Introduction: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 has 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 is your host Jason Hartman with the complete solutions for real-estate investors.
Jason: This show will be two parts. The first part will talk about the recent Meet the Masters Event and in the second part, we’ll talk about Low Vacancy Rates with Military Tenants.
Welcome to the Creating Wealth Show, this is Episode #225 and I am your host Jason Hartman and I am here with two of our investment counselors, Ari and Sara, are you on with me? How are you?
Ari: I am great Jason.
Jason: Good, good. Well, I wanted to have Sara and Ari on just to debrief a little on our Meet the Masters event over the weekend. We had that at the Hyatt Regency in Irvine and it was just a phenomenal event and Sara what you said to me at the end, you kind of always say that to me every time we do a masters event, you always say, “It’s the best one yet,” and you said that again right?
Sara: I did, well we seem to be getting a better at this every time, the speakers were really great and it was just an overall great vibe.
Jason: Yes, I thought it was an awesome event, we had probably somewhere in the neighborhood of 65/70 people, and just such great crew of people. We started off Friday evening with just like a very social fund networking dinner, nothing educational then but just to help people get to know each other and one of the things that everybody commented on, that was so valuable for them was the networking at the event and how the real world experiences just sitting down across the table from some of our other customers, people that had owned property before they discovered us, just hearing the stories about all of that and each investor hearing the personal experiences from other investors and getting great ideas from them. One of my former tenants Daniel came and he is just a great guy and he has been listing to the podcast and I was able to get a hold of his notes and they are very complete. He took 45 pages of notes and Daniel was Ari’s client. Ari what are you observations from the event?
Ari: This is my fifth or sixth Masters weekend; I have attended to so it was definitely great every time I go I always learn something new. I think the best thing about the, ‘Meet the Masters’ weekends are that every time you come, there are similar topics but, the more that you keep listening to our contents and just educating yourselves, it does stick in your head and you actually start taking away more and more stuff.
So it was really good in, like you said Jason, many of the people really appreciated the fact that they were able to network with other people, learn from their experiences, whether they bought or hadn’t bought real estate and that was a huge thing so that was really great, and the other thing I would say real quick is that we had a big portion of our audience that actually have acquired real-estate. I don’t know if you agree with me like 70% of the audience had actually purchase real-estate.
Jason: Yes, I will, and not just purchased real-estate but a lot of real-estate, so some of the people, they were really experienced investors and some were, they were for the game, so we had a really nice mix. I thought and just thought it was an overall great event. Before we kind of reflect on some of the other elements of it, I just thought I maybe go over, and here I am looking at Dan notes and some of my own speech. and it’s just kind of interesting to see what someone else scribes when they were listening to you speak because of course it’s from a very different perspective, being the listener versus the speaker and just kind of go over a few of those little bullets points from Saturday morning, which was the opening keynote that I gave just sort of talking about some general factors in the environment, the financial environment, the economy right now.
But we talked about establishing a five year plan and how important that is for people to have a five year plan of where they want to be by 2016, you know I mentioned that the real unemployment rate when you include the discouraged workers under employment, it’s about 26 to 27 percent. I talked about the decline of the standard of living in America and how I think it’s going to decline a lot further and what this means when we talk about this kind of negative stuff because a lot of people say and I know Ari and Sara, your clients have said that to me and you have [unintelligible 04:45] that question back as, well with all these negative things going on, “Who is going to run my properties?”
Well the question is that’s not the right question, there will be a renter there, and it’s just that the same renter will have lived a much nicer lifestyle in the prior years for most people and I mean the vast majority of America and to some extent any advanced country around the world lifestyle is in decline. The standard of living is going down and people who are following our plan, I think can do a lot better and avoid this trap that most people will experience.
Sara: If I can chime in here, it’s funny because you know, like Ari, I’ve attended several of these events and I would say about a year ago, sitting in the event and you know after the weekend, I thought, gosh the world is coming to an end and I was almost scared by you know all the talk on inflation and all of this, and a year later, it’s a completely different feeling, it’s like you really did a good job at painting the big picture, and I left this weekend feeling like really blessed to know what I know today that there are so many people in this world that don’t have this information and just don’t get it and they are falling in terms of this trap that you are talking about, and you know, I think everybody left the weekend feeling refreshed and glad to know what we all know, so you know we thank you for that.
Jason: You are certainly welcome and my take on it is, look there are a lot of bad things. I am not going to be a Pollyanna and say that there is a bunch of good news and things like that, there is not, the news is bad but the point is, how can we exploit that bad news and make it in our favor and we definitely can do that in just comparing this event.
I think this was probably our 11th Meet the Masters event, I am sort of losing count from the one that we held back, 2006, I think was our first and we do it twice a year so there you go, whatever that number comes out to be, but it is amazing how easy it is to exploit all of these things that are going on and right now, I mean as one gauge of a barometer, just looking at our business and what’s going on in terms of our customers, and it is such an amazing attitude that people have out there.
I mean, you don’t need to talk anybody into investing in real-estate anymore. There is no salesmanship whatsoever going on. People want to do it, people see that there is blood in the streets and this is the time that the smart money moves in and locks in long term fixed rate mortgages and locks in properties and commodities, packaged commodities far below the cost of replacement, far below the cost of construction. One of the other things I talked about is how typically real-estate out performs inflation by a fairly small margin, nothing to write home about, in other words when you leverage the real-estate, say for example you put 20% down on a property that means you have a five to one leverage ratio.
So if the property appreciates at a nominal rate of only 3% which since 1968, the average has been about six or seven percent depending on which survey you are looking at but say it only appreciates at 3%, well you multiply that in a simplistic example by five because you are only putting 20% into the deal.
When you buy a mutual fund or a stock or a bond, you put 100% down, when you buy income property, you can buy it with only 20% and only one fifth of the amount required to buy virtually any other investment including a business for that matter. Now, occasionally you can do some financing on this stuff but nothing is practical and workable and desirable.
