Jason talks with a mortgage expert about investing over time, financing properties, the federal reserve, monetary policy and creating passive income.
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. Thank you for joining us for another Creating Wealth show. Glad to have you here today. We have been busy, busy, busy moving to our beautiful new office these last few days. It’s a rather big and stressful project, but glad to say that we are getting settled in our new place. And if you are a local listener, and even for non-local listeners, remember our Grand Opening celebration and also our 11th year anniversary is on the 27th of this month and you can R.S.V.P. for that at www.jasonhartman.com. R.S.V.P. is absolutely, 100 percent required so that we can notify the caterers to how much food and drink we need to help celebrate our new office.
And also, I thought I’d give you our new address, which is 555 Anton, Suite 150, in Costa Mesa, California, 92626. And of course, you know where to reach us on the web and phone numbers are at our website and everything at www.jasonhartman.com.
Today, we would like to first have an interview with one of our clients and mortgage brokers, Tim Stewart. He has not been on the show before, but I think you’ll find this discussion between Tim and I very, very interesting. We are going to talk about a variety of subjects, from what’s going on in the mortgage world – of course, mortgages are such an important part of our real estate investment – and financing, we’re going to talk about the conforming loan limit changes. We’re gonna talk about the Federal Reserve and the stock market and real estate investments, alternative investments. Just a whole bunch of things. I think you’ll find this conversation interesting and after that, I want to share two CBS news clips from the past. And why do I want to do this? Well, because remember the old saying: Those who do not learn from history are doomed to repeat it.
On these clips, you’ll hear from the ever-articulate President of ours, George Bush. I’m being sarcastic, by the way. And several other people as well and I just think you’ll find those interesting to round out today’s show. So let’s listen in to the interview first and then we’ll go to the CBS news clips and close with a couple of announcements. Thanks for listening and here we go with the first part of the podcast.
We are here with Tim Stewart who is with TS Maverick Financial. He is a mortgage broker and he’s been to many of our events and is a frequent podcast listener. So Tim, welcome. It’s great to have you today.
Tim Stewart: Thank you for having me. It’s an honor.
Jason Hartman: We wanna talk a little bit about the mortgage business, but as we were talking before we started recording here, I like your philosophy that says as investors, we should be excited. We make money when we buy, not when we sell. The worse the market gets the more of a buyers’ market it becomes. And then the other thought that you had was learn from your mistakes. Investing is not an event, but rather a journey. Isn’t that so true?
When you look at successful people throughout life, they can never seem to attribute it to one big event, like I got this incredible deal and it made me rich. It’s the process of continuing to invest and follow all the techniques we talk about on the show, right?
Tim Stewart: Exactly, and I think that particularly California residents should avoid the temptation of being scared off from real estate as a result of what they’ve seen in previous months and years of their net worth declining as a result of owning a home here.
Jason Hartman: Good point. I just wanna say, Tim, in addition to that, though, is still be scared of California because it’s not time yet.
Tim Stewart: Absolutely, but don’t be scared of real estate as an asset because it still is very powerful as far as investment goes.
Jason Hartman: It’s a great asset and by the way, if I haven’t said it before on the show, I just wanted to mention to our listeners that my current thinking is that it will be about mid-2009 before California, Arizona, Nevada, South Florida, and the various bubble markets – there are several others around the U.S. – hit bottom and then the question is when will we come off the bottom. That’s a whole other discussion, but right now, it’s like catching a falling knife, so don’t touch it. But be in the markets we’re in, especially the Southeastern United States, the Midwest. There are some phenomenal opportunities.
But hey, we’re here to talk about financing and lending and money today. And you know, Tim, we’ve heard a lot about – the news about conforming loan limit increases and thought you could just share with our listeners. What is the status of these changes and how much impact do you think they’ll have on the lending environment?
Tim Stewart: Well, officially, these conforming limits were changed along with the fiscal stimulus package that was passed a few weeks ago. The truth is, unfortunately, I don’t think it’s going to have a whole lot of an impact on the market. One of the reasons is because it’s taken an awful long time to actually get it in place and one of the things that they’ve said they need to do before it’s actually going to hit the front lines of the mortgage industry, is for housing and urban development to release a median home price for basically the entire country. They’ve labeled it as areas. I’m not sure if that’s counties, cities, states –
Jason Hartman: Or metropolitan statistical areas. Who knows?
Tim Stewart: Exactly. Needless to say, that’s quite a task in itself, so for them to release that information for Fannie and Freddie to be able to actually implement that information into their system, their automated underwriting systems, and then for that to become available to the public, may take a few months, and then on top of that, it’s supposed to expire at the end of this year. So we may only get about six months before.
Jason Hartman: And just for the benefit of the listeners, I just wanted to say Fannie and Freddie, Fannie Mae and Freddie Mac, the two big buyers on the secondary market of mortgages. But first, when I heard this, Tim, I was really excited. I thought this is gonna rescue the higher end bubble markets around the country, but then after delving into it, the formula in which they use to calculate what the loan limit will be and your “area,” whatever that means – we don’t even know yet – is so complex. And some areas do benefit and really do see an increase in the conforming loan limit. By the way, tell the listeners what the conforming loan limit is now.
Tim Stewart: Well, at the moment, it’s $417,000.00 in California.
Jason Hartman: Okay. And so, $417,000.00 and in some areas, it will go up to almost $730,000.00.
Tim Stewart: That’s the max. It’ll be 125 percent of whatever HUD, Housing and Urban Development, determines the median home price to be to a max of $729,750.00.
Jason Hartman: Yeah, so I saw this report that I was reading and it showed how, in some areas, it really won’t help at all.
Tim Stewart: Right, exactly. And the other thing –
Jason Hartman: In other areas, it will.
