Jason provides a quick overview of some global real estate markets, a discussion on Missed Fortune by Doug Andrew, some numbers to know when buying property and a chat with our client Jeff Blankenship about his path to financial independence.
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: Welcome to another addition of Creating Wealth. This is Jason Hartman and if my voice sounds a little bit hoarse, it’s because it is. I’ve been sick all week and I tell you, it’s probably happened to you, too, I’m sure. You never appreciate your health enough until you get sick for a few days and you just want nothing more than to be well. I think I’m on the mend, but pardon the voice.
Anyway, it’s great to be with you today. We have a good podcast. We’re going to talk about a few different things. The first thing I want to talk about, though, is the show that I released on Christmas Eve 2007, where I talked about America’s best export, being freedom, and I quoted a Ronald Regan speech and I’m not sure I really made the connection well enough for all of you listeners, so I wanted to just talk about that again for a moment.
I think that given current market conditions, the United States is really one of the very best places on the planet to be investing. We have looked at many, many international markets and considered going there. I’ve talked about some of those international markets on other shows, but given the fact that you have a weak dollar, a generally feeling soft market in the U.S., and a sputtering U.S. economy that’s, depending on who you ask, on the verge of recession, I think it’s an excellent time to be investing in the United States. But back on that old show, the Christmas Eve show, the thing that makes the U.S. such a great market – I just got back from India. When I was there, I mentioned on the last show that I completed this great book by Robin Meredith called the Elephant and the Dragon. And in there, she likens China as to the world’s factory. She says China is the world’s factory. India is the world’s back office.
Well, America is the world’s Brinks truck. America is the world’s safe harbor because very few countries are as politically stable as America. Very few countries have the type of freedom that Americans enjoy and very few countries have the transparent legal system, and frankly, relatively low taxes, although we in the States love to complain about how high taxes are. On a global scale, they’re relatively low.
So those are some of the reasons that I think the U.S. is really the greatest market, especially at this time, to be investing in. But I wanted to share something with you from Global Property Guide and there’s some terrific research here that talks about the world’s most expensive cities in 2008. And guess what No. 1 is? Most expensive city – now, this is the per square meter price in London, for example. In U.S. dollars, $24,000.00; New York, $15,000.00 – there’s some small dollars on there in hundreds. It’s really $16,000.00 in New York. Moscow, Russia, just over $15,000.00; other areas of London, there outside the primary, $15,200.00; Paris, $13,800.00; Hong Kong, $12,600.00. And you go down the list and you see all the major cities that we’re all familiar with, of course.
But what’s surprising is how cheap U.S. real estate is and, remember, these prices are pretty much for stacked flats, little apartments. When you look at the rents globally, you look at the monthly rent for a 120 square meter apartment in the city center of any of these cities, in London – now, that was the sales prices as per square meter in U.S. dollars – in London, the rent per square meter, $12,900.00; Moscow, $8,122.00; New York – of course, we would not recommend investing in New York, by the way; I should say that. That’s a market where the cash flow doesn’t work. It doesn’t make sense. Again, we’re in 36 markets around the U.S. New York is not one of them. It may be at some point, but land values are way too high for us to ever consider them. But that’s $7,900.00 in New York; Paris, $5,600.00; Sydney, Australia, $4,100.00; Geneva, $3,600.00; St Petersburg, Russia, $3,400.00.
And you know, you go down the list: Mumbai, India, $3,400.00; Singapore, $3,300.00; Toronto, Canada, $3,200.00, on and on and on. At the bottom of that list is Cairo, Egypt. I’ve been to Cairo; saw the pyramids there, and at $364.00 per meter per month. And what you really come to realize when you look around the globe is that American real estate on a global level is really inexpensive. Even when the market was super hot here, it was relatively inexpensive, especially if you get out of the major cities. I call those sort of the tier 1 cities, like Los Angeles, New York, Chicago, and you go to the second tier and third tier cities, which are really the cities we recommend investing in now because they make the most sense from a cash flow and a potential for appreciation perspective.
So American real estate still can’t be beat. When it can, we will let you know because we’re constantly watching international markets and we have been very interested, but I love the cheap dollar and the low interest rates and all the other stuff I mentioned about the U.S. real estate. Very, very inexpensive.
Okay, let’s talk about urgency for a moment. There really is some urgency in terms of your investing in real estate. Nike has the slogan “Just Do It,” and some people, unfortunately, and we’ve all suffered from this malady from time to time, suffer from paralysis of analysis, and certainly education and research and due diligence, these are all important. I would never minimize any of those things. However, the most critical element in being a successful real investor is taking action. I mean you’ve gotta take action or nothing happens.
Now that may sound incredibly simple that I’m saying that, but here’s one of the major, major urgencies and it is the fact that you are being attacked relentlessly by inflation. Finally, we’re starting to see more news about inflation in the national media, and really, it’s much higher than they’re saying, and we’ve talked about that on prior shows, so go back and listen to those. But the beauty of inflation, of course, as I’ve mentioned before is it pays your debt off for you because you pay back in constantly cheaper dollars. And I don’t see any way out of this for the U.S. because the U.S. has spent so irresponsibly for so many decades that the only way to get out of this debt is to weaken the dollar even more.
And as such, you will benefit as a borrower and an investor in real estate. Think of this this way. Think of the urgency in terms of lending and borrowing. I made the analogy a long time ago as the mortgage meltdown began last February about four ships in a harbor. Picture these four ships in a harbor and the first ship is out to sea, actually. It’s not in the harbor. But on the side of this ship, it says Zero Percent Down. Now, that ship has already sailed. It’s long gone. You used to be able to buy investment properties with zero down and that was really an incredible, incredible opportunity. I took advantage of it. I got several rental properties with zero down. I’m very happy that I did that. Of course, having that additional leverage reduces your risk. It dramatically increases your return on investment and it’s a great thing as long as it’s managed properly, and we are very prudent about our use of leverage and debt.
The second ship, and by the way, this one Zero Down is out to sea. The second ship on the side of it is painted a large 5 Percent, 5 Percent Down. Now, that ship has pretty much sailed. Occasionally, it kind of veers its way back into the harbor a little bit, post-mortgage meltdown, and there’s like one lender or two lenders out there that are offering 5 percent down on rental properties, but with very, very stringent requirements. So that one is pretty much out to sea and it has sailed.
