Jason talks to two southern travelers about their thousand mile “Investor Road Trip” then Gary returns for a discussion of how the south is the location of the next great American industrial revolution. Stay tuned for Part 2 and “The Subprime Primer.”
Announcer: Welcome to Creating Wealth with Jason Hartman, President of Platinum Properties Investor Network in Costa Mesa, California. During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing, fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible.
Jason is a genuine self-made 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 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it. And now, here’s your host, Jason Hartman, with the complete solution for real estate investors.
Jason Hartman: Welcome to another addition of Creating Wealth. This is Jason Hartman with Platinum Properties Investor Network and we’re glad to have you with us. Okay, a few things today. No. 1, what are we covering? We are going to have a brief snippet from a 60 Minutes episode you may have seen, entitled “House of Cards,” which talks about the subprime mortgage meltdown. And then we will have a little skit for you. Yes, a skit. I have a new guest on the show who will be on from time to time, Laura. And Laura and I did a little skit, entitled “The Subprime Primer” and I think you’ll find that educational about one angle as to what happened in the subprime mortgage meltdown.
And then we will have Part 2 of “The South Shall Rise Again” with Gary and I think you’ll find Part 2 very interesting because it’s much more contemporary than Part 1, which was on the last show. So stay tuned for that.
Before we get started and dive in, I want to talk about a couple of things here. No. 1, we really offer just a tremendous service here at Platinum Properties Investor Network and we don’t make money off of education and we really don’t make money off of selling advice. We charge a nominal fee for our live seminars and include meals with them, and frankly, we lose money by the time you attend. Although, we’d love to have you attend because we use those events as a way to educate people and help them in real estate, and of course, we earn our living by helping you invest and one of the things that means is that we are tied to the result of your investments. That is very important.
See, what we say on the show here, what we say in our live events, what we say to you individually has to come true in real life or you won’t invest. So if we were to make a lot of promises and give you a bunch of hype like they do at many of these seminars and on these books and tapes from these various “gurus” out there, and then we’re in the business of brokering real estate, of arranging referrals to different markets around the country, and therefore, if what we say to you here doesn’t come true when you actually want to buy the property and do the investments, then you’re not going to invest, and if you don’t invest, we won’t stay in business.
So here’s what I’m getting to. I want to ask you to give us some feedback on what you find out there in the marketplace. I’m sure that many of you listeners have been to various seminars and read various books on real estate investing and maybe you’ve purchased some educational CDs or products or whatever, and in doing that, you have found different offers. A lot of you have found people selling very expensive $5,000.00 and $10,000.00 seminars. There’s a company out there called Nuvo Reach that does this. I’m not too impressed with their offering because it’s just darn expensive. And you know, we had a client come in recently who had spent all of this money, and this happens to us frequently, on education and we just say to them you could have bought your first property with all of that money you spent.
So think about that. Don’t go spending a fortune on education. Education is important. It is the first of our Ten Commandments for Successful Investing. It is important. But get your education prudently. Don’t overpay for it. That’s what I’m trying to tell you. And get your education from someone who is tied to the real world result of that education so that they have a vested interest in seeing that it really works in real life.
So what are you seeing out there? One of the things that I’m seeing is a lot of these various groups out there charging these huge, astronomical membership fees. A membership fee, I mean for what? $15,000.00, $10,000.00, $20,000.00 “membership fees.” Give me a break.
Now, look, I don’t know. Maybe these memberships are really meaningful and they’re worth it. It’s certainly possible. But what I’m saying here is we want to hear from you. What is going on out there in the marketplace? Tell us what pitches you’re hearing, what you’re being offered, what seminars you’re going to, and what they’re saying. We have people come in all the time that say I enrolled in this coaching program and I spent $3,000.00 a month on being in a coaching program. Yet I still haven’t done any investing. I spent $5,000.00 going to a seminar for a weekend. I spent another $10,000.00 going to a boot camp and I still haven’t done any investing.
Folks, you can get started investing for as little as $15,000.00 or so. Don’t waste all your money on education. Education is important, but get educated efficiently. Don’t overpay for it and make sure that you’re really getting what you paid for, okay? That’s one thing. So give us some feedback.
We have a new section of our website for questions and feedback of any kind and if you go to www.jasonhartman.com, you’ll see a section there entitled Ask Jason, and this is sort of a free form part where you can put in detailed questions. You can write on and on and we’d love to hear your questions, your feedback, what’s being offered in the marketplace, what can we offer you; what subjects do you want to see us cover on future Creating Wealth shows? What do you want to see on the audio show? What do you want to see on the video show? What questions would you like us to answer for you live on the air, on the podcast? Let us know. We want to hear more from you and also, of course, as I’ve mentioned before, go to www.jasonhartman.com and request your free CD, your free audio CD. I think you’ll really like that.
All right, another thing we’re going to talk about on future shows is we’re going to talk about a new thing. I sort of thought of a new way to say this to you and it is called Negative Interest Rates. I firmly believe we are in a negative interest rate climate now and that’s why I believe it is such an opportunity to borrow, such an opportunity to take on high quality, low cost, fixed-rate, investment-grade debt because I think you’re really getting paid to borrow. And let me just whet your appetite for this and we’re going to talk about this more on future shows.