It’s only desirable when it comes to income property and so you automatically multiply any appreciation you have by five so that 3% appreciation which might just be keeping pace with inflation. Now increased by 500% or five times and its now 15%. So at 15%, you are outperforming inflation by 12% annually and that doesn’t include tax benefits, it doesn’t include positive cash flow and it doesn’t include really what we call regression to replacement cost because we are buying these properties so inexpensively nowadays aren’t we?
Sara: Yes, most certainly, one website that was pointed out to me that you know maybe helpful for some listeners is home-cost.com. I think it’s actually home-cost.com and you can actually, you know if you go to one of the tabs, you can type in the zip code of the property and in all of our performances, you can see the zip code and also what the cost per square foot is on the property. Well on this website, you can go in and type in the zip code and it will give you what the replacement cost is for that area or how much it would cost to rebuild a home in that area and so it just sort of telling you.
You know the other day, I looked at a property one of my investors was purchasing in Atlanta, it was 50 bucks a square foot, it was what they were paying and this website said it would cost $80.00 per square foot just to rebuild that same property in that area. So you know, I thought that was very telling.
Jason: You are sure its home-cost.com? Because I am there and this looks like a sort of site with, I don’t know a bunch of various stuff, really kind of on one of those advertising sites where there are just sort of linking together.
Sara: No, no it does look like that. I am going to go on there right now because it does look like that.
Jason: Which by the way, you know I have to throw in and Ari, I am sure you will agree with this. What just struck me more than any other events we’ve had this last weekend, was how much we learned from our own clients and I got to just pat all of us on the back because certainly, I have been to our competitors meetings okay, and I don’t go as a spy, I don’t wear a disguise, I go up and shake hands with the speaker and they know I am there and they know who I am and so far, nobody has asked me to leave, you know and, “Get out,” but our audience is so much more sophisticated than when you go to these other groups.
These other groups, it mostly just feels like these are the people that have been waiting for their ship to come in, they are dreamers and there is nothing wrong with being a dreamer of course. I was a dreamer at one time. Everybody starts out there but how much I learnt from our clients, our clients, this weekend brought a wealth of knowledge to us, whether it’s Dave or Pat or anybody else in the audience. I mean any other examples of it.
Sara: Yes, oh, I remember, now I remember leaning over and I think it was David. I leaned over to someone I was sitting by in the back and I said, “Gosh our investors are really smart, you know they have got some good tough questions.” So I completely agree. So going back to that website if I can just give you the website again it’s, home-cost.com and it does look like it’s a subscribed website, like a paid website but if you just go to the blue tabs across the top, it’s the second or it’s the third to the last tab, it’s a blue tab it says, ‘Construction cost for square foot’. When you click on that, that’s all free, you go and you scroll down, there is a little spot to enter the zip code or state and then that’s whether you get the construction cost.
Jason: Okay, so I am going to enter California zip code which will be everything over your fortune there and, yes $129.00 per square foot for Irvine California and of course that doesn’t include land, the land is massively expensive but now I’ll include, I’ll do [unintelligible 12:07] and Arizona zip code here and let me just see how this, how different this looks. It will be interesting, $97.00 per square foot. So even in a low priced market like Arizona, we are buying far below the cost of construction, and the land is free to build so just a phenomenal opportunity for investors. That’s why the smart money is coming out now, so feel free to rub me on any point but I just want to go over a few more of these bullet points from Dan’s fantastic notes here.
We talked about the entry point, where a person is entering, they entry point investors who is just early, who is just new to the game, they want to optimize for rapid growth, that can be reinvested for long term investment and we showed a great example where if someone for the first five years, in this, and any other investment, its sounds totally unrealistic but with income property, properly structured, people can do it all day long, if they can earn 20% annually and then for the next 25 years just earn a very modest 10% annually which I know with any other investments sounds like a really high number but if you have been listening to the show for a long time, you know that very conservatively, that is very possible with the right properties structured in the right way, 10 to 20 percent, not a problem.
Look at the projects on our website at jasonhartman.com for more details, look at the properties complete performance there and then the second category is the growing investor, they want to optimize for stable long term inflation protected wealth creation and then there is the person who is very close to retirement and they want to optimize more for security and basically investing in what we call income property bonds.
We talked about how the peak spending age for most people is about 46 years old; we talked about Gen-X only having about 40 million American, whereas Gen-Y has about 80 million in people. That’s four million larger than the baby boomers and they are going to make a huge impact on the rental market, and that’s why the institutional investors are wanting to buy income properties so much now because they see the demographics.
When you just look at age, this is a very simple thing to do, to be an economic demographer and you just look at the age of people, they do certain things, generally at certain ages in their lives and the 80 million people coming right after rental housing market right now are going to change everything and create a very, very good future for income property investors.
So the prudent person sees that and that’s why the smart money is just rushing into income property right now.
New investors should seek returns in the 20 to 25 percent range, again very possible. Take a look at the projections on the website and the big problem people are going to have now with life expectancy increasing so much, is that they are going to have too much life at the end of the money so people have got to plan more than even in the past, people have got to plan for their financial future because we know that the government is insolvent and it’s not going to be there to take care of any of us. So very important thing, any other reflections on the event or people who attended that you want to talk about Ari or Sara?
Ari: One of the coolest things I think that we have never done is that we had a live musician in play.
Jason: Oh, yes, [laughter], thank you so much for coming out and singing for us.
Ari: Yes, Brandon that was great. I think a lot of people kind of enjoyed that. It was a break between the kind of like a mental break in the day that kind of helped people ease and relax their mind for a few minutes but I think Brandon that was very good. Jason, did we ever post that video on our website at one point?