There is another ship in the harbor and this one actually still is in the harbor. It’s the third ship. And it says 10 Percent Down on the side. And on this one, I’m going to add something to it. It not only says 10 Percent Down, but it also says Stated Income. For self-employed people who want to use stated income loans rather than doing full documentation loans – now, you’ve heard me mention this before. I certainly recommend full documentation loans if you can qualify full doc because you’ll get a better interest rate on your loan. But if you have to go stated income, more power to you. Do it. Borrow, stock up on this cheap, cheap mortgage money while you still can.
So this one says 10 Percent Down, Stated Income on the side and the engines are running. The ship is warming up. People are boarding and it is about to set sail. This ship is really, with some banks, major banks like Wells Fargo that announced this last week, announced that this ship has sailed. It is gone and who knows if it will ever come again. Don’t be in the position where five years from now or ten years from now, or even two years from now, you say to yourself, boy, I wish I borrowed more money when it was so easy to borrow and so cheap to borrow.
Remember money is on sale in two ways. No. 1, the cost of borrowing, the low interest rates, and No. 2, the ability to borrow it in the first place, the ability to borrow it at all. So stock up on this cheap debt while you still can. It’s a very important component of your investment.
So the 10 Percent Down, Stated Income ship is really just about to sail and for many banks, it has already sailed. And you can still do 10 percent down with some banks, full documentation, but many are saying that that ship might even sail away. So if it does, what is the next ship?
Well, this ship doesn’t have its engines on. It’s just sitting docked comfortably in the harbor and on the side of this next ship, the fourth one, it says 20 Percent Down. And the 20 Percent Down ship is the first ship that was available when I started my real estate career back in the ‘80s, because if you wanted to buy a rental property, you had to put 20, 25, or even 30 percent down to buy a rental property. So historically speaking, a lot of people are talking about the tightening of the credit markets and the difficulty of borrowing right now, but historically speaking, everybody, it is still very, very easy to borrow.
So take advantage of this. Seize the moment. Carpe diem. Nike says, “Just do it.” Get in the game, and if you’re already in the game, get in the game more because you want to stock up on this high quality, fixed rate, long term, investment grade, good debt while you still can, while it’s available.
All right. I’ve got three guests for this show today, so let’s get into it and let’s have them on. These are all prerecorded interviews. The first one is with Randy Luebke and we’re going to talk about the concepts expressed in Doug Andrews’ book, Missed Fortune and Missed Fortune 101.
Now, I think Doug Andrew is half-right. He makes a very good case that you should pull your equity out of your home. You should pull your equity out of your rental properties. I do not agree, at least so far, no one has convinced me yet – maybe I’ll be convinced in the future and I’ll change my mind on this, but no one has been able to convince me yet. What he says to do and what Randy’s kind of promoting here, so we’ll just give him a fair talk at expressing it, is that you take that equity out and you buy life insurance with it.
Now, I don’t like life insurance and the reason I don’t like it is because I think the insurance company takes a very, very large handling fee for managing the policy for you and you can do much better investing that money yourself as a direct investor. And one of the things they never seem to mention is they never seem to express the benefit you get out of this life insurance later in life in inflation adjusted dollars. Same with annuities, by the way.
So listen to this. I think it’ll be interesting to you, either way. And then after that, we’re going to have Dino back. She has been on a prior show and she’s going to talk a little bit about analysis and analyzing your real estate investments. Her techniques are some of the more traditional techniques; not the newer, more cutting edge techniques, if I don’t say so myself, that I’ve taught you on the show here. But I think it’ll be a good primer and some good information for you, good education for you. And then we will have one of our clients from across the country, about 3,000 miles away from us here in California, and that will be Jeff Blankenship who is in North Carolina. And let’s go on into it and again, thank you for listening and happy investing. Here is the first guest.
We’re here with mortgage innovator, Randy Luebke, and today, I want to talk about a book that, near and dear to my heart, I really liked it and read two of them, Missed Fortune and Missed Fortune 101, by Douglas Andrew. And Randy used to work very closely with Doug and thought since he was here in the office, we’d ask him to talk to us a little bit about the missed fortune philosophy. And if you haven’t read the books, I highly recommend them, although my caveat, unless Randy convinces me in this interview, is that Part 1 is good; Part 2 doesn’t make any sense to me.
Now Randy may change my mind here in the next ten minutes or so, but I love the idea of getting equity out of your properties because it is very poorly “invested” or should I say saved by being in the property. Properties are not good banks at all. I love the first part of the Doug Andrew philosophy, the Missed Fortune philosophy, but the second part, investing in life insurance with that money? Oh, it’s not my ideal, but Randy can convince me.
Randy, welcome. What is the essence of Missed Fortune?
Randy Luebke: Thanks, Jason. Well, let me tell you the essence of how Missed Fortune works, which is this. In his book, Douglas Andrew talks about the idea that people that have equity in their home are not necessarily making the right decision with how they use that equity.
Jason Hartman: Well, they’re not using it.
Randy Luebke: Well, that’s the point. Many people have been taught by their parents and their grandparents that they want to pay their home off and own it free and clear when they go into retirement. And as a result, they’re mismanaging their money because that equity that they’re creating in their real estate – and this is the essence of the book – that equity has no rate of return; that equity is always at risk for loss, and again, because they’re paying down their mortgage, they’re also creating more taxes for themselves along the way.
Jason Hartman: And so far, I agree completely because we’re still on Part 1. So I’m totally in agreement. You’ve got me now.
Randy Luebke: The thing that throws people – this is for your listeners – they say, well, what do you mean equity has no rate of return? I put $100,000.00 into my home and now it’s worth $500,000.00 or $1 million. I have a great rate of return. And I have to say to them, look, Jason, if you put no money down on that home –
Jason Hartman: It would still have done the same thing.
Randy Luebke: Same thing! It doesn’t matter how much equity you have. It’s the asset that appreciates altogether.
Jason Hartman: Absolutely true. I couldn’t agree more. And what I think is deceiving about that, Randy, is that in the Wall Street par lance and commercial real estate, there is a metric that they sometimes use called Return on Equity, but that’s really a misleading term because there is no return on equity.
