On this Flash Back Friday show Jason plays a live recording about SWOT. SWOT stands for strengths, weakness, opportunities, and threats as they apply to income properties. Jason goes into the fragmentation of the US real estate market and how it benefits real estate investors. He also talks about its performance against Wall Street and the stocks.
Jason Hartman 0:00
Welcome to this week’s edition of flashback Friday, your opportunity to get some good review by listening to episodes from the past that Jason has hand picked to help you today in the present, and propel you into the future. Enjoy.
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 1:05
Welcome to the creating wealth show. This is your host Jason Hartman Episode Number 692 692 on the road to Episode 700, thank you so much for joining me listeners around the world. today. Our guest will be none other than that guy who is always going off on what’s he going off on? tangents. Yes, that’s good old Jason Hartman yours truly.
Jason Hartman 1:30
And this is a recording from a live talk that I gave on a SWOT analysis, SW, OT strengths, weaknesses, opportunities and threats as they apply to the most historically proven asset class in all of the world. And that is income property, income property. So we’re going to talk about what are the strengths and you know, we’re always talking about the strengths so actually when you hear this Recording, you’re not going to hear that much about the strengths. There are so many more than I cover in this SWOT analysis because it’s the most historically proven asset class in the world. Of course, you know that already because you’re listening to the show and you get it. It’s better than the modern version of organized crime known as Wall Street. Yes, the modern version of organized crime, the one that makes Al Capone that’s the old gangster, the Chicago gangster, the mafia guy, right? It makes him look like Mother Teresa. In terms of the amount of money that wall street scoundrels are stealing, and you know, there was just another big scandal on Wall Street. Maybe we’ll have time to talk about that for a moment before we get to our guest our live recording of yours truly talking about SWAT. But before we do that, I want to talk to you about something called a buy down and this is something that you may have or may not want to use as you are purchasing and financing your income properties, and maybe even your own home, it can be a very good deal. It’s not always the best thing to do. But we as long term income property investors, we like to buy and hold and usually say, hey, try and buy and hold your properties for how long? 27.5 years? Yes, why 27.5 years. So you can run the depreciation schedule, because income property is the most tax favored asset class in America. And 27.5 years is the depreciation schedule on commercial properties. It’s longer, it’s 39 years, so it’s not as good on those commercial properties. The residential investment properties have a shorter schedule, which means you get about 25% more tax benefit, because you get to depreciate them over a shorter schedule, which means more tax benefits sooner. And with the time value of money concept that we all understand because we listen to the show, and we’ve talked about it before, with the time value of money $1 today $1 saved today is better than $1 saved in the future, because inflation will make that future dollar worth less money. And it’s not just inflation. It’s also the opportunity cost of what you might use that dollar for today. That could help you grow that dollar versus having it in the future and not being able to use it today. So it’s not the time value of money concept isn’t just about inflation. It’s also about opportunity cost. And remember, when you have money tied up in savings accounts, Home Equity equity And income properties or rental properties or investment properties in a mutual fund in an s&p 500 index in bonds God, hopefully you don’t have bonds those absolutely suck as I predicted they would. They’re really terrible. Now they’re actually more terrible than I thought they would be when I predicted that many, many years ago and talked about bonds. That’s a subject we should really do an episode on, in and of itself, that bond subject. And when you don’t have use of that money, to put it to its highest and best use, that represents an opportunity cost. So you don’t ever want to have lazy money. You don’t want to have money tied up in things that isn’t providing the highest and best return on investment. You want to get the maximum ROI. So by downs, what is a buy down? A buy down is when you as a borrower when you’re financing Property have the option to pay more loan points up front. Now why would you want to do this because you can buy down your interest rate in doing so. So points 1% of the loan amount. That’s a point. That’s what I didn’t know, when I went to my first real estate seminar at age 18. When the speaker got up there and he was talking about points, I thought, What’s a point? Well point is just 1% of the loan of the loan amount of the amount financed. So if you have $100,000 loan, one point would be $1,000. You have the option to prepay and pay more points and lower your interest rate. See points are really just prepaid interest. points are prepaid interest. So for example, if you’re going to buy a property to flip it, and instantly resell it, Your goal as the buyer financing that property would be to pay zero points. Because you, you will only be paying interest for a very short time on that, that loan. And so it’s better to take a higher interest rate. And maybe pay say you’re a flipper and you’re