Jason shares some of our “best practices” for organizing your real estate investment business (yes, it’s like a lucrative little side business) and working with your professional property managers. You’ll gain specific insights from Jason and Dave on this area. Then a CBS news video on yet another Wall Street scam and finally, a quick chat with attorney James Burns about his new book.

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 another addition of Creating Wealth.  This is Jason Hartman and we have several things on this podcast today to talk to you about, but first I’d like to introduce an “in the conference room” guest and that is Karen, Karen Nicholas.  Hi, Karen.

Karen Karanickolas: Good afternoon.

Jason Hartman: Karen is our Operations Manager and my nickname for Karen is the Goddess of Organization.  And today we’re going to talk about – I see that grin on your face, that regretful grin, Karen – today we’re going to talk about getting your real estate investment business, and yes, it is a business, but a very lucrative little side business for most people.  It’s amazing that the way we really create wealth in most of our lives and build our retirement is through something we just do part time.  It really hardly takes any time to do it.  That’s the great thing about this real estate investment business.  So we’re going to talk about organizing it.

Remember, here at Platinum Properties Investor Network, we provide the complete solution for real estate investors through a unique five-step process.  Step No. 4 is Management, Maintenance, and Monitoring of your portfolio of properties.  So we help you do it in many, many ways and today we just wanted to share some of our “best practices” in doing that.  And by no means should this be considered a comprehensive talk on the subject.  There’s a lot more to it than this.  But let’s just give you some ideas that you can implement right away to make things a lot easier for you.

And then later in this show, we will have Dave Toombs, who’s been on before.  I interviewed him a couple of days ago on some property management  best practices and working with your property managers, getting your properties leased up quickly, kind of part of the same subject.  And then we will have a little Wall Street video.  You know I couldn’t resist, just showing you one of the other Wall Street scams, a CBS news clipping that’s coming up.

And by the way, on balance and in all fairness, you know, everybody listening, there are crooks in the real estate business, too.  There are many of them, believe me.  I’ve met and actually, I hate to say this, I’ve employed a few.  Karen, you’re laughing at that one.  Got rid of them as soon as I could and I’ve been doing this 11 years, so I’ve employed a lot of people and you gotta watch out for crooks in anything.

But the best way to avoid dealing with a crook or anyone unscrupulous is to be a direct investor.  Don’t put your money in their hands.  And when you’re investing through us, you’re not putting your money in our hands either.  You’re a direct investor in properties that you own, you control, you decide what to do buy, where to buy, when to buy, what to pay for it; how much to rent it for, who to rent it to, when to refinance it, when to sell it, when to do a 1031 exchange, how much to charge for rent.  You know, it’s all your thing.  No one can take it away from you.  So you are not under anyone else’s control when you’re a direct investor.

Anyway, we’ve talked about that in past shows.  Go back and listen to the one about Pools are for Fools and Thou Shalt Maintain Control.  That’s, I think, two or three shows ago and more on that.

But let’s talk about organization.  So Karen, before we dip into the whole organization subject, I wanna just mention something on financing.  Now, when you’re investing in real estate and when you’re acquiring these properties, Karen, as you know, the hardest part is the starting.  I think there’s a song like that; the starting is the hardest part or something like that.

Karen Karanickolas: Yeah, I’m not familiar with it, but yes, I’ve heard it.

Jason Hartman: Wasn’t that Rod Stewart?  Anyway, the starting is the hardest part.  Acquiring the properties is really most of the work.  Wouldn’t you agree?

Karen Karanickolas: Exactly.  There’s a lot of work involved in getting your documentation together to provide for your financing.

Jason Hartman: And once you do it, once you sort of get your financing package together, it becomes much easier, so the first time, the second time, those are harder.  But if you’ll get yourself organized with some of the tips that we’re gonna share with our investors today, it really makes it a lot easier, doesn’t it?

Karen Karanickolas: Yes, and when you’re going with financing, if you’re going full doc, having your documentation put together after the first one, you’re just going to use that same documentation and update it accordingly with your latest additional investments that you purchase.  But once you put together your borrower profile, then it makes acquiring the second and third and multiple properties a little bit easier.  But the very first one that you go to purchase is going to be a little bit cumbersome in getting that documentation together.

Jason Hartman: Because you won’t have it all together, but the idea of this is to get you organized so that the first time, it’s a little tougher, but then when you’re on property No. 9, 10, 11, No. 15 and 20 and 30, it just becomes much easier, okay?  So a couple thoughts on financing before we really delve into organization.

First of all, of course, your FICO score, that is critically important.  Remember it’s reported in three different credit bureaus, so what the lenders usually do is they take what your mid score of the three and so you want to monitor your FICO score.  There are many ways you can do this, freecreditreport.com; there are lots of websites on the subject.  You can get one credit report free if you use prepaid legal or identity protection.  I believe included with that is a free credit report every single year.  It’s a great little service and I highly recommend that.  But monitor and know your FICO score.  Of course, it changes all the time, but have a handle on it.

Next, know your adjusted gross income for the past two years.  I personally like to do full documentation loans.  They’re harder, but it’s worth it because you get a better rate.  You get a better deal on the interest rate.  And if I have to do a little more work in gathering documents and submitting documents to the lender in the beginning, heck, I would much rather do that and save a quarter point on the interest rate for the next three decades, all right?  So when you can do it, and depending on your qualifications, go full doc when you can.

Have a list of all your assets and a schedule of real estate owned, and as Karen will tell you, your schedule of real estate owned is really easy with the software that we use and we recommend because once you put it in, all you need to do is update it from time to time, right?

Karen Karanickolas: It’s exactly right.  The online software that we use, it prints out a schedule of real estate owned once you enter all the data into the software, and so it makes it very easy when you go to acquire the next properties, you’ve got the information already there for you.

Jason Hartman: Yeah, and so you’re just adding one property each time you acquire a new one.  Now, as you know, we are very conservative here at Platinum Properties Investor Network.  We’re really prudent and careful about our investing habits and our borrowing habits.  And one of the things that actually makes it easier organizationally is that we always recommend fixed rate loans because this climate lends itself better to fixed rate loans.  We’re long term, buy and hold investors, so you won’t have to be changing your mortgage payment.  The only thing that may make it vary, ever so slightly, is if you have an impound or an escrow account.  Then that will vary just a little bit from time to time, but it’s not adjustable, so it’s much easier.

The last thing I wanna say on the financing part, and Karen, I know you’ll agree with this, is that remember when you’re financing your investment properties, like everything in our ultra specialized world today, that is a specialty and it’s important that you use a lender who is an investment lending specialist.  So when you bought your house or you refinanced your house last time, that person, that loan officer, or that bank that did the work for you is probably not the same bank you necessarily want to use for your investment properties.  We have a full network of lenders here that we can refer you to that specialize in investor financing.  The sources where they broker loans to are usually different.  Staying on top of investor oriented interest rates and programs and financing options are very different and qualifying is more difficult.  So work with a lender who is an investment property specialist, not just the lender you bought your house through.

In terms of organization, there are a couple basic elements.  No. 1 element is the software and we use really two different software programs for this.  Karen, would you like to elaborate on that?

