Jason discusses the Four Pillars of Return On Investment (ROI) at a recent live educational event and how to take advantage it. He recalls an acquaintance who has trouble understanding the simple concept.
Announcer: Welcome to Creating Wealth with Jason Hartman, President of Platinum Properties Investor Network in Newport Beach, California. During this weekly program, Jason is going to tell you some really exciting things that you probably haven’t thought of before, or a new slant on real estate, 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 multimillionaire, who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in nine states. This program will help you follow in Jason’s footsteps on the road to financial freedom through real estate. You really can do it. And now, here’s your host, Jason Hartman.
Jason Hartman: Hello, this is Jason Hartman with Platinum Properties Investor Network. Welcome to Podcast No. 16. We are going to talk about ROI, the most important thing in any investment. What does ROI mean? It means, “Return on Investment.” So many people, believe it or not, are just totally confused about the way real estate investment works, how to use real estate properly. What kind of vehicle is real estate and how do we make it work for us? So let’s talk about that today.
You know, I have an acquaintance. His name is Patrick and he illustrates a good point because he is a – or at least, I’m sure, considers himself to be a sophisticated person, a sophisticated investor. He is a commercial real estate broker, been in the business a little while. I don’t know exactly how long and he looks at things from a mathematical and analytical perspective, which you would think would be good. But even someone like Patrick does not understand how to use real estate properly as an investment. What is it good for? How do you get the ROI or the Return on Investment out of real estate? So let’s talk about that today.
In a couple moments, we will share a live clip from a recent seminar that explains this pretty well, but let me just preface it by saying real estate is not a good cash flow investment. If you want cash flow, invest in bonds. And by the way, I don’t think bonds are a very good investment at all because bonds, the value of bonds, get destroyed through inflation. Real estate is the world’s best investment. It is not a good bank. It is not a good place to keep money. It is not a good cash flow vehicle. It is good for the reasons you will hear in the live seminar.
So let’s learn how to calculate and understand ROI. Why is ROI so important? Return on Investment is the number that you compare to other investments. So if you are investing in a savings account, stocks, bonds, mutual funds, a piece of real estate, and you’re earning 4 or 5 percent in a savings account, 6, 7, 10 percent in stocks, bonds, and mutual funds, or you’re earning 40 percent on a real estate investment as an ROI number, this is how you accurately compare a real estate investment.
Remember, it is not necessarily about cash flow. It is not necessarily about appreciation. There are two other pillars of those four major real estate pillars. So listen in to the live seminar, and I will come back afterwards and talk to you about it a little more and wrap it up for you.
Here is the deceiving thing about real estate. This is probably the largest problem of all for investors, and it is this. They do not truly understand how to evaluate return on investments. Most real estate investors think that real estate is about appreciation, buy low, sell high. Sound like a good strategy? That is only a small part of the strategy. In fact, we call “appreciation” the icing on the cake. It’s not the cake itself and the reason for that is appreciation is somewhat speculative. You never really know if it’s going to happen for sure. So we don’t wanna bank or hang our hat on appreciation.
The next one is cash flow. A lot of people like their properties to have positive cash flow and like to use that income to retire on or have extra spending money, extra income. Now, real estate is a lousy cash flow vehicle. If you want cash flow, real estate is not a good vehicle for it. Told you I’d challenge a lot of closely held, long assumptions that people have had over the years.
We will show you why cash flow on real estate, believe it or not, is actually a bad thing. Not a good thing. If you want cash flow, invest in bonds, and I don’t think you should invest in bonds.
There are really four pillars of real estate rather than two. Four major pillars. The next one is principle reduction. Now, everybody’s certainly familiar with the concept of you rent your property out, the tenant pays down your mortgage for you as years go by, and that’s a very good deal, right? How many of you like this idea? You have your properties free and clear over the years as you pay your mortgage down. I don’t like that either.
We have a gift for you and I might as well pass these around now. This is a DVD by a very renowned, best-selling author and financial advisor named Rick Edelman. And Rick Edelman has a DVD here, and Terry will pass those out to you, on ten great reasons to carry a big, long mortgage and never pay it off. So your homework is listen to this DVD. It’s a $30.00 value. Yours free today.
Principle reduction, that’s the most familiar form of principle reduction. You pay down your mortgage slowly. But there is one largely hidden form of principle reduction and it is inflation. How many of you like inflation? Oh, yeah, this guy who likes tenants and taxes likes inflation. Well, you’ve been to the seminar.
