In this episode, Jason Hartman hosts Randy to talk about mortgage financing and lending. Randy shares FirstKey and B2R and some of their benefits and compares them to Fanny Mae/Freddie Mac. They also discuss underwriting, the value of leverage, and the day trader. Lastly, Randy gives his thoughts on Douglas Andrew’s strategy.
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.
Announcer 0:12
Welcome to creating wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine self made multi millionaire who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities, this program will help you follow in Jason’s footsteps on the road to financial freedom, you really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 0:55
Welcome to the creating wealth show. This is your host, Jason Hartman. We are at episode number 484 484. Hey, I hope you liked our flashback Friday episode, where we talk about the ultimate investing equation. What’s interesting about these flashback Friday episodes is number one, you get to hold me accountable. See if what I said is true or came true or you know not true. I mean, I make predictions. And I interviewed an interesting guest today for a future episode that we have coming up who is the author of a book called The wealth of nature, not the Wealth of Nations, that would be Adam Smith, the wealth of nature. And he’s a really interesting guy. And he said, What do you call an economist who makes predictions? Wrong. That’s what you call them, an economist who makes predictions is wrong. So that’s what you get to do with my flashback Friday episodes. They are raw, they’re unedited. So whatever I published years ago, you’re going to hear it on every Friday for flashback Friday. And today to help me with the intro portion before we get our guest on who’s going to talk about Chicago. Yes, Chicago, the Windy City, one of our newer markets, we got a lot of interest and a lot of activity there a lot of our clients buying there. So we’ll talk about that in a few minutes. But first, we’ve got my friend Randy, who is our mortgage expert who’s been on the show before welcome, Randy, how you doing?
Randy 2:26
I’m doing great, Jason, how are you today?
Jason Hartman 2:27
Good, good to have you. And, you know, I’m really glad you came on the show you of course spoke at our meet the Masters event. Just over Well, about a month and a half ago, a little over a month and a half ago. Now. We’ve talked a lot about B to our or which stands for buy to rent, buy to hold and rent as an investor. And first key, which are two companies who are offering some unique mortgage financing. They’re really kind of filling some of the gaps. And you know, I’m pretty excited about some of their programs. And I wanted to have you on to talk about that as well as any other mortgage financing and lending related things we might talk about. So what’s going on with firstkey and BTR Randy.
Randy 3:11
Well, Jason, first of all, thanks again, for having me on, I always appreciate the opportunity to talk I and you know, regarding first key and bita are, again, just for people that aren’t familiar with them at all, in between the world of Fannie Mae and Freddie Mac, which would be our say, our preferred a tier lending. And the other end of the spectrum being the excuse me, which would be like your private money lending. Now we have this, more like a portfolio type operation where these these particular lenders are recognizing the value of real estate as a security and the value of real estate owners as being good borrowers. And so they’re offering unique programs allow properties to be finance inside of LLCs, which can’t do with a Fannie Mae or Freddie Mac loan. It’s allowing people to bundle properties into a group a big one bigger loan, which, you know, gives you some simplicity, if you will, instead of having a bunch of little loans. And it’s giving people an opportunity to get cash out of properties that they may have paid cash for and now or they’ve appreciated right, you sold in a lot of markets for home values have gone up. So they’re doing all kinds of things to really help real estate investors.
Jason Hartman 4:25
Yeah, I mean, that’s one of the big ones. We’ve had a lot of our clients, especially the ones who have the the guts and courage and faith to buy in 2008 2009 and even 2010. You know, they’ve all realized some really nice appreciation on their properties. So you know, they want to pull that equity out, engage in what I call equity stripping, which is I you know, a really good practice as long as you can do it well and get some good rates and their fixed rates, hold that equity out and use it to acquire more properties. grow the size of their portfolio. So they can control more real estate, which I mean, I don’t want to say for sure, but should lead to more wealth creation for them, and more semi semi passive income, nothing’s truly passive. So that’s been a really exciting thing for for many of our clients, you can take and potentially buy many more properties when you can refinance them. So tell us what the rules are, or the you know, the guidelines here for purchase money loans, which means just money being used to purchase a property, and refinance loans where you can refi and get cash out of the properties, give us some of the guidelines, they’re pretty good. I mean, this is not bad at all.