getting hard money loans out there, right, which hopefully you’re not in that, you know, it’s not our thing too much. We do a little bit of it, but it’s not our main thing. Our main thing is buy and hold investing because, as I’ve always said, I’ve noticed just over the many years I’ve been in the business, that the people who who do the flips, they have spending money, but the people who buy and hold the properties and build big portfolios, they have real wealth and hate spending money ain’t bad, but I’d rather have real wealth any day of the week. Okay? So points are just prepaid interest. So if you were doing a flip, for example, and you were thinking, well, gosh, I’m going to flip this property really fast. I know I’m gonna sell it in a month, hardly gonna own it for any period of time at all. You might be willing to pay 16% Yes, I did say one 6% 16% interest with no points over maybe 10% interest with two points, because points are prepaid interest. And if you’re only going to keep that loan for a very short time, it’s going to cost you more money to pay a higher point value or prepaid interest. Now let’s get look at the example that we might face. And I have to be frank with you. I don’t think these examples are very compelling, but I’m going to share them with you anyway. So I just got a quote from one of our lenders who if you talk to any of our investment counselors, they can refer you and I wanted to have totally accurate up to date pricing. So all of this is his math. And it’s his his his point chart. Now when when you get a loan and I’ve owned several mortgage companies over the years I don’t own one now but I I’ve owned several over the years, when you get a loan, what they call par meaning the rate being at par that means no points are paid at all. So at par, the rate today, according to him on an investment property is about and it depends on the loan to value ratio, your credit score the whole package, okay, understand that, but the rate he quoted was 4.875%. at par, meaning you don’t pay any points, that’s the rate you’ll get 4.875% of course rates are subject to change without notice. Okay, so if you wanted to pay one point, and by the rate down, you would get a rate of 4.6 to 5% 4.6 to 5% with one point or $1,000. Now, what would be the difference in your mortgage payment on a $100,000 loan? So in this example, say you purchased a $125,000 property, and you put 20% down. So you got an 80% loan to value ratio, that means your loan amount would be a nice even $100,000. And I point would be a nice even $1,000. The payment at par at 4.875% would be $529 per month. Wow, that’s cheap. Oh, wait. Ah, yes, we have some of the lowest rates in history right now. Are you taking advantage of that? Are you stocking up on these low cost 30 year fixed rate mortgages that are huge assets to us as investors. I hope you are I hope you are. Okay. So with no points, your payment would be 529 per month. If you pay one point and by the rate down, your payment would be $514 per month. So taking the difference of what how much would that be? Well, it’d be 15 bucks a month less your time horizon to recoup, the cost of the extra point that you bought the rate down with would be 60. Approximately, I’m rounding slightly here about 66 months. Okay, before he would break even, that’s five and a half years. Now, I do have to say that buy downs that I’ve priced and actually done myself on my own portfolio over the years have been better than this. This is not as good as what I thought I would get. This time horizon is a break even point in five and a half years. Not bad if you’re going to keep the property for 27.5 years, or if you’re going to keep The property for eight years, it might may well be better to pay the extra point and by the loan down. But usually I see the time horizon here of about three and a half years. Usually it’s a little better than this. And I don’t know if buydown pricing is just not as good as it used to be. Or if maybe our particular lender that quoted these rates doesn’t have the best buy down pricing? I do not know the answer to that question. I’m really just wanting you to think about this. I’m wanting to give you an example of how it can be. Now the same deal, let’s just do some other math here. If you took that same loan, and you bought it down with two points, in other words, $2,000, your payment would go down to 499 per month, you would save 30 bucks a month, and your time horizon you can see how it would basically be the same right? So that doesn’t change anything but It does change if you change the loan to value ratio. So let’s do one more example here. And let’s go with a 75%. LTV or loan to value ratio, meaning on the same house, your loan amount instead of being $100,000. It would be $93,750. Okay? And that par because you’re putting more money down. Now, more money down is not the same as a buy down. You do, in most cases get a lower interest rate. If you put more money down. Well, of course, there’s less risk to the lender. So they’re better collateralized if you have more skin in the game, and they’re going to give you a lower rate as an incentive to put more money down. So if you put that extra 5% down, what is that? That’s about $7,000 or a little less than 7600 6250 bucks extra down payment you would get a rate of 4.5%, which would bring your payment right down to $475 per month. But remember, you have a lower loan amount here, you’re financing less. So what does that do? Well, the disadvantage is you’re going to get less leverage on the deal, you’re not going to have as much leverage. And because you get it because you listen to my show, you know that