So here’s the concept. Inflation, we’ve talked a lot on previous shows about inflation. If you haven’t heard them, go back and listen. You need to hear about inflation. So I say that the real rate of inflation is about 8, 10 or really probably more like 12 percent annually. Wow! That’s a lot of inflation.
The government will tell you it’s about 4 percent. The government is doing what – I remember what George Bush called it when he was campaigning against Al Gore in the first election. He said that’s fuzzy math. Rarely does Bush say anything real intelligent, but I think that fuzzy math example was a pretty good term and you know the government is guilty of fuzzy math left and right. Their inflation statistics and also – I’m going to talk more about this on future shows – their unemployment statistics are also another example of fuzzy math.
So here’s the concept of negative interest rates. When you borrow money to buy an investment property and say just for the sake of round numbers you’re borrowing at a 7 percent interest rate, 7 percent, just for the sake of round numbers here. You borrow at 7 percent and inflation, the real rate of inflation, is 10 percent. So right there, you are already getting paid 3 percent to borrow money because the money you borrow is depreciating at a rate of 10 percent annually when you get the use of the money for 7 percent annually.
But it actually gets even better than that because when you add to it the return you can earn on the money, if you invest it properly, you can do much better. And we’re going to talk again in the next show, the show after that, about how to really understand ROI, Return on Investment. We have talked about that on prior shows. In fact, we have a prior show and I don’t know what number it is offhand, but if you look at the show entitled “ROI,” ROI, of course, Return on Investment, and my other definition for that, Return on Inflation, this show is entitled “ROI – Some People Just Don’t Get It.” Go back and listen to that one.
But we’re going to explain this in more depth and examine this issue more carefully because our investors can really get a good solid 30 percent, give or take a little bit. Some do a lot better; some do a little worse than that. Thirty percent ROI annually on their rental property investments. And people still, after all of this talk, don’t understand how you do that. They think it’s fuzzy math. Well, I tell you, folks, it is not fuzzy math. It is very, very possible, very prudent, and very conservative that you can really achieve those numbers. I doubt you’re going to get them in the stock market. I doubt you’re going to get them in a mutual fund and I certainly doubt you will get them in bonds. And I know you will lose money in a savings account.
Let’s look at this concept in reverse. Let’s look at a savings account. Okay, you put your money in a savings account and, just for round numbers sake, let’s say you open a CD or money market account. You’re getting 5 percent interest every year. Now, you’re taxed on that interest and you understand that you pay income tax on interest income. So let’s say that after taxes, the real interest rate, that 5 percent, now becomes 3 percent. But then you come along and take away the other hidden tax, called inflation. Inflation is the insidious hidden tax and the reason it’s so insidious is it destroys your wealth and you’re usually not paying attention to it. That’s why I talk about inflation so much because it is a tax on your money. It is a tax on your savings. It is a tax on your home equity. It is a tax on your mutual fund. It is a tax on pretty much any asset you have.
But it is a dividend on debt. See, when you borrow, inflation pays you. As long as you borrow right and as long as you borrow at a rate lower than the cost of inflation. So let’s say you believe the government’s number and you believe inflation is only about 4 percent. Well, in that example of the savings account, remember you were getting paid 5 percent interest income and then the government came along and they taxed you and you had 3 percent left. And then inflation comes along, the insidious hidden tax, and takes away another 4 percent. So now, by saving money, you are losing 1 percent on your taxes. Negative 1 percent is your return on saving money.
But if you take the real rate of inflation, we’ll just call it 10 percent for round numbers sake. I believe it’s 8 – 12 percent, probably easily 12. And by the way, if you don’t believe this, here are my challenges to you. I want you to look around. I want you to really start paying attention to your own real life because, folks, real life does not take place in statistics. It does not take place when you look at the Wall Street Journal and read what the Consumer Price Index is. It takes place in your checking account. It takes place in the way you spend your money and if you look at the real cost of things, going out to dinner, buying a candy bar, buying a stamp – the cost of postage, of course, went up just last week – buying almost anything, except a technology-based product, the cost has gone up dramatically.
Now, don’t look at this over the short term. If you live in an overvalued real estate market that is actually declining in value, you might say, well, Jason, you’re crazy. I live in California. I live Arizona, I live in Nevada; I live in some parts of Oregon, Hawaii, some parts of Florida, the Northeastern United States. These are markets that had ridiculous inflation put into them already. They’ve been way overpriced from the beginning. But if you look in prudent markets where the values are increasing at 4, 6, 8 percent a year, and then you look at the price of gasoline, you look at the price of your insurance, the cost of going out to dinner, the cost of buying any product that has a U.S. labor component in it, you are going to see a heck of a lot more inflation.
The things that hide inflation, remember what they are: importing cheap labor, mostly from Mexico in this country. Importing cheap labor hides real inflation. Exporting to areas like China and India. India’s the world’s back office. China is the world’s factory, right? That is the way inflation is hidden from us.
