Jason shares an abridged real-world Portfolio Makeover™ and some thoughts on empire building. Investment Counselor and Area Manager, Lynda Mulley, asks a common client question and Jason interviews a prior guest from episode #29, Chartered Financial Analyst and Finance MBA, Daniel Amerman, on winning through inflation and creating wealth with prudent debt. Learn how the “Three Boxers” fight with powerful economic forces and who wins in the ring.
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: Welcome to the Creating Wealth podcast. Happy Thanksgiving to our American listeners. It is Thanksgiving Day tomorrow, so we want to wish you and your families a very happy Thanksgiving. And today we want to talk about several things, but we’re going to start off with one of the commandments. We have a prior podcast on the ten commandments of successful investing, which kind of sums up our core philosophy of investing.
And why don’t we just start with No. 1 today? And that is what we’re doing today, and that is what we do in all our podcasts and our seminars, and that is thou shalt become educated. It is so important to become educated so that you, the investor, can be your own best advisor, not relying on anybody else, not even relying on us to some extent. Be your own best advisor and know the market.
I did a radio interview the other night, and it is amazing to me how many people still are so unaware of what is going on in the market. People that are still wanting to invest in crazy places like Las Vegas and Miami, overvalued markets, California, many of them, so we will keep you educated – that’s our commitment to you here – and make sure that you have the latest and greatest and most innovative new thinking on real estate investing in America’s most prudent investment.
At one of our recent seminars, we had a successful investor in the front of the room. Her name was Evelyn. Hi, Evelyn, if you’re listening. I know you’re a podcast listener, so it’s good to have you with us. And she shared her what we call portfolio makeover with us, and this is an exercise that any of our investment counselors here at the office would be happy to do for you, and we also do it as just a quick sample in our seminars, so I thought I’d share this one with you.
She has a property in Southern California that’s valued at about $2.5 million, and this is so amazing how much money people have that is not working for them, and we want to put this money to work. And Evelyn, being very sharp, saw this right away and wanted to jump on this and make it work for her.
So the property worth $2.5 million rents for about a .4 RV ratio, and if you’ve listened to us talk about RV or rent-to-value ratios on other podcasts, you know what that’s about. Our ideal target is a .7 percent RV ratio, so the before and after picture here is really wonderful, really exciting, and really awakening because if she were to sell or refinance this $2.5 million property, and do it on a tax-free event, a 1031 tax-deferred exchange with 30 percent down on the new properties, she could buy – assuming she could qualify for all of the loans, which won’t be easy because this is a big number – about 34 properties in diversified markets around the country.
I mean, think about that. One property, non-diversified, all your eggs in one basket in Southern California, which is a declining market with bad cash flow at the current time, or 34 properties in basically a kingdom, an empire of real estate, spread all around the US in diversified markets. Now, the portfolio value would go from about $2.5 million, and by the way, this client we’re talking about has other assets, but this is just one asset, and we want to put each asset to work at its highest and best use.
So the before picture is one $2.5 million property; 34 diversified properties around the country would be a value of about $5.8 million, and look at the difference in the rental income. Currently, it’s $9,500.00 a month, but in the diversified markets with all of these properties, assuming our target of the .7 percent RV ratio is achieved, the rental income here would be $40,600.00 a month. Forty thousand dollars a month versus $9,500.00 a month, and there would be a whole lot more tax benefits and, of course, a whole lot more diversification.
Now, that’s our basic idea on the portfolio makeover. Let me just give you a suggested portfolio, and this is much smaller than this particular client could do. She could do a lot more than this and put a lot more money to work, and I’m sure she is working on that now because I know she was very excited after attending our last two seminars. But if you wanted to buy ten properties, and you wanted to buy those properties – assuming you could qualify for all the loans; it’s always subject to qualifying – based on 10 percent down, it would only take $248,000.00.
Now, we always suggest that our clients keep at least 4 percent of the value of all the properties in reserves, cash reserves of 4 percent. So down payment and closing costs, $248,000.00, cash reserves of just under $74,000.00, for the total cash needed to have a little mini real estate empire here – Donald Trump would probably be eventually worried here that you’d be catching up to him – of ten properties in diversified markets is only $322,000.00.
Do you know our typical client comes to us with about $300,000.00 or so equity sitting in their home not working for them? That equity is earning exactly zero percent interest, and there is no FDIC insurance. That is sleepy money. It is lazy money. Put it to work at its highest and best use. That’s just a little taste of the portfolio makeover. Again, there’s more to it than that. Our investment counselors here would be happy to help you with it, and of course you can call us at any time to have your own portfolio makeover done and make sure you’re using your assets, whether it be stocks, bonds, mutual funds, a savings account, equity in a rental property, equity in your own home.
Make sure it’s working as hard as it can. You work hard in your career. You want your kids to work hard. If your spouse is working, maybe you want your spouse to work hard, too. Make your money work for you. It’s really easy to do and a very prudent thing to do, so that’s a taste of the portfolio makeover.