Randy Luebke: There’s absolutely no return on equity.
Jason Hartman: It doesn’t matter how much the equity is. The return or the appreciation or depreciation, for that matter, of the property will be the same either way.
Randy Luebke: Absolutely.
Jason Hartman: The monthly income on the property will be the same either way.
Randy Luebke: Absolutely.
Jason Hartman: Your tenant, when they rented from you, they don’t say what’s your loan balance? I’ll pay you more, if you have a higher loan balance. Or I’ll pay you less if you have a low one. In fact, I contend, and this is a little off topic here, but I contend that the more equity is in the property, the worse the manager of the property usually becomes because they become complacent and they think, well, as long as I’m breaking even. And you see this all over Orange County here –
Randy Luebke: Yes, you do.
Jason Hartman: — where you’ve got people with beach cottages that are worth a million and five, and they’re only renting them for $3,500.00 a month, whereas if they had those levered up and they had the equity out, the pressure of that debt on the property would actually make them be a better manager.
Randy Luebke: Absolutely.
Jason Hartman: And it would make them charge a more aggressive rent. So anyway, a little off topic there, but what are the risks of the Missed Fortune philosophy?
Randy Luebke: Well, obviously, the idea of Missed Fortune is to then let’s liberate the equity from the real estate and you know there’s only two ways to do that: sell your home or refinance and pull your cash out that way. That’s the only way to free up equity from the home. If you’re going to do the latter, meaning you’re going to get a mortgage on the property, then you’re going to have the debt associated with it. You have to be able to make that mortgage payment each and every month. So the risk is really two-fold. One, you have debt. Can you continue to make the mortgage payment; and two, if you take that money, that liberated equity now, and invest it in an investment that you could lose money on – this is where Doug talks about a prudent investment has three characteristics. It needs to be safe, it needs to be liquid, and it has to have a reasonable rate of return.
So again, the risks are I might not be able to make the mortgage payment or I get too much mortgage payment to make, or No. 2, I’ll invest that into an asset that might decline or dissipate in value.
Jason Hartman: Yeah, or the carry cost on that debt will be higher than the return I’m earning on the investment. So in other words, if you take a mortgage out on your rental property or on your home and stick that money in the bank and you’re paying 7 percent on the mortgage, but you’re only earning 5 percent in the bank, obviously, that is not a good deal, right?
Randy Luebke: Right. That’s the principle of arbitrage.
Jason Hartman: That’s mega-trage!
Randy Luebke: That’s negative arbitrage.
Jason Hartman: Nega-trage.
Randy Luebke: I’m glad you mentioned that point because in his book, Doug talks about borrowing at 8 percent and earning a rate of return at 6 percent and shows that you can still make money with your money. But what you really need to do is peel back the onion on that one because what he’s done is he’s created what’s called a tax arbitrage, meaning that the money that you’re borrowing is deductible, so the 8 percent cost is really somewhere around 4.2 percent and then the 6 percent interest you’re earning is tax advantaged, meaning you’re not paying any taxes on that growth. So you still have to have a positive arbitrage in order to make money or it never makes sense.
Jason Hartman: Right, right. So obviously, we’re looking at the net effect of these numbers.
Randy Luebke: Absolutely.
Jason Hartman: So if the net effect gives you tax benefits, that has to be considered.
Randy Luebke: Absolutely.
Jason Hartman: Or a tax liability, that has to be considered, too. One of the important things that I do want to mention, though, Randy, is you keep mentioning taking a mortgage out on your home. Obviously, the same rule here applies even better to a rental property, an investment property, right?
Randy Luebke: Absolutely.
Jason Hartman: Because there you have your tenant paying, hopefully, all or most of or even more than the cost of the mortgage.
Randy Luebke: Right, and once again, we’re talking about an asset class called real estate, so this would transcend from primary residence, second homes, rental properties, commercial properties. The same principle applies. Equity has no rate of return. Equity is always at risk to loss over which you have no control. That’s another thing that people forget, that markets go up or down in value. You cannot control that and as you’re watching the market go down in value, you’re watching your equity disappear. And if you were to own stocks, I wager there’s nobody in their right mind that would say I’m going to keep putting more money into the stock that I know is going down in value, just so I can keep my value the same.
Jason Hartman: Are you kidding? The vast Wall Street conspiracy, they do that. They invented a word for that almost. It’s called Dollar Cost Averaging. Yeah, I mean you’ve gotta be good to invent a spin like that on how to keep losing more money. But we won’t go there right now. There’s not enough time. Now, here’s where you’re probably going to lose me, but let’s talk about it. How does life insurance work into the formula, Randy?
Randy Luebke: Okay, well, this is, again, an important part of Doug’s book. This is Doug’s background and so what he was trying to find is a vehicle where he could get a positive arbitrage like we’re talking about and that was safe and that was liquid. So safe, he meant guaranteed that the principle account would be there, that the value would always be there or increase, and get a reasonable rate of return, one that would exceed the cost of borrowing funds. Well, life insurance, traditionally, is a pretty mediocre, at best, investment.
Jason Hartman: At best.
Randy Luebke: At best, and if you look into the internal rates return in most traditional life insurance policies, they generally run about 2 to 3 percent. You can’t borrow money at 6 or 8 and earn 2 or 3 percent and make a positive arbitrage.
Jason Hartman: Okay, so how do we win in this game?
Randy Luebke: All right, so here’s how we win. What we do is we structure an insurance contract so that the cost of insurance is much lower than it would be in a traditional insurance program. So let me give you an example. Let’s say you get a million dollars worth of term insurance, right? That would be the lowest cost insurance for the highest amount of death benefit.
Jason Hartman: And by the way, for our listeners, because I remember once I was crazy enough to buy life insurance and I let the policy lapse, but it was explained to me this way and I thought the way the sales person explained it was pretty good. Term insurance is like renting. Whole life is like owning. Now, universal life is a hybrid of those.
Randy Luebke: Both, exactly.
Jason Hartman: So I just want to point that out to our listeners.
Randy Luebke: That’s a very good point.
Jason Hartman: But we’re not saying you should own. Sometimes it’s better to rent than own.
