Unlike stocks, bonds, mutual funds or commodities such as precious metals like gold and silver – real estate is a multi-dimensional asset class. The multi-dimensional nature of income property makes it extremely profitable in changing ways based on varying market conditions. This is a wonderful thing because investors can profit even seemingly “bad” markets. For example, when financing becomes expensive (low housing affordability rates) or difficult to qualify for (low capital liquidity) it can create excellent opportunities to increase rents. When mortgage rates are low and qualifying is easy it can spur terrific appreciation. You can win either way so long as you adapt your strategy based on economic realities.
Additionally, a discussion about Macro vs. Micro Markets™ so don’t just run out and buy based on a city – be sure to screen and drill down into the various Micro Markets™ within each city. Since you can’t buy all of them… you may as well buy the best ones!
Last but not least Jason recommends the book “Revolutionary Wealth” by Alvin and Heidi Toffler.
Announcer: Welcome to Creating Wealth with Jason Hartman, President of Platinum Properties Investor Network in Newport Beach, California. During this weekly program, Jason is going to tell you some really exciting things that you probably haven’t thought of before, or a new slant on real estate, fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible.
Jason is a genuine self-made multimillionaire, who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in nine states. This program will help you follow in Jason’s footsteps on the road to financial freedom through real estate. You really can do it. And now, here’s your host, Jason Hartman.
Jason Hartman: Hello, this is Jason Hartman. Thank you for joining us for another podcast, Podcast No. 24. Today, I’d like to talk about a commonly misunderstood or not understood at all subject when it relates to investing, especially real estate investing. See, most investments are one dimensional in nature. Conceptually, they’re all about “buy low, sell high.” You buy a stock; you buy it low; you wanna sell it high. Now maybe it’s a dividend paying stock, so you buy low, you get some tiny little dividends and pay taxes on them all along, and then sell it and pay capital gains tax again.
I’m kind of alluding to here the fact that real estate is such a tax-favored asset. You really never have to pay tax on your real estate if you do it right. It’s very tax efficient. But if you buy precious metals, you wanna buy low, sell high. If you buy bonds, same idea, right?
Real estate, though, is so misunderstood because real estate has a multi-dimensional nature. Now, what do I mean by a multi-dimensional nature? Well, real estate has many dimensions, but in this podcast, we’re just going to talk really about three of them and we’ll call this, as we’ve called it for many years now, the Three Dimensions of Real Estate Investing.
And the three dimensions are explained in a brief outtake I have coming up from one of our recent live seminars here in Newport Beach, California, in the O.C., Orange County. So listen and enjoy this, and think about how real estate has a multi-dimensional nature. It’s not just about buy low and sell high. Here at the Platinum Properties Investor Network, we consider appreciation to be the icing on the cake when it comes to our real estate investments. The reason we say that is because appreciation is not – it’s not as predictable as cash flow, one of the other dimensions of real estate.
Cash flow is pretty darn predictable when it comes to real estate investing and what you’ll notice that’s happening, currently, at the time I’m talking to you here in August 2007, is that there is tons of press in the media about the mortgage meltdown, about how there is a credit bubble. By the way, I agree with all of this stuff. There is a credit bubble. There is a mortgage meltdown, no question.
But the question is does that ruin our chances of making a killing in real estate? Absolutely not. We’ve just got to adapt to what’s going on and adjust our strategy. You’ll see that landlords actually benefit from high interest rates. Landlords benefit when it is harder to qualify for loans because it puts upward pressure on their rents. So this improves our cash flow as investors.
Now, many times I have talked about how money is on sale. In not one way, but two ways. Most people think of money being on sale as well, interest rates are low. They’re the lowest they’ve been in what? Three or four decades, a very good thing. But also, there’s another dimension of the money sale and that is ease of qualifying or ease of obtaining loans.
Now, this ship is leaving the dock. I want you to understand as I have been trying to say for years now to our listeners, that you have got to do what you do when every other product is on sale. When you go to a store and you wanna buy something and you see that it’s on sale, I bet you do just what I do. When it’s on sale, you probably stock up. Well, you know what? Money is on sale. It’s still on sale historically speaking. Money is very cheap and even in the midst of all of this talk about credit bubbles and mortgage meltdowns and so forth due to totally irresponsible lending over the last years.
By the way, this is no surprise to us. I predicted this three, three and a half years ago. Everybody told me I was crazy. The Ponzi Scheme can continue and banks can just keep loaning money to people that should never be borrowing it in the first place, blah, blah, blah. You have no idea of how much dissention I was met with when I used to say this three, three and a half years ago. But guess what? Like so many of my predictions, this has come to pass as well.
