This Flashback Friday episode is a discussion on global trade, container shipping, and Packaged Commodities Investing. Jason Hartman and Empowered Investor Counselor Sara talk to David Porter, where he introduces the ‘free lunch’ metric to help evaluate investment property.
Announcer 0:00
This show is produced by the Hartman media company. For more information and links to all our great podcasts visit Hartman media.com. Welcome to the
Jason Hartman 0:10
flashback Friday edition of the creating wealth show with Jason Hartman. As he rapidly approaches 1000 episodes of this podcast, he has hand picked individual episodes that he feels is going to be good review for you to prepare you for the future by listening to the past. Let’s dive in.
Announcer 0:29
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 Get 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. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 1:19
Before we start today’s show, I want to make a couple of very important announcements, our twice yearly event, the Masters weekend, a gathering of experts on Saturday, March 7, and Sunday, March 8, so join us for these events. So that’s what we do. Let’s get into the show now. I wanted to have you join them on a very impromptu discussion. A few minutes ago, one of our investment counselors Sarah, who’s here with me. Hi, Sarah. Hello, just walked into the office introduce one of our clients, David Porter, who I’ll have on in just a moment here. And Sarah wanted me to have him on the show because he has some very interesting metrics as to how to choose an answer. vestment property. So we’re going to hear about that in just a few minutes. Sarah, thanks for bringing David in.
Sara 2:04
Sure. Yeah, we just getting ready to close some properties in Indianapolis or I should say, David is getting ready to close some properties. He purchased some bank owned properties with our local market specialist there. And so far, he’s had a pretty good experience. But he definitely has his own metrics for choosing the specific properties to purchase. And I would love to share it with all of you because I think it’s a really great idea.
Jason Hartman 2:27
Excellent. Well, sir, we appreciate you doing that. And I think you’ll find this fairly interesting little quick chat. David, thanks so much for joining us with no notice whatsoever.
David Porter 2:35
Well, surprise. It’s great to be here.
Jason Hartman 2:37
We’re glad to have you as a client and just want to hear a little bit before you tell us about one of your unique metrics and looking for properties. Tell us a little bit about your background because it integrates into the concept of packaged commodities investing and global trade and you have an interesting outlook on the global economy based on what you do for a living. So why don’t you tell us what you do?
David Porter 2:56
Yeah, absolutely. While since 1988 for the most of That time I’ve been in international transportation. Basically what my company does is provide the inland or the North American transportation for all the containers that are brought in from China, Malaysia, Singapore, Taiwan, Hong Kong, so on and so forth.
Jason Hartman 3:14
A big part of what we do when we’re thinking about world trade. You know, obviously, the economy is pretty connected together around the world now. And we have mirrors just three floors above us in our building. And they are closing the office here, subleasing their space. They are a big shipping company that ships containers all around the world, and businesses slow dramatically for them. Do you want to give us an outlook on what’s going on with container shipping?
David Porter 3:40
Jason, what I’ve seen since 1988 is an explosion in the amount of transportation that we’ve been providing, because those ports have just exploded as you can witness, it’s impacting our traffic here in Southern California, for example, these trucks and containers are just absolutely everywhere. And so you got
Jason Hartman 3:57
into the business right when the global Trade boom was really picking up in 19, sadly, and then you saw it kind of peak and you change careers. What’s happened here with
David Porter 4:07
my capacity that I provide, which are the trucks and the rail equipment to bring these shipments inland. I had excess capacity of my trucks and rail equipment, I had to discount my prices because there wasn’t enough of these containers coming in, in the late 80s and early 90s. That started to shift to the point where we would literally auction off our capacity because there weren’t enough of my services of my trucks and containers to bring all of these imported goods inland. We were in a shortage situation and my rates increase by about 100%. For me to provide my services we were charging double, from 1990 to say 2000 it increased exponentially almost.
Jason Hartman 4:57
Remember, you’re listening to flashback Friday. Our new episodes are published every Monday and Wednesday. Wow. So what we had happened during that time is we saw more free trade agreements, yes are more of an open less protectionist policy. And we saw more of the green spam bubble as he was just feeding credit into the system and just pumping insane amounts of money into the system through credit creation. Yes, right now we have that being done through creation of fake money. Yeah. Okay.
David Porter 5:30
So it’s a different kind of pump. Now, it’s interesting. In Southern California, we don’t have much of a manufacturing base anymore. Our manufacturing base in Southern California is called Tijuana and Mexicali. And that’s where most people that live in United States may not realize this, but all of your televisions are made either in Mexico in what’s called the maquiladoras section.
