Jason reveals how you can actually profit from prudent borrowing. Then Jason and Ben, a local businessman and caterer, discuss inflation and rising food prices.
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:Good day and welcome to another edition of Creating Wealth. This is your host, Jason Hartman. Glad to have you here today. We’re going to talk about a couple of my very favorite subjects and for all of you regular listeners, I’m sure you know what my favorite subjects are. Well, of course, my favorite subject is creating wealth, but especially creating wealth and having all things on my side and all things on your side, doing it the right way, the conservative way, and the prudent way. It really works in real life and the way it has worked for tens of millions of people throughout America and many, many more around the world.
We are going to talk about inflation again, but not in the same way we’ve talked about it in the past. How would you like to get paid to borrow money? Yes, really and truly paid to borrow money. In fact, you can get paid more than 1 percent every year to borrow and I will show you a specific example on this show over the last 30 years – well, over a 30-year period actually where you can get paid to borrow money.
Now, this example comes from a friend of the show, who’s been on a couple times before, Dan Ammerman, who, by the way, has an excellent seminar coming up here in Newport Beach. It is at the end of the month, the end of June, I should say, here in Newport Beach, California, and we have information about that on our website in the blog section. And there’s a whole bunch of details about it. I’m really looking forward to his workshop myself.
And on a recent conference call, we talked about a calculation that really is quite interesting on getting paid to borrow and here’s what it doesn’t account for in Dan’s equation that makes it even better and better and better. It does not account for rental property benefits in terms of depreciation tax benefits and the big one it doesn’t account for is it doesn’t account for the issue you have when you get paid to borrow because the renter, the tenant, makes the payment for you. This is just an example of a typical homeowner, so this is someone who lived in their home, paid the payments, and over the years, basically got paid to borrow money.
Now, the other thing it doesn’t account for is the fact that inflation is much higher than the numbers quoted by the government and these numbers are just based on the government’s version or the government’s story of inflation. So we’ll get into that and we’ll also have an interview with our caterer, one of the caterers. We have two of them, but one of them that caters our events and our seminars, so if you ever come out or you have come out to one of our live events here in Costa Mesa, California, at our office, you will hear from the person who provides some excellent food for us. And he’s going to talk about how inflation has impacted his business and the prices of food and some real world examples that I think will be of interest to you.
But before we get into either of these things, let’s talk about some of the Ask Jason questions. Thank you so much for going and posting these questions on our website at www.jasonhartman.com in the Ask Jason section. So let’s first hear from Mark, and I believe Mark, by his area code, is from Memphis, Tennessee, although I’m not positive. It may be a cell phone number. So Mark, we appreciate your question and it is very applicable to me, actually, and it looks like it’s applicable to you as well.
You said, Jason, you’re big on borrowing as much money as possible to leverage your dollars and let inflation work for you or for your tenants and pay back your mortgages. I would like to know your thoughts on buying a car and the best way to use the money for that purchase for personal use. I know the car depreciates in value every year, so to me, getting a new car loan is kind of silly because you owe more money than the car is worth in a few years. Should I pay cash up front for the car or not?
Well, Mark, that’s a great question and you know what? I just was faced with that myself. I had a Range Rover and I tell you, that was not a great experience, by the way. If any of you are buying Land Rover products out there, they are very stylish, luxurious cars, but I don’t think they’re engineered that well, frankly. I had a lot of problems with mine. Anyway, I was glad to get rid of it. I traded it in and I got myself a brand new BMW. And when I did this, I decided to lease my BMW.
Now, I gotta tell you a big mistake I made. Unfortunately, experience is a great teacher, but it’s an expensive teacher. So what I did in my story, and I’ll kind of get around back to your question here, Mark, in just a moment, is I purchased my Range Rover and I purchased it because I could get this big tax credit because it was classified as an over 6,000 pound commercial vehicle and of course, a huge gas guzzler. Gas was a lot cheaper then. But gas was getting expensive and I did the math and I don’t drive that much, and based on the discount you get on these gas guzzling cars, it was actually a better deal to buy a gas guzzling car because they were really inexpensive and they were making a lot of deals on them at the time, and the deals are even getting better now.