Okay, people do not realize, real estate investors love inflation. Now, the obvious way they love inflation is they think, well, it makes my real estate appreciate in value. Real estate has historically been a terrific hedge against inflation. But when you properly finance real estate, when you use debt on your real estate, inflation becomes the best ally in the world, and I will demonstrate that for you later.
The last one is tax benefits. These are the two more unseen things, the unseen pillars of the real estate investment. Principle reduction through tenant pay-off and inflation, and then tax benefits, that real estate saves you a fortune on your taxes.
Real estate is not about appreciation. That’s a part of it. It’s not about cash flow necessarily and it’s not about the other two things either. It’s about the combination of all four pillars. All of these ingredients working together create return on investment, or ROI. And what we’re going to talk today a lot about is ROI, Return on Investment because this is the number that you compare to your savings account, your stocks, your bonds, your mutual funds, whatever other investment you have. We’re going to compare it based on ROI, return on the investment, in real estate investments. And remember what I said earlier, that I expect 40 percent a year from my investments. Forty percent, pretty darn good.
So what do we have historically? Well, for the last 100 years almost, stocks around the world have returned about 9.2 percent, in the U.S. with dividends, 10.1 percent, not tax-favored. Taxable. When you sell the stock, the gain is taxable. When you receive a dividend, the dividend is taxable. Real estate, you save on taxes. You can trade it your whole life through 1031 exchanges and constantly defer, defer, defer the taxes, die and never pay them. Basis steps up to your heirs; they can cash in. So you really have a way to get out without paying the taxes on it and it’s terrific.
Government bonds, these aren’t very exciting; 4.8 percent, most of them taxable. Not all. Cash about 4.1 percent, taxable certainly, but real estate, since World War II, the national average appreciation on real estate has been about 6.7 percent. Since 1968, anybody know what the average is then national? 6.4 percent. Anybody know the last ten years? It’s been a pretty good ten years or seven of the ten have been pretty good, right. 7.29 percent.
Let’s just go with the 6.7 number for purposes of the example. When you put only 10 percent down on your real estate and have a 90 percent loan-to-value ratio, 6.7 percent turns into 67 percent. That is the power of leverage in your real estate investments. You amplify or magnify these returns dramatically and that is why real estate has been such a terrific wealth generator for so many tens of millions of people.
Looking nationally, since 1968, that’s where we have really good statistics, good tracking. Since 1968, you can see nationwide, there has never been a downturn in residential real estate prices. But there have been a lot of local downturns. Certainly, right here in the ’90s, there was a big downturn here. We lost about a third of our value here. I mean I remember. I remember the listings I would have would sit on the market for sometimes a year. I mean it was unbelievable. It was really challenging to sell a property and we’re moving into that type of market again now.
But nationally, if you diversify, at least based off history, and look, what else can you go by but history, there has never been a nationwide downturn. And that is why we diversify, so that we limit any downside risk and maximize upside potential.
In Robert Kiyosaki’s book, Who Took My Money, did anyone read this one? He’s got a great little graph in here. It shows $10,000.00 in 1992 invested in an S&P 500 index fund and $10,000.00 invested in real estate, which buys you a $100,000.00 property based on 10 percent down. Now I know these examples are a little oversimplified. There’s a little more to it than this, for certain, but this just illustrates the point and the benefit of leverage.
Ten years later, a decade goes by, in S&P 500, you have $17,000.00 from your $10,000.00 originally invested. But in real estate, you’re still controlling a $159,000.00 investment. So if you sell this property at that time, you’re going to have a much larger gain. Now, you’ve got a $90,000.00 loan balance on it when you sell it, but look at the difference in the gain. In fact, it shows that residential real estate outperformed the S&P by nearly 800 percent over that 10 years, not including tax benefits. And for most of that time, certainly in California, we had a down market.
Assumptions, to perform on any investment, we have to make some assumptions. These are the ones that we make and we keep them consistent on every property. Occasionally, there’s kind of a unique thing that we’ll make a slight exception for, but basically, every property you look at, you will see these exact same assumptions. One of the other things we do is we standardize things so that if you learn to look at and evaluate one sheet of paper, this one that – you’ll be handed a lot of these throughout the day – you will know how the investment works. It gives you all of the numbers you need to make a decision on how good or bad the investment is.
Down here in this section is the assumptions, and here they are blown up for you. Appreciation rate, 6 percent. That is the projected appreciation rate. Remember, World War II, 6.7 percent. Last 38 years, 6.4 percent. Last ten years, 7.29 percent. Let’s go below all of those and only project 6 percent in the future on a nationwide portfolio.