Tim Stewart: It should. The thing that I’ve heard recently that’s been released is that Fannie Mae and Freddie Mac will actually treat these loans differently than $417,000.00 and below. Even though they’re going to be forced to buy them now and actually make a market for them, they’re still going to add a markup as if they were a jumbo loan.
Jason Hartman: So let’s talk about that for a moment. What is the significance of the conforming loan limit? The way it works, just for the benefit of our listeners, is that the conforming loan limit is now $417,000.00 and below and those loans are easier to qualify for, you get better interest rates, and then if you go above that, you’re into what we call a jumbo loan. The interest rate is higher, a little harder to qualify for, yes or no?
Tim Stewart: Maybe slightly, but that’s typically not the big problem with jumbo loans. The deal is that –
Jason Hartman: It’s more the cost, right?
Tim Stewart: Exactly. Those loans are packaged and sold to Wall Street as opposed to Fannie Mae and Freddie Mac.
Jason Hartman: Right.
Tim Stewart: And Wall Street demands a premium for buying those loans because they have higher loan amounts and what this fiscal stimulus package and the increase in the limits was supposed to achieve was supposed to narrow that spread between rates on a jumbo loan and a conforming loan.
Jason Hartman: Okay. That’s interesting. Now, when Wall Street buys these loans, they, of course, don’t look at what they’re buying as we can tell from history now. I’m being sarcastic, by the way, but accurate.
Tim Stewart: I think you might argue that Fannie Mae and Freddie Mac also don’t look. Look at their earnings from 2007.
Jason Hartman: You know what? That’s a very good point. I appreciate you making that point. Yeah, it’s just amazing this total lack of responsibility. We have this system where everybody gets paid just to see more deals occur and nobody’s getting paid to put the brakes on and be prudent and cautious.
Tim Stewart: Yeah, don’t get me started on that one.
Jason Hartman: Yeah, okay, we won’t go there. Okay, so what else do you wanna say about the loan limit issue itself, because next, I wanna ask you a question about your Wall Street background.
Tim Stewart: I think much like you, I’d hoped that it would be a lot more effective than it looks like it’s eventually gonna be. I don’t think it’ll have much of an impact on the overall market. There are individuals in California who will benefit as a result of being able to refinance. The problem is, in the time that it’s taken to get that package passed, interest rates have actually climbed to a point where the conforming rate now is where the jumbo rate was a month and a half ago anyway.
Jason Hartman: Yeah, so it’s almost irrelevant, really, yeah.
Tim Stewart: Exactly.
Jason Hartman: I don’t know if it’s on our list of things to talk about today, but what is your prediction on the rates? I mean I see them overall softening a bit and seeing money getting a little bit cheaper as the Fed loosens the money supply, but they don’t control mortgage rates directly, of course.
Tim Stewart: Exactly. To answer that question, I think you need to have an understanding of how mortgage rates are determined and I’m glad you brought that up because a lot of the people that I deal with anyway don’t thoroughly understand who actually determines the rate on a 30-year fixed mortgage. And most people look at one of three figures to determine if rates are going up or down. They’ll look at the Fed Fund Rate, which Bernanke controls. They’ll look at the 10-year Treasury, which is a step in the right direction, but not the answer. And then third, they’ll look at mortgage bonds and that’s actually what determines the rates on a 30-year mortgage.
Jason Hartman: Yeah, so when the bond market rallies, it influences mortgages. When the bond market is down, it influences mortgages as well.
Tim Stewart: As of this morning, I actually saw on CNBC that Steve Liseman was talking to some mortgage bond salesmen and today was the maximum spread that they’ve ever seen between 10-year Treasury notes and mortgage bonds.
Jason Hartman: Okay, so why is that, though? Is that an issue of lenders determining risk or bond sellers determining the risk of that bond and the risk that it might go into default?
Tim Stewart: Exactly, the market determining that, so those guys that are trading bonds back and forth have determined that these mortgage backed securities are now a lot riskier than they thought they were six months ago.
Jason Hartman: That’s for sure. Yeah. Okay, good.
Tim Stewart: So basically, you could see, and hypothetically, we have seen, the 10-year Treasury could actually go down in interest, the Fed Funds Rate could go down, and these mortgage backed securities could actually go up. And they’re very difficult to follow. You don’t find those on Yahoo Finance. They’re a little bit more difficult to track than the other metrics, but that’s ultimately what determines rates on a 30-year fixed mortgage.
Jason Hartman: Okay, so your prediction is, or I know I’m asking for a crystal ball here, but do your best.
Tim Stewart: My prediction is that they’ll trade within a relatively narrow range. We’ll be pretty close to where we are right now for the next year or so.
Jason Hartman: For the next year or so.
Tim Stewart: Which is about 6 percent. We might get down to 5 ½, we might get up to 6 ½.
Jason Hartman: Okay. Still historically, incredibly, good, fantastic, yeah, fantastic rates, but overall, we call this the perfect storm. I’ve been talking about that on the previous shows that it is just such a great time to be buying the right real estate in the right markets, financed the right way. We just happen to call it real estate. It’s really a set of packaged commodities. The last show, as a matter of fact, talks about that subject in depth. You probably haven’t heard that one yet.
Tim Stewart: Not yet.
Jason Hartman: But you’ll like based on our prior discussions. Okay, Tim, you come from a Wall Street background, Morgan Stanley, and I think this may be one of the things that attracted you to our philosophy is my general hatred for Wall Street.
Tim Stewart: Yeah, I find it rather comedic, to be honest.
Jason Hartman: Well, I’ll tell you, and we talked about this the other day when we were having coffee, but maybe I should make a disclaimer about that. I really don’t hate Wall Street that much. I think it’s better than the bank. If you could call Wall Street equities rather than bonds, which you really can’t because it’s both, of course, but stocks are better than bonds. I am totally against bond investing. I think it’s a really lame deal. I think a savings account is a very bad deal. I think precious metals are a speculative deal, but they’ve been good lately, obviously. Real estate is just about the only thing, real estate and prudent stocks.
