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. This is your host, Jason Hartman, and this is Show No. 87. It’s great to have you with us today. Now, we have a few events coming up and you have to hear about them before we dive into today’s show, especially be sure to come to the Master’s Weekend. Remember this is only a twice a year event where we fly in experts from all over the country.
This time – people had asked last time – we had 16 experts flying in from all over the country on subjects ranging from asset protection. We had the property managers from various markets. We had agents from various markets. We had lawyers talking on different subjects. We had loan modification people talking. Just a whole bunch of stuff. You can find out all the details at www.jasonhartman.com.
But this time people had asked that the speakers have longer sessions, so we are reducing the number of speakers. We will probably have 14 experts rather than 16 this time. They will have a little more time to talk with you, and remember, these people are sitting down, and they’re eating meals with you. All of the meals are included, of course. It’s just a great event and it’s only twice a year, every spring, and every fall.
So the one coming up here is March 7 and 8, and we start off on March 6, Friday night, with the Cash Flow game as well, Rich Dad’s Cash Flow game. So check that out.
Today’s show we’re going to talk a little bit about apartment investing, so if you’ve been interested in investing in multiple units, we’re going to have just a few minutes on that. And then we’re going to have an in-depth discussion with our property manager, really one of our excellent property managers. We have several excellent property managers in different markets, and remember one of the big values adds we provide for you as our client is we prescreen these property managers and not only do we prescreen them, but we exert a lot of leverage over them to make sure that our clients get good service.
So we tell you to diversify and invest in several different markets because that makes sense. It maximizes your upside potential and limits any downside risk. But what happens when you do that is you are only a small client to each manager in each market because maybe you have one property in one city and another property in another city, and I always say property management is kind of a thankless, low-paying job.
And so what we do is we aggregate all of our clients and we refer them to the various property managers in those specific markets, so one property manager may have two dozen accounts from us. They may have 150 accounts from us, from our network. We exert a lot of leverage over them to make sure you get excellent, excellent service, and one of the things we say is if you ever have any need for assistance with your property managers or any of the service providers, just email or call your investment counselor here at Platinum Properties Investor Network, and we will call or email your manager for you. And I tell you they will respond to our request very, very quickly because we represent a big source of business for them. Some of them, we probably represent half of their business. This is a very, very powerful thing.
The other thing I want to mention to you when it comes to property management – a lot of you don’t know this – take advantage of it. It’s completely free to you. Any of our clients, we offer free lifetime rental coordination, so as long as we’re around, which hopefully is going to be forever, we will be happy to help coordinate the renting of your properties. So if you purchased a property through our network three years ago, four years ago, and your lease has come up for renewal and you have a vacancy, just call your investment counselor here and we will be glad to set you up with our rental coordinator, who will place ads on the internet. They will coordinate with and nag your property manager to make sure that you are getting the best service and your property is leased as quickly as possible.
A lot of value added services here. You’ll find out more about them by, of course, listening to the show and being in communication with the people here at Platinum Properties Investor Network.
Okay, so just listen to a couple of announcements real quickly. Then we’re going to talk about for just a few minutes apartment investing and we’re also going to talk about an in depth session here on property management and the best practices in property management. By the way, we have another Best Practices show. I can’t remember what number it is, but it’s all about managing your managers and organizing your files and really treating your real estate portfolio as a business so that it becomes very, very easy for you and very simple. When you’re organized, this gets really, really simple and easy. So a couple of announcements and then we’ll go to the show. Hang on just a minute. Here are the announcements.
Jason Hartman: Be sure to join us for our REO and Builder Closeout Event on February 17 at our office in Costa Mesa. And then we have a mini version of Creating Wealth in today’s economy on February 28. We have Rich Dad’s Cash Flow Game. If you haven’t played that, it’s a lot of fun. Join us for that on Friday, March 6.
And then our twice-yearly event, the Masters Weekend, A Gathering of Experts, on Saturday, March 7 and Sunday, March 8. So join us for these events.
Here’s a little bit of info about the REO and Builder Closeout and Commercial Property Event on Tuesday the 17th.
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And now let’s go to today’s show.
Jason Hartman: It’s a great pleasure to have one of our clients on the show and this is Henry, and he just purchased an apartment building in one of our markets, which is Columbus, Ohio, one of the bright spots in the Rust Belt. We think there are just a couple of spots up there that we like and this happens to be one of them because it’s a pretty unique opportunity with the sort of special terms that are available.
Henry, welcome. Thank you so much for sharing your experience with our listeners.
Henry: Well, thank you for having me Jason.
Jason Hartman: Our pleasure. So tell us a little bit about your experience. First of all, with our network, how did you happen to find us? Were you a listener to the podcast?
Henry: Well, it’s an interesting story. I just had purchased an iPod and well, I go to the gym and work out with it and listen to music. And I realized that doing cardio by itself is pretty boring. So I wanted to download some interesting things and one of the things I’d been kind of studying the last few years is real estate. I kind of stumbled onto your show and I really liked it. I can’t remember the first episode I first listened to, but I think after that first episode, it sounded pretty interesting. I started downloading the past episodes and I just really like Platinum’s philosophy on investing and your formula and the way you go about things. And that prompted a phone call from me to your network.
Jason Hartman: Fantastic. Well, we’re so glad to have you as part of the family and thank you for finding the podcast and listening to it. So did you look at several markets or were you particularly attracted to this one, and tell us about what you bought and everything.
Henry: I have other properties. I have five other investment properties and because the lending environment has changed a little bit, I had to change my strategy a bit. I think I was basically looking for more single-family homes. That’s what I have in my portfolio right now. But because things have changed a little bit, I think it’s harder to obtain a loan once you have more than four houses, I believe.
Jason Hartman: Yeah, you’re sure right about that.
Henry: So my goal for myself is really to purchase at least one property every year. I kind of wanted to stick to that and that’s when I called Karam and kind of talked it over with him to see what he had to say and what type of products that you guys might have out there that you’re working with that might be feasible.
At first, I wasn’t really thinking about multi-families, but when he sent me the pro forma, boy, it looked really good. So that’s what prompted me to look further into it and there’s no looking back. It looks really good right now.
Jason Hartman: That’s fantastic. So you’ve already closed the deal then?
Henry: Yeah, we closed mid-December and I just got my first statement yesterday for the pro-rated rents and so forth, and everything is set up. We have an escrow account and it’s really easy. As I say, no brain damage. It’s made easy for me. I appreciate it.
Jason Hartman: Excellent. That’s good to hear. We try to make this as arms’ length as possible so it’s as much of an automatic pilot as you can get. And you know, Henry, I’m sure you’ve invested in other things over the years, like stocks and bonds and mutual funds and all that stuff that never seems to work for anybody I know, including yours truly.
Henry: That’s absolutely right.
Jason Hartman: And a lot of people think I don’t want to be a landlord, I don’t want to be a real estate investor because, as such, I’ll have to deal with management problems and it will just be more complicated and difficult. But what they don’t seem to know is that when you invest in other things, if you’re any good at it, you’re watching CNBC all the time or Fox Business Network, you’re reading the Wall Street Journal or Money Magazine or Barron’s or Forbes or Fortune, and you really kind of have to be educated. Maybe you’re filling out those proxy statements you get in the mail on those stocks you own or reading the annual reports.
And if you’re a good investor, you have to exert some effort. There’s really no such thing as a passive investment as far as I know. Any thoughts on that?
Henry: Correct, Jason. I have money in 401k’s and stocks and bonds, but there’s so much behind the scenes that I just feel like I don’t know and because of that, I don’t feel completely comfortable in that type of investment. I’ve always like real estate. The people around me that I’ve seen massive wealth have done so via real estate.
Jason Hartman: Isn’t that a funny coincidence that I just don’t know anybody who’s gotten rich in the stock market? I know a lot of people. I hear about them. I know who Warren Buffet is. I don’t know him personally. But of course, he’s an insider and in a much different situation than all of us, right?
