Announcer: Please note disclaimers at end of show. Welcome to Creating Wealth with Jason Hartman. 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 the Creating Wealth Show. This is No. 148. I’m Jason Hartman. Thank you for joining me today. I am very busy today with the build-out of our new office, and we will announce and give you all of the details real soon. But we’re busy building out our new office and really excited about it. It looks like a very swanky place.
So today, I want to talk to you about the real world of investing. We’ve all heard that over the last year and a half or two years it is getting really, really difficult to get financing. And you know what? It is. It’s getting tough. No question about it. It was very, very difficult a while back as the banks were overcorrecting, as the financial crisis hit. And now it is maybe a little bit easier. There are some options out there. For a while, there was just nothing. There are some creative options nowadays, but it is difficult.
I want to have for you today, a show where Sara and I talk to two of the people that are very important in one of our markets, in the Atlanta market, where you’ll hear from, first, the lender, the mortgage person, about the real world of qualifying for these loans. It’s, again, rather challenging, but if you can qualify, you put yourself in a very, very special place because you are able to buy properties in a market where other people aren’t able to compete with you for buying. And again, it’s all about supply and demand, and if that lowers the demand, good for you as a buyer who can actually follow through on a transaction.
So we’ll talk about that here in a moment. A couple quick announcements: Join us for the Creating Wealth Bootcamp on February 20. Register at www.JasonHartman.com for that. And the Masters Weekend in early March, also register at www.JasonHartman.com. And our next show, we’re going to have a little Masters Weekend content sampler for you. I think you might like that.
And then our Show No. 150, we’ll have Dr. Denis Waitley, one of my big mentors and idols. Great guy; really did a great show.
If you are a foreign investor and you are outside of the United States – I know we have a lot of listeners in Europe, in Asia, in the Middle East, New Zealand, Australia, Canada. I guess I sort of covered most of the globe right there. But we do have a lot of foreign investors from many different markets all around the world, who have found it very, very challenging to get financing. And if you have about $50,000 with which to invest, we have some special opportunities that have opened up for you. So call one of our investment counselors, inquire at our website, and we’ll tell you about that.
But right now, let’s go to the interview. There are four people on this one, so it’s a bit busy, but you’re going to hear first all about the financing side of things. And this applies to many markets. Not just the one we’ll be talking about here. Then we’ll talk about some properties as well. Happy investing to you and here is the interview.
Interview on Atlanta
Jason Hartman: We have our team from Atlanta on the line here. We have Eric and Jim. How are you guys doing?
Eric and Jim: Great. We’re doing great. Thanks.
Jason Hartman: Good, and here in the office, we have Sara, one of our investment counselors you’ve heard on the show before. Hi Sara.
Sara: Hi, how are you?
Jason Hartman: Good. Okay, so the reason we wanted to get everybody on the show here all at one time is because we are having some frustrations and our clients are experiencing some frustrations from time to time on the lending side. We all know that in the last year and a half to two years, financing has become much more difficult. Of course, it was probably far too easy before, so this is now the hangover from that. But the fact that financing is difficult is the reason the opportunity to take advantage of some fantastic investments is here. You don’t get one without the other. When financing is easy, the deals aren’t as good. When financing is difficult, fewer people can get financing and the deals are better.
So if you’re willing to jump through the hoops and you want to make yourself a better deal, that’s the opportunity you have in this market. So I’d like to start with you, Jim, if I could because you are the mortgage expert, and talk a little bit about sort of the ideal client. And some people listening may realize that even though there are properties available that our clients can buy with $5,000 down, they can’t just necessarily have only $5,000 to their name, right? They need to have some reserves.
Jim: That’s correct.
Jason Hartman: So go ahead, Jim. Tell us all about it.
Jim: Sure, Jason. I’m happy to. On the one hand, if you listen to the news accounts, you think that nobody can get financed these days, which is certainly not the case. There is plenty of financing available, but like you said, there are more hoops to jump through.
Jason Hartman: Right. And you know what? Just to my earlier point about that, Jim, that kind of news media is really good for investors because that scares a lot of people away. They won’t even try. They’ll give up before they start, yet the people listening to this show they know better because they can hear how to get around the hoops and to get financing.