Vacancy rate, 8 percent. Folks, your properties will not be occupied all of the time. We’re going to project that they will be vacant one month per year. Now if you buy a brand new property and you initially take two months to get it rented, but your tenant stays in the property for two years, your vacancy rate is 8 percent, or one per year on average. I had a tenant in one of my properties; he stayed there nine years. No vacancy. Kept raising the rent; didn’t move. Great.
But the fact is you need to perform in some vacancy. I hate when I go to these other real estate groups and I see them projecting 15 percent appreciation, zero vacancy. Folks, your properties just won’t be occupied all the time and 15 percent appreciation is in the past. That’s in the rearview mirror, okay. That’s not what’s happening now.
Management fee, 10 percent. That’s for your property manager. Could you get a better deal on management? Sure. We recommend that you don’t negotiate with your property managers. People don’t usually do what you tell them to do. They do what you pay them to do, so pay your property manager well because a small difference in negotiating their fee, you lose one month of your property being occupied and you’ll lose a lot more than whatever you negotiate with them. So we just believe pay them their full price; give them 10 percent.
A maintenance percentage, 2 percent of the rental income. Now, these are brand new properties, one-year home warranty. You probably won’t have any maintenance at all on your property for the first three, four, maybe five years, but we’re still going to perform in that you’ll have 2 percent.
Next one, equity share percentage; that just means that you own 100 percent of the property. If you had a partner, the harder ship to sail, it might say 50 percent. This just means that you own it all. And this sheet we’ll go over throughout the day and it will show you a lot of how these assumptions work and how they interplay with each other.
Leverage, just to drive the point home about leverage, look at this example: $100,000.00 property purchased with all cash or 100 percent and 6 percent appreciation means that your gross return on investment is 6 percent. No leverage. If you put 10 percent down on that property, or $10,000.00, $90,000.00 of the bank’s money is working for you, so there your 6 percent magnifies to a 60 percent return on investment. That’s the power of leverage.
Let’s look at some examples and I’ll need you to write some numbers down, so I think you’ll like this. This is a property in Houston. It’s a $140,000.00 and it’s almost 1800 square feet. Look at that house. See what I told you about being careful not to take your California mind to some of these markets? It looks free, right? So on this sheet, it tells you everything about the investment. Here it tells you just a little summary about the property. Write down that it’s $28,000.00 down. That’s the down payment. Here’s the projected rent of $1300.00 a month, the vacancy losses, property tax, insurance, management fee, all of this stuff, right, is all performed in here.
When you get down here where the arrow is to Before Tax Cash Flow, you see that it’s negative $28.00 a month, so write that down. Negative cash flow $28.00 a month with the down payment you wrote down of $28,000.00. Gross Equity Income with Tax Savings at the very bottom here, $764.00. So you see that real estate is deceiving from a cash flow perspective and even sophisticated investors do not understand this. It is amazing to me that they see it so myopically and they don’t understand the blending of those four pillars for creating return on investment.
Let’s look over here, how we finance the property. Here’s the mortgage info. We’ve got an 80 percent loan and we put 20 percent cash down, $28,000.00. And our loan here, by the way, the interest rates vary a little bit so we can never be exact on this, and it varies a tad based on your credit score and your ability to qualify. Here, we’re saying interest rate of 6.5 percent. It might be a little higher. It just depends on you and the exact time you get the loan.
Total return on investment – write this one down – 24 percent. Important number. That is the number you compare with your lousy mutual fund, not that I have an opinion or anything. So this is a 24 percent return on investment. After tax benefits, it’s a 28 percent return on investment. Now, look, taxes are complicated. There are lots of issues with taxes that we do not have time to discuss today. I need to say to you that we are not tax advisors, we do not prepare taxes, we’re not licensed to practice tax or anything like that. Go to your tax advisor to get the general concepts. We’re just giving you general concepts. Get the specifics from them.
So 28 percent ROI after taxes. Now, that’s with 20 percent down. You got your numbers written down? $28,000.00 down, $28.00 a month negative, return on investment 24 percent. Not a bad deal, right?
But what if we put less money down? What if we look at the exact same property and the only thing we change is the down payment? Here it is, same property, everything’s the same except look at the down payment. It’s only $7,000.00 down rather than $28,000.00. So write that down, $7,000.00 because we’re gonna go back to these numbers so we need them written down. $7,000.00 down, same rent, same expenses. Before Tax Cash Flow is negative $220.00 a month, much higher negative cash flow. How many of you like negative cash flow? Nobody likes that, except Karen in the back, and oh, this guy likes it. What is your name, sir? You’re such a rebel. Okay, okay, good.