Henry: And the concept of leveraging, I mean if you went to a bank and asked to borrow money to buy stocks, it’s not going to happen. So these lending institutions, even in this environment, they know it’s a great bet and they’re willing to lend you money to create wealth for yourself. I think it’s a phenomenal vehicle.
Jason Hartman: Yeah, that’s a great deal. If they’re willing to lend the money and you get rewarded for borrowing from a tax point of view and from a leverage point of view and increasing your ROI and reducing your risk. And then also, benefitting through time and inflation. I mean inflation makes those debts cheaper to repay because you pay back with evermore-worthless dollars ultimately. It’s a pretty good equation. It sure is.
So what you bought, Henry, is a pretty unique deal and that’s one of the reasons we like this deal. These are brand new apartments and how many units did you buy? Was yours a 24-unit or 16-unit building?
Henry: Sixteen units, Jason.
Jason Hartman: Okay, excellent. It’s, first of all, very rare to find an apartment building that’s brand new, No. 1, and No. 2, if you do find it brand new, it’s usually vacant or you’re actually the developer of it, taking all the risk to lease up the property. And with yours, was it 100 percent occupied when you closed the deal?
Henry: We had everything occupied except for two units, but the rent was paid for by the builder as promised, and now, in the last couple of days, I understand they’ve both been rented as well, too, so we’re sitting in good shape here.
Jason Hartman: So basically, for all intents and purposes, the builder covered those two units that were vacant and you had all of the other units rented, and now those two are rented. So you have a brand new apartment building, 100 percent rental income is there, no vacancy at all, no losses there. That’s a pretty good performer. Do you remember, Henry, what the projected ROI was on that investment offhand?
Henry: I don’t have the sheet in front of me. I know it’s a 12 percent cash on cash, which is great in this environment.
Jason Hartman: Sure is. Well, any other thoughts you’d like to share with the listeners about investing in general or this particular deal?
Henry: Well, I just wanted to thank you guys. I appreciate all your help, everybody from yourself to Gia and Karam. I’m a working professional and it’s nice to be able to have a network to work with. I know you guys do your due diligence. I know you build relationships in different communities and it seems like you make it really easy for your investors and I just want to thank all you guys for making it a great experience.
Jason Hartman: Well, good stuff and thank you so much for being on the show and sharing your experience. Just out of curiosity, so you’re up north, Northern California. Are you in the San Francisco area?
Henry: I’m in the San Francisco area and as you know, Jason, the Bay Area, there’s no way to buy investment property and make it cash flow, so that’s why I like to look out of state.
Jason Hartman: Yeah, you have some pretty bad rent control problems there from what I understand.
Henry: Oh, yeah. Yeah.
Jason Hartman: They call it the People’s Republic of San Francisco. It sure is a beautiful city, though.
Henry: I hear the horror stories. I have friends of mine who own rental units and no thank you.
Jason Hartman: Yeah, you don’t have any rights as a landlord. So good stuff. Where else do you own properties, in what other areas?
Henry: I have some property in Colorado. I have a couple single-family homes there. And I also have three single-family homes in Dallas, around Dallas area.
Jason Hartman: Oh, yeah, fantastic. We just opened, several months ago, Denver, Colorado, and we’ve been recommending Dallas for a long time. I’m actually going – I’m on my way to a big road trip. I’m going to Dallas and Austin and Houston and through New Mexico. I’m going to revisit our Albuquerque market, which hasn’t been too active. I want to kind of get an update on there and see a lot of stuff along the way. I’ll be sharing my experiences on the show, so I hope you’ll listen in.
Henry: Oh, yeah, I look forward to it.
Jason Hartman: Good stuff. Well, hey, Henry, thank you so much for sharing your experiences with the listeners and we really appreciate you coming on the show.
Henry: All right, Jason, thank you very much.
Jason Hartman: Thank you. Bye-bye. And let’s listen in to the interview. Here it goes.
Interview with Property Manager
Jason Hartman: Bart, it’s great to be here with you in Austin. I love this city. It’s just a wonderful place, a lot of fun here, a lot of natural beauty. And of course, you’ve been out and visited our Masters Weekend before in California.
Bart: I have and I was stationed in California for a short time when I was in the Marine Corp, so yeah, Austin and California are very similar in climate, people, everything.
Jason Hartman: And one is a much better value as far as real estate and cost of living.
Bart: It is for right now, that’s for sure. California is getting hammered.
Jason Hartman: It is. Well, tell us a little bit about what’s going on in the Austin market.
Bart: Well, if you’re keeping up with what’s going on in the national market, you can see that things are having problems, things are slow. Austin seems to be doing a little bit better than the national market on that. Our real estate bubble has, as people say, popped a little bit, but our home values are still staying pretty well. What you’re seeing is prices are staying about steady, but days on market are increasing.
Jason Hartman: Days on market for rent or for sale?
Bart: Both. You’re seeing it across the board. Typically, property management and rentals are anti-cyclical to sales. If sales are doing well, rentals are doing bad.
Jason Hartman: Right, because the sales suck the renters out of the market. Now, one thing I’ve sort of hypothesized and noticed in some of these markets around the country that we deal in and it may be happening here is that we started when the sales really started taking a downturn. We started seeing the rents actually increase and the days on market decrease.
But I think what has sort of messed that up for property owners, if you will, is government intervention in the sense that they’ve put so much pressure on banks to do loan modifications and workouts and short sales and sort of prolonged the process. The government’s philosophy seems to be keep people in their home. And what that’s done is it’s lowered the demand for rental housing to some extent, right?
Bart: Well, but also it saves the rental housing because you have to remember not only are they saving the people who live in their homes, they’re saving the investors that have properties that are rental properties. And so if they put those into place, you’re also saving the people who are the investors. Without the investors, there is nothing for people to rent. There’s no inventory. You have to have the investors to have inventory and the government realizes that, too.
Jason Hartman: But how are they saving the investor? What do they mean by that? By working out their loans?
Bart: Absolutely. We’ve had several owners who have had problems in the last year and they were able to go to their mortgage companies and say, look, I’m behind on a few payments. Can I put those payments on the end of my note? Can we do something? Can we restructure my note? Is there any financing for me available?
Jason Hartman: And the lenders are pretty willing to do that.
Bart: And the lenders are working with them. And by saving those investors, you’re saving that property on the market for a renter to be able to rent. Without the investors, there isn’t a rental market. It’s a necessary evil to be able to save. In one sense, you say, well, they’re saving people so there’s not going to be any renters left because they’re saving them into their homes. But actually, we’re seeing a huge inflow of people who probably should have never purchased a home to begin with as a homeowner.
And even though homeownership is great in this country, it’s not for everybody. Some people should have been renting instead of buying these homes under what I would call snaky deals and getting tricked into purchasing homes they shouldn’t have purchased. Now, those people are coming back into the rental market and those are good tenants. They were great tenants before they bought a house. They got in trouble and now they’re having to come back as a tenant.
And what I always tell my owners is don’t be afraid of those people coming back into the rental market. They were good tenants. They’ll be great tenants for a long time.
Jason Hartman: And they should have stayed tenants.
Bart: They should have stayed tenants.
Jason Hartman: So Bart, you mean what you’re telling us here is that everybody shouldn’t be able to own a home, even if they have no job, bad credit?
Bart: Absolutely. Homeownership is not for everybody, especially in Austin. Austin has seven universities. Our cycle runs in the summer. Ninety percent of rentals and demand for rentals happen in May, June, July. That’s where the majority of our cycle is. It’s the peak of our business cycle. The winter’s the trough. Nobody moves in the winter. They don’t want to move with their kids in school. Universities are already in session. A good time to be looking in the Austin market to buy a home is right now. There are great deals. Builders are giving good deals, good incentives because they’re hurting. They want to move their inventory. We’re seeing a lot of spec homes decrease because builders don’t want to build it if they don’t have a buyer. So it’s taking a little longer for investors to buy those.