So money has been a little bit cheaper in recent years in the post-911 world, but it is still historically very, very cheap. When I got into the real estate business in 1985, if you wanted to buy a rental property, you had to put 20, 25, or even 30 percent down. Even in the midst of this credit bubble, this mortgage meltdown we’re in now, which had to happen; this adjustment had to come, you can still get properties with 10 percent down on high quality, very cheap loans; very good fixed rate financing. Think about it. You lock in your cost of borrowing for the next three decades. Where else can you do that?
As the mortgage rules get tighter and I think rates will initially dip a little bit here as the fed has loosened the money supply. Last week, they have just announced that they have lowered the discount rate to pump more liquidity into the capital markets. So these things benefit us as investors, but it is getting harder to qualify.
A few years ago, you could get nothing down on conventional financing for investment properties. You still might be able to do 5 percent down, but that is quickly coming to an end. Ten percent down you can still do and I say – my prediction – is that in the future, you will have to put 15 or 20 percent down. So take advantage of the money sale. It’s still occurring, but supplies are limited. Stock is running out. Borrow money. We have loads of inflation coming at us in the coming years here.
We have 2.5 billion people in China and India that are moving toward middle class lifestyles. We have wealth that is being created on a global scale that has never before been seen in human history. The deep fundamentals of this real estate market are incredibly good as long as you buy right, you buy prudently, you buy in the right markets.
And by the way, when I talk of the right markets, I wanna mention something else about that. We’ve done a couple podcasts profiling certain areas and I wanna give you a word of caution. We’ve profiled, I believe, Austin, Texas on prior podcasts, Mobile, Alabama, Dallas, Texas, all very good markets; very good markets to invest in at the moment. But within the larger markets when we do those profiles, I wanna caution you: Don’t just run out and buy properties in these markets. You have to look at not just the macro market, but the micro market, the areas of each city. Is it on the north side, the south side? And then within those areas, north, south, east, west, city center, within those areas, what are the right neighborhoods within them to look at? What are the right tracks of homes to look at? Who are the best builders to be dealing with, to purchase from? What are the best styles of properties? Single level, two story. What type of architectural style is most appealing? What community amenities do you want to have?
I wanna really caution you, please, do not listen to market profiles where we talk about macro city markets. That is not enough information. You need to talk to our investment counselors and our area managers, and get the scoop on the exact micro market within that city.
We are currently in 33 markets around the U.S. and within each of those markets, there are micro markets that you need to pay attention to because you can buy in the right macro market, but still make mistakes because you’re not in the right micro market within that macro market. Make sure you talk to us about details when it comes to those markets.
So without further ado, why don’t we listen in to this live tape here, and this will be about 18 minutes long, I believe, 17, 18 minutes, and then I will be back with you to kind of recap and talk to you about a couple of other things. So enjoy.
Getty, another Getty quote: “By what everybody’s selling, sell what everyone’s buying.” The problem with real estate is – this is great advice, by the way; this is how he became a billionaire because he bought up oil company stocks in the Great Depression when they were really cheap and everybody was selling them. But so this might be good advice for us as real estate investors, right?
The problem is this. When people invest in real estate, they don’t really understand fully what they’re buying and selling. I’d say that real estate is not a one-dimensional asset like most people think it is, but it’s at least – and there are really more dimensions than this – but it’s at least a three-dimensional asset. Three major dimensions of the real estate asset.
Men’s Health, another non-real estate publication – interesting article in here. It says Ten Incredible Trends that Will Make You Rich, and this alludes to that asset shortage issue that we discussed a few minutes ago. It says, “Build your castle 2020 in investment strategy. Will the future find you secure or struggling? Gaze into the year 2020 and discover where your money needs to be.” And here, this graphic is kind of a compilation of an Indian and a Chinese architecture all in one, and the little callout here says, “India plus China, they will control more than 50 percent of the world’s gross product by 2020.” It’s only 13 years away.
And to illustrate the concept of how that rising economic tide floats almost all of the ships, and there’s this huge asset shortage and the wealth that will be created from these 2.5 billion additional people playing a big part in the economy is this. On page 77, it’s just kind of a funny thing, but it says, “If China really prospers, think about how much Botox you can inject into 2 billion Chinese foreheads.” I mean just note all of the markets for goods and services and it’s just amazing.