leverage is an extremely powerful tool, and used prudently and properly. It is a fantastic thing. I always say debt is my favorite four letter word. No, it’s it’s great. I mean that in a positive way. I love debt. As long as it’s not consumer debt. I want debt. I want lots of real estate debt. In fact, there there are old sayings that say things and you know, forgive me if I don’t get this exactly right. But I this is not my saying. I’ve just heard it out there. They say the amount of money you owe on your real estate today will be the amount of gain you have In I don’t know what they say, like five years or seven years or something like that. And so the theory behind that statement, or the thesis of that statement is that if you owe a million dollars, today on your real estate, that you’re going to gain a million in, I don’t know, seven years or something like that. I can’t remember the exact example they use. Having more debt is better because you get more inflation and do step destruction, you get more leverage, you get less opportunity costs, because why? Well, you have more money freed up, heck, you could buy a whole nother property with that extra money, right? For example, if you’re putting that extra 5% down on this property, well, you do that four times with four properties. And hey, you could have just purchased another property and have a larger portfolio. So there are things to think about here that are important issues, and leverage, a very, very powerful tool. Okay, but looking at this example, your interest rate goes down to 4.5%. Now, what here’s a good comparison, what would it cost you? Here’s a good question. What would it cost you with an 80%? LTV or loan to value ratio getting the higher leverage amount to buy that rate down? Or is it better to just put more money down? It’s a great question. Jason, thank you for asking that. Great question. Oh, you’re welcome. That was a good question. Too bad. We don’t have stereo it sound like I’m talking to you in different ears. We always make the show as mono. So we’re more flat and boring, right. But if that wasn’t stereo would have been kind of good. Anyway, so it would cost you 1.5 points or 1500 dollars. So you could either pay or you could you could get the higher loan amount and pay 1500 dollars, to have the same interest rate that you can get for free or at par With 5%, more down. So looking at that difference, the way we analyze that is we say, Okay, I can either put down an extra $6,250 in downpayment or I can simply pay 1.5 or 1500. dollars more in points, and I can have the same rate.
Jason Hartman 17:24
So, that’s an interesting analysis. And frankly, it’s hard to analyze that I’m not a mathematician. And I don’t exactly know how to weigh that out. Because you get less leverage, you have more opportunity costs, you have a lower loan balance, that’s why your payment is lower. It’s not just the rate but your rate is also lower. So these are sort of amorphous questions. You can’t exactly answer that one. But on the buy down, you can answer that pretty scientifically, because all we’re looking for there is our break even point what is the time horizon to the breakeven point. So let’s just look at one more example. Then we’ll go to our guest, Jason Hartman. Oh, I get punchy sometimes when I do this, you know, by the time you hear this recording, I will be in Fiji. I’m recording it here in Scottsdale, Arizona, where it’s hot, but it’s a dry heat. I will be in Fiji at Tony Robbins Resort by the time you hear this, hopefully not getting bit by too many mosquitoes. But living with passion and hearing all about Tony’s great techniques in terms of life and wealth mastery. That’s the name of the events I’m going to there. More on that later. 4.5% no buy down at par for free at the 75% loan to value but what if we were to pay $1,054. Now let’s even do more. Well, what if we were to pay two points 1800 and $75 more, we could buy down our rate by a half a percent. So It would go from 4.5% to only 4% for a fee a buy down fee of 1800 and $75. So what happens to our payment? Okay, the first payment is $475. god that’s so cheap. It’s mind boggling. You really got to stock up on these long term fixed rate mortgages. They’re a phenomenal asset. So the new payment at with the buydown is 448. So let’s take 475 and subtract 448 and that is $27 a month. And what do we want to do next, folks, you already know the answer. We want to take 1875 which is the amount of the buy down that’s what two points will cost you. And we want to divide by $27 and we get 69.4 that represents the number of months to your break even point now. We Take that, and we want to divide it by 12. So we know the number of years, and that’s 5.78 years. So interestingly, do you notice that on the lower loan to value ratio where you’re putting 25% down, the break even point is longer interestingly. Remember, you’re listening to flashback Friday. Our new episodes are published every Monday and Wednesday. In other words, paying more points on that deal is a little bit less valuable. You get less bang for your buck on that buy down than you do on the higher leverage buy down where you’re only putting 20% down on the property. So that’s kind of interesting. But again, I want to tell you that most of the buy downs I’ve seen and done over the years are a little bit more desirable. On this, and I haven’t shopped for them in a few years, so the price of them just may have gone up. That may be what’s happened. Look at the deals. You know, I love it when you hear these real estate gurus out there, and there’s such a bunch of crooks, half of them, half of them, maybe 80% of them are crooks.