Jason Hartman: You say they’re building less speculative housing, so that’s shrinking the supply is what you mean.
Bart: It is or it’s taking longer for the investors to get the home, to get ready. It used to be you could go to a builder and a builder would have a home and say we have this one ready to close in 30 days. Well, that’s great. But now, if you come into Austin and you want to buy a brand new home, it’s going to take three or four months before it’s ready for you to own. That’s a perfect time if you get in right now. Three or four months puts you right in that summer cycle. Perfect timing for the lease market.
Austin has slowed a little bit, but it hasn’t slowed like the rest of the market.
Jason Hartman: That’s what we found in Dallas and Oklahoma City as well. I mean those are pretty good.
Bart: Sure. Right now, our vacancy rate is 2 percent.
Jason Hartman: So you have about 300 properties under management and you have five vacant.
Bart: That’s correct.
Jason Hartman: Bart, that is pretty good.
Bart: That’s not bad.
Jason Hartman: Before we started recording, I was having a conversation. You were, frankly, kind of giving me a little bit of a downcast view of the market, but then you gave me that number and I thought that’s fantastic.
Bart: It is good numbers, but you have to understand not everybody in Austin is as good of a property manager. I would consider myself with my credentials and what I do nationally probably one of the top five percent managers in the nation.
Jason Hartman: Yeah, we’ve been working with you about three years now, I guess. And you manage my property in Austin. One of the things I’m really regretting is that I didn’t buy more properties in Austin three years ago, four years ago when I bought. I just have one here.
But tell us about some of your qualifications. You’re very active in the property management industry.
Bart: I am. I believe to be a good agent you’re always learning and so I’m active in the national sense with the National Association of Residential Property Managers, which is a professional organization of four property managers. A lot of times in real estate, people look at property managers as the subcategory. You don’t do sales. Oh, you’re not a sales agent. You’re just a property manager.
Well, property management itself is quite a task and either you are good at it or you’re not and not everybody can do it. Some states require licensing; some don’t. You need to be very careful in some of those states, like Idaho. Anybody can say they’re a property manager. They may not have any real estate experience at all.
Jason Hartman: With no license?
Bart: No license.
Jason Hartman: I find that interesting, like in California, you have to have a license to do property management.
Bart: You have to have one here, too.
Jason Hartman: But in some places, you don’t have to have a license.
Bart: You have to realize, though, Texas and California are the two strictest real estate states in the nation. And usually what happens in California trickles down to Texas and it will.
Jason Hartman: Hopefully not everything will trickle down to Texas.
Bart: Well, hopefully not, but California right now is not being able to deny a Section 8 tenant in your property.
Jason Hartman: Now, tell us what Section 8 is.
Bart: Section 8 is, well, it started out as a HUDD program for single women with children.
Jason Hartman: Okay, so the Housing and Urban Development Department, HUDD, started this program and basically, my mom has made a lot of money renting to Section 8 tenants over the years, over the last two decades really. But some people like them; some really don’t as property owners.
Bart: And the system has changed. It started out as a help program for single women with children. That’s how it started. In Austin, though, it has totally switched gears and the problem with Section 8 in Austin is it’s available for anyone who really wants to apply for it. They’re not necessarily qualified tenants.
And then Section 8 will come in and they’ll lower your rent because they’ll say, well, if you want this tenant, we’re only going to pay you this. And then while the tenant’s in the lease, Section 8 will come in and say, well, they got a raise at their work, so we’re going to pay less. Well, that doesn’t mean the tenant can afford to pay more. Actually, the tenant can’t, and so now Section 8 is paying less, so you’re not getting your rent made.
Jason Hartman: So there are a couple different types of Section 8 from what I’m familiar with. One is where Section 8 pays the entire rent.
Bart: That’s called a full ticket.
Jason Hartman: Okay, full ticket. And then the other one is where the government pays part of the rent. And I tell you, for all the complaints some people have about Section 8, my mom used to love them because they were the most dependable tenant ever. You got the rent check every single month no matter what because the tenant was really the government, or at least it was maybe 60 – 70 percent government, if not 100 percent, full ticket as you say.
But the other part about it is they would send her a little postcard every year and it would say would you like a rent increase; check this box. And so she’d check it and of course, they’d give her a little rent increase.
Bart: Well, that’s great, but that’s not what’s happening nowadays with Section 8. It’s not the people. The tenants are still good people. It’s the company. The company is killing the Austin market.
Jason Hartman: You mean the government.
Bart: The government, absolutely.
Jason Hartman: How are they killing it?
Bart: Well, because they come in and I do a market analysis on a property and say this property should rent for $1,250.00. Everything else around it is renting for $1,250.00. Section 8 will come in and say if you want our tenant, we’re only going to pay you $1,100.00. They’ll drop your rent.
Jason Hartman: Now, will they allow you to collect more from the tenant?
Bart: No, that’s illegal.
Jason Hartman: Not on a full ticket deal.
Bart: You can’t work any sub deals with the tenant. You have to do everything on paper.
Jason Hartman: Well, I’m not saying it’s a sub deal. I’m just saying can you –
Bart: Well, some people do, though. It’s illegal, but some people do. Some people will say okay, Section 8, I’ll take that, and then they’ll turn to the tenant and say you’re also going to pay me $150.00 fee every month for this.
Jason Hartman: That’s kind of like rent control, where it creates this black market where the government intervention seems to screw everything up. I completely agree. I’m not saying it’s a sub deal. I’m saying will Section 8 in that case allow you to on paper, fully disclosed, say okay, $1,100.00 and another $100.00 from the tenant?
Bart: No. No.
Jason Hartman: Because that’s a full ticket tenant.
Bart: That’s right.
Jason Hartman: Okay, what about on the percentage ticket?
Bart: They work the percentages. We don’t get to determine what they are.
Jason Hartman: The government does it.
Bart: The government does it. The government sees what she makes or he makes and then they say, okay, we’re going to give you a partial ticket. We’re going to rate you for this big of a property and you can’t adjust those. There’s no dealing with the tenants at all. You’re dealing with HUDD.
But there are some differences with California and Texas, but being on a national board, I see that all the time. I’m very into the legislative stuff, what’s happening in both states. I sit on the Texas Association of Realtors Property Management Committee, which meets here in about 20 days for our annual meeting. So I’m going to conventions all the time. I’ve served as president of the chapter here for National Association of Residential Property Managers. I hold the Residential Management Professional designation. This is what we do. Property management is it.
Jason Hartman: Tell us about the regulatory climate. One of the things we really have liked about Texas and we’ve recommended a lot of owners and referred business into people buying properties in Dallas, Fort Worth – Houston has been a very good market for us. Austin, of course, has been an excellent market. Austin is one of our top markets. And all of the major stuff. We’ve done a little bit of business in San Antonio as well. We really like Texas and I think it’s kind of because of that old saying – there’s an old saying, “Don’t Mess with Texas.”
The regulatory climate to a person who lives in one of the sort of more leftist states like California and New York and many, many others, and other countries around the world as well, like we have clients in Europe, they like it because it’s easy. If you get a bad apple as a tenant, you can get them out quickly. They find it hard to sort of work the system and be squatters like they do in California. They can really kill you as a landlord. Tell us about the regulatory climate here.
Bart: Well, we work really hard with that. As I said, I sit on the Property Management Committee with the Texas Association of Realtors and we lobby very hard. As a matter of fact, our session is going right now and there are a lot of bills at the Capitol that deal with this all the time that we fight. But basically, everything that has to do with landlord/tenant is governed by the Texas property code. Our leases are regulated by property code and everything like that. And there are certain things in the property code that we have to follow, but I would say Texas is definitely less pro-tenant than some of the other states you talked about.
Jason Hartman: So it’s pro-landlord. We like pro-landlord.