Another thing I want to bring to your attention, my friend Gary purchased an investment property from us, his first one. He never owned a rental property. He owned lots of houses over the years, but never a rental property. He said to me, you know, I really like this property investment because I’ve invested in everything pretty much. I’ve invested in oil and gas exportation; I’ve invested in precious metals, gold mines, stocks, bonds, mutual funds. They can always create another stock that’s just someone’s idea taken to the public markets through an IPO. There’s another stock. No limited supply. They can always find another gold mine, they can always find another oil well that hasn’t yet been discovered, but all real estate has been discovered.
I mean really think about the incredible wisdom of that statement and the impact of it. Every piece of real estate on Earth is mapped and catalogued. We know it’s there and where it is. Now, granted, there is a lot of vacant land on Earth. I understand that. But I’m not investing for land values. I’m investing for improvement values and the way the structure of the taxes and the debt works, as we’ve talked about today.
And this one was kind of interesting because this is the Wall Street Journal in January 13, Gem War. These are real diamonds, only they cost about 15 percent less than the other stones of similar size and quality. The reason, they were produced in a lab. They’re real. They’re not fake. They’re real diamonds. They were produced in a lab. “How a new generation of high quality diamonds is shaking up the jewelry world.” People invest in diamonds; that’s an investment. And so with real estate, it’s all been discovered. We all know that the supply is limited, other than colonizing Mars, the moon, and the lost city of Atlantis. That’s my disclaimer.
The other great thing about this type of investing is, you know, how many of you are homeowners? You know that when you bought your home you probably got all these things in the mail from mortgage companies, right? Little checks and stuff like that saying, “Here’s a check for $49,000.00. Just apply for a loan with us on your equity.” Well, the great thing now is I’m getting all these on my rental properties all over the country, so this one is – well, which property was this? Oh, this is on my Chapman Falls property in Richmond, Texas, and this says, “GMAC. We would like to loan you $49,000.00.”
Then, folks, I’ve only been doing this out of state investing for just over two years. It hasn’t been that long. These are several of them from Countrywide. You probably get these for your own house. And this one says you can borrow $18,096.00. I don’t know where they got that number, but some computer. This one says you can borrow $100,000.00. This one says I can borrow $17,988.00 in equity. This one’s $18,423.00. Folks, it’s like I’ve got all these little banks all over the country. Isn’t this great?
This is the refi-till-you-die plan. You don’t get them right away, by the way. I didn’t get these immediately. They had to kind of season a little while, develop some equity, but it really starts to happen. It’s just a wonderful, wonderful feeling. J. Paul Getty’s quote, “People don’t understand the multi-dimensional parts of the real estate asset they’re selling. What are you really buying or selling?” Well, one of them is the property price and its future potential. This is the one most people are very obviously aware of.
The second one is not too many people are aware of is the mortgage. The mortgage is a major part of the asset. I just cannot stress that enough. The mortgage is one of the biggest assets in the real estate deal. Interest rates have ticked up just a little bit since their low, but they’re still very low historically. One of our investors who doesn’t get it, who doesn’t understand how to calculate rate of return and frankly, he just won’t listen, so this guy’s gonna shoot himself in the foot – and by the way, he is a commercial real estate broker; you would think he would know better, but he’s too smart and you can’t tell him anything – he’s decided his property isn’t that great an investment. I offered to buy his half out. He split it with someone else. I offered to buy his half out and I come to discover that this thing is way better than I thought it was because he has a single loan on it for 5.5 percent, 30-year fixed. Wow. What a deal.
I mean think about it. That is something that can no longer be replaced. That loan, you can’t get it today. So that asset, even if the price of the property has not appreciated at all – say that were the case – the mortgage has become an asset relative to the owner because every other owner or buyer that comes after him has to pay more for the money. That mortgage can no longer be duplicated and like I said before, in the next five or ten years, two classes of people, those who stock up on this cheap debt, easy to qualify for debt where they could, and those who miss the boat. Don’t miss it. You will really, really regret it later.
Cash flow in the rental market, that’s sort of the third dimension of real estate and its future potential. Let’s look at how these three dimensions have played out over the past few years and how I think they will play over the coming years. Let’s look at four dates. The Tech Wreck, the dot com bubble, the stock market crash, whatever you wanna call it, early 2000, 9/11 terrorist tragedy, today, the future; four major points in time.
What was going on with one dimension? Interest rates. Well, interest rates were on the rise, and then the dot com bubble burst and they tried to loosen up the money supply, the Federal Reserve did thinking it would stimulate the stock market, and it probably did to some extent. And so they were lowering rates and making money more available and more liquid, but then 9/11 came along and there was a huge historic drop in interest rates, that huge decline that occurred. Of course, no one could forget that day. There was a lot of talk that there will be a global depression. Who knows what will come after this. I mean it was just a major, very scary event, obviously.