Randy 5:41
Well, they are pretty good. And you know, back to your point just a minute ago, this is what we were talking about at the meet the Masters was using leverage. Remember, the title of my presentation was debt is not a four letter word. In, you know, basically, when you refinance and take equity out of the property, you’re shifting more of the risk of owning that property to somebody else to this third party, because you took the equity out, that’s the part that is at risk that you own. And so really, this is just a smart way to not only just to grow your real estate investment portfolio to leverage that portfolio to give you a greater return, but also actually reduce your risk. It’s just a it’s a, it’s just a good strategy altogether. Now, specifically, to your question, we can do properties that are one to four units with these types of lenders, these are wonderful unit type properties, not apartment loans,
Jason Hartman 6:30
We can get up to 75% loan to value on these properties, both on the cash out and on the purchase, by the way, so 75% loan to value leaving only 25% equity, again, not bad at all. I mean, if you bought a mutual fund or a stock, you’d be putting 100% down here, you only have to put 25% down or you can get cash out, you can get 75% of your cash out of it. So that’s phenomenal.
Randy 6:55
And if you like you said the mutual fund, you’re 100% at risk with your money, now you’re going to be 25% at risk, but you get the benefit of owning 100% of the asset, you get 100% of the rent, you don’t have to give away 75% of that to the lender. So yeah, it definitely is something that that works for the investors benefit. You know, the the VTR program B to our program, initially, it started out at $500,000 was the minimum loan size they have or they are about to lower that to $300,000. And, you know, a lot of people go as you’re going on properties that are worth 100, or, you know, $150,000, how would I ever get that loan? Well, this is what I meant about bundling because we can take five or six properties worth $100,000. And then at 75%, that would be let’s say, you know, 500,075%, we would have what $350,000, that would satisfy now B to R, and we can get one loan for all those properties, so bundling the properties, and now they’re allowing even a smaller bundle. So the bundle doesn’t need to be half a million dollars worth of property, it can be just $300,000 worth of property, right. And that’s what we do are on first key, it’s even lower, you can actually have a smaller low amount, you can have a smaller value property as well. So you know, all these things are very specific. And you don’t want to necessarily get into all the detail detail of it. If somebody has a question they can reach out to us we can fill it is just specific to their situation. But the point is, they’re getting better. And they’re getting more flexible, and they’re getting more available to more people because they’re doing all the right things.
Jason Hartman 8:36
I want to ask how hard the underwriting criteria is, which isn’t too bad either. But before we get into underwriting criteria, and you know, those those kind of hoops that the investor has to jump through, what about the rest of the terms? I mean, 75% loan to value ratio, that’s pretty darn good. What is the interest rate? What is the term of the loan, the length of the loan? points, fees? Anything else? Someone should know?
Randy 9:00
Okay, so the loans can be adjustable loans ranging from three five to seven years, which is the fixed period, right? fixed period of time? Yes. So the interest rate is fixed for three years fixed for five fixed for seven, up to seven year fixed? Okay. Yeah. And it’s not amortized over five or seven years to be amortized over 30 years. So the payments are lower. You just have the interest rate that’s fixed for the three five or seven years.
Jason Hartman 9:23
So So is there anything longer on the fixed rate or is seven as far as they go?
Randy 9:27
No, actually, with our with one of our investors, which is first key first key offers a full 30 year product 30 year fixed rate? Uh huh. Okay, great. How high is the rate on that? And I and by the way, this is all subject to change, of course. So yeah, as you can say, it’s February 27, right at the end of February in 2015. Because this is going to be on the internet and live forever. But, you know, on the 30 year fixed rate, you’re looking at the seven, mid 7%
Jason Hartman 9:52
give us a comparison. I mean, what could you get? foreign investment property, not an owner occupied property. What could you get for an agency loan? Fannie Mae, Freddie Mac type of loan that you just get from a bank, sure, in same same day, same timeframe, today, we’d
Randy 10:07
be looking at maybe four and a half percent. So we’re looking at what 250 basis points higher interest rate, because of the uniqueness of this loan. Again, it’s, it’s that world in between the agency, Fannie, Freddie, and the private money loans, which are going to be more like 910 percent 11 12%. interest, that’s,
Jason Hartman 10:25
that’s pretty darn good. I mean, you know, remember, the comparison we have here, dear listeners, is we have hard money or private lending type of financing. That’s all we had. Before, you know, now, it’s really nice to see that there is there, there is a lot of money here that is kind of filling this gap. So this is this is not bad, this is not a bad deal at all,
Randy 10:49
I also see a big benefit that people that have taken the, you know, the extra steps for asset protection to have their properties owned by an LLC, these lenders are willing to make loans directly to the LLC. And Fannie, Freddie just won’t do that. If you have, you know, corporations, whatever type of entity they’ll they’ll lend to those entities where you can’t, you can’t do that with an agency loan. They’ll also do loans for people that have properties and self directed, like retirement plans, 401, K’s or IRAs that are non recourse. So that’s also available through these types of programs as well,
Jason Hartman 11:28
Just out of curiosity, will they even finance owner occupied homes? Are they strictly for investors?
