On this Flash Back Friday originally published in March 2014 as episode 354, Jason talks about cash flow, real appreciation and diversification in real estate investing. He gives a comparison between a typical property in Santa Ana, California with one in Birmingham, Alabama. Jason goes through various metrics and then discusses the differences between linear and cyclical markets.
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 is hand picked to help you today in the present, and propel you into the future. Enjoy.
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 and 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 1:07
Welcome to the creating wealth show. This is your host, Jason Hartman. This is episode number 364. And thank you so much for joining me today. always appreciate having you listen, and I got a lot of great feedback on the last show with my mom having her back. For some reason you always seem to like to hear from mom. I’m not not exactly sure why, but her story is pretty good. She’s got some interesting things to say and share about property management and so forth. So well, we’ll have her on again soon. But what I wanted to talk to you about today before we get to our guest, who is Aaron, who will be talking about reverse mortgages, and this isn’t applicable to everybody, of course, because reverse mortgages require you to be of a certain age. However, I think you’ll find it interesting because it has broader implications on the real estate market and the economy as a whole. I think this is destined to become a lot more popular over the years. And anyway, I just think it’ll be an interesting discussion, even if it doesn’t apply directly to you in terms of you being able to get a reverse mortgage. But before we get to that, a couple of things here, first of all, I heard a great quote today that I wanted to share with you, it was in a in a book that I was reading, and it is I looked it up to just get the exact quote from from the internet. And I found it on a website that says, It’s falsely attributed to Buddha. And so it’s not a Buddha quote, or it is I’m not sure, but this is what I really want to constantly stress to investors, to my listeners, to my followers, is think for the self, right? And that’s really commandment number one, thou shalt become educated thou shalt become educated so you can become your own best advisor right? In my 10 commandments and now 20 because we added 10 more As an addendum, and just recently played that episode where we did that and think for ourselves, we’ve got to think Does this make sense? And so this quote is great. It says, believe nothing, no matter where you read it, or who said it, no matter if I have said it, unless it agrees with your own reason, and your own common sense. So believe nothing unless it agrees with your own sense of reason and your own common sense. So here’s one of those things I want to talk about today. And this is the concept of Einstein’s theory of relativity. No, I’m just kidding. We’re not going to talk about Einstein’s theory of relativity. We’re going to talk about Jason Hartman’s theory of relativity at it as it applies to rental income in real estate investments. You know, occasionally we have a client who is having a challenge in renting one of their properties, and sometimes we hear about this, where they bought a property from somebody else and they come To us, and they say Help me Help me, please. And you know, we’ll try and help them out if we can. But sometimes they buy property from us and they have challenges. This is a hardly perfect, I will be the first to disclose that. I think it’s like a great quote about about capitalism or democracy. It’s been used both ways. I’ve heard it both ways. And one of those quotes says, capitalism is a terrible economic system, but it’s better than everything else. And that’s really how I view income property. It’s hardly perfect. It’s just better than everything else, at least everything else I can find out there for investment. And my second favorite, as you know, is hard money lending or private lending, which is pretty darn good too. But in terms of my theory of real estate, relativity, it applies to many aspects, but the one I want to talk about today with you before we get to our guest is rents. And so if you’re having a problem renting one of your properties, I just want you to consider This concept that I’m about to say, and to do this, I looked up one of my mother’s properties because she was on the show last week. And I thought, heck, what could be more applicable than to just look up one of the properties she purchased several decades ago. This is a property that as a kid I used to live in actually are not a kid, but a young adult, probably between the ages of
Jason Hartman 5:25
Oh about 18 and 19, right, and they’re 17 to 19, maybe years old. I lived in this property and it’s in Santa Ana. Santa Ana is a city in Southern California. And it’s not a very nice city. It’s pretty bad, actually, most of it, but this is sort of a little bit better area of Santa Ana, and it’s called Washington Square. It’s in the northern end of the city. Still, you know, again, not a great city by any means, but this is a slightly nicer area. Now. There was a really, really nice area of Santa Ana north of this property that my mother actually still own and I’m sure your experience is pretty similar to mine when it comes to close friends and family. They would sooner listen to a stranger than listen to us right.