The Federal Reserve acted very decisively and lowered rates a whole, whole bunch. Now, the effect this had is it over stimulated real estate in what are now the bubble markets. It was too much stimulation. We didn’t need that much help. But in the linear markets, which are the markets we are now recommending, where places just sort of chug along, there’s not these big ups and downs like California, those markets really didn’t get so much stimulation. So what happened?
In reaction to the lower rates, the cyclical markets really had a big price jump. Remember what happened post-9/11? You do about a year later and the housing market went crazy here. I mean you couldn’t find a house. There was nothing for sale. I remember in Irvine there were like 140 houses for sale in the whole city, whereas normally inventories may be around 400 or 500 at a time. No inventory. Now, it’s like – I don’t know what it is lately, but it’s probably 1300 – 1400 homes, maybe even more. It’s really bad now.
So prices went up a whole bunch. They went to the peak, now we’re past the peak, and going down. Linear markets not quite so sensitive to the large reduction in interest rates. Linear markets, they may have had a little bit of a bump, but it was no big deal. I love how they talk in these out-of-state markets we deal in. “You better act now. The next phase, the price is going up $1000.00.” Ooh. Being from California, we’re thinking if it doesn’t go up $40,000.00 a phase, it’s not a big deal. Right? What’s wrong? So you know how that is if you shop for new homes.
So the prices went up a tad, nothing major, though. They just kind of chug along and do their thing. So what do you do? You lock in the cost of your money for the next three decades. Think about it. Every investor or homebuyer that comes after you has to pay more for that money when rates go up. This is a great thing. Why? Because the other dimension of real estate investments that landlords absolutely love is they love to see higher interest rates. What happens when there’s higher interest rates? The less affordability, the fewer people can qualify, rents go up.
Now, when rates went down, rents went down. And remember about six months after 9/11. I ran into my friend Nancy who works for the largest apartment owner in Orange County, IAC, or Irvine Apartment Communities; the Irvine Company right across the parking lot. I said, “Nancy, how’s it going at the Irvine Company Apartments?” She says, “Terrible. We’re having an awful year.” And I said, “Why is that?” She says, “Well, all of you realtors are selling them houses. They’re all buying and not renting. We’re having to offer huge concessions, low security deposits, bring your iguana and your snake and your dogs, whatever you want. We’ll rent to you, okay?” Because the rental market was very soft when the interest rates were low.
The same thing happens with the mortgage meltdown issue. Like Karam said, fewer people can qualify now. It is tougher for them to get financing and with that in mind, they are renting. The other thing that happens when rates go up, all the people that fell for the live-for-today, instant gratification mentality, they got adjustable rate loans, their rates adjusted, fantasy land or honeymoon is over. Now they’ve got to be in a position where they’re having their rates adjusted up dramatically and they’re forced to either sell their houses – they can’t refinance them, a lot of people – or worse yet, they go into foreclosure. They recycle back into the rental market.
So when you see rates go up or qualifying get harder for whatever reason, the rental market strengthens. The point is here that you win the game either way as long as you understand the dynamics of it and you play it right. Yes, interest rates go up, your property may not appreciate in value. Worse case, it could even go down in value. But not when you’re buying it so close to the cost of construction and you’ve got three billion people consuming materials for building. We talked about that.
So you raise your rents, though, because the landlord market strengthens when interest rates go up. Try ideally to raise your rents about 4 percent per year, so if you’ve got a $1,000.00 property per month, $1,000.00 per month, hopefully next it will $1,040.00. Raise your rents every single year. The time you can’t do it or you can’t do it very aggressively is when rates are low. But then your house should be appreciating in value a whole bunch. So you’re winning either way as long as you understand the dynamics of that.
Now, just some articles on how the rents are going up and renters are losing ground. Realty Times is one of the largest news outlets for the real estate industry, www.realtytimes.com. August 10 of last year, “Renters lose more ground. With the potential buyers forced to rent, a strengthening landlords’ market is moving to new heights with concessions to renters vanishing like ever increasing home prices.”
You see what happened there? The prices started to soften, but that was really mostly in the bubble markets anyway, and rents started going up. Look at us. This is just two months later, October 11, “Bidding war may be moving to the rental front.” So the rental market is strengthening. I’m starting to pump my rents up on all my properties. I try to raise them every year. Now I can be even more aggressive because it’s harder for them to qualify. It’s just supply and demand. When you understand this, you win either way.