So he likes negative cash flow. I think we’re gonna get along just fine because I agree with you. So negative $220.00 a month. But return on investment for this way of financing is 45 percent. Isn’t that interesting that we put less money into the property, we have a larger monthly outflow of cash, but the property gives a higher return on investment. Why is that? It’s because of the blending of the four pillars. And look at this. After taxes, 59 percent. Don’t try that in a mutual fund.
So look at what we did here. The way we financed this is different. Eighty percent first loan just like before, but we got a second loan on the property of 15 percent of the value or $21,000.00 at 11 percent interest. Who wants to pay 11 percent when you can get 6.5, maybe 7 percent? I mean doesn’t that seem high? But it’s actually worth it to pay that high interest rate because it makes the investment perform so much better because we’re using less of our own cash.
Here’s a couple quotes for you that you might want to write down and they’re from yours truly. These just came out of my head. “Real estate is the best investment, but it’s the worst bank.” “Real estate is the best investment, but it’s the worst bank.”
Another one. “Real estate is a great place to invest someone else’s money.” The banks. It’s not a good place to put our own money. It’s a great place to put their money, so we get a whole bunch of benefits by investing someone else’s money in the deal.
“Equity in real estate” – here’s the last one – “equity in real estate is like putting your money in a bank account that pays zero interest and is not FDIC insured.” How many of you would do that? You wouldn’t do that, right? Don’t keep money in real estate. It’s a bad place to hold money. It’s a great place to invest someone else’s money.
Look at Donald Trump, probably the most famous real estate investor. He could pay cash for all his buildings, I’m sure, but he never does because real estate is not a good place to keep money. The investment performs worse the more you have into it. The less you have into it, the better the performance and I say the lower the risk. I’ll demonstrate that a lot of different ways today.
One of the things we’re gonna get to is what I call the great inflation payoff that you’re gonna love. See, it used to be a good idea to save money. It was really about 1971 that most of that changed and what happened is Nixon took us off the gold standard. And when we went off the gold standard, we started having a lot more inflation. Also, I think the government’s numbers on inflation are completely bogus, but that’s another subject as well. But we started having a lot more inflation and the people that save money get really hurt by inflation. They get killed by it because their savings becomes worth less and less.
But the people that borrow money actually become enriched by inflation because they’re paying back in cheaper future dollars. So if I said to you would you rather have $100,000.00 today or in ten years – so similarly, if I say to you would you rather pay $100,000.00 today or pay $100,000.00 in ten years, what would you rather do? You’d rather pay it ten years from now. Why is that? Because the $100,000.00 will be worth less in ten years than it is today. I mean, folks, just look at your own psychology. Remember when it used to be a big deal to be a millionaire? Millionaire ain’t nothing anymore.
I mean in Southern California, that’s no big deal to be a millionaire. Most people are equity millionaires here a couple times over. But the thing is, nowadays, what you have to be is a deca-millionaire, $10 million, okay. That’s the new millionaire with inflation-adjusted dollars, all right. So we’ll work on that today.
But debt actually benefits you. The borrower benefits through inflation and I’ll show you how that works. So look at the difference on these properties. With 5 percent down, you’ve got a 45 percent ROI; 20 percent down got you 24 percent. You lose 19 percent ROI by putting more money down because the investment stops performing as well. Let leverage work for you by using the bank’s money to grow your wealth and the urgency here is that it is getting very difficult to obtain these low down loans. When I got into the business back in 1985, when I was in college, I remember if you wanted to buy rental property, you had to put 20, 25, 30 percent down back then. Nowadays, you can still do it with 5 percent down for a rental property. It’s much different than financing your own home. Your own home is easier. Rental properties are tougher to finance.
Soon it’s probably gonna be 10 percent down is gonna be the only deal available and then maybe even worse. Maybe 20 percent. So borrow while money is on sale. Now, people don’t really usually see the two ways money is on sale, debt or money, mortgage money. One way that it’s on sale, obviously, is we have the lowest interest rates in almost 40 years right now. The second way, though, that money is on sale is just the ease of qualifying, the ease of borrowing with very low down payments. It is much easier to borrow now than it was in the past. That really changed after 9/11.