Jason Hartman 21:20
And they say things like, air never been a better time to invest in real estate. That’s wrong. That’s not true. Of course, there was 1972 was a lot better. 2010 was a lot better. I’m sure the deals ain’t as good as they used to be okay, to use slang. Obviously, this is not bad. I mean, if you can break even in five and a half years, this may well be something you want to consider. If you think that you are really going to hold these properties for the duration, if you’re going to keep them a long time, which if you’re fighting My plan, you probably will, that’s the likelihood. Now I move my portfolio around once in a while, but most of it is long term buy and hold stuff. As you know, and I’ve talked about this on recent episodes, I do some 1031 tax deferred exchanges, I sell one property and I get two in the exchange, hey, that’s a great deal. There are lots of things you can do move things around, but by and large, you’re going to keep your property more than five and a half years, based on the scenario I’ve outlined here today, it would make sense to really, really consider the buy down. Why do I say it? I wouldn’t absolutely do it. Okay, because obviously you can just do the math and no, you will definitely break even in five and a half years. Well, the reason I don’t say definitely do it is because of that opportunity cost issue and that time value of money issue. Look, if you have to pay an extra $2,000 on the buy down. You do that 10 times on 10 properties and You’ve got just about enough money to maybe buy another property, depending on how you finance it. It’s all complicated, of course, and how you sequence your mortgages. And there’s a whole zillion other little issues there. But, you know, look at I learned about inflation from a fantastic economics teacher that I had when I was a young boy. And his name was wimpy. And he was on a cartoon. Yes, Popeye, you may know that, okay. And when he was on Popeye and wimpy taught me something about inflation. And he taught me something about opportunity cost and the time value of money. How did he do this? While this little cartoon character, I wonder if he even knew he was teaching me this. And here’s his famous saying, When be and I’ll try to impersonate him. When be the cartoon character on the Popeye cartoon, when people would say, I’ll gladly pay you Tuesday for a hamburger today. So he wouldn’t Always try when he was like this deadbeat, and he would always try to get a hamburger today, but to pay for it later, wimpy understood the time value of money. Right. So there’s your little economics lesson from a cartoon character. How do you like that we Yeah, you know we do really sophisticated stuff on this show. Don’t wait. All right, well, let’s jump over to the live recording, talking about the SWOT analysis, strengths, opportunities, our swings, weaknesses, opportunities and threats, SW OT, make sure you visit Hartman education comm for some great educational products that go into tremendous depth. And they are unlike the podcast Look, the podcast is a fantastic way to learn. But with a podcast, it’s more like reading a newspaper or a magazine or watching the news, right? It’s, it’s this and it’s that and it’s this hodgepodge of ideas but if you Want more structured stuff, get some of our courses, get our jQ Jason Hartman university course and you can get that at Hartman education comm or some of our products at Jason Hartman calm either one and our meet the Masters recordings you can get those there as well Hartman education comm or Jason Hartman comm check those out we’d love to have you take advantage of the many many of you have, be sure you’re subscribing to the show so you don’t miss any episodes. And thank you so much for your views on iTunes, Stitcher, radio or whatever podcast platform you’re using. We really appreciate the nice reviews and the kind words and if you haven’t reviewed the show, we would very much appreciate it if you do. Thanks for listening to this little intro on buy downs. And now let’s talk about the SWOT analysis.