The few different scenarios, and kind of my opinion, as a way they could play out for you. One is that the dollar will weaken. I think the dollar will continue to weaken and get a lot weaker over the coming years. This is due to inflation, and inflation, by the way, is our friend when we play it properly. So the dollar weakens. That means there’s more foreign investment in our market because why? Our properties look cheap when exchanged into dollar denominated assets.
What else happens? Inflation. That means there’s upper pressure on rents and real estate prices, and the little side benefit is our debt is essentially being paid off by inflation. Beautiful thing.
Higher interest rates, affordability declines, people can’t buy because they can’t qualify, so you increase your rents. What if we have the cost of construction increasing? Well, I think that’s a foregone conclusion over the next several decades. Supply of any piece of improved real estate declines. Less people build when it’s more expensive to build, right? Sound logical? That means upward pressure on rents and prices.
What about affordability? People are forced to rent, rents go up, same concept as before. Stagflation, that’s kind of an interesting concept. Well, value could decline, but if there is stagflation, it’ll be similar to the Houston market over the last 25 years. Until a couple years ago, the Houston – one of our markets – I own a few houses in Houston. The Houston market has been like flat. It’s done nothing, you know, since oil, well, crashed and then it just flattened for like two and a half decades. So here’s the thing. When that happens, there’s no urgency for people to buy. Why do people all wanna buy here, at least until recently? Because they were scared of loss. They were scared if we don’t get in now, we’ll never get in. That was the feeling, right? You’re all nodding your heads in agreement.
So stagflation occurs. There’s no real incentive to buy. Values either flat now or declined, but people rent so there’s upward pressure on rents because you have more renters. And the likelihood is interest rates will decline and you refinance. That is the one time I could be wrong about my recommendation to get 30-year fixed rate loans. But I still get fixed rate loans on all my houses. I like it better.
What if we have an overall depression like we had 78 years ago? Isn’t it amazing that so many of our financial philosophies and our thinking about debt is rooted in what happened 78 years ago? Because our grandparents and our parents even have told us save for a rainy day. Well, we were on the gold standard back then, okay, folks? They didn’t have rampant inflation. It’s a different strategy today. If we have an overall depression now, you remember the Waltons – goodnight, John Boy – if we have an overall depression today, we’re all screwed. Sorry, I can’t solve all your problems. I just wanna make the full disclosure there.
But actually, if you finance your properties correctly, at least you have options because you can go to your lender and your lender is probably more screwed than you are. You can always negotiate with them in a worst case calamity, tragic situation. That’s what’s happening here in California now. People are doing what they call “short sales” and “workouts” where they’re saying to their lender, look, I’m a moron. I got into a house over my head and I couldn’t afford it.
Do you know in the New Jersey – actually, if you email me, I’ll email this article. I just saw it yesterday on In the News. There is actually a government financed mortgage bail-out program now. It’s like it pays to be irresponsible nowadays. Isn’t it ridiculous? Where they are floating government bonds to bail people out that got adjustable rates, subprime loans. Disgusting, you know, from the philosophical perspective. But the point is our society, for better or worse, and I say worse, rewards debt, so do what they want you to do. So either way you play the game, well, your cash flow should improve and you win the game.
Okay, welcome back. Well, now you’ve heard a little bit from that recent live seminar about the three dimensions of real estate. Remember there are actually more than three dimensions. Real estate is a multi-dimensional asset class, unlike other more simplistic investments, like commodities or stocks or bonds, things like that. Real estate is multi-dimensional and as long as you adapt and adapt quickly to the type of market you’re in, you can always maximize your investment potential. So for example, if interest rates go way up and that is causing prices to be stagnant or even fall, God forbid – of course, if you listen to the prior podcast on eliminating downside risk in your investments and you buy based on construction cost value versus land value, the likelihood of any downturn is extremely low. That’s another subject. Go back and listen to that podcast and we explain that.
But say, for example, you have a situation where we’ve got high interest rates. Well, that is going to mean that you should be able to raise your rents more aggressively. Also, not just a matter of interest rates, but just ability to qualify. The type of market we’re in at the time of this podcast recording is we’ve got this credit bubble, this mortgage meltdown, if you will, and with this, this is a good time and we’re seeing it in many markets all over the country. We’re seeing the rent increases because the tenants cannot qualify to buy a property, so what do they have to do? They have to rent.
A whole other group of people got themselves into trouble where they’ve got to sell their home because they took an imprudent adjustable rate mortgage or they got into a situation where, God forbid, even worse; they went into foreclosure. They recycled back into the rental market and those people become your renters, increasing rental demand. So multi-dimensional asset. If you have more questions about this and I know on the podcasts you don’t have the benefit of the visual aids, meet with, talk with any of our investment counselors. They will be glad to explain this to you in more detail.
