Announcer: Welcome to Creating Wealth with Jason Hartman, President of Platinum Properties Investor Network in Costa Mesa, California. During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing, fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible.
Jason is a genuine self-made multimillionaire, who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it. And now, here’s your host, Jason Hartman, with the complete solution for real estate investors.
Jason Hartman: Welcome to another edition of Creating Wealth. I’m your host Jason Hartman. Thank you for joining us today. We have an interesting show for you. First of all, I want to start off with a couple of questions. We appreciate you going to our site and asking questions.
Then we will expose you to a new real estate evaluation software. As all of you know, I’m a big, huge fan of Property Tracker. Been using it for several years now and really, really like that program. But there is another program, which is very unique and has some really interesting characteristics, and I was fortunate to have an interview recently with the founder and CEO of that company. And we’ll have that for you and we will also have an update on a few tax issues with our former guest Peter DeGregori of Vertical Advisors. So let’s get on with the show.
We really appreciate all of you that go to the Ask Jason section of www.jasonhartman.com website and submit your questions to us. We try to answer them as quickly as possible and get them on the next show. Our first question today comes from Michael.
Michael says, “Hi, Jason. I really enjoy your podcast. I live here South Pasadena, California. I have a property in Florida with a $600.00 per month negative cash flow. Yeah, I know. Dumb.”
Well, not so fast, Michael. Let’s see if it really is.
“Obviously, I did not buy the property from your network and really wish I had. I want to know if you think there’s any way I can talk to the lender to modify my loan and possibly avoid this negative cash flow. My wife and I bought the property three years ago, but the property values have really gone down there. Our credit scores are great and we don’t want them to be affected. I heard I could tell the lender that I want submitted deed in lieu of foreclosure so that they would talk to me, or that I should stop making payments so they’ll know this is serious. But we don’t want our credit scores affected, so we really don’t know what to do. Any advice you can provide would be great. Thanks and keep up the fantastic work. Whenever we decide to buy another property out of state, we will definitely come to you. I already refer a lot of friends to your website.”
Well, Michael, thank you for the support and for your question. It’s a good question. Unfortunately, it is a tough spot, so let’s see if we can kind of help you out with your situation a little bit. The problem here is it’s kind of a catch-22. Most lenders will not really take you very seriously when you’re trying to get a loan modification or to even get them to talk to you at all, unless you stop making payments. It’s kind of like you withhold the oxygen and then they know you’re serious. The oxygen is the payment I’m referring to here.
So what you should probably do first is call your lender, let them know that you’re experiencing some trouble, and that you’re having trouble making the payments. You might also try writing them a hardship letter, just kind of a tale of woe, telling them what you told me, but expand on it a little bit. Maybe talk about your job situation and so forth and see if you can get them to work with you. If not, there are companies out there who do loan modifications.
Now, I have not researched this industry extensively. It’s a pretty new, sort of cottage industry that’s come out of the mortgage meltdown and I’m sure that there are a lot of unscrupulous, unethical people in that industry. So I just want to say be careful. I am sure there are good, honest people in companies as well.
The thing I would avoid is going with any company that charges a very large upfront fee and makes vague promises as to the results they deliver. So just be a good, smart consumer. Let the buyer beware – you’re the buyer – and shop around and make sure that if you do use one of these loan modification companies that you really are careful with what kind of relationship and what kind of agreement you enter into.
And other than that, if worse comes to worse and you can’t make the payments and you have to stop making the payments, the lender, by that time, should definitely be working with you and getting serious.
In regards to your statement here saying that that’s dumb to take that negative cash flow, maybe, maybe not. When you buy a property, as I’ve talked about on prior shows, remember it is not necessarily about cash flow. Now, I know to anyone who might be a new listener to our show, who hasn’t listened to the other shows where I’ve discussed this issue, they may think I’m absolutely crazy for saying that. It’s really an issue of deferred down payment.
See, if you bought this property and it’s an expensive property and you put nothing down on the property, as you might have been able to three years ago, a negative cash flow of $600.00 is pretty high no matter what, but if it was $100.00 or $200.00, that’s not necessarily bad at all if you didn’t put anything down on it because what you’re really doing in essence is entering into a deferred down payment relationship.
So of course, never buy more property than you can afford. Always be a conservative and a prudent investor. Use leverage in a powerful way and again, listen to my prior shows on this subject. One of the great features we have is that almost all of our shows are transcribed in print on my website. So what you can do is go to www.jasonhartman.com and there’s a little Google search bar there that we bought from Google, and you can type in any key phrase you’re looking for and wherever it is appearing on our website, even in podcast transcripts, you can find where I talk about that subject. And then you can either read the transcript or just listen to the audio version of the podcast and get information you need that way.
So again, Michael, thank you for your question. Good luck with your situation. I know it’s a tough spot and again, next time around, always make sure the property makes sense the day you buy it or don’t buy it. Here at Platinum Properties Investor Network, we never engage in speculative activities. We do not gamble. We only buy properties that make sense the day we buy them.