Bart: Pro-landlord. I would say compared to other states, absolutely. It’s a very quick process. As a property manager, I can handle it from start to finish, represent you in court. It’s one of the few things I can do where I’m not acting as an attorney. I’m still your broker representing you in court for a failure to pay rent. That was passed several years ago that allowed us to do that instead of the owner having to hire an attorney.
So basically, our standard operating procedure here at Bella is rent is due on the first. Last session, they passed a law stating we have to give tenants a grace period in Texas, so they have until the third to pay their rent by law now. If I don’t have the rent in my office by the third, then on the seventh of the month, I am on their door with a notice to vacate.
I don’t really want them to vacate. I don’t want to evict tenants because I know it’s going to cost the owner money and they’re going to have a vacancy, but I have to start that motion forward. Typically, we’ll then be on the phone with the tenant. We’ll try to work with the tenant. We communicate with the landlord; let them know what’s going on. The way I run my company is the landlord owns the property and I don’t know what that landlord’s situation is. I know what my situation is. I may know what some of them are, but that landlord could be hurting and that landlord would say do not evict my tenant right now. Work with them. Take what they have and that’s what we’ll do.
Jason Hartman: Take a partial payment you mean.
Bart: Absolutely. Whatever the landlord needs us to do is what we do. But if the owner says, you know what? Do what you normally do. Okay, great. Well, then they get their three-day notice on the seventh. Three days after that, I’m at the courthouse filing the eviction. Seven days after that –
Jason Hartman: So it’s now the tenth of the month. Only ten days have gone by.
Bart: Ten days, I’m in courthouse filing the eviction. Seven days after that they have to respond. Some JPs have now moved to –
Jason Hartman: The tenant has to respond.
Bart: The tenant has to respond to the court. But some JPs now have started a process of setting the court date right when I file.
Jason Hartman: What is a JP?
Bart: Justice of the Peace. In Texas, you have municipal court and county court, and the Justice of the Peace is the county court. Anything under $10,000.00 now and eviction suits is county court.
Some of the JPs have started a process of as soon as I file the paperwork they give me the court date. They know they’re going to serve the tenant with a constable and they know it’s going to be seven days and they give me a court date. Some are still on the old system where I file it, I have to wait for the constable to go, then I have to call the court back and say were they filed on, when’s my court date, stuff like that. Typically, now though, we’re into the 21st.
Jason Hartman: Even in the worst-case scenario?
Bart: Even in the worst-case scenario.
Jason Hartman: So now this owner has only been missing rent for 20 days.
Bart: Twenty days and I’m in the courthouse in front of a judge, and the tenants there or they’re not there. If they’re not there, I get a default. If they’re there, I have a court case. I’ve never lost a court case and I’ve evicted probably 500 tenants in my career. So I didn’t always manage nice properties when I started out.
But then we have a court case. They have five days to appeal that. If they want to appeal it, they have to pay three times the amount of the rent as a bond, which they don’t have. Otherwise, they would have paid the rent. So they have five days to move. If they’re not out on the 5th day, I get what’s called a Writ of Possession, the constable detains them, and we move their stuff to the curb.
Jason Hartman: Wow. And so that’s – what – 25 days.
Bart: By the end of the month usually.
Jason Hartman: So you really have a tenant out in less than 30 days, in a month. Wow. So that risk is really, really mitigated by the landlord friendly, regulatory climate of Texas.
Bart: It is, but don’t forget that, like anything in your portfolio, there’s risk there. I try to minimize risk. That’s our job as a property manager. But when you’re evicting a tenant, you have to pay the court cost. I’ll represent you as part of my fee, but you have to pay movers to move them out. It’s not going to be clean when they move out, so now you’re going to have a make-ready cost. You’re going to have a vacancy cost. There’s going to be a leasing cost. It’s expensive to evict a tenant.
Jason Hartman: How much does all of that cost?
Bart: Let’s say we have a standard property collecting $1,250.00 in rent. You’ve already missed one month of rent. That’s why we’re evicting. So you’re out $1,250.00. Court is $150.00. Writ is another $70.00. So that’s chump change there, but then we get into the next month because we’re already at the end of this month. You’re going to spend at least $500.00 – $1,000.00 to move them out with movers.
Above and beyond that, you’re going to have another month’s worth of rent lost, so you’re at $2,500.00 plus $150.00, $2,800.00, plus the make-ready cost to clean the property and get it ready. It could be as much $500.00 – $600.00 for carpet cleaning, house cleaning, light bulbs, all of that, and then your commission to release the property. So that eats up the rent that you do get on the following month. You’re looking at $3,600.00 just for one eviction on a standard property.
Jason Hartman: But that’s including the lost rent.
Bart: That’s everything. That’s money out of your pocket.
Jason Hartman: You know, Bart, it’s amazing because sitting here with you, the perception is that’s such a terrible thing. But compared to other states, let me tell you something. The risk here is so low. It’s so landlord friendly. I mean a person in California, first of all, is probably talking somewhere of a $1,600.00 – $2,000.00 a month rent, so you’re a larger thing there. You have a larger mortgage payment and larger debt service on the property in California or any other expensive state.
And you have this tenant-friendly regulatory climate, where the tenant says I’m going to contest the eviction 21 days after you start and you’re horsing around with them another month, another two months. It’s amazing. If they know how to play the system, I mean they can sit in your property for months. That’s a low risk deal if you ask me. I love it.
Bart: It is and I’ve had owners tell me that. When we get an application on a property, I’ll present the application to the owner and say this is who your applicant is and I’ll present everything to them. And they’ll go, well, they’re not the greatest, but I’ll take them because you can evict them so fast.
Jason Hartman: Yeah, right.
Bart: I hate that they think that way, but I can understand why they think that way based on the fact that they live in California and they’re three months on a bad tenant. But with the screening we do and I try to tell owners, look, it’s not that bad of a market. Wait for the next one because it’s not the eviction that I’m worried about. Sure I can evict your tenant. It’s the damage they can do to your property. It can be really costly.
Jason Hartman: And some of that you have insurance coverage for.
Bart: Sure. It depends on the insurance company, but if you’ve leased to a tenant on a lease and they damage the property above normal wear and tear, some insurance companies will give you the insurance for that for – I forget the term for it – and they’ll give you lost rent income for that, too. But some insurance companies say no, that’s the risk of renting your house.
Jason Hartman: So check your insurance policies because there are some really good comprehensive landlord insurance policies that are good.
What about suing the tenant after the fact on like a deficiency? I think a lot of this risk of owning rental property is really overblown. So many people have these images of they went to see the movie Pacific Heights and they think they’re going to get Alec Baldwin in their property.
Bart: Michael Keaton.
Jason Hartman: Michael Keaton, sorry. And it was just going to be this terrible experience. And I’ll tell you something. I’ve owned rental property now for 22 years. I’ve owned lots of rental properties, had hundreds of tenants. I’ve only evicted one and it was my first one, a property in Huntington Beach, California. And that was my first property when I was a kid. I was 20 years old and I had a bad experience.
Bart: And I’m not trying to paint a bad picture here.
Jason Hartman: But how often does this really happen?
Bart: It doesn’t anymore. Like when I said I’ve probably done 500 in my career, I’ve been managing property for 15 years now.
Jason Hartman: And you have 300 accounts now.
Bart: I have 300 now, but see, when I first started, I would take anything. My accounts now are high quality rental properties.
Jason Hartman: Yeah, and that’s what we really recommend our clients buy in your market.
Bart: But back when I was doing four-plexes and small apartment buildings and low rents, there’s a rent margin there where if you’re below $800.00, you’re risky. From $800.00 to $1,000.00, you’re even more risky for some reason. Those are the rents that really default and evict. And above that, you’re kind of a little bit safer.