All right. I want to do something kind of different today for the podcast. I have one of our investment counselors and area managers here, Lynda Mulley, and we are going to be on a future podcast constantly answering a lot of the frequently asked questions we get from our clients. So Lynda, what is your question?
Lynda Mulley: The question I’ve been getting a lot lately, and I think it’s a recurring one and a good one from our investors, is the concern about buying real estate out of state. And that is the question on what do we do for property management when we purchase a property and we’re buying it out of state where we may not necessarily go look at it or even see it in the first year that we own it.
Jason Hartman: Absolutely. Lynda, that’s a great question. I have never seen most of my properties. I kind of think about my other investments, too. I think about my stocks that I own, and I’ve never visited any of those companies, either. In fact, I’m not a customer of most of those companies. I have no idea how they run their business. Now, I don’t think this is a good way to invest because we believe in direct investing.
So what we do is we help people diversify and build national real estate portfolios so that they are in many markets. A long time ago I remember reading back in the early ’80s in my first real estate book – it was a Robert Allen book – where he said, “Try to have all your rental properties within one hour of your house.” And you know what? That would be reasonably good advice. It doesn’t work today, but it would be reasonably good advice if I lived in a market that made sense to invest in, but I don’t.
I live in a very expensive, overvalued market here in Orange County, California, and it doesn’t work here. Investing doesn’t work here, so what do I do? What are my choices? Do I either not invest in real estate at all, or do I invest only in other things like stocks and bonds – and we know the lousy performance of those investments – or do I decide I’m going to be a sophisticated national investor?
Now, what we do here at Platinum Properties Investor Network is we, of course, provide the complete solution for real estate investors. So we have a national perspective where we look at properties all over the country. We’re not attached to any one market. When a market stops making sense, we don’t recommend it. We just go somewhere else, and then we make it very easy for our clients to coordinate national portfolios of real estate.
So you’re an area manager, and I know what you do and I know what our other area managers do.
Lynda Mulley: Um hm.
Jason Hartman: You go to markets, you visit the markets, you get your shoes dirty. You look through the tracts of homes as they’re under construction.
Lynda Mulley: Exactly.
Jason Hartman: Or the tracts of commercial properties when a commercial property is under construction, and then you interview at least – in each area at least three property managers. You try to meet with them all face-to-face and you ask them tough questions about the rental market. What is going on with the rental market? Are properties renting easily or are landlords being forced to give concessions?
And one of the nice things about talking to property managers versus real estate agents and developers is that the property managers, like us here at Platinum Properties Investor Network, they have to live with the investment. They have to live with a client on an ongoing basis, and so they’re much more likely to give you the real picture of what’s going on out there versus the Pollyanna picture of, “Hey, we just want to sell you a property.”
So our area managers research markets, and that’s what they do. And they’re not attached to any one market, so if a market doesn’t work, they just go somewhere else. We’re completely disloyal to markets. We only want to be in working markets. And then the other thing we do is we, of course, provide a lot of leverage over that property manager to make sure our clients get good service.
So the example is we tell you as a client, “Diversify; be in several markets.” The problem with diversification, it’s good advice but there is one down side to it is that when you’re diversified, you might have one or two properties in each city, so you don’t represent a large account to any one property manager. And I always say that property management is a thankless, low-paying job. So a property manager might have two or three hundred accounts under management, and if they lose on client because the client gets upset or the property is not rented and they’re not receiving income, it’s no big deal to them.
But we, on the other hand, have referred maybe two, three, four dozen, 100, over 100 clients to that one property manager, and so if our client has trouble getting good service from the property manager, email or call your investment counselor here at Platinum Properties and we will call them and see what’s going on for you.
And we’ve only fired three property managers since we started our nationwide network about three years ago, but I’ll tell you, if they lose our account, they lose a lot of business so it is valuable to them, and so if they get a call or an email from us, they are responsive.
So does that answer the question or was there more to it than that?
Lynda Mulley: That’s exactly what we do, and I think we also have a rental coordinator that works with us and we can supplement –
Jason Hartman: Oh. Thank you. I forgot to mention that.
Lynda Mulley: – what the property manager is doing. And as an area manager, and I know the other area managers that we have here also are talking to these people on a weekly basis.
Jason Hartman: On a weekly or sometimes daily basis actually.
Lynda Mulley: Sometimes daily basis.
Jason Hartman: Yeah.
Lynda Mulley: We’re always watching the balance of what’s out there to be rented and how the rental market is going, so hopefully that makes people comfortable that we have this under control.
Jason Hartman: Yeah, it is. So we look at the absorption rates, the amount of incentives we have to give and all that kind of stuff, so great question.
Now let’s listen in to the continuation of my interview with Dan Amerman. And this was a second part. Dan is really one of the most insightful people on inflation and the benefits of debt versus inflation. It’s really the best way to win and beat the inflation game with your mortgage. So there are there particular ways to use this, and listen in to the rest of this interview and then we’ll be back for more.