And our first metric for that “making sense” issue is what – it’s the RV ratio, the rent-to-value ratio, which I developed to basically show the relationship between price and monthly income that you’re expecting on that property.
Just as a reminder, the ideal RV ratio is .7 percent. In other words, if the property is $200,000.00, you want to receive $1,400.00 a month in income from that property. An acceptable RV ratio, which is the lowest you should go, .5 percent. Example: $200,000.00 property; $1,000.00 a month. If it’s a $1 million apartment building or a $10 million apartment building, well, $1 million at .7 would be $7,000.00 a month, $1 million at .5 is $5,000.00 a month. So if it’s $10 million, you just add a zero. It’s pretty easy and that’s a good rule of thumb metric.
Remember it’s not necessarily about cash flow. It’s about the ratio of purchase price to projected income on that property. That’s the true evaluator for it because if you evaluate the cash flow, then you have to look into what type of financing do we have, what is the rate, is it fixed, is it adjustable? Did we put anything down? How much, 5 percent, zero percent, 15 percent, 20 percent, 30 percent? Those are a lot of complicated questions. Just going with the RV ratio is a good, quick rule of thumb, really simple. Now, there are other metrics as well, but RV ratio is a quick, down and dirty, fast way to know.
Okay, the next question, which wasn’t really a direct question, but it was an email I was copied on that I think is an interesting point that was brought up, this one is from Craig and Craig copied – it was talking to some people in our office about the naysayers. And he said, “One of your podcasts talks about naysayers and people who are always bringing up problems, the arguments against investing instead of the arguments in favor of investing. Last night, I listened to a podcast with a guest. I think his name was Jim.” And by the way, I’m not sure who you’re referring to because I’ve had a few guests like this, but “he was talking about the Fed lying to us about inflation and that Bernanke was full of it, and I actually got scared, almost anxious, about the future of America’s economy.
“So given this, everyone is talking about impending recession. The naysayers are telling me the economy is headed for rough times. Could you get into these investment properties and then have no renters to pay your rent? I replied, quoting ‘Everyone needs a place to sleep.’ But the response is, yeah, but not everyone can pay for it during the coming recession. What’s your take on this? Just dive in despite the gloomy outlook? I still know it’s the best place to put our money, but the prospect of failing renters does cause me some concern.”
Okay, so he goes on to say and I’ll just skip ahead here, “Jason mentioned he’s never had a failed renter on the podcast.” Okay, so here’s the thing. Let me just kind of clarify my take on what’s going on and what my experience over the last 21 years renting properties. First thing, my very first rental property, here in Huntington Beach, California, I did have a problem tenant. That is the only time I’ve had a problem where I lost money in terms of rents. It was my first experience. I was not a good landlord and now, of course, all of my properties nationwide, I have professional managers who do this day in and day out, managing my properties. And I had to evict a tenant. I’ve never evicted anybody else since then. That’s been 21 years, probably – I don’t know how many tenants I’ve had now. Probably over 100 of them, at least; maybe more.
So I just think that the tenant problem issue is overplayed. Now, I could be saying that to you and your first experience with an investment property will have a row of bad luck and you’ll have to evict a tenant. That could happen. We all know that’s a risk of being a real estate investor.
But in terms of the economic outlook, let’s talk about that one. I don’t think the tenant risk is very high as long as you have good property managers and as long as you’re paying attention to what you’re doing and your managers are doing that for you. Let’s talk about the economy. I think that we have a lot of bad news in the economy. I think America is broke. I think states, cities, and counties around the country are broke. We have problems. I will be the very first to admit that. Every time you’re in these economic crises like this, wherever it is around the world, there are certain classes of people who suffer from them and other classes of people who learn how to profit from them by adapting their strategy.
And that’s what I’m suggesting to you. Go back and listen to my Podcast No. 60 on “Entitlement Versus Gratefulness.” And what you will see there is that with all these impending economic problems, there are really only four ways to resolve them and they’re not really solutions, per se, but they are resolutions. Put it that way. Four ways. So if you listen to Podcast No. 60, I describe them on there.
The way that I think will occur and I’m pretty darn sure I’m right about this, although I could be wrong, too, I suppose, is that the government will create a lot more inflation to deal with these economic problems.
Now, people make this sort of low-level blanket statement and I hear it all the time: Well, gee, if the economy is really so bad and the outlook is really so gloomy, am I going to be faced with the situation where nobody can afford to rent my properties from me? Well, no. I don’t think so. Why do I say that? Because it’s a matter of lifestyle, purchasing power and socioeconomic status.
Maybe look at it this way. Look at it as though you have two ladders that are side-by-side, leaning against a wall, and these ladders can move up and down, up and down. And you have someone right now who’s renting a house that rents for $1,500.00 a month, for example, and the economy gets worse and there’s more inflation and their purchasing power, the purchasing power of your tenant, is destroyed. And maybe they lose their job. Maybe they take a lower paying job.