Jason Hartman 25:52
First, we’re going to start off with something we’ve only done once. And that’s a SWOT analysis. How many are familiar with SWOT? Yes SW ot strengths, weaknesses, opportunities and threats, both the internal and the external threats and opportunities that come with real estate investing. And of course, it covers the strengths. These are internal things internal, in our case to the investment. And they’re positive things. The weaknesses are internal factors, but they’re negative. And the opportunities are outside. They’re external. And they’re positive. And the threats are obviously external, but negative. So as we dive into this, let’s break this down and look at some of the strengths of income property as an asset class. You know what I say it’s the most historically proven asset class in the world. Income property is the most historically proven asset class in the world. And one of the great things about it is that it’s so fragmented, right? You’ve heard me talk on the podcast before about what? embrace the fragmentation, right? embrace the fragmentation and This is something that frustrates a lot of people when it comes to income property. They don’t like the fact that it’s fragmented. They think, you know, why can’t this be simpler? Why can’t it be easier? Why does my property manager in Orlando do things differently than my property manager in Atlanta? And they do things differently than my property manager in Memphis? Right. So that’s one of the frustrations we constantly hear from you. It’s it’s one of the things that really bugs people, why can’t it be more standardized? Why can’t it be more refined, more simple? Well, we are trying to help with that. And when Fernando speaks this weekend, he will talk about a big step that we took to that end to help you that we have never announced before. You’re going to hear it here. First, a big step that we took in the world of software just about a week and a half ago. Okay. So you’re going to hear more about that, especially tomorrow. When we go over that in detail. So that fragmentation, as I always say it is the opportunity. The fragmentation is the thing that keeps the income property, or the big institutional investors out of income property that preserves the opportunity for us for the regular middle class investor, okay, the fragmentation increases returns, because the institutions aren’t in our game. Now, how many of you have ever thought about or invested in or looked at? So that’s a pretty broad category, right? commercial property? How many of you considered that or done it? Okay. fairly small number, okay. commercial property, right? If you look at these institutional commercial properties, and usually that’s in the category of anything over about $4 million and above, institutional investors will accept really low, really, frankly, crappy returns on their investments. The reason is, they have so much capital deployed, it’s deployed in a more Quote, perfect type of market deployed in a more perfect market in the sense that all of those investments are underwritten. There’s a word for you they’re underwritten. So when one of these big commercial real estate investment firms looks at a deal, maybe it’s a big apartment complex or a big mobile home park, or a big self storage facility or office building or whatever they quote, underwrite the deal. And that means they do some due diligence on it, and they kind of investigate it. And they have this common language, and this common format for discussing the deals and the best investment group for this type of thing of underwriting and having a common language. Who would that be better than commercial real estate, the best group of people out there, it would be Wall Street. They’re the best stat having a common language and an understanding of how things work. In fact, companies on Wall Street have the common standard, not that they follow it or anything for accounting, what do they call that they call it gap, generally accepted accounting principles gap. And so the more refined and the more perfected and the more standardization there is in any investment. The lower the returns on that investment.
Jason Hartman 30:28
And the more fragmented and the more imperfect. And the more unstandardized The higher the returns. And in the world of residential style real estate investing of single family home type investing. It’s really imperfect. This is a totally fragmented market. And in the US, it’s less imperfect than it is around the world. Okay, I met someone from Brazil this morning that you’ll you’ll be talking to not Fernando. He’s from Brazil too. But another guy that Giovanni’s team, and, you know, you’ll meet him on the bus and when we’re touring properties and so forth, and he talks about how he helps Brazilian investors buy property in the US. So let’s compare residential real estate now, to resume in the US compared to residential real estate around the world. I have looked at property in so many different markets around the world and say that the US real estate market is a very special real estate market. Because the data that’s available on us real estate is much more comprehensive than it is around the world. You know, this whole concept of an MLS. A multiple listing service is a US concept. Now other countries kind of have this but it’s not to the extent that we have it in the US. And we have things like Zillow and Trulia. And so there’s much more data available in terms of public records and knowing what a property is worth here. So it is more perfect than it is Around the world, which is a good thing, because you can feel more safe in your investment. And also, it’s been subsidized by the government since the Great Depression, and so forth. But the fragmentation is just huge. This is a big deal. It is a huge opportunity. To some extent, it’s kind of, you know, towards that direction on the continuum of the Wild West concept, versus Wall Street or even commercial real estate. So, here’s an example from Wall Street. How many of you own stocks? Why do you own stocks? Wall Street is the modern version of organized crime. Okay, so, if you own a stock and let someone name a company they own stock him and that they know what it’s trading for somewhere around what it’s worth now, apple, so apples like 110, right. Anybody own Apple one. Really, so you know when Apple stock, right? If it’s trading at 110, I want you to do this experiment, you know, say you’re with Schwab and you trade online with Schwab, call up the the rapid Schwab and they’re really good. Schwab is a great company, by the way, really helpful. They answer the phone, and they’ll help you and I just want you to call them up and say, hey, look, I know that my Apple stock is trading at 110. You know, but I’d really like to see if I can get more money. Can you do a little extra marketing and a little extra promotion and you know, put a coat of paint on it and see if you can sell it for 150. You can’t do that right because of the perfection of the market. The market is perfected. It will only trade for what it trades for period. Same with gold or silver or any of the precious metals. It’s a perfected market. Take the metals for example, that becomes more imperfect in the field of numismatics. Okay, rare coins. They’re made out of the same precious metals, but they become more imperfect. Because of their art value, right. And so this is true, this is the advantages. It’s one of the huge strengths of income property in the residential market, the one to four unit market as an investment, the fragmentation, it’s huge. Believe me, this is a big deal. Now, there’s another aspect of this fragmentation that I want to mention to you. When you’re looking to buy a property that might be a single family home, or a four Plex or a duplex. When you’re looking at this asset, you look at it through the eyes of an investor. And when I got into this business of nationwide real estate investing 11 years ago, the first thing I decided I had to do is standardize the data, data standardization. And so we do that if you look at Jason hartman.com. You see our properties presented in a standardized format. So here’s a huge advantage for you as residential income property investors. You buy the property like an investor. But if you decide someday to sell the property, who you gonna end up selling it to another investor you’re going to sell it to a homeowner and owner occupant.