Dan, welcome to the show.
Dan Amerman: Oh, thank you so much, Jason.
Jason Hartman: It’s great to have you. Something else you talk about is boxing with inflation. Can you explain how someone can box with inflation?
Dan Amerman: Well, what I’m talking about with – in boxing with inflation is looking really in constant dollar economics, but there’s a problem with constant dollar economics – it’s so boring. It’s very difficult to follow.
Jason Hartman: Okay. So what is cost in dollar economics?
Dan Amerman: It says that you look at what the dollars are and you strip out the inflation –
Jason Hartman: Okay.
Dan Amerman: – when you compare them across time.
Jason Hartman: So that’s really just adjusting dollars for inflation?
Dan Amerman: Yeah.
Jason Hartman: Yeah, okay.
Dan Amerman: Which is easier said than done.
Jason Hartman: All right.
Dan Amerman: And what I’m doing with boxing with inflation is to make it easier for people to follow the concepts that are involved. Instead of talking about economics, I’m taking three different boxers and I’m putting them in the ring with inflation. And the first one has a glass jaw, and by a glass jaw I mean they own dollar denominated investments.
Jason Hartman: Yeah. So they’re going to be very delicate when someone hits them.
Dan Amerman: It takes one hit to the jaw and down they go, yeah. The only question is how hard the hit is. And their assets are going to be wiped out and, unfortunately, that’s going to be true of an awful lot of people.
Jason Hartman: I know. It’s just so sad, and I hope our work and your work helps correct this and many people will take action. I feel so bad for the unfortunate that don’t take action on this topic. Okay. So the first boxer with a glass jaw, he gets a punch to the jaw and it breaks, and so he’s wiped out because he’s living his life in dollar denominated assets.
Dan Amerman: What he’s doing in the boxing ring essentially is he’s kind of standing there with his eyes shut and his hands by his side and kind of leaning forward with his jaw out.
Jason Hartman: Okay. So we don’t want to be the boxer with the glass jaw. Who’s the second boxer?
Dan Amerman: The second boxer is our control because he shows the difference between tangible assets like real estate and tangible assets plus debt. So our second boxer is someone who, let’s say, owns a $1 million property but he owns it debt free. And what this boxer has is he has a right jab, and he can use that right jab to keep inflation at bay.
Jason Hartman: How does he do that, though, because he didn’t borrow? Unfortunately, he didn’t borrow on his property.
Dan Amerman: Right. Well, his $1 million property, let’s say that dollar becomes worth a quarter. If he’s fortunate – and it really doesn’t work that way; he probably won’t do quite as well in inflationary times – his $1 million property will become a $4 million property.
Jason Hartman: Okay.
Dan Amerman: So you divide by four then to account for the inflation, and he’s still got a $1 million property in real dollar terms.
Jason Hartman: In real dollars, yes.
Dan Amerman: In fact, if we go into an inflationary environment, high interest rates tend to drop the price beneath that, so he probably wouldn’t quite stay there. But he’s pretty much keeping inflation at bay, so it looks like if you look at it in nominal dollars, he turned a $1 million into $4 million, and he’s doing really well.
Jason Hartman: Explain for the listeners, if you would, nominal dollars because we use that term quite a bit, and I know what it means but what does it mean? You’re the expert.
Dan Amerman: A nominal dollar means a dollar’s a dollar. It means that a dollar is worth the same right now as a dollar was worth, let’s say, in 1970 when the average price of a house was $17,000.00. Now, when we look at a difference that great, it’s easy to see that a dollar is not a dollar. In fact, there hasn’t been any year in our lives where a dollar’s been a dollar between years. It shifts every single year, but we tend to lose track of that. So anytime you talk about dollars but you don’t adjust for inflation, you’re using nominal dollars, and then when you adjust for inflation you’re using real dollars.
Jason Hartman: Got it.
Dan Amerman: So our boxer with the right jab is pretty much keeping inflation at bay, but his turning $1 million to $4 million is an illusion. It didn’t happen in real dollars; it just happened in nominal dollars.
Jason Hartman: Okay. So now that begs the question, before we go on to the third boxer, Dan, is we’ve seen such radical real estate appreciation prices in the past few years, especially the post‑911 marketplace where the Greenspan interest rate cuts which were – they were too much. He pumped way too much liquidity in the system, in my opinion, and so we saw this huge real estate inflation.
But here’s the trick is that real inflation hasn’t really been as much as the real estate inflation, although real inflation has been, in my opinion, higher than what the government tells us by at least double, maybe three times what the government says. But the real estate inflation has been far above that.
Now, of course, if you live in Southern California like I do, your most expensive part of life is your house, and that’s not necessarily true all over for sure. But what are your comments on that? It seems like the people in this market have won because they got that radical appreciation that is above inflation, so they can go out and buy cars, watches, home theater systems, et cetera, go on vacations, that haven’t gone up as much as the gains they’ve made from their real estate.