Jason: We did not and what Brandon did is he wrote a song for us, all about investing and how to invest, and how he likes the podcasts and all of the main points that he has learned from the podcasts. So maybe we will get a recording of that and get it up on the website or play it during a podcast but yes that was awesome Ari, thank you for bringing that up and Brandon, thank you, I am sure you are listening so thank you so much for coming out, brining your guitar and flying all the way from Durham North Carolina out to sing and attend the event that was great. You know, we had a lot of people come from other states, I think we had nine different groups or couples come from out of state, outside of California.
Sara: Yes, I think that was our biggest out of state attendee list this time around, your podcast is definitely growing [laughter].
Jason: And that doesn’t, of course that doesn’t include speakers, local market specialists who regularly come from out of state. This is just attendees and guests so that was fantastic so that probably totals around 15 to 18 people.
Sara: Yes, well and it was really great to have Rodney and Carol out again from Chattagona.
Jason: Yes, second time.
Sara: They came about a year ago and purchased some deals in Atlanta and now they are looking to diversify but just great people, great dinner conversation, as well as Phillip also from Tennessee came out. This was also his second Masters.
Jason: Now, I think Phillip has been to more than two, he has been to three.
Sara: Yes, actually, it has been three, at least three.
Jason: So it was great to see you Phillip, and Rodney and Carol. By the way thank you for the book recommendations and I am looking those up and I’ll check those out. Just great again on how much we learn from our clients. One of the other things, speaking of learning from our clients is what Patrick presented to us on how he, he has purchased I think eight properties through our network and he talked right at the end of the weekend on Sunday evening about how he researches rents on all the different websites, he uses and all the different techniques he uses to research rents and really, I mean, some of our investors do an incredible amount of due diligence and they, in many cases, I have to say and I am just going to admit this openly, they won up to us because they are taking everything we do and then just adding to it.
Sara: Yes, no I was just going to say, I am so thankful he did that, you know me I am not really big on speaking in front of a group of people, I am more of a one-on-one kind of a person and so when he got up and did the rental presentation, I was like, “Sweet” [laughter].
Jason: Yes, that was really good Ari, any other thoughts from you on the event?
Ari: Well I have to, real quick, say thank you to David and Tina for coming out. They came out from the Chicago area and it was great to see them and Brandon, who is a fighter pilot, I want to say thanks to him, he brought his dad out from Colorado so that was very cool and also Roger and his son. Roger brought his son [unintelligible 18:28] and they from, well they are from [unintelligible 18:28] Texas, well in the Dallas area, east of Dallas. Anyway but Roger said something to me about his son, his son told Roger which is his father, he told him that this seminar actually, it almost makes you feel stupid if you don’t buy real-estate right now because of all the stuff that was going on. He said at this seminar, it makes you feel that if you don’t buy it then you are doing something wrong [laughter].
Jason: Yes you know, and I have to just add to that, you are doing something wrong if you are not buying right now, if you have the ability to purchase income property in this environment and of course, always if you happen to be a first time listener and you haven’t been listening for 225 shows, then you know, you may not know so I want to just clarify that, we are not talking about property that’s in overvalued bubble markets, we are talking about prudent markets across the country where they properties makes sense the day you buy them from a cash flow perspective, and cash flow is pretty darn reliable.
We are not looking forward to any big appreciation numbers in the future or anything like that, that’s pretty much in the rear view mirror and there is a lot of tough times ahead in a lot of ways but things are lining up in favor of income property really like never before and a lot of it comes from our government being so irresponsible and profligate with our spending and the inflation that’s going to create in the way monitory and physical policies are interacting but the day after our Meet the Masters event and that was Monday, the day after, I filed my personal tax return on the very last extension [laughter].
Nothing like getting a head start on it right [laughter]. October 17 was the drop dead day that you had to file it and I was talking to my CPA, Mike who happened to speak at a few events on Sunday mornings and he is always great because he is such a technician, he is not slick speaker type, he is just a technician who loves saving people money on their taxes and so I talked to him the next day and he filed the return for me as I was on my way back to Arizona and it is amazing how tax favor income property is.
I mean, you can make, you can make a fortune, you can make an unlimited amount of money and if you can play your cards right and do all the right things that the IRS incentivize, you can literally pay no tax. I mean, it is, as much as I complain on this show about big government and intrusive government and high taxes and high regulations, I don’t really pay much tax at all because of my property holding and when you go through the course of several years or a lifetime and you have a get out of tax free card because you are an investor, structuring your investment properly, I mean, just think of the difference that makes to you, income taxes account depending on what state it is that you live in, income taxes account for anywhere between …, for most people listening 30 to 45 percent of your income. Thirty to 45 percent. Imagine if you could save 30 to 45 percent of your income every year and then take that saving that you didn’t pay in tax and invest it wisely and also use it to enjoy life, to travel, to buy nice things, send your kids to good schools, whatever it is, I mean, that is a phenomenal opportunity.
The compounding effect of a household making $100,000 a year of savings between 30 and 45 thousand dollars a year and adding one additional rental property every year, or two addition rental properties every year, more than you would normally buy because you have figured out how to not pay taxes by doing the things that the IRS wants you to do, provide rental housing to people that’s it incentivizing you to do. That makes an amazing difference over the course of five, ten, twenty, thirty years. It’s incredible, it’s incalculable. I mean a total difference in your life and your friend’s life that isn’t following this plan. Just an amazing opportunity.
Sara: Well, I was just going to comment and this was a little while back when you were talking about you know what an incredible time we are in, I was thinking about how Tammy, who is one of the property managers in Atlanta, she was a new speaker, came out as she was supporting, she was so nervous doing her speech but I thought she did a great job.
Jason: And she did fine, she was great. She talked about property management and about lease to own and rental home programs we had her on our members only monthly call just a couple weeks ago and yes that was great so what about Tammy?