Jason Hartman 6:12
And so for the last several years I’ve been working on my mom and I’ve been trying to bring her around but mom is a very focused which is a great quality kind of one track minded sort of person. And she only likes to kind of do one thing at a time. And so her thing now and for the past several years is building that house you heard about on the last episode, that Southern mansion it’s it looks like Tara from the movie Gone with the Wind or I think there was a another house that’s actually nicer that looks more like hers called 12 oaks or something like that. I don’t pretend to be any expert on Gone with the Wind, but very old movie anyway. So that’s been focused but slowly as she has purchased new properties. She has purchased them around. country and markets that make a lot more sense than where she started, which was investing in Southern California properties just like me. Remember my story when I was 20 years old, I bought my first rental property from a client and it was on Coventry lane in Huntington Beach a little, a little crappy one bedroom condo there in California, New York City or New York City metro area. It’s much bigger than actually New York City itself. South Florida, areas like Miami, Fort Lauderdale, Chicago, kind of, you know, some of the more expensive areas of Chicago, or more expensive areas anywhere. Seattle, the Pacific Northwest Portland, we haven’t been able to make any of these markets work. And believe me, it’s not for lack of trying. It’s just that the prices are too high. And when the prices are high, of course, you have run into this problem, which we’ve talked about extensively of rent elasticity, where the rents don’t really go up enough to cover And give you good cash flow on your income property. So these properties basically just don’t make sense and how this applies to having trouble renting possibly one of your properties. If you’re having that problem now, or if you’ve ever had it in the past or, you know, you’re bound to face it in the future, the theory Jason Hartman theory of real estate relativity applies very much here. And here it is, as it applies to rents. So what I did is I looked up one of my mom’s properties in Santa Ana, and I looked it up on Zillow, and I found that the zestimate Now listen Zillow. The big disclaimer here is Zillow is notoriously inaccurate. And so is truly an all of these sites that, you know, use algorithms to give you real estate data. But not always. Sometimes it’s pretty close. And this time, I think it’s pretty darn close. And so Zillow said that this property was worth $455,000 And the reason I wanted to use this one is because it’s a good like just middle class maybe, you know, a little bit lower than middle class or I don’t know, middle class in Southern California property. But you know if you can believe 455,000 is middle class, right, you know, this is an old house. It’s not that nice, really. I mean, I used to live there and it’s kind of a crummy little house. It has three little crummy bedrooms, and one and a quarter or I’m sorry, one in three quarter baths. Okay. Anyway, so 455,000 is what Zillow said it’s worth and Zillow estimated the rent at 20 $400 and change, you know, we’ll call it 20 $500 for round numbers, and so I called my mom up and she’s at a Mardi Gras parade. For some funny politician who passed away and the reason this kinds of funny politician Forgive me, I can’t remember his name is he had He had a whole bunch of wives. And they have a parade just for this guy. And all the wives are in the parade. And they’re all you know, wearing black mourning his his passing, and there were a bunch of Undertaker’s on a float. And I’m like, this is just kind of weird, morbid humor. Anyway, my mom was telling me about it. But I said, Hey, Mom, how much does this property rent for? And she said, Well, I just rented in September for 20 $500. My mom knows off the top of her head, what every one of her properties rents for granted. She doesn’t have that many. She’s got like, what 15 or something like that, I think maybe 16. So she said, I just rebranded in September to a family of six people. There are six people living in that little house. So that means two per bedroom, and the house is not very big. I would guess it’s probably 11, maybe 1200 square feet, and she rented it for 20 $500. And I thought, wow, this time and then I said, Well, what do you think it’s worth? And she said, I don’t know. It’s been probably worth 400. Now she doesn’t keep very close track of her values of her properties. And that’s really one of the lessons that I talk about is, you know, don’t be too concerned, once you own it about the value of the property, then Heck, we don’t invest for appreciation if it happens, great. It’s icing on the cake. It’s wonderful. And but that’s not really the core of our philosophy. The core of our philosophy is cash flow investing. And so I said, Well, do you think maybe it’s worth for 5455? And she said, Yeah, I guess it’s probably worth that much. So it seems like Zillow is pretty accurate. Well, what does this tell us? It tells us that if the property’s worth 455, and the rent for six people occupying the property, probably putting some pretty significant wear and tear on that property. And by the way, until last September, it was rented for 20 $300. She had the same tenant there for eight years, and the last rent eight years tenant stayed and the last round was 2300. So this property if you do the math and divide it, your rent is point 00549 of the value. Now you probably know what I’m going to say here, right listeners, I’m going to say I want you to get at least 1%, or at least close to 1%. Maybe you’ll get more maybe a little less, but right around that 1% target. So in my eyes, I think this property should be rented for $4,550 per month. Well, it’s actually rented for 2500. And that represents a loss, in my opinion, of $2,050 per month. She’s really losing $2,050 per month income that she otherwise should have. Because I mean, just look at it this way. If you bought $100,000 houses in diversified markets are around the country, you could buy four and a half houses, right? And if they each rented for 1% of the value, you would get 40 $550 per month. Right? And you’d be diversified. And you’d be far better off in my opinion. Now, you might be saying, well, Jason, you know, I know you’re all about cash flow. And you know, you’d be right. That is what I’m about. But Southern California, I mean, doesn’t that market appreciate better? Well, not really. And here’s why, you know, as you know, that’s a cyclical market versus the markets that we recommend are very linear markets, or at least hybrid linear cyclical markets. And in a market like Southern California, you’re going to have big ups and you’re going to have big ugly downs, really bad ones that hurt and and so the values fluctuate, and there’s a lot more volatility than you have in these more stable markets, which also, you know, they have volatility to I’m just saying that the volatility is Last, because you have more inexpensive properties, where the prices are much closer to the cost of construction. Yes, they can still go down, and they have gone down, but overall, less volatile than the more expensive properties. And you know, I had a great example that I’ve got to find this old PowerPoint slide. I used to use it as an example in my seminars and I in the creating wealth boot camp, but I haven’t been presenting it in a long time. And I’m not sure why just a short and my very long winded day, you know, that takes about it’s about a nine hour day when you come to that boot camp. Okay. And what it basically did is it compared Orange County, California, the OC, to I think, maybe Kansas City, Missouri, a market that we’ve done business in and out over the years. And it compared the two of them over I think it was an 18 year period and I I kind of trickly audience into guessing which market they think appreciated better in this 18 year cycle. And invariably, the audience always says, you know, Orange County, California, of course, the high flying market with wealthier people and expensive homes and higher number of college degrees and higher number of master’s degrees and a higher number of PhDs and you know, all of this great stuff, right? Well, the reality was, and you know, I may not be remembering this exactly, but the reality went something like this Kansas City, actually, and I believe that was the example appreciated, on average, over that 18 year period, at I think it was 5.8% and Orange County, the much more famous place with seven TV shows about that dumb town where I live for a couple of decades.