But in the last year, I only did four evictions and it was only after I really tried to work with the tenants. If I can get a tenant on a schedule to pay a rent because they lost their job, but they have another job, so they’re going to be slow for a month or two, that’s better for an owner than having it not. Now, as soon as the tenant doesn’t do what they tell me they’re going to do, they’re gone.
But the risk is low because we screen so well. We’ve been doing this long enough to know that when I’m looking at someone on paper and looking at their rental history and looking at everything else, I can tell almost 90 percent whether they’re going to be a good tenant or a bad tenant. And I’m an investment owner myself and I’ve had no problems with my investment properties because I screen like I do for my owners as well.
That’s how I manage property. I manage it as if it were my own property. I will try to contact an owner any time that there’s a problem. If I can’t get a hold of that owner and I have to make a decision, I make the decision based on if it were my property, what would I do.
Jason Hartman: Right, you put yourself in the client’s shoes. So Bart, I told you I had that one eviction 22 years ago. The other one problem that I really had where a tenant really beat up a property was in South Carolina, a property I own there. The tenant was there a year. They moved out. They paid all the rental along the way. It was just fine. But when they moved out and my manager went in and saw it and they sent me pictures of it, it was really – I mean the house was basically all new. They had ruined the carpet. They had ruined the paint and it was about $2,700.00. Their security deposit, just from memory here, was something around $1,200.00.
And so they had a deficiency of $1,500.00. Now, my landlord just told them, look, we’re going to sue you if you don’t pay. And gosh, they paid me. I didn’t lose a dollar. And they paid it – it took them a month and a half, but they paid me the rest of that money.
Bart: Well, the way it works here is I have to, by law, give them an itemization within 30 days. So let’s say we have a property that has a $1,000.00 deposit and there was $2,000.00 in damage. That tenant still owes that owner $1,000.00.
Jason Hartman: After they move and the itemization is any back rent that they owe.
Bart: Back rent, late fees.
Jason Hartman: Damage.
Bart: Damage to the property. Anything that wasn’t paid to the owner that’s owed to the owner after we bring the property back to the standard it was when the tenant moved in. So they owe $1,000.00 to that owner still.
What we do is we immediately send them an itemization saying you owe $1,000.00. If you do not clear this per your lease within ten days, this will go to collections. And it does. We send it to collections and they hammer them. As soon as it goes to collections, a nice thing in Texas is we can state right in the lease that if it goes to a collection company, the amount you owe automatically doubles because the collection company keeps 50 percent of what they collect.
Jason Hartman: So the owner is really out nothing as long as they collect. And those collection companies are tough. Let me tell you. They collect.
Bart: They are. But the owner also has one other means here in Texas as well that I cannot do because we have not passed it yet in legislation, but we’re working on it, which is they can either represent themselves or hire an attorney to sue the tenant civilly in JP court if it’s under $10,000.00, or municipal court if it’s over $10,000.00. We’re working to try to get the property manager to be able to do that for the owner, too, so I can go file another lawsuit in JP court for anything above and beyond the eviction lawsuit.
So if I evict a tenant and they owe $1,000.00 in rent and now they also owe $1,000.00 in damages, the judgment is only for $1,000.00, but I can go back to JP, if the law passes, and file another lawsuit for $1,000.00 in damages and get a judgment against them for the damages as well.
Realistically, does the owner see that money? Not a lot of the time. You can’t squeeze blood out of a turnip. But it helps. Anything helps and those judgments can be renewed. They’re ten years and in ten years you can renew it and it stays for another ten years.
Jason Hartman: Yeah, so the judgment, it’s going to follow them forever, so as soon as they want to buy a car or buy a house, they have to satisfy that judgment before they’re going to get a decent loan. Now, they could get a crappy loan on the car or the house probably with the judgment there. But if they want a good loan, they have to pay that judgment off.
Bart: Absolutely and it happens. I was contacted three months ago from a client ten years ago. “I’m trying to buy a house and you have a judgment against me. I don’t owe you any money.” I go up in the attic; I get the file from ten years ago, and say here it is. And they sent that owner a check. Now, I don’t manage the property anymore because the owner sold many years ago, but I hunted that owner down and I sent him his money, and they’re tickled pink.
Jason Hartman: The long arm of the law. That’s great.
Bart: That’s right. That’s exactly right.
Jason Hartman: You keep talking about JP court. Don’t you have small claims court here?
Bart: That is our small claims.
Jason Hartman: That is your version of small claims court, okay.
Bart: Yeah, Justice of the Peace county court is our small claims, anything under $10,000.00.
Jason Hartman: So you don’t need a lawyer or you’re not allowed to have a lawyer?
Bart: Both. You can do it yourself or you can have an attorney present. I’ve had tenants show up to eviction court with attorneys. I recommend they practice their Texas property code before they show up in front of me, though.
Jason Hartman: There’s about four more major points I want to hit in our discussion here. I want to talk about the general overall Austin economy, zeroing in on some specific areas in which you think are the best rental properties. I want to talk about property manager corruption because that’s sort of a thing I get some questions on. And then loan modifications, even though that’s not your business, but we can talk about that a little bit.
Bart: It can definitely help the owners.
Jason Hartman: Let me talk to you about property manager corruption for a moment. I have something, as you well know, called the Ten Commandments of Successful Investing and the one that really gets a lot of our clients’ attention is my commandment No. 3, which is, “Thou shalt maintain control.” And what we say to people, Bart, is they should be a direct investor. Stop putting their financial future in the hands of the crooks on Wall Street, these money managers. Don’t go into any sort of pooled investment where you’re pooling your money with other people, with Birney Madoff, who made off with $50 billion.
So many of these Ponzi schemes are now being uncovered and people really have a choice. When they invest, they either relinquish control to somebody else or they are a direct investor, which is what we recommend, of course, and what you help facilitate for our people, and they maintain control.
And then they say things like the three major problems when you relinquish control and you’re investing in a stock in someone else’s company, a bond, a government bond, any of this, is you might be investing with a crook. No. 2, you might be investing with someone who is just incompetent. So either you lose money through their corruption or you lose money through their incompetence and their stupidity. Or No. 3, you assume they’re honest, assume they’re competent; you lose money because they just take a huge management fee off the top for managing the deal.
And the thing I love about owning income property is that the only person in between you and your return on your investment is your property manager. And then they say things like – the skeptics say – well, the property manager, they can rip you off. You know they’re getting kickbacks from the handyman and the repair people and this kind of stuff. I’m thinking what really is the client’s risk?
Assume the property manager is just a crook and say they’re getting a kickback from the guy who comes and replaces the garbage disposal or fixes the water heater or repairs the roof or whatever. And again, this stuff doesn’t happen until the property is five or ten years old really, where you get into repair types of business there. But what are they going to do, markup the bill $50.00? I mean the potential for risk and loss here seems very, very minor to me.
Bart: Well, it can be or it can be extremely great. I’ll give you an example. I sat on the ethics committee last year and there was a complaint case that came through to us on a – I can’t disclose the management company, but basically, the management company was paying mortgages for the owners, was taking the rents, paying the mortgages, and then sending the difference.
Jason Hartman: And see, our managers don’t do that.
Bart: I don’t do that.
Jason Hartman: All of our managers pay their own mortgages.
Bart: I recommend that and as my company, a standard operating procedure is we won’t pay your mortgage and we won’t pay your HOA because those are entities that can foreclose on your property. If I don’t have the funds to pay those things because you have a vacancy and I can’t pay them and you think I’ve paid them, we have a problem. So we don’t do that.
Jason Hartman: Yeah, our owners all pay their own mortgages.
Bart: And that’s the way we do business.
Jason Hartman: And by the way, I want to mention we have another show on that and I don’t remember what number it is, but we have like a “Best Practices in Managing your Managers” show. So please look back through the show notes at www.jasonhartman.com and look for that show. It’s really good. It talks about how to set up your mortgages on auto-debit. Do it the right way so that it’s really simple. You don’t have to mess with it every month. But go ahead.