But what I didn’t realize when buying over leasing, because I usually lease my cars, is that when you buy, you take 100 percent of the depreciation risk and during the time I owned that clunky Range Rover that broke a lot, but was a very stylish car, it depreciated a whole bunch on me. It was really pretty severe actually. And when you lease, you allocate this depreciation to the leasing company where you lease the car.
So I go to trade it in, it’s worth much less, much, much, much less than any normal car would be, and because I was the owner rather than the lessee, I took all of the depreciation risk. So then the next question I was faced with is here I’m leasing the new BMW. Do I want to just pay for the big, huge – and huge, let me tell you, deficit on that Range Rover – and just write a check for it, or do I want to try and bury that depreciation or as much as the dealer would let me into the new lease on the BMW.
Well, I chose to bury the maximum amount into the lease on the BMW because the effective interest rate on my lease – now, car leases go by what they call a money-factor rate rather than an interest rate, but it works out to be the same thing, you’re paying to borrow money, of course, and there are websites you can find on the internet that will calculate what the money-factor rate is equivalent to in an interest rate. Turns out on the BMW, it was equivalent to about 5.9 percent.
Now, I know that I can do a lot better on my money investing it at 5.9 percent, so I buried as much as possible of that Range Rover depreciation into the BMW’s new lease and took a very high payment on the BMW at 5.9 percent approximately interest rate. And that was a good deal for me because through the time value of money, I, first of all, believe that inflation is much higher than 5.9 percent, No. 1, so there I’m getting paid to borrow money and that’s really the subject of today’s show. We’ll get into that as time goes on here. But No. 2, I can invest that money in rental properties and I’m pretty darned confident that I can make 30 percent every single year, pretty prudently and pretty conservatively, on an average. Now, I may not make that the first year I own the property, but I will make that over time, I think.
So I feel that it’s a good deal to finance your automobiles, especially if you can take, like I can in my business, a business write-off on them. That makes it even more attractive. I do not want to pay cash for cars. I know they’re depreciating assets and we will end up owing more than it is worth, but that’s why we lease because we can just turn it back in at the end of the lease.
And then the next issue is you pay an extra mileage fee on the lease if you go over the miles, but you know what? It’s a little bit of a premium, but if you own the car and you put more miles on it, it depreciates more in value, so it’s worth less at the end of it when you sell the car anyway.
Okay, so thank you very much for that question, Mark. I appreciate it. I hope I answered it for you. David from Tennessee asked the next question. He said, “Why is Tennessee not on your list of states where you sell properties? I live outside of Nashville and believe middle and east Tennessee meets most of your criteria. I have admired your work and the philosophy of your company. If you ever decide to franchise into Tennessee, I would be very interested in getting involved. Keep up the fine work. Respectively, David.”
David, thank you so much for the nice words. First of all, Tennessee is pretty good and we do like Tennessee as an investment. We have not really opened that area. There are other areas around the country that we like. We have done a little bit of business in Knoxville and also in Memphis and those just aren’t big markets for us. But most of them are pretty darned good. I have no objection to Tennessee. Most of our activity right now is in Go Zone oriented markets and of course, many of those Go Zone areas end at the end of this year, and that’s just where our focus is. It’s where most of our investors want to be right now and we have many other good markets around the country, but by no means is every market we’re in the only market in which to invest.
I definitely know where you should stay away from and I’ve mentioned those on many shows. That’s a dynamic, fluid thing as well, so we will probably be in Tennessee real soon, and if you are interested in a franchise, we’re just getting our franchise reapproved right now and it’s pretty easy to be approved in Tennessee. So you know what, David? Why don’t you give us a call and we’ll talk about that and talk about some possibilities for the future? Thank you for the question.