But it’s ridiculous in the stock market where you see invest in stocks and historically you’ll make 8, maybe 10, maybe even 12 percent if you’re lucky, and certainly, that’s not going to make anybody rich because a prior guest that I’ve had on other shows, Dan Ammerman, points out very succinctly, in my opinion, that you need to make about 17 percent annually in order to break even, to tread water after the true rate of inflation. Now, that’s the true rate of inflation, right?
Tim Stewart: Right.
Jason Hartman: And taxes and the impact of taxes that are both things that are stealing your wealth and Wall Street won’t do it. It just doesn’t do it. It’s just a place to save money essentially and it’s better than a bank account at 5 percent or 4 ½ percent.
Tim Stewart: Yeah, I think you hit on a big advantage of real estate and that’s the tax advantages. As you put it, refi till you die. Also, 1031 Exchanges allow you to defer taxes forever on that estate, which is a huge benefit.
Jason Hartman: It’s the most tax-favored asset in America.
Tim Stewart: I would agree with that. You factor in the GoZone opportunities that exist today and it’s even better. But I think it’s really interesting to me when you talk to somebody who has made money in either stocks or real estate how they become so loyal to that particular asset, almost to the point, like you, for example, to where they hate the other one.
Jason Hartman: Right.
Tim Stewart: And I’m glad you put out that disclaimer because if you just listen to the podcast, you would think stocks were anathema. I don’t particularly agree.
Jason Hartman: Well, you know, they are. You know what I really hate about them is the fact that the investor might get 8, 10 percent return, but it’s the insiders that are making ungodly, disgusting fortunes when they should be paying the investors enough to get 16, 17 percent return, if they weren’t skimming all the cream off the top.
Tim Stewart: Perhaps.
Jason Hartman: Yeah.
Tim Stewart: I think – I’m sure you’ve heard the story about where are all the customers’ yachts, and I think that that is so indicative of Wall Street as a business.
Jason Hartman: I have, but go ahead and why don’t you make that full complete thought for the listeners.
Tim Stewart: Well, the deal is – I don’t know exactly where the story originated from, but a client was being shown the corporate headquarters of some investment firm and he shows them the marble floors and he shows them the company yacht. And the customer looks at him and said, “Hey, where are all the customers’ yachts?”
Jason Hartman: Yeah, the customers don’t have any yachts.
Tim Stewart: And when you look at Wall Street, there isn’t a money manager on Wall Street who isn’t swimming in money. That goes without saying. The guy could have negative returns for ten years straight. If he can still convince investors to come into the fund, he’s going to make a killing.
Jason Hartman: It’s unbelievable what a big line that is.
Tim Stewart: However, that being said, I don’t think it’s fair to discount stocks as an asset because that’s the case. So that’s my only point and I think it’s really interesting that there’s a huge divide between the over analyzation that takes place in stocks – I mean you can drive yourself crazy studying technical analysis and getting –
Jason Hartman: Sure and fundamental analysis and Elliot Wave theory and Modern Portfolio theory, and I mean the list goes on and on.
Tim Stewart: Exactly, but the opposite end of the spectrum is real estate.
Jason Hartman: Yeah.
Tim Stewart: If you talk to an “investment realtor,” any time you have a multiple unit property, that’s considered an investment.
Jason Hartman: Right.
Tim Stewart: Based on no figures, no cash flow, no rental, no nothing.
Jason Hartman: No return on investment, no cap rate, yeah.
Tim Stewart: So I think that if you can take the two and marry them somewhere in the middle, where you take the cash flow, you take into account return on investment, return on equity, you take a look at historic cycles and what you can anticipate in asset return, that’s something that typically isn’t factored into real estate investment and I think a lot of real estate investors would actually do a lot better if they incorporated a little bit of those concepts that are utilized commonly in stocks and actually applied those to their real estate investments.
Jason Hartman: Yeah, that’s what we are doing here. We are financial planners. Instead of using stocks, bonds, and mutual funds, we use real estate. We use the most historically proven wealth creator and if you have additional money outside of your real estate holdings, it’s better off in the stock market most of the time than it is, at least historically, than in a savings account or pretty much anything else. The only other one that we didn’t mention would be a business of your own.
Tim Stewart: Sure.
Jason Hartman: And that really can go either way. Business you can do well with it. A few people do; most people fail. Odds are definitely against anybody starting a business, but for those who succeed, some succeed very, very nicely and a lot of them succeed by offering fake stock certificates that are essentially fiat money, printing their own money essentially in the form of stock certificates and selling them to others, and that’s how they get rich in their business.
Tim Stewart: There’s a show on tonight called American Greed on CNBC that you’ll love. It’s about WorldCom CEO Bernie Ebbers and I think you’ll get a real kick out of that one. That should be on a video podcast any day now.
Jason Hartman: Very good. Yeah, good point. I saw him on a 60 Minutes interview a while back. So tell us more about what you think about real estate and how it stacks up against stocks. Any more comments on that?
Tim Stewart: Well, I do think when you incorporate the two, and I come from a stock background and I’ve become more of a real estate guy, but the truth is I’m an investment guy and if you can show me something that makes sense and it’s gonna give me safe, powerful returns, then I’m gonna be excited about investing in it. That’s why I think it’s a little bit ridiculous when people get so loyal to their particular investment choice that they almost lock out any other opportunities that are presented to them.
So that being said, I think that when you look at the numbers, strictly from a numbers perspective, real estate tends to be a far more powerful investment and far safer at the same time. When you look at the ability to leverage and historically, not only the returns on real estate, but actually the safety, you don’t see nearly the fluctuations in price of real estate as you do in the stock market.
Jason Hartman: Yeah. That’s one of the criticisms that the stock people, the people that really believe that you should be investing in stocks and I’ve had these debates with about a zillion of them, they all say that the thing I love about stocks is I can go online to my Ameritrade account or whatever and I can liquidate them instantly. Well, that’s what I actually hate about stocks.