Jason Hartman 15:52
And before that, in Los Angeles area as I was a kid, that place it only did about 5.3%. So can City boring Kansas City beat Orange County. I mean, can you believe it? Yeah. You know, when you average things when you’re a buy and hold investor, you did better appreciation wise. But so what appreciation really isn’t the game. The game is cash flow. The game is all about income. That’s why it’s called income property. It’s not called appreciation property. It’s not called speculation property. It’s not called gambling property. It’s called income property. And that’s exactly what we’re looking for. So let’s take and compare my mom’s house that is an old house occupied by six people that rents for 2500 a month, and it’s got a point five RV ratio rent to value ratio. And let’s compare that to a little property on my website at Jason Hartman comm slash properties in the Birmingham section, and I’m going to compare one more market and it’s going to be Atlanta next, just to see how these stack up And so here we go. Here’s a little house in Birmingham that you can buy for $51,900. And again, you can see the entire pro forma with all the details at Jason Hartman comm slash properties and the properties section there. And so this property is we’re going to round it off. We’re going to call it $52,000. And it has a projected rental income of $700 per month. Well, let’s see this $52,000 house. How many of those could you buy? For the price of my mom’s one house in Santa Ana, California? Well, according to my calculator, my trusty HP 12 see it says you can buy 8.75 of them. So if you take $700 a month in rental income, as we’re looking at this Performa, and you multiply it times 8.5, the rental income of eight point or I’m Sorry, 8.75 of these houses would be 60 $125 per month. That’s $6,125 per month versus the paltry 20 $500 per month. My mom is getting Now see, my mom doesn’t believe this anymore. But after many hours debating this with her and trying to get it through her head, because of course, I’m her son, and she’d sooner listened to some stranger than she listened to me, right. That’s just the way human nature is. And it’s pretty true with all of us. We know that but I finally have convinced her that this doesn’t make any sense. And she’ll say, Jason Well, I paid that house off. I own it free and clear, which you know, I believe that’s a pretty terrible idea right to pay your houses off. I like to keep them leveraged and do the refi till you die plan. Right and we’ve talked about that on prior episodes. If you want to under Stand that go to Jason Hartman, calm, look at the little Google search bar in the upper right hand corner of the website and type in refi till you die. And you’ll find the podcast on that and some documentation about it, and so on and so forth. So, here, this property 60 $125 per month, you could own almost nine of them. So you’ve got a loss there. That’s very significant every month. Now, what if you take a nicer property and you look at it, Atlanta, Georgia, okay, now Atlanta is a great market, done business there for many years. Lots of good client feedback from Atlanta, some problems here and there. And I’m going to tell you how to overcome your rental problem here in a moment if you have one. And if you don’t have one, and if you haven’t had one, you’re going to have one. So that’s why we’re talking about the theory of relativity here. We’ll get to that in a moment. Remember, you’re listening to flashback Friday. New episodes are published every Monday and Wednesday.
Jason Hartman 20:06
So this one is on the website at Jason Hartman calm if you want all the details, but I’ll just give you an overview This house is $124,900. And you know, this same thing applies to multifamily apartment complexes to in high price versus lower price markets. I’m just using good old single family homes as an example. So we can keep the comparison as apples to apples as possible. So here we go. We’ve got this property for 124 nine, let’s call it 125. We’ll round it off. And the projected rent here is 1200 dollars per month on this fully renovated property. And by the way, almost every single one of our properties is fully renovated. Occasionally, there’s an exception but the vast majority are completely rehabbed or renovated. Now this property if you wanted to spend 450 $5,000 the value of mom’s home in Santa Ana, you could buy 3.64 of these houses. And you could take that 1200 dollars a month in rent, and you could multiply it times 3.64. And your rental income would be 40 $368 per month, 4368 per month. So compare that. And the fact that you’re diversified. Not all your eggs are in one basket. They don’t necessarily all have to be in one city, which I think is a great idea to spread it around a little bit. So if one city goes down the tubes, you’ve got another one there that won’t, so you can diversify, spread your risk of it. And here even if they are all in the same city, you know, if one goes vacant, you’ve still got 2.64 that are hopefully occupied in the Birmingham, Alabama example. If one goes vacant, you’ve still got 7.7 Five that are hopefully occupied, right? So you you spread your risk through diversification in that way in terms of vacancy in terms of market risk, geographically you can spread it as well. So here you see how the RV ratios are much better when you are in the lower priced side of the market now, I don’t like really, really inexpensive properties and the reason I don’t like those is because the tenant quality gets pretty pretty rough. Now, there have been many landlords aka we’ll call them slumlords, who have made a lot of money in these really rough neighborhoods. And you know, you can do that. But just understand it’s especially you’re probably