But guess what? These countries are starting to experience a lot of inflation. And you know what that means to you? The cost of all those cheap goods we’ve been importing from China, the cost of those back office services that our companies and some of us on an individual basis have been getting from India are going up. And that means we’re going to see inflation rearing its ugly head in a big way over the next decade.
Now look, I am talking macroeconomic terms here. I’m not talking about what happened last week or last month, or really even last year. I’m talking about the overall global trend. So don’t read the newspaper or listen to CNBC and say well, producer price index went down a little bit last month. So what? You don’t live your life in last month. You live your life over the course of years and that’s how inflation really affects you. So just check that out. Just start noticing it in your own life. You are losing money by saving money for sure. There’s an old saying; cash is king. That rule just ain’t true anymore. Cash is not king. You know what is king? Hard assets, hard assets like housing gained with borrowed money, money that was borrowed cheaply, prudently, and you let a renter pay for the cost of borrowing.
So just understand that when you borrow prudently, you have to follow our plan to do this. I’m not just saying go out and get yourself into debt, obviously. When you borrow prudently, you are paying a negative interest rate. And remember when you borrow, your renter is paying the cost of your borrowing.
All right, enough of my little rant here. Let’s go into the show. We’ve got first the clip from 60 Minutes. Then we’ve got the skit with Laura and I. It’s kind of funny. We had to clean it up to make it family-friendly. And then we’ve got “The South Shall Rise Again” with Gary. So enjoy the show today and again, give us some feedback. Let us know how we’re doing, what you’re thinking. Let us know what else is being offered to you in the marketplace. Let us know what questions you have. And we’d love to hear from you. Go to www.jasonhartman.com and click on Ask Jason. Here we go.
60 Minutes Clip
Announcer: It was another nervous week for the world’s financial markets and on Wall Street. In the last six months, Americans have seen their investments shrink, their property values plummet, and the country edge closer towards a recession. And at the heart of the problem is something called the subprime mortgage crisis, which began last summer and continues to ricochet through the economy.
It sounds complicated, but it’s really fairly simple. Banks lend hundreds of billions of dollars to homebuyers who can’t pay them back. Wall Street took the risky debt, dressed it up as fancy securities, and sold them around the world as safe investments. If it sounds a little like a shell game or a Ponzi scheme, in some ways, it was; a house of cards ripe with corruption, greed, and negligence.
Skit
Jason Hartman: I’m here with a new guest I’d like to introduce to you. Hi, Laura.
Laura: Hi, Jason.
Jason Hartman: Good to have you on board. Laura is going to be participating in some of our shows to make them a little more interesting for you, so you’ll hear some other voices, so that’s good. And also, to help read some things. A lot of the information that I get that I want to share with you listeners is in written form and rather than just read to you in my boring voice over and over, I figured we’d add another voice to it to make it interesting, and today we will start with Laura onboard to review with you something that has been floating around the internet that you may have seen. It’s kind of a PowerPoint show and I apologize because I do not know who created this. I cannot figure it out. But it’s called the Subprime Primer relating to subprime loans.
And so you may have seen this in your inbox and what we thought we would do is just sort of act it out as a skit and I have to tell you, Laura and I have to clean it up a little bit because the language is not family-friendly, if you will. So as we talk to you, we will be sort of improvising a little bit to kind of clean up the language in it.
But it is an interesting story and it’s very educational because it’ll help all of you understand what was really going on and why we are having this mortgage meltdown and how irresponsible all of the parties involved were in creating this mess that we’re in, and I just think you’ll really like it. So let’s just kind of get into it. There are really sort of three positions here. There’s a narrator and then two other participants and I’ll do the narration and be one of the people in it, and then Laura will be the other, okay? So let’s go with the Subprime Primer.
At the mortgage broker’s office, Ace Mortgage Brokers will make your dreams come true.
Laura: Gee, I’d like to buy a house, but I haven’t saved any money for a down payment and I don’t think I can afford the monthly payments. Can you help me?
Jason Hartman: Sure, no problem. Since the value of your house will always go up, you don’t even need a down payment anymore. And we can give you really, really low interest rates for the first couple of years. We’ll raise it later, okay?
Laura: Sure, no problem. There’s one thing. My employer is – he’s a real jerk and might not verify my employment. Would that be a problem?
Jason Hartman: That’s no problem at all. We’ll get a special liar’s loan and you can verify your own employment and your own income. Just tell us what you make, where you work, or if you really work, and we’ll just believe you.
Laura: You guys are awesome! You are really willing to work with me?
Jason Hartman: Well, we don’t actually lend the money. A bank will do that. So we really don’t care if you repay the loan. We still get our commission either way.
Laura: Wow! Let’s get started today.
Jason Hartman: A few weeks later at the bank, First Bank of Bankland, Incorporated, open your Christmas club account today.
I better get rid of these crappy mortgage loans. They’re starting to stink up my office. Thankfully, the really smart guys in New York will buy them and perform their financial magic. I’ll call them right away.
Here’s a new mortgage file. Let’s see what the “smart guys” are doing.