Okay, I want to give a little disclaimer, kind of on a different subject. In recent podcasts, we have profiled a couple of markets and we got kind of concerned about this because we profiled some great places to invest. Dallas, Texas was a recent podcast, Mobile, Alabama, Austin, Texas, other great places to invest, and we’ll profile many other markets in the future. But we need to make a disclaimer to you. Don’t run out and follow our advice. Can you believe I’m saying that? Well, I don’t exactly mean that, but here’s what I do mean.
You’ve got to understand the distinction between the macro market of a place like Dallas or a place like Austin, or a place like Mobile, Alabama, or Salt Lake City, Utah, wherever it is. Those may be good markets and we’re talking about them kind of generally in the macro sense, but within every city is a micro market. So there are a lot of questions that need to be answered here. What area of the city do you want to be in? What is the best area to invest in? Every city has a wide variety of areas. What neighborhood or subdivision? Drone down even further.
I brought Marcus Meleton, who was interviewed on a prior podcast. He’s a senior area manager for us and senior investment counselor, and just wanted to have him comment on some of these micro considerations, so Marcus, thanks for coming in to comment on this.
Marcus Meleton: Oh, sure. One of my biggest areas is Houston and we’ve talked about this before. Houston’s a very large city. There are a lot of places to invest in in Houston. There are a lot of builders that are there.
Jason Hartman: Good and bad.
Marcus Meleton: Good and bad. There are a lot of neighborhoods that are in there, good and bad. And our objective and really, how you leverage us is that I fly out there. I have an agent out there. I have agents out there. I have property managers out there.
Jason Hartman: And you’re talking to them all the time, so you have your finger on the pulse.
Marcus Meleton: Phone, visit. If we buy in the neighborhood or want to buy in a neighborhood, I’ve either been there or I will be there. And what we do with them is you don’t wanna just buy a house in Houston. You want to buy a house with the best value that’s gonna get a great rent, that’s gonna be in a very good neighborhood; that’s gonna have a long history, yeah, a long future ahead of it. And that’s what you wanna get and that really takes a lot of selection to do it. There are loads of homes to buy, lots of neighborhoods.
Jason Hartman: And there are 4-plexes and apartment buildings and different options.
Marcus Meleton: And Houston, in that particular case, a 4-plex is not a good idea. In other places it is and there are reasons for that, and that’s something we can go in depth in another time. So when we sell a house there, that house has been cleared by me, by the agent that found it, by the property manager, who will go look at it and say will it rent for this much? Is this a good house to rent because some houses aren’t really beneficial to renters in the city or the neighborhood you’re buying in?
So everything’s been vetted so that when you buy a house, it’s one that we ourselves would invest in and it’s very selective.
Jason Hartman: And it’s one that we ourselves do invest in –
Marcus Meleton: Do invest in myself, uh huh.
Jason Hartman: –because we follow our own advice. And if you wanna just comment on that again, Marcus, maybe it would be helpful.
Marcus Meleton: Right, because I’ve got three homes in Houston. I have to buy in the cities I sell in.
Jason Hartman: Yep, that’s one of our rules here that is every area manager has to purchase and invest in the area before they’re allowed to recommend it to you, our client, so that’s our first stage of quality control is they’ve gotta put their money where their mouth is. So that’s helpful.
Marcus Meleton: You can call any agent in Houston and you can ask them to find you a house that’s $150,000.00 with 2,500 square feet, brick on the outside, and there’s an incredible range of homes that you could get. And they will sell it to you even though it’s not the right size to rent, even though it’s in a neighborhood that’s maybe not as good as could be, the school district isn’t as good, the layout isn’t a type of layout or the size that renters are renting at that area. They will sell it to you because all they’re concerned with is that you’re gonna buy the house and they’re gonna get their income on it.
Jason Hartman: Yeah, the other considerations are leverage the human capital of our network. You know, we have people that are flying around to these areas, like Marcus, and checking them out and they’re doing their own investing there. Marcus, I remember one time we were in Charleston, South Carolina, I believe it was, and we were looking at properties and we drove through this one area that agents had told us was a good rental property type of market. And we saw these sort of duplex type attached style homes. Remember those? Do you remember what –?
Marcus Meleton: Yeah. And it was a builder we bought from.
Jason Hartman: We didn’t discuss this before recording, but it was built by, I believe, KB Home, if I’m not mistaken. That was the builder. And they were awful. They were just terrible. They looked like a tenement tract. The front doors were right next to each other.
Marcus Meleton: We didn’t even get out of the car.