Okay, Gary asked the next question. Gary says, “I currently have the opportunity to borrow against my 401k at 6 percent fixed for ten years. I have about $40,000.00. Does it make sense to borrow this money and reinvest it in rental properties? My wife and I make under $150,000.00 adjusted gross income.” Why you’re saying that, I’m sure, is because that does entitle you to some of the depreciation tax benefits under $150,000.00 AGI. We’ve had several experts talk on taxation and you can go back and listen to those podcasts for more detail. “I would have to pay the loan back in monthly installments from my paycheck. Thanks for your time.”
Well, you know, Gary, I think this is a really good opportunity for you. Forty thousand dollars could be much better deployed in rental properties than it can in a 401k or any sort of qualified plan and when you borrow, you’re really just borrowing from yourself and you’re paying yourself back anyway. So the interest isn’t real because you’re only paying it to yourself. So this seems like a very good deal and I would definitely recommend borrowing from your plan and buying income properties with it, sensible, prudent, conservative income properties in the markets we recommend. So contact us for that and I think that’s a great idea and it’s a really good question.
One more thing I want to say about qualified plans, 401ks, IRAs, etc, Wall Street has a huge multibillion dollar machine promoting the concept of putting money into these plans, and at first glance, I thought many years ago when I opened my plan, I was about 20 years old, I did it real early, I thought this was a really good idea to just sock money away into a qualified plan because what it allowed you to do is put in pretax dollars and let them grow and compound in various investments on a tax-deferred basis.
But here’s the problem. Investments inside of your plan usually aren’t that good. You can invest on Wall Street and I think that’s a pretty mediocre deal at best. You can buy mutual funds. You can invest in notes and trust deeds. I believe you can even buy tax lien certificates inside a plan. You can buy rental properties inside a plan. But unfortunately, the terms at which you can buy the rental properties inside a plan aren’t that good. It’s not as good as you can do outside of a plan. So I really don’t think these plans are a very good deal.
And the other thing that the Wall Street people and the financial services firms, like the Merrill Lynches of the world and the Ameriprises and all the rest, won’t tell you is that, of course, these dollars are progressively devalued through inflation and when you take them out and you start taking distributions – I believe you can do this at 59 ½ years old – you have to pay taxes at that time.
So I ask you the question. Do you think taxes will be higher or lower in the future? Well, they’re probably going to be a lot higher than they are today, so I don’t think these plans are a very good deal at all. You can do a heck of a lot better buying rental properties. Even though you’re investing post-tax dollars in the properties, you get all of the other benefits, tax benefits, most tax-favored asset in America, renters who pay the cost of borrowing, and then of course, you get paid to borrow through inflation. We’re going to talk about that in just a moment. And just a whole bunch of other benefits, so we’ve talked about that on prior shows. I won’t delve into it today.
But thank you for all the questions. Let’s get on with our show. Now, I am going to be going over a lot of numbers and I addressed this on a recent conference call that we have, so we just cut out this little portion of the conference call where I explain the concept that Dan Ammerman explains about getting paid to borrow money. And there is a chart where it goes over this in detail and if you want to refer to it, just go to www.jasonhartman.com, click on Education, then click on Resources, and you’ll see this chart there. You can print it off and it is very, very enlightening.
So take advantage of that and listen to this. It is really, really cool how we can get paid to borrow money. It’s really true. So let’s listen in and then we will go to our caterer for our man-on-the-street story about inflation and we will look forward to talking with you in about a week on our next show. Let’s listen in.
Conference Call
Jason Hartman:As I see it now, we are really in the kind of market that is an incredible opportunity for people who are qualified. Unfortunately, a lot of people who were the less qualified borrowers have been sort of knocked out of this market, but that leaves an even greater opportunity for those qualified borrowers. And you know, all of us have looked at one time or another in our life a balance sheet and on one side of a balance sheet, we’ll have assets and the other side will have liabilities. And when it comes to financing, most people consider money that they owe to be a liability. They consider any mortgages, any debts, to be a liability.