Tim Stewart: That’s a huge disadvantage.
Jason Hartman: It’s a giant disadvantage.
Tim Stewart: Absolutely.
Jason Hartman: They think it’s an advantage it has liquidity, but the point is, Tim, what do you need liquidity for? We’re not talking about your lunch money here. We’re talking about your future wealth money and when you can buy a house, something everybody on the planet Earth needs is a place to live, shelter, for $20,000.00, the lender pays for the rest of it – that’s your down payment and closing costs, about $20,000.00 – the lender pays for the rest of it and the tenant pays the lender back for you. The value of the loan keeps depreciating with inflation. You get tax benefits all along the way. I mean real estate has special characteristics that other investments don’t have. And that’s what I love about it.
Tim Stewart: Me too.
Jason Hartman: Another good comment there. Okay. Tim, you have a quote from who is considered to be the world’s greatest stock investor and that’s Warren Buffet. Why don’t you share that with us?
Tim Stewart: He’s a big hero of mine and, along the lines of incorporating the principles of stock investments into real estate investments, I think this quote is particularly applicable at the moment. What he said is look at market fluctuations as your friend rather than your enemy; profit from folly, rather than participating in it. And when you think about what’s happened in real estate in the last few years, if you recognize the folly that was going on all around you, when people were selling a three-bedroom, two-bath home in Orange County for $750,000.00, it was pretty clear to see that that was folly and that was something that, as an investor, you should have taken advantage of by selling.
On the flipside of that, as prices continue to decline, as I think they will, you could take advantage of folly on both sides and prices will probably eventually get depressed to a point that’s beyond the fair value for these homes. And that’s when you wanna have the courage to step in and start purchasing these properties.
Jason Hartman: Very good point and you know what? We will be recommending them. You know I’ve always said to people in a few years, we’ll probably be recommending California again. So we’re area agnostic and area opportunistic, so.
Tim Stewart: It might take more than a few years, but we’ll get back there eventually.
Jason Hartman: We don’t know exactly, but when the time is right, everybody who’s listening to the Creating Wealth podcast will hear about it from us. That also goes back to that point we talked about, about liquidity and liquidity creates volatility, so it’s very important that our listeners understand that. The fact that stocks are so liquid is the reason they’re so volatile. Real estate is a slow, expensive thing to trade. It doesn’t trade real quickly. In a hot market, yeah, you can get out of a piece of real estate in three weeks potentially and sell it, close escrow, close the deal in three weeks, maybe four weeks. But in a slow market, it takes longer than that.
But the closing costs going in and out of the investment will really cost a lot. It takes about 3 percent of the sales price to go into the deal with loan fees and so forth and appraisal fees, etc. And then about 7 percent with real estate commissions and title insurance fees and stuff to go out of the deal. You’re looking at a 10 percent cost to sell there, which is another reason that real estate is more illiquid, and I love the illiquidity. Embrace the illiquidity. It’s the thing that makes it so stable.
Tim Stewart: Yeah, in order for compound interest to really benefit, you need to stay put in your investment for a pretty extended period of time, so absolutely, I would agree with you, the fact that illiquidity is really an advantage. I mean at the same time, I think you should add that these people investing in real estate need to keep a reserve account for emergency situations.
Jason Hartman: Of course, and we recommend a minimum of 4 percent of the value of the asset. So if you have six properties, for example, six residential properties, single family homes in six markets, and that’s a total of $1 million, have at least $40,000.00 on the sidelines that’s liquid that you can pay for vacancies and contingencies and whatever might happen.
Tim Stewart: And that’s a huge mistake that a lot of “investors” made in the last three and four years, that they didn’t have those reserve accounts.
Jason Hartman: They didn’t have reserves and they bought properties that never made sense in the first place. They were speculative deals. And back to that thing, you quoted Warren Buffet and I’d like to share something else that Buffet said because I like his philosophy a lot. I don’t like his investment that well, but I like his philosophy because Buffet has a long-term buy and hold philosophy, which is my philosophy, too, as it relates to real estate. He was criticizing the people that are like the day-traders and the people that are in and out and have these knee-jerk reactions and panic and folly in the market and so forth. And he was saying selling your stock when it has a bad quarter or a bad year is like trading your wife in when she gets old.
You gotta just stick with things and go for the long term because mostly they recover. And that’s the thing. The people who can wait and have the courage to do that are the ones who always seem to do quite well. Real estate is definitely a game of staying power.
Tim Stewart: And he’s done quite well as a result.
Jason Hartman: He certainly has. Okay, at the moment, we’re hearing a lot of people talking about foreclosures and I just had lunch with someone, and he was saying that so many people now, potential investors, are so misguided because they’re watching late night TV and they’re getting into this siren song of foreclosures. And we hear it all the time and we currently do not offer foreclosure properties. However, we are constantly monitoring that situation and we do think that eventually there will be some really good opportunities in foreclosures. We’re still too early. Tim, what do you think about foreclosures?
Tim Stewart: Well, I’ve been keeping a pretty close eye on it as well. Being a broker who focuses on investments, I think it would be imprudent for me to not pay attention to what’s happening because eventually, opportunities certainly will present themselves over there. At the moment, I have some friends who are brokers for REOs, meaning real estate owned. Once a property goes to foreclosure, if it doesn’t sell at the auction, the bank basically takes it back. So that’s what an REO is.
Jason Hartman: So that means real estate owned by the bank.
Tim Stewart: Exactly. And basically, we have this sort of a standoff right now in the foreclosure market where whoever’s controlling the sale side of these properties isn’t willing to budge to the point where it makes sense for these investors that are coming in to purchase them. So what we’re seeing is it’s still a highly illiquid market. The sellers are holding a price that doesn’t make sense for the buyers to come in and buy. Therefore, not a whole lot is moving and in my opinion, it probably won’t move until the lenders really start to give.