Maybe they have to have additional family members move in with them to share the burden or take on a roommate. I mean there are many people around the country in situations where instead of one couple, you’ve got a husband and wife living in a property, there are two couples living in that house now because we are in some difficult economic times. Or there will be a couple living in a house taking on a totally outside, unrelated roommate, not a family member, just to rent a room to somebody in a property. That happens, too.
The point is this: the person that was living in the $1,500.00 house may move down that socioeconomic ladder and they may be moving down to a $1,200.00 a month property. And the person above them that formerly lived in a place they rented or owned, where they were spending $2,000.00 a month for their house, will move down to where they will only be spending $1,500.00.
So it’s not an issue of making a blanket statement that is somewhat naïve, saying renters won’t be able to rent. Listen, folks, there are only three choices when it comes to housing. First of all, everybody on Earth needs a place to live. Three choices are you either buy, rent, or you’re homeless. And someone in one of my seminars, when I gave that example, jokingly said well, you could always move back in with your parents. Well, I guess you could. But it’s basically buy, rent, or be homeless to some extent.
So the thing is here it’s just a question of how nice a house will anybody live in. Granted, everybody would love to live in the nicest home possible, whether they rent it or they own it. The point is we are in for tough economic times. I freely admit that. But great opportunities are being created for investors. Remember two quotes. The first one, J. Paul Getty, the world’s first billionaire, he said buy when everybody’s selling; sell when everybody’s buying. I agree with that. What’s going on in the national psyche right now? Everybody’s selling, so this is an opportunity to buy. I’m a contrarian in that way.
Warren Buffet, he said be greedy when everyone is fearful and be fearful when everyone is greedy. Everybody’s generally fearful right now. Now’s the time to be greedy and with our strategy, our very unique strategy, based largely on inflation, you don’t need to depend on appreciation of your properties. You’re buying it at the lower end of the socioeconomic spectrum, so this is kind of nice, but basic housing. We like the areas that sort of have a little tinge of yuppie-ism to them, but not very much. They’re just sort of above the more basic housing, a little, just slightly above it. So you have a slightly better quality tenant. That’s sort of our usual target type of tenant.
And everybody needs a house and you know what? A lot of your tenants in the next five years and ten years in your properties, they will probably be coming from a nicer home than the one they rent from you. They will probably be moving down in lifestyle. They will probably be losing purchasing power dramatically. But of course, if you’re a regular listener and you’ve listened to my other shows, you’ve heard me talk about how this loss in purchasing power, what does it do? It’s a result of inflation and inflation destroys debt. That’s why we use debt in a prudent fashion, to profit from debt and let inflation destroy our high quality, long-term, fixed-rate investment-grade debt, attached to properties that are commodities that have universal need.
And the commodities that build that house sitting on that land are full of globally indexed prices. Big part of it. Not dependent on the dollar. Global commodities like copper wire, petroleum products, energy it takes to build properties, this is all really good stuff. So we’ve got a very bright future as investors. Granted, some of our tenants may well be coming from nicer accommodations than they are renting from you, but nonetheless, they will be there and I think they will be paying you rent.
Experts say in the next 34 years in the United States of America, we will add another 100 million people. By 2050, predictions say we will have 438 million people. That’s about 135 million more people than we have today and you thought the freeways were crowded already, right? It’s going to get a lot more crowded in this country.
The other thing you have is you have the global population boom. They say by 2050, I mean think of it. That’s only 42 years away. On the overall large macro look at things, that’s the blink of an eye in historical perspective. The population of the world will go from about 6.1 billion now to 9.5 billion people. Guess what all of those people will be consuming? Lumber, energy, petroleum products, glass, steel, copper wire. I mean, folks, the future is very bright for the prudent investor.
So don’t wait to buy real estate. Buy real estate and then wait. That’s not a blanket statement. You have to follow the other rules, the Ten Commandments of Successful Investing. Go back and listen to that show. There we tell you about the ten basic rules of investing, which I think will be a good guideline for you.
All right, so thank you, Craig, for that question. That was a good issue. We appreciate you bringing it up. Go visit www.jasonhartman.com. Complete the Ask Jason question. Also, we have a new feature on our site. For many of our podcasts, you can go and take a quiz, which will test your knowledge. That’s totally free. It’s just available on the site. Go into the www.jasonhartman.com, click on Education, click on Podcasts and Radio, and several of the podcasts now have little quizzes attached to them. They just take a few minutes, but it’s kind of good to test your knowledge and make sure that you’re absorbing the material and comprehending it.
I’m here with Mike Genstil, who is on the phone for an interview with us about his software program, called eRealInvestor and it’s a fantastic program and I’m looking forward to learning more about it myself and telling all of you listeners about it. Mike, welcome to the show.
Mike Genstil: Thanks, Jason.
Jason Hartman: Good to have you onboard. What’s your background and how did it lead to the creation of eRealInvestor?
Mike Genstil: Sure. Over the past decade, I’ve led kind of parallel lives. On one hand, I’ve been a software and internet executive, having worked at Adobe Software and Lycos, the search engine, and a couple of other software companies. And on the other hand, I’ve been a real estate investor in multiple states.