Jim: Oh, absolutely. Well, as far as the ideal client today, you’re right about the reserves. If you’re buying an investment property, no matter how you buy it, if you buy it outright with your 25 percent down payment or if you do the seller financing and then we do the permanent financing, the takeout loan, if you will, you do need to end up with a minimum of six months’ reserves. That’s six months of the full payment, PITI payment.
What I’m finding – and I’m a direct lender with Freddie Mac; that’s who the loan eventually ends up with when I do the financing. Freddie Mac says you can only have four financed properties total, which sounds like great. I’ll just pick up four right away. The problem is they also say if you haven’t owned the investment property for at least two years, we can’t count any rental income as offsetting those mortgage payments. So a lot of times, when you get to your third or fourth property, even though cash flow is good and everything is right, we can’t count it necessarily, so debt-to-income ratios come into play. Just keep that in mind.
But basically, what I’m seeing just flies right through and gets approved is someone with very little consumer debt, practically no revolving debt, maybe a car payment, a small car payment, something of that nature, but debt-to-income ratios under 45 percent, even with this new property.
Jason Hartman: Now, I just don’t want to take for granted the people understand the debt-to-income ratio, if we could, Jim. So debt-to-income ratio, otherwise known as DTI, explain that. If someone makes $5,000 a month, how much total debt can they have and how do you parse that up, or does it matter?
Jim: That’s a great question, and I do speak industry jargon too often sometimes, so thank you for catching that.
Jason Hartman: Well, you didn’t say DTI, so that’s better than most mortgage people. I gave them that one because I knew they were going to hear it somewhere else.
Jim: Well, Jason, debt-to-income ratio is essentially, first of all, calculated off of gross income, not the take-home pay, so pretax income is the base calculation. You count any debt that shows up on a credit report, revolving, student loans – revolving meaning credit cards with balances. If they’re paid off every month, we don’t worry about it – Student loans, car payments, house payments, mortgages, things like that.
Jason Hartman: Now is this the after purchase debt-to-income ratio? So for example, we have a person here, or maybe a couple – it could be one or two people, right – that make $5,000 a month before taxes. And that means at a 45 percent DTI or debt-to-income ratio, they could $2,250 of monthly debt, right?
Jason Hartman: And that’s after they buy the property?
Jim: That’s after they buy the property. You’re right.
Jason Hartman: Okay, now here’s where it gets a little tricky, though, and I want you to just help clarify this for our listeners, if you would, Jim, and I know you have a lot more to tell them. But here, they’re buying an investment property, not their own home, so say they have their own home and their mortgage payment is $1,500. Their income is $5,000, and then they have another $750 in car payments, a little bit of credit card debt, things like that, maybe a student loan. So now, they’re up to that $2,250 DTI, right?
But now they want to buy a rental property, and so, the rental property, when they buy it, say the total cost of owning that property is $1,000 a month and the projected rental income is $1,000 per month. Where does that leave us? Is this guy going to get a loan?
Jim: No, I’m afraid not. Under the old rules, yes, he would. The old rule said we could get the appraiser to see what the average rent on a home is like that in that area and we could count that as offsetting the mortgage payment. Those rules have changed, at least for Freddie Mac. And essentially, we just have to count the entire payment not offset by anything, and count that as the full debt that he’s taking on.
Freddie certainly has gotten a little more conservative in that regard, but nonetheless, especially couples, even folks with very little debt to begin with, generally speaking, don’t have a problem qualifying at least debt-to-income-wise. We can also go a little bit higher with offsetting compensating factors. We’ve gotten them approved with higher debt-to-income ratios, but normally, it’s with excellent credit and plenty of reserves, cash in the bank, that sort of thing.
Sara: And what is the minimum credit score that they need to have?
Jim: Excellent question. And that one is something that I’ve been talking to the folks at Freddie Mac a lot about quite a bit. On paper, in theory, a 680 credit score would be fine for buying an investment property. In practice, I have trouble getting that approved through Freddie. Freddie Mac, just like Fannie Mae, has an automated underwriting system. They’ll kind of make a call there, if you will. Ideally, a 700 credit score is what we’re looking for, and what I’m seeing gets approved more easily and more readily.