Jason Hartman 35:16
The likelihood is you’re going to sell it to an owner occupant who looks at it through rose colored glasses. They look at it from an illogical emotional perspective in a fragmented market. And they always view remember, I was in the traditional real estate business for many years. Okay, that’s you know how I did mostly actually most of my career has been in that field. I worked for REMAX for many years. I, you know, worked for century 21 when I started for about nine months and then I worked for REMAX for 12 years. Okay. I can tell you that when people look at a house that they want to buy to live in as an owner occupant, they look at it through the process of elimination and they Look at it through the process of scarcity and comparison to what else, you know, they have out there in the marketplace and their expectations. When someone calls on a property, and they’re considering living in it, they have one goal when they call before al gore invented the internet, we have this thing called the newspaper. Okay. And, you know, we place ads in the newspaper and people would call or they’d see a sign in front of the house, and they’d call in on the property and when they call you, they have only one goal. And the goal is to eliminate the property to move on to consider another property. It’s simply a process of deduction, elimination. That’s how a homebuyer thinks. Just a reminder, you’re listening to flashback Friday. Our new episodes are published every Monday and every Wednesday. So
Jason Hartman 36:55
when they do that they have this they have this view of the world and it’s out of scope. And what motivation do you think is more powerful for humans? Is it the possibility that I might gain something, or the possibility that I might lose something?
Jason Hartman 37:14
Definitely fear of loss far more powerful. In fact, just test yourself, you know, go into a transaction. And, you know, think, Well, you know, if someone takes advantage of me in the deal, and they overcharge me by 100 bucks, you know, how long does it take you to earn 100 bucks, especially if you’re in your own business, or you have a little of your own business on the side, right? You can earn 100 bucks pretty quickly. But if you check out the hotel and your hotel bill overcharges, you 100 bucks, you’re gonna be mad, right? And it’s just the way we operate. We operate this way out of scarcity out of fear of loss. Because for eons before this, that’s how our world was. Our world was not abundant. It was scarce. And you know, maybe over the last hundred years during the Industrial Revolution, we have the first time in human history that we’ve actually had abundance. And so our minds have not adjusted to the new world at all, we can earn the hundred dollars a lot faster than we can bitch and complain about losing it, right. That’s just the way our minds are. And so we take advantage of this. And even if we don’t sell our property, the whole marketplace is operating like this out there. You know, when you sell a commercial property, it’s sold by a strict measure of cap rate, capitalization rate. In other words, the income the property produces. So fragmentation huge strength, huge strength don’t minimize that leverage. The leverage offered on a residential income property is much better than the leverage offered on a commercial property, a commercial income property. So that increases our return on investment and It’s the most tax favored asset in America. And taxes are the single largest expense in our lives. We live in Florida. They’re a little lower, though, right? Isn’t that good? So those are some of the strengths of income property. Now, there are many other strengths. Okay. Any any strengths you’d like to share or discussion on this or questions on this real quickly? Okay, weaknesses. Why does it suck? Okay. I’d say the hardest part is the management part. Management is so critical when it comes to income, property investing, management management. In fact, this is where it all falls apart for most investors on the management. Would you agree with this? How many of you own investment property now? Yeah, most of the room, okay. Is the management The hardest part? Yeah, it can be. I mean, sometimes it’s not if you have a great property manager, or better yet a great tenant. The management gets pretty easy and you Most tenants are pretty great. And we’re going to talk about the three different are really four different classes of income property and how those tenants differ this weekend. And so we’ll talk about that as well. So management is difficult. Of course, tenants can abuse your property. And that’s a weakness, rent collection or vacancy, another weakness. Okay, so I think these weaknesses are pretty self explanatory questions or thoughts on weaknesses? You know, feel free to have interaction here, you know, but Okay, maybe not. You know, it usually takes a little more coffee, it’s like after the second break, you know, everybody really wakes up. Okay. So, moving on here to opportunities. Well, the opportunities are huge. I mean, this is the