I bought my first property, a condo in Boston, when I was living there in the ’90s. Then I took a course in real estate investing in business school and I learned how the power of leverage could enable me to make money in real estate. Of course, as most people know, what that means is if I buy a property for $100,000.00 and put 10 percent down, the property appreciates by 5 percent over two years, that property is now worth $105,000.00. Of course, I’ve just gained $5,000.00 in equity, which is a 50 percent increase on my $10,000.00 down payment. So that’s a great two-year return. That doesn’t include the transaction costs, of course, if I were to sell it, but that’s the idea.
So knowing that, I got excited about looking at investment properties around the country and I looked at single-family homes, condos, multi-unit buildings in multiple states. And when I looked at a property, you know, I’m really interested and I’m looking at three key things. One is the local market. The second is the economics of the property itself. And the third is the people that would be involved in touching that property. None of these is probably surprising to folks, but from a local market perspective, I’m trying to understand what the job situation is like. Is this going to be an attractive place for people to be today? Is it an attractive place for people to be in five years or ten years, based on jobs, based on climate, based on the school situation?
From a people perspective, if I choose to have other people involved in managing my property, and not everybody does that, but I tend to have other people involved from a property management and maintenance perspective.
Jason Hartman: You know, Mike, if I can just mention something about that, you know many of our investors, I find, sort of trip themselves up over the management issue and here’s my new question for people. What makes them think they are a better manager than the property manager who is engaged in that business, does it all day long, knows all the laws, has all the forms and documents, and is set up with a system and a staff to support that function? I manage one of my own properties. I have one still here in California, kind of unfortunately, and I’m not as good a manager as my managers around the country. And I tell you, I’ve been in the business a long time. But they’re just better at it. They’re set up for it.
So I just wanted to get your take on that because you said you usually use professional managers to manage your properties and I find that with our investors that’s kind of a sticking point. I know this isn’t related specifically to this software, but thought it was an interesting subject you brought up.
Mike Genstil: Yeah, sure, and I find that people in different generations tend to have more of a desire to be hands-on or hands-off. I know people that are willing to buy properties today without even having visited them because they’re able to trust the people involved, representing it and selling it, and if they’re out of state. So I tend to be a little more trusting and like you, don’t want to necessarily try to do a job that I’m not necessarily the best at or skilled at.
So in any case, trusting the people is key. And finally, the economics of the property is the final thing that I need to understand and that’s where, as I’ve looked at properties over the last decade, there’s a lot of seemingly good deals out there and I’m looking for the best deal. I’m typically trying to look for a 20 percent return on my money, if not more, so I need to be really confident that I’m going to be able to make a 20 percent return. And my questions are what do I need from a rental income, from a vacancy rate perspective, from an expense perspective, appreciation, etc to get to that 20 percent return over the period of time that I’m holding that property, whether that’s five years or ten years or even longer.
Jason Hartman: Yeah, and you know our typical investments will yield somewhere around a 30 percent annual return, and I tell you, even if they don’t work out quite as well as you want them to being the investor, 20 percent return is phenomenal. I mean who is doing that on any consistent basis in a mutual fund, in the stock market, in a real estate investment trust, in a tenant-in-common or TIC deal? Nobody. I don’t know anybody who does that. Real estate is just such a nice stable, conservative, proven investment. It’s a good point. Twenty percent is phenomenal.
Mike Genstil: I agree. Well, we’ll have to talk about your 30 percent opportunities as well. Nevertheless, to try to get comfortable with these numbers, I’ve developed dozens and dozens of spreadsheets and I would compare and contrast different scenarios. What if the property rents for $1,000.00? What if it rents for $1,200.00? What if I put 10 percent down, what if I put 20 percent down, etc? And I found that trying to do these things, although Microsoft Excel can do those calculations, for me to ultimately get comfortable with the best property and then my best approach to that property personally, considering my own tax scenario, etc, it was just a real challenge.
And so I founded this company to solve these challenges, both as an investor myself, as well as someone that has a lot of friends who are real estate agents around the country that also has these challenges when they sit down with buyers of real estate.
So our vision about eRealInvestors simplified this process of identifying, analyzing, and acquiring attractive real estate that will help people build wealth, and really, we want to empower investors to make better decisions, but at the same time, empower their agents and their mortgage brokers to help them with this process.
Jason Hartman: Tell us about the product and how it works. Give us a quick overview if you would.
Mike Genstil: Sure. So I think we’re all in agreement that this is a bit of a numbers game and what we’re trying to do is help you build confidence as you look at a property from a numbers perspective. Just to give a brief background of the kinds of numbers that our software application, which is an online software application, helps you look at, they’re in two categories. One is the metrics that you care about, so again, as I mentioned, when I’m looking at a property, I care about the cash flow, both pre-tax and post-tax. I care about the rate of return.
Of course, when I’m looking at this 20 percent or 30 percent return, I’m comparing that to what I might be able to get in a CD, which would be 3 percent or 4 percent these days, or a mutual fund. If I get in a great one, maybe I’ll be looking at 10 percent or 20 percent, but that could go south on me also. And then, of course, the equity in the property.