RSG Investment Bank of Wall Street. Trust the really smart guys with all of your investment needs.
Phew! We’d better get rid of these crappy mortgage loans because they’re starting to stink up my office and attract flies.
Laura: But who would buy this crap, boss?
Jason Hartman: I’ve got it! First, we’ll create a new security instrument and use these crappy mortgages as collateral. We’ll call it a CDO or maybe a CMO. We’ll sell the CDO to investors and promise to pay them back as the mortgage loans are paid off.
Laura: But wait one second. Crap is crap, isn’t it? I don’t get it.
Jason Hartman: Oh, come on, sure. Individually, these are pretty crappy loans, but we’ll pool them together and only some of them will go bad, certainly not all of them at the same time. And since housing prices will always go up, we really have very little to worry about.
Laura: Are you feeling okay? I still don’t get it.
Jason Hartman: The new CDO will work like this. It will be made up of three pieces or tranches, and we’ll call them the “Good,” the “Not So Good,” and the “Ugly.” If some of the mortgages fail, and surely, some might, we’ll promise to pay the investors holding the “Good” tranche first. We’ll pay the “Not So Good” investors second and the “Ugly” investors last.
Laura: Oh, I’m starting to get it. And because the “Good” investors have the least risk, we’ll pay them a lower interest rate than the other guys, right? The “Not So Good’s” will get a better interest rate and the “Ugly” guys will get the nice fat interest rate.
Jason Hartman: Exactly. But wait. It gets even better. We’ll buy bond insurance for the “Good” piece. If we do that, the rating agencies will give us a really great rating in the Triple A or A range. They will likely give the “Not So Good” piece a Triple B or B rating. Still pretty good. We won’t even bother asking them to rate the “Ugly” piece.
Laura: So you’ve managed to create a Triple A and Triple B security out of a pile of stinky, risky mortgage loans. Boss, you’re a genius!
Jason Hartman: Yes, I know.
Laura: Okay, now who are we going to sell the three pieces to?
Jason Hartman: Well, these folks at the SEC won’t let us sell the stuff to widows and orphans, so we’ll sell them to the sophisticated institutional clients on Wall Street.
Laura: Like who?
Jason Hartman: Well, like insurance companies, banks, small towns in Norway, school boards in Kansas, or anyone who’s looking for a high quality, safe investment. Yeah, right.
Laura: But surely, nobody would buy the “Ugly” piece, would they?
Jason Hartman: Of course, not. Nobody’s that stupid. But we’ll keep that piece and pay ourselves a handsome interest rate.
Laura: This is all great, but since we are only using the smelly mortgages as collateral on an entirely new security, we haven’t really gotten rid of them. Don’t we have to show them on our balance sheets?
Jason Hartman: No. Didn’t you study Enron’s accounting? No, of course, not. The guys who write the accounting rules for us set up a shell company in the Cayman Islands to take ownership of the mortgages. The crap goes on their balance sheet, not ours. The fancy name for it is a “Special Purpose Vehicle” or SPV. It’s exactly the same vehicle Enron used in their accounting.
Laura: That’s great. But why would they let us do that? Aren’t we just moving our own crap around?
Jason Hartman: Sure, but we have convinced them that if it is vitally important to the health of the U.S. financial system that investors not know about these transactions and what’s behind them.
Let’s drop in to see the accountants. Office of the Czar of Accounting. No nit is too small to pick.
Laura: Sir, as an investor and a concerned citizen, I demand that you force our financial institutions to show greater transparency and openness in their financial reporting.
Jason Hartman: Buzz off! It’s none of your business. Gee, we never saw it coming.
At Norwegian Village Pension Fund:
Laura: Hey, man, what is up? We’re not receiving our monthly payments.
Jason Hartman: RSG Investment Bank: Yeah, I meant to call you, but it’s been really crazy around here. We’re doing lots of business. It seems that the flakes who took out the mortgages back in the CDO aren’t really able to pay them.
Laura: Wait a minute. We bought the Triple A “Good” piece of the CDO. You know! The safe one. We’re supposed to be getting paid first.
Jason Hartman: Well, unfortunately, the loans were quite a bit crappier than we originally thought and there’s very little cash coming in. Frankly, I assure you that we are disappointed as you are.
Laura: But you told me that the housing prices always go up and that the borrowers could always refinance their mortgages.
Jason Hartman: Yeah, you know, that was a stupid assumption. We screwed up. Sorry.
Laura: Bad assumption, my frigid Norwegian butt! What about the Triple A rating from the agencies?
Jason Hartman: Well, they messed up, too.
Laura: But this security was insured. What about the insurers?
Jason Hartman: Are you kidding? There’s no way they have enough money to set aside to cover this mess. They screwed up, too.
Laura: Well, that’s just great. What am I supposed to tell my villagers?
Jason Hartman: Tell them that you messed up.
Laura: Screw you.
Jason Hartman: No, screw you. Then end.