Jason Hartman 5:50
Last time I drove down there, which I wouldn’t dare do it today. That is outrageous. Mexico has become another Colombia. It’s like a drug cartel. Now, it’s amazing you drive across crossed that border, all you see is all these big corporate names absolutely across the border from San Diego because the environmentalist have chased out all the manufacturing out of California, you know, you can’t
David Porter 6:10
afford to do business here, for example, they make a lot of furniture down there. Now, California chased them out because they didn’t want the lacquers. And these emissions in the air. We saw large screen television sets, furniture, all that we import all those goods from Mexico, then all the other various things that you see at Walmart, Target and other places almost everywhere that’s coming in from these other Asian countries. That’s what we were importing it. And that activity was huge. It was great for our business. In fact, I made pretty good money doing that for a number of years. And as you were starting to ask me, after a while, I went to work for my investment advisor. Right, right. I was making money, I needed a place to invest. So I said, Okay, I liked what they were doing. I was also making a lot of money in the stock market at the time, right? And I said, You know, I want to be part of that. So I went to work for them. You get a securities license and everything. Yeah, the whole deal. Yeah. So this Was 2007 when I made this great move, and you joined the fast Wall Street conspiracy? Yeah. With no evil intent, but I was part of it. Yeah, absolutely.
Jason Hartman 7:12
A lot of good people in that industry. But unfortunately, the overriding theme of that industry is it’s just a big scam.
David Porter 7:18
You know, there’s all levels of that thing that’s scary about it is you have no control. You don’t know what’s going on. And every day almost lately, literally, there’s some new revelation about these people thought they had their money invested. The guy actually never invested their money. Yeah, the CFO did this or that. It’s a scary thing. And you know, certainly
Jason Hartman 7:38
You’re right, David, the difference with what we recommend and the other scams you see in the real estate industry, or you see things where people join these partnerships or these tenant in common deals, and they lose control of their money. The thing I love about investing in income properties is you have a deed you know you own it. You’re receiving the checks every The only intermediary party in there is really the property manager who could rip you off. But the amount of damage they could do is so small, it’s no big deal, you know, what are they going to do? mark up the cost of the repair of the garbage disposal and take a kickback of 25 bucks from the repairman? Well, interestingly,
David Porter 8:15
I was doing both at the same time. I mean, while I had money invested in the stock market, and I was an investment advisor for stock market investments, I also had rental properties. And the interesting difference about that is that, you know, my stock investments, they went way down some of the stocks my mutual fund, I mean, those companies don’t exist anymore. And you know, what my property values went down to, but you know, what my rents didn’t, and that’s what I really, really like about my investment properties is that cash flow actually increased. I took my rents up a little bit. So you know, my theory on investing in properties is, you know, I’m investing for the cash flow. The appreciation is the icing on the cake. I know I’ll get it sometime. I want to get it but I’m not bank. On that I’m just investing for the cash flow. And in the meantime, if you did it, right, you have a sustainable investment. So you’re never in a position where you’re forced to sell. And you know, that’s really the key never be forced to sell at the wrong time. Yes. And if the investment is self sustaining, you’re never put in that position. Exactly. Oh, that’s good. Okay, so you had your brief foray into the securities and then stock market world and Wall Street world and then you got out of that? Yes. And you came back into transportation. Yeah, went back and changed quite a bit. Things changed.
Jason Hartman 9:30
I am having everybody here. This is that this is a firsthand outlook on what’s going on in the global economy.
David Porter 9:37
Yeah, it is. So what’s happened is, as Jason mentioned, within the building, where Jason has this beautiful offices is Maersk. These people and just recent years very recent years built and purchase tremendous investments in these giant container ships that can hold 10,000 of these steamship containers that you see at one time and they’re just mothballing up because they Don’t need them. The trade has collapsed people, the United States consumers tapped out they’re not buying anymore. And so what I talked about before the rates were going up and up and up each year. Now they’re coming down. The other way is there’s excess capacity. Sure. I have excess capacity. The steamship lines have excess capacity. The factories in China have excess capacity. In fact, they’re closing many of them. Yeah. So that’s what we’re seeing. Yeah,
Jason Hartman 10:22
I just saw a thing recently. And I don’t know if I mentioned on the show before that 20 million or 26 million Chinese workers moving out of the cities back to the countryside, because they’ve just been laying off closing down factories. I mean, it is bad out there, you know, no question about it. And
David Porter 10:37
not even just the new kind of emerging economies, if you will, of China, even great names and Toyota of Japan, for example. I mean, there
Jason Hartman 10:46
for seven decades, Toyota never showed a loss. Yeah. And then last quarter was the first time Yeah, Toyota is a great company. And even they’re having troubles. Exactly.
David Porter 10:56
I mean, because they now to have access capacity. We’re in an era now of excess capacity. Yeah.