Jason Hartman: No. I wish we would have taken pictures of that because it served as a bad example.
Marcus Meleton: It was right next to an area of the city that was an excellent place to buy and a much, much better builder. You could have gotten that house that we looked at, those duplexes, for a good bit less than what we were buying ours for, but it would have rented for very poorly. You would have had a lot of maintenance costs and you just never would have gotten any appreciation out of those that you would have gotten from the homes we did choose. We found another one, if you remember. It was next to a landfill.
Jason Hartman: Yeah, that was up in Charleston area also and that was in an area called Monk’s Corner.
Marcus Meleton: Right.
Jason Hartman: And remember we thought we had discovered the sort of a gold mine because we were there first and it was just a little trailer. They had no sales office in presence.
Marcus Meleton: Nothing had been sold, yeah.
Jason Hartman: And we thought it was really good at first, Marcus, but then we drove around and we went around the whole area. We saw one sign that said landfill. The other said, I believe, like Waste Recycling Center.
Marcus Meleton: That was on the other side, yeah.
Jason Hartman: You know you don’t wanna live next to those, yeah. So on each side, it had a problem.
Marcus Meleton: Right and our agents know in those cities that we don’t wanna have one of our clients buy a house and find out later that it’s next to a landfill. I mean if it is, then they should tell you and tell you that the price is so exceptionally low that it’s still worth it. But you need to know this and that’s how you leverage us. We go out and we look at the places like this. I had in Houston, someone came in, looks like they may be going bankrupt. They had bought two homes in Houston. Great city to buy in. They both cost $250,000.00 something.
Jason Hartman: They bought too high for that area, see?
Marcus Meleton: You never buy a house that high because the rents only go up a certain level and there’s no assistance.
Jason Hartman: Yeah, and then they become buyers, so they’re out of that market.
Marcus Meleton: And so she was getting maybe $200 – $300 a month rent more than what I was getting, but we were paying almost half as much for the homes in the same neighborhood.
Jason Hartman: So the RV ratio wasn’t very good.
Marcus Meleton: They were smaller and they were rent ready. And so here she is about to go bankrupt because she was trying to get a rent to make up for the cost of $250,000.00 and all we had to do was get the rent that was gonna make up for a $135,000.00 house and we nailed it and we got about 1 percent the value of the house, and we did well and she may very well be going bankrupt and it’s because she heard Houston was a good place to buy. Called an agent, agent sold her a house; he convinced her that it was gonna rent for a certain amount. Said, hey, there’s a second one. Maybe you oughta buy it before it falls off the market. She did that and she came in to me to ask for advice on how to deal with this.
Jason Hartman: Yeah, so very interesting. Yeah, don’t let that happen to you. Don’t be caught in that situation. Leverage the human capital of our network by calling our office, talking with our investment counselors here and they will help you with all of these micro considerations. The considerations, some of them – and this is not all of them; just a review – area of the city, neighborhood or subdivision within that area of the city; type of property; housing; floor plan; single level; two story; what size is optimum at that time. And all of this stuff is really a moving target because I remember what happened years ago in Arizona in the Phoenix area, which by the way, don’t invest there now. That market’s totally overvalued at the moment. But this stuff is dynamic and it changes.
Here’s what happened. Everybody from California, it would seem, ran out to Phoenix as the market was starting to boom in about, oh, 2002, 2003. They bought two or three rental properties out there with their home equity from California and they flooded the rental market with all of the things that people think, Marcus, makes the good, typical rental. A smaller, three bedroom, two bath house, okay, and they put so many of these on the rental market that nobody was renting. So in that time in Phoenix, the best thing actually was to buy something more expensive, to buy something larger, nicer neighborhood; maybe four bedrooms, three baths, and spend a little more for it, maybe $50,000.00 more because there was that total shortage at that time in the rental market.
So it depends. This is all dynamic and it’s always changing. So the other consideration is price ranger, higher or lower; school district; shopping; homeowners association, yes or no, good or bad. It differs depending on area. Community amenities; those differ in their desirability. Garage or no garage; employment centers; what type of employment. What is your ideal tenant profile? So there is a lot of stuff to know and outside of these micro market considerations, there are also things regarding the micro aspects of what type of financing and what type of plan you have and sort of financial plan for your investments. So that’s what we’re here for. We just wanted to make that disclaimer. Use us. Take advantage of the human capital by giving us a call.
Okay, any other comments on that, Marcus?
Marcus Meleton: That’s it. That is our job to really look these over and sift through because there really are a lot of places, a lot of homes, a lot of areas you can buy into, so you may as well buy in the best areas and the best areas of the areas, best size house, and have a property manager basically approve of it before you actually put it up to one of our clients to purchase.