Dan Amerman: Yeah. You’re talking almost a matter of economic philosophy and what we call inflation because inflation is an artificial construct. There’s no such thing really. The way people usually do it is they look at changes in the Consumer Price Index, which is itself an artificial construct.
I would argue, as would many other people with economics inclinations, that asset inflation is every bit as much inflation as inflation in the cost of a hamburger. That if a house doubles in cost, that’s inflation. It costs you twice as much to buy it, but we don’t include that in our official government inflation measures.
Jason Hartman: I know. That’s completely ridiculous.
Dan Amerman: What we do from a government perspective, and it looks really good for winning elections and so forth –
Jason Hartman: Sure.
Dan Amerman: – is that we say if a house costs twice as much as it did five years ago, that we take that all into income but we ignore the expense.
Jason Hartman: That’s so bogus.
Dan Amerman: So it distorts the system.
Jason Hartman: Yeah. Okay. So who’s the third boxer?
Dan Amerman: The third boxer has a right jab just like the second boxer. Okay. Let’s say they owe a – they own a $1 million property, but they have a left hook, too.
Jason Hartman: Okay. So the third boxer is the best equipped. He’s got a good right jab and a good left hook.
Dan Amerman: So he’s got the defense in terms of the right jab, and what his left hook is, it’s his mortgage.
Jason Hartman: Uh huh, so his mortgage is an asset? Is that what you’re saying?
Dan Amerman: His mortgage is how he goes on the offense against inflation.
Jason Hartman: All right. How does he do that?
Dan Amerman: He turns inflation into wealth.
Jason Hartman: Okay.
Dan Amerman: Well, here’s what happens, and you can look at it in nominal dollar terms or you can look at it in real dollar terms. If you had an $800,000.00 mortgage against that $1 million property, and then a dollar’s worth a quarter, he pays the mortgage back with dollars that are worth a quarter each.
Jason Hartman: Okay. So let’s put it in maybe a perspective the listeners can understand a little better, so you have an $800,000.00 mortgage.
Dan Amerman: And it’s now worth $200,000.00.
Jason Hartman: And it’s now worth $200,000.00, but like how many years went by? How much time has elapsed?
Dan Amerman: Oh, that’s a really good question. If you’re talking about history in terms of recent years, it may be a number of years. If we’re talking about when the crunch is really hitting with the baby boom retiring over the next ten years, that could happen in a fairly short period of time. The problem is once substantial inflation really gets out of the box, it’s tough to put it back in.
Jason Hartman: Okay. So comment on that before we move on because this is really, really important, Dan. What is your projection? What is your outlook for inflation?
Dan Amerman: My outlook for inflation is that I think it is highly likely that the dollar is going to be severely damaged within the next five to ten years.
Jason Hartman: But it’s already so low. I mean, the dollar is at one of its lowest value points compared to other currencies since it’s been in like ’76 or something like that. I mean, it’s really low right now.
Dan Amerman: Yeah. But what you have to remember about what we’re seeing with the dollar and interest rates right now is they have nothing to do with the free market. They have to do with manipulations on both the long and in the short end. Right now what we’re seeing with the dollar and with interest rates is we’re seeing, in my opinion, fairly frantic attempts by the Fed to contain the damage from the sub-prime mortgage debacle –
Jason Hartman: Sure.
Dan Amerman: – by pumping more liquidity in the system to keep interest rates artificially low. Now, if you look at the long end, and this is something that’s really changed in the last ten years from classic economics, from people who took it in college even from the mid ’90s or before, is that our long-term interest rates are kind of driven by our trade deficit. I don’t know if you’re familiar –
Jason Hartman: Yeah, sure.
Dan Amerman: – with that approach.
Dan Amerman: But effectively because we are buying much more goods from China and Japan and other overseas nations than we can pay for, they have excess dollars.
Jason Hartman: Right.
Dan Amerman: And to keep this trade going for their own reasons –
Jason Hartman: They prop up our dollar.
Dan Amerman: – they prop up our dollar.
Jason Hartman: Then this is a very dangerous thing, by the way, in my opinion because this is an artificial deal. China could pull the rug out from under us at any time, and when they don’t need us as customers so much, when they create their own 1.3 billion customers by creating more wealth in their country, then that’s a scary scenario, it really is.
Dan Amerman: It is. So we have this kind of artificial island of stability is how I look at it, and whether that could last three months or three years, I don’t know.
Jason Hartman: Yeah.
Dan Amerman: I don’t think anyone else knows either, but the problem is the longer we keep things at this artificial level, the more severe the adjustment is going to be when things finally break loose which makes me think there’s a very good chance it’s going to come fast and hard.