Jason Hartman 11:02
So what I call this in the housing world is the inventory hangover. And this inventory hangover represents huge opportunities for people. Because as we were talking, you know, you follow commodities a bit. Yeah. And what’s interesting here, everybody is that there’s this huge gap between the market cost of something or the cost to replace something, and the situation where the value of what it really is. Okay, so we see this artificial deflation that I think is quite temporary, where we see a lot of funds, investment funds and so forth, unwinding positions forced to sell things quickly to raise cash in order to stay afloat and stay in business. In our lobby of business got bad enough, I guess I’d sell those two big flat screen TVs in our lobby, right, right. Maybe some of our furniture, right so it for a lot less than it’s worth. That’s right. This is what’s going on around the world. And overall, if you look at oil for example, it literally costs seven dollars a barrel to bring oil out of the ground. Right? And oil is trading at what about $44? Last time I noticed somewhere in that range, you know, so you know that that cannot continue this deflation is very artificial and it’s built on markets and speculation and shorting of markets and so forth. Tell us your thoughts about the packaged commodities investing, and maybe you can share that experience also about
David Porter 12:23
shares. Yeah, yeah. So I purchased my first two properties through platinum. They were in Indianapolis, and one is 3500 square feet, five bedrooms, four years old. Okay, purchase it for $85,000. And in the process of purchasing it, we had to get the insurance. So I went to the insurance company I said, hey, I’ve got this property gave him the specifics on it. And they said the insurance on it is gonna be higher than what you expect. I said, Well, why is that? Well, we’re gonna have to insure it for $300,000. Now, this is a big deal folks, everybody listening how Did you pay for the house again? $85,000. And your insurance company told you they would require you to take $300,000 of insurance on the house. Exactly. Wow. Yeah. And their rationale was they said, Dave, it seems like you got a really good deal here because it would cost about $300,000 to replace that property if something happened to rebuild the house. So
Jason Hartman 13:23
if it burned down, they’re saying now it’s 3500 feet. You said, yeah,
David Porter 13:27
it kind of makes sense. When you think yeah,
Jason Hartman 13:28
that’s less than 100 a foot, it’s probably what’s that maybe around $80 $70 a square foot, which is about the minimum cost of construction is right, I can tell. So you bought that property for potentially. Now, this is not firm. And I’m not saying you could sell it for that today. But potentially the intrinsic value, if you will, of that property is $300,000 $215,000 more than you paid.
David Porter 13:49
Yeah. In terms of you know, when you talk about a basket of commodities, you know, all the steel and the cement, the wood and appliances, all these types of things, the glass, the lumber, the energy cost the petroleum products and the labor and all these things that go into producing the house is worth 300,000. Yeah, it’s your point. I mean, yeah, I could sell it for more than 85, but not 300. Eventually, I believe, and I don’t know how long it’ll take that type of value will be realized. I mean, I believe that it has to be long term. These are scarce commodities, right, so much steel that we can produce, for example, and there’s a huge demand for it all over the world. And so I kind of have a tied up on a nice piece of land, in addition to that in a beautiful neighborhood that has a PGA golf course nearby, and it’s very, very nice area.
Jason Hartman 14:34
So yeah, it was very interesting to me, as you were talking, I just got an email from Brittany who is coordinating a lot of our properties, and a new property was uploaded to our website. It’s a foreclosure property in Indianapolis. And so this one I’ll just tell our listeners real quickly, this is built in 2002. So it’s six years old, basically, three bedroom two and a half bath plus a loft in Indianapolis. It’s a foreclosure 1700 square feet. It’s priced at seven thousand dollars. Yeah, the cost per square foot here is only $41 per square foot. Now that sounds just like oil Oil should be $70 a square foot $80 a square foot. And here it’s $40 a square foot or so today, this house is the same thing because cost of construction should be 7080 bucks a foot, just like well, it’s like it’s parallel to oil. Yeah, interesting thing. Yes, it is. And here, they can buy it for $41 a square foot and it’ll rent projected for $1,000 a month. Yeah. Just a reminder, you’re listening to flashback Friday. Our new episodes are published every Monday and every Wednesday.
David Porter 15:39
Exactly. You know, and to your point, I’m from the Midwest originally, and I transplanted to California so I might have a different view on the Midwest and you but the people there when you visit them, they love it there and they have a quality of life while I personally it sounds like you valued the sunshine and the ocean all that they value uncongested streets low crime and they have certain qualities in their life that we don’t have that are just fabulous. And overall a relatively low cost of living to really want to be there. It’s a great, great area, great schools. And so it works for them. Everybody has different needs and interest. And there’s a great demand in Indianapolis for rental property. Listen,
Jason Hartman 16:16
I gotta tell you, I’ve lived in California since I was five years old. And I am really beginning to think California is about the most highly overrated state in the country. As you travel around to these other states, you just realize California just ain’t that great. Back in the 60s and 70s when it was uncongested here, and you know, that’s when California must have been great, but I think it’s largely writing on a reputation created 3040 years ago.