Karen Karanickolas: The first one is an online-based software product that we use and it’s got two portions, or two segments to it.  The first is to help evaluate the property before you purchase it and then once you do purchase the property, you can enter the additional data of your purchase price, your purchase dates, your mortgage information.  And then there’s additional software either Quicken or QuickBooks or financial software for writing your checks, keeping track of your outgoing expenses that way that are coming out of your checking account.

Jason Hartman: Yeah, good, so remember you need two pieces of software.  I wish it were only one.  That would be great in a perfect world, but it’s just not that way.  No. 1 is the software to evaluate your investments and keep on top of your investments and the progress of them, and we’re going to delve into that deeply in this show, and then you also need an accounting program like Quicken or QuickBooks, which actually writes the checks for you.

Now, in terms of the files, we’ve developed a filing system here and it’s pretty simple, but I tell you, if you just do this one little simple thing, it’s really gonna help keep you organized and why don’t we just talk about the two different files and their formats, and some of what’s in them, too.

Karen Karanickolas: Based on our experience having accumulated many properties and help managing them, organizing your paper files is very important up front and we’ve developed a system where we have two separate files.  One we call the Acquisition file and then the next one is called the Operations file.  The Acquisition file is where you wanna keep all of the documentation that is required to acquire the property, such as your purchase contract, starting with your purchase contract, your loan documentation that you’re gonna get your financing from, and then your loan closing when you do that final signing and closing on the property.

And then, once you’ve closed the property and you’ve purchased the property, then you wanna start on your Operations file.  It’s a file that we use to keep track of your monthly documentation, such as your mortgage payment, your insurance payment, your HOA, your monthly property management statements that will be sent to you.

Jason Hartman: By the way, I always say let’s not use any abbreviations.  HOA means Homeowners Association.  And the Operations file will have your property management statement, too.  Did you mention that?  I’m not sure.

Karen Karanickolas: Yes.

Jason Hartman: Okay, good.  Anything else in the Operations file?

Karen Karanickolas: I think I covered them all.  You just wanna make sure you have your mortgage statements.  It’s the most important thing.  Any insurance documentation that goes with that, your property management, your leases – you wanna get a copy of your leases from your property management, and then also, your property management contract between you and the property manager.  Those are the main components that will be in the Operations file that you’ll use on a regular basis.

Jason Hartman: Now, on the two files, this little thing can really make it a lot easier for you.  We recommend that you use the multi-section files and they’re kind of expensive, but you’re gonna be a rich real estate mogul very soon, so don’t worry.  Just buy them, all right?  And on the Acquisitions file, we recommend that that be the legal size file and that the Operations file be the letter size file because the documents you’ll have when you acquire the property, a lot of them are legal size loan documents and so forth, contracts and things.  And once you’re acquired the property, you can probably put the Acquisitions file in the bottom drawer of your file cabinet and you won’t use it very often.  You’ll refer back to it occasionally, but the Operations file you’ll be going into that one once a month.

By the way, if this is all sounding like it’s a lot of work, I just wanna tell you one of the metrics I’ve sort of used and it’s been pretty successful over the years, is to assume that it takes about one hour per month per property.  Now, if you do this right, it probably even takes a lot less than that frankly.  But I just wanna say, if you have, for example, six properties, estimate that it’ll take one hour per month to deal with them.

Remember you’re not the property manager.  You have a professional that’s doing that for you.  None of my tenants on my properties nationwide know my name, my phone number, they never call me.  I’ve never heard them.  I don’t meet them.  The property manager does all that work.  But there is a little bit of bookkeeping work, if you will, and Karen does a lot of that for me and that’s why I’m so grateful to have her here with us today telling you about this.

So back to the rest of the system.  The web-based software in there – that does a lot of really, really unique things.  Do you want to talk about any of those, Karen?

Karen Karanickolas: I can talk a little bit about once you’ve acquired the property, you’ve already gone through the first section, which would be the evaluating of the property.

Jason Hartman: Before you go ahead, though, let’s talk about evaluating.

Karen Karanickolas: Okay.

Jason Hartman: Just for a moment because in evaluating, you see those proformas on our website, so if you go to www.jasonhartman.com and you click on properties, you’ll see the first year projections of what we think is possible for a property.  And remember it’s a projection.  Nothing is guaranteed except death and taxes, and actually, you know, if you play your cards right with real estate, you buy in the Go Zone, you might even get out of most of those taxes, too.  We can’t help you with the other one, though.  But eventually, we are living longer, too, so that’s a good thing.

But on the evaluator side, you can do a first-year projection; you can do a ten-year projection.  All kinds of great ways to evaluate your properties, and remember when evaluating a real estate investment, the ultimate number you wanna look at is ROI, or Return on Investment.  Now, if you’ve been listening to the Creating Wealth podcasts for any length of time, and if you’re new, please go back and listen to all of our core content, our foundational materials, and those are labeled on the website at www.jasonhartman.com.

But that doesn’t include the return on inflation, which is my own definition for ROI.  So that makes it even better and you’ll be getting many times 30, 40 percent return on investment annually on these properties if everything works out right, and of course, that’s a projected number, but we’ve had clients do as well or better than that in the past.  So it really does happen in real life.  And that’s the number you compare when you’re evaluating properties.

So there’s terrific evaluational stuff.  We’ll probably address that in more detail on a future show.  But now, into the tracking, the keeping track of the investment.  Karen?

Karen Karanickolas: When you start tracking your data, it will ask you for the date you purchased the property.  That’s kind of the pivotal point in the software is once you enter that data, then it knows – it turns it from a prospective property to a purchase property, and so it will wanna know the date you purchased it.  Then it will wanna know the date that you placed it in service, that it was ready to rent.  Then you also want to enter any lease data information, such as the lease agreement with your property manager.  You also want to put in your insurance information, when your insurance policy starts and ends, and it also has an email feature that will send you an email alert telling you that your insurance policy’s coming up for expiration.

Jason Hartman: Isn’t that great?  I love that feature.  Forty-five days before my insurance policies come up for renewal, I get an email reminding me which property and what policy is coming up, and same with the tenants.  So if someone signs a one-year lease on my property in Georgia or Texas or wherever it is, it tells me, and you can set it for how long before, and mine are set at 45 days.  But you know, a lot of times, the tenants just stay there month to month or they’ll renew the lease for another year.  Go ahead.

Karen Karanickolas: And then the last section is the intimate expenses section and that’s basically the one that you’re gonna use on a monthly basis.  Once all your information is entered into the software, once a month, you’re gonna come in and you’re go into the income and expense data for each property, and what that entails is when Jason talks about an hour per property, it can be a little less once you get acclimated to it.

Jason Hartman: And you get organized.

Karen Karanickolas: Yes.  You’re gonna get your monthly statement.  You’re gonna enter your mortgage information.  You’re gonna enter how much principle was paid, how much interest was paid.  If you have an escrow account, if you have PMI, those can also be prefilled as well if that is something that’s the same every month.