not going to get the properties from my company because we try to go toward like the lower middle of that market. So for example, if the median price in a given market is $100,000 for your typical single family home We’re gonna want to be around $80,000. If possible, we want to be under the median. So we’re not, we’re not on the middle. We’re a little bit below the middle. Okay, but we’re not in the low, low end. So there you go. That’s your cash flow number. Now, the theory of relativity. Let’s circle back here. Why did I tell you all of that stuff? Well, I told you all of that because I wanted to explain how to handle a rental problem. Occasionally, we’re all going to run into rental problems where we have long vacancies and we we think, Why the heck want this property rent? Well, here’s what you can do. Lower the rent. Oh, Jason, that’s just too simplistic. Well, no, not really. It’s actually there’s a little more to it than that. And here’s why. If you took the exact same rent to value ratio that mom is getting in her property, and this she owns several properties. This is just one of them that I’m using as an example, but that Birmingham property that is On the performance says $700 per month rent, if you apply the same ratio to that one, you could rent that for only $260 per month. And you would have people lining up around the block. I mean, folks, look at this is a three bedroom one bath home. And it’s a really cute house by the way. I’m looking at a picture of it right now. You can’t rent a room for $260 per month right here you get a whole house with three bedrooms 260 per month, same ratio. Well, what about the Atlanta property? Well, that one the performance says 1200 dollars per month. Okay, what if you applied the same ratio that mom is getting in this example and you wanted to rent this property really, really fast? And and any worries a vacancy? Well, you would price that property at only 625 dollars per month.
Charlie Ridge 25:02
Jason Hartman 25:03
Now, I just want you to know this property is 20 460 square feet 20 460 square feet to two storey house, I do not have the bedroom count on that house. Sometimes it’s in the remarks section. It’s not here, I’m going to guess that that’s four or five bedrooms. In many markets, just renting a room alone would be five or $600 per month here, you’d rent the whole house for only 625. Now, you don’t even need to be this extreme. But if you if you’re thinking, gosh, and you know, you might be asking yourself, Jason, why are you talking about California? What does this have to do with me? I don’t live in California. I’m not silly enough to consider investing in California. It’s just an example. The same story is true in Miami, or Fort Lauderdale, or the North East in any of the expensive areas, whether they be the Boston metropolitan area area, many areas of Connecticut, many areas of certainly New York, any area where you’re not looking at houses that are below $150,000. And in total price, your rent ratios just simply don’t work. And I’d say that if you look at history and a lot of these linear markets, because you don’t give anything back, or at least you don’t give as much back when the downturn comes, it’s crazy to say don’t give anything back. You do give something back. Now, this last financial crisis. This was to be fair, it was certainly an anomaly, right? We haven’t had that bad of a real estate market in seven decades. This is the worst the economy has ever been since the Great Depression seven decades earlier. 70 some odd years, right. So that’s, maybe it’ll happen again, you know, it could, but the likelihood is the downturns will be a little less pronounced and significant than that in the future, we can blame the Wall Street crooks for that. We can blame the banks and the lenders as well. But to a lesser degree, as I’ve told you many times before I I saw the foreclosure crisis coming, I predicted that I talked about it, you know, it live events and publish that numerous times. I knew that was coming, and I knew it was going to hit in late 2005. That was the mortgage crisis. But I did not know. I didn’t there’s no way I could have known because I’m not an insider. I don’t work for Goldman Sachs. I don’t work in government or in these Wall Street firms that were basically destroying the world with toxic financial assets, their financial innovation, right. Anytime you hear Financial Innovation run for the hills, because that usually means the money is going to move on. from your bank account to their bank account. So, you know, I didn’t know that they were polluting the world with toxic debt and credit default swaps and all this kind of stuff that we all learned about post financial crisis. But I certainly knew that the lending was way too aggressive and they were giving loans to people who could fog a mirror. I mean, it was ridiculous. They just weren’t qualifying people and the banks were being just completely stupid. I knew that was coming. But the second part of the crisis No, I didn’t know that one was coming. So what do we have going on? What’s going to happen in the future? Nobody knows. But I think we can all all pretty much feel fairly secure in the knowledge that governments solution to everything and central bank’s solution to everything is inflate, inflate, inflate, inflate your way out of the mess, it is the most painless. It is the best business plan. It really works pretty well. I mean, philosophic Basically, I hate it. I think it’s completely stupid. But given you know, the fact that our government and many governments around the world are irresponsible, and they just spend too much money, I love the Ronald Reagan quote, he said, to say the government spends like a drunken sailor is an insult to drunken sailors.