Bart: So this property management company was collecting the rents and sending the differences to the owner. Well, the owners didn’t get their monthly statement or their money. They didn’t get their funds one month, so they started complaining to the property manager. “Well, someone broke in, stole my computer. I’m trying to rebuild everything. You’ll have your money next month.”
She collected rents again for the following month and disappeared with deposits, all the rents, and your mortgage is two months in arrears.
Jason Hartman: Now, I have heard a story like this from a guy that used to work for me, who owned an apartment building with many, many tenants, and it was in California and the manager was a crook. And what they did was they collected the rent for a month and they just made some excuse why they didn’t pay the owner that month. The owner let it ride. So you have to manage your manager, all right owners? Are you listening to me?
And then they collected it for a second month and it was a big building, maybe 50 or 60 units. I can’t remember how many. But that rent was a lot of money and the property manager just disappeared. And that one is where you have a lot of risk in one place. Our clients are diversified. They have many property managers in many markets, so their risk is very low. They only have maybe a couple properties with each manager.
Bart: When you’re looking for a property manager, it is a trust relationship and I tell people this from the git-go, and I speak all over the country on this. You have to trust the person you’re doing business with unfortunately, but that trust has to be earned. It’s not like I sit here and expect people to trust me right from the git-go. I have people I’ve managed for for 15 years that don’t even want to hear from me. They just say do what you’re going to do. I know you.
I have some people that are with me one month and say I want a phone call on anything. And I respect that. It’s their property. They don’t know me. Eventually, they will know me. I would have to be dead for you not to get a statement on time. That’s how serious it is to me. If your money is late, there’s no excuse for that. I switched banks last year. My direct deposits were going to be late one day, one day. I can tell you I was on email to every owner the day before, telling them there’s going to be a one-day delay on your funds.
Jason Hartman: So what you mean is you collect the rent and you do direct deposit electronically into the owner’s account so the investor gets it automatically. They don’t even have to go and put the check in the bank. It just automatically shows up in their account.
Bart: It just shows up in their account. And they get online statements and I notify them when their statement is available online. Everything is electronic here. We try to keep up with state-of-the-art, with everything in our industry that we can.
But things to look for in your property manager are what kind of accreditations do they have? Check their references. If they have standard operating procedures, manuals like we do, if you want to see that, it should be in a pdf format. If you really want to read their standards and procedures, they should be able to send that to you.
Jason Hartman: So they’ll just email a pdf file to you.
Bart: I have a pdf of my standard procedures manual. If you want to see it, I’ll pdf it to you and it states in there exactly how I do business, when you can expect what, what people in my office are supposed to do if I’m not here and there’s an emergency. Anything goes.
Jason Hartman: What about fidelity bond insurance?
Bart: Yeah, it can be done. I have fidelity bond insurance, just because I used to manage homeowners associations. A lot of property managers you’re not going to find have it.
Jason Hartman: So let me explain to the listeners what that is. A fidelity bond, in case you don’t know, is sort of an insurance if you will, or a bond, where your property manager puts this bond up and in case – fidelity, of course, means trust – so if they abscond with the money, if they steal the money, then you have some recourse and you can be protected there.
Bart: The state of Texas also protects people who purchase property and are managed here in Austin. For you to be a property manager in Texas, you have to be a licensed real estate broker, which means you’re a member of the Texas Real Estate Commission. The Texas Real Estate Commission also has a general fund to protect its constituents, the general public, for being harmed by any broker or licensee.
So in the case of that other one, where the property manager just up and disappeared, those owners could go to the Texas Real Estate Commission and they were able to get up to $100,000.00 each from the state itself on that.
Jason Hartman: And it’s really unlikely unless you have a gigantic commercial property or a huge apartment building that your losses are going to exceed a couple thousand dollars.
Bart: And that’s the thing. We got five complaints on the property manager. She probably managed probably 100 properties, maybe 50 – 100 properties, so five complaints. Forty-five owners didn’t complain because they just look at it and go I lost $2,000.00; it’s not worth chasing. And they walk on.
Jason Hartman: Yeah, which is a heck of a lot better than investing on Wall Street, while your portfolio has lost 50 percent of its value last year, and yet all the scumbag CEOs and fund managers and the people at Goldman Sacs and all these other companies, at Merrill Lynch, are taking giant multi-million dollar comp plans and bonuses. And you hear about that John Thain with Merrill Lynch – what unbelievable, out of touch, disgusting abuses.
Here all the investors are losing their shirt, the people that invested in Merrill Lynch, and of course, their business is investing other people’s money. They can’t even manage their own company. And he’s getting like $70 million in his comp plan annually and the guy is new. And then he spends $1.4 million of company money to redecorate his personal office. I mean not the building, just his own office within the building, as investors are losing their shirt.
And then the guy has the nerve to ask for his $10 million annual bonus, and finally, there was so much pressure and so much outrage from shareholders that he backed off and he was just pushed out. That was just last week in USA Today.
Bart: That’s just an example of someone who’s out of touch with his clientele. Two years ago, we had to make a hard decision because costs were coming up and we cover a lot of the things in our management fee as everything included, and that’s the way I like to do business. I don’t like to have hidden fees where if I have to pick up the phone, that’s $.25, if I have to make a copy, that’s – I don’t do it. I set a fee and we live by that fee.
Well, a couple years ago, we’ve added a lot of features to our company to make things better for the owners and tenants both. Those cost us money.
Jason Hartman: Tell us what the fees are, typical fees for just a typical single-family home.
Bart: Sure. My management fee is 8 percent and 80 percent leasing. Now, I give the people at Platinum a discount on that that I’ve worked out with Karam and you a long time ago. Anyone coming from Platinum gets 7 percent and 70 percent leasing.
The 70 percent leasing fee covers me putting the property on the market, advertising it, paying the outside agent commission because typically, we do a multiple list share here, so a Teller Williams agent could lease the home with their client, so I have to pay that agent a commission.
Jason Hartman: Or a ReMax agent or a Century 21 or whomever, yeah.
Bart: Yes, absolutely. So I have to pay that agent a commission. That comes out of that 70 percent.
Jason Hartman: Okay, so let’s explain what that is. The first month, when that property is initially leased, if it’s a $1,000.00 a month rental income, $700.00 will go to your company, and then you will pay, if there is another agent involved outside, you will pay them part of that. And then every month, you’ll charge them 7 percent of the rental income, so it will be $70.00 a month after that.
Bart: That’s correct.
Jason Hartman: Are there any other fees?
Bart: No. There is a renewal fee. Instead of having to pay a whole other 70 percent leasing fee when the tenant comes up for renewal, it’s just a flat $100.00 fee because basically what we do is we contact the owner and make sure they want to renew the tenant. We inspect the property to make sure the tenant hasn’t done damage.
Jason Hartman: So once a year, if it’s a one-year lease, you’re going to inspect the property, even if the same tenant stays there, and they’re paying their $70.00 a month in that example of $1,000.00 a month rental, plus $100.00 when the lease is renewed.
Bart: When it’s renewed instead of another 70 percent commission.
Jason Hartman: Just that one month.
Bart: Just that one time.
Jason Hartman: So the one month, in Month 13, for example, they’ll pay $170.00 as opposed to $70.00.
Bart: That’s correct. The only other fee we have, which we started two years ago, was we had to make a hard decision on whether to raise our management fees or find another way to offset the cost that we have incurred. To raise the management fees in a bad economy I felt would be harming my owners. That’s not good. They’re already trying to get as much as they can out of their rentals. So instead of raising the management fees a full percent because I can’t work on partial percentages in my software, I thought it better to charge an administrative fee every year.
So January 1 of every year, an owner gets charged a $50.00 administrative fee. It’s a one-time fee every year, but it’s a lot less than it would have been if I had to raise their management fees every month. And we thought that would be better for the owner and sure enough, that was enough revenue to offset the increased cost that we’ve eaten. And so we’re not making any money from that, but at the same time, I’m not having to lose money. We’re a business and believe it or not, I have to make money to be in business.