So those are the metrics that I’m trying to understand, and then the input variables themselves, some of them are property specific, such as the rent, the vacancy rate, expenses. Some are personal variables, such as my loan situation and my tax situation. And then, of course, there are market variables on how is this property going to appreciate over time and what’s going to happen to rent, etc.
So what we’ve done in our product, eRealAnalyzer, is create a dashboard-like interface, which doesn’t exist anywhere else that I’ve seen on the Web or in any desktop software, that allows you, the user, to feel in control as you’re trying to look at all these different variables, so the input variables that I mentioned, as well as the metrics, and see how they all relate to each other real time.
So for example, as I was mentioning, if I’m trying to figure out what an appropriate rent is for a property, I’m going to want to see what my breakeven number is for cash flow. Often, if I’m looking at, for example, a $150,000.00 property, if it rents for about $1,500.00 a month, depending on how I finance it and depending on some of the expenses, that’s often kind of a breakeven number for cash flow positive, sometimes a little bit less, sometimes a little bit more. Our application allows me to move a slider that says, okay, if it rents for $1,500.00 or $1,400.00 or $1,300.00, what happens to my cash flow?
And then what we’ve done to then help you get comfortable with that rent assumption is we’re actually pulling in live rental comparables and we’re the only company that I’m aware of that’s doing that. So just next to this rent slider, I can actually click a comps button and we’re pulling in comparable rent information from various sources around the Web.
Jason Hartman: Okay, so on that comparable rent information, I hate to say it, but I’m just a little skeptical as to what the quality of that information is like. It is so hard to do comps for sales prices comparisons, is what we’re saying, or comps for rental, what are the market rents in an area because every property’s so different and you go sometimes across the street and these little micro markets and neighborhoods very so much. I just wanted you to speak to that for a minute before we move on, Mike, if you would.
Mike Genstil: Yeah, no, that’s a fair point, Jason, and what I was just about to say is we’re not saying that 123 Main Street in Dallas, Texas, is going to rent for $1,100.00. We’re actually showing you live rental listings near that property in Dallas and what that means is if 128 Main Street or a neighboring street has a rental listing, we allow you to actually click through to that listing, whether that listing is on some local Dallas-based leasing agency or some other local newspaper.
And then you can actually, if you wanted to, actually pick up the phone and call the property managers that might be leasing that neighboring property because you’re absolutely right. Across the street, the true rent may be totally different and you’re not going to get fully confident with this until you get a property manager on the phone who knows that local area very well and can give you confidence for that specific property you’re looking at.
So all we’re trying to do is give you kind of a ballpark range of a comfort level. If I need a property to be $2,000.00 to be breakeven cash flow positive and everything in the neighborhood is $1,000.00 to $1,100.00, that’s an indicator that I might be concerned. But if I’m within the range, if everything nearby is $1,800.00 to $2,400.00, well, then I’ve really got to pick up the phone and/or fly out there or drive over there to view that property specifically.
So that’s a good point on the rental concept. A few other benefits to our application, again, it’s an online application. It’s a dashboard view. It allows you to compare and contrast multiple scenarios side by side, so often, like even property, if you’re very optimistic about what you can get for rent and how it’s going to appreciate and perhaps if you want to be aggressive with your financing scenario, you can have an aggressive stance and view that this property, under all these assumptions, will generate a 35 or 40 percent return perhaps.
And then you might want to compare that to a more conservative view of that property, which is, well, let’s say the rent is a little bit lower than what I hope I can get and maybe it’s going to appreciate at a relatively normal rate over the next several years, and maybe I’m going to finance it more conservatively. And in that case, the rate of return would be something maybe closer to 15 percent or 18 percent.
But now, I’m looking at two scenarios that are different from each other, but I’m really excited about that 18 percent scenario and that’s good enough, and if I get better, then I’m really excited about that property.
So we have that side-by-side scenario comparison. As I mentioned, we’re pulling in data sources, both rental comps and appraisal comps. We allow you to look at a property as both a buy-and-hold opportunity, as well as a re-sell opportunity. Of course, in this market, there’s a lot of foreclosure or REO opportunities that might be good re-sell opportunities, so in those cases, the holding period is not over years, but it’s over a period of several months perhaps. And so we allow you to look at the property from that perspective.
Again, what we built is very graphical and intuitive, but we also have a button that says, “Click Here to View a Spreadsheet.” And so we’re the only product again, that I’ve seen and I’ve looked at a couple dozen of them, that allows you to kind of play with numbers in a dashboard graphical view, but then when you’re ready, to click a button that says “Export this Data to Excel.” So now, I can actually get all of this data in an eight-by format or a pro forma format and I can have it in Excel. I can save it for later review.
And then finally, I can save all these properties, save scenarios, compare properties and scenarios to get to each other side by side, and have a portfolio of properties that I can look at and analyze over time. That portfolio can be dozens and dozens of properties. And the whole package, as of right now, is $9.95 per investor per month, or $59.95 per year. And that may go up at some point, but that’s the pricing currently.