What about cash flow? Now remember those numbers we wrote down. We wrote them down for a reason. Here they are again. Remember the $140,000.00? If you put 20 percent down, you’re going to be putting $28,000.00 down. If you put 5 percent down, it’s $7,000.00 down. Remember the difference in the cash flow; with 20 percent down, it was negative $28.00 a month. With 5 percent down, it was negative $220.00 per month, so the difference between these two numbers is a $192.00 per month. The difference between the down payment is $21,000.00.
So if you divide $21,000.00 by $192.00, you will get a 109 months or over 9 years – over 9 years to get to the break-even point. See, I like negative cash flow so much I changed the name of it. I’m a salesman. I call it deferred down payment because that’s what it really is. I can eliminate negative cash flow by putting more money down, but I don’t want to because it raises my risk and it reduces my rate of return on my investment. I wanna use the bank’s money as much as possible.
Now, the problem here is that you’ve got to be able to afford the negative cash flow. So the way you manage this issue is you don’t buy too much property because you’ll have too much negative. But think about it, if you just took this $21,000.00 and put it in the bank and earn 5 percent interest on it, and we’re not even calculating the interest benefit here, and earned interest on that money and put it as a slush fund on the sidelines in a special bank account, and every month you wrote a check for $192.00 out of that account, it would take you 109 months to spend it without earning any interest. You see that?
So this is the more sensible, more prudent way to go. Let’s talk about buying properties that make sense the day you buy them. When you look at real estate over time, it generally goes like this. It goes up, it goes down, it goes up again. It’s kind of that pattern, right? But it always has this definite upward trajectory. The problem is people get into trouble with real estate because they buy it here at the peak and then sell it somewhere as it’s moving down, right.
But what is the reason they do this? The reason is because they don’t manage cash flow correctly. It’s all about managing cash flow. You see, real estate is a game of staying power. If you stay in the game long enough, you’re going to win the game. At least, that’s what history tells us. So the problem is manage cash flow so you can get through any of these bad times in price.
Now, we’ll talk about, as the day goes on, two kinds of appreciation markets, linear and cyclical markets. Linear markets, which are the markets we recommend now, don’t have these big ups and downs, but Orange County looks like this. It goes up really high. Now it’s going down. In Orange County, we’re probably right about there, I think. We’ve still got some more to go downward. So the key is manage cash flow so you’re not forced to sell at the wrong time.
See, we cannot depend on appreciation. So we have got to make sure the property makes sense from a cash flow perspective the day we buy it. Over 7,000 people have been through our seminars and whenever I ask this question, I get one of two responses. One, not managing cash flow correctly. The second one is the big “D” word, divorce. Divorce is one of the biggest destroyers of wealth and the reason is not because she got half or he got half. The reason is it forces people to sell assets at the wrong time. So one of the other things that I want you to take home today is learn to time your divorces, okay? At the peak of the market, it’s okay to break up. The trough, you go to counseling. You work it out no matter what! So this is like your last chance to get divorced in Southern California for about three more years, if you ask me. All right?
So those are the two things that kill people in real estate, divorce and not managing cash flow correctly, not buying properties that make sense the day you buy them.
What is investing? Investing is not about speculation or gambling. It’s not a get-rich-quick scheme. It’s the long-term process of creating value over time. Understand that anything that does not have income is not an investment. Your home is not an investment. Your vacation condo is not an investment. Those are not investments.
Now here’s one of the other things that bugs the heck out of me. The vast financial services industry, Wall Street conspiracy – I knew you’d love that, Richard. I just threw that one in for you. What they do is they publish articles comparing real estate – well, what is real estate? I don’t know what that means. Is it a rental property? That’s the only thing that’s an investment in my opinion. Or is it a second home? Comparing, gee, I bought this second home in Palm Desert 20 years ago and paid cash, and now I’m gonna compare it with the Dow Jones Industrial Average. And the stock market was a little better. That’s such a lie because it didn’t produce income. Okay? That’s not an investment. That’s a toy. All right, your home is not an investment. Your vacation property is not an investment. The only thing that we call an investment is something that rents. You need rent to make it an investment.
Managing cash flow is key, so let me give you a rule of thumb on the cash flow thing, and it is the RV ration. I keep with this RV ratio thing because I kept talking to investors and they kept confusing me. I don’t like to be confused and I don’t like our clients to be confused. If you want something that’s just a really quick rule of thumb to show you the performance of an investment, here it is. It’s the Rent to Value Ratio, the RV Ratio. The ideal RV ratio is .7 percent, .7 percent; write that down. That means that if the value of the property is $100,000.00, the rental income ideally would be $700.00 a month, .7 percent of the value.