Jason Hartman: I have another theory about that, and I don’t think I’ve even said this on a podcast before, but I think that the reason there is a lot of inflation coming at us in the future is because so much wealth is being created outside of the US. You’ve got this giant growing middle class in China, India, many other countries. I leave for Ukraine on Wednesday, and just reading an article as I’m researching the real estate market there about how everybody has got so much money now, it’s just amazing that all of these economies around the world are moving up.
And, I mean, that’s a good thing for people, certainly, but what that means is that people in other countries, we can’t find the cheap labor pools to keep outsourcing to forever. I think those are going to go away, and as they go away and people demand more pay, then what happens to the shelves of Target and Wal-Mart and Costco and all of our stores here where we’re getting the benefit now of, in my opinion, artificially or at least temporarily cheap consumer goods? Do you agree with that?
Dan Amerman: Oh, absolutely. I mean, that’s the long term bigger picture is depending on the source you go with, we in the United States have been fortunate enough to, as 4.5 percent of the world’s population, to be consuming about – depending on who you believe, about 25 to 33 percent of the world’s resources. That’s been very lucky for you and I growing up and the lifestyles we’ve enjoyed so far, but the rest of the world doesn’t really want that situation to continue.
Jason Hartman: Why don’t they want it to continue?
Dan Amerman: Because they want to enjoy the same benefits we get.
Jason Hartman: Well, yeah. No. I understand that. I didn’t mean it in that sense, but – so they enjoy the same benefits. They become more wealthy, and there are studies that say over 200 million Chinese have been lifted out of poverty due to globalization, and many more to come. So as they become more wealthy, they will start being more expensive. They will start demanding more from their employers. They may form unions and everything that happened in the US 80 years ago, 100 years ago, 120 years ago even. I think we’re going to start seeing that happen around the world, and as it occurs it’s going to drive up the cost of all of these cheap consumer goods.
Dan Amerman: Exactly. Plus the cost of the resources. It’s going to drive up the cost of the food and it’s going to drive up the cost of oil and it’s going to drive up the cost of natural gas as there are more and more middle class people around the world who are able to bid against the American consumer for the rights to those goods.
Jason Hartman: Absolutely. So they’re consuming more and more, and it’s just a simple supply and demand equation. You look at China now. Ten years ago, people were driving bicycles; now they’re driving cars. And what happened to the price of oil, and what happened to all the building materials due to all this construction that’s going on all around the world? So it’s just getting more and more expensive everywhere.
Dan Amerman: And what we risk is something that economists call – and I apologize for using the term – a supply side shock.
Jason Hartman: What does that mean?
Dan Amerman: That was what really got inflation going in the 1970s where the dollar lost 57 percent of its value in a ten-year period, and that is if the cost of buying supplies – and in this case it was because of an oil embargo – rises sharply, that sends a shock into the system and prices start rising all around. And then as that happens, it becomes built into people’s expectations and then more prices rise and then you’re in a cycle where it becomes very difficult to get out of it. And we’re risking that with commodities kind of across the board.
Jason Hartman: Yeah. So that has definitely happened in other countries, too, where we’ve seen this rampant inflation. Argentina, Zimbabwe, these countries have just experienced massive, debilitating rates of inflation. But if people owed money, do they benefit there?
Dan Amerman: Well, let’s go back to our example with the person that had a $1 million –
Jason Hartman: Right.
Dan Amerman: – in property and they had an $800,000.00 mortgage. If you look at it in just a dollar being a dollar, what happens is the property is now worth $4 million. The mortgage is still $800,000.00, so instead of having $200,000.00 in equity, they have $3.2 million.
Jason Hartman: Boy, do I love real estate, at least so far.
Dan Amerman: Yeah. In my opinion, if you want to understand why the statistics get thrown around that seven out of ten or eight out of ten millionaires in the US made their money in real estate, it has more to do with what we’re talking about right now than it does the property itself.
Jason Hartman: Yeah. That’s a good point. That might, on its face, bode poorly for real estate investors, but the question is what else can you do with your money?
Dan Amerman: Well, it’s an arbitrage opportunity, and that’s why I’ve ended up getting into looking at this turning inflation into wealth business is that right now because of governmental policy, we have not only the danger of very high inflation in the future, but we have artificially crashed interest rate levels, so you can’t go out and buy a bond or buy a mortgage that’s going to incorporate the risk of future inflation. So when you take an arbitrage perspective instead of saying, “Well, that’s a real problem. I can’t invest at the right rate.” You say, “What an opportunity. What a perfect opportunity to lock in long-term, low-cost, tax advantaged funds.”
Jason Hartman: You know what I say, Dan, on my podcast and at my seminars. I say, “Here is the opportunity that really may never come again in our life, these low, low interest rates.” So here’s the opportunity to lock in your cost of borrowing for three decades, and not just your cost of borrowing is locked in for three decades, but if you ask yourself a question, “Well, if you invest in a house, for example, just a simple single-family home, how long does a house last?” And the numbers are all over the board, but I say a house lasts about 50 years before you will want to do an extensive remodel to it.