Well, everybody, there’s an example of passing the buck and how ridiculous this whole mortgage meltdown is. We had to kind of clean that up and ad lib a little bit for you, but it really does explain how everybody was not accountable in the system, you know. It doesn’t even go into some of the unaccountable parties, but it goes into the main ones. And you see how everybody was just trying to make money for themselves and pass the buck, meaning pass the risk, onto another party, and that is why we are in the mess we’re in today. So thank you, Laura, for sharing that little skit with everybody.
Laura: Thank you very much.
Jason Hartman: All right, I’m here with Gary to talk to us about our series entitled “The South Shall Rise Again; Causes and Effects of the National Migration to the Sunbelt.” And Gary, talk to us about it.
Gary: Hi, Jason. Thanks for having me back again, and this is a continuation. Last time, we talked about the South being at a net disadvantage to the North for about the first 200 years of the country’s history, culminating in the Civil War, which left the South devastated and the North as victors. And as with all wars, it takes about 20 years for a country to recover or a region to recover in our case and things started turning toward the South’s advantage in the early 1900s. And as we mentioned last time, the TVA brought electricity to the South. They eliminated malaria and air conditioning was invented.
Jason Hartman: TVA as you’ll recall is the Tennessee Valley Authority, just for the listeners.
Gary: That’s right. It was there primarily to bring electricity to the South, but there were a lot of side benefits to that, roads, the disease reduction, just the general improvement of infrastructure in the South.
What also happened at the time was, during the ’30s, in the North where all the factories were, factories were pretty tough environments back then. As somebody from Detroit, I have relatives that kind of lived through that history and people actually died on assembly lines. They used to use gasoline in the manufacture of cars and people actually were caught on fire in building cars. So a lot of death. And the unions, the union movement became very strong and one of the leaders, the founding leaders of the UAW, which is the United Auto Workers, Walter Ruther, there was what was called the Battle of the Overpass, where union workers and the Ford Motor Company security people, which at the time, were kind of thugs. This was kind of like the Bloods and the Crypts, called the Battle of the Overpass.
Jason Hartman: And for those who don’t know, I better explain that. Those are two rival gangs in the Los Angeles area and they may well have expanded now. I know these gangs are going all over the world. So that’s the Bloods and the Crypts. A little pop history there.
Gary: Right. And this was a very – the unions had a very violent beginning, along with the auto companies. So what happened in the ’30s, factories were tough. They did unionize. Unions clearly brought improvement to the workers’ lot in the 1930s, but what it also did is it hardened a worker’s attitude toward their company, and workers and companies became adversaries. And that exists as a problem to this day where most of the gains, virtually all of the gains of unions today have been codified in federal and state laws, like 20-minute breaks, pension plans. Many companies have health insurance. The EPA has taken over. Things are totally different than they were and again, somebody who worked in –
Jason Hartman: OSHA.
Gary: OSHA, sure. Someone who actually worked on the assembly line in the early 1970s, factories today are like spas to me compared and some people may think that’s a joke, but yeah, compared to what I worked in in the ’70s, which we considered to be very good plants. I walk in a factory today and it’s like – like I said, I may be in a health spa, right.
Jason Hartman: It’s clean; it’s nice, right?
Gary: But what’s happened, unfortunately, and again, still having relatives in Detroit, well, the whole world has changed as far as what it’s like to work in a factory and the benefits available. The attitude hasn’t changed and there’s still an adversarial attitude that the average union worker is the company’s out to screw me and companies have to deal with it.
Jason Hartman: And these companies are dying under this weight and the legacy cost that they have at these companies with these old union scenarios are just killing the companies. They can’t do it.
Gary: And just like the workers have voted with their feet, the companies have voted with their feet. So what happened, and it started in the 1960s – I worked for another company by the name of Magnatech. They still exist today and they made electrical equipment, motors, generators, electric lighting ballasts. And in the ’50s and ’60s, they started moving out of places like St. Louis, Indiana, Detroit, New Jersey, and started moving into the South. And most of our plants were in Tennessee and some in Mississippi for a couple of reasons. One, the work ethic was better. The pay was lower there and most importantly, those states all had what’s called Right to Work laws and again, please don’t call, but I’m going to give you the non-union guys’ impressions.
Jason Hartman: Gary, don’t worry. We haven’t given your phone number to anybody.
Gary: Yeah. But here’s the deal. What does Right to Work mean? Okay, what that means is if I want to go work for a company, and again, today, working for companies today is a whole different thing than in the ’30s – if I want to work for a company today and the state does not have Right to Work laws, the state and a good example is Michigan, I am forced to join the union, even if I don’t like the union. I think their management is corrupt. I think their pension plans are a bad deal. I am forced to join the union just for the privilege of working for that company.
Jason Hartman: So maybe a way to think of it is you don’t have a right to work at that company unless you join the union.
Gary: Yes. And what does that mean? Why is that so bad? Because the union has union dues, so I am forced to have money taken out of my check. This is really no different than having your wages garnished, okay? And you can listen to all the propaganda about how wonderful that is, but if you wanted to go work for General Motors, you would have no choice but to have the union garnish your wages for these purported benefits that most of which are all required by law anymore, okay.