Jason Hartman: And I’m sitting in your office here and I can tell you that your office is very nice, it’s very professional, but it doesn’t look like you spent $1.4 million decorating it.
Bart: No, maybe $1,500.00 decorating it. But you just have to keep in mind who you work for. My fiduciary obligation is to the owner and that’s who I work for. Without the owners, I don’t have properties to manage. I have to be fair to tenants, but I work for the owner, and to raise an owner’s management fee is a big deal to me because people are hurting right now in this country, they really are, and these investors may have – even though their Austin properties are doing great and sometimes I forget about that. An owner will call me and say, man, I’d really like to put that garage door opener in for that tenant, but I just can’t because I’m so upside down. And I think to myself this property is doing great for you. How are you upside down? And then they remind me it’s not just Austin that they have investment properties in.
Jason Hartman: They have a bunch of other properties.
Bart: Absolutely and they may not have managers in other places that are good because not everyone, believe it or not, goes to an investment group like yourself to buy their properties. Some people get hooked up with agents, who are just concerned about the commission.
Jason Hartman: That’s the danger of surfing the internet and doing it yourself.
Burt: That’s exactly right and there’s a lot of things out there. I’d love to tell you that every real estate person in the world is the most ethical person in the world, but unfortunately, that’s not the case. And they’ll tell them they’ll get $5,000.00 a month in rent and then they come to me and I say you get $1,500.00 in rent, and they’re upset. It happens.
But as far as property management corruption goes, do your due diligence. Talk to the person, ask for references. If you’re going through an investor group like yourself, it’s done for you because you take care of your clients.
Jason Hartman: Because we’re doing that, yeah.
Bart: Right, absolutely. Every person I’ve met from your company that has clients they send to Austin also has properties in Austin. Karam is a great guy. He owns properties here in Austin. David owns properties in Austin. You own properties in Austin.
Jason Hartman: We practice what we preach. We’re doing the same thing we’re telling our clients to do.
Bart: But it doesn’t hurt for your clients – and a lot of your clients will – pick up the phone, even before they’ve purchased a property through you, and they’ll call me, and they’ll talk to me, and they’ll ask me. I send out a Power Point with references. I’m an open door. You want to know something about me? Let me know and I’ll tell you. Nothing to hide.
Jason Hartman: Okay, good stuff. I want to touch on the Austin economy in general. What’s going on here? What are the businesses? Who’s laying people off, who’s growing? What are the main industries?
Bart: We’re still doing better than the nation. There’s no doubt. We’re starting to see a little bit of a slowdown. We’re starting to see some hurting. But as far as nationwide, we’re better than average, absolutely. There were 4,500 layoffs this week. They were through Free Scale and IBM. They’re downsizing. Microsoft for the first time in history has laid off people.
Jason Hartman: That’s amazing. I saw that, so the Seattle area is affected by that mostly.
Bart: Dell has laid off a little bit. They’re announcing more layoffs later in the spring. But we are seeing some layoffs, but you have to remember Austin is still a growing city. We have a population increase still happening. Last year, our population increased by 5 percent. Jobs are increasing. AMD is building a brand new semi-conductor plant that’s going to employ over 5,000 people. There are still things moving to Austin.
Jason Hartman: And one of the things I like about the Austin economy is of course it’s the state capitol. Unfortunately, the government never goes out of business, although I sometimes wish they would. But you have the University of Texas, which is a giant university, one of the country’s biggest. What do you have, about 43,000 students there?
Bart: I think they’re more close to 50,000 now.
Jason Hartman: Fifty thousand students.
Bart: Just at that one.
Jason Hartman: That’s a huge employer, yeah, UT. And then the government is a giant employer as well.
Bart: Don’t forget, though, we have seven universities in Austin, seven majors. We have Southwest Texas, which is now Texas State. It has 30,000 students. There’s the University of Texas. There’s St. Edwards, Concordia, Houston-Tillotson, Austin Community College. That’s all over the city. It’s a huge employer.
And the government, like you said, the capitol is here. The session is going right now. Our legislative session started just this month, so that’s a huge inflow of people into the city right now. We have sporting venues. We have such a diverse economy in Austin that if one sector is doing bad, there are three other sectors to take up the slack.
Jason Hartman: Yeah, that’s good to hear. Anything else on the economy?
Bart: Things are slow. Days on market have gone up. I’m not going to sit here and try to tell people everything here is great. But our prices have probably dropped a little bit. I’m still not quite sure if that’s because we’re in the trough of our business cycle and supply and demand has brought those prices down and we’re going to see when the summer happens. That’s where I get a true picture is what happens in the summer market because that’s where supply and demand are at their peak.
Jason Hartman: So we should mention to people listening we’re recording this on January 28, 2009.
Bart: That’s why I say it’s a great time. If you’re going to invest in Austin, now is the time to do it because by the time your new home is finished and ready to lease, you’re in the peak market. You’re getting the best prices and you have the most people looking.
Jason Hartman: Excellent. What about the different areas? Austin is a big and somewhat confusing city. We’ve done a lot of business in the north, in like Pflugerville. That’s where I own. In Round Rock, that’s been really good for our investors. Give us sort of an orientation. If someone is looking at an Austin map, north, south, east, west, where should they be looking?
Bart: Sure and it is confusing because I lived in California and you go from one city to the next city to the next city. You can’t really tell that you’ve changed, but everyone knows what city. Everyone knows where Irvine is, Tustin, Anaheim, Newport. You know where you’re at and so you can easily distinguish that little section of an area based on its name.
Not so well in Austin, but what we do is we break down into different areas of town. Pflugerville is its own city, it’s an incorporated city, but you can’t tell you’ve gone from Austin to Pflugerville. It just mushes altogether. Round Rock is the same way now. You can’t tell you’ve left Austin and you’re in Round Rock. But Pflugerville and Round Rock are still great areas to buy in.
We’re seeing the south come up. It’s harder to find good deals in the south that work.
Jason Hartman: So that’s the northern areas. What are the southern areas called?
Bart: The southern areas are called Southwest West is basically Southwest West is anywhere west of the I35 in the southwest Austin area.
Jason Hartman: So you just call it Southwest West Austin.
Bart: That’s right. And then there’s Southwest East Austin, which it’s still west of the interstate, but it’s the east portion of the Southwest sector. Both of those areas are real good. Southwest West is really good because it has great schools and now it has really good access to downtown. Even though it’s probably 20 miles from downtown, you can get right on Loop 1 and get into town within 10 – 15 minutes, and that’s with traffic.
Jason Hartman: Is that a new road?
Bart: No, it’s been there for quite a while, but it’s finally extended out there. Austin, unfortunately, our infrastructure is lacking. We don’t have any loops. We have a small city mentality, but we’ve grown to over a million people. Austin is also the largest city in Williamson County now, so we spread into two different counties as being the largest city in two counties. It’s a joke why we even have a county government in Travis County because most of the county is the city of Austin. We should just have a city government.
But one area that your clients have done well in is also the Hays County area down there in Kyle. Kyle and Buda, like Round Rock and Pflugerville, are out-skirting towns, but they’re to the south instead of the north, like Pflugerville and Round Rock. Builders are offering good incentives. They’re good new homes being built.
A lot of your clients like new homes and that’s great. The problem with Austin is to get new homes, you have to move further out because there’s no land left in town for new subdivisions to be built. And if there are, they’re usually high-rise condos or they’re very expensive condos.
Jason Hartman: Yeah and we haven’t really favored high-rise condos at all, whereas many other groups are recommending them like crazy. We just find the construction cost is far too high in the high-rise stuff and the association fees are far too high and the rents just never match.
Bart: They don’t and they won’t, especially in Austin.
Jason Hartman: In other cities, it’s even worse than here, Bart.