Randy 11:34
Ah, you know, I guess they would. But, again, given the choice, why would you if you didn’t have enough, if you could get an agency loan and the interest rates 250 basis points lower? You don’t want to go that route? Oh, no,
Jason Hartman 11:47
I agree with you. But I’m just kind of curious as to what their mindset is, you know, they really do cater to investors, you know, the fact that you can use entities and they don’t have a problem with it. Whereas we’ve always in real estate than trying to, you know, kind of make a square peg fit into the round hole, in that we’re using residential type products that are not really designed for investors or investment properties. And we’re using them to finance them. But these companies are really just totally catering towards investors.
Randy 12:21
That’s what they’re designed. They’re, they’re built and designed for investors. And you know, so to answer your question, I don’t even know for certain that they would lend to somebody with an owner occupied property. I don’t know that it even fit their guidelines. These are made for people that own investment properties for financing investments. That’s they’re doing good. Good
Jason Hartman 12:38
deal. Okay. So tell us more. We talked about the rates. Did you want to talk any more about the fixed versus adjustable, or do you want to jump into the underwriting criteria?
Randy 12:49
Well, I think I’d like to go to the underwriting criteria a little bit. So I want to talk about this thing called debt coverage ratio.
Jason Hartman 12:54
We’ve mentioned that before the dti as it’s known the dti, the debt coverage ratio. Yes. Okay. Go for it.
Randy 13:01
Yep. So DTR DCR. Actually DCR dti debt debt debt to income versus debt coverage ratio. So, you know, a lot of times I asked people tell me about their properties. And they’re all happy that all these properties cash flow well, cash flow to some people is not the same as what these lenders are looking for in terms of they don’t want to see breaking even, they want to see positive cash flow. And they want to see typically about 120% of the income after the expenses, not including the mortgage, that cover the mortgage debt. So if I have $1,000, mortgage payment, I want to have 1200 dollars of net income after paying property taxes and insurance and setting aside money for property management and in vacancies. So the debt coverage ratio is very important. And you can fix that if you find yourself with a cash flow that’s not quite right by borrowing less or having more equity in it, but on a on a Fannie Mae loan, so they don’t care that they’ll let you have negative cash flow, right. These loans you can’t you have to have a positive cash flow, it has to be positive by 20% more than the than the mortgage payment itself. Basically, that means that the if someone goes to Jason Hartman calm and looks at the performance in the Properties section, when you look at the debt coverage ratio, okay, and you see 1.2 in there, or you see 1.4 1.5, which you will see on a lot of our properties. That’s just a totally easily financeable deal, right? That’s absolutely right. And if you happen to see one, I don’t think you’d have any of these right now. But if you happen to see one that was like one or 1.1 all that would mean is instead of putting 25% down, you may need to put 30% down or 31 or 32 or whatever the number is to get the dad Yeah, that’s that’s
Jason Hartman 14:48
fantastic. Wow, there’s some good opportunities here, people this is nice. Now, what about the underwriting though after that? I mean, you know, are they going to ask for your credit report? Are they going to knit Pick every little thing in your file, are they gonna be easy to work with?
Randy 15:03
I mean, everything changed in 2008. And you know whether, you know, this is a product designed for a purpose. And if you fit the box and set the purpose, it’ll work and you’ll get the loan. But if you do that round peg square hole, whatever isn’t going to work again. And so it’s not made it’s this is not the fog and, you know, fog a mirror type blown, you still have to qualify for it. And the property has to qualify for there’s underwriting criteria. But if you fit it’s a fantastic opportunity,
Jason Hartman 15:29
or both lenders pretty much mirroring each other. I mean, I know there are some slight differences. But would you say that overall, they’re they’re pretty similar?