A Right to Work state means I can go work for a company and I can choose to join the union or not join the union if there is a union. And what’s happened is, again, companies have voted with their feet. My old company, Magnatech moved a lot of their plants to the South, virtually, all of their plants to the South, in fact, in the ’50s and ’60s. If you’ll notice General Motors, for those of you – I’m an ex-General Motors employee – Saturn is a relatively new brand for General Motors. If you look at Buick, Olds, Pontiac, Chevrolet, they go back to the teens and the ’20s. Saturn was only formed I believe, in the late ’70s, early ’80s. Where did they locate that?
Jason Hartman: That early? I didn’t even notice them until late ’80s, I don’t think.
Gary: It may have been in that area. We could look it up. But it was in the ’80s, yeah.
Jason Hartman: Maybe even early ’90s. Yeah, right.
Gary: First new brand for General Motors in many years. Where did they locate the plant? Tennessee, just out of Nashville. So while GM still had the unions, what’s happened are companies like Toyota, Nissan, Honda, Mercedes, and BMW have all built plants in America. Hyundai, where the average wage of a Korean – Hyundai, by the way, is a Korean company and they manufacture cars and you would think, well, why wouldn’t you manufacture them in Korea? They found the American climate hospitable enough to build a plant in America, but they didn’t locate in the North. They located in the South.
Jason Hartman: And then a lot of our properties, our rental properties that we’re recommending for investors, are near these auto plants and in many of our markets, we have auto plants. So it’s really interesting because you look at a city like Detroit that you’re from, and I’ve heard you talk a lot about Detroit and I know people that invest there and I know other investor groups that actually recommend Detroit because it seems so cheap, and maybe I’d just like you to address that for a quick moment here. We don’t have much time left, but Detroit to me is still a falling city. It’s kind of like buying California real estate today, sort of the falling knife. Wait until it hits the ground. Out-migration, population problems, labor unions forcing employers out. Comments?
Gary: Sure. Regarding Detroit, I spent the first 30 years of my life there and using one of your comments, all real estate is local. You have to remember also that real estate, up to a point, is somewhat like a commodity, so as you’ve pointed out to me on many occasions, you really want to be in an area where there’s growth because real estate, the homes we buy, have to be built on land. And as I’ve said, since there is no undiscovered land, the more people that flock to an area, there’s a certain amount of real estate, which may or may not have houses on it. The more people want to live there, the more that area’s going to go up in value.
An interesting fact: Detroit’s population peaked in the 1950s at about 2.2 million people. The country, at the time, had maybe 150 million people. We’re about 300 million today. Detroit today has like 1.1, 1.2 million people. Detroit’s population has fallen by half. So while the country has almost doubled, the city has fallen by half. So anybody that would buy real estate in Detroit really needs to have their head examined. They’re just more available.
Jason Hartman: You wouldn’t believe, Gary, how many emails I get and phone calls I get from realtors and other groups that want to come in and talk to our investors and promote Detroit, and I just said I don’t care if the condo is only $23,000.00 in Detroit. It’s just not cheap enough. It’s going to be less expensive.
Gary: It’s just you’ve pointed out that the job market is bad there, the people in general that live there don’t understand that it’s like, look, the job market is bad because the tax rate is high, just a bad job climate, okay. And people have moved to the South, so where we want to look is we’ve already talked about the Right to Work, which is good. The infrastructure is great in the South and as we know, businesses follow better environment.
Jason Hartman: More favorable tax climate.
Gary: But jobs follow business and of course, home prices follow jobs and the last two things we want to touch on is now that there’s air conditioning, the South’s climate is quite nice. For people who don’t like the snow, there’s very few days and sometimes none. It can get fairly hot there, but in general, the climate in the South is much better than the North. There are some very beautiful rivers, streams, forests. It’s just a very nice place. Add that to the last thing we’re going to talk about and that’s the future.
The Tennessee Valley Authority brought electrification into the South and industries today, all industries today, need power. And if you look at California, New York, we pay $.25 a kilowatt-hour, and for those of you that don’t follow it, that’s a lot. Most of the Midwest is about $.08 a kilowatt. In other words, a kilowatt-hour. In other words, if you ran 100-watt light bulb for 10 hours, that’s one kilowatt hour.
Jason Hartman: Or a 1,000 watts for one hour.
Gary: That’s correct. Therefore, in California, that costs you about $.25. In most of the Midwest, that costs you about $.08. There’s some places in the South maybe as low as $.06 a kilowatt-hour. Think about if you use multiple megawatts like industry and that makes a very big difference. And Jason and I have talked about again, the Tennessee Valley Authority was one of the first places to bring us wide scale use of renewable energy, which was hydropower, and now it looks like they’re going to lead the United States in the future with one of our cleanest energy sources that has no greenhouse pollution, and that’s called nuclear power.
And while everybody else is boo-hooing and complaining about the energy source and basically not allowing us to drill anywhere, the South is going to go ahead and prepare for their financial future by allowing nuclear power, which will bring us relatively low-cost energy compared to coal, oil, and natural gas. And it’s essentially a non-polluting energy source. So you take the work ethic, the Right to Work, the climate and the environment, and a great energy and infrastructure. The South is really going to be where the job growth is and the job growth is going to bring people, which is going to bring demand for housing.