Sara: Well, so I was just, something she said stuck out in my brain and it was you know her little background, is that she has got over 18 income properties herself that she has slowly acquired over the years and you know she is a property manager but she has got her own growing portfolio, but the thing that stuck out to me was that she was looking at a listing that was close to one of her properties that she bought like 20 years ago and that you know you could buy that same property for the same price or just slightly less than what she paid for it 20 years ago. I mean that’s what kind of times we are in today.
Jason: That spells opportunity; it gives everybody listening a chance to turn the clock back. A lot of people listening feel like they missed the boat and you know sometimes, I read that poem called the, ‘The reluctant investors lament’, and sometimes I read it at the end of the seminar, like a Creating Wealth Seminar or Meet the Masters weekend or something like that and it goes, “I hesitate to make a list of all the countless deals I’ve missed,” and many people listening feel that way but this financial crisis like the Chinese say, “A crisis is an opportunity riding the dangerous wind.” This crisis has brought with it huge opportunity where people who did missed the boat and who maybe kicking themselves that they didn’t start investing in real-estate 10, 20, 30, years ago, they can turn the clock back depending on the market, they can turn the clock back and get their chance to start and create that wealth so very good point Sara, very good point.
Sara: Well, if I could just say one thing in closing you know, you know what I was thinking over this weekend is that I wish that I could get everybody to come to this event. You know so many people I talk to from out of state and everybody is a little skeptic of so many different real-estate groups and they are not sure which one to pick and it’s like everybody who attended this even, Meet the Masters event just really appreciated all the networking, putting some faces with the names and you know, I just think it was so valuable so again we thank you for this event.
Jason: The thing that differentiate us from other promoters out there like the Internet marketer and people who are selling educational products, certainly education is important but the problem with all of these other groups is that they are not usually selling real-estate and so they have no attachment to the actual outcome. What we say, in our seminars, in our podcasts, on our educational products, has to come through in real life or at least get close to what we talked about in real life because we are attached to the outcome.
We are the referral network that is providing people through our connections and our local market specialists with actual properties or actual private lending deals where they can loan money and earn a return on it and that attaches us to the outcome. We can’t just sell someone a set of audio CDs or DVs and send them on their way. We are in the business; we are really doing in it. This is where the rubber meets the road and then the other thing I would say, and I got this from talking with one of local market specialist at the Friday night dinner, because he works with a lot of our competitors that do have referral networks that sells real-estate and I kind of hate to almost think this way but I got to be honest I did, I think this way and he said, “Jason,” I was talking to him about all these other groups because of course I wanted to get his scoop on all of our competitors and he said, he said to me, he said, “Jason you don’t have a competitor really,” and I said, “Well what about so and so, I think that person has a good business.”
You know I mean, never mind competitor, I don’t love them because they are my competitor of course but you know I thought this one person I mentioned, was running a good business and then I mentioned another one who I thought was running a pretty good business, and he said, “You have no idea, these people are doing the deal of the month, they have no consistent program, they have no consistent philosophy, they have no money.” That’s what he basically said.
They are not investing like you are, they are not doing the good things you are doing, your business is the real deal and I’ve got to say that’s the one theme I keep hearing from our clients and from sometimes from our vendors, our local market specialists who do business with some of our competitors so it just makes me feel good and it makes me feel like we are really doing the right thing and we are really helping people and we are really providing a good service.
This is not just a let’s make money business, it’s a mission, it’s a mission to save the middle class and help the middle class not move in terms of the lover class which is what’s going to happen to tens of millions if not a couple of hundred million people here in the coming years as things in many ways get a lot worse in the US and in many places around the world. So yes, thank you for listening to this debrief about this. Ari, do you want to mention anything in closing.
Ari: No, that’s it Jason, thank you.
Jason: Well, good thanks to both Sara and Ari for coming on and talking about this stuff and up next, this show is not over because we have a whole presentation here where we are going to talk about on one of our markets and we have got an interview with a local market specialist from St. Robert, a very stable interesting military type market, of one that’s definitely off the radar of institutional investors, one where I purchase a ten unit building, a few months back with a couple of our clients and boy that thing just leased up lickety split, we are going to talk about vacancy rates and we are going to look at some historical studies of vacancy rates in this market. This is sure to amaze you so we will be back with that in just less than sixty seconds so stay tune we will be right back in less than a minute.
Vacancy or how not to have Dreaded Vacancies:
Jason: Hey, it’s my pleasure to welcome Zach back to this show, he is going to talk about vacancy or how not to have dreaded vacancies and we are going to talk about that in one of our markets, one of our markets that I am investing in with 10 units of my own and then we are also going to talk about special pricing and how that is really true, how you can actually buy below what other people are paying right in the timeframe and you will be kind of amazed on how this is possible so let’s talk about that, Zach, let’s talk about the vacancy here. We both got some vacancy reports in front of us for this particular market that we are going to talk about today and they are nothing short of amazing if you are an investor, if you are a landlord right?
Zach: Absolutely, that’s correct.
Jason: So, well what are they? I mean, I am seeing vacancy rates below 3% in an almost three year period, wow! That’s amazing, I mean, our performance go with 8% vacancy, but you being now like crazy are you?
Zach: We are and we have consistently done that since well, you are looking at the reports, January of 2009 and we have done that across the board on our duplexes, on our two and three bedroom duplex units and on our one bedroom apartment type units.
Jason: Okay, so we’ve had a lot of clients buy duplexes in your market and a couple buy small apartment buildings in your market, tell us about the duplexes I guess.
Zach: The duplexes typically, they are, either two bedroom, two baths, one car garage type units or three bedrooms, two bath, one car garage type units. Overall, they rent obviously very well and they stay rented, you can see the vacancy reports where you can see the average move in and move out times.