But think about what happens there. You’ve locked in your cost of construction, your cost of those commodities that make the house for five decades your cost of borrowing for three, interest rates go up, inflation does its thing, and the cost of those commodities that form the house – I call this packaged or assembled commodities investing – so when you buy a house, what do you buy? You buy a bunch of concrete, lumber, maybe some steel, glass, copper wire, petroleum products, et cetera. And it seems like you just win from every perspective there, right?
Dan Amerman: Yeah. I would put that as a right jab and a left hook.
Jason Hartman: Yeah, okay.
Dan Amerman: Your right jab is the commodities and the house that are maintaining their value. The left hook is the value of the debt that gets destroyed by inflation, and what happens then is that your real wealth leaps upwards to cover the difference.
Jason Hartman: Yeah, it’s incredible. So are you finished on that example, the $800,000.00 mortgage, $1 million property? You have inflation that basically causes the house to quadruple in value so it’s worth $4 million. The debt, you’re only paying back 25 percent of it so it’s only $200,000.00. Is that what you’re saying, in real dollars?
Dan Amerman: Well, I’m saying that what you need to do is ignore the $1 million going to $4 million.
Jason Hartman: All right.
Dan Amerman: That’s what everybody focuses on, so they think that you made your $3 million off the property. You didn’t. It’s like we saw with the right jab only investor. All you did with the property was maintain. Where you made –
Jason Hartman: In real dollars, yes. Okay.
Dan Amerman: Where you made your money was in real dollars. What was an $800,000.00 mortgage is now really only $200,000.00 in purchasing power terms.
Jason Hartman: Um hm.
Dan Amerman: So you went from owning 20 percent of a $1 million property in real terms for $200,000.00, to owning 80 percent of a $1 million property.
Jason Hartman: Oh, that’s a great –
Dan Amerman: That’s where the real money is. It’s in the debt.
Jason Hartman: Dan, that is a great way that you say that. The real money is in the debt because now you own so much more of that same property in essence, right?
Dan Amerman: Yes. It was the left hook that did it.
Jason Hartman: Ah, very interesting.
Dan Amerman: And that’s why I use that analogy. People – everyone looks at the right jab and they say, “That’s where you made your money.” But when you run the numbers and you look at it, the right jab, all it does is a defensive move. The real money with inflation is made with that left hook.
Jason Hartman: Okay. So there’s the three boxers. Yeah, excellent. Excellent point. This all sounds good in theory, but is there any real historical, hard evidence, Dan, that this works in practice?
Dan Amerman: Oh, tremendous, and it forms a good part of probably the background of most people in this country today. And if you will recall, I talked about working with savings and loans in the aftermath of the last big bout of inflation.
Jason Hartman: Sure.
Dan Amerman: That was a previous financial crisis in this country, and what happened there that I think is not generally recognized is that when the savings and loans lost about $2 trillion in current –
Jason Hartman: Are you talking about the late ’80s, early ’90s, Charles Keating era, Lincoln Savings, S&L crisis?
Dan Amerman: Yes. But what that was really reflecting was the delayed effects of the ’70s and early ’80s inflation because what happened was that the old rule with the savings and loans was five, four and three. You lent out money at 5 percent, you borrowed at 4 percent, and you were at the golf course by 3:00. It wasn’t rocket science.
Jason Hartman: That was when we had banker’s hours.
Dan Amerman: Yes, exactly. And then the inflation hit in the 1970s, and all of a sudden they were paying 10 percent per fund.
Jason Hartman: And that really destroyed the banks is what you’re saying?
Dan Amerman: It destroyed the industry.
Jason Hartman: Yeah.
Dan Amerman: It absolutely destroyed the industry, but what people miss is that for every dollar of loss that the savings and loans were taking, there was a family on the other side that was benefiting because you had tens of millions of households across the country. And this is something I track in exact terms for exactly average households with exactly average homes with exactly average mortgages and real historic inflation rates.
During the ten-year period at the height of the inflation from 1972 to 1982, an average family that had bought an average home with, say, 20 percent equity, where their equity would have then been equal to about 25 percent of their mortgage amount, would have seen their equity climb to 500 percent of their mortgage amount.
Jason Hartman: Isn’t that amazing?
Dan Amerman: So it was the very same decade that the dollar lost 57 percent of its value, the Dow Jones industrial average, if you look at it in inflation-adjusted terms, which most stock firms prefer not to.
Jason Hartman: Yes. Because it would show how much money they’re losing or how little people are gaining.
Dan Amerman: The Dow Jones went down 62 percent –
Jason Hartman: Wow.
Dan Amerman: – in inflation-adjusted terms in one decade, and the very same economic conditions that made that happen boosted the average homeowner’s wealth in terms of their equity in their home from about 25 percent of their mortgage to 500 percent.
Jason Hartman: Yeah.