Jason Hartman: Yeah, I call it the new version, the modern version of the American Industrial Revolution, which is really going on in the South. It’s no longer in the Rust Belt. It’s in the Sun Belt.
Gary: Absolutely, and they’re preparing for that with all these points we’ve just made and it’s just a very nice place to live.
Jason Hartman: Yep, I agree, and it’s very affordable, has a lot of natural beauty, a lot of recreational opportunities, and you know the other thing, Gary, that you didn’t mention. It was interesting. I read an article in Business Week a couple of months ago. I think I was coming back from Europe and I was on the plane, and it was an article about Extreme Commuters, I think was the name. It’s people who live in and around DFW, Dallas-Fort Worth airport, and literally, commute via airplane to other points around the country and even in Canada, where their job is.
So think about this. A lot of my friends that live in Texas, for example, they love being in Dallas because they’ve got an airport with access all over the world. Houston has the same thing. And you have the perfect middle time zone. So you know you’re right in the middle of it. You can do business with the West Coast, the East Coast. It kind of drives me crazy when I’m getting to my business day and it’s 2:00 p.m. and gosh, it’s 2:01 p.m. I can’t talk to anybody on the East Coast anymore because they’re all closed, right. And so there are other benefits like that as well. Any thoughts on that?
Gary: Yeah, and my final comment here will be in relation to my first podcast, which was regarding China, the dramatic improvements in infrastructure, electricity, roads, and so on, if you appreciate what they’re doing, I happen to. But if you don’t want to live in China, the closest you’re going to get to that is in the Southeast in America.
Jason Hartman: And the corollary I have to that one is a very good point, Gary, is the way to invest in China’s growth is to buy the same commodities they’re consuming over there and put them here in a country where you actually have rights and your property can’t easily be taken away from you, except maybe by lawyers, but at least not by governments. We’ll talk about that another time.
Gary: Taken away is taken away, but I know what you’re saying.
Jason Hartman: I’d rather go up against a lawyer than a government, okay? So you’re really investing in China and India and global growth when you buy packaged commodities in the form of rental houses. Someone else pays for them. The bank finances them. The renter pays the bank. U.S. government gives you tax benefits, blah, blah, blah. You’ve all heard my spiel.
Gary: And while I agree with all that, the houses only go where the jobs are and the jobs only are where the industry is, and the industry only goes where they’re wanted and it’s made beneficial for them to operate. And my personal belief is that’s in the Southeast.
Jason Hartman: Good stuff, Gary. Thank you so much for talking with us again and sharing your thoughts, and we’ll have you back on a future show.
Gary: Great. Thank you very much, Jason.
Jason Hartman: Attention agents, brokers, and mortgage people. Do you know that we cooperate? Do you know that our network is an open system that you can refer clients and outsource your investor clients to us and receive passive income? It’s a really great opportunity. All you have to do is register your clients at www.jasonhartman.com and tell them to attend one of our live events, our live educational seminars.
Listen to our podcast, go to the website, and request our free CD at www.jasonhartman.com. And if they invest with us per the terms listed on the website, you will get a referral fee. We have lots of agents, brokers, and mortgage people that receive surprise referral fees that they weren’t even expecting. They get a check in the mail and they are just happily, happily surprised. It’s a nice extra supplement to your income. So be sure to take advantage of our broker cooperation. Agents are welcome. We cooperate with outside people and we’d love to help you with your investor clients.
I’m here with a previous guest, Randy, and we are excited today to announce a new joint venture, a new seminar that we are offering for pre-retirees and retirees, entitled, “Fatten Your Golden Goose.” Now, I kinda think we should call that the Platinum Goose, but we’re going to call it “Fatten Your Golden Goose – Real Estate Strategies for Seniors and Pre-retirees.” Randy, tell us more about this exciting new seminar.
Randy: Jason, thank you. Yeah, we’re very excited about this opportunity to talk to people that are about to retire. They’re in that area, maybe five or ten years at the most away from retirement, or they just entered retirement, and they’re looking at all of these opportunities, or I should say stresses, in their life of what to do in terms of making sure that they’re minimizing their taxes, that they have enough money to last their retirement. They’re looking at things like the IRAs and the 401ks that they put together over these years and they’re wondering what’s really the best way to plan and use that money effectively as they go into retirement.
So what better to do is utilize real estate strategies to help these people minimize the taxes, increase their safety and liquidity, and help them to increase their income that they’ll have when they get into retirement?
Jason Hartman: Excellent and this is on May 27. It’s a Tuesday evening here at our office in Costa Mesa and it’s from 5:30 – 9:00 p.m. What else can you tell us about this event?