David Porter 16:41
Yeah, I think it is. And not only important televisions and other goods from Mexico and Asia, but people are coming to right and it’s making it very congested here.
Jason Hartman 16:50
Yeah, definitely. is. This property. The projected return on investment is 39%. annually. Yeah. Okay, folks, are you listening and don’t try this in Mutual Fund. Okay. 39% annually, of course that’s projected. Of course, it may not work out that way. But look, what if it’s only half as good as projected? Then your rate of return is 19 and a half percent, the total cash you’ll need to buy this property is about $22,000. Okay, that’s 25%. Down. Right, right. With closing costs, and your monthly payment here, your property tax will be $105. your mortgage payment here is $284 a month. Yeah. Okay. You’ll have $354 a month positive cash flow. Yeah. If it happens as projected. Yeah. The downside risk here is very, very low. Now, this property does need an estimated 80 $700 in repairs, no big deal. Okay. We have contractors go through all of these. Yes, most of them are just pretty cosmetic and in terms of what they need, downside risk very low. Yes, it is. Tell us David about your kind of funny metric, which I like when Sarah brought him into the office. She’s Jason, you just got to hear this.
David Porter 17:58
I’m an out of state investor. Living in California investing in Indianapolis. So I’m trying to get a feel for these areas. And there’s different areas within areas too, right? I mean, a certain city can have all types of different demographics within it. And ideally, I’d like to invest in the best demographic area I possibly can people that are more likely to be able to pay my rents on a continual basis. So what I do is I go to the zillow.com website, and I’ll put the address of the property in there. And if you do that, and you scroll down far enough, it’ll show you the schools that you would go to if you lived in that house. Those are all hyperlinks, you can double click the names of any of those schools. And then I’ll go to another page and you scroll down and I’ll show you all types of demographics of those students. And the one that I kind of key in on is what percentage of the children at this school are getting free lunch, so or subsidized? Who says there’s no free lunch?
Jason Hartman 18:55
We’re gonna call this David’s free lunch metric. Okay.
David Porter 19:00
James Freeland Well, that’s the key thing. And you can remember it that way, too. There is no free lunch. If 100% of the kids are getting free lunch unless you’re specializing in section eight properties, then maybe you want to think twice about it. I mean, some people love those properties have done very well with them. That’s just not my thing. My mother has,
Jason Hartman 19:17
you know, and it’s not my thing, either. But I made lots of money over the years doing section eight, just remember it’s a different business. Yeah. And if you want to be in that business, it’s a different kind of landlording. It’s a higher maintenance, your collection problems. But certainly there’s opportunity there.
David Porter 19:32
You know what there absolutely is. And, you know, I have two other properties. I just bought two more through Platinum network. So I’m a little bit of a newbie, and I wasn’t ready to go there yet. So what I like to see is something less than 50% of the children in a school getting free or subsidized lunch, and that indicates to me that the people in that neighborhood are probably going to have enough money to pay my rent.
Jason Hartman 19:57
That’s a great metric that’s really, really interesting. So you get A sample there of what type of tenant you’re going to have. Is it going to be someone who’s depending on the state to feed them? Or is it going to be someone who’s resourceful enough to feed themselves? Exactly. Okay. And if the state’s not paying your rent, you better hope they’re resourceful enough to pay your rent. Exactly.
David Porter 20:17
Yeah. And I would just mention too, it’s just an indicator. It’s part of the overall evaluation, I would still buy a property if it was over 50%. But it’s one of the things I like to take in consideration amongst many other things. All right. Well, anything you’d like to say in closing, the people that I’ve been introduced to from Sarah to Karen next door, the person that handles your organizational things where
Jason Hartman 20:37
operations manager, yeah,
David Porter 20:38
the people in the markets, to the financing people, property managers and your local real estate experts, they’ve been just more than helpful. I mean, seriously, and that’s why I’m back for more, I’ll be buying more properties this month. And as you point out, it’s a little bit of work upfront, really, the works up front and later on. As with my other properties, it’s really not too bad. The returns are just outstanding. The downside is it’s not that significant. Yeah. So I think it’s a just a wonderful program. You’re doing a great service for people. So I
Jason Hartman 21:10
would just like to add that good. Well, thank you so much. I appreciate it. And thanks for being on the show. You know, I was going to produce a show today and I was going to talk about the 10 or 12 biggest mistakes investors make, but now I can leave that till the next time.
Announcer 21:39
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Jason Hartman 22:32
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