Now you notice this is not the rent to what I paid for it ten years ago ratio. It’s the rent to current value ratio. That’s how we evaluate this. It doesn’t matter what you paid for it. It’s irrelevant. The acceptable RV ratio is .5 percent; $100,000.00 property rents for $500.00 a month. Anything below .5 percent is unacceptable.
Veronica, I will bet you that your person you talked about – about the properties in Irvine and Tustin – has an RV ratio of .3 percent, because that’s pretty much what it is in Southern California. That means, and the typical example here is, they’ve got a $600,000.00 property that rents for $1800.00 a month, .3 percent of the value. Not acceptable; not good enough. So let’s put a cross through that.
I hope you enjoyed that. I hope the example of understanding the four pillars of real estate investment made sense to you and I hope that understanding cash flow was enlightening as well. Isn’t it amazing how when you put less money down on the real estate investment and take on negative cash flow, which most people feel is bad, the investment actually performs better and you lower your risk? Always remember something when it comes to money and investing, that the more money you put into the deal, the higher your risk. The more money someone else puts in to the deal, the lower your risk and the higher their risk.
So I always say real estate is the worst bank, but it is the best investment. Real estate is a great place to invest someone else’s money. Put as little of our own money as possible into a real estate investment, and that was illustrated when we looked at that property in Houston with the different cash flow numbers and the different rate of return, and the different down payments. Use the deferred down payment technique to your advantage. I would rather pay my down payment each month rather than all up front, all at once. Folks, there can be no argument and no discussion on this. It is unassailable logic. It works in every case no matter what.
The only caveat to it is this. Don’t buy more property than you can afford, obviously. Look. It takes a little bit of money to make money, like any investment. If you wanna invest in stocks and bonds, you gotta put some money in, right? Same is true with real estate, so understand that you cannot go out and sign up for a bunch of properties and take on a bunch of negative cash flow. You will get yourself into trouble with that. So you’ve got to have enough money in the bank to manage your deferred down payment. And as you can see, it is always better to invest this way.
So understand, again, real estate is not just about appreciation. It is not just about cash flow. It is not just about principle reduction. Remember, there are two types of principle reduction. One is the obvious one where we pay down our mortgage over the years. The other less obvious one is another type of ROI that I call Return on Inflation. Inflation is one of our best friends in the real estate game, so in a future podcast, we will talk about the wonderful virtues of inflation. It is really a terrific thing.
Let me also share with you something that wasn’t in this live seminar. We recently found a new article from the Wall Street Journal. If you wanna look it up, I wanna cite the exact source from you. It is entitled “Stocks Versus Other Investments: Average Annual Rates of Return.” And listen to this. From 1926 to 1992, a very long period, a very long sample, and it says, “Dow Jones Industrials have been a wise investment decision.” The article, by the way, is dated September 30, 1996. Note that that is prior to the real estate boom.
Now what they said in the article is they talked about comparing the different investment possibilities, and here they were. Average rates of return, 1926 – 1992, prior to the real estate boom in a very long sampling, a very long period of time, small cap stocks did 12.5 percent ROI; real estate, 11.2 percent, coming in at No. 2. Dow Jones Industrial Average, 10 percent, coming in at No. 3. And then there’s bonds, 5.2 percent, treasury bills, 3.7 percent, and they noted that inflation over that same time period averaged 3.1 percent.
But here is the big lie, the big misrepresentation that is not explained by the Wall Street elites. Real estate, who buys it with cash? You’d be crazy to buy real estate with cash. Real estate is, as I always say, the worst bank, but the best investment. Not a good place to park money; not a good bank. Putting cash into real estate is like putting your money into a bank account that is not FDIC insured and it offers a zero percent rate of return. So real estate is a lousy place to keep money. Always understand that. Great investment, but a bad place to keep money.
So now, let’s compare. When you take and you put 20 percent down on a piece of real estate, and you factor in the value of leverage, how the borrowed money, how someone else’s money, how the bank’s money works for you, it increases your rate of return by a 5:1 ratio.
Now let’s look at the new rate of return here. Small cap stock, 12.5 percent, just as before, but real estate with the value of leverage because 80 percent of the money is borrowed, 20 percent is your own, the real estate return on investment is 55.5 percent. Coming in at No. 1 is real estate, 55.5 percent. Dow Jones Industrial Average, 10 percent; bonds, 5.2 percent; treasury bills, 3.7 percent; inflation, 3.1 percent over this very long period. Guess what happens when you put only 10 percent down? Your investment performs incredibly well, even better than with 20 percent down.