Jason Hartman: Yeah.  So really, in the ideal world, I mean you’re probably only spending 15 minutes a month per property, but we wanna just tell you an hour a month, okay?  So you’ll probably find that number to be much lower than we say.

Karen, I tell you something.  We had this client who you may remember a couple years ago and she just couldn’t get her head around this real estate investing stuff.  She bought a few properties through us and we kind of find a lot of times investors are their own worst enemy.  And this was a very successful lady.  She made a lot of money; she was highly educated, and real sharp.  But when it came to her properties, I remember having this conversation with her and she was complaining that she had to make a phone call to her property manager and talk something through.  And she said I think I’m just gonna sell this property.  And it was just a few months after she bought the darn thing.  It was a great investment.

And then I said how much time did you spend on the phone with your property manager, talking about this issue?  As I recall, the number was like 26 minutes or something like that.  Big deal, right?  And it got her all flustered.  And I said how much time do you spend at your job?  And she said, well, I work about 60, 65, even 70 hours a week.  Isn’t that amazing?  The job will never make you wealthy.  But the real estate investment will make you wealthy, so keep this in perspective.  This is a low management thing.  It doesn’t take a lot of effort and I just find it funny when investors say that they’ve had bad experiences or they don’t wanna hassle with real estate because of the management.

If you’re a good investor in stocks – and so far, I’ve never met anyone who is, but fine; some people say they are.  If you’re a good stock investor, you know what you better be doing?  You better be reading all the financial magazines.  You better be glued to CNBC.  You better be reading the Wall Street Journal and Barrens and Money and Kiplinger’s Personal Finance, and all of these magazines all the time to see what’s going on with these companies and the crooked boards of directors and executives, and then the brokerage houses and the investment bankers, and everybody who’s taking their cut along the way.

Then when you get your statements in the mail, are you filling out the proxy forms and voting?  Are you going to shareholders’ meetings?  Are you reading the annual reports?  I bet you’re not, okay?  So your real estate investments are very simple, folks.  This is not difficult at all and stock markets average returns, what, around 8 – 10 percent, if you’re lucky.  That’s what I say.  And these real estate investments, the direct investments when they work well, you’re making 30 – 40 percent annually after tax benefits if you qualify for all of them, a whole lot better.  So it’s just not much work and you can outsource this work, too.  If you don’t wanna do it yourself, you can hire a bookkeeper to do it.  So there’s a lot of options there.  Anyway, go ahead, Karen.

Karen Karanickolas: There’s a couple other statements that you’re gonna want to enter monthly besides your mortgage statement, is your property management statement.  And that will list how much rent received, when it was received.  Also, if there were any additional expenses, like if they needed to –

Jason Hartman: Oh, if they needed to – I’ll help you there.

Karen Karanickolas: Help me there.  My mind went blank.

Jason Hartman: If they needed to, say the property was vacant for a month between tenants and they need to mow the lawn, or say they need to change the locks or something like that, and I will tell you, by the way, back to this complexity issue and the downsides of real estate investing, I’ve been a real estate investor for 21 years now.  And I have – knock on wood – I have never lost money on a tenant, ever.  I’ve had tenants that have caused some damage to my properties from time to time, but either their security deposit has covered it or I have one now, actually, and this was Campus Lane – you know the one, Karen – where the tenant did really leave it in pretty bad shape.

And the amount of repair was more than their security deposit, but you know what?  They paid for it because they knew we could sue them.  We could take them to small claims court.  And this tenant just did the honorable thing.  I didn’t have to come after them.  They paid the excess money they owed me.  I had to replace the carpet, do new paint, and a couple other little repairs.  So far, it’s just not that big an issue, the tenants.  It usually works out pretty well.

Granted, if you’ve seen the movie Pacific Heights, which maybe everyone should see before they become a landlord, but that’s such – it’s a movie obviously; that might turn you off on the idea of investing, but you know, never live next door.  That was a duplex and the real owners live right next door.  So don’t live anywhere near your properties, that’s what I say.  Okay, what else?

Karen Karanickolas: And that’s the reason for having the property manager.  Have that go-between, have that buffer.

Jason Hartman: Arms length separation of church and state, okay?  So you’re not in it.

Karen Karanickolas: So when you get your property management statement, you’ll enter the rent received and plus the property management fee will be deducted as well, and any expenses, such as lawn service or any repairs that might need to be done at that time.  So basically, you’ve got two items that you’re gonna enter data in once a month on your property data.

Jason Hartman: And remember the great thing about the software is it’s web-based, so you can access it from anywhere on the planet.  I travel a lot and all I need to do is just pull up an internet connection from a cyber café while I’m drinking a cappuccino in Italy, for example, and I can sit there and I can see what’s going on with my properties at any time.  I can be on my own laptop or my iPhone, so it’s really cool.

Karen Karanickolas: So the income and expenses, you’re gonna have your property management statement, your mortgage statement.  Now you also need to remember your insurance is probably going to be impounded into your mortgage statement, so you’re not gonna have that monthly item or your taxes, and those are paid once or twice a year and those will be coming out of your mortgage statement and that detail will be on your mortgage statement.  So you can just enter the amount that the mortgage company paid to the county assessor for your taxes or your insurance.

Jason Hartman: Okay, so now, I wanna make a recommendation on the impound.  I recommend that you impound when you have a choice.  Now, they do have a buffer in that account and they usually keep a little more money in it, in the escrow account or the impound account, and what this is, this is an account that our lender will set up for you where they will collect more money than your mortgage costs every month and they will hold it to disperse to your insurance company and your property tax collector.  I recommend the impounding account because it’s simpler and it makes it the lender’s responsibility to pay the taxes and the insurance.

Now, granted, every year, you may get an impound account refund because there will be an overage in there sometimes and so once in a while, I get a check back, a nice surprise check, for $600 or $300 or even $800, and it’s an impound overage refund every year.  And you know what?  I don’t mind that the lender has a few hundred extra bucks of mine for a certain time period because it just makes it a lot simpler.  So I highly recommend you have them impound taxes and insurance.

If they would do it for homeowner’s association dues, where I have an association, I would love it if they would do it, but I haven’t found one that impounds the HOA yet, so oh well.  Okay.

Karen Karanickolas: Yeah, that’s exactly right.  The less checks you have to write every month out of your checking account, the better, so –

Jason Hartman: Keep it simple.

Karen Karanickolas: Exactly, keep it simple.  So you may only have to write your monthly mortgage payment and you can set that up to have it automatically deducted from your checking account.

Jason Hartman: And that’s the way to do it.  Do it on an auto debit.  In the next segment where we have Dave in here, we talk about that a little bit and you’ll hear that in just a moment.  But I prefer the auto debit, where the lender goes to your bank and says give me this money every month, versus your bank on the internet doing an automatic payment because if the amount adjusts, you have to be on top of that.  I want to make it the lender’s responsibility to go to my bank and get the money.  All my responsibility is is to have enough money for them there so that they can debit it every month.  Much better; auto draft or auto debit.

Karen Karanickolas: Yeah, so it makes it a lot easier for the number of checks that you don’t have to write every month, so you could be writing just one for an HOA, so you may only have to write one check a month or you may have to write zero checks a month on your properties.