Jason Hartman: Yeah, good point. I agree. Just because you can buy a property today that was, for example – I’ll use the California example, the Southern California example – if it was $700,000.00 a year ago and now you’re getting it for $600,000.00, that ain’t such a great deal if you’re gonna be able to buy it for $450,000.00 later.
Tim Stewart: If you talk to the realtor, that’s another example of how they’ll justify an “investment” is $100,000.00 off of what they paid a year ago, which does not hold up.
Jason Hartman: That’s a really good point you bring up because I get all of these emails from various real estate people that are trying to sell investment properties, and they say things like $40,000.00 instant equity; $80,000.00 instant equity. Folks, be really, really scared when you see that type of advertising. We never do that type of advertising.
An old real estate instructor of mine, many years ago when I first got into the business and took all these commercial real estate classes, really just a brilliant author and a great teacher. I had him for a few different classes I took. His name is Dennis McKenzie. I don’t even know if he’s still around now, but he had written a lot of the real estate books and so forth, real estate principles books, and he said – he called this Hokey Broker Goes to Jail. That was his term, Hokey Broker Goes to Jail, he used to always say.
And one of the things that we could easily do here and I will not let our investment counselors do it, is we could represent properties as below market value. And you know, we never say that because the market value is a dynamic thing and it’s changing constantly, and it dramatically increases the rate of return.
So, as you know, Tim, we standardized all of our pro formas and projections to one certain report and those can be found at www.jasonhartman.com on our website. But a lot of people will go in there and they’ll use the same software that we use, but they’ll put – well, you’re buying the property – we’ll just use a residential, simple house for it – for $150,000.00 and they’ll put the market value as $155,000.00. Just a minor amount, $5,000.00. But that’ll take the rate of return from like 40 percent or 30 percent annually to something like 200 percent, a ridiculous number.
Tim Stewart: I’m really glad you brought this up because I do a lot of networking with realtors and other people in the industry, and there does seem to be a very wide misconception of the term market value.
Jason Hartman: Yeah, I know. It’s amazing that there is such a misconception, but go ahead.
Tim Stewart: Well, basically, a market value is what the market will pay you for your asset, whatever it is that you’re trying to sell.
Jason Hartman: In a reasonable period of time.
Tim Stewart: Exactly, and I think that a lot of the public right now, I mean homeowners, realtors alike, are holding to a market value from a year ago. This property is worth X, when the market value is truly what a buyer will pay for it today. And if that happens to be 30, 40, 50 percent below what the current homeowner paid for it, that’s unfortunate, but that’s the market value.
And I think that what we’re talking about of the lenders being unwilling to give on the price that they’re trying to sell these properties for, they’re still holding onto this concept of market value from a year ago or two years ago, when the truth is, they’ll list it 20 or 30 percent below that market value and still not get any offers. So the truth is the market value is a lot lower than where most sellers think it is today and that’s really a scary thought.
Jason Hartman: You’re absolutely right. You know, we’re probably off the peak now about 13 to 15 percent and I say we’re going to be off the peak at the end of this at about 25 percent off peak, will be the decline. And I remember in the early ’90s and up until the mid-’90s, when things were really bad in Southern California, especially Orange County, properties depreciated 30 – 35 percent.
Tim Stewart: And it’s great to put a historical perspective on it because I think a lot of people have either blocked that from their memory or are just unaware that ever happened, but the savings and loan crisis was so similar to what’s happening in the industry right now. It would do every real estate investor some good to go back and really read about what happened, what caused things to happen, and what allowed us to work ourselves out of that hole that we built up, and I think that when you look at that and you make the parallels between the late ’80s and early ’90s to today, you can see that when things looked their worse, which was probably about ’91 or ’92 –
Jason Hartman: That was the time to buy.
Tim Stewart: Great time to be buying.
Jason Hartman: I agree.
Tim Stewart: I mean you could look at figures, median home price figures back then and imagine had you picked up five or ten properties in 1991 or 1992, what your net worth would be today. And it’s really difficult to go against the grain and to go against the crowd and be a contrarian investor, but common sense tells you the average American is not wealthy, so you should be doing something that other people aren’t doing. And what everybody’s doing today is selling.
Jason Hartman: Yeah, yeah, yeah. You know that’s what I always say is Getty’s quote, buy when everybody’s selling, sell when everybody’s buying.
Tim Stewart: Exactly.
Jason Hartman: So good point and of course, probably one of the most famous names of the 1990s – it really started in the late ’80s, but the 1990s debacle – was Charles Keating and Lincoln Savings and Loans, so if any of our listeners wanna go back and read about that and learn about it, that was definitely a period of, as Greenspan, the sell-out Greenspan would say, irrational exuberance. And from our conversation the other day, you know I’m not a Greenspan fan either.
Tim Stewart: I do think he gets a little bit worse rap than he deserves, but he may have contributed to everything that happened. I would agree with that.
Jason Hartman: Well, I’ll certainly give him credit for retiring at just the right time.
Tim Stewart: He kind of reminds me of Jeff Skilling, stepping out at just the right moment.
Jason Hartman: Man, Bernanke’s got a tough job. It’s really true. Okay, do you see the mortgage lending guidelines continuing to contract and it being harder to obtain mortgage financing, or have we sort of reached the – I guess we’ll call it the bottom of this where it’s the hardest it’s going to be, and I have my own opinion on that, but tell us what yours is.
Tim Stewart: Well, I think two things. I think, No. 1, I can’t see how it can get much worse. We’re almost to a place now where you have to put a 20 percent down payment if you wanna purchase a home. We’re not quite to that point. If you have full documentation and if you’ve got great credit, then you can get 5 percent down, 10 percent down. However, we’re moving in that direction and investors, especially, the down payment requirements are getting back to a place where they’ve been historically, which is 20 percent down.