I mean, you are looking at typically 12 days or less and typically two weeks, it’s very, very tight turn times. A lot of that has to do with a very strong rental market and very strong demand and strong demand with a couple of supply shortage along with [unintelligible 31:18] here, a management company that really understands and understands the penal law of property and understands how to decrease vacancy by being highly proactive whenever they know a unit is going to open.
Jason: Yes, so I’ve got a few different reports here that I am looking at, there are three different reports but let me share one, summary of one of the reports with our listeners here. Okay and this is history, this is not a projection into the future, this is, this actually occurred, this is real life, so we are talking about a total of 20 different units here where in this period of almost three years, 980 days this is the exact time period, there were 39 move outs, now that sounds bad but remember this is almost three years so you didn’t even get one turn in a year on average and the average days vacant between tenants get this, you are listening everybody? 11.66 days, not even 12 days of vacancy on average. The total vacancy percentage here is 2.34%, 2.34% and again we wouldn’t allow you to project anything below 8% so you are beating the heck out it.
We have been working with you for a few years and just so that it’s not to keep everybody in suspense here, we are talking about St. Robert Missouri, okay, I don’t want to keep the listeners in suspense for too long as to what market we are talking about with these great records but Zach, what is going on in St. Robert, why are you having such good success there, I mean, other than tooting your horn with a management which is great.
Zach: Obviously with St. Robert you have Fort Leonard Wood which is the units that we are discussing in this vacancy reports are within four miles away from Fort Leonard Wood and these vacancy reports go along back to January 1st of 2009 and since then, we have seen the base in Fort Leonard Wood expand substantially which has obviously increased demand. It’s now graduating a hundred thousand, over a hundred thousand soldier and students per year through it, which in turn obviously creates a very good rental market.
Jason: Yes and how long have you been operating in that market.
Zach: We bought our first unit online back in ’08 so I’ve been there almost four years now, going on four years.
Jason: So four years and pretty good success that’s for sure.
Zach: Pretty good success is an understatement.
Jason: Now I bought a ten unit property there with some wonderful clients of ours who are probably listening to this show right now Danson and Elton and how is that one going?
Zach: That one we brought online in May and I think by mid June we were, actually by the 1st of June I believe we were eight out of ten and I think through June we got the last two leased out so I believe the 1st of July or mid July were at a 100% occupied and I believe we are 100% occupied right now on that building.
Jason: Well, it’s hard to complain about a 100% occupancy that’s for darn sure so good, good job. Let’s look at another one of these reports, Zack, now this one we are talking about 24 units here and we are talking about a slightly longer period of 949 days, we had 70 move outs but the average days vacant between tenants was 9.71 days, 9.71 this is in the report you just gave me and this equates to a 2.88% vacancy rate. Pretty awesome and I am looking at a report here with the actual names of the tenants and this is the real deal unless you are just completely making this up okay [laughter].
Zach: I don’t have that much time on my hand.
Jason: Yes, okay, so tell us a little bit more about what you are doing to get these units and really keep these units leased and get them leased so quickly between tenants.
Zach: Well, these units we have actually found a target market, we do a lot of one year and less leases on these types of units and even though its identical to the ten unit building, you are involved with these just have been online since February 1st of 2009 is when we actually finished up these two 12 unit buildings and stabilized them but the units are identical to the current 10 unit building you are involved with just a longer time period obviously stretched out over 949 days you can see what happens with 2.88% vacancy rates.
We are targeting with these [unintelligible 25:28] markets and a lot of people are coming in for captain courses and a lot of times hire ranking soldiers that are renting these things and they are coming in for a six month captain’s course and as those courses come through, they graduate and then the next one comes in and you can obviously tell by our vacancy report and average number of days vacant of 9.71 that even if we turn over more than one time a year on a year net, it’s a very quick turnover and it works very, very well. Obviously we tapped the very, very strong need in the area.
Jason: And talk to us a little bit about how the, well before we switch from vacancy actually, before we do this I want to just go over one more report summary, okay but before I do that Zach, tell us about the product types, mainly duplexes right, is that what you are working on mostly?
Zach: A combo actually, about 50/50 between apartment and duplexes.
Jason: And when you say apartments, what unit sizes are those?
Zach: These are one bedroom. All our apartment buildings that are …, we do anyway from four unit buildings all the way up to 16 unit buildings and it’s just a different variation on the size of building, all the units are identical, they are all one bedroom, one bathroom, they have a carport for their unit and they are all right around that 640 square foot per unit.
Jason: And so you are finding those small, really almost efficiency type units are really the most desirable in your market ha?
Zach: They are for this and with and with the apartment building and once we go to the duplexes, we get into two bedroom two bath type units, and the duplexes units and a garage on a two a two bedroom units are right around 1140 square feet of living space per side and then on the two bedroom duplexes they are 1380 per side.
Jason: So let’s take one of those three bedrooms as an example because I want to switch to that in just a moment but let me just share one more vacancy report summary here. Now this is a total of 16 units and there were six move outs, this is a shorter time period. Its 615 days and the average days vacant here in this report was 6.8 days vacant so not even a week, not even seven days and the vacancy percentage here is only 1.48% that’s phenomenal.
Now let’s switch gears here but you know before we switch gears on that, I know I keep saying I am going to switch gears only get to the pricing, at least I’ve got a question for you about that but when landlords are looking at vacancy rates, it would be deceiving to look at and I am going to spring this on you Zach because you are probably not ready for this one because we didn’t talk about it and you really are not expecting it, it would be deceiving just to look at vacancy rate and think that that’s your total issue because what it assumes Zach is it assumes that everybody is paying their rent, so you have also got to look at collection issues.
Now, I know from the military tenants, I have had over the years and I have had several of them, the vast majority have been great just great tenants and I don’t have collections problems with military tenants.
Zach: No and we do not either.