Same thing with owing their own home. For example, we’ve talked about this, Sara. It’s odd, but in some cases, I don’t get an approval if someone rents their primary residence and they’re going to buy an investment property. It’s perfectly doable on paper, but that generally takes over a 750 credit score to get approved and like I said, plenty of reserves, plenty of cash in the bank.
Jason Hartman: So a credit score, meaning their FICO score, now there are really three different credit bureaus and so three different agencies report the score, and I know a lot of times, borrowers have been frustrated because they say, well, my score is 700, but that’s not the only score that’s looked at. What are lenders doing nowadays, Jim? Are they averaging the three scores or are they taking just the mid-score and not averaging them all because they’re different at each credit reporting agency usually, right?
Jim: Yeah. Usually all three agencies are different. The information might be the same, but their credit scoring models, the way they calculate that score, may be different. And essentially, it’s very, very simple. We just take all three scores, throw out the top score, throw out the bottom score, and whatever falls in the middle, that’s what we count as your credit score.
Jason Hartman: So it’s kind of like the median score then, really.
Jim: Yeah, exactly. It falls right in the middle.
Jason Hartman: Okay, what else do you want people to know about getting financing? Who can buy this property? Kind of in that example and I know I’m using maybe a little bit lower of an example for the typical investor, but let’s just say they’re making $60,000 a year. What’s the sort of profile of a person who can get this? They own their own home, or maybe they don’t own their own home. They want to buy a rental property. What do they have? They have maybe a little bit of debt. How much can they have?
Jim: Basically, we’re looking for folks with a little bit of debt and that’s who’s getting approved. If someone has maxed out credit cards, for example, I’m not having good luck getting approvals on that because Freddie Mac, the whole automated underwriting system, basically takes risk levels and they consider that one risk level. That’s maxed out, so how are they going to manage this new debt, etc. Basically, the ideal borrower has some cash reserves in the bank, whether it be in a 401k, a retirement type of account, or savings or whatnot. That’s somewhat indifferent, but they just want to have – the six months is the minimum. Really, I’m finding you want to have a good buffer, $5,000 – $10,000 at least, probably $10,000 – $15,000 at least, that you could come up with if you needed to in a pinch, in an emergency.
Other than that, fairly low debt, some reserves, and you guys do a superb job helping the first and second time investor, who kind of wants a turnkey system. They don’t want to get their hands dirty and they certainly don’t want that call at midnight saying the toilet broke, come and fix it. And you guys do a superb job with that, so that’s I think the ideal type of investor, that just wants it for cash flow, wants it for eventual appreciation, and the tax benefits.
Sara: Hey, Jim, I have a question for you. You had mentioned early about people having maxed out credit cards not being able to get financing, which seems to be clear why, but I have to say that I have experienced lately pay down some of my debt and then the credit card companies come back and they lower the availability that they’ll give you, essentially maxing you out again, even though you’ve paid down the majority of your debt. Do you have any suggestions for borrowers or investors who are also experiencing that because that’s been a big frustration? It makes your credit score go down, right?
Jim: It does because suddenly that amount of available debt versus how much you owe looks like it’s maxed out or close to it again. Yeah, you’re right about available balances. I don’t really have a perfect solution for that right now. The same thing is happening with homeowners who pay down their home equity lines of credit. They might use that for cash flow purposes in a business or for whatever purpose, and as they pay that down, the banks come behind them and cut that line of credit down to whatever they owe on it currently. Same thing with credit cards is happening. I wish I had a perfect solution for that, but I’m afraid I don’t.
One thing they can do is call the credit card company and just explain and plead the case and see if they’ll raise the limit again.
Sara: So is it better to just not pay down the debt and just keep the cash in the bank? I mean what’s better, pay it down and have less debt, or keep the cash?
Jim: That’s the rock in a hard place, the real catch-22. You pay down the debt because you need to to qualify for the investment loan, and I will stress that’s simply on investment properties where I’m seeing that as a real risk factor. If someone has a maxed out credit card, but still is fine debt-to-income-wise buying their primary residence, it’s not such a factor. But yeah, that’s the real catch-22. What do you do there? And I would say just talk to your credit card company and kind of plead the case and explain what you’re doing.