And one of the things we really want to talk about on this call is the concept of actually being paid to borrow money and I also call this negative interest rates because as we will illustrate on this call, it is really incredible how much of an asset your ability to borrow is. So when you’re looking at your own financial life and you look at your liabilities, all of the money you owe, as in the traditional sense, they’re called liabilities, and you look at all of your assets, all of the things you own, and then you subtract liabilities from your assets and that number is your net worth.
But one of the things that I want you to add to the asset column is I want you to add your ability to borrow, your credit worthiness, your credit score, and your ability to borrow. And I want to talk about getting paid to borrow money. So if any of you are at your computers now, please connect to the internet and I want to show you something visually, and if you don’t have it up handy visually, you can either refer to it later or you can just listen along. I’ll try to make it as clear as possible for those who don’t have the internet right at their disposal now. Just go to www.jasonhartman.com, and once you’re at the jasonhartman.com website, click on Education on the Nav bar and then Resources below that, and right at the upper left of that page, it says “For Conference Call Listeners.” And then you’ll see a link to something called “30 Years of Inflation,” which is a .pdf file. Please open that file and follow along with me.
Now, this is really an amazing thing, this “30 Years of Inflation” .pdf file. This was put out by a gentleman named Dan Ammerman, who I have interviewed on my podcast two separate times and you can go back and listen to those at your convenience at www.jasonhartman.com. But we did not cover this subject specifically.
Now, what this shows you is how you can actually get paid to borrow money and how when you borrow, you might be thinking that you’re paying an interest rate, but you’re really not. So that may sound like a pretty extraordinary claim, but let’s just take a look at this and let’s look at this period from 1972 on up to 2001. What we want to talk about here is how a dollar is not worth a dollar as you go into the future. So you see here, if you’re looking at the chart, in 1972, the government quoted inflation at 3.2 percent annually. And in 1972, if you had $1.00, that was dollar was worth a dollar that year.
But then the next year, because of inflation diminishing the purchasing power of that dollar, it became worth a little bit less the following year and over the subsequent years, as we got later into the ’70s, we really saw rampant, rampant inflation that really detracted from the value of those dollars. And over the course of time, on up to 2001, think about it. If you got a 30-year fixed-rate mortgage in 1972, which you could have done and maybe some of you did do and you were made wealthy by this because you really were getting paid to borrow money, as we’ll illustrate.
So that dollar from 1972 on up to 2001, that dollar was only worth $.24. So that dollar today is worth a lot less than it was then, so if you follow up on to 2008, it even gets worse than that. But for purposes of this example, we just want to take what would be a 30-year mortgage timeframe.
So let’s look at this. This person who borrowed money on a mortgage in 1972 had a mortgage payment of $101.00, you’ll see in Column 7, annual payments in Column 6, that are adjusted for inflation of $1211.00. Now, you’ll see how the next year, this annualized payment actually gets lower, but it really – it does and it doesn’t because this person got a fixed-rate loan. So their mortgage payments did not change. They just became reduced through the beneficial effects of inflation over time.
And if you follow this, let’s just pull out a couple of years here. We won’t go through the whole chart. That would be too tedious. But if we look up to 1975, for example, the inflation in 1974 was very high. It was 11 percent and a dollar, by 1975, was only worth $.78. That same dollar became worth less and less money. And the payments were the same in Column 5. Every single year, this person paid $1,211.00 in mortgage payments. But if you see in Column 6, as those payments are adjusted for inflation, they actually decline in value.
So I’m sure you’ve had this happen in your perception of borrowing. I remember when my mother bought her first house in 1976 and she was very, very stressed at the high mortgage payment of $416.00. But over time – and she still owns that property; she rented that property out for several decades and made a lot of money renting the property out – and over time, that mortgage payment of $416.00 felt like nothing. Nowadays, people have car payments that are easily double that amount, right? And that was for a nice house in West Los Angeles.