Randy 15:38
I’d say they’re similar in that they both lend to investors. But beyond that, I think the products are very different. You know, again, these beta are has this this minimum $300,000 first key doesn’t have that first key has a property alone design just for fixing flips, which be too hard doesn’t, you know, they’re more the buy and hold. So yeah, there’s some you know, there’s there’s nuances and subtleties, product differentiation, which you know, you want, and that’s, again, why you got to really sit down and find out what it is that you need to accomplish. And then we can find the right program and lender fit that that scenario.
Jason Hartman 16:14
Any other advice or tips that you want to share on lending in general, or borrowing, I should say more than lending?
Randy 16:20
Well, we are, we are once again, in a super, super low interest rate environment. And everybody should be looking at refinancing anything they can right now, because this opportunity, you know, we said it wasn’t to come along again. And it did. But it’s just not going to last forever. This is not normal. And to get 30 year financing at these below, you know, hundred year interest rates, if you will, and be able to lock in an interest rate for three decades in the future. This is going to pay off in spades if
Jason Hartman 16:50
you can take advantage of it today. It really is. It’s an it’s an amazing, amazing time. Any thoughts on when interest rates are going to go up? I was reading an article two days ago, and it talked about how Janet Yellen was kind of setting the path for rate increases. But still inflation is very low. What are your thoughts on this?
Randy 17:12
Yeah, I think that’s a that’s a really great question. Because, you know, fundamentally, we look at all the money that that’s been pumped into the system through the Federal Reserve’s since, you know, since the financial crisis, and everybody’s just waiting for this inflation to happen. Now. I have an opportunity as a lender, of course, to see what’s been going on with rates going down. But I’m also a financial planner, and I work with, you know, life insurance annuities, the other side of the equation, if you will, right. And so I’ve been seeing interest rates being lowered on the payouts from the insurance companies who are looking far into the future as possible. They basically they’re saying, Hey, you know, there in the in the near future, I’m not talking like the next six months or you’re I’m talking like years, they still don’t see a big rise in interest rates ahead of us, because the world that cold that we caught back in 2008, the rest of the world got it now. And they got to get over it.
Jason Hartman 18:06
Right, right. It’s contagious economics are contagious. No question about it. I wanted to just mention to our investors before we jump into our guests, and hear a little bit about Chicago, in addition to that, Indianapolis. I mean, wow, a lot of our investors, I mean, that’s just been a perennial market for us. We’ve got some different providers. There. We had problems with one of our providers, and we’re really kind of phasing them out and welcoming some more business with some of our other providers there. There’s just a lot of great metrics about it. USA dubbed it the number one convention city in the US. Now, you know, I when I hear that I say, what about Las Vegas? Well, it says, but according to visit Indy 62% of visitors to Indianapolis came to see family members and friends, the number has risen from the 50s in recent years. They’ve got just a ton of good things going for them. The newer Times said they listed as one of 52 places to go in 2014 now, you know, there’s a lot to brag about in Indianapolis. It’s kind of surprising. I mean, the reason I’m saying this and surprised about it is that I would never really consider Indianapolis a tourist destination unless I’m going to go see the Indy 500 right. But you know, I’m looking at this ranking right now from USA Today. In terms of the best convention cities, and here they are in order According to USA Today, Indianapolis number one, Boston number two, Nashville number three Salt Lake City for Atlanta, one of our markets five Denver another one of our markets, although kind of expensive we can’t do much in Denver because the prices, New Orleans number seven, Denver was six by the way, DC number eight Minneapolis Chicago, another one of our markets. That’s number 10. So some of this stuff actually kind of surprised me. Does that surprise you? Randy?
Randy 20:08
It does surprise me. I mean, I wouldn’t think of going to Indianapolis on vacation either.
Jason Hartman 20:14
Well, but and but for conventions, you know, it’s like, it’s got to be a lot less expensive for companies to have conventions there than in Las Vegas. Right. So I think that’s one of the reasons it’s really, it’s just really attractive. I mean, whenever I go to Las Vegas, I just feel like everybody is in my wallet. You know, everything costs money there. It’s just mind boggling. How expensive that places now. I mean, I remember in the old days, Las Vegas, you know, they used to have dollar 99. buffets. What happened, all of that.