Jason Hartman: Okay, great. Where is this technology deployed?
Mike Genstil: Well, what we have done, in addition to allowing you to build your own portfolios in Investor, is we allow real estate agents and any website that is listing properties to deploy our technology. And what I mean by that is just like when you’re browsing properties on the Web today, next to each property you’ll see a button that says “click here for a map” or “click here for a photo.” We have a button that says, “Click here to analyze this property.”
And when you click here to analyze the property, it brings up a window with our dashboard-like interface with all the information pre-populated in charts and graphs, and it’s a very, very “sticky” application that helps people kind of engage with the property in a new way. And then there’s a button that says, “Click here to contact agent,” so people who are listing properties are getting more people contacting them through this interface.
And so the kinds of companies that have deployed our technology in this way are various portals, such as Condo.com, which is the largest condo portal, or a large for-sale-by-owner site, called byownermls.com, several investor-focused websites, including rehab list of Homevestors and several others.
And the main real estate and brokers, like thousands of agents from REMAX, Century 21, Coldwell, Prudential, have our button on their website. Many of these have their sites hosted by website hosting firms, such as Obeo, a No. 1 expert in Birdview, so you can look for technology there. And then finally, there’s some media sites, such as Wall Street Journal.com have a version of our product, which allows people to very simply enter a few data points on a property and then click analyze to bring up the analyzer.
Jason Hartman: So Mike, who else can benefit from the application?
Mike Genstil: Sure. So in addition to agents, anyone kind of connected to this business can benefit from it from a couple perspectives. We have relationships with mortgage brokers, banks, 1031 Exchange companies, appraisal companies and several others, and there’s a couple of things that these folks are doing. One is that they’re putting a version of our product on their websites, like the Wall Street Journal has, to enable people to very quickly and simply start analyzing a property. And then, in addition, because we’re getting so much traffic to our application through these other relationships, there’s pretty much lead generation and sponsorship opportunities for companies who want to access these buyers who are qualified and quantitatively minded. And we are actually able to target users by state, by property type, by property value, and then display the roles of our partners, and these get tens of thousands of views per month and that’s growing pretty rapidly.
I meant to also say that for the real estate agents, who are deploying our technology today, it’s pretty beneficial to them in this current market because properties are sitting on the market for a pretty long period of time and agents just don’t know whose going to buy property today. It could be a local primary homebuyer, but it could be an investor coming in from Canada or Europe, in fact, given that the dollar is weak these days, so our application enables all types of buyers, whether they’re primary homebuyers or property investors, whether local or remote, to very quickly and simply visualize the numbers associated with a property.
Jason Hartman: Okay, fantastic. What upgrades or enhancements do you envision in the future for eRealAnalyzer?
Mike Genstil: They’re coming in three different buckets. One is the data bucket. We’ve talked about that a little bit, but there are many, many data elements that you want to get a confidence level around. One is, of course, how should the property appreciate over the next period of time, whether you hold it for five years or ten years or longer. You’re going to be pulling in data sources that help you look at how properties appreciated historically in that given market. We’re also going to be pulling in additional data on vacancy rate information. So you’ll see a lot of information on data, and frankly, people have local data sources that they prefer to use. If they happen to be affiliated with a local property manager, they can let us know that and we can pull in those data sources as well. We’re very data agnostic, so to speak.
The second category is greater levels of personalization and I think we’re starting to see some of this happen in the web where, of course, people can save the kinds of searches that they like to do and get properties sent to them that match some of those criteria. But we’re all about the numbers. We’re numbers guys and so we’re going to be driving great levels of personalization in terms of helping people match up the properties that meet their financial criteria. So we already enable you to enter your personal tax information and then do the right tax calculations based on those.
By going forward, we actually will enable you to very simply indentify by having a button pop up that says this is a good deal for you given your financial criteria and your financial scenario for this particular property.
Jason Hartman: That sounds like a fantastic feature. I really like that.
Mike Genstil: Thanks, Jason. And finally, the notion of people again, I think, is pretty key, so there are good investment opportunities all around the country in many, many markets and there are ecosystems of people in each of these markets, and by ecosystem, I mean whether it’s a property manager, an appraisal person, a rehab person, etc. We want to enable people, really, to kind of “click” to talk to the experts in that market and one kind of individual you might want to talk to in a local market might be a tax person, that you know that kind of has understood how assessed values have changed over time. And you might want to talk to an attorney in a local market, depending on tenant laws and those kinds of things. So those are the three areas that we’re going to be building out.
Jason Hartman: Excellent, excellent. You know there are other software products out there on the market that address a similar problem. Can you summarize again what is really unique about this type of service? I like the slider because then you can do variables really easily. That’s a really neat feature. But maybe you just want to expand on that, Mike, and kind of summarize those thoughts for us.