So the value of those payments, as your income is higher and the value of a dollar declines, the value of those payments actually goes down. This is one time we really, really like to see inflation because not only do the payments get reduced in value, so we’re paying in cheaper future dollars, but also, the balance of the loan is reduced by inflation, too.
Now, we all know that as we have an amortized fixed-rate loan, every month we’re paying, part of the payment goes toward principle. Well, a little bit goes toward principle and most of it goes toward interest, right? So the principle payment is very, very low, so we’re barely paying down our mortgage and if we have an interest-only loan, for example, for the first ten years, we’re paying off no principle at all. But the value of that principle declines because the value of the dollar declines because inflation reduces the value of that loan.
So let’s just look forward here again and let’s look at 1984 on this chart. Now, if we go across and we look at all of the different numbers for 1984 – remember we started in 1972 and a dollar was worth a dollar, but by 1984, the value of a dollar was only $.40. And the payments, being a fixed-rate loan, were still $1,211.00 annually and $101.00 per month. But the inflation-adjusted amount of those payments because the value of the dollar declined was really only $487.00 in 1984, just 12 years later. And the inflation-adjusted payments every month were only $40.00 a month. Isn’t that nice?
And then you can take and you can look at Column 8 for the after-tax amount of payments. So let’s go forward now, all the way up to 2001. This is the year that the loan will be completely paid off 30 years later. So in 2001, we’ve seen inflation go over the years up to a high of 13.5 percent according to the government’s numbers in the Consumer Price Index and down to a low of, oh, probably 1.6 percent I think was the lowest year along this chart and that was in 1998.
But at the end of this period, we’re still writing a check every year for 12 different payments of $101.00 per month, $1,210.00 per year, but in 2001, when we paid the loan off, we’re making the last year of payments here, $1,210.00 annually to pay for a property seems like nothing, right? I mean it’s just a nominal amount of money. And the monthly payment, instead of being $101.00, when you adjust for inflation, is only $23.81. Really, really amazing how beneficial this is.
Inflation is paying off our loans for us. But then you might say, well, yes, Jason, I am being paid to borrow money because I understand that the value of the mortgage payments goes down with inflation and the value of the loan balance, which we haven’t even examined yet, also goes down with inflation. That is all true. But the question you might have is what about the payments? Don’t I have to pay interest rate payments along the way? Well, of course, you do. But if the inflation and the tax benefits exceed the interest you are paying, you are actually being paid to borrow money. This is a beautiful equation.
Now, that’s pretty darn good right there. If I could borrow money all day long at 7 percent and invest it at 7.1 percent, I would do that because that’s called arbitrage and that’s how many of the richest billionaires on Earth have made their billions, through what they call arbitrage, exploiting the differences in something. If I could invest just a little higher, ever so slightly higher, than I could borrow, that would be a very good deal. But what if we could make this equation even better?
We can because when we buy a rental property, rather than with our own home, we can turn around and we can have the tenant pay the mortgage for us. So if you look at this chart, for those of you who are looking at this .pdf file at jasonhartman.com, and you’ve clicked on Education, then Resources, and you opened up the little .pdf there, let’s look at the summary of what really happened here.
Over the course of this loan, you have paid $36,318.00 in payments and the original loan amount that you borrowed was $14, 614.00. That’s at the top of the sheet. So this was to buy an $18,000.00 house in 1972. Your interest rate on the mortgage was 7.37 percent and so you got an 80 percent loan at the time. Well, that would seem like a bad deal. You borrowed only $14,000.00, but you had to pay back $36,000.00. But upon closer inspection, we see in Column 6 the total of the annual inflation-adjusted payments is $16,393.00, rather than the payments we thought we paid, the amount of all the checks of $36, 318.00. Very good deal so far, but it gets even better than this.
See, in 1972 dollars, we paid the $36,000.00 for that loan amount because we had to pay so much interest on it, the loan amount of $14,614.00. But the real dollars we really repaid in inflation-adjusted terms was only $16, 393.00. I’m at the bottom of the sheet if you’re looking at this. And of course, any of you who don’t have internet access right now, you can just go and get this off our website at your convenience any time tonight. Just go to www.jasonhartman.com, Education, then Resources, and it’s right there for you.