Jason: Yes, so is the vacancy rate, I guess the way to say it is, is that an economic occupancy rate or a physical occupancy rate? In other words, someone could be in the house but not paying the rent or are they paying the rent what are collections like do you have collection issues?
Zach: That is technically a lease date to a lease date so that is a physically occupancy date report. Now as far as collections and stuff, we could figure those in, those are not enough to even make a bullet in its [unintelligible 38:56] due to it being 95% of our tenants being military.
Jason: And what does that mean military? I mean, I know what it does but I want you to explain to listeners because you have more firsthand experience than I do, I just have of several military tenants I have had over the years. Like when a military tenant doesn’t pay their rent, what do you do?
Zach: We go to their commanding officer and we have some [unintelligible 39:18] there, typically we can find out who their commanding officer is, most of the times, we get that information if it’s all available at the very front when they are moving in we request their commanding officer’s name and contact information so if we ever have an issue, we go straight to them and generally speaking, we get our money very quickly.
Zach: Much more than the pure and normal non-military [unintelligible 39:41].
Jason: Yes, the civilian tenant doesn’t have to do like 6,000 pushup if they don’t pay their rent right?
Zach: That’s correct, the military definitely frowns on any kind of financial hardships or anything like that and they definitely step in and try to get it straighten out on any kind of off base private issue.
Jason: Yes, military people are great, I mean, they are so disciplined and generally just very, very good people. Okay, so let’s switch here finally, and let’s talk about price because something that’s very interesting is all these investor groups out there, my competitors you know they are marketing properties as though they are below market and I wouldn’t allow any of our local markets specialist whether they are developers or rehabbers, we have different deals in different markets so sometimes, we have developers that are building brand new stuff as it is in your case but sometimes, we have rehabbers that are buying properties at actions and rehabbing them and getting them ready for investors to buy and rent or buy and flip and they all want to say, you know the properties are below market and I think that a lot of times that’s really, really a misnomer.
It’s not true and that’s the reason I wouldn’t allow our local markets specialists to, for example put it on the performer if the market value, the initial market value versus cost, I wouldn’t let them make those numbers different because if they make them different, the ROI, the return of investment on that investment, it goes through the roof like if you were to say a property is just $3,000 below market value, it would turn an ROI projection of 20 to 30 to 35 percent into 250% annually.
I mean, it’s just …, it’s crazy. The numbers just, they go nuts, nobody would believe it and plus it creates too much liability for us so we wouldn’t allow that okay, we just think it’s wrong but, now, but I want you to explain what goes on with the pricing of your units and let’s use a duplex, a three bedroom duplex as an example so you’ve got 1380 square feet on both sides, our clients can buy these for $189,900 right?
Zach: That’s right.
Jason: So $189,900 and we are going to take 1380 square feet, we are going to multiply it times two okay that gives us 2760 square feet. So everybody remember that number 2760 because we are going to come back to it in a minute. Now, Zack, what’s the highest price, you have sold one of these duplexes for?
Zach: I believe it was $236,000. Right around $235,000.
Jason: How long ago?
Zach: $235 was sometime in 2011 [unintelligible 42:11] was sold for that, yes five to seven month somewhere in that ballpark.
Jason: So this year, so earlier this year, for $235,000. Now if we take, now here is the BS detector folks for everybody listening, this is a BS detector, when you are talking about a brand new duplex, okay any brand new structure, all you do is I want you to take your calculator like I am doing and take $235,000 and divide it by 2760 square feet and we see that the cost per square foot there is $85.00 per square foot. Now that is a legitimate number for a brand new construction $85.00 per square foot so the first thing that comes to mind, is why would anybody come along and pay you $235,000? Wouldn’t they simply check the comparable sales and realize that you are selling these properties to our investors for $189,900 let’s just call it 190, what don’t they know?
Zach: They do not know how we structure the deals and that is where our competitive advantage if you will kind of lies. With being in the construction company, the property management company and the [unintelligible 43:20] developer, we have the ability to do things that most other investors don’t have access to or provide different ways of financing those other investors don’t have access to.
Jason: Okay, but let’s get some specifics about because what you do is our client really is not buying the property from you per say, they are hiring you to build it for them right?
Zach: That’s correct.
Jason: So when they hire you to build it for them, the price that they ultimately pay never really shows up as a comparable sale does it?
Zach: That’s correct and this is not marketed locally either so nobody has access to it, nobody even knows about it.
Jason: So they are not in the MLS, in the multiple listings service so it’s a different deal and there is nothing to prevent you from building a home for someone, you can do that, you are a developer. Now, if you build a home for what they call for spec which is the way you are doing it for a regular consumer, you stick it in the MLS and you get them to pay $235,000 for it but you can’t get the economy of scale where you are selling a lot of them to investors through our group in that scenario, so for those, you really do have to sell them for more don’t you?
Zach: That’s correct, to the investor, we own the land, we develop the land and we own the lot. The investor will come in to execute a Lot Purchase Contract, to acquire a ground that we would build the duplex on, at the same time that they execute our Lot Purchase Contract, they would execute a Construction Agreement, a Specification Agreement and Floor Plan agreement and what those things state is that we are going to build you a building, turnkey it to you and we are going to give it to you for X amount of dollars and build it and then once you are done, you are done.
Now, we actually even, I’ll take it a step further then I am going to spring this on you Jason, we actually take care of all of your interest during the construction inside that turnkey price, we take care of all the appliances, the yards, everything, a building that is absolutely ready whenever you are done in so much that we actually cover your interest until there is one tenant in place.
So as a developer and owing the property management company, we are assuming that risk that you will not take over it and pay bills or taking over any kind of payment on an empty building so you will always be 50% occupied. So by doing it this way, you, you are not buying a building, you are having a building built and while on the surface and at first glance, it doesn’t seems like not much of a difference, it’s a huge difference in the marketplace and as Jason was saying, [unintelligible 45:46] in the Multi List because it’s never technically …, the only thing we are selling will be the lot and we could put that on a multi-list that’s no problem, it wouldn’t hurt anything but the building is what you will find in your name, you are acting as, in a sense as a mini developer because you are providing the financing to build the building which in turn is not a sell but it is a build out and a build to suit the potentially.