Randy: Well, aside from the ideas that we just mentioned, I think a big thing that people need to understand is that 2010 is going to be a very special year. In that, it’s going to be an opportunity for people to convert their regular IRAs or 401ks into Roth IRAs. And you know the benefit of a Roth IRA is that the money can continue to grow income tax deferred. But now, because it’s in a Roth, you can pull that income tax-free. The challenge is how do you move it from your traditional IRA or your rollover IRA to the Roth IRA without paying a bunch of taxes, and we’re going to give the people that attend this seminar some strategies to help them potentially eliminate 100 percent of that tax.
Jason Hartman: And you know, Randy, that is a great strategy and folks listening, this is a big deal, a very unique strategy Randy has come up with and I think you’ll really like hearing more about it. So be sure to join us on May 27. We will look forward to seeing you there. Go to www.jasonhartman.com to get registered. Thanks, Randy.
I’m here with Nancy and wanted to talk to you about two of our fantastic markets. One is our tried and true market that we’ll talk about in a moment that is strengthening and has gotten better. And one is a newer market. Nancy, welcome.
Nancy: Thank you.
Jason Hartman: Tell us about Gulfport/Biloxi area and Long Beach area. That’s Long Beach, Mississippi, not California. We were there a few weeks ago. What’s the scoop?
Nancy: Yeah, we had a great trip. Jason always talks about out of a disaster comes an opportunity and I really believe that’s what’s happening in Biloxi. The economy there via the casinos and the major boom on the ocean, they are now allowed to build on land. Biloxi is now the third largest gaming revenue area in the country, behind Atlantic City and Las Vegas.
Jason Hartman: So what you’re saying is that before, the casinos had to be built on barges.
Nancy: That’s right.
Jason Hartman: And when Katrina came along and wiped them out, the city said, hey, let’s let them build on land. Let’s change the law. And that made the casinos so much more substantial. They’re huge now. They’re like 50 – 60 percent the size of a big glamorous Vegas casino.
Nancy: Right and there are 11 casinos currently up and running and they’re employing about 17,000 people. That’s about 2,000 more than all the casinos that were open pre-Katrina.
Jason Hartman: Tell us some of the big corporate names in the gaming business who are in Biloxi. I mean it’s amazing.
Nancy: Yeah, Harrah’s is there right now with the Grand Casino in Biloxi and they’re also building a $700 million resort with Jimmy Buffet, the new Margaritaville Casino that will be open in 2010. MGM Mirage is there with the Beau Rivage, which is the sister casino to the Bellagio in Las Vegas.
Jason Hartman: These are all big corporate names and those casinos, we were there on that trip, and they are unbelievable how swanky and glamorous they are.
Nancy: The Hard Rock is there. Interesting tidbit about the Hard Rock: it was there before Katrina. The whole casino got destroyed. The guitar remained standing. It was the only thing on the beach that remained standing.
Jason Hartman: Long live rock and roll.
Nancy: And they are – they have rebuilt the Hard Rock and it’s just amazing inside there.
Jason Hartman: I mean that Hard Rock Casino is gigantic, five, six levels of parking outside. I remember going through that parking garage. It was packed. I mean it’s just huge inside. It’s amazing how much money they have dumped into this area.
Nancy: Right. They have actually inked about $1.3 billion in casino revenues last year. Prior to Katrina, the gaming revenues were about $800 million. So they’ve just almost doubled the revenues in just a couple years. They’re also, because of the casinos and the tourism, they do $100 million in golf each year. There’s 20 golf courses there. This industry is just spurring all kinds of job growth, not just from the casino workers, but also construction workers to build these places. There is a major military installation there with Keesler Air Force Base, the CB naval base, a couple Army and Navy National Guard installations and also the Stennis Space Center, which is NASA’s backup space shuttle installation. So there’s just a ton of activity there that we really think is going to make this one of our booming higher appreciation areas, and we’re very excited about that.
Jason Hartman: And a shortage of housing because we had to look around a lot for that, Nancy. That’s excellent. Tell us real quickly about one of our tried and true markets, the market where I own and the market where many, many of our clients have invested, and it’s actually improving in terms of the rental market being very, very strong. Stronger than before, and this has just been a real dependable market. What’s the name of it? Everybody’s wondering.
Nancy: This is Kansas City, Missouri, and Kansas City is the 13th largest metro in the U.S. The statistics in Kansas City are just excellent. This is a strong, stable rental market. We talk a lot about our rent-to-value ratios and it’s .7 percent being ideal. All of the properties that we have in Kansas City, we get at least a .8 percent RV ratio.
Jason Hartman: On my property, my four-plex in Kansas City, I’m getting about a .82 percent RV ratio, so it’s phenomenal. It’s just a great property.
Nancy: There are some positive cash flow opportunities in Kansas City, which we haven’t seen for a few years. So if you’re looking for a market with some positive cash each month and a .8 rent-to-value ratio, Kansas City is your market.
Jason Hartman: Excellent. Thank you, Nancy.
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 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.
Remember that Platinum Properties Investor Network has moved. We are in our beautiful new office in Costa Mesa, California, 555 Anton, Suite 150, in Costa Mesa, California, 92626, and we’re right by world-famous South Coast Plazas. So come in for a visit and a little shopping.
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.
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Duration: 54 minutes