Jason Hartman: Yeah, isn’t that great?  It’s good.  Okay, we’re getting a little bit long here, so let’s just go over a few more quick things, and by the way, this is not a complete education on this.  But it’s a good solid start.  There is a little bit more to it.  We’re happy to help you with that.

By the way, Karen, our Goddess of Organization, for any of you local investors, you’re welcome to come into the office.  People do it all the time.  We have a client in here about once a week and they sit down with Karen, and she gets their files organized, helps them set up the software and all that kind of stuff.  So she’ll be happy to help you do that as well.  You enter in the lease data and the tenant information, and then, a feature that Karen and I both love is the lease calendar.  And what this does is it’s got a whole list of all your properties that you own and it shows you when the property is occupied and when it’s vacant, so you might see a green space in there when it’s occupied, a white space when it’s vacant, and it’s yellow if it’s month to month and there’s not an ongoing lease.  So you kinda know what’s going on there.  That’s good.  Any comments on that?

Karen Karanickolas: Yes, there’s not only the lease calendar.  It’s just the view calendar in general and you can pull it up and look at your rents received.  Did you enter all your rents?  Did you receive all your rents?

Jason Hartman: Right, you hover over it with the mouse and it shows you the amount that you received that month.

Karen Karanickolas: Exactly.

Jason Hartman: Such a great, great feature.  I love it.

Karen Karanickolas: And it also shows you did you make your mortgage payment as well, so it’s also a good reminder to check for did you pay your rent, did you pay your mortgage.

Jason Hartman: Make sure it’s in and out.  Remember, you as an investor, you’re kinda like brokering this deal of owning the house between you and the bank and the tenant.  The other great feature that I just love looking at all the time is the map of the United States.  And it puts a little house wherever I own a property and I just love watching my empire grow and having a bunch of those houses all over the U.S., a nicely diversified market.  So that’s a wonderful thing.

We talked about the income and expense tracking already, so that’s excellent.  What about the correspondence log, Karen?

Karen Karanickolas: Oh, that’s a feature that I absolutely love.  It’s great for keeping track of who you called, whether it be your property manager or you have to deal with your mortgage company at least a couple times a year for some reason or another.  You can put down who you called, when you called, how long you were on the conversation, and a little bit of detail about what that conversation was about.  So you have a history to go back and look, well, okay, I had a problem with maybe a water heater problem or something, or a termite inspection came up.

Jason Hartman: We don’t get any of those yet because our houses are pretty much all brand new.  But five years from now, seven years from now, those issues will arise from time to time.  And remember the property manager takes care of all that for you, okay?

Karen Karanickolas: Yeah, so the items you’ll have in your correspondence log will probably be the conversations you have with your property manager, which will be few and far between, and the same with your mortgage company.  You may have one or two conversations with your mortgage company when you first purchase the property because they do transfer the service of the loan from the person that financed it.

Jason Hartman: That’s a great point.

Karen Karanickolas: And so you have an idea, you can keep track and a history of who you called, what the conversation was about, and the most important thing is keeping the time allotted so you can really see how much time you are spending on each property.

Jason Hartman: Okay, good.  Good point.  A couple things I wanna mention there.  People have asked when comparing real estate investments to stock investments or things like that, they say, Jason, you’re always saying how you were talking about these various scams on Wall Street and how investors are getting ripped off, and there are so many, there’s just not enough time to list them all, but they say, what about real estate?  You can get ripped off by your property manager.  And you know what?  That is possible.  You’re right.  It is possible.

But the great thing about our investment style is it’s very limited to any downside risk.  For example, Karen, you reminded me when you mentioned termite inspection or termite work or replacing a water heater.  I mean folks, think about it?  How much could they really rip you off?  If the garbage disposal needs to be replaced and it’s not the tenant’s responsibility, for example, usually the tenant ends up paying for a lot of these things, but say it’s not.  Say it’s your responsibility.  If the garbage disposal needs to be replaced in a property and the property manager takes care of it, you’re usually authorizing them to use their discretion for expenses under $200.00 and that’s sort of typical on each unit.

And I mean how much could they rip you off?  What are they gonna do?  Pad the bill by $25.00?  What is the downside risk here?  It’s minor.  And once you get some experience with this – look it, folks, you can go to the Home Depot website and see how much a garbage disposal costs.  How much does installation cost, $50.00?  I don’t know; $75.00?  I mean there’s really nowhere to go here.  There’s not much you could lose.  I mean not much more than the cost of dinner out at a restaurant, okay, worse case scenario.

And the other thing is, there’s one other scam I want you to know about with property managers, and this happened to someone I know who had a large apartment building and you know what?  He got into trouble with it, and Karen, you know this gentleman I’m talking about also.  And what happened is his property manager would go around and collect all the rents, and it was a large apartment complex, so it was one manager, probably without what’s called a fidelity bond – should have checked that to make sure they had a fidelity bond – they’d go collect the rent and he wasn’t paying much attention and they didn’t send him the rent check that month for all of those units, those many units in the complex.

And then another month came by, property manager collected all the rents again, and left town and they did not pay them.  So this guy did lose a lot of money.  So you can get ripped off.  There are downsides, but the way we invest, we’re mostly doing small four-plexes, single-family homes, things like that, and if you do ever get into larger properties where you have a lot of money being collected – see, for our property managers, it’s not worth it for them to steal.  How much would they get?

And you’ve gotta make sure you’re getting your checks every month.  Don’t let them get behind on you, okay?  So keep up on it.  There’s just not a big risk, and make sure your property manager, especially if you’re talking about a lot of money, make sure they have a fidelity bond so the insurance company will step in and pay you.  And all you have to do is look at your lease calendar every month and make sure you’re receiving your money.

Now the other thing here is the online document storage, real handy feature, just quickly.

Karen Karanickolas: There’s – I love the online document storage – there’s a few documents that I like to upload and one would be your closing statement, your settlement statement or your HUD1 because you do need to go back and look at that every so often during the first year that you own the property.  And so that’s a nice, quick, easy place to have it instead of having to go to your Acquisition file and get it from that location.  And also, you can put your tenant leases or your insurance policies.

Jason Hartman: Isn’t that great?  You can just scan them in and the way you do this is so wonderfully easy.  All you do is you fax it to a special phone number and it creates a cover sheet with a bar code on it, so the computer, when it receives the fax, knows where to file it in cyberspace and then you can go online and you can see it.  So you can store your documents there, so God forbid, if you have flood or fire in your house or wherever, you’ve got a backup online.  But keep your paper copy as well.

Karen Karanickolas: Yeah, it’s great for having a copy of your insurance policy and your contact information of who your agent is, whether you have a flood, fire, God forbid, something like that.

Jason Hartman: Well, that brings me to the next point, Karen.  There’s an actual contact database, so you can just go in and enter all the phone numbers of your property managers, the email addresses, the mortgage companies, their contact info, insurance, everything else, right?

Karen Karanickolas: Yeah, it’s right there at your fingertips, so when you’re in your own account, you have access to all that at your fingertips.