Jason Hartman: Talk to us a moment, if you would, Jim, a lot of people in the glory days, or the days that really led us to the party days that led to the hangover when it was too easy to get financing – a lot of people would refinance their primary residence. They would pull cash out and they would purchase investment properties with that cash. And that was really a pretty good strategy as along as people didn’t over do it, get themselves into trouble with it and they kept reserves in the bank. I saw investors get into trouble occasionally because they would do that and then they either wouldn’t borrow enough – I know that sounds counterintuitive, but they would only borrow enough to buy the properties, and then if they had some vacancies, they couldn’t cover them. So they got into stress, and I’d say borrow more and then keep a reserve account. You have to have reserves. Not just for the lender’s sake, but for your own real life sake.
And I also saw people just overdo it and stretch themselves and have their life situations change and so forth from time to time. But is it even possible to pull cash out of your existing residence nowadays?
Jim: It is. In theory, it is, but it’s become a lot more restrictive. Basically, if you’re doing a conventional loan, you can go up to 80 percent of the value of your home, in its current value, of course.
Jason Hartman: Right, and that’s a good disclaimer, current value.
Jim: Right. You can go up to 80 percent. Ideally, you could go a little bit higher. I think conventional mortgages still in theory allow it to go higher, but you would need PMI, or mortgage insurance, and you can’t get it. So that’s the restriction there. On FHA financing, if you’re in an area where that would work for you, you can go to 85 percent loan-to-value on a cash-out refinance.
Jason Hartman: On a cash-out refinance. Okay. Talk to us, if you would, just about addressing kind of some of the frustrations that borrowers have. There was a big thing about seasoning, and Eric will maybe speak to this, too, in a moment, but we work with different rehabbers around the country that are rehabbing homes. They’re buying it at wholesale, selling it to our clients at wholesale as well, and doing the rehab. Our clients get a good deal. The rehabber makes a profit. Everybody wins. It’s just a great win-win deal.
But then, a couple of months ago, the lending rules just started to really put a kink in that whole system because they had this seasoning requirement. What is seasoning and what happened there?
Jim: Well, what happened there is a long story, which I’ll make relatively short, but you can read books on that. Seasoning is simply how long the current owner has been on title, how long they’ve owned the property. And for example, FHA, for the longest time, said you need to be on title current owner for at least 90 days before you even write a contract to sell the property. They just waived that, so I’ve been told. I haven’t seen the mortgagee letter myself.
Jason Hartman: Right. I got that news, too, but it only applies to FHA, not conventional bank loans.
Jim: Correct. And that’s where the banks are overlaying their own sort of overlays, their own guidelines over and above. At least Freddie Mac. Freddie Mac doesn’t actually have seasoning requirements. However, a lot of banks that sell to Freddie Mac will impose their own seasoning requirements, so it’s kind of a lender-by-lender judgment call at that point.
Jason Hartman: So when you say the seasoning is required, I think a lot of borrowers don’t – or it was required or sometimes it’s required now. I guess pardon me for the confusing statement there. But when it’s required, whom is the seasoning being applied to? Is it Eric, who is buying that property at a foreclosure sale and then wanting to resell it to our investor? Is that who has to season it?
Jason Hartman: But Eric buys it with cash or hard money financing.
Jim: Right, exactly. And it’s not the financing that needs seasoning. It’s simply Eric being on title that needs to be seasoned.
Jason Hartman: Even though he paid cash, it doesn’t matter.
Jim: Correct. Now, if the new buyer is coming in and paying cash for Eric’s property, then obviously, there’s no seasoning requirement because that’s a lender requirement. So it’s only if you’re getting a mortgage. Whoever is buying that property from Eric and is taking out a mortgage to purchase the property, then that lender is the one who says, “No, Eric has to have been on that property for 90 days.”