Mike Genstil: Yeah, thanks. Again, I think the slider – I would, again, kind of call that a dashboard-like interface. What we’re really trying to do is to empower the user to run real time scenarios in a way that you’ve never been able to before and what this gets you is confidence that there is a scenario that could generate a cash flow positive property or better set kind of a financially attractive property, given your financial criteria. And then the question is what do you need to do to believe those assumptions behind that financially attractive scenario? And again, it gets back to rents and vacancy rate expenses. So this dashboard-like interface is truly unique.
The second area is the rental comparables that are really enabling people to get a sense for what’s happening in that local market, again, given the caveat that we’ve discussed, but then enable you to kind of click through to talk to people in that local market that might be able to, frankly, become the property manager for your property, if that’s what you want to do.
And then, finally, nobody else has developed a product that is very easily deployed on a real estate website, so that, again, if you’re listing a property, whether you’re an investor or realtor or portal or an investment club, you can drop our analysis button next to that property, literally a half hour of development time for your web developer, and now you’re enabling people coming to your website to engage with properties in a new way that’s very compelling and very sticky.
In terms of organizations that want to deploy our technology in that way should contact us directly and the models in terms of whether we charge people for that or how that works really depends on the business model of the organization that wants to include our technology. So again, as I mentioned, we have relationships with everybody from the Wall Street Journal to local real estate agents, and all of those relationships are very, very different. But our intent is to really help you achieve your business objectives through using our technology.
Jason Hartman: So Mike, this has been very interesting learning about your software product. Tell us what your thoughts are on the marketplace currently and where it’s going. We’d love to hear that from your chair.
Mike Genstil: Sure. Well, obviously, I think everybody’s asking that question and it’s on the front page of every newspaper every day. There’s a lot of concern on Fannie Mae and Freddie Mac and banks that are in trouble, like I think there’s still a year or two, hopefully not much longer, ahead of challenges for folks that had some exposure.
Obviously, in any sort of tumultuous situation, there’s opportunity and I’m encouraged as I attend real estate investment club meetings all around the country. They’re just as attended today as they have been in the past and people recognize that the nature of the opportunity has changed a bit, that you’re not buying kind of on speculation today as you were three or four years ago, expecting to sell a property in three years for 50 percent more than you bought it for. You’re really buying today based on either near-term cash flow because rents are rising in many, many markets and for-sale prices are flat and declining, or you’re buying for an equity opportunity given certain discussed situations.
But I think everyone knows that real estate is a very local game and I encourage people to take a look at some of the data sources that talk about where there’s actual appreciation. The media talks about property prices falling in many, many markets, but there are many markets that have appreciation. Some of those are in the Carolinas, some of those are in Texas, some of those are in certain spots in the Midwest, so as a Californian investor, those are the markets that I’m looking at for buying old opportunities. And of course, I have many equity purchase opportunities in my own backyard here, but those carry a different risk profile than the buying for cash opportunities around the country.
Jason Hartman: Good. How do you see technologies like yours and others changing the real estate landscape, and what lies ahead in your opinion?
Mike Genstil: That’s a good question. I mean I think what we do know is that real estate is the greatest asset class in the world and people have accumulated more wealth in real estate over the century and even the most recent several decades in the real estate area. Yet at the same time, the real estate market is several years behind the market of lucrative investments in terms of the availability and accessibility of information and the ease of conducting transactions. If you think back 20 years ago, there was no Morning Star doing any of the searches for mutual funds. So there’s a pretty big opportunity to enable people who are spending more time online searching and less time driving around to kind of have greater access to information and greater levels of personalizations. Some of these issues we’ve already discussed.
We know that, going forward, real estate agents and mortgage brokers will continue to provide a critical service in assisting people making a significant purchase, so they’re not going to go away because these purchases are so significant. But the technologies that are emerging, everything from the use of mobile technologies to enhanced level of personalization, will effectively drive greater efficiency, saving time, and facilitating communication across these different constituencies.
We’re hopeful that the sort of things we’re working on will not only simplify the process of identifying good deals that are financially attractive to buyers and helping them acquire them more quickly, but also helping multiple, greater levels of liquidity and transactions both inside the U.S. and kind of across borders as well as the world’s becoming flatter and flatter and getting access to interesting opportunities in South America or Eastern Europe or elsewhere will become more and more attractive.
Jason Hartman: Good points, Mike, and I really hope to see residential real estate especially become a true sort of big asset class for people because it has worked so well for people to build wealth, create financial security, and have a much better retirement, and I just don’t see that happening on Wall Street, except for the people who are actually on Wall Street, the insiders, if you will. It seems like the normal investors just can’t make any real money there. Seems like kind of a rigged game.
Real estate has such great opportunities, leverage, tax benefits, risk mitigation through different strategies using software products like your own, and just really looking forward to seeing this become a little bit more I guess institutionalized, if you will, in the sense that there are more products and services like yours and like ours that make it easier for investors to connect with good, sensible assets and create financial security.
Thanks so much for being on the show, Mike. Appreciate having you.
Mike Genstil: Thanks very much, Jason.