So that being said, I don’t think we’ll get to a place where they’re gonna start requiring 30 or 40 percent down, but I also think that the mortgage industry as a whole is going to continue to feel the hurt. The losses on these CDOs, the losses for Fannie Mae and Freddie Mac are gonna continue.
Jason Hartman: Collateralize debt obligations.
Tim Stewart: CDOs, excuse me. And basically, what that is is all these mortgages that we closed in the last few years, packaged and sold to Wall Street investors, and that’s why you’re seeing Citigroups earnings being hit drastically. So the point is I think that that’s gonna continue to get worse, which is gonna cause the lending standards to continue to tighten. I just don’t think that, relatively, there’s a whole lot further to go from here because we’re already at a place where there are pretty darn conservative guidelines.
Jason Hartman: Yeah, and you know historically, compared to the ’80s, it’s relatively easy to borrow even now. People think it’s so bad because we came from a place where we were so ridiculously spoiled and the flipside of this whole issue is it’s good news because it makes the market healthier. It gets the amateurs out of the game. It gets the speculators and the get-rich-quick people out of the game, and it increases the rental market because it’s harder to qualify for loans.
So the flipside of the investor is that it may be harder to acquire your properties and your financing, but once you have them, you have a more valuable asset because there are more renters for it. And we’ve definitely seen that in our markets all around the country.
What are some of the differences between T.S. Maverick, your company, and a typical mortgage broker?
Tim Stewart: Well, the main difference is that we focus on real estate investors. That’s not to say that we won’t provide financing for a primary residence, but we do require that our borrowers treat their primary residence as an investment. A lot of realtors will give – and I hate to beating up on realtors –
Jason Hartman: Does that mean they have to rent it out?
Tim Stewart: It doesn’t mean you need to rent it out. But what it does mean is that you’re gonna need to have some sort of a plan financially for why it makes sense for you to buy a home today. And a lot of realtors, and I really don’t hate realtors by any means and mortgage brokers are equally guilty, when you have your own commission on the line, it’s kind of like to a man with a hammer: everything looks like a nail. And absolutely, I’ve seen on television, all of a sudden, ReMax commercials stating that it’s a great time to buy, which I would argue that’s the case in certain areas of the country, maybe in other parts of the country.
Jason Hartman: The reality is, though, you saw those in California –
Tim Stewart: In California.
Jason Hartman: And it’s not a great time to buy here now.
Tim Stewart: So everybody’s got their own agenda. However, the point is, if it doesn’t make sense for you financially to buy a home, then you probably shouldn’t be buying a home and that’s really all I mean by that. We work with investors. We also – we treat even a primary residence as an investment. A lot of realtors will give you the argument, well, hey, ten years from now, the property is gonna be worth more than it is today anyhow, so who cares? Now’s a great time to buy. I understand that. However, I’d much rather have $100,000.00 of equity ten years from now than break even ten years from now.
Jason Hartman: The thing we say is it’s always a great time to buy somewhere.
Tim Stewart: Sure.
Jason Hartman: There’s always a bull market somewhere that makes sense, and a lot of people who are wanting to buy properties for themselves, their own home in California, for example, just buy some rental properties all across the nation and don’t worry about your own house right now. It’s a better deal to rent it at the moment.
Tim Stewart: Sure.
Jason Hartman: So just keep renting. A lot of my friends that are in their late 20s and early 30s are saying that type of stuff. They wanna go buy a condo or go buy their first little place and fix it up, and I’m just saying just hold your horses. Buy six rental properties instead and by the time the market is ready for you to be buying in California –
Tim Stewart: You could pay cash for it.
Jason Hartman: – you’ll be – but you’ll never pay cash because you’ll listen to me. But you’ll be in much better position for sure.
Tim Stewart: Yeah. So I didn’t want to put off the impression that we don’t work with people who are buying their primary residence, but the truth is, I think way too many people and it’s pretty clear to see just looking around in California especially, had people looked at their primary residence purchase as more of an investment, they wouldn’t find themselves in the predicament that they’re in today. So that’s a part of it and that’s really the biggest thing is we don’t encourage people to buy things that don’t make sense for them.
Jason Hartman: Good point. What are some of the common mistakes that you help clients with on the financing side when they’re investing in real estate? I mean how do you help them with these mistakes, help them avoid the mistakes, etc?
Tim Stewart: Well, probably the most obvious one is locking in fixed rates. I hear a lot of people encouraging you get a better cash flow or you get a little bit lower interest rate if you use an adjustable rate mortgage. With everything that’s happening right now especially, to save maybe a half a percentage point on your interest rate and risk an adjustment three, five, ten years from now is really not a risk that’s quite worthwhile in my opinion. And a lot of people, as we’re seeing, a lot of the foreclosures that are popping up right now are the result of these adjustable rate loans.
Jason Hartman: I completely agree. When money is cheap, money is on sale now, lock it in. If rates go a little bit lower, no big deal. The downside risk is very low by taking the good fixed rate mortgage, the investment grade debt as we call it. But the other risk of having an adjustment that goes up and really, really hurts you is pretty high.
Tim Stewart: Sure, and that’s kind of an obvious one. To be honest, one thing that we do encourage all of our clients to do is really maximize their leverage and that’s something that’s probably a little bit more uncommon. You’ll find a lot of people that are proponents of fixed rates and the thing that I try to use to illustrate to people why it’s a good idea to maximize your leverage is a question that I pose. I ask them how much money would you borrow from me if I offered it to you at zero percent interest.
Jason Hartman: What’s the answer to that?
Tim Stewart: I’m curious. What would you say?
Jason Hartman: Infinity and beyond.
Tim Stewart: Exactly, exactly, and I think that most people with zero percent would say, oh, I’d take a ton of money. Okay, great. Well, what about at 1 percent? Would you take $100,000.00 at 1 percent?