Randy Luebke: Life insurance is kind of one of those basic building blocks of all financial plans. Initially, you have it as an income replacement tool so when the primary wage earner, if something happens to them, it allows his family to carry on and do the things they want to do. Ultimately, it becomes an estate-planning tool to help forego estate taxes. But let’s get back to the topic at hand. A term policy is going to have the largest amount of insurance, face value, death benefit, for the smallest premium that you pay on an annual basis. What we want to do and what Doug is espousing in his book is completely turn that model upside down.
So what we want to do, instead of having the least amount of payment with the highest death benefit, is get the least amount of death benefit and then stuff as much money into that policy as you possibly can. And the reason for that is real critical is because money that grows inside of a life insurance policy is just like a Roth IRA.
Jason Hartman: Right.
Randy Luebke: The money can grow income tax free and you can make withdrawals from the policy income tax free as well, and there’s no limit to that.
Jason Hartman: Right. So I agree with that. If you’re going to get life insurance, I agree that that’s the way to do it. But I still think that when you buy a life insurance product, you’re paying the insurance company a giant handling fee, aren’t you, for sort of managing the “investment,” I mean if you could even call it an investment. But I do remember a chapter in the book when I read it about the retirement plan idea is really quite misleading and what I’ve always thought was misleading about it is that it was sort of planning to be poor in the future because the way it was always sold to me, which is not the way I want to end up, is you can take your money out later when you’re in a lower tax bracket. Are you kidding? Tax rates are not going to go down. And I don’t want to retire poor either.
Randy Luebke: Yeah and let’s kind of support the financial planners here. Back in the ‘60s and ‘70s, when they were touting that idea, tax rates were as high as 60, 70, even 80 percent.
Jason Hartman: True and fair enough, I agree.
Randy Luebke: Okay. So the Tax Reform Act of 1987 changed everything.
Jason Hartman: Thank you, Ronald Regan.
Randy Luebke: Yes, and of course, once Mr. – who was his predecessor that came after Ronnie?
Jason Hartman: Well, successor, that would be Bill.
Randy Luebke: Bill, yes, Bill was his successor.
Jason Hartman: No, that was Bush. That was Bush, the first Bush. Bush father, fourth one.
Randy Luebke: We waited for Bush and then we went on to Clinton and he managed to take the lower tax rate from 33 back up to 35 percent, but the point is this. That they compressed all the tax rates, so now to be in the highest tax rate doesn’t take nearly as much income as it used to, so the idea that you can earn a lot of money now and stash it away at a low tax rate, then when you retire, take it out at a lower tax rate doesn’t hold water anymore.
Jason Hartman: Right, even if it grows pretax.
Randy Luebke: Even if it grows pretax, the probability is you’ll be paying the same or higher taxes at retirement as you’re paying during your earning years.
Jason Hartman: The life insurance product to some extent helps us with that, right?
Randy Luebke: Yeah, because with life insurance, the growth inside the life insurance policy grows income tax free, so in other words, the money can compound and grow without paying taxes. And then if you pull it out properly, if you do it through what they call a wash loan borrowing strategy, which basically, means you can pull the money out for nothing –
Jason Hartman: Where you borrow it from your policy, right?
Randy Luebke: Borrow it from your policy.
Jason Hartman: You don’t cash in the policy. You borrow from your policy.
Randy Luebke: You borrow from your policy and you have to do it in a structured way. The money has to go in in a structured way and it has to come out in a structured way, but if you do that then, you can pull the money out and pay no taxes on it. So that becomes a very, very positive strategy and, relative to the cost, you mentioned that there’s a lot of different flavors of life insurance, if you will. There’s the variable products, there’s the fixed rate products, and there’s this new one called the equity index product. The variable products, which are the ones that were sold really in the ‘80s and the late ‘70s, are quite expensive and they do have a lot of fees associated with it and they don’t meet Doug’s test of a prudent investment. I mean you could lose money on most policies. You could actually lose the principle that you put into them.
So if you’re going to use a strategy like this inside life insurance, you’ve gotta use it with a fixed type product, which has a guaranteed rate of return and a guaranteed principle value, or with an equity index that gives you the guaranteed principle value, but the potential upside of growth in the market.
Jason Hartman: Okay, so fair enough. Now, what I really think is the thing to do here, and I know that you agree with me, at least partially, Randy, is pull the money out, put it to work, use leverage, use arbitrage, gain a huge arbitrage by buying rental properties with that equity.
Randy Luebke: Yeah, absolutely.
Jason Hartman: And so what do you think about that with the Missed Fortune spin on it, though?
Randy Luebke: It’s funny. When I first was introduced to Doug’s book about four or five years ago, I read it and I go, my gosh, this is exactly what we’ve been doing with our clients for years, taking money out of their homes and then helping them buy more rental properties that we ended up taking more money out of them to buy even more rental properties. The only twist on it was now we had a life insurance piece on it. But absolutely, taking equity out of your home to put it into more real estate equity, take right now where in Southern California, where homes are declining in value, wouldn’t everybody wish they would’ve a year ago pulled every dime of equity out of their property and put it in some of these markets that are still appreciating all around the country, which there are plenty of markets doing that, right?
Jason Hartman: I know, I know. We’ve been preaching that gospel for many years and those who have listened to us have been fortunate. Those who have not have suffered, I’m sorry to say. But that’s the way it is. So what if the investment declines or dissipates? What if the house goes down in value after you pull the money out?
Randy Luebke: That’s an easy question. If the house goes down in value, it goes down in value. The difference is once you’ve pulled the money out, you still have the money.
Jason Hartman: You’re in control. That’s good.
Randy Luebke: Absolutely. You think about it, let’s say I had a home that was free and clear. I took all the money out of it, 100 percent financing; I took 100 percent of the cash out and the home goes down in value 50 percent. I still have my cash. I still have the value of that home even though the home went down in value 50 percent. So I can invest that money and let it grow at a reasonable rate of return. Eventually, the market will return the value of my real estate, but in the meantime, the equity that I removed from the home has also had an opportunity to grow, so I can double down, play two games at once.
Jason Hartman: That’s a very good analogy. It’s like double down, yeah, because you’re not losing the opportunity cost of that locked up equity, so I always say to our listeners get the equity out of your properties, all of your properties, while you still can. The urgency is America’s been using their homes mostly, their homes and their rental properties, frankly, in an irresponsible way, like an ATM machine in the middle of the living room. But get that money out, get control of that money, and invest it and buy rental properties; prudent, sensible rental properties that make sense the day you buy them. No speculation here.