Jason Hartman: Excellent. Well, thanks for commenting on that. Thank you so much for joining us today. We look forward to talking to you on the next podcast. We’ve got some really good podcasts coming up. One is going to address the big China and India factor, and the looming asset shortage. The other one is going to be a property selection, like an in-depth property selection podcast. We’ve just got a lot of good stuff in the wings, so keep listening and thank you for making us so popular. We – recently, I just returned from Europe, and by the way, we got a future podcast on that, probably the next one, talking about international investing. Kinda interesting. A little bit out of the box.
But I just returned from Europe and while I was gone, we are very happy to say that we broke the 10,000 listener mark, so thank you for listening and we appreciate your tuning in and please keep doing it and recommend our podcast to all of your friends, family, coworkers, etc.
I want to recommend a book today. I finished it while I was on my trip in Eastern Europe and it is called Revolutionary Wealth by Alvin and Heidi Toffler. They are futurists. It’s not about real estate at all, but it’s always about real estate. And the reason it’s always about real estate is because all of the trends they discuss, very many of them talking about China and India, which is a big issue in the world today and good issue that is going to really cause us to prosper in the future with our real estate investments, are sort of chronicled in there. And so I’ll talk about that in more details in a future podcast, but get a copy of Revolutionary Wealth by Alvin and Heidi Toffler. I think you’ll really enjoy it. A lot of good stuff in there, and until next time, we wanna wish you happy investing and we will talk to you soon. Take care.
I’m here with Area Manager and Investment Counselor Lynda Mulley, and she just returned from Kansas City and also Grand Junction, Colorado, and Lynda, tell us about what you saw in Kansas City.
Lynda Mulley: Kansas City is a great market, Jason. It’s very stable and solid. It’s a market where there’s good growth and lots of things going on, and there’s some great projects there that I took a look at that I think the investors would love to hear about.
Jason Hartman: Now one of the things we always do is you’ve gotta go buy your own house there if you wanna recommend the area to clients and of course, I’m already an owner in Kansas City. I bought a 4-plex there, but tell us what you’re recommending today in Kansas City.
Lynda Mulley: What we have is a great single-family home, three-bedroom, two-bath, about 1450 square feet, for $189,900.00.
Jason Hartman: Brand, spanking new, right?
Lynda Mulley: Brand new, rent ready, close to schools and a beautiful shopping center, big upscale shopping center called Zona Rosa, which I had lunch at and just fell in love with.
Jason Hartman: Excellent. What’s the projected return on investment?
Lynda Mulley: Projected investment return here is 34 percent based on our usual assumptions that we put on our performance projections in the loan that you could get.
Jason Hartman: Excellent. Boy, 34 percent annually. Don’t try that in a mutual fund or the stock market. You probably won’t get it. But you can do it pretty conservatively and prudently with the right real estate investments with the right structure. Lynda thanks so much for talking about the property in Kansas City.
Lynda Mulley: You bet. Thanks so much.
Jason Hartman: Hey, I just wanted to announce a couple of quick things for you. If you are interested in the Platinum Properties Investor Network franchise in your area, we are now approved for franchising in eighteen states. Please visit www.jasonhartman.com and click on the franchise link, and fill out the short application.
If you are able to come to one of our live events, we would love to see you and meet you in person. We’ve had people fly in from all over the U.S. for them. So hopefully you can join us for some of those events.
Also, if you are interested in career opportunities with us, our company is growing quickly and we would love to talk with you about career opportunities.
Also, remember our rental coordinator is here to help with your rental properties. If you need assistance with your rentals, your property managers, your advertising, remember we’re here to help and we stay with you through the life of the investment. So feel free to call our office anytime and ask for the rental coordinator for assistance on your rentals.
Also wanna remind you, listen to our old podcasts. At least go back to Podcast No. 13 forward and listen to all the podcasts after that. You’re welcome to listen to all of them. The ones before No. 13 are older, but they’re also good, but the newer ones are No. 13 and forward, which are really good ones to listen to, so please take advantage of that.
Be sure to see appropriate disclaimers and disclosures on our website at www.jasonhartman.com. Remember that we are not tax or legal advisors. So give us a call on any of these issues, and remember, we are here to help, and we will look forward to talking to you on the next podcast.
This material is the copyrighted creative work of either Jason Hartman, the Hartman Media Company, Platinum Properties Investor Network, Incorporated or the J. Hartman Company, all rights reserved.
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Duration: 48 minutes