Jason: Let me take a brief pause, we will be back in just a minute.
Recording: I have never really thought of Jason as subversive but I just found out that’s what Wall Street considers him to be.
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Jason: So one of the big risk people have with building their own property is this and my mother is going through it right now so I’ll share that experience because many of our listeners have been kind of interested in the unusual story about my mum building her house and it’s exactly this. It’s that you go and you finance the project and this happened to thousands of investors in Florida.
I mean, there is a lot of litigation out of this stuff that Russ Whitney was selling a lot of properties like this, Marshall Reddick was selling a lot of properties like this and it was a big problem in Florida. We never did that main Florida area, we did a little bit of business up in the Panhandle in the military areas like Pensacola where I own property myself and those are fared much better but the rest of Florida is pretty much a blood bath and what would happen there, is people would do deals similar to this and the way they got burned is because the builder would never get around to building the house, or finishing the house and so my mother is building this 9,000 square feet house, her dream home.
This southern mansion in Gulf Shores Alabama and she is having the same problem because she can’t get people to get their job done to get the work done, the painting contractor comes in and makes promise, “Oh, I’ll have it painted in a month,” and here we go, months later, the painting still isn’t finished and he uses every excuse in the book, “Oh the weather, the this, the that,” and that’s where the risk really comes in for the investor developer because our listeners is really an investor/developer and what they are doing, is they are hiring a developer to take that risk, put their money where their mouth is and carry all the costs until when, until the property is rented right?
Zach: That’s correct, until there is one tenant in place.
Jason: Oh, one of the two tenants, so they do have the risk of not getting the other tenant but at least it will be half occupied and it will be finished because it has to be finished to get the Certificate of Occupancy.
Jason: Okay, good. What else should people know?
Zach: Typically, it takes two to three weeks obviously you can see by the vacancy report that we were discussing earlier; it takes typically two to three weeks. I mean, you can have second tenant in place so its typically a very short period of time before the second tenant is in place so overall, traditionally there has been little risk there as well so that’s a very good thing.
Jason: And you’ve got a new financing plan that we are going to talk about on a future show, you’ve got to get it clear, the accounting, legal, get all that done and its pretty exciting and pretty interesting so we will have you back here on a future show to talk about that but just give us a little overview of the area and why its desirable and the product that you are selling. You know, we started in kind of backwards on this one where we talked first about vacancy, then we talked about the pricing issue and how to build in a profit for oneself as a developer basically a $45,000 potential profit there but talk about the market and the product if you would.
Zach: I’ll start with the $10,000 [unintelligible 51:17]. The reason we are, the question I get all the time from investors is how can you give this at $189,000 to us and then still take them for $235,000 aside from just the appraisal and those types of things? How can there be that much margin in there because if you do the calculations, $189 to $235 that’s a huge developer margin. Typically construction margins are not that big let alone for us, to allow us to do the building to the investor $189,900, and still have enough margin in there for us to survive and there is a few different reasons for that.
In fact there is that play. The first one that comes to mind is by doing $189,900, we get our economies of scale, we can run for the area, a decent amount of volume, we can rent anywhere from 15 to 25 duplexes a year so anywhere from 30 to 50 units a year and that in turn gives us in this in this size of an area, in this demographics, the different demographics of an area, that gives us a substantial control over labour and a substantial control over materials and pricing and everything in the area.
It gives us buying power to in turn bring down our power that build price to allow us to be able to build for the $189 and have enough margins in there. If we were coming in on a retail side like we were talking about $235, the reason $85.00 a square foot is concluded as legit on new construction, it is actually completely legit in this area because for typical volumes and a typical absorption of sales for a developer or builder to build that on spec, they are not going to do 15 or 25 building a year and to put it bluntly if we can come in and build and sell 15 to 25 building a year retail, we would probably do that and not even mess with that [unintelligible 52:55] to put with investors to put it very bluntly.
Jason: You used to be able to do that, I mean, during the heyday, during the roaring 2005 era, I’ll call it, the money printing era and that craziness, anybody can get a mortgage, you know a developer could do that and they would make obscene margins, they could build a track of 40 properties with no buyers, they just build, they can get the financing to build them first of all, they could just build the track of 40, or really they could build a track of a couple of hundred units and the buyers would just come on in and buy them. If you build it, they will come and fill their dreams, yes but you can’t do that nowadays, it just doesn’t work anymore and so that’s why the investment model is much more efficient for you as the developer right?
Zach: Yes, absolutely and also just as you were saying, we don’t have to build it and they will come which in my conservative answer that equates to risk and I am very risk adverse and we do not build it and they will come, we make the investor come and then we will build it which in turn decreases our risk substantially which in turn make our risk reward from a construction company and developer and everything, it puts in line to where the comfort level that I am okay with, by having the investor already speaking for it and carry it on.
Typically carrying the debt and the loan and everything on the investor balance sheet versus us carrying it on our construction balance sheet, construction companies balance sheet and those are the two biggest contributing factors to allow us to come in hit the type of price point because we are building substantially cheaper than market value in the area. One more quick thing I want to add to that is, that’s not going to last forever, while labour pricing just in the construction industry as a whole the labour pricing is very, very cheap right now, labour is not going to get any cheaper.