So that’s one thing I definitely recommend. But Randy, you talked about the property going down in value, okay, and getting control of that money. We both agree on that.
Randy Luebke: Yes.
Jason Hartman: But then what you do with the money, say you do one of these investments that you’re talking about rather than a rental property, what if that investment declines in value?
Randy Luebke: Well, think about it. I think that might be your worst-case scenario because now you’ve taken the equity out of your home and converted it into cash, and the home goes down in value. Now, right along side that, I make a non-prudent investment and I put that money into an investment that goes down in value as well. And you know that the law of multiples says in order to get back to where I started from, I need to have a multiple in gains, so I had $100.00 that went down by 50 percent. If it goes up 50 percent, I only have $75.00, right?
Jason Hartman: Right.
Randy Luebke: So I have to double.
Jason Hartman: Gotta have 100 percent gain to get back to where you were.
Randy Luebke: To square one. Exactly, exactly.
Jason Hartman: Not including the time value you lost in between there, either.
Randy Luebke: Absolutely, which is, once again, if you’re going to take this money out, I tell my clients, you know what? You’d be better off sticking it in a can in your backyard and at least having it, than to put it into an investment where the principle could be at risk for loss. Which is why I like real estate because you and I know long term, real estate always goes up in value.
Jason Hartman: Yeah, on a future podcast, by the way, we’re going to talk about packaged commodities or assembled commodities investing, which is my philosophy of investing in the ingredients or the commodities that make up a home; the copper wire, the petroleum products, the lumber, the labor, the energy costs, the glass, the steel, all of that stuff. And you know that is just such a great strategy. I think you’re really going to like that. Look for it on a future podcast.
But the last thing on the Missed Fortune concept, Randy; what about age and health issues? Is there anything that the listeners need to consider there about the Missed Fortune concept?
Randy Luebke: In the health issue, only in the context of life insurance. Certainly, health does not fit into the equation relative to owning rental real estate, except you need to be healthy enough to deal with all your rental real estate. In terms of age, here’s my take on that, Jason. The only strategy that is a dumb strategy is to wait. It just makes it more difficult for you to achieve your goal because you lose the benefit of compounding over time. So personally, I think the younger you start these types of programs, taking the money and leveraging it into safe, prudent investments to get a preferred rate of return, it makes all the sense in the world.
Jason Hartman: Yep, I agree with you. Well, with that, let’s close on the concept of don’t wait to buy real estate. Buy real estate and then wait. Just make sure you do it in the right place in the right market, structuring the financing correctly and following the Ten Commandments of Successful Investing. Randy, thanks for being here today.
Randy Luebke: All right, Jason. Thank you.
Jason Hartman: I’m here with Dino Champagne and let’s talk today about the power of analysis. Now, Dino’s company, Asset Preservation Inc., does 1031 Exchanges and we’ve talked about that on another podcast. But today, let’s talk a little bit about analysis and analyzing deals and analyzing properties. As all of you listeners probably know, that’s what we do, that’s our area, and we use a great software program for it and really look at analysis as a very important part in understanding how to be an object of, rather than a subject of, investor. So Dino, welcome.
Dino Champagne: Thank you.
Jason Hartman: What are the advantages of owning investment properties?
Dino Champagne: Well, let’s see.
Jason Hartman: They are numerous, I know.
Dino Champagne: Quite a few. One of the things that I always talk about when people are considering investment property is if we’re thinking that our 401k’s or retirement plans or Social Security for that matter are going to be sufficient to keep us in the lifestyle we’d like to be accustomed to, that’s not going to happen. So one of the major advantages, obviously, of owning investment property, is hopefully to use this for future retirement funds and you’re getting the cash coming back from that. It’s also another vehicle to round out someone’s investment portfolio. To have everything in one basket is not good either.
Jason Hartman: Be more diversified, yeah.
Dino Champagne: Stocks, bonds, real estate, and such, so that’s the advantages is you definitely can stretch out and expand your portfolio.
Jason Hartman: One of the things that amazes me, Dino, is so many of the lies that are out there in the financial services industry. They talk about 401k and IRAs and Keoghs and SEPs and all of these plans. Of course, I’ve had one for many years, but after the ravages of inflation take their toll, it’s just so many people will be, and already are, so disappointed with that. And then you add to that all of the constant scandals and fraud that’s going on on Wall Street, whether it be in these CDOs and these mortgage-backed securities and mortgage-backed bonds, all of this stuff. I mean it’s just an investment you can control, like direct investment in real estate, is just so refreshing. And of course, that’s what we believe in. That’s what we do because it works so well and it’s so historically proven.
What is more important, cash flow or appreciation?
Dino Champagne: Well, let’s see. Both?
Jason Hartman: I’ll take both.
Dino Champagne: Yeah, exactly. When you have an investment property, it’s much more – we call it phantom income, if you will, because when you have cash flow from the property, that basically means that all the debt and everything and the cost of running that property is being handled by the rent and the cash flow means that’s the excess funds that you have. Appreciation is always a good thing as well. I mean sometimes you might go to particular markets where you may not get the cash flow because of the type of market that it is, and so you’re counting on appreciation.
Jason Hartman: Okay, so, just a note here, and Dino has not attended our seminars, so I just want to say to listeners, go back and listen to our podcast on the deferred down payment because I do agree that cash flow is very reliable and it’s very important, but the way you use cash flow and the way you structure the cash flow and financing on your properties is also very important. So we don’t want to have necessarily positive cash flow because we have to pay taxes on it. And we use a strategy, Dino, that we talked about in another recent podcast, called Refi Till You Die because you never pay your taxes. So cash flow – I want to kind of make a disclaimer there on cash flow. I don’t believe that anything qualifies as an investment unless it produces income. Now, does it have to produce income more than the expenses?
Well, let’s examine that question for a moment and I just want to challenge your thinking here, if I may. Is No. 1, if you want to generate positive cash flow in the property, you’ve got to put more money down. And so the thing we always say is put less money down, keep it on the sidelines, and then use that slush fund, let the negative cash flow to the deferred down payment just kind of eat away at that negative cash flow because then you pay no tax, you increase your leverage ratio, which increases the performance, reduces risk.