Jason Hartman: I’m here with Peter DeGregori, a friend of the show. Peter’s with Vertical Advisors located in Newport Beach, California. Peter, welcome back.
Peter DeGregori: Thanks, Jason. Thanks for having me.
Jason Hartman: It’s great to have you here today and I’m afraid we’re here to share some not-so-great news. It’s not terrible news, but it’s not as good as we thought it was. Of course, we know that the GoZone is probably the greatest gift in U.S. history that the IRS has ever given the American people for those that qualify and those properties that qualify and people that can take advantage of it.
But there is a little bit of a catch that you’re going to share with our audience today when it comes to 1031 tax-deferred exchanges. And one of the great things about real estate as an investment is that you can trade it on a tax-deferred basis if you do it properly all your life and just constantly defer, defer, defer the tax. But when it comes to the GoZone and that big bonus depreciation, it’s not as good as we thought it might have been, so Peter, why don’t you explain that to our listeners.
Peter DeGregori: All right. Thanks, Jason. As we’ve spoken on some previous podcasts, the GoZone does offer some great tax benefits, but there can be little landmines out there, so all real estate investors that are interested in going into the GoZone or have purchased property in the GoZone, make sure you get the education, the information that you need. And today, we’re talking about 1031 Exchanges.
You can do a 1031 Exchange with a GoZone property. However, there’s a little landmine. If you do a 1031 Exchange from a GoZone property to a non-GoZone property and let me just define GoZone property in this sense – the GoZone that we’re talking about are the qualified properties that give that real estate investor a big depreciation. They call it bonus depreciation.
So those qualified properties in the GoZone, where you’ve taken a big piece of bonus depreciation, 50 percent of that bonus depreciation, that property is what we’re talking about today. If you exchange that property into a non-GoZone property, then you have to recapture the bonus depreciation.
Jason Hartman: Yeah, we were hoping that this would originally turn out that you could buy in the GoZone, take that wonderful 50 percent bonus depreciation, and all of our listeners know and if you need more information on this, listen to the old podcasts where I interviewed Peter, and we talk about qualifying for the GoZone, tax benefit, and of course, you know that depreciation is a non-cash write-off. It’s the best type of tax deduction available out of any other type of tax deduction in my opinion. And we thought that we could turn around and just put the GoZone property exchange into a non-GoZone property and defer that bonus depreciation without recapture into the next property. But it turns out we can’t, right?
Peter DeGregori: Correct. And for those people that want to make sure that they have the right information because there might be conflicting information out there, you can go and look at Internal Revenue Code Section 1400ND5. That’s where the law states that if you exchange out of a GoZone property where you’ve taken bonus depreciation into a non-GoZone depreciated property, you have to pick up the difference on depreciations. So I have a little example to share with the listeners.
Jason Hartman: Fantastic. Examples are always helpful.
Peter DeGregori: Okay, so let’s say that the individual goes and buys a GoZone qualified property and pays $250,000.00 for it. That’s a reasonable price, right, Jason?
Jason Hartman: Yeah, or even most of ours, for single family, $200,000.00 even. It’s good enough for an example.
Peter DeGregori: Okay, so I thought that this one was really nice, so we put $250,000.00. And let’s say 80 percent of that purchase price is allocated to the building because remember when you buy residential property, you have an allocation that’s for the land and allocation that’s for the building. So 80 percent of it gets us to a building basis of $200,000.00.
Now, if you can take that bonus depreciation, hence one of the reasons why a lot of people bought properties in the GoZone, you automatically get $100,000.00 of bonus depreciation. That’s 50 percent of the basis. In addition to your first year of bonus depreciation, you’re going to get regular depreciation and regular depreciation is around $3,600.00 a year.
So if you kept it for three years and then you want to exchange it outside of the GoZone, what the law says is you’ve got to recapture the bonus depreciation, so anything above and beyond regular straight-line depreciation, you have to pick up into income.
Jason Hartman: Yeah, so the straight-line depreciation is, of course, based on a 27 ½ year schedule and in the GoZone, as we’ve talked about on prior shows, you’re getting half of that up front and then the other half over the next 26 ½ years remaining. So you get your regular depreciation and you get to defer that, but you don’t get to defer the entire bonus depreciation unfortunately.
Peter DeGregori: That’s right. So make sure you take this information into consideration if you’re considering selling or doing a 1031 Exchange. You need to know. Run the numbers. Maybe it doesn’t hurt you, but at least you know about it.
Jason Hartman: Okay, terrific. That’s great information, Peter. Unfortunately, it’s not better news, but it’s a lot better than making a costly mistake with the Internal Revenue Service, right?
Peter DeGregori: Right, Jason.
Jason Hartman: Okay. And we want to have you back on some future shows to talk a little bit more about this real estate professional status and we had a little talk outside before we started recording about some of these new asset protection vehicles and maybe you can give the tax spin on those. We’ll have a lawyer do the legal side of them. But it’s always great to have you on the show and we look forward to having you back again soon.
Peter DeGregori: Thanks, Jason.
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Duration: 57 minutes