Bart: We’re kind of like California in the sense that over here, we have mountains and hill country.
Jason Hartman: You’re talking the west side.
Bart: The west side of Austin we have the mountains and the hill country, so there’s not a lot of wiggle room there, plus that’s a recharge zone with a lake and the aquifer. So construction is kind of limited there. You go east of Austin and you get into bad soil and some bad areas over there. And like California, you have the mountains and the ocean. So we have to grow north, west, south, and that’s how we grow is north/south.
Jason Hartman: I tell you, my ex-girlfriend lives in the hill country and I went to see her house yesterday. She’s married with three kids now and I’m probably going to get her on the interview if I can talk her into it. But she has just a gorgeous home. I mean 4,500 square feet and owns the house next door on one side that her parents own. They live there part time and in Newport Beach part time. And then owns the house on the other side of her as well that they rent to somebody. And just a gorgeous, gorgeous area.
She took me yesterday through an area called Seven Oaks, I believe.
Bart: That’s a new subdivision there.
Jason Hartman: Unbelievable! I mean these are just mansions. They’re castles. It’s incredible. And people can buy those for $1 million, $2 million, whereas you’re talking California, New York, even Oregon Coast – that’s so inexpensive. It’s just so refreshing.
Bart: And that’s top dollar for us in Austin. Most investor homes in Austin, you can get a good investor home for $200,000.00.
Jason Hartman: I know. And that used to be, by the way, $150,000.00 just a few years back. I paid $153,000.00 for my 1,860 square foot home in Pflugerville, which you manage by the way, and you’re doing a great job on that. But what was really amazing in talking to my ex-girlfriend and her husband is that virtually everybody on their street, they lived in California. It was so-and-so. They’re talking so-and-so from Newport Coast, which is where I live in California. They’re talking about so-and-so from Tustin, the other person from Mission Viejo. These are all right near our office in Costa Mesa, California.
So it’s just incredible. I came here ten, fifteen years ago and everybody had an accent and they spoke with a Texas drawl. “Ya’ll come see us again, now, ya hear?” But now, nobody has an accent because they’re all Californians.
Bart: It’s true and I think Austin sees that more than other cities in the state of Texas because Austin is so much like California.
Jason Hartman: The natural beauty, the rolling hills, the waterways.
Bart: And we have wineries. Our hill country wineries are fabulous. They compete with the California wineries and they hold their own, so it’s so much like California. I visited Northern California, I’ve been to the Bay Area, I’ve been in Southern California. I see a little bit of everything in Austin. I really do. A lot of people say Austin is a second San Francisco.
Jason Hartman: I would say Austin is in many ways on par with San Francisco, New York, Chicago, Miami, which is another sort of flagship city, and a lot less expensive than any of those, and except for California, better weather than most of them.
Bart: Yeah, that’s true. I bet we get more sunny days than you get in California. Unfortunately, they’re hot, sunny days instead of cool, sunny days.
Jason Hartman: But as far as Texas goes, your weather is really the best in Texas, I’d say, because your elevation is a little higher.
Bart: And we have the lakes and most of the winds come from the west, so they come over those lakes and it cools a little bit. But it does. In the summer, it can get up to 110 degrees. So unfortunately, when I call you as an owner and say your AC is broken, that’s an emergency situation in Texas.
Jason Hartman: Fair enough. Good to know! Okay, so we talked about areas, we talked about all of the other stuff. I’d just like to talk for a moment about owners who get themselves into trouble. It is amazing to me. We do business in 39 markets around the U.S.A. and it is amazing to me how illogical our world is today when it comes to the subject of my favorite four-letter word, “debt.”
People who are in debt and many of them who are overleveraged really have the best of all opportunities. It’s sort of counter-intuitive to think this way, but we are seeing lenders just give money away right now. It is incredible. People are getting loan modifications, where the banks, if they just ask for it – literally, just for the asking – if they write a hardship letter to their lender – and by the way, if anyone wants a sample hardship letter, they can go and look at one that I personally used and got loan modifications on several of my loans.
Just go to www.jasonhartman.com and click on the Members Only section, sign in. It’s totally free. There’s no charge for this at all. And a bunch of the content from our Masters Weekend and sort of exclusive content for our clients and members, you can just sign in there, get a membership, get a password, and you can get a copy of this sample loan modification request letter.
But a lot of people, Bart, amazingly don’t know this option is available to them and if they are in trouble, if they are experiencing problems with a property, they’re overleveraged, whatever the case is, they can ask their lender for a loan modification, where they will potentially reduce interest rates. They will even forgive principle balance sometimes. In the worst case, they’re probably going to at least do what’s called a forbearance, where they’ll take some of the interest or the payments and add them to the back of the loan. And that’s the worst-case scenario in many cases, not the best case. But that’ll help you out.
Bart: Sure because it solves the immediate problem of what’s going on right now. We’re a proud country and we’re a proud people and that hasn’t changed over the years. Unfortunately, sometimes that hurts us because of the fact that we get ourselves into trouble and we’re going to fix it ourselves. But sometimes you have to ask for help and you shouldn’t be ashamed to ask for help. If you’re having a problem with your property and you have an investment group, go to those people because they do this for a living. They know what’s out there. They can help you.
Go to your property manager. It’s not just about what you bring in on your property for rent. It’s also what you have to pay out. Both sides make what happens in your property happen. If you can reduce your insurance by getting an insurance company that will give you a discount because your property manager is certified, that cuts your expense.
Jason Hartman: And you just sent a letter to all of your clients with an insurance company that is offering a discount on insurance, the homeowner’s insurance policy, if your property manager is a certified property manager. So that was available to your clients.
Bart: Absolutely, and then the loan mods, you can get a loan mod that decreases the amount every month that you’re paying in mortgage payments because they’ve lowered your interest rate. If you can’t increase your rent, but you’re in trouble, then try to decrease your expenses. Either way, it’s more money in your pocket every month and you can save your property. If all else fails and you can’t save your property, then you have other options there, too. You can short sale and work with the mortgage company to say look, I’m going to sell this and I’m going to pay off the mortgage, but don’t put this on my credit. You save your credit so that if you want to leverage something else later on, you still can.
Jason Hartman: It was amazing to me. My lender, they had about seven of my loans, they sent me a letter asking if I would like a loan modification basically. I’ve never been behind on payments. I’ve made every payment on time. I’m not in trouble. Things are going pretty well. They aren’t as incredible as they used to be with the economy slowdown. But I just asked them and they just gave me a loan modification. They just helped me out basically.
Bart: And I can see that because you have seven loans with them, so they look at that and go, wow, this guy’s got a lot of leverage. Maybe this would be a good pre-emptive strike on our part before he gets himself in trouble. Let’s offer this to him.
Jason Hartman: Exactly and you know what? They are getting a lot of pressure from the government regulators that are saying give people loan modifications. There was some talk and I don’t know if it ever went through that the FDIC would actually give banks – they would give lenders — $1,000.00 of FDIC money for every loan they modify. They’re incentivizing them to do that.
But there’s a lot of pressure and a lot of incentives for these banks to modify loans. The government is pressuring them to do it and they want to do it. So ask for it. It’s a gift. Take advantage of it.
Bart: Absolutely. Anything that can either increase your rent or decrease your expense is what you need to do right now.
Jason Hartman: Absolutely. Well, Bart, this has been a great interview and I’m sorry that we didn’t get a chance to also talk with your co-owner of your company, Marissa, but she’s available, too, and a lot of people listening to this show are probably already clients of yours. But if you’re buying in the Austin area, we will certainly be referring you to Bart. He does a great job and anything else you’d like to say in closing about property management or the Austin market in general?
Bart: Just check your manager and make sure they’re doing a good job for you, and then buy in Austin because it’s still doing well.
Jason Hartman: We love Austin; great place. Okay, thanks so much Bart. We’ll talk to you again soon.
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Duration: 75 minutes