Jason Hartman: Excellent, excellent.  Well, this has been really great.  The software also prepares your schedule E, so it’ll make it much less expensive for you to do your taxes every year, and Karen, as you know, as real estate investors, we love tax time because that’s when we save all the money.

Karen Karanickolas: As long as you’re inputting your data every month, your income and expenses every month, come tax time, all you do is click on that Schedule E, verify that your rent and expenses add up; you’re ready to go to your tax person.

Jason Hartman: It’s real easy and real estate is America’s most tax-favored asset, so be sure you own a lot of real estate to save on life’s largest expense, taxes.  Any other comments in closing, Karen?

Karen Karanickolas: Nope, that’ll be it.

Jason Hartman: Okay, thank you so much.  Next, let’s listen to a little video.  This is a clip from a CBS news video about another, one of so many, stock market swindles and then I will be back with Dave to talk about working with your property manager.  We talked about organization and thank you, Karen, for helping us on that, and then we’ll talk with Dave about working with your property manager and developing a relationship with them and how to make it easy for you.  And then, finally, we will have a quick chat with attorney James Burns, who has written a new book on Asset Protection and Wealth Creation and I think you’ll want to get a hold of it as well, so let’s listen in to the video.

CBS News Video:
Federal regulators today announced a widespread inquiry into Wall Street practices that may have hurt millions of investors.  What started as whispers of fraud has turned into a flood of consumer complaints alleging that prominent brokerage firms and their stock analysts pumped up bad stocks to keep profits flowing.  A state probe in New York has now led to this new Federal investigation by the Securities and Exchange Commission.  CBS News Business Correspondent Anthony Mason explains it in this report.

Anthony Mason: It’s the cases of ordinary investors, like George Zicarelli, that have provoked the SEC investigation.  When Zicarelli, a video tape editor at CBS news, invested his life savings with Salomon Smith Barney in 1999, the firm recommended a hot, new fiber optic company called Global Crossing.

George Zicarelli: And then the stock starts dropping.

Anthony Mason: As the stock, which Zicarelli first bought at $50.00 a share, began to swan dive, Salomon’s star tech analyst, Jack Grubman, stuck to his “buy” rating and said he was still bullish.

George Zicarelli: I constantly asked my broker to reassure me.  And he constantly kept reassuring me.

Anthony Mason: In the end, you lost how much money?

George Zicarelli: Over $450,000.00 on Global Crossing alone.  Pretty close to half a million dollars altogether.

Anthony Mason: But after learning that analyst Grubman was making millions in investment banking fees from the very companies whose stocks he was recommending, Zicarelli is now seeking damages from Salomon and Grubman.

George Zicarelli: Jack Grubman and Smith Barney have misled public investors with thoroughly conflicted stock research.

Anthony Mason: And his attorney, Jacob Zamansky, has already won $400,000.00 in damages from Merrill Lynch for another client.

Jacob Zamansky: These two cases ultimately are fairly similar.

George Zicarelli: Absolutely, it’s the same issue.

Anthony Mason: The issue is the credibility of Wall Street’s investment advice and potential charges of criminal fraud, and it’s not just burned investors out for blood.  Wall Street hasn’t faced this kind of legal scrutiny in decades.

Eliot Spitzer: It may only be the tip of the iceberg.

Anthony Mason: New York Attorney General Eliot Spitzer set his sights on Merrill Lynch this month.  After subpoenaing confidential company emails, he revealed that Merrill’s former internet analyst, Henry Blodget, while publically touting a stock called Infospace, was privately ridiculing it as a powder keg and a piece of junk.

Eliot Spitzer: I think there’s a crisis of accountability right now.

Anthony Mason: Across the entire industry, Spitzer says he sees –

Eliot Spitzer: A desire and an urge to push the boundaries in a way that almost means fraud on a daily basis, and that can’t be permitted.

Anthony Mason: Salomon Smith Barney has refused to comment.  Merrill Lynch’s chief financial officer, according to the Wall Street Journal, has called its analysts’ actions inappropriate.

Is it going to be enough for Merrill to say it was all inappropriate?

Eliot Spitzer: No, if they continue to maintain that what happened may have been inappropriate, but wasn’t illegal, then there will be no settlement.  Then there will be much tougher sanctions.  There could be criminal charges and the fate of their company is in their hands.

Anthony Mason: Among ordinary investors, like George Zicarelli, Wall Street’s credibility has already taken a beating.

George Zicarelli: I believed them.  I mean I know it sounds dumb now, but I did.

Anthony Mason: If Wall Street does not pay in court, it’s already paying with its reputation.  Anthony Mason, CBS News, New York.

Jason Hartman: Today, I have a couple of guests in the room with me to talk about some “best practices” when it comes to managing your properties and one of the things about real estate investing that makes it so great is the fact that it’s a very fragmented business.  And as such, this might first appear to be a hassle, but it’s really a benefit because the fact that it’s fragmented and every property manager does things a little differently and every developer and every real estate broker does things a little bit differently in all of the markets around the country, makes it so that it keeps the big institutional investors out of it, which is wonderful for us because we want the opportunity left for us.  If the big institutional investors came in, they’d be selling shares and taking all the money off the top, just like they do on Wall Street.  So let’s keep them out and embrace the fragmentation as I say.

So to talk about these “best practices” and managing your managers, I have our former client and now an investment counselor with us, Mr. Dave Toombs, who you’ve heard on previous podcasts.  Welcome, Dave.

Dave Toombs: Hi, Jason.

Jason Hartman: And then I also have Senior Area Manager and Senior Investment Counselor Karam, who you’ve also heard from in the past.  Welcome, Karam.

Karam: Yes, thank you, Jason.

Jason Hartman: Okay, Dave, you’ve done a great job at being an investor and being a great client of our firm, and you liked it so much, I guess you came to work here.  Go ahead.

Dave Toombs: I was gonna say the formula that Platinum’s put together works so well, it just made too much sense to buy more property.

Jason Hartman: I think you’re up to – what do you have?  Eleven or 12 properties now?

Dave Toombs: Twelve properties.

Jason Hartman: Twelve properties.  Congratulations.  That’s a little real estate empire for sure.  Tell us about some of your best practices and managing your managers.  First of all, I guess we wanna talk about getting the properties advertised to be rented quickly.  That may be the first part of it, so go ahead.

Dave Toombs: There’s an opportunity to start promoting and advertising your property before the close of escrow and there’s many sources available on the internet to do that, so that’s one thing that I like to do is find out as much as I can about the property, school zones, and the local area employment, etc, and include that in the advertisement to make that appealing for potential renters.

Jason Hartman: One of the great things now is we have the internet, so it makes it so that we can easily access advertising venues in local markets all across the country, or for that matter, around the world, whereas before, you had to find out the local paper and call them up, and talk about fragmentation.  That’s a real bear.  So you go on the internet and I know you have several different websites that you use and we use for this, and what do you do?  You place your own ads and you don’t really rely on the property manager.  They do advertising also, but tell us about that.

Dave Toombs: I would say I do it in advance and complimentary to the property managers.  I just do it in advance of close of escrow, so I try to find out what I can about employment opportunities, about school zones, to describe the property itself.  What’s it like on the inside.