Randy 20:47
That’s why they have all those big beautiful casinos are now I have to say the one thing I love about all of these types of properties in these communities, is that the land evaluations You know, when when you look at, you’ll say cultural property like California, where 80% of the property value is the land and 20% of property you go to Indianapolis is completely opposite. And what a difference that makes the net cash flow the money you get to keep after Uncle Sam.
Jason Hartman 21:15
Yeah, it’s huge. It’s just huge. You take the same dollar value and move it from the coast, one of these communities and you’re going to increase your income by you know, 100%. Well, Randy, that harkens back to one of our clients, Dave and Rebecca, that you referred to us. And we did that fantastic exchange together with them. And by the way, I have to tell you, that I was just at one of my mastermind groups, and one of their brokers came up to me and said, that they were you know, they brought up our names. I just heard this the other day. And, you know, I thought What a small world it is, here’s the sky is 3000 miles away across the country. And he says, Oh, yeah, we were buying properties through Jason Hartman, his company, and we got a whole bunch of them. And they bought one locally through him there in Pennsylvania. So he just said, What a small world I’m gonna see Jason next week.
Randy 22:06
Yeah, that was, that was quite the exchange. That was what a $3.7 million property into, I think we did ended up with 27 single family residences that we had.
Jason Hartman 22:17
I’m gonna correct you I Well, I don’t know, maybe I you know, I could be wrong. But I thought it was a $2.7 million beach property in like San Clemente. And I think they bought 36 or 37 properties with that exchange. could be wrong.
Randy 22:32
Yeah. You know what you might be right. But the point was that we did all this in 45 days. Right. And we closed them longer, but 45 days, we identified that many properties that that worked. That was That was fun.
Jason Hartman 22:46
It’s really just phenomenal. You know, that’s really and, Randy, you’ve heard me talk about it enough times. It’s the Hartman risk evaluator. There. There’s just so much to that, you know, I mean, if you want to be a real investor and not a speculator, buy the commodities, the packaged commodities, buy the structure, the house sitting on the land, because that’s going to give you two things. It’s going to give you much better cash flow, and it’s going to dramatically reduce your risk. There’s there’s no question about it. Oh, good.
Randy 23:20
All really good. Yeah, that was, that was quite the experience. We had to do that again, sometime. Absolutely, we will.
Jason Hartman 23:27
Hey, Randy. I noticed we’re going a little bit long here. So I think we’re gonna run Chicago on the next show. Why don’t we just talk for a little bit longer here for the listeners? I just want to ask you another question. Remember, Douglas Andrew, of course, or Doug Andrews. He wrote a few great books, one that I read, maybe 11 years ago called misfortune. And then he wrote misfortune one on one. And it’s kind of like, I loved half of his philosophy. I didn’t like the other half. I talked about it on the show many times before, especially in the old days, maybe some of our listeners on one of my flashback Friday episodes will catch some of those interviews. That guy his whole concept was was half grade. I thought, you know, have you kept up with him? Whatever happened to him and his stuff? You know, is he still around? Or what’s his thing nowadays?
Randy 24:16
Well, he Yeah, he’s definitely still around. The concept is still around sort of. And just again, for the for listeners that don’t know what we’re talking about, basically, the the book was about taking the equity in your real estate, that in Doug’s words, was not safe, not liquid and provide a no rate of return. And I couldn’t agree more.