Jason Hartman 29:21
And that is certainly true. So if we’re going to have this happen, it’s not going to stop as long as you have politicians that want to buy votes, right? So the likely response will be inflate your way out of the problem. So with that, we already are planning for that we’re already investing for it. We know how to how to how to game the system, we’re doing the exact same things that some of the most powerful people and entities on planet earth are doing to hedge against that risk. We’re investing in commodities that have intrinsic long term Global value that are needed by every single person on the planet that are traded in every single currency on the planet. And we are buying them with long term fixed rate debt that we are outsourcing to another party called a tenant. And at the same time, we’re getting the most favorable treatment, the most favorable shield against life’s life’s single largest expense taxes because we’re investing in the most tax favored asset in America and the most debt favorite asset in America. I mean, try getting the kind of wonderful positive Dave Ramsey be damned. Okay. You know, my thoughts about Dave Ramsey, okay. I mean, he’s okay for people just starting out in life regardless of age. That doesn’t mean that has nothing to do with age by the way it has. It means starting out on the path to financial freedom but His deal is not about investing. We’re talking about investing, okay? We’re not talking about consumer debt, we’re talking about good debt debt that we can use to our benefit, that that helps us gain the system against a responsible government spending and central banks and the welfare state. That’s what we’re doing. Anyway, I hope you liked that example. So, look at everything will happen at a certain price. I remember years ago, I was sitting at a small round table that was sponsored by the young entrepreneurs Association, y eo at the time now called e o. RG, just the entrepreneurs organization. And that’s like a sister organization of YPO young presidents organization. And I remember listening to this guy who was talking and he was he was very successful. I don’t remember what business but he said something that, you know, made a lot of sense to me. He said, How many problems do you have today that you could solve instantly by just writing a check I thought, you know, I’ve got a few of those, and I’ve got the money to write the check. Maybe I should just get rid of a few of these problems and solve them by buying my way out of them. That is a wonderful privilege when we control assets, whether they be money, or things like commodities, like rental properties, so how does that apply to you? Well, if you have a problem, and you’re thinking, gosh, I can’t get this damn house rented. What is the problem renting this house, try running it at a California rent to value ratio of point 5%. And I guarantee you will have people lining up around the block. I mean, of course, you know, assuming you have proper marketing, you know, if you don’t tell anybody, it’s that cheap. You’re not gonna have anybody line up, you’ll probably have a bidding war for tenants, where you’ll actually end up renting the property above what you listed it for. So that 1200 dollar a month rental property, if you list it for $625
Jason Hartman 33:06
I bet with right marketing, you’d end up getting 750 for it. You know, you’d be you’d have tenants bidding against each other you literally have a bidding war would be my my my guests. Okay? So we’re no problems are not problems. They’re just do you want to buy your way out of it? Do you want to lower the rent and get it solved? Now listen, I don’t want you to lower the rent, I want you to raise your rents every year, I want you to try and raise your rents 4% every single year if you can. Now, granted that depends on the interest rates. Why? Well, because the tenants have choices, right? They may want to go and buy something if rates are really low and qualifying is easy. They’re going to be sucked into the buying market. Now we have an interesting thing because we have very low interest rates, but qualifying is very difficult. So it’s kind of a quandary. If you can call fi your The world is your oyster so to speak, and a lot of tenants can’t qualify a lot of them have foreclosures and that’ll keep them out of the buying market for a few a few more years. Well, good for you strike a win win deal with them, serve them, give them the housing they need until they can get back in the buying market and get their credit repaired or or just wait for you know, their credit to improve automatically because this stuff comes off eventually. And it’s a great win win deal. So there you have it my theory of real estate relativity across multiple geographies, you can write your check if you will, by making the rent such a bargain that the property rents you know, you can make it a special where you, you do it the first year and then you raise it back to the market rent the next year. And you might lose the tenant. But maybe your situation will have changed maybe the market situation will have changed by the If you lower the rent $200 a month times 12 months, that’s 20 $400. Right? But you’ve got $1,000 a month, rather than 1200 a month. But you’ve got something. Again, this is my fallback strategy. It’s not my ideal strategy. I’m just saying it’s something to consider to understand that every single day, lesson formed investors, people that don’t get it. People who think they get it for various reasons, are buying, quote, investment unquote properties. There’s You certainly couldn’t call them income properties, but we’ll call them investment properties or speculation or gambling properties in in markets like Southern California or northern Cal or anywhere in California, nothing works in California, you know, or South Florida, or, you know, the Northeast any of these expensive markets. They just don’t work. It doesn’t work and a lot of them because you know, you don’t have to give back the money when the market goes down or give back very much of it when there’s a downturn, really overall, over time, your average appreciation rate is better. So it’s, it’s something to consider. Alright, I’ve rambled on long enough, check out those properties at Jason hartman.com. Click on the properties link, and you’ll see them there, you can see the full performance. And also check out the blog and the members section and everything else while you’re there as well. Without further ado, let’s get to our guest. Let’s talk about reverse mortgages. I’m here with Charlie ridge. And one of the things Charlie that investors are constantly disappointed with is that their quota rate in one place or they look online, and they see a rate for a mortgage, and then they’re switched and it’s kind of a bait and switch and they find out they have to pay a higher rate. What’s going on with that?
Charlie Ridge 36:49
I get this question almost every day they’re looking at the difference between owner occupied type rates and non owner occupied type rates, the one is always going to be less than the other
Jason Hartman 36:58
investor mortgages are just going Little bit more expensive folks. But remember, as an investor, you don’t pay your own mortgage your tenant does. So it’s a pretty great thing. Charlie, where can they find you?
Charlie Ridge 37:08
www rich lending group. com.
Jason Hartman 37:11
Fantastic. And if you forget that, you can contact your investment counselor at Jason hartman.com.