Jason Hartman: Lots of photos.

Dave Toombs: Yeah, I have my property manager or the builder take pictures and send those in advance.

Jason Hartman: A picture says a thousand words.  That’s good advice.

Dave Toombs: Right, right, right.  And then take, in addition to inside, what’s it look like on the outside of the structure, what does the neighborhood look like, and what’s –

Jason Hartman: Community amenities, schools, the parks.

Dave Toombs: — the community look like.  Yeah, exactly.

Jason Hartman: But yeah, all that stuff.  Good.  Maybe shopping nearby even.  Well, tell us more.

Dave Toombs: So another thing is work with our investment counselors and find out how strong the market is and then determine up front do you want large family, do you want roommates, are you going to allow pets, things of that nature.

Jason Hartman: Yeah, that’s good advice, Dave.  Figure out who your target tenant is.  That’s a great way to look at it.  And then the marketing can sort of be geared toward that target tenant.  And one of the things that I always advise our clients to do is three weeks before the deal is closing, before the close of, we call it, escrow, but three weeks before settlement, depending on where in the country you are, higher your property manager three weeks ahead of time.  Sign the agreement with the property manager, of course, subject to the closing, and get them working on it in advance so that they know they’ve got the account, they know they’ve got this property coming up and they can kinda get to work on it.

And then a lot of pictures, I think, is really critical, like you mentioned before.  And it’s so easy to just post those on the websites, the various websites, and property managers’ doing their marketing, but you’re also doing something in addition to that.

By the way, for all of you listeners, our rental coordinator here does that free of charge.  We don’t charge anything for our clients and we do that all for free, and she’ll go place additional ads.  But we do need the pictures and the description of the property.

Dave Toombs: And this is something that property managers will have three or four advertising venues that they prefer to use in their local market and this helps them get the properties up and running on those venues immediately so that they don’t have to write all this and take all the pictures themselves.

Jason Hartman: Yeah, one of the things I’ve noticed, too, Dave, is that a lot of the property managers are very high tech, but some are very low tech.  And so some are still using the Penny Saver and the local little newspaper and some are really embracing the internet.  It just depends.

Another of those “best practices” that we do and our rental coordinator has been trained to do is that when we place the ads on the various websites, we place them so that there are two email addresses.  One is the property manager’s email address and the other one is our rental coordinator’s address, so that we see the number of leads coming through on that property through this website, and we can hold the property manager accountable and say to them, hey, last week, we got 11 leads on that property.  What’s going on?  Are they coming out to see it?  Are you calling them?  Are you doing the follow-up?  What are they saying?  Etc, etc.  Do you have any comments on that, or Karam, do you?

Karam: Yes, one thing I noticed what David has been doing and I do monitor all the properties with the property managers, and I see how each of our investors’ approach is different.  And one thing David does that impressed me most is he takes the input from the property managers.  He stays all the time in contact with the property manager, even before the property is closed, settled, transaction is closed.  So what happens is David has enough information, he has enough ammunition to start thinking and advertising, and one thing David does is ask the property manager, you know, what rent is reasonable for the market?

Now, for a particular property, let’s say 2,000 square feet, four-bedroom, two and a half bath, brand new property in Tuscaloosa, Alabama.  That same property, market condition would be different in February than let’s say in June, July.  So David is always in touch with the property manager, knows what the reasonable rent is.

Jason Hartman: And he’s conscious and we’re conscious of the seasonal nature of the rental market, and we’re gonna talk about the difference in a few minutes here with getting a great deal on rents or getting a great deal on the property.  There’s always money to be made.  You just have to adapt to whatever the changes are.

Karam: Even when the property is leased and after one year, the lease is expiring and the property manager – our recommendation is 4 percent to 8 percent increase in rent –

Jason Hartman: Wow, if you can get 8 percent, you’re really doing well.

Karam: Dave Toombs will always be asking the property manager, what is the market condition and what is reasonable.  Can we get 8 percent or do we have to settle with the 5 percent?  So you always want the input from the property manager and not increase the rent unreasonably that you give away your tenant, good paying tenants.  So you always want to be in touch with the property managers.

Jason Hartman: One of the things that’s very important is developing kind of a virtual relationship, if you will, with your property manager, having a good working relationship.  But again, some people, Dave, they kind of overcomplicate this and make it sound like it’s so difficult and it’s just – at least for me – it’s not.  I mean for my properties, I just get an email once in a while and I reply to it.  Occasionally, it’s a phone call.

But one of the things that I think you do very well is the upfront relationship building so the property manager cares about your account, hopefully more than maybe everybody else’s account because you’ve taken a little bit of an extra step to develop a relationship with them.  How do you do that?

Dave Toombs: Well, I would wanna start by saying cash flow is really the life’s blood to our real estate investing endeavors and therefore, our property managers are the key to our success.  So I like to develop a relationship with my property managers just as early in the process as I can and that starts with interviewing to make sure that we’re on the same page and I’m comfortable with them and they’re comfortable with me.  And also recognize that property management is very difficult work and I would say, oftentimes, very thankless.

Jason Hartman: I, for a long time, said that property management is a thankless, low paying job, and it really is.  Property managers do not usually make a lot of money and it’s a lot of work because they hardly ever hear anything good.  It’s mostly complaints.  Oh, this isn’t fixed or that needs fixing or whatever it is.

Dave Toombs: Yeah, if things are running good, they don’t hear anything.

Jason Hartman: Right, exactly, so it’s not such a great job always.

Dave Toombs: Well, they can service a client base that can range from dozens of clients to into the hundreds and, by law, they can’t show favoritism to any one client.  So how can you gain your property manager’s attention?  What I like to do is offer some sort of perk up front.  In other words, if they get the property leased within a certain amount of time, I’ll offer a gift certificate to a store or restaurant, or maybe even a commission bonus in addition to what they get in their contract.  And that’s easy to do because when you close escrow, let’s say you close escrow in mid-February, your first mortgage payment is not gonna be until March 1, so you have some leeway in there to where you can be very generous.

Jason Hartman: That’s good.  That’s a good idea, yeah, incentivize.  There’s a great book.  I really liked it in the ’80s.  It’s called the Greatest Management Principle in the World and the concept of the book is what gets rewarded, gets repeated.  So you wanna, obviously, encourage the outcome and the behavior you want.  So that’s great how you do that with your managers.

Dave Toombs: Sure, and then I do things like send Christmas cards and pictures of the family and just stuff to help them remember who I am and I’m just the guy who worked with them in a nice fashion and led with a carrot instead of a stick.

Jason Hartman: Yeah, good.  Good advice, absolutely.  You know we had one of our investors who was so difficult, the property manager just called up and says, you know, this woman is too difficult.  Just tell her to hire another manager.  And I don’t know how it ultimately worked out, but again, you gotta remember that your property managers are such an important ingredient on the one hand because they’re the one that’s doing the ongoing work on your property.

Dave Toombs: Absolutely.