The prudent use of leverage is incredibly powerful. The rate of return on real estate in this example goes up to 111 percent. Folks, there is no better investment in the world than properly, prudently, carefully financed real estate. And understand also, that nothing qualifies as an investment that does not produce income. So when we compare real estate to other investments – we are not talking about your house; we are not talking about your vacation condo. We are only talking about rental properties because in a future podcast, we will talk to you about the incredible benefits of inflation on your real estate investments.
Think about what happens here folks. You get someone else to loan you the money to buy the property. Then you put someone else in the property as a renter to pay the lender back on your behalf. Inflation, all the meanwhile, is reducing the basic value of the money you need to pay back so that your loan balance is essentially declining through the beneficial effects of inflation. So of course, these examples are somewhat oversimplified. I understand that. Contact us, contact one of our investment counselors for more details on this, but it is incredibly powerful when done right. Understand that the return on investment is what we’re looking for. Do not let the people on Wall Street, do not let the supposedly sophisticated people like my friend Patrick, confuse you as to how well this investment works.
Really, I think that in his case, he’s operating largely out of jealousy and envy and these are all bad things, and we’ve all dealt with people like this in our lives. So understand that you must hang around the right people who are reinforcing positive attitudes and positive beliefs. Just wanted to share a couple of great quotes with you on this subject.
Mark Twain said, “Keep away from people who try to belittle your ambition. Small people always do that. But the really great make you feel that you, too, can become great.”
On critics, everybody’s a critic out there at times, right? Well, this person, this critic, I’ve talked about has not taken the time to understand how real estate really works. You would think a commercial real estate broker would understand this, but it is very clear that he does not, okay. So the armchair critic, the people that don’t do anything in their own life, but like to be a critic of everybody else. And this is the famous quote by Theodore Roosevelt. You may have heard it.
“It is not the critic who counts, not the man who points out how the strong man stumbled or the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, who’s face is marred by dust and sweat and blood, who strives valiantly, who errs and come up short again and again, who knows the great enthusiasms, the great devotions; who spends himself in a worthy cause, who, at best, knows in the end the triumph of high achievement; who, at the worst, if he fails, at least fails while daring greatly so that his place shall never be with those timid souls who know neither victory nor defeat.”
Charles Jarvis said, “Luck is a word used to describe the successes of people you don’t like.” Everybody knows that successful people are not usually lucky. They’re working real hard.
Last one, Dale Carnegie said, “Unjust criticism is usually a disguised compliment. It often means that you have aroused jealousy or envy. Remember that nobody every kicks a dead dog.”
So I hope you’ve enjoyed this podcast. I hope you make sure that you are associating with people that are benefiting your life, people who are into growth, people who are into success, who are into positive things. The Monday morning quarterback, the armchair quarterback, there is no place for that person in our lives. There is no place for that person in the world. Stick with the people who are really doing things, not the people who are busy being critics, and who are not taking the time to understand how things really work.
Thank you for joining us today. If you have questions on any of these topics, give our office a call. Visit our website. Talk with any of our investment counselors. We’ll be happy to help. We’ll explain them in further detail and give them all to you in writing so that they’re easy to understand. Join us for the next podcast, which I think will be on that topic of inflation. You will absolutely love it. Thanks again. We’ll see you next time.
I’m here with Senior Area Manager, Karam, and we wanted to talk to you quickly about his recent trip. He just returned yesterday from Jackson, Mississippi. Karam, what did you find there?
Karam: Well, Jason, it was a very interesting trip. Unlike other areas, this is a very unique area in the sense that we live here in California and we go to all these markets, and every market is different. Jackson, Mississippi, on the other hand, the way it is different from the other areas is they don’t have the apartment complexes like we have in most of our metro areas.
Jason Hartman: Yeah, so you don’t have that high density attached housing, huh?
Karam: That’s correct. So what happens is all these houses have high demand of rental, and on the rental side, there is not too many houses available for rental, so there’s a quick rental and you get the high rents, so the cash flow is better. But you have to drill it down to the micro area, the communities that we want to invest in, buy the investment properties. The first thing we look at is the school system. Now, if you look at any particular city and suburb, it may have a good school system or it may not be in the good school system. Now, one particular city may be half in one county and the other half is in a different county.
Jason Hartman: So that was true of Hattiesburg, right?