most historically proven asset class in the world. So the opportunities well inflation induced debt destruction. You know, I love this thing, right? inflation induced death destruction. It reduces the real value of the mortgage and increases the nominal value of rent and the nominal value of the property. Nominal means a name only. That’s just the name of something. And real estate, as a hedge against inflation, in and of itself, is okay. But it’s not that great. It’s when you leverage that hedge that it becomes great. And when you outsource the debt, that that leverage cost you that it becomes great, because then the tenant is paying that debt for you. And hopefully, they’re paying you a little extra every month. Okay, so the time we can go back, you know, the the ship has left the dock, so to speak, right. And so we can’t go back. We can only start where we are now. And how many of you have heard me, you know, share that great, great poem, The Reluctant investors lament. I talked about it on the show, you know, written in 1977 when everybody thought, real estate was so overpriced in 1977. Okay, we always think that we always think that that’s just the way it is. But regression to replacement cost is different, in my opinion from appreciation. Regression to replacement costs simply means that if you can buy the property for below the cost of construction,
Jason Hartman 42:24
and when you buy it below, remember, when you look at the performance that we’ll be looking at this weekend, it shows you the cost per square foot and the cost per square foot. I don’t know exactly, maybe Giovanni’s team can share this with you better than I, but the cost per square foot in in Orlando is probably somewhere in the neighborhood of $80 per square foot. I’m just gonna guess somewhere close to that. So if you can buy the property below the cost of construction, but here’s the thing that performance doesn’t tell you. It doesn’t include land value. So if you look at the typical hundred thousand dollar single family home, the land value is probably somewhere in the neighborhood of $20,000. So to find out the real cost per square foot, you have to do a different calculation. Okay, and why don’t we just do this right now while we’re talking about it. Okay, so you got your pen, do you have your smartphone with your calculator, we’re going to take the typical hundred thousand dollar house, and we’re going to assume a $20,000 land value. So it’s $100,000 land is 20,000. This is pretty simple calculation. I know. $80,000 is the improvement or the structure sitting on the land, right? Okay, so let’s say that this house is 1400 square feet. What’s 80,000 divided by 1400? Okay, so $57 and 14 cents, right? Is that we said we’ll just call it 57 $57. If it costs you at all dollars per square foot to build that house. Did we buy below the cost of construction? Yeah, we did. Okay, if a hurricane comes along, or a fire comes along and destroys the structure, depending on the type of insurance you have, the insurance company may pay you the full cost to rebuild it. Or they may pay you a depreciated value on it. But if it’s $57 per square foot, and it costs $80 per square foot to build it, that delta between those two is built in equity. Now, I understand completely that you may not be able to turn around and sell the property for more than that. But that equity is kind of hanging there and this is a great safeguard. It shows you that in addition to the potential for future appreciation, before you get to appreciation, the first thing that happens is regression to replacement cost. And when Carrie It was kind of funny how you introduce me because you said, you said, Jason looks at every house as a commodity, right? See, I’m really at heart A commodities investor, we invest in the commodities, but when they’re labeled as real estate when they’re labeled as income property, it brings special characteristics to those commodities that we don’t get anywhere else. You can go on the commodities exchange and buy lumber, copper wire, petroleum products, glass, steel, all the ingredients of a house and get three decade long, artificially low fixed rate financing. And you can’t take those commodities once you encumber them with that good debt. Okay, debt being my favorite four letter word. Okay, once you encumbered them with bad debt, you can’t turn around and outsource that debt to a tenant and say how you pay my debt for me. special characteristics of income property for sure So regression to replacement costs happens before appreciation. When you see the market turn and prices start to come back. The first thing you get back is the regression to the replacement cost. In other words, this $57 per square foot house going to $80 per square foot, the replacement cost and after that, you get appreciation. Just think about that concept. Okay and asked me about it this weekend. It’s it’s pretty awesome. And then you have appreciation. Okay, so that’s the last one. Okay, what are the threats? overall economic collapse, certainly a threat. And, you know, that could change everything.