So we see that the cost of borrowing there in inflation-adjusted dollars was about $2,000.00, about $2,300.00, right? But after taxes, we got a tax benefit here, we really only paid real dollars after tax benefits of $12, 655.00. Wow. That means we actually paid back less than we borrowed. We actually paid back less than we borrowed.
Now, it gets even better in two ways. Not one. I told you one already. One way it gets better is that we didn’t pay the interest. We put a tenant in the property and the tenant paid the interest. But it gets even better than that. You know why? Because the government’s numbers on inflation are underestimated. Inflation is far higher and if you want to listen to our podcast at the www.jasonhartman.com website, you can see all of the ways that we explain and prove that the inflation rate is much higher than the government would have us believe. So this is just based on the government’s numbers, so it’s really quite a bit better than this in many ways.
Our effective interest rate that we were quoted when we took out this loan in 1972 was 7.37 percent, 7.37 percent. But the effective interest rate in real dollars, inflation adjusted, before tax benefits was 1.06 percent, okay, because remember we paid about $2,300.00 over the course of 30 years in this example. Now it gets even better, though, because after tax benefits, the real dollars we paid, where it’s only $12,655.00, meaning our effective interest rate was negative, negative 1.16 percent. We got paid 1.16 percent to borrow this money for 30 years, assuming the government’s inflation numbers are correct, which they are understated, and No. 2, assuming we did not put a tenant in the property. So we were paying our own debts here.
Now, I don’t have a calculation for this, but just imagine how desirable this investment becomes when someone else pays the 7.37 percent interest rate for you and you get all of this benefit accruing to you as a property owner, and the property is appreciating historically at a rate of about 3 percent above the Consumer Price Index. For more information and back up material on that, it’s on our podcast. It’s one of the early ones. I believe it might be No. 6 or No. 7 at www.jasonhartman.com. You can listen to an interview of Dr. Christopher Cagen on that subject.
End of Conference Call
Jason Hartman:I’m here with Ben Lyons, who is our caterer for many of our seminars and events, and he owns a company called Saltwater Events and Catering and I wanted you to just get a perspective as to what is going on out there in terms of inflation because Ben is in the food business. And the food inflation and the transportation or energy costs, fuel costs, gasoline specifically here, is something that is impacting his business quite a bit. Ben, welcome. Thank you for coming in.
Ben Lyons: Yeah, it’s a pleasure. Glad to be here.
Jason Hartman:Good. Glad to have you on and we just wanted to hear a little bit about what is going on for the man on the street, the businessman out there, in terms of how inflation is affecting your business.
Ben Lyons: Well, we have a catering business, so it’s the price of food that is our main concern. In the last year, the price of eggs has gone from wholesale price approximately $.10 to $.20. It’s 100 percent increase in eggs.
Jason Hartman:That’s per egg.
Ben Lyons: Per egg.
Jason Hartman:So one egg has doubled in price in a year.
Ben Lyons: Doubled in price.
Jason Hartman:Wow. It’s no longer a good egg, huh? That’s an expensive egg.
Ben Lyons: It’s getting there, that’s for sure. And most dairy products have gone up somewhere between 50 percent and 100 percent. They say it’s because of transport costs and all that kind of stuff.
Jason Hartman:Transport costs and also the ethanol issue is impacting a bit because the farmers are converting their crops to some extent.
Ben Lyons: That’s correct. I think that’s a real boondoggle. It’s probably the least efficient way to –
Jason Hartman:To produce energy. It just doesn’t work, yeah.
Ben Lyons: Yeah, to challenge the price of fuel, that’s crazy.
Jason Hartman:All of these environmental things out there, everybody gets on these big, excited trips about it, and then you see all the law of unintended consequences. It’s making people starve around the world, frankly.