Dan Amerman: It was one of the greatest transfers of real wealth we’ve ever seen in this country.
Jason Hartman: That’s amazing. And so what really happened there, though, is that the people that won were the people that owned real estate, No. 1, but No. 2, borrowed money to own real estate.
Dan Amerman: Exactly. If you track – and something else, again I use a control, much like our right jab only boxer.
Jason Hartman: Yeah. So the people that didn’t borrow only had the right jab. They weren’t the boxer with the right jab and the left hook.
Dan Amerman: Correct. The average home went from about $17,000.00 to a little over $41,000.00 over that time.
Jason Hartman: Um hm.
Dan Amerman: But when you adjust for inflation, someone who didn’t own a mortgage would have lost about 3 percent of the value of their home.
Jason Hartman: Yeah.
Dan Amerman: They wouldn’t have made a dime, but if they had the mortgage, it would have been one of the best investments they made in their life.
Jason Hartman: So the people with no debt, no mortgage on the property, are basically treading water. At least they’re not being destroyed by inflation, but they’re not making the gains in essence, right?
Dan Amerman: They’re not even really doing that well, although there are some exemptions with homes when you consider taxes, which we can talk about a little more in a bit.
Jason Hartman: Okay. So they’re doing a little less than treading water, but they’re not getting completely wiped out like the others.
Dan Amerman: Exactly, yes. They’re kind of maintaining their position with that right jab.
Jason Hartman: Okay. You’ve been talking about changes in property values and loan values. What about making the mortgage payments? Don’t they pull down the benefits to the owner?
Dan Amerman: The mortgage payments are really the best part.
Jason Hartman: The best part?
Dan Amerman: Where you do the best is not when you sell your house. Okay. Let’s take an example and let’s look in, say, 1982, someone who had been in the inflationary situation for ten years. And I don’t know if you remember the real estate market at that time, but the last thing most people wanted to do was to sell their house and recognize that big profit they had in it, and the reason why was they still had loans at 6 or 7 percent.
Jason Hartman: Yeah. And they wanted to keep that asset, those cheap loans, right?
Dan Amerman: Yeah. Instead of going out and getting a new mortgage at 12, 13, 14 percent, there was a tremendous value to them in keeping for year after year a loan that was at a well below market interest rate. And the other thing that happened is that if you’re looking at the amount of income they’re putting on their mortgage, maybe on average they would have started off putting in 28 percent of their income, which is a good mortgage underwriting figure.
Jason Hartman: Right.
Dan Amerman: Inflation had devastated the value of the dollar after ten years. On average, they were putting in about 10 percent of their income, so they had just freed up 18 percent of their income for other purposes, and that’s huge.
Jason Hartman: So you’re saying if the mortgage was a fixed rate mortgage, and ten years go by in this example, then you’re paying much less every month later than when you started in real dollars.
Dan Amerman: Exactly.
Jason Hartman: Because the dollars have depreciated in value. And you know, Dan, I can actually share a very specific example about my own mother. In 1976, she purchased her first home in West Los Angeles. And I remember it well, and it was $62,500.00 in 1976 for this little house in West Los Angeles. And I remember her being stressed that the mortgage payment was $416.00 per month.
Dan Amerman: Um hm.
Jason Hartman: Now, it turns out that she moved out of that property later and kept it for many years as a rental property, and over the years, five years later, ten years later, she kept it for a long time. And over the years that $416.00 mortgage payment seemed like nothing, like, “Why would I be concerned about such a tiny little payment?” But at the time in 1976, it seemed like a high payment.
Dan Amerman: And that’s exactly where the big benefit comes in. If you had bought, say, an average house nationally in 1972 – just four years before that, but inflation had already really kicked in getting that payment up to where it was – the average mortgage payment was only $101.00.
Jason Hartman: Yeah.
Dan Amerman: And this is for a three-bedroom house in the suburbs, and if you look at the amount of money that was costing, particularly with even being able to deduct part of that as an interest rate deduction, there are millions of families all across the country where that’s how their kids went to summer camp. That’s how their kids went to college. That’s how they paid for those European vacations because they were making a $100.00 a month payment at the same time that everyone around them was paying $500.00 a month, $1,000.00 a month, whatever the case may be.
Jason Hartman: The benefits of inflation are just wonderful. They’re numerous benefits. You know what’s even better though, Dan, is we’re just talking about the typical homeowner living in the house that they’re paying this mortgage on, but what happens when you invest and you buy a rental property is twice as good if not even more because the tenant makes the mortgage for you. And so the tenant is paying the bank back in depreciating dollars on your behalf, and you’re getting the benefit of a loan balance that is being reduced through inflation and a property that is appreciating in value through inflation, so it’s just a win-win-win-win-win everywhere you look, right?
Dan Amerman: I love commercial property for inflation.
Jason Hartman: Yeah.
Dan Amerman: It’s really hard to come up with a better investment.