Jason Hartman 46:44
A few years ago, well, now several years ago, time flies when you’re having fun. We had the worst economic collapse in seven decades. The Great Recession and that’s a wild card. Okay, but Think for many reasons income property is probably your best hedge here. Most people think it would be gold or silver. As you know, I’m definitely not a gold or silver bug, I would far rather own bullets and food and water than gold and silver. Okay, those are far more practical and you can barter with them. And you know, cigarettes and vodka, not bad either population decline. This one is tough. And, you know, I think everything I’ll share with you this weekend, it’s pretty reliable, you know, it’s pretty darn reliable. But if the population declines, all bets are off. all bets are off. I can’t do anything about that, and I have no solution. And this is why when you look at areas like Detroit, the poster child for big government disaster. When you look at areas like Detroit, you just can’t fix that. Because when the population declines, it’s just over Okay. And when you look at this on a national level and you look at countries like Japan, that’s their problem is their population is in decline. You look at Western Europe. That’s a huge problem. You look at Russia. Putin is paying people to have kids. Okay, I think it’s $7,000 get paid to have kids. You look at places like what was my other example? It was a good one China. Oh, yeah. China. Thank you. They’re their one child policy, absolute disaster. And now they’ve reversed it, thankfully. Okay. So population decline. So over, there’s no solution for that. Thankfully, though, in the US, we’ve had we have pretty fast population growth, okay. And in the markets when we’re in and the markets we recommend, I mean, they’re attractive places to live, right. So, so this probably won’t be a problem. Okay. And then other threats any other threats? No. Okay, so let’s talk about how to mitigate these. Number one, spread your risk along multiple properties and multiple markets. Okay, obviously diversify. That’s one of the 10 commandments, thou shalt diversify. You want to have all your eggs in that income property basket, maybe not all of them, you’re probably not gonna listen to me anyway. But I think it’s the best thing going. It’s the best thing since sliced bread. Okay, so diversification and the law of large numbers, the law of large numbers. So increasing the total number of units or doors in your portfolio creates economies of scale. And it actually reduces your risk quite a bit. So if you have, you know, if you have 25 homes or doors in your portfolio, 25 units in your portfolio, and four of them are vacant, and 21 of them are occupied and paying, you know, your risk is a lot lower than if you have two units, right. It’s the law of large numbers.
Jason Hartman 50:02
I’ve never really thought of Jason as subversive. But I just found out that’s what Wall Street considers him to be. Really now How is that possible at all? Simple. Wall Street believes that real estate investors are dangerous to their schemes? Because the dirty truth about income property is that it actually works in real life. I know I mean, how many people do you know
Jason Hartman 50:25
not including insiders
Jason Hartman 50:26
who created wealth with stocks, bonds, and mutual funds? those options are for people who only want to pretend they’re getting ahead. Stocks and other non direct traded assets are a losing game for most people. The typical scenario is you make a little you lose a little and spin your wheels for decades. That’s because the corporate crooks running the stock and bond investing game will always see to it that they win. This means unless you’re one of them, you will not win. And unluckily for wall street Jason has a unique ability to To make the everyday person understand investing the way it should be, he shows them a world where anything less than a 26% annual return is disappointing. Yep. And that’s why Jason offers a one book set on creating wealth that comes with 20 digital download audios. He shows us how we can be excited about these scary times and exploit the incredible opportunities this present economy has afforded us. We can pick local markets, untouched by the economic downturn, exploit packaged commodities investing and achieve exceptional returns safely and securely. I like how he teaches you how to protect the equity in your home before it disappears and how to outsource your debt obligations to the government. And this set of advanced strategies for wealth creation is being offered for only $197 to get your creating wealth encyclopedia book one complete with over 20 hours of audio go to Jason hartman.com forward slash store If you want to be able to sit back and collect checks every month, just like a banker Jason’s creating wealth encyclopedia series is for you. This show is produced by the Hartman media company All rights reserved for distribution or publication rights and media interviews, please visit www dot Hartman media.com or email media at Hartman media.com. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax legal real estate or business professional for individualized advice. opinions of guests are their own and the host is acting on behalf of Platinum properties, investor network, Inc. exclusively.