Jason Hartman 37:25
Hey, it’s my pleasure to welcome one of our lenders, you heard him speak at different meet the Masters events over the years. And also on a recent podcast that we did where we played our mortgage lender panel from our last meet the Masters event. And I wanted to have him on today to talk about a new product offering that he has. It’s not new in general to the industry, although it’s not talked about very much and I’ve been fascinated with it for, oh, I don’t know, maybe 10 years now, I’ve been kind of fascinated with this whole idea, but you don’t hear too much about it and that is the subject of reverse mortgage. pitches. So Aaron, welcome. How are you today? I’m good, Jason, how you doing, buddy? Good. Hey, it’s great to have you on the show to talk about this because I think it’s a good option for some people. It’s a, it’s a relatively, you know, small market, you have to meet certain age requirements and so forth. But it definitely fills a very particular need. That’s that’s pretty interesting, a way to engage in equity stripping, you know, I believe that income property is the best investment. But it’s a mediocre bank. It’s it’s not a great bank. So why keep equity in it? It just doesn’t make much sense. And if you’re new to the show, and you’re hearing me say that and you think I’m nuts, please go back and listen to the prior episodes. There’s well over 300 episodes where we talked about this stuff in depth, and the benefits of having your properties properly leveraged, and the downfalls of having equity in them. And it really is a big downfall. In so many ways. mortgages that rates like we have today are an asset, not a liability. As long as they’re used properly, so Aaron, when it comes to these reverse mortgages, first of all, you know, maybe talk a little bit about why should someone consider a reverse mortgage versus a refinance?
Charlie Ridge 39:12
Well, first off, I can’t agree with you more about it being really an untapped and very obscure way of tapping into an opportunity that people really don’t discuss. When you’re considering an individual that has a has equity in their home and they meet those age requirements. Many times they may have some sort of form of income that restricts them from their ability to go out and, or they have their assets tied up in ways that give the restricting be able to use those to go out and buy more real estate and expand their assets and expand their income capability with your your thought processes where if they’ve got that equity sit in their home, you can utilize that process that reverse mortgage that gives them the ability to tap into extra funds put that to work out in the market and it not cost them any money. on a monthly basis, it’s designed to basically not tap into their resources on internet on a monthly basis, like any other type of loan would.
Jason Hartman 40:09
So the reverse mortgage doesn’t have payments.
Charlie Ridge 40:14
Right? Correct. It doesn’t it’s it’s designed a lot like an annuity, where they are looking more or less at the, the average mortality table just like an insurance company would. And they’re setting it up that when it when an individual has is of an age of 62 or older, they will lend up to a specific loan to value based on that table. And they don’t charge a monthly interest or a monthly principle to satisfy that lien because there’s the equity sitting there to do that for them.
Jason Hartman 40:43
Right, right. So here you can refinance and have zero payments.
Charlie Ridge 40:48
Pretty cool. Exactly right over a lot of people will try and refinance and pull equity out in in a cash out type scenario. But then they have that payment that they are subject to because they pulled that cash out now You have an increasing debt to income ratio, and a diminishing capability to borrow more to buy additional real estate. This actually helps their debt and commercial work wouldn’t otherwise.
Jason Hartman 41:09
Right, right. Okay, good. So how does it work? I mean, you need to be 62 years old, right? 62 or older?
Charlie Ridge 41:16
Well, yeah. When you’re thinking about a lot of people say, Well, I gotta qualify for financing. This is probably the most simple qualifying process that exists. It’s based strictly on age and value of the home, and whether or not there’s an existing balance on the loan against them.
Jason Hartman 41:30
So if you have a loan, let’s let’s do maybe an example. Let’s take a $625,000 value of the house. Now, this has to be the principal residence probably right, not an investment property, correct. It has to be something that they are occupying. Okay, so your own owner occupied home, say the value is $625,000. And is it free and clear in this example, or is there a small loan against it already, but let’s just take a look at addiction. clear example. So $625,000 property free and clear. You want to free up that equity so you can do something with it. You can do more investments. And keep in mind 62 nowadays is young. I mean, the problem people are facing nowadays is too much life at the end of the money. Not too much money at the end of a life. So, know that this is definitely very true. Yeah, yeah. So what do they do? They come to you and they say, Okay, here’s my $625,000 house. I’d like to pull some money out of it, how much can they get what is the maximum Is it is it almost $500,000
Charlie Ridge 42:37
their maximum is actually approaching that $400,000 mark it as we’re as we’re looking at, and what we have is, depending upon the age you can go and in fact the age table more or less hits at you know, 62 to 68 dangled 55% of that total value 69 to 75, then go between 60 to 65% of that total value 76 to 81. They go 65 to 70% of the total value and then when they hit 81 on up, they can they cap out at 75%. So we’ll go between 71 and 75.