Now, the way people get into trouble with this, though, we should also mention right now – I can see you’re kind of laughing about this because it’s true and unfortunate, though. People get into trouble with it because they buy properties that they couldn’t afford in the first place. They expect something great to happen, like the second point of what we were just talking about, appreciation. The appreciation doesn’t occur. It doesn’t come along to rescue them. The investment never made sense the day they bought it and voila! We are here in a foreclosure situation, right?
Dino Champagne: Yep.
Jason Hartman: That’s so important to understand, that real estate is a multi-dimensional asset class, unlike investing in gold or stocks. Well, stocks, some of them pay dividends, but it’s relatively minor. So real estate has income, it has appreciation, it has depreciation, tax benefits, and there’s a whole host of dimensions to real estate. But how do you analyze an investment property to determine if it meets someone’s investment goals?
Dino Champagne: Well, everybody’s gonna have a little different criteria, obviously, to that. One of the things, of course, you’re going to look at the geographical area. I mean I take a look at geography because am I going into an area that is appreciating or we’re looking at there’s a good job growth in the area. Are the big boys coming in, such as Lowes or Home Depot or Wal-Mart or something like that?
Jason Hartman: Don’t forget Starbucks.
Dino Champagne: Starbucks, yes, that’s an interesting little test, now, isn’t it? So how’s the area growing geographically? Is it appreciating or is it declining? Are people moving out of it? Also, you take a look at what’s the affordability factor or the salaries in the particular area because basically, when you’re buying investor property, you are looking at who’s your tenant base.
Jason Hartman: True.
Dino Champagne: So there’s a lot of components that I take a look at. What is the appreciation factor? What is my cash flow going to look like? I don’t stop at the analysis just to see how much cash is coming in because there are other factors, such as the appreciation, such as the tax advantages to investor real estate. So again, I’m gonna look at what is the appreciation factor. Geographically, how is this area looking? What is the rent-ability? Is it gonna be a good spot for me to have my money?
Jason Hartman: Good points. A couple things on that, No. 1, remember the past does not equal the future when it comes to appreciation. This is really malpractice, if you ask me, Dino, and I know you’ve seen this out there, too. There are other investment firms, other investment groups out there, that are quoting appreciation that is historical as though it is going to happen again. Not always, but I’d say the vast majority of the time, radically huge appreciation gains in the past mean that you’re in for a problem. That creates a bubble and well, like number of the last five years and you see these incredible appreciation rates. Well, most of those markets now are in trouble. So that’s a good thing to notice.
I was looking at an interesting metric when I was comparing one city, Austin, Texas, to Newport Beach, California, and Dino, I think you’ll find this interesting – and these numbers are just off the top of my head here, but the median household income, as I recall from looking at this, was $124,000.00 in Newport Beach; household, not individual. Household income. And the median sales price in Newport Beach at the time was just over $1.3 million. Now that to me is way out of whack.
Then I looked at Austin, Texas, and just from memory here, the median household income was around $65,000.00 and the median house prices was around $190,000.00, $195,000.00; something like that. So that market is much more poised for a healthy future than is Newport Beach, California because here it’s way out of whack.
And a lot of people argue with this. I know there’s one local economist here who kind of argues with us a lot, although he’s turned out to be pretty wrong lately and you probably know the person I’m thinking of. We won’t mention his name. Maybe I’ll get him on the podcast to interview him and debate it with him someday. And they say things like this. They say, well, in this market, people are just trading equities, so if they’re already been in the housing market in Southern California and they’ve already owned for the past years, affordability doesn’t matter because they’ve got $500,000.00 in equity to put down into the new house, so that affordability equation is a non-issue.
I beg to differ. I think that is very wrong. I think that can hide a problem for a little while, but if an area does not constantly have new blood, if it doesn’t constantly have in migration, you have a recipe for trouble. And that’s what we’re seeing now in Southern California, okay? So you’ve got to have new blood coming into an area. You’ve gotta have growth. You can’t just have a stagnant pool of buyers trading equity from one neighborhood to another in a local market.
Dino Champagne: Well, it’s eventually going to top out.
Jason Hartman: Yeah. And it did, and it has and it is, and now it’s starting to decline on that. Okay, any comments on that or thoughts?
Dino Champagne: No, you have to analyze, like you said, going forward, you should not be looking completely at what was as what’s going to be as a guarantee of what’s going to be in the future. You just don’t know.
Jason Hartman: Yep, it’s a different thing. What is the difference between before-tax cash flow and after-tax cash flow?
Dino Champagne: Well, before-tax cash flow basically means, and I mentioned I called it phantom income, it’s a very quick analysis of is this property giving me some cash flow after I have paid my mortgages and all the expenses associated with the property? After-tax cash flow takes into consideration the tax advantages for investor property, such as depreciation, which is a beautiful thing from the Internal Revenue Service because it’s a non-cash expense and in effect, it’s a loan, if you will, because it reduces your real estate taxable income to the IRS.
Jason Hartman: So we call those non-cash write-offs or phantom tax deductions.
Dino Champagne: Right.
Jason Hartman: They’re the best kind and if the listeners go back and listen to either of our two GoZone podcasts on here that talks a bit about depreciation specific to that area.
Dino Champagne: Yeah, and GoZone has major depreciation advantages. I mean it’s an incentive to get to build into those particular areas, to grow it back up to where it was prior to Katrina.
Jason Hartman: It’s awesome.
Dino Champagne: And then you have the interest deductibility, which now lowers your real estate taxable income, so after tax, now you’re looking at, by lowering – and we call it in our class, we call it “dipping,” depreciation, interest, and points amortization – you’re lowering your real estate taxable income because you see, when the IRS is looking at taxing a tax payer, they’re not looking at the before-tax cash flow as a tax liability. It’s the net operating income that’s a tax liability and that’s the number you get down by doing the depreciation, the interest deductibility, which now lends right into your financing. Don’t pay all cash for property because you don’t get the interest deductibility. And also the points amortization for the loan that you needed to acquire the property, and then after you analyze that, you’re going, okay. So here’s my tax potential savings to my before-tax cash flow.