Material pricing, material prices are rock bottom bare and not going to be any cheaper. At the first opportunity for construction to pick it up and here is what we are going to see in the construction industry, there is enough sub-contractors that have went out of business that the few that are still standing are getting all the current business and they are just coasting and they are just surviving if you will and they are going to survive, they are the best of the best that are left but as soon as the volume of construction pickup you have a much smaller labour pool to pull from so in turn that’s going to enable them to raise the prices very quickly and the same analogy is in place on the material/supply side, so as an investor when you are getting in for these type of price points, that are really below market value, you are going to, I believe, correct me if I am wrong here Jason, you always say that the factory replacement cost, I can’t remember your exact verbiage you always use.
Jason: Regression to replacement costs and that’s the famous phrase. Regression to replacement costs.
Zach: Very hot, I’ll send you your nickel, that I owe you for using your term [over speaking].
Jason: My royalties yes [laughter].
Zach: Your royalties on that but you are going to see the same thing because you are going to see inflation in the construction industry and it maybe two years from now, it maybe a year from now, it maybe three years from now and every market is going to be different for that but every market you are going to see a very quick ramp up of those construction costs due to the decreasing in the size of labour pool and the decrease in the amount of material suppliers and there is going to be a disproportion of supply to demand and its going to go the whole opposite direction very quickly when volume pickup in the construction industry.
Jason: Yes, well you know what I think it going to be? I think it’s just going to be inflation driven basically and we should just therefore differentiate in all fairness, most people say well prices will rise, well, that’s true but that’s in nominal dollars maybe or maybe not, I am not sure yet in real dollars, the significance in real dollars will be much less but the thing is, is you that you arbitrage that nominal versus real dollar equation with financing and that’s the beauty for a real-estate investor.
If there is 10% and we have talked about this in prior shows so I am not go into it in detail, listeners go back to prior shows, Creating Wealth Home Study Course, Come to the Meet the Master event whatever there is a lot more to this, too long to explain now but basically it’s like this, if you get a five to one leverage ratio, say you are ultimately putting 20% down on a property just for a simplistic example you have a five to one leverage ratio, if inflation is in the future 10% then you normally just by owning the property with cash, you are going to keep pace with inflation because real dollars to real dollars, it’s just a real dollar increase, it not a true gain but if you finance it, you are going to outpace inflation by a multiple of five or 500%.
This is why people become so wealthy owing income property properly structured and that’s why we are here to help our listeners do so go to jasonhartman.com and have us help you with that but yes absolutely that’s an amazing opportunity no question about it. What else do you have to tell us on that Zach?
Zach: Along with the construction pricing and where we are at with that with investor versus retail price points and that market value, the market itself in the local economy is booming with the military, you don’t have job loss in the military, you don’t have wage decreases, if there is inflation, the military people will get, you know generally will always get cost of living increases which in turn means you have nice rental increases so those two things coupled together really help to hedge this area against inflation when and honestly if and when they comes that coupled with just the economy and what’s going on in the area with the growth of installation, the growth is outpacing the supply side by far because the construction financing is still very tight and it is still.
I will be honest nobody in the area focus on multifamily, nobody in the area understand the smaller demographics and it’s not big enough to attract larger money pools to come in and drop two and three and four units at a time in the area, its smaller developers we develop more multi-families than anybody else in the area and we develop about 60 to 100 units a year and we will keep on that pace. It’s a solid good pace that we can observe and it’s strong without getting way too ambitious and increasing the supply side too much. Its good and we will keep a good and we’ll keep a good sum on that market.
Jason: Well, what you seem to have really done and you succeeded at it quite well, my hats off to you, is you are a big city guy because you don’t even live in St. Robert, you live in Kansas City so you are a big city guy that came into a small town, it largely a government funded small town through the military, through gigantic military base and you are in a place where there aren’t a lot of like really sophisticated real-estate development type people that are competing with you so that was really a brilliant strategy hats off to you.
Zach: Thank you, it was dumb luck.
Jason: Really good. Well, dumb luck freaking strategy. Hey, you know what I always say, I’d rather be lucky than good any day of the week [laughter].
Zach: Exactly, no, the rate if value and the area where to build cost is highly disproportion in the right direction from the investor’s point-of-view and it’s a very good opportunity that jump on [unintelligible 60:05] cost on it.
Jason: Well, it’s that way on a hotel as well and the problem with hotels is they can’t keep their units occupied enough but because just the hotel industry and the way that whole business motto works but when a hotel is providing in service to its very short term tenant is its providing convenience and mobility and I said it to someone yesterday, I was, yes the W Hotel in Scottsdale Arizona and I was talking to this girl, she was there with her dog, we were going to doga class, I know, it’s something you’d think you only do in California, but [laughter] yoga for dogs, I know it’s hilarious right and she said she was interested in real-estate investing and she said she just moved here with her fiancé for a job from Dallas, moved to Scottsdale, Arizona and what’s interesting is I said to her because she was thinking of, “Should I buy a place for myself, should we buy a place for ourselves here or should we buy rental property?” I have been reading, ‘Rich Dad, Poor Dad’, etcetera, and I said hands down, rental property because the best thing you can have on a resume nowadays is mobility.
The ability to move for a job, that is what will keep you employed so as investors, as landlords, that’s what we are providing to people, we are allowing them to stick mobility on their resume where they only have a one year lease instead of a house that they are just completely stuck with. So I think we are providing a great service, I think landlords, investors like us will literally help increase the rate of employment and decrease the rate of unemployment and so it’s a great thing that we are doing and with military people they need mobility so they are not looking to buy stuff as much, they are looking to rent stuff right?
Zach: Absolutely, they definitely look for mobility, most people there are there for three years or less and generally speaking they can’t buy a single family home, [unintelligible 61:55] and everything between the time they move there, buy it and need to sell it again so it make sure perfect sense for them to be renters and for two or three years while they are there.
Jason: That’s a great strategy. Okay good, well hey, thank you so much for sharing this today, we look forward to having you back on to talk about a financing opportunity and we appreciate it, good luck keep it’s no good those vacancies as low as they are good job.
Zach: Appreciate the time Jason thank you.
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