Jason Hartman: Now, why is it they’re so concerned about the time that Eric or any rehabber, for example, has owned the property? What’s the big deal? I think a lot of borrowers really get frustrated by this because they don’t understand what it is they’re trying to prevent. Are they just trying to slow the market down? Are they trying to prevent inflated fake appraisals? What’s going on there?
Jim: Yes. It’s the fake appraisals. It’s called a “flip” and a flip has a very negative term in the lending and real estate industries these days because during the height of the subprime days, it became all too easy for a few people to be in cahoots and come up with – you’ve heard the term “straw-buyer” – a buyer who didn’t really exist, get an inflated appraisal, have an attorney there kind of saying this is a cool deal. We can really inflate these values and pull some cash out and everybody’s happy. We all have cash in our pockets.
And that was a “that was then, this is now” type of thing. But underwriters are still nervous as can be about it, so they just want to slow it down, double check, breathe deep, and say okay, we know we have a solid value here. We know we’ve checked and double-checked the borrower and we know they’re good. And it’s really only on investment property you’ll see underwriters be just totally on top of this and kind of worried about it because investment property has always been considered more risky. If a borrower gets in trouble, they’re going to let that investment property go long before their primary residence, the roof over their head.
So that’s it. It’s more of a historical thing at this point. As far as I can see, I haven’t seen nor heard of that happening in the last many months. But it’s so fresh in everybody’s mind that they just say, “Look; I don’t even want to take the chance. We just slow it down, take our time, verify everything, and make sure we have a solid deal and solid value here.”
Jason Hartman: All right, any other frustrations that borrowers constantly get that you would like to address?
Jim: Yes. The over documentation these days. I don’t know how many people, self-employed folks, who had excellent credit, excellent cash flow, excellent everything could go stated income in the past. And stated income, I think, did have a role. It got abused certainly, but it had a very valid role, and they were used to just signing a few papers, give a bank statement, and the loan was closing the next week. Well, that’s not going to happen right now, not in this environment. So it’s basically, no matter how good your credit, no matter how great your credit history, you’re just going to have to buckle down and do an extreme full doc loan.
Jason Hartman: So funny because I used to talk in my seminars in, say, 2005, 2006, when I just knew this mortgage thing was going to blow up. Now, I didn’t quite know the whole financial system would blow up, but I knew banks would –
Jim: Banks and everyone were insolvent.
Jason Hartman: Yeah. I don’t think anybody but the crooks at Goldman Sachs and the Federal Reserve knew that. But I knew the mortgage thing was a fiasco because I was constantly poking fun of it in my seminars, and I was calling these stated income loans “liar’s loans.” And I tell you, Jim and Eric and Sara – well, Sara, you witnessed it, but Jim and Eric – I had mortgage people come up to me at the breaks and after my seminars and say that they were offended because I called them “liar’s loans.” And that’s exactly what they were. It was a perfectly accurate way to describe them.
Jim: They were. And that’s where no-ratio loans, meaning you don’t get any income, so there’s no debt-to-income calculated back in the day when they existed, were slightly higher rates, and I have borrowers come and say, “No, I’m telling you I make $100,000 as a cashier at Wal-Mart, and I’m stating it, so just take it,” because they wanted that quarter interest rate better. And I’d say there’s a no-ratio loan. Let’s just do that. But you’re right. They were. That’s what they were.
Jason Hartman: It’s unbelievable that was ever allowed to happen. Sara?
Sara: Do you want to, Jim, just give investors an idea of the timeframe from start to finish? I mean we have the seller finance portion with Eric, the rehabber, and then you immediately start the refinance into the 30-year fixed-rate mortgage. From start to finish, what’s the timeframe looking like?
Jim: It’s basically what we’ve done is we usually get a pre-approval, a full package and a pre-approval. Get the paystubs, the bank statements, etc, the tax returns if they’re self-employed, whatever we need to approve the loan, up front before they go into the seller financing with Eric. But then we just kind of sit on it and say we know we have a loan that we can do here. And they work with Eric, go through the whole process of inspections and anything they need, until the seller financing is closed. Then we pick that back up again and start our process, order the new appraisal, etc. And generally speaking, from the time the seller financing closes to the time our financing closes, it’s usually 30 days give or take. It’s right at a month later we’re closing.