Jason Hartman: Making sure you get paid every month, and then also, on the other hand, remember that they don’t make that much money.  They don’t get thank-yous, so when someone stands out as treating them nicely and making the extra effort like you do, Dave, I think they really just really appreciate it.

Dave Toombs: Sure.

Jason Hartman: Yeah, you can attract a lot more bees with honey than vinegar, right?

Dave Toombs: Right.

Jason Hartman: Okay, good.  What else?

Dave Toombs: Well, one thing I like to do is we bought property all throughout the year and I like to think that there’s always a good time to purchase property, but there are some peak periods to pay attention to, depending on the area that you’re in, of when you want your lease to renew.  One of those is during the summer months, the 100 days of summer, so it’s important to know when’s the last day of school and when’s the first day of school.

And if I buy something towards the end of the year, I’ll ask my property manager for, let’s say, a six-month lease and have it time out around June 30 or so.  And then that gives me ample time to either renew the lease with my current tenants or start advertising the property, let’s say June 1, so that I have the opportunity to get new tenants the day after the former tenants move out.

Jason Hartman: Yeah, you know, I used to put a clause – I haven’t really practiced this lately, I hate to admit, but years ago, I would put an addendum on all my leases that said that property – of course, it might be a one-year lease and then it automatically goes month-to-month after that – but it would have a clause that said the tenant cannot the vacate in December.  They always agree to get me over that December hump, which is usually not such a great month to be leasing your property out.  Although, I will tell you I have leased properties in December and it can certainly happen.

Dave Toombs: There’s college towns where that’s when the winter semester begins and that’s a great time to lease, so it all depends on the area.

Jason Hartman: It does and every area is different, every manager is different, and every property is different, and again, that’s the beauty.  It’s hard to institutionalize this, so we embrace the fragmentation.  It’s a wonderful thing.

Dave Toombs: And then the last point I wanted to make is hire a tax professional that specializes with real estate investors.  What I’ll share with you is one of my character flaws is loyalty.  I’ve been with my previous tax professional for over 20 years, but he did not specialize in real estate investors.  And in a previous tax year, I paid tens of thousands of dollars in taxes when I didn’t need to.  Now I have a new tax professional and I’ll be getting back tens of thousands of dollars as a result.

Jason Hartman: Isn’t that great?

Dave Toombs: Yep.

Jason Hartman: Two things I wanna mention there.  No. 1 on the tax thing, so many CPAs now are basically selling investments, just like Wall Street is, and you’ll go to them thinking you’re talking to someone who’s impartial and a lot of them have a little investment business on the side or they have a buddy in the investment business whose selling stocks, bonds, and mutual funds, and they’ll refer to them and they’ll have some sort of deal going where they get some gain either way referring business back and forth.

Or my last CPA had his own little investment business going and so, of course, he didn’t recommend real estate.  He wanted me to put my money in his lousy mutual funds and I did for a little while, and every month, I got this statement.  I think I was with him on his investment side for about a year and a half.  Every month, I was losing money.  I mean it was a terrible deal.

And then a lot of CPA and some enrolled agents, too, they just don’t understand real estate.  They don’t understand how it works and if you have a tax preparer who’s created any wealth for himself, they’re probably investing in real estate because that’s where most of the wealth comes from.  And you are absolutely right, Dave, when you say have a tax professional who understands real estate and really knows how to milk all the benefits out of it for you.

Dave Toombs: I liken it to if you needed some major surgery, like open-heart surgery, you would not go to your family practitioner for that.  You’d go to a specialist.  And I’ll let you know up front, they will cost a little bit more, but weigh paying the government $10,000.00 or $20,000.00 in taxes and paying your former tax professional a few hundred bucks versus getting back $10,000.00 or $20,000.00 and paying a few dollars extra.

Jason Hartman: Very good point.  Taxes are life’s largest expense and real estate is America’s most tax-favored asset.  I’ve seen a lot of tax advisors give people what I thought was very bad advice on real estate.

Dave Toombs: Sure.

Jason Hartman: So that’s important to have someone who’s a pro-real estate tax advisor.  All right, Dave Toombs, thank you so much for your sage advice and this is really practical.  This is where the rubber meets the road and it’s after the fact, after you’ve purchased the properties, how do you make it easy and successful to manage them, and a lot of investors fall down here.  And it’s really not very hard.  You just have to do a couple things right and it all comes together for you.

Dave Toombs: We genuinely want to help you through the process, all the way through the process.

Jason Hartman: And we’re here for the lifetime of your investment.  As long as we’re here, we’re here to help you.  We’ve got a client in the other room right now with two of our investment counselors who bought several properties from us and she’s got a couple challenges here and there, but we’re here to help her.  We’re doing a portfolio review.  She’s meeting with two investment counselors on that, and then she’s going into Karen’s office for organizational help.  And again, all free of charge.  We don’t charge anything for this stuff, so we’re here to help you and please call on us if you need our help.  Anyway, Dave, thank you so much and this was a good segment.

Dave Toombs: Thanks, Jason.

Jason Hartman: I’m here with James Burns and he is the author of a fantastic new book called The Three Secret Pillars of Wealth.  James, welcome.

James Burns: Thank you, Jason.  Glad to be here.

Jason Hartman: Why this book at this time?

James Burns: Because the public is starving for information and education on what’s going to be the best investment vehicle to get them to their retirement goal.

Jason Hartman: Excellent.  What specifically is the book about, in terms of the three pillars?

James Burns: Well, the three pillars of wealth are age-old techniques and tools that banks use and self-made billionaires.

Jason Hartman: Excellent.  Is this book timely, James, and why is it timely?

James Burns: Absolutely.  The reason it’s so timely is any time you turn on a television set right now, you see that there’s shrinking pension plans, you see what’s going on in the stock market.  One geo-political event can wipe it out by 50 percent, so people really need education and they need to take back control of their investments.

Jason Hartman: Who will benefit most from the Three Secret Pillars of Wealth philosophy?

James Burns: Well, as we try and define it, we believe it’s an age group from 30 to 52 who still have a horizon for their retirement to be able to capture some of the benefits.

Jason Hartman: All right, well, there’s definitely a lot of people in that group and we pretty much know the government’s not gonna be there for us and even if the government is, adjust it for inflation, which those dollars really aren’t what they say they are, of course, there’s just not enough money.  So we’ve gotta build and plan and be responsible for our own financial future and our own retirement nowadays, and our own medical care and the care of our parents and so forth.  How is it relevant, though, to our lives today?

James Burns: Well, Jason, the old formula that most Americans used to live by, which is go to school, get a job, rely on your pension plan, pay off your home, and then try to seek your retirement living on that pension plan is becoming a failure.  As we know, the pension plans are vanishing and all the other types of pieces of this formula have evaporated.

Jason Hartman: Okay, excellent.  Yeah, that’s a very good point there.  What are the top three things that readers will learn?  What are these three lessons of the three pillars?  I love how you titled them and I can’t wait to hear what you say about them.  Go ahead.

James Burns: Okay, again, the three pillars are leverage, arbitrage, and cash flow.

Jason Hartman: Leverage, arbitrage, and cash flow, great.  Tell us about leverage.