So sometimes, in your example that you used before, you may not have the “major positive cash flow,” but you have the tax advantages, which is where I think you were going with all of that, that lower your overall tax picture as opposed to just getting cash from this one particular property. So that’s the difference between the two.
Well, maybe you don’t have strong before-tax cash flow. The tax advantages to lower your real estate taxable income and to lower your tax liability with the IRS completely are the after-tax aspects of owning real estate.
Jason Hartman: Yeah, and real estate is, again, America’s most tax-favored asset and we talked before on another podcast about 1031 Tax-Deferred Exchanges. You save on taxes while you own it, potentially. You get to trade it tax free if you do it right all your life, and it’s just so favored. Taxes are life’s largest expense for any human being and we wanna make sure we save on those.
Just in closing here, what are some of the types of questions one might want to ask when deciding to purchase investment properties?
Dino Champagne: Well, I think one of the most important questions you want to ask is are we saturating a particular market? I mean because you’re looking, if you’re buying investor property, and we’re talking about single family rentals, let’s just say as an example, how many investors do we have going in that particular market, in that particular locale because that can impact your ability to get the tenant. Be realistic as to when am I going to get a tenant? Am I gonna get a tenant within three days, 30 days, 60 days? What’s realistic? How’s the area look for employment? Are there a lot of employers coming in? Is the area growing where people are now checking out to see that they might want to buy there eventually, but in the meantime, want to rent?
So are the loan numbers realistic? What’s the loan program I’m looking for? And then just common sense questions that you might want to ask about the property itself. I mean what’s the condition of the property? Is there any deferred maintenance that I have to concern myself with? One of the standard lines I always use in our class is there will always be surprise expenses, but there will never be surprise income.
Jason Hartman: That’s a good point. I like that. Yeah, good. Good stuff. Well, Dino, thank you so much for coming in today and talking to us about analysis. If you’d like to get more information, visit www.apiexchange.com and thank you for coming in.
First of all, Jeff, I want to thank you for coming on the podcast with us, appreciate you being here.
Jeff Blankenship: Yeah, thank you for having me. I’m very honored. Thank you.
Jason Hartman: And we’ll just run through a couple quick questions. We appreciate you sharing your experiences with our investors. So we’ve got one of our clients, Jeff, who’s in Greensboro, North Carolina, with us and then our investment counselor, Gia, who’s also here.
Gia Jurevich: Hello and welcome.
Jason Hartman: And Jeff, tell us, how did you find out about Platinum Properties Investor Network?
Jeff Blankenship: Well, just listened to various podcasts, just started searching iTunes for other investment networks, and came across Platinum Properties. And from the very first one that I listened to, I just didn’t have that sleazy, used car salesman feel after listening to it. It was great information. It sounded like very conservative, but yet doable approach of investing in real estate, and it was just a refreshing thing to hear. And I found a couple of others as well, but just through a search on iTunes and filtering through some of the information that’s out there, and you guys were just not a sales pitch at all. It was very information packed and willing to help people by just sharing information for free, which was very refreshing.
Jason Hartman: Good, well, thanks. We’re glad we try to do that. And Gia has a question for you.
Gia Jurevich: What was your experience with real estate investing prior to coming to our company?
Jeff Blankenship: Well, it’s been mixed. I actually bought my first house just two years out of college. I bought a little HUD foreclosure and I pretty much did that on my own, although I had bought a Carleton Sheets course from a late night course, but to be honest, it was more of I had spent the money and better go do something. But as far as information that I gained from it, I can’t say it was a whole lot. The people in the local market, attorneys and real estate brokers really were more helpful in that area as far as getting me through the first deal.
And since that time, I’ve just purchased a few houses, lived in them for a little while, while I did the rehab work and resold them, and several years ago, I just came to the conclusion that my job would always be – I mean I make good money and will always be able to provide for myself, but in order to give me the ability to take more control, I just looked at various things and real estate just makes a lot of sense to me and I enjoy working with my hands and going around and looking at homes as far as the rehab work. But I also knew that a long-term investment, that most of the people who had wealth, did it, for the most part, in real estate. So not that my goal is to become wealthy, but I’ve always been of the opinion that if I have the ability and have the mindset and have the opportunity that there’s something inherent that I should take advantage of that. So not only for myself, but to maybe help others around me.
So the past couple of years have just been furthering my education in that area as far as reading books and researching on the internet, and that’s really how I came across Platinum Properties.
Jason Hartman: Excellent. In what areas have you invested so far with us? Where do you have properties, Jeff?
Jeff Blankenship: Well, I, of course, have a couple of properties in the Greensboro, North Carolina area. I also, from Platinum Properties, have invested in Mobile, Alabama, and also, in the Houston, Texas market.
Jason Hartman: Excellent, and Gia?
Gia Jurevich: How has it been getting the properties leased? Did you have any issues? Was there a lag time?
Jeff Blankenship: No, not at all. In fact, the one that I bought in Houston was already leased by the time I bought it. The property in Mobile, I have to say buying a home out of state was a little scary at first, not having done it before, so I was a little antsy and the property managers were probably annoyed by me with my emails and making sure to get it rented, but the home in Mobile, seven days after the closing date, we had it rented to a very qualified tenant.
Gia Jurevich: That’s great.
Jason Hartman: Excellent.
Jeff Blankenship: It was an excellent experience.
Jason Hartman: And you already really explained why you like real estate as an investment vehicle. Maybe you want to comment, Jeff, for listeners. What do you think makes Platinum Properties Investor Network different from some of the other companies that you talked to about investing with.
Jeff Blankenship: Well, Platinum Properties was really about educating me. I didn’t feel like they were out to just make a dollar. I mean you guys have been a part of the whole process from finding good properties in good markets where there’s high probability that they’re gonna be rented. You were completely honest in nothing’s for sure, there’s no guarantees, but here’s what we’re finding and we’re moving out of this market because of this, and we’re moving into this market because of these indicators.
And even after I had them rented, you guys continue to call and follow up, hey, is everything going okay; is there anything else we can do to help. It was all about customer service and not so much about making a sale and to me, that’s really what set you guys apart from most of the other companies that I dealt with. I just felt like they were out to take my money and you guys not only were saying here’s a good deal, you also backed it up and Gia and Karam and some of the others were willing to answer all of my questions in detail as to why we were looking at certain markets and why these made sense.