Sara: Great. And so, Eric, do you want to just touch on the timeframe that it takes for the clients to close when they start with you?
Jason Hartman: Yeah, and maybe we want to switch gears here and talk to Eric completely here, and Jim, if you have anything to chime in on the financing part, we’d love to hear it. But can we do that now?
Sara: Yeah, sure.
Jason Hartman: Eric?
Jason Hartman: Okay, great. So first of all, I think a lot of listeners that have been listening thus far may not know what we’re talking about unless they heard the prior shows where we’re talking about rehabbers and seller financing. And they might be thinking, “What are you guys talking about? This doesn’t really make sense.” So we’ve kind of done this almost backwards, but let’s just set it up for them if we could.
We have relationships with several different rehabbers in different parts of the country. One of our best relationships is with Eric, who’s on the show now. And what they’re basically doing is they’re buying properties all different ways, but a lot of times, through foreclosure. They’re buying them very inexpensively. They’re properties that need some rehab. It’s usually just a little bit of rehab, but it may be a lot in some cases, too, and Eric, you can address that in a moment.
And what they’re doing is they’re basically selling them to our investor at a higher price than they paid, so that’s where they make their profit, but it’s still a price that’s usually maybe 20 – 25 percent below what that property will ultimately appraise for. By the way, is that the right number, Eric?
Eric: I’d say that’s spot on.
Jason Hartman: So our client is getting a great bargain on that property and they can do it as an armchair investor from anywhere on the planet, where Eric will provide through us a complete solution, so that they don’t have to go visit the property, they don’t have to manage any contractors, they don’t have to horse around with any of that. They can just be an investor, and that’s the way they want to do it. They want simplicity and they also want a great investment and a good deal.
So what they do is Eric turns out and he buys that property, either with his own financing or just with his own cash, and then he turns around and sells it to our investor – that’s you listening to the show right now – for a given price that is usually 20 – 25 percent below what that property will appraise for ultimately. And you basically do that where you finance it yourself. Our buyer only gives you – what — $5,000 to buy that property?
Eric: Correct. It’s $5,000 down and then we always tell them on the back end, you’re going to have closing costs for the refinance, so whatever the closing costs are going to be for that in addition. But on average, that’s probably $3,000.
Jason Hartman: So about $8,000 total, they’re into this property, and they’ve bought this property below market value. And then what they do – just the chronology here, the timeline – you buy the property on your own, you sell it to our investor at a slightly later date. You do seller financing for our investor. Our investor goes and talks with a mortgage person like Jim, who we just heard from, and they go ahead and qualify for the loan. Jim, or whoever the mortgage person is, sits on the loan application and doesn’t really do anything yet. And then you start to do the rehab on the property. How long does that take you, Eric, about two weeks, three weeks to fix it up usually?
Eric: On average, I’d say 3 – 5 weeks.
Jason Hartman: Three to five weeks, okay. And then, Jim starts processing that loan at some point, and then the appraiser comes through after the property has been rehabbed. Is that correct?
Eric: That is correct.
Jason Hartman: So then, in the appraiser’s eyes, that property is worth full market value. Now, the appraiser has appraised that property – and let’s use some numbers here. I’ll use some nice round numbers to make this example clear. Say, for example, you buy the property for $50,000. You sell it to our investor for $75,000. The property ultimately appraises for $100,000. So everybody here is getting a very nice deal. You’re getting a good deal because you can buy, rehab that property and sell it at a markup. That markup is still only $75,000, so it’s well below the market value of $100,000. Our client gets some built-in equity and they get it in a way that they don’t really have to do anything except just get a loan. Everybody wins.
The bank does not appraise the property for any more than it’s ultimately worth because the value has been improved. We’ve truly created a social benefit and an economic benefit at the same time because we’ve improved the value of a property, we’ve improved the social standard and the living standard of neighborhoods, and it’s just a good win-win deal all the way around. And the bank has not made a risky loan like they used to. They have not over-financed this property. They have 25 percent equity or 20 percent equity in this property at the time the final loan that Jim does closes, right?