Karam: That’s correct, yes.
Jason Hartman: So if you look at Hattiesburg, you can’t choose by just Hattiesburg. Some of the area is not so good –
Karam: Not so good.
Jason Hartman: And some is a desirable investment area.
Karam: Right.
Jason Hartman: You were telling me about how they gave you a list of 131 properties that the broker thought would be good for our investors and the process of you narrowing it down and what you narrowed it down to. Why don’t you tell everybody about that?
Karam: Well, I just narrowed it down to 21 properties.
Jason Hartman: Out of 131.
Karam: Out of 131, and that’s all I will sell from, 21 properties, and they are in a good school system, good quality product. Looking at the communities, the location of the communities, location of the properties, and that’s all I came up with.
Jason Hartman: Excellent. So Karam, talk to us about this specific property you’ve got in front of me. This one is $179, 760.00, so we’ll call it $180,000.00. It’s almost 1700 square feet. The projected rent is $1500.00 a month and return on investment, Karam?
Karam: Yes, 42 percent believe it or not.
Jason Hartman: Forty-two percent projected ROI and if you qualify for all that goes on tax benefits, projected first year ROI is 128 percent. Don’t try that in the stock market, huh?
Karam: That’s correct. The reason is these areas, not only the high rent, but the property tax is very, very low.
Jason Hartman: Only $195.00 a month on that property. Wow.
Karam: Right.
Jason Hartman: Good stuff. Okay, Karam, anything else you wanna talk to us about. Let’s – you’ve got one more property. Maybe this one in Indianapolis; that looks kinda interesting. There’s some big discounts on this.
Karam: Yes, Indianapolis really surprised us, that market, and we are getting great deals.
Jason Hartman: Yeah, we weren’t expecting this one to be so good.
Karam: Yes. Great deals and I’ll give you an example of the property that I saw yesterday. Twenty one hundred and one square feet, four bedroom, two and a half bath, brand new single family house, comes with a rent-ready package, meaning washer, dryer, refrigerator, blinds, garage door opener, front and back yard sodded, for only $127,000. You know what that means, Jason, per square feet price?
Jason Hartman: Yeah, that’s amazing. You’re buying like very close to the cost of actual construction here. How much?
Karam: $60.00 per square feet only.
Jason Hartman: $60.00 per square foot. That is unbelievable. It’s like the downside risk is almost nothing. Go back and listen to our podcast on risk evaluation.
Karam: And again, return on investment is 41 percent.
Jason Hartman: So 41 percent projected return on investment, and these are some good properties. Give us a call or check out our website for more properties and all the details are listed there. And we will look forward to talking to you on the next podcast. Thanks.
Hey, I just wanted to announce a couple of quick things for you. If you are able to come to one of our live events, we would love to see you and meet you in person. We’ve had people fly in from all over the U.S. for them. So hopefully, you can join us for some of those events. Also, remember our rental coordinator is here to help with your rental properties. If you need assistance with your rentals, your property managers, your advertising, remember we’re here to help and we stay with you through the life of the investment. So feel free to call our office anytime and ask for the rental coordinator for assistance on your rentals.
Also wanna remind you, listen to our old podcasts. At least go back to podcast No. 13 forward and listen to all the podcasts after that. You’re welcome to listen to all of them. The ones before No. 13 are older, but they’re also good, but the newer ones are No. 13 and forward, which are really good ones to listen to, so please take advantage of that.
And remember, the overall market commentary right now, due to the mortgage meltdown, the subprime issues that are going on out there in the market, is that rents are going up all across the nation. When people cannot qualify as easily to buy a property, they are forced to rent. So let that work in your favor by accumulating more rental property assets and don’t be afraid to ask for more rent and raise your rents. That’s a good thing to do.
Also, if you are interested in career opportunities with us, our company is growing quickly and we would love to talk with you about career opportunities. We’re in the process of getting approved for franchising. If you’re interested in a Platinum Properties Investor Network franchise, we’d be happy to talk with you about that and get you set up there once we are finished with our approval process.
Be sure to see appropriate disclaimers and disclosures on our website at www.jasonhartman.com. Remember that we are not tax or legal advisors. So give us a call on any of these issues, and remember, we are here to help, and we will look forward to talking to you on the next podcast.
This material is the copyrighted creative work of either Jason Hartman, the Hartman Media Company, Platinum Properties Investor Network, Incorporated or the J. Hartman Company, all rights reserved.
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Duration: 50 minutes