Gia Jurevich: That’s great. Thanks, Jeff. Would you recommend us to your friends and relatives?
Jeff Blankenship: Oh, absolutely. Yeah, without hesitation, I certainly would, above and beyond other companies that I’ve dealt with because I feel like from the research I’ve done, I decided to go with you guys and would certainly feel comfortable in handing any of my relatives, whether they are prior investors or not. I feel like you guys would certainly be able to help anyone in my family who may be experienced in investing to those that have never had a rental property at all before.
Jason Hartman: Good. You know, we appreciate your kind words very much. Is there anything that you would recommend or want to see us do differently, like any added services or anything like that?
Jeff Blankenship: Well, I guess the only thing, and this is just from my perspective, I really enjoy seeing the market indicators and I know that your people do a lot of research on that and those are all explained on many of your podcasts as to why we’re going into a certain area. The only thing that I can think of that I’ve kind of been hungry for and haven’t found yet is maybe some research on the unemployment rates or how exactly your area managers go about finding these properties.
And some of that may be your niche and that’s what you bring to the table, but for me, it’s just the information is always nice to kind of back that up. But that’s really the only thing that comes to mind. I certainly trust the area managers and the information they provide, and they always seem to have very sound information and data, but maybe just getting my hands on that data at some point, maybe that would be something you could provide on the website sometime.
Jason Hartman: Excellent. Good advice. You know, actually, we have a podcast that is in the queue that is coming up on how to select markets. And we’ve alluded to it a little bit when we discuss the difference between macro markets and micro markets.
Jeff Blankenship: Oh yeah, okay.
Jason Hartman: You probably caught that podcast, but –
Jeff Blankenship: Exactly.
Jason Hartman: We’re going to talk about like the 13 things that we use as a criteria and the five major resources we use, and that one is coming up, so that’s very good advice, Jeff. I think you’re reading our mind.
Jeff Blankenship: Okay.
Gia Jurevich: Absolutely, and you also missed out on the live events where we have the area presentations and those are actually in the area presentations. Unfortunately, we don’t have those on our website mostly.
Jason Hartman: Yeah, we probably should do that. That’s good advice, too.
Gia Jurevich: Yeah, we’re learning a lot here.
Jason Hartman: Yeah. And Jeff, I hope you can fly out for the Master’s Weekend to see us and that’s coming up at the beginning of March and we’d just love to see you. I know Karam and Gia have talked to you about that before.
Jeff Blankenship: Yeah, that would be a great little birthday present. My birthday’s in the beginning of March, so that would be nice to get out.
Jason Hartman: Oh, so you’re a Pisces like Gia.
Gia Jurevich: March 1. When’s yours, Jeff?
Jeff Blankenship: Oh, March 3.
Gia Jurevich: Oh, my goodness. No wonder I like you so much.
Jason Hartman: Okay, Jeff, anything else?
Jeff Blankenship: No, I think that’s all. I just look forward to earning some more money so I can buy my next property.
Jason Hartman: All right, good. Well, thank you so much for being on the podcast, Jeff, and we look forward to talking with you real soon.
Jeff Blankenship: All right, thanks so much.
Gia Jurevich: Thanks again, Jeff.
Jeff Blankenship: All right.
Jason Hartman: Bye-bye.
Jeff Blankenship: Bye-bye.
Gia Jurevich: Bye.
Jason Hartman: I’m here with Area Manager, Karam and if you’re looking for positive cash flow – yes, you can actually do that with only 10 percent down. Quite an amazing deal to do in today’s market and remember: the interest rates are getting a lot lower right now, so it’s a good time to be locking them in so that you lock in your cost of borrowing for the next three decades. Karam, tell us about positive cash flow and rent guarantees in Columbus, Ohio.
Karam: Well, Columbus, Ohio, we have a builder who is very, very creative. What he did was he went ahead on all these brand new single-family houses, townhouses, and condos. He’s guaranteeing six-month rent. Not only that, he is going to pay our investors the homeowners association fee and the management fee for two years. And what that does is, with 10 percent down, you get anywhere from $100.00 – $200.00 positive income before even the tax benefit is considered.
Jason Hartman: Wow, that is really phenomenal. That’s gotta be one of our very best markets in terms of cash flow, so excellent. Anything else you wanna say about Columbus, in general?
Karam: Well, the economy is booming there. There are several major corporations headquartered there. University is big, so a smart workforce, low cost of living. That attracts a lot of investors there.
Jason Hartman: Okay, Karam thanks for updating us on Columbus, Ohio. Great market.
Karam: You’re welcome, Jason.
Jason Hartman: 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.
I wanted to mention to you that we have a new offering, a free CD, a free audio CD, that you will really, really like. We’ve had so many people that have given us really good comments about them, and you can go to our website at www.jasonhartman.com and just fill out a little quick web form and you can either download or you can have the physical CD mailed to you in the postal mail. But get the free CD, especially if you are a new listener. You need this. And if you are a regular listener and you’ve listened to all the other old shows, you don’t need the CD so much, but it will be a nice review for you either way. But if you’re a new listener, you definitely want to go to www.jasonhartman.com and request the free CD.
Just wanna remind everybody listening that we are moving to our new office and you can find all that information on our website at www.jasonhartman.com.
Also, we just uploaded another video podcast and I’d highly recommend that you subscribe to that. There’s some stuff that just lends itself better to video than audio. If you want to see what’s on that, subscribe to it, you can go to www.jasonhartman.com. If you use iTunes or an iPod and you’re an Apple person, then you can go to the iTunes Store, type in Jason Hartman, and two podcasts will come up, the video podcast and the audio podcast. And you’re probably already, if you’re listening, a subscriber to the audio podcast, so make sure you get yourself a free subscription to the video podcast as well.
And this particular one that we just loaded in the video podcast is about Naked Short Sales and what goes on with this short sale and manipulation of the stock market. It’s a very interesting report from Bloomberg News and I think you’ll really learn a lot from that. So be sure to tune in and watch that.
Be sure to see appropriate disclaimers and disclosures on our website at www.jasonhartman.com. Remember that we are not tax or legal advisors.
Anyway, we’ll talk to you next week. Thanks for listening.
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.
[End of Audio]
Duration: 61 minutes