Jason Hartman: Everybody wins. That’s what we call a win-win-win deal, right?
Eric: I think so.
Jason Hartman: Good. Well, do you want to talk anymore about how that process works and then about some specific opportunities you might have for clients?
Eric: All in all, I think you explained it very well. From our standpoint, we have a ton of great contacts out there and we know our particular area of expertise extremely well, so we’re able to identify and find outstanding properties in great areas. One thing we didn’t quite touch on yet I don’t think is that we also do the construction ourselves. We don’t outsource it, and we also have a property management in-house as well. So we are able to do everything from start to finish and it’s all in-house. If there are any issues, you know we’ll certainly own up to any problems there might be or anything like that. It’s just an easier process for us to be aware of everything that’s going on.
Sara: Now, Eric, do you give out any warranty on your rehab work or do you recommend that the clients purchase through a warranty program?
Eric: We give a warranty on any specific work that we do for a year, so if we replace the plumbing in the kitchen, for example, we’ll warrantee that work that we’ve done and we’ll fix it free of charge for a one-year timeframe. They’re welcome to purchase a home warranty, if they’d like, for bigger things. For example, if a furnace is 3 years old, typically we’re not going to replace something that’s 3 years old if it’s functioning well when we’re renovating the property. But if something were to happen to that, a home warranty would cover that, so they could do that in that instance. But for the most part, we haven’t had an issue with that.
Jason Hartman: And how old are the properties?
Eric: They range anywhere from the 1970 range up until usually 2000 – 2001 is as late as we get. I’d say most of them are in the ‘80s, but it kind of just depends on the various areas that we’re in. But 1970 – 2000 would be a pretty good range for what we’re doing.
Jason Hartman: And why should a client do this type of deal?
Eric: I think ultimately it’s a way to diversify your portfolio. If you are on the stock market, for example, and are interested in getting an opportunity where you’ve got positive cash flow and you’re involved in a great market, then this is a great way to kind of diversify yourself from stock market risks or whatever investment opportunity you may be in. And the buyer literally has to do nothing except gather loan documentation. We feel like for a hands-off process and a great market, it’s a pretty awesome opportunity.
Jason Hartman: Tell us about the properties real quick and then tell us about getting a tenant and about management real quickly, if you would.
Eric: Yeah, sure. The properties, generally speaking, are to be three-bedroom and four-bedroom homes. They range anywhere from brick to siding to – I guess we’ve never really had stucco, but there are some stucco homes here in the Atlanta area. You’re looking at a pretty decent size plot of land compared to where most of your clients are from in California. A quarter acre to a half acre is typically what you’re looking at. And then we actually have trees here on the East Coast, so I know some people get a little nervous if they see a tree in the yard. Don’t worry. You’re not in rural America. You’re right near the city. It’s just we have a ton of trees here in Atlanta.
The homes that we’re buying are in areas that we feel are great rental markets and areas that we feel have long-term potential to appreciate. And the property management company, basically we’re managing about 100 properties right now, and we do everything from start to finish as far as finding the tenants and anything along those lines. We have a pretty rigorous screening process the tenants have to go through. It’s a company called National Tenant, which is where the application is screened. And from that standpoint, we actually waive the tenant procurement for the buyer.
Jason Hartman: I believe I actually had the head of National Tenant on my show before. I had one of those big tenant-screening agencies on a prior show, but I can’t remember right now.
Eric: They do a good job. They do a really good job for us and help us out a lot. We call up the employers. We check tax records to validate if they’re renting at a current house that the owner that they say is really the owner, so we’ll look at tax records for that. We feel like we do a very thorough background search. For your clients, by the way, you do get two months guaranteed rent on the properties, as well as waiving the tenant procurement fee, which is usually a one-month fee.
Jason Hartman: Okay, good. So our clients get kind of a special offer due to our relationship. That’s good to know. What else should people know just in wrapping this up?
Sara: Can I chime in here for one second, Jason? And this is kind of a question for you, Jason. Earlier today, Eric and I had talked about Section 8 and I know some people love Section 8 and some people are a little bit turned off by it. What are your thoughts on that? I kind of think it seems like a good deal.