Jason Hartman 24:35
You know, there’s no By the way, Randy, before you go on, you know, there’s a metric and I’m sure you’ve heard it, it’s called, it’s called r o e, not ROI, like return on investment or return on inflation as I’ve coined, but ROI or return on equity. And I say that return on equity is bogus, there is no such thing. There is no actual return on equity. And that is a metric that is Especially commercial real estate people use all the time return on equity, you know,
Randy 25:03
yeah, it’s kind of like, I guess the opposite of opportunity costs, right? So your, if you finance 100% of cost you x, if you finance a 75%, that savings would be your return on equity. So you could you could argue it. I mean, obviously, I’m expected just having that conversation today, if you had a home that you paid cash for, you know, I have no mortgage and so I have a $500,000 house, I paid no cash, I pay cash for it, I have no mortgage payment. True, but you also lost the opportunity to earn, let’s say, 5% on that $500,000. So, still, it’s clashing you $25,000 a year to own that home free and clear. Right? That’s, that’s kind of the opposite of return on equity. But But back to back to our point, Jason. So Doug’s theory was, you know, let’s take the equity out of your house. And then that’s a part of that you did like, and then the part that you didn’t like, is he was putting it in equity indexed universal life insurance policies, or you would have advocated putting it in real estate. Right. And we, I still would love to have that debate. It’s not today, because it’ll, it’ll take some time. It will take a while. It’ll take a while now. And so now fast forward, you wrote that book, I think back in 2002. So we’re looking at 13 years later? I would, I would say that, that people that follow that strategy, and didn’t, you know, panic, and you know, when the home values went down, and they had negative equity, possibly. And, you know, the stock market went down. You know, if they held on, they probably did really, really well. Those insurance contracts made made lots of money, the equity in the real estate, you know, sir, went away. But so what they had some in another place making, making money as well. And you go fast forward 30 years, and now probably the equities back the real returns inside the investments or have done well as well, it’s a good, it’s, the point is that the equity real estate is just the part that’s at risk. So who do you want to own that rest? Do you want to own it? Or do you want to let the bank own it,
Jason Hartman 27:05
it’s much better to let the bank on that risk, right? Right. You can, you can basically outsource your debt obligation to the tenant, you can outsource your risk to the bank, you can outsource your tax liability to you know, give that back to the government instead of it being on your head, if you can qualify for all the depreciation and so forth. I mean, it’s just a it’s just the best thing going, you know, it’s, it’s amazing. What, why don’t why don’t some people get it? I mean, you know, you’re you work with a lot of people, you know, you’ve got a financial planning practice, in addition to your mortgage practice. How is it that some people just get it about this real estate thing? And some just don’t?
Randy 27:45
Yeah, yeah. Well, you know, if they, if they get on the internet, or they, you know, the listen to the, you know, the the popular gurus, whether it’s Suzy Orman or Dave Ramsey, whatever.
Jason Hartman 27:56
Well, Dave, Dave Ramsey owns quite a lot of real estate. But, you know, he loves to brag about how it’s all free and clear. And I mean, this is just idiotic. I’ll tell you two things I want to say about this. Number one, is that I had Dave Ramsey. He’s number two guy, he would not come on my show, Dave. Okay. And but I had his number two man on the show. I can’t remember exactly. It’s titled like the CEO of his company, or something. Or maybe this CFO, I’m not sure. Anyway, he was on the show a while ago. And he talked about how well the reason Dave doesn’t like debt is because he had all this real estate and his loans were called. And I said, That’s impossible. You can’t they change that law in the depression. No lender can call your loan, okay, it’s long. If you’re making the payments, they can’t call your loan, if you’re not making the payments. Heck, they can take the property. Great. That’s the implicit, your, that’s your implicit exit option is that you can let it go. Okay. So what I mean, that’s just it’s just amazing how people don’t get that. Now, fast forward to today. I was doing an interview with a very bright author and she was an anchor on CNBC and on a lot of things, but you know, it’s not our fault. She’s doesn’t understand real estate. Right. And we were talking in this interview will be published soon, by the way. And, you know, she was saying that people shouldn’t view their home as an investment. Now, of course, I agree with that. Okay, your home is an expense, it’s not an investment. We’re all in the final analysis. We’re all renters. Okay. We don’t own anything. We’re not taking anything with us. Okay. Out of this life, right? There’s no like they say there’s no suitcase on the Hearst Okay, here, no suitcase rack on the her on the top of the hearse. Okay, so we’re not taking anything with us. We’re all renters, we just have our house that we use for