Make their own properties, buy foreclosures, patrol the areas for deals, and look for low market areas.
Hartman recalls a client of his who purchased a property that was owned by a pornography hoarder. With the condition the home was in, it could not have gone on the market, so the client purchased it for a steal before fixing it. It’s a good idea to seek people who are desperate to sell.
Oliver mentions that in his work, he uses his time to find deals and things that will make sense to the investor.
Hartman takes a moment to explain that if there is a property on his website, it does not mean that this property is going to be the best deal around. Some of the properties listed might never sell and he’s okay with that, he says. He advises listeners to be picky while looking for investment properties, and those that aren’t selling will give input to the market specialists and let them know that the property isn’t selling. They’ll know what a good and bad deal are because the clients are smart enough to know the difference.
Can I Negotiate Prices?
Hartman states that it’s acceptable to try to negotiate prices. Some sellers are going to refuse but it can’t hurt to try. He offers a warning, though, that while you’re negotiating prices, it isn’t out of the ordinary to have the property bought out from under you.
Is it Better to Invest in Multiplexes or Single-Family Properties?
Hartman mentions having done a podcast episode on this topic at length and advises listeners to find it on his website. The episode covered all aspects of the question, but Hartman recaps by saying that apartments are far more complicated investments than single-family homes. They are much like owning and operating a business, and Hartman advises listeners to be careful and be sure that they’re properly educated on owning apartments before getting into that venture. The returns are not as good as they appear to be some of the time. Single-family homes are the best proven investment class on the market. They just work, Hartman says.
Should I Buy a Home Warranty?
In short, Hartman states that home warranties are a good idea. They’re a fairly cheap form of insurance and they’re quite simple. He also states that if there’s an opportunity for the seller to buy the warranty for you, take it. Depending on what you’d like covered, warranties are generally around $400, and Hartman advises having an inspection performed as well.
Why is the Cash on Cash Return Less on Higher Priced Properties?
Hartman explains that the cash on cash return changes with the increase of price. As the property’s price increases, the rent-to-value ratio gets worse. This will diminish the cash on cash return. Higher priced properties are not going to have as good of a cash on cash return as a cheaper property. However, the more expensive properties will probably have better tenants renting and less maintenance involved.
In closing the podcast, Hartman mentions that he has some free asset matrix slides available on his website. Visit www.jasonhartman.com/matrix to have the list of slides emailed to you.