Jason Hartman: Yeah, there are some great things about it. First of all, what is Section 8, for those of you who might be wondering? Section 8 is a government program that offers rental assistance, and I believe the way it works is they will either pay the full rent for the renter, or they will pay part of the rent for the renter. And my mother has extensive experience in Section 8 rental properties that she owned over the years, and oddly enough, she got very wealthy renting properties to Section 8 tenants. But she always liked to complain about it, too. In some ways, she loved it because the government pays on time every single month. They’re very good. And she used to always joke that she got a little postcard in the mail every year with a checkbox on it, and it said, “Do you want a rent increase?” And she would check yes and the government would pay a higher rent.
And the thing with Section 8 is the properties need to pass an inspection, and the inspection is not anything onerous, but my mom just didn’t like the government telling her what to do, like put screens on the windows or basic stuff that should be done anyway. And I’m not saying Mom was a slumlord or anything. She certainly wasn’t, but she just didn’t like the sort of philosophical angle of the government bugging her.
But she loved taking their money, so they always paid on time and they’re very good tenants. And the thing that you find, and some people are turned off by these Section 8’s, but some people love it. Here’s one of the great things about it and by no means a Section 8 expert, but I’m just sharing with you some of the stuff I know about it. The thing is that the tenants tend to stay much longer. In fact, from a philosophical angle, I’ll say that I hate the welfare state because it creates dependency. It actually turns people into less motivated people, making them dependent on the government. And Section 8 probably does that, but that kind of benefits the investor because there’s not as much tenant turnover usually in Section 8 properties. They’ll just kind of hang out there for several years at a time. Section 8 tenants will stay a long time.
The other thing is there’s a huge leverage over that tenant because if that tenant is a bad apple and they do things bad, they violate covenants of the lease, they mess up the property, if they are kicked out of the Section 8 program, they’re kicked out for life. And they know that. So they tend to make a pretty good tenant, believe it or not.
And I will say a lot of investors have this perception, “I don’t want to rent to Section 8 tenants.” They’ll say, “I don’t want to deal with that low end of society,” and have this sort of snobby attitude about it. But it actually can be a very, very good thing. So investors listening, don’t be scared of this Section 8 stuff. It can be great. I’m not sure, Sara, why you asked me that, if it had anything to do with Eric in particular, but Eric, what do you want to say about it, or Sara?
Eric: I was going to echo those sentiments. I also say that just because you have the potential to rent out to a Section 8 tenant doesn’t mean it’s a bad area. It’s a broad-based coverage, especially in Atlanta, that Section 8 covers. I know there was a client who was potentially interested and a little concerned about Section 8 in general just because the perception is they’re bad tenants.
Sara: Yeah, and I just brought it up because Eric and I literally just talked about this today on a specific deal.
Jason Hartman: It’s a good thing to mention anyway. It’s not really what this call is about or what these investments are about. Many properties in many areas of the country qualify for Section 8 rentals. That’s all over the place. It’s not just in this area or anything. But it’s good you brought that up because I think a lot of people have questions about that.
All right, Eric, anything else? Jim, anything else?
Eric: I think that about wraps it up for me. If anybody has any questions, obviously I’m always available, so more than happy to talk to anybody.
Jason Hartman: And any of our investment counselors can put our clients in touch with you directly, and also, Jim, you directly. Jim, on the financing angle, anything you want people to know?
Jim: No, I think that was a great call, Jason. Hopefully, listeners get a lot out of it.
Jason Hartman: Good. Sara?
Sara: I just wanted to mention these properties kind of come and go. We get a handful of properties. They usually go within a couple of weeks of us getting them. Last week, we had four and we’re down to two this week. So if you’d like more information, you can email us or contact us through the website on the properties that we have. And we have some really great before and after pictures for you guys on some of the deals we’ve already done.
Jason Hartman: Excellent. Well, thank you everybody for being on the call and thanks everyone for listening.
Jim: Thank you.
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Female Guest: Probably the most interesting thing I’ve learned so far is about the 1031 Exchanges. I thought that was an excellent presentation. It answered questions I didn’t really even know I had.
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End of Audio
Duration: 49 minutes