Ben Lyons: Right. I mean there are some environmental things that this bio-diesel thing has potential, but they have to look at it carefully so that the price of food worldwide doesn’t increase anymore than it already is.
Jason Hartman:Yeah, you have to look at the whole equation, the whole ecosystem of the problem, rather than just attacking one symptom. But back really to your business, Ben, so you’re seeing the price of eggs have doubled in a year. The price of pretty much every dairy product has gone up 50 to 100 percent in a year.
Ben Lyons: That’s correct.
Jason Hartman:Wow, that is something else. How about meat products? How are they doing?
Ben Lyons: Actually, beef and pork have increased slightly. I’d say somewhere between 5 percent and 10 percent over the last year.
Jason Hartman:Okay, so that’s not as bad, but the government would have us believe inflation’s only about 4 percent, so everything is higher than that.
Ben Lyons: Right. The price of chicken has gone up a lot.
Jason Hartman:Now, how much has chicken gone up if you had to say?
Ben Lyons: We used to be able to buy chicken wholesale for $2.50 – $3.00 a pound. It’s $5.00 a pound.
Jason Hartman:In a year?
Ben Lyons: In a year.
Jason Hartman:So that’s almost double in a year.
Ben Lyons: And that’s directly related to the corn thing we were talking about earlier because that’s what they feed them on is 100 percent corn.
Jason Hartman:Yeah, so the corn’s gotten more expensive because it’s being used, diverted to ethanol production, so yeah. So what’s the reaction? In your business, are you in this very unenviable situation, which I know a lot of businesses are in right now, where they’re trying to pass off these inflated costs to their customers, which is okay if your cost goes up and you can pass it right along to the customer. That’s the same to you. It’s the same profit margin. But are you able to get the customers to accept the higher cost?
Ben Lyons: Well, it’s difficult because everybody’s being squeezed and so you try to raise your prices to cover your costs and the client is either looking to alternate sources of catering – a lot of them, we don’t do their catering anymore. They go to Costco and –
Jason Hartman:And they do it themselves to save money.
Ben Lyons: – to do it themselves to save money and so we’ve had to switch to businesses that are doing quite well. A lot of the tech businesses are still doing quite well.
Jason Hartman:Yeah, there are certain segments of the economy that are still booming actually.
Ben Lyons: And we’re trying to tap into those to offset the ones that we’re losing.
Jason Hartman:Yeah. Ben, any other comments you would have about what’s going on out there in terms of inflation, in terms of your business? Maybe you want to talk about the fuel costs, too, because you drive all this stuff around.
Ben Lyons: Well, I think the fuel cost is directly related to the value of the dollar. I mean in the last five or six years, the dollar’s gone – it’s half of the value it used to be. Nobody can afford to go to vacation in Europe anymore because it’s twice as expensive. And everybody buys oil on the international markets in dollars, so they charge double what they were before because the dollar’s worth –
Jason Hartman:To offset the weakness of the dollar.
Ben Lyons: Yeah, exactly. So it’s real. You go to the gas station now. A year ago, to fill our big diesel truck up would cost $60.00 to $70.00. It’s $150.00 today.
Jason Hartman:And that’s a direct cost right to you because you’re driving the food around to the events that you’re catering.
Ben Lyons: Exactly. It’s something that you probably didn’t even notice before with your fuel costs. It was just a small amount. But when it gets to $150.00 per tank and you’re filling up two or three vehicles once a week, that’s thousands of dollars a month now.
Jason Hartman:It’s a real expense, yeah.
Ben Lyons: Yeah.
Jason Hartman:Yeah, absolutely. You know it’s amazing to me, Ben, that people still occasionally, although not nearly as much as before, debate the subject of the real rate of inflation. The government tells us it’s around 4 percent. I think most people in their right mind now know that that is completely bogus. Any overall comments on that in closing?
Ben Lyons: Oh, I can’t believe they’re saying it’s only 4 percent.
Jason Hartman:What do you think the rate of inflation is in your life, in your business?