Jason Hartman: I’d take a lot more than $100,000.00 because I know I can invest it and earn more.
Tim Stewart: Exactly and what about a 2 percent, and once you get people thinking down that path, they realize that if you can get a 6 percent mortgage with the interest deductibility, you’re looking at net close to 4 percent on that money. So you tell me, can you make 4 percent or more on your investments elsewhere, and I think most people –
Jason Hartman: Heck yeah.
Tim Stewart: Absolutely. So the net is quite a profit and you should borrow as much of that money as you possibly can.
Jason Hartman: Good point. That’s arbitrage and that’s created a lot of wealth for a lot of smart people.
Tim Stewart: Exactly.
Jason Hartman: Absolutely. How do you see the current economy affecting the housing market or vice versa? What’s your prediction about that?
Tim Stewart: Well, I think I should preface by saying, kind of repeating, the way that you opened, which was the worse the market gets, the better off we’re gonna be as investors. So I just wanna make sure everybody understands that I’m not a doom and gloom guy. However, to answer your question, I think we’re in a lot of trouble and I think that if you look at what has spurred all the spending and the growth in the economy in the last three or four years, a lot of it has had to do with housing prices.
Jason Hartman: Yeah, you know what’s amazing about that? And I remember a few years ago, when I was watching the economy and talking to people about it and thinking that we were in this sort of irrational exuberance time, I was talking and I remember having this conversation at a coffee shop with someone about how most of the GDP, the Gross Domestic Product of the United States, was being basically fueled by home equity, by the ATM machine in the living room, as I call it. And now, you see the complete opposite. We have a country that’s largely based on consumer spending and that’s why our economy is so prosperous usually.
But the consumer is pretty tapped out right now and I remember I was at Nordstrom about three weeks ago and I was buying some clothing, and I always ask everybody everywhere I go, how’s business. And of course, we’re moving into our new office in just a few days and we’re spending money like it’s crazy, it’s going out of style. New furniture, new everything –
Tim Stewart: You’re one of the few.
Jason Hartman: Yeah, I’m one of the few, and I’m asking the office furniture vendors, how’s business? And they’re all saying it’s slow. But the Nordstrom guy was rather interesting because what he said – he was in the men’s suit department – and he said business was really slow. And I said, why? And he said housing. And I mean, of course, I knew what that meant, but I wanted him to tell me. So I asked him, man, what do you mean by that? And he said, well, basically, people before, over the last few years, we’ve doing great because they’ve been spending all their home equity.
Tim Stewart: Not to mention locally, plenty of the economy in Orange County and probably in lots of parts of California and other hot real estate markets, were driven by real estate industry professionals who were making big huge paychecks and going out and spending them.
Jason Hartman: Mortgage people, my gosh. I mean I hate to say it, mortgage people, if you’re listening, I make the same disclaimer Tim did, I don’t hate all mortgage people and I’m not bagging on all of them, but some of these overly flamboyant types that got some money in their pocket and bought the new Ferrari and now got it repo’ed. I mean come on. This is unreal. This is stupidity. It doesn’t make any sense. I just never saw so many people that were so untalented and unambitious making gobs of money. It was insane.
Tim Stewart: Usually, that’s a glaring, flashing light that tells you something is amiss here and we’re probably gonna see a correction, which is what we’re experiencing right now.
Jason Hartman: You got that right, so we say slow and steady, the turtle strategy, if you will. Buy a bunch of real estate. Take on a lot of prudent, long-term, fixed rate debt. Hang onto it forever. Just let your tenants pay the mortgages back for you by sticking them in the properties and I mean, how can you lose with a commodity everybody on the planet needs? It’s just a great thing. Any comments in closing, Tim?
Tim Stewart: No, I would just say one of the most challenging things right now is gonna be to go against the grain, that contrarian investing style that I was talking about. So do what you’ve got to do to surround yourself with positive people that are still excited about investing in real estate right now because you’ll find plenty of people who will tell you about how real estate is the worst investment ever or any investment. People will be negative.
And there are plenty of people that are in misery right now as a result of their poor real estate investments, if you wanna call them that. So I would say make a conscious effort to surround yourself with people who aren’t in that camp and you’ll be able to take advantage of those bargain basement prices that are presenting themselves from now until however long it takes to clear out this inventory.
Jason Hartman: That’s a very good point. I remember I had this girlfriend several years ago and she used to always have these friends that were kind of negative and stuff and I mean I liked her. I thought she was very positive and stuff, but she didn’t pay enough attention to who she surrounded herself with and what influences she let in. And I remember reading in a Jim Rohn book – Jim Rohn is an author that I’m really a big fan of and a motivational speaker – and he said the people you are with in life have an incredible amount of influence on you. It’s like getting into an elevator and you’re pushing the up button and they’re pushing the down button. So you’ve gotta be very careful who you associate with in that way, so that’s a very good point.
Tim, thank you so much for being with us. We will have your info so people can contact you in the show note section of www.jasonhartman.com and we really appreciate your insight.
Tim Stewart: Thanks for having me.
CBS News Clips
CBS News Anchor: President Bush came here to the financial capital of the world today where markets are facing a crisis of confidence, shaken by one corporate accounting or fraud scandal after another. The President vowed to do everything he can to, as he put it, end the days of cooking the books, shading in the truth, and breaking the law.
But Democrats in Congress say Mr. Bush is not doing nearly enough. We begin our coverage tonight with CBS News Business Correspondent Anthony Mason.
Anthony Mason: President Bush flew into the heart of corporate America today, going directly to Wall Street, to call for a new ethic of personal responsibility in the business community.
President Bush: At this moment, America’s greatest economic need is higher ethical standards.
Anthony Mason: Before an audience of top business leaders, the President called for tougher penalties for financial fraud, proposing to double the prison term from five to ten years and to ban convicted executives from ever serving as officers or directors of a public company again.
President Bush: If an executive is guilty of outright fraud, resignation is not enough.