utility, and that’s all there is to it. There’s nothing more to it, okay. So you’re either going to pay rent, or you’re going to pay a mortgage. Now if that property is $100,000 property, That means it’s at the lower end of the spectrum, then, you know, you should own that property, you should buy that property, you should not be paying rent. But if it’s a million dollar property, you should rent it, you’d be much better off renting it, because you can rent that million dollar property for a lot less, then you can get the return back from a million dollars invested in other properties that are rentals. So, you know, that’s one thing. And then she said, Well, you know, it’s been shown over the years that, you know, real estate doesn’t really beat inflation. And I agree with that. But Robert Shiller said that in his book to the famous Robert Shiller, the name behind the Case Shiller index, the author of irrational exuberance, number one, and irrational exuberance. Number two, he borrowed that phrase from Alan Greenspan, and then wrote those books. I read the number two book years ago, and I just thought, is the guy an idiot, or is a liar, it’s one or the other. Because to say that real estate only keeps pace with inflation is true on its face. But the reality is that in practice, most people finance their real estate. And when you finance it, and say, for example, inflation is 3%. And real estate that same year appreciates it 3% or say inflation is six, and the real estate appreciates it six, doesn’t matter. When you only have 10% of the money into the deal, you multiply that return by 10 times. So you inflation did in the first example, or in the second example, 6%. And the real estate did 6%. But your gross, you know, simplified return on investment is 60%. Because you only have 10% of your money in the deal. I mean,
Randy 32:05
that’s when homeownership, even if it’s your own home, that you’re not running out, where you’re paying the debt yourself, it’s still a phenomenal deal, and you still get the tax benefits that you could do back from it, and you get that property taxes, you get to deduct from him. And that doesn’t even include that you’re just looking at pure appreciation. So now with leverage and tax benefits, it’s hard to say how you can’t beat the stock market. Now it gets even better, because then you add to it. And you spoke about this at our last meet the Masters event
Jason Hartman 32:33
you add to it, which, you know, one person argued with me that this is you’re just talking about leverage. But no, I’m not talking about leverage. Leverage is what happens on the top of the deal, right? So the hundred thousand dollar property goes up $6,000. If you’ve only got $10,000 in the deal, then your return on $10,000. In gross numbers, admittedly, this is simplified, is $6,000. You just made 60% on your money in one year, in one year. But if the inflation rate is 6%, then you take a $90,000 loan that just got the base or devalued by 6%
Randy 33:22
or 5400.
Jason Hartman 33:24
Yeah. I mean, now you’ve more than doubled your money in a year. I mean, you take the leverage, which most people get the leverage concept except Robert Shiller and this lady didn’t want to understand that. But fine, you know, and Jim Cramer doesn’t either because Jim Cramer on Mad Money. I you know, I I saw him talking about it, or maybe this was on his radio show on Kf fi in Los Angeles. I’m not sure. But it was either on the Mad Money TV show that’s on CNBC, or on his radio show. And he was talking about how stocks outperform real estate. Well, I mean, the vast majority of people don’t pay cash for real estate, and the vast majority of people, I mean, the vast, vast, vast majority pay cash for stocks. So that is a lie on its face. These people are just lying to the world. They just are not telling the real story. I mean, Robert, the the highly credible Robert Shiller Okay, who you know, I mean, it’s just it’s amazing to me. So, you’ve got the leverage, then you’ve got the inflation induced at destruction. And we haven’t even talked about the other benefits mean, you know, that’s it right there. You’ve already doubled your money in that example in one year.
Randy 34:42
Well in just to bring you back from this like tangent here.
Jason Hartman 34:47
I, someone needs to buy me a shirt that says think of the tangent.
Randy 34:52
The tangent was a bunch of lines going all over the place. So you know, the question was, Why don’t some people get it and, you know, I because I’m a financial planner. I’ve run into all different types of people. And they’re certainly we can just we can take out the group that can’t qualify. That’s not about getting it, they just can’t do it. But there’s still a bunch of people that could do it that won’t do it. And, you know, some of them are just fearful. Some of them are, are they’re just ignorant of all these things? Like we’ve been talking about that certainly a part of it in frankly, Jason, some of them are just lazy, because real estate, you know, it’s direct calls it a passive investment, but it’s the most involved passive investment you could ever own. Would you agree? I mean, you got to find the property. There’s a lot involved with that you take away a lot of that work, but buying real estate is it’s not just like sticking money in the bank account. There’s, there’s stuff you have to do. That makes sense.