Jason Hartman 43:09
Just a reminder, you’re listening to flashback Fridays are new episodes are published every Monday and every Wednesday. Yeah, so just so people understand the rationale. In other words, the older you are, the more qualified you are in a kind of an odd way. Because they know from the actuarial table, you have less life left, so they’ll give you more money. They’ll give you a higher loan to value ratio. kind of
Charlie Ridge 43:37
counterintuitive in a way. And like you pointed out when we’re talking about there’s more life in today’s in today’s world because of multiple reasons. This particular table may or may not fit everybody. So since it’s built like an annuity, even let’s take a look at the table set up to where they’re expecting. The average individual live to say its age 92 I don’t have that table in front of you be able to say what their expectations are when a person goes to the hundred and 10. There’s insurances involved in this that indemnifies that lender, so the individual who was receiving the loan doesn’t have to, they keep the loan continues on, as if it was set up the very same day. So they continue to have no payments, they continue to be able to use that money as necessary.
Jason Hartman 44:22
Okay, so they’ll, the lender will give you a lump sum here for what $393,000 393,000 and
Charlie Ridge 44:31
change, okay, and the person who used to put that in the bank account, to use that to vast they can, they can do several ways. There’s a really, really good, really kind of a newer system that you that that AARP has stated that balls and recognized about 66% of the time is be the best choice for them. And that’s referred referred to as a reverse mortgage credit line. So you get the mind say that, let’s take that figure 393 seven. You’ve got those funds. It’s a daily To you, but you’re not borrowing and you’re not using it’s just sitting in that account. Well, there’s still that interest accruing, that comes as a result that should be going against the equity. Well, since that there and the individuals not really using the money, the way that that’s written, the bank will actually have to increase the credit line by the amount of the interest on a monthly basis such as say the interest would have been $1,000, they have to increase that credit line by that thousand dollars. plus an additional, I believe, is 1.25% of the balance so you’re seeing a increase in credit availability every month when you’re not using it. So some of the clients I spoke with about about this and let’s just say they get a $200,000 credit line, and they only use 100,000 of it. They had an interest of grievance going on to the balance of that hundred thousand dollars. Hold the undercurrent of the other hundred thousand that is sitting in the account being unused is getting the interest increase in their balance. In their availability plus an additional one and a quarter percent. It’s offsetting what they’re using. So what the availability here is huge and their ability to go out there and use that money to buy additional real estate receive an income on it, all the while, they’re not making a payment on what they’re using to buy the real estate, and also getting unique increased availability on a monthly basis.
Jason Hartman 46:22
Yeah, that’s a pretty cool deal. So in other words, they can take it out as a lump sum, or they can take it out as a credit line and access it whenever they want. Right. Exactly. And put it back as they sell real estate. So if they sell something, they put it back and let it continue to grow and increase in availability. So if they see something else coming down the pipe that they want to purchase into, they can pull it and do it again. Yeah, yeah. Pretty interesting. Okay, what else should people know?
Charlie Ridge 46:49
Well, look at some of the things that are fears that I’ve heard over the years that people looked into is, you know, are they signing over their home to somebody? Is it something that they’re they’re getting rid of their They’re giving their asset to somebody else to control. It’s no different than any other loan, whether they’re refinancing or doing a cash out or just a regular into refinance or doing the reverse mortgage, it’s the exact same style we make. Nobody can take any possession over that property any easier than they couldn’t any other type of loan situation. Another concern that I’ve heard of, as those are saying, hey, if I do a reverse mortgage, what happens to my estate or my posterity with my home? Well, if you’ve got that reverse mortgage, and there’s this this balance that had accrued, and in the, you know, the demise of the individual and their estate takes over the estate can refinance it, they can sell it and pay off the note in the same as what would happen with any other type of mortgage situation. So those fears shouldn’t really be anything different than a fear that they would have just to have a regular loan on the house. The big pluses there not having to deal with the monthly payment that comes from Covering or at least maintaining the home, so they wouldn’t have any other situation.
Jason Hartman 48:03
Yeah, so so you know, what they need to understand is, if they have a normal loan against their house, when they pass away, there will be the property will probably be sold off by the heirs, and then that lien will be paid off and the heirs will get the proceeds. The same is true of the reverse mortgage, it’s just a lien against the property, nothing more.
Charlie Ridge 48:22
Exactly. And the difference really is is what they do with the reverse mortgage versus what they would have done with the other loan. With the reverse mortgage, they’re increasing their capability to go out there and build a bigger estate. They want to leave their home to posterity Feel free to leave the home but why not leave some into some investment properties and an operating business that was put together because that initial home existed. Another thing here is it is very pricey when a person steps into that transaction. There is a lot of fees up front and that’s again it’s more to their said they’re more fees than what would be on the standard refinance because of the nature of what it is.
Jason Hartman 48:56
Yeah. Why Why is that? I mean what what’s the what’s the nature of it. Why do they have to pay all these fees will be a lot of it has to do with insurances.