Anthony Mason: Mr. Bush also said he was creating a new corporate fraud task force.
President Bush: The task force will function as a financial crimes S.W.A.T. team.
Anthony Mason: The President has already proposed adding another 100 investigators to the Securities and Exchange Commission. Today, he asked for another $100 million to upgrade the SEC’s technology and enforcement.
President Bush: The American economy is built on confidence.
Anthony Mason: The President’s speech was monitored closely on Wall Street trading floors. The erosion of trust has hurt stocks badly. The President may have been trying to reassure investors, but his speech failed to produce a dramatic move in the markets.
Stocks rallied briefly, but by the close, the DOW had sunk another 178 points.
Mino Capossela: Did investors need to hear this? I think investors needed to hear this just the way they need to see continued pressure on CEO accountability rising.
Anthony Mason: Mino Capossela is head of U.S. Equities for J.P. Morgan.
Mino Capossela: I think this is one of the sweeter things that has to happen to restore confidence.
Anthony Mason: Outside the NASDAQ market sight in New York’s Times Square, many investors were still wary.
Female Investor:
I definitely feel more comfortable about investing. There’s still a little trepidation, but I believe that this will definitely help.
Male Investor:
I mean it doesn’t necessarily boost my confidence. Am I happy that something is happening? Absolutely.
Anthony Mason: As the markets themselves showed the President today, it will take more than reassurances to restore investors’ trust. Anthony Mason, CBS News, New York.
CBS News Anchor: But as correspondent Russ Mitchell reports, that may not be enough to restore investor confidence in the stock market.
Russ Mitchell: Jeremy Schneider planned to ride a booming stock market to save cash for a home. Not anymore.
Jeremy Schneider: We lost some of the money that we had worked hard to save. Too, the money that we have been able to save is growing at a very, very slow rate.
Russ Mitchell: Investors nationwide spent today reeling over the WorldCom scandal and taking stock of a shaky market. Investment houses are reporting a brisk business from those looking to take their money out of the market.
Fred Galarraga: We’ve done a lot of business in plain old [inaudible], CDs, regular money markets, and a lot of short-term treasuries.
Russ Mitchell: The buzzword from financial planners is diversify. Investors like Fred Galarraga, who took a big hit in the NASDAQ, are listening.
Fred Galarraga: It was almost like a roll of the dice. It’s very risky right now.
Russ Mitchell: As a result, Americans are putting their money in homes. New home sales were up 8.1 percent last month. Money markets, only promising a return of 2 – 3 percent, are popular again. And some are converting their stocks into cold cash, banking on playing it safe. But analysts say consumers shouldn’t panic.
Analyst: People are frantic. There are people who usually wanna go put 100 percent in the market and I had to talk them out of that. And now they wanna take everything out and you’ve got to kind of calm down and look at the overall picture.
Russ Mitchell: Jeremy Schneider says it will take a lot to get him back in the market.
Jeremy Schneider: I need to feel confident that there aren’t other Enrons or WorldComs or Andersons out there.
Russ Mitchell: Analysts say investors have to understand the days of overnight 20 percent returns on stocks are over, and these days, it pays to be realistic. Russ Mitchell, CBS News, New York.
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.
Join us for our Grand Opening celebration, celebrating our 11th year in business at the grand opening of our new office at 555 Anton in Costa Mesa. That will be Thursday evening, March 27, from 5:00 – 9:00 p.m. and be sure to register. You must register for this party in advance. It’s free of charge, of course, but we need to know you’re coming so we can tell the caterers to provide for you. So go to www.jasonhartman.com and R.S.V.P. for the party on the website please.
We have a very special event coming up. It is our Master’s Weekend. It is on March 29 and 30, that’s a Saturday and Sunday, the Master’s Weekend. We only hold this event, so far, once every year, so it is a very, very special event. And last year, it was just exceptional. People loved it and we flew in 16 experts from all over the country on every topic under the sun regarding investments and finance and real estate, from property managers to area agents and brokers and builders, and asset protection techniques and tax savings techniques, and wealth creation techniques; and how to use the software to manage your properties and be organized in your real estate business, and just a whole bunch of great things.
I’ve got Karen and Karam here in the room with me to just comment on the Master’s Weekend. Karen, you want to say anything about it?
Karen Karanickolas: Yes, I’m very much looking forward to the Master’s Weekend. We’ll have some great food for everybody. We’ll provide you several meals throughout the weekend. And also, I’m looking forward to giving you a presentation on getting your business organized because once you start acquiring these properties, it does become a business, so I’m here to help you. And I’m looking forward to giving you an overview of getting your business organized.
Jason Hartman: All right, Karam, what do you have to say about the Master’s Weekend?
Karam: Well, last Master’s Weekend was a great success and this time, even it will be better. And for our clients who have already purchased the properties, investment properties nationwide, you will be meeting one on one with all these agents and property managers that you have been dealing with. Now, you can put a face to it. And for our clients who are going to be purchasing, there will be a lot of questions answered when you meet these people. They will have all the answers about the areas and it’s great to meet all these property managers and area agents who come with the flavor of their different areas.
Jason Hartman: That’s excellent. So that will be at our new office and Karen, another comment?
Karen Karanickolas: Yes, for all of you new investors, we will have some testimonials from our existing clients, from our previous clients who have purchased multiple properties. We will have a panel there available for you to hear their stories and ask them questions about your experiences as well.
Jason Hartman: Yeah, this is a great thing Karen’s talking about. We’ll have a panel of actual investors who have done it. They’ll show you the ups and downs and pitfalls, and how to avoid the pitfalls and make sure you maximize all of your investments. So join us for the Master’s Weekend. It’s at the end of March at our new office and register at www.jasonhartman.com, and we have experts flying in from all over the U.S. for this event. It’s really a big one-of-a-kind event. 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 it 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: 55 minutes