Jason Hartman 35:43
You do have to do stuff, but I argue and my listeners have heard me say this a lot, is that there’s no such thing as a passive investment. And you know, one of my friends who who’s owned over 1000 houses, okay, 1000 houses, he says the same thing. Nothing is passive. Even if you put your money in the bank account, you’re subject to taxes, inflation, of course. But you’re also subject to if you’re a, you know, if you’re really, Doman bloomer, you’re subject to bank failure. So you can’t really say that even the bank, which would be considered a truly passive investment, is even totally passive. Because you’re getting passively screwed. Okay? Yeah, call it passive. If you want you, you know, it’s like, there’s, there’s different things in life, you know, there’s playing to win, playing not to lose, and there’s playing to lose. If you put your money in the bank, you are most assuredly playing to lose. The only time that won’t be true, isn’t a true deflationary environment where your cash becomes more valuable. And in that environment, I would submit that if there was a significant portion of that environment, you run a very strong risk of bank failure. Okay. So and And believe me, the FDIC. And Brandi I’m sure you know about this, the FDIC does not have anywhere near the reserves to insure the banks, okay. They don’t. They don’t. They don’t, they don’t. But they also have the, you know, the Treasury to prop them up if they are not the Treasury, but they have the FDIC printing presses you You are right, and they would they would print to make good on the loans, I bet, right? Because they have that right. But guess what happens? See, the FDIC says that you’ll get your money back, they insure up to $250,000. Right? So they say you’ll get your money back, but they don’t say what the money will be worth when you get it back. And what I mean, there is that the printing press is inflationary. So they can pay you back in nominal dollars, but the value in real dollars is huge question mark. Yeah. And and, you know,
Randy 38:01
I guess my point is that if, if you’re willing to put a little time and effort into this, the returns are well worth it. And and so if it’s fear or laziness, I don’t know which of the one or the other or both that are holding you back. You really just got to think through that. What else could you do with your time that’s gonna give you those kinds of returns.
Jason Hartman 38:20
The funny thing is, you know, the people that are all in the stock market thing they spend all this time thinking of, I know those people, you know, I know lots of those people. They spend tons of time thinking about this stuff. They spend a lot of time watching Bloomberg and CNBC, listening to it on the radio on their, you know, satellite radio in their car, they they read the Wall Street Journal and Investor’s Business Daily and Barron’s, and, you know, all these publications, they, they have expensive newsletters to which they subscribe that they pay, you know, $2,000 a year they look at the Morningstar reports. I mean, my God, do they actually think what they’re doing is passive. You know, they’re online trading stuff. There’s nothing passive about this.
Randy 39:05
That’s that’s how it works. And if you listen to the, again, the pundits on television, they’re talking the same thing is sounds like you’re at a racetrack. Did you ever hear that? Oh, yeah.
Jason Hartman 39:15
It’s like a total casino. You know, totally. It’s, that is, I would, I would submit to our listeners that CNBC and maybe to a lesser extent, Bloomberg, are, are designed literally designed by psychologists the same way Las Vegas casinos are designed. And you know, probably our listeners have heard about this stuff they’ve heard about the way in these casinos, they manage the lighting, the way they manage the ventilation, the way they pump oxygen, extra oxygen in through the HPA system, the patterns of the carpet, the colors on the walls, they move the needle on This stuff by just a little bit. And that can mean millions and millions of extra dollars to them every single year. And so I would submit that the set, the design, the talk, the voices, the modulation, all of that stuff on CNBC is designed to encourage people to invest, and it works. And it does work. For people who are just I remember, remember when day trading was such a big thing years ago, whatever happened to that? I don’t know. But anyway, it was it was like a huge thing. Like every other person I met Newport Beach used was a day trader for a time there
Randy 40:40
Flash crashes, what happened, Jason, they went, Wow, I can lose that much money in a few seconds. Really?
Jason Hartman 40:45
Yeah. Then Then they were done with a trade. Well, I remember these people like literally Randy quitting their job. And all they would do like you couldn’t talk to them during the time the market was open, they would not talk to you at all, they would not plan anything, you couldn’t go to lunch with them. And they would sit there in their, in their room with CNBC on the TV. And they would just be watching it, watching it watching it. And they’d have their computer in front of them. And they just be trading stuff. I don’t know what people think, you know, that just I mean, you compare all this stuff to income, property and income properties really easy.
Randy 41:23
All point of view all a matter of perspective.
Jason Hartman 41:25
Right? It most it most definitely is. So anyway, Hey, thank you for joining us today and talking about this stuff, folks. We will do the Chicago local market specialist on our next episode, which is just two days away, probably I don’t know when you’re listening to this, but it’s just, you know, you’re gonna hear this on Monday. It’ll be Wednesday. Okay. So it’ll be right out. You’ll hear about Chicago, a lot of our clients buying there are a lot of interest in that market. You know, I asked him some tough questions about the landlord, friendliness issue, the taxes, the government, the crime rates, all of that stuff. You’re going to get all your answers to that on the next episode. So again, Randy, thanks so much for joining us, and happy investing to everyone. Thanks, Jake.
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