James Burns: Leverage is doing more with less and the biggest place we see that is using real estate.  In fact, most people probably are living in leverage right now.

Jason Hartman: Yeah, so leverage means borrowed money; you use someone else’s money or, as the old saying is, OPM, other people’s money.

James Burns: Absolutely.

Jason Hartman: That’s great, so leverage in real estate and other business activities.  Any examples of another business activity?

James Burns: Well, sometimes it’s taking – buying and selling businesses.  I give an example of a self-made billionaire in the book and what he’s done using leverage to sell businesses.

Jason Hartman: Yeah, excellent.  Well, that’s the old thing that got so big in the ’80s, of the LBO, the leveraged buy-out.

James Burns: Absolutely.  He was one of the masters.

Jason Hartman: Yeah, where you take on debt and make the company pay the debt back for you, so you really put in no money into the deal.

James Burns: Correct.

Jason Hartman: It’s the ultimate leverage.  All right, tell us about arbitrage.

James Burns: Arbitrage is taking advantage of an inadequacy in the market, so for instance, say you’re paying simple interest and you’re capturing compound interest, the old rule of ’72.  A lot of times people are going to harvest some equity out of a home and they’re gonna deploy those funds into something that captures some compound interest.

Jason Hartman: Okay, so like what would capture compound interest?

James Burns: Well, when you’re looking at trying to capture compound interest, we’re going to probably look at either real estate or there’s other types of uncorrelated types of investment vehicles and life insurance.

Jason Hartman: Okay, great.  So I love the concept of arbitrage because basically, what that word means is it means exploiting the differences in something.  So if you can borrow money at 7 percent, but you can invest it and make it earn 8 percent or even if you make it earn 7 1/8 and that is for sure, you can become very wealthy just by little tiny differences, exploiting that little tiny difference in arbitrage.

James Burns: Right and then you’re like your local bank and that’s what they do.

Jason Hartman: Yeah, excellent.  And it’s better if you can borrow it at 7 percent and earn 30 percent on it like you can in a lot of prudent rental property deals.  Excellent.  Okay and the third pillar is cash flow.  Tell us about cash flow.

James Burns: Well, cash flow is simply a management idea.  It’s pretty much organic to businesses.  It’s the lifeblood of businesses.  But what I’m focusing in on in the book is people to run their family almost like a business and really observe their cash flow.  And the best way to do that is to mitigate or reduce your debt.

Jason Hartman: Okay, now see that’s funny because it sounds like that’s a contradiction and I wanna make sure we clear that up for the listeners.  The first pillar is leverage, so take advantage of borrowed money and have debt.  And then when we talk about cash flow, the third pillar, you talk about dollar discipline, which sounds like a good idea.  I wanna ask you about that in a moment.  But what do you mean by reducing your debt?  What kinds of debt?  Do you distinguish that?

James Burns: Yeah, bad consumer debt.  It’s like food; you have good food and bad food for your body, right?  And similarly, in terms of debt, we have good debt and bad debt.  And good debt is that kind of debt that will create future wealth.  Bad debt is something that you’re just simply paying on with no return.

Jason Hartman: Excellent.

James Burns: Like credit card debt.

Jason Hartman: Good point.  Excellent.  Tell us about dollar discipline.

James Burns: Dollar discipline is really what people need to employ for themselves in their life and there’s a few of these multi-level marketing companies selling a type of software that will help people reduce their debt or you can pay down your home in like ten years.

Jason Hartman: I’m familiar with that.

James Burns: In my book, I give a website that has the exact same software, yet it’s free.

Jason Hartman: Oh, wow.  Excellent.

James Burns: So all you’re gonna need to do is if you can get a home equity line of credit, you can have the same instance for absolutely nothing.

Jason Hartman: Wow, that’s excellent.  That’s a very good reason to pick up a copy of The Three Secret Pillars of Wealth.  James Burns, any comments in closing?

James Burns: Just wanna thank you and wanna thank you for what you do for the public.  I’ve enjoyed what Platinum Properties has done over the years and I think it’s a great thing.

Jason Hartman: All right.  Thank you for being here.  Appreciate it.

I’m here with Area Manager, Karam and if you’re looking for positive cash flow – yes, you can actually do that with only 10 percent down.  Quite an amazing deal to do in today’s market and remember:  the interest rates are getting a lot lower right now, so it’s a good time to be locking them in so that you lock in your cost of borrowing for the next three decades.  Karam, tell us about positive cash flow and rent guarantees in Columbus, Ohio.

Karam: Well, Columbus, Ohio, we have a builder who is very, very creative.  What he did was he went ahead on all these brand new single-family houses, townhouses, and condos.  He’s guaranteeing six-month rent.  Not only that, he is going to pay our investors the homeowners association fee and the management fee for two years.  And what that does is, with 10 percent down, you get anywhere from $100.00 – $200.00 positive income before even the tax benefit is considered.

Jason Hartman: Wow, that is really phenomenal.  That’s gotta be one of our very best markets in terms of cash flow, so excellent.  Anything else you wanna say about Columbus, in general?

Karam: Well, the economy is booming there.  There are several major corporations headquartered there.  University is big, so a smart workforce, low cost of living.  That attracts a lot of investors there.

Jason Hartman: Okay, Karam thanks for updating us on Columbus, Ohio.  Great market.

Karam: You’re welcome, Jason.

Jason Hartman: Hey, I just wanted to announce a couple of quick things for you.  Just wanna remind everybody listening that we are moving to our new office and you can find all that information on our website at www.jasonhartman.com.  If you’re interested in career opportunities as we are a fast-growing company, or franchise opportunities, inquire about those online as well.  We have some information at the www.jasonhartman.com website.  And reminder also that we cooperate with agents, brokers, mortgage people, and people in the business, so keep that in mind and be sure to check out all of our upcoming events at www.jasonhartman.com.

And if you are non-local listener, be sure to call in for one of our free conference calls.  I think you’ll really, really enjoy those as a nice supplement to the Creating Wealth podcast.

Also, we just uploaded another video podcast and I’d highly recommend that you subscribe to that.  There’s some stuff that just lends itself better to video than audio.  If you want to see what’s on that, subscribe to it, you can go to www.jasonhartman.com.  If you use iTunes or an iPod and you’re an Apple person, then you can go to the iTunes Store, type in Jason Hartman, and two podcasts will come up, a video podcast and the audio podcast.  And you’re probably already, if you’re listening, a subscriber to the audio podcast, so make sure you get yourself a free subscription to the video podcast as well.  And this particular one that we just loaded in the video podcast is about Naked Short Sales and what goes on with this short sale and manipulation of the stock market.  It’s a very interesting report from Bloomberg News and I think you’ll really learn a lot from that.  So be sure to tune in and watch that.

Be sure to see appropriate disclaimers and disclosures on our website at www.jasonhartman.com.  Remember that we are not tax or legal advisors.

Anyway, we’ll talk to you next week.  Thanks for listening.

This material is the copyrighted creative work of either Jason Hartman, the Hartman Media Company, Platinum Properties Investor Network, Incorporated or the J. Hartman Company, all rights reserved.

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Duration:  66 minutes