Charlie Ridge 49:04
Because when a, again, we’re talking about a mortality table that is, as an average across the board, we’ve got some people that will live shorter lifespans, others are live much longer lifespans. And so when the lenders putting the money up for this, for this situation, they are taking a little bit of a, they’re taking a calculated risk. And so one of the calculations that added add into that risk is having insurances put in place to ensure that they don’t lose money on it. Because if you’ve got somebody that lives for, you know, used to be the age, you know, 90 805, something like that, depending upon what market you’re in and what’s going on with real estate. There’s, there’s a good chance that they could lose mine. Let’s look at people who may have had a reverse mortgage back in the mid 2000s. That ended up hitting you know, the 2008 2009 area or they their their guests had come and the property values in some places had dropped 70% 50%
Jason Hartman 49:58
Yeah, well, you know, risk. The real risk though is that the person will live too long. That’s the biggest risk because then the lender has to keep waiting and waiting and waiting to get paid. This reminds me Aaron of what happened in the world of something called viral articles. And viral articles were basically when in the early 80s, when there was this big scare about AIDS, and they thought everybody would be dying of AIDS, but they essentially learned how to treat it. And people were able to live even if they if they have the HIV. And so what what happened there is a lot of people had life insurance policies. And they figured, why not cash in this life insurance policy, sell it to an investor. So I’ll have the money to either pay for my medical care, or just live it up. I’m not gonna live that long. You know, I got a year to live or whatever. And you know, I’m just going to spend the money and that was kind of the attitude. And so investors would buy these policies, banking, essentially on the on the on the person passing away and then they would get The benefit of that life insurance policy, they would be the new beneficiary? Well, the problem was, the people didn’t die. Like I thought they would. And And now, here we are, what, 30 years later, and they still haven’t cashed in those, those policies. So the investors really got burned on those vehicles. You know, that was like, it’s kind of it’s a mccobb thing to say that
Charlie Ridge 51:22
it is because people didn’t die but right. That’s the reality of it. Investors are in it to make money. But, you know,
Jason Hartman 51:28
there’s nothing wrong with that, really, because if you think it serves a need for the person if they want to pay for their medical care, or take a cruise around the year, around the world, in their final days, they could cash in their policy early. I mean, it was it’s, it serves a huge need for them too. So you know, the problem was,
Charlie Ridge 51:51
they didn’t pass away items serve a purpose. And when we’re talking about these insurances, or what they have to do put in place and that may be why these insurances exist in these these higher costs that add to these insurances because maybe the bionicles had some sort of window into what what could happen with this and that’s why they put in place. But regardless, the investor who owns the home, take advantage of the opportunity put this to work, you can go out there and buy multiple pieces of real estate receive an even greater income, increase your lifestyle, absolutely what really no cost to you. Even though there’s these expenses associated with the loan, if we’re talking about 200, or $300,000 loan in the expenses are, say 12, or $13,000. That’s not an expense You see, leave your pocket, you can still take the remaining amount and put it to work and make that money back in a matter of months. And it’s money that never left your pocket. You don’t ever feel that sting. So there’s a mindset that one has to wrap their head around and what really would take is is for us to sit down to look at their situation, look at what they want to do and where they want to be with that and pencil it all out to where it makes sense. This is Not something a person goes into lightly. We have an education process, they must complete up front before we even take the application. They have to go through all that they have to understand it fully. And then we pencil out. How does this work for them? To get them to their to their ultimate goal? It doesn’t get them closer, does it? Not? If it does, it’s very much worth looking at
Jason Hartman 53:19
one. You know, some of the pros are there’s no qualifying to access the equity in the home. There’s no credit check, no financials, no paperwork about how much assets you have no monthly payments on the loan, no, no impact on the debt to income ratio. Normally when someone starts accumulating more and more mortgages, and we’re going to have you back on to do a show on mortgage stacking or mortgage sequencing, where we talk about how people can accumulate more properties and that has there’s no age requirement on that one, but on the reverse mortgage if you qualify for it and you know, we have investors that are well into their 80s who are buying properties from us. Certainly this this can really be a nice benefit because it doesn’t impact the debt to income ratio. So if they have income, and they’re using that income to qualify whether it’s investment income, or even, you know, if they’re still working, and they use that income, this doesn’t, this doesn’t impact in a negative way, their debt ratio, this reverse mortgage, they can use the funds for whatever they want, you get to pay off the existing loans. So you have no more payments. If you have a loan, now that loan is paid off. credit line can increase over time. And you can you can do more investing with it. So it’s a pretty cool thing.
Charlie Ridge 54:34
I see it as a big win win for somebody in the right position, is it
Jason Hartman 54:38
now it’s just a small niche market? That’s that’s the difference, right?
Charlie Ridge 54:42
That is correct. There’s not a lot of lenders out there doing it because I don’t know why. I honestly can’t answer why a lot of lenders are doing I know that we are and we’re participating in it heavily and it seems to really work for a lot of people.
Jason Hartman 54:54
Yeah, well, I see a lot. You know, it’s a small market. It’s a small number of people that can qualify for it. But you know what? We see a lot of commercials on TV about about reverse mortgages. I know Robert Wagner had some commercial he was promoting a lot. And I don’t know some other famous character does too. I can’t remember who it is, but but you know, I see those commercials on TV about it. Is there anything else you want to say on reverse mortgages,
Charlie Ridge 55:15
not after the premises of the other things that need to be discussed, we can discuss one on one with the individual based upon their specific scenario.
Jason Hartman 55:22
All right, good, folks. So if you’re interested in this, go to Jason Hartman, calm if you’re already working with one of our investment counselors, just ask them, they will get you in touch with Aaron, where you can find out all the details about it. Thanks for telling us about reverse mortgages today.
Charlie Ridge 55:37
Thank you for having me on Jason, I appreciate it.
Charlie Ridge 55:44
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