Jason Hartman: Oh, you say commercial property, but residential rental property is even better because you can borrow more and the rates are lower and they’re longer term fixed rates.
Dan Amerman: You’re exactly right. I was using commercial generically –
Jason Hartman: Yeah. In the sense of –
Dan Amerman: – in terms of anything you’re doing for money as opposed to your personal residence.
Jason Hartman: Absolutely.
Dan Amerman: But the benefits are tremendous, and as you say, you’re getting them simultaneously. You’re getting them on the asset appreciation side and you’re getting them on the cash flow side. If you start off with – let’s go back to that example with the $1 million. It’s not just that you’re going to go from let’s say $200,000.00 in equity to $3.2 million in equity. It’s that you’re going to have a tremendous amount of cash flow freed up on a monthly basis because your rental payments will more or less rise with inflation, your mortgage payments will stay down, and that means that you’re going to get a rapid increase in real cash flow. And the stronger inflation is, the more powerful your increase in real cash flow.
Jason Hartman: Excellent. Yeah, that’s just a very powerful, powerful tool. Well, Dan, we’ve been talking for a while here about these inflation principles, and I’d like to get into the subject of taxes on a future podcast with you, if that’s okay.
Dan Amerman: Okay.
Jason Hartman: But in closing on this part of the subject, I mean, it sounds like the rule is buy real estate, an appreciating asset, borrow as much money as you can to do it, and would you recommend borrowing that money as a fixed rate? See, I think the fixed rate is the way to go, but –
Dan Amerman: I absolutely believe in fixed rate.
Jason Hartman: Yeah, me too.
Dan Amerman: And I also would not recommend necessarily borrowing as much as you possibly can.
Jason Hartman: How much would you recommend borrowing?
Dan Amerman: I think the key here is to borrow prudently because the other thing that you need to keep in mind is that I think there’s a good chance we’re going to be hitting a period of economic turmoil coming up over the next several years.
Jason Hartman: Maybe we’re in one already.
Dan Amerman: Yeah. It may be starting right now.
Jason Hartman: Yeah.
Dan Amerman: So the thing about debt is I think of debt as it’s a tool whereas many people think it’s a moral judgment. It’s a tool and you want to carefully select the right amount of that tool so that if you do hit an adverse year or three or something like that, your debt doesn’t take you down.
Jason Hartman: Yeah. That’s a really good point. I’m glad you said it that way because the game of real estate investing is always a game of staying power, and when you acquire a good asset like a good property, you want to be able to keep it through a storm, through some rough weather. But also, when you acquire that property, like if you’re acquiring it today, another good asset you’re going to acquire with it is a good mortgage because the mortgages even now are just historically excellent, even though it’s become a little bit harder to borrow, fortunately, due to the mortgage situation going on.
But you want to keep that mortgage asset, too, so you’ve got to manage debt prudently and according to what you can afford and what really the property can support or the property can afford, but also have a little bit of depreciating cash in reserve to pay for vacancies and so forth.
Dan Amerman: If I can kind of reinforce that from another perspective, then I think when people look at real estate, they’re concentrating for the most part on their right jab. They want the best possible property, and many people don’t really look at their left hook other than borrowing as much money as possible. But if you want the best long-term strategy for fighting inflation and winning, you really need to be looking at your left hook every bit as carefully as you’re looking at your right jab.
Jason Hartman: Very good advice. That’s Dan Amerman, and Dan, where can people learn more about your principles and your book? Tell us about your book.
Dan Amerman: The book is “The Secret Power Within Your Mortgage,” and –
Jason Hartman: What a great title.
Dan Amerman: – it’s about a 200-page book that starts off by spending about three chapters talking about how things have worked in the past, so we’re not just talking theory here; we’re talking how things have actually worked out. And then it spends the next 12 chapters kind of talking in detail about how people can take these principles and today apply them to making the best decisions.
Jason Hartman: Excellent. Where can they order the book?
Dan Amerman: From the website www.mortgagesecretpower.com.
Jason Hartman: Excellent. Dan, any words in closing? And we’d like to have you back for a future interview on taxes and some other subjects, as well.
Dan Amerman: Well, I sure appreciate that. I guess my only closing words would be to concentrate on that left hook.
Jason Hartman: All right. Thank you, Dan Amerman. Such great advice and we look forward to having you back on a future podcast.
Dan Amerman: Thank you so much, Jason.
Jason Hartman: 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 are 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 got to go buy your own house there –
Lynda Mulley: Yes.
Jason Hartman: – if you want to recommend the area to clients, and, of course, I’m already an owner in Kansas City. I bought a four-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 and 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. Thank you so much.
Jason Hartman: Hey. I just wanted to announce a couple of quick things for you. If you are interested in a Platinum Properties Investor Network franchise in your area, we are now approved for franchising in 18 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 US 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 want to 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, No. 13 and forward, which are really good ones to listen to, so please take advantage of that.
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Duration: 50 minutes