Ben Lyons: I think the overall rate of inflation is somewhere in the region of 15 percent.
Jason Hartman:Fifteen percent? See, I say 10 – 12 personally, but here’s the thing. Maybe some of our listeners want to notice is that the rate of inflation is different for everybody because everybody spends money a little differently. Of course, we all have some piece of things –
Ben Lyons: That’s correct.
Jason Hartman:– that we all buy. Inflation affects us the same there, but I might go buy electronics and you might buy more clothing. Those things are different in the way they’ve inflated.
Ben Lyons: Right. I think electronics have a much smaller inflation rate.
Jason Hartman:Because of technology.
Ben Lyons: Because of the technology. You can get a DVD player now for $30.00.
Jason Hartman:Right, right, whereas it used to be $1,500.00 when they first came out.
Ben Lyons: So that offsets other inflationary parts of the electronics business, but for real – the real cost of inflation are to do with commodities that you use every day and you use food every day, and you use fuel every day and housing every day. And we all know the price of housing went through the roof.
Jason Hartman:Food, clothing, and shelter, yeah.
Ben Lyons: Exactly.
Jason Hartman:So those, we love packaged commodities investing as I always say in my seminars because you’re buying all of those commodities that are the ingredients to these houses and they include a lot of energy costs. It takes a lot of energy to manufacture a house.
Ben Lyons: Yeah, it does.
Jason Hartman:And so that’s how we invest and then the debt goes down in value as the dollar depreciates. So it’s a pretty good equation, huh?
Ben Lyons: It is, exactly. And the price of energy’s gone up for us. Apart from gasoline, we use gas in the kitchen and electricity to cool down the building.
Jason Hartman:How significant is that part of it? I mean I never even used to pay attention to my utility bill and now I’m noticing my utilities on my house that I live in are – they’re getting kind of expensive. Everything’s just more expensive than it used to be for sure.
Ben Lyons: Well, on a personal level, I’ve seen my gas bill go from $20.00 – $25.00 a month to $85.00 a month.
Jason Hartman:Wow. Amazing. And in your business?
Ben Lyons: Commercially, we’re paying $600.00 – $700.00 a month for gas.
Jason Hartman:And what kind of facility are you talking about here? Put it in perspective for us. How many square feet?
Ben Lyons: It’s a 5,000 square foot facility with a couple of walk-ins, a couple of freezers, all of the equipment that you need to prepare your food.
Jason Hartman:How about electricity?
Ben Lyons: Electricity has gone up. It doesn’t seem to have gone up as much as gas. I don’t know why that is either.
Jason Hartman:Yeah, I think we need – I think what this country really needs is to follow the example of France, is nuclear power because it is the safest and cleanest and cheapest thing going, and it’s so sustainable. I don’t know if you agree with that, but that’s my opinion.
Ben Lyons: You know, I actually wrote a paper, a marketing paper, when I was at college about nuclear facilities and the risk factor compared to gas-fired electricity places.
Jason Hartman:Or coal, yeah.
Ben Lyons: Or coal. And coal produces so much more byproducts that are detrimental to the environment than radiation because the radiation is contained and it’s a controllable factor.
Jason Hartman:It really is and we’ve really only had one real nuclear accident in the world and that was over in Russia, well, Ukraine, in Chernobyl. Three Mile Island really wasn’t – nothing really happened out of it that was very significant.
Ben Lyons: Yeah, it was a warning.
Jason Hartman:It was a warning, yeah, and it’s good to have a warning. Keeps you more careful, right?
Ben Lyons: Keeps you on your toes.
Jason Hartman:Absolutely. Well, Ben Lyons, Saltwater Catering and Events, thank you so much for being with us. We appreciate you sharing your insights from a person who this is really affecting and it’s really affecting our listeners. But it’s good to hear it from some other people and some other perspectives. And we wish you the best. It’s a tough time out there.
Ben Lyons: Thanks for having me and I think things are going to get better.
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 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.
[End of Audio]
Duration: 51 minutes
