Jason Hartman starts episode 377 with a correspondent’s report from Denver, Colorado regarding the house flipping market. Investment counselor Steve is consulting with three would-be home flippers who are looking to make quick cash but they discover many obstacles, not the least of which are razor thin profit margins, black mold, hard to source deals high short-term capital gains taxes.
In part two, Jason talks about the difference between an estimate and a quote when hiring contractors to repair or improve your investment properties. He recounts his Memphis, Tennessee property tour last week with a walk down Beale Street and a visit to Elvis Presley’s Graceland. Next up, a discussion of “Currency Wars” by James Rickards and some crowd sourcing to help with his mother’s medical condition.
Be sure to take advantage of the “super early bird pricing” for Jason’s Creating Wealth in Today’s Economy Boot Camp at Hotel Irvine in beautiful Orange County California on June 28th at http://www.JasonHartman.com/events/ where you can also find information about private property tours.
ANNOUNCER: Welcome to Creating Wealth with Jason Hartman! 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 multi-millionaire 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 the show! Hey, this is Jason Hartman, your host, and this is episode #377. And I’ve got a correspondent here with us today, so I wanted to have him on, and that is Steve, coming to us today from Denver, Colorado. Beautiful place. I love Denver. I think it’s John that got me into it. Ha! John Denver. Anyway—
STEVE: Ha, ha, ha.
JASON HARTMAN: Yeah. Well, hey, John Denver’s pretty great, Steve. Have you ever listened to any John Denver songs?
STEVE: The only experience I have with John Denver is on Dumb & Dumber, when Jim Carey is looking at Nebraska and he thinks it’s Colorado, and he says, wow, that John Denver’s full of blank.
JASON HARTMAN: [LAUGHTER] You know, I don’t remember that. But I’ve seen Dumb & Dumber, and it’s a pretty funny movie. But the best one is Liar, Liar. Is it called Liar, Liar?
STEVE: Yeah, that’s a funny show too.
JASON HARTMAN: Hilarious. Because it parodies lawyers, which, of course—[LAUGHTER].
JASON HARTMAN: Let’s not offend all our lawyer clients here. But anyway—one of the interesting things I wanted to talk about today, and then I’ll finish up the show, because I know you’ve gotta run for an appointment here. But, I just went on a private property tour in Memphis with some clients of ours, and just had a great time. We toured around, we looked at properties with three different providers in Memphis. So maybe I’ll talk about that a little bit later. But, you’re doing some freelance consulting today, and you know, you do this every, I don’t know, every couple of months, it seems like, where you’re in Denver, and you are working with a family—three people, who are interested in doing some flips. And we don’t really talk about this stuff, because our philosophy is, it’s kind of a buy and hold philosophy.
But believe me, I have done many flips myself. I’m experienced with flips. You know, where you’re buying a property and doing a short-term deal to make a quick capital gain, and this is really the business, essentially, all of our local market specialists, all of our providers, are in. They’re in the business of buying, rehabbing, and reselling properties. And for many reasons, not the least of which is speed, they like selling to investors rather than homebuyers. Now, most of the people in the business of flipping are—they’re selling to end retail homebuyers rather than investors. But, tell us a little bit about what you’re doing, what your experience is, and that kind of thing.
STEVE: Sure, sure. I have a background in flipping like you do. And I really do prefer the buy and hold over it. However, flipping can be a way to make some money, but it’s not for everybody. Contrary to what many of the late-night infomercials will tell you, it’s not that easy.
JASON HARTMAN: Wait, let me repeat a few of those. I made $67,000 in a day! I made $300,000 my first month! And so and so—and you know, I mean, these testimonials are just crazy.
STEVE: Yep. They’ll get some hillbilly from West Virginia up there that can barely speak, and he says he made a bazillion dollars his first month, so, everybody thinks, wow! If he can do it, I can do it too, right?
JASON HARTMAN: Hey, now we’ve offended lawyers, hillbillies from West Virginia, and I don’t know, man. When we were doing that conference last year in Nashville, even though good old Taylor Swift lives there, there were some hillbillies!
STEVE: Yeah. Well you know what? Hillbillies and lawyers are used to getting offended. I think they’ve kind of waived their right to—
JASON HARTMAN: This is not fair.
JASON HARTMAN: Alright, go ahead. So, yeah. They get some hokey testimonial—tell us more.
STEVE: Yeah, they get a hokey testimonial. But it really—it’s pretty hard to do, flipping is, and it requires a unique kind of person. Now, if you’re that kind of person, and you’ve got the capital, and you’re a great negotiator, you’ve got great people skills—you could probably be a successful flipper. But it’s like a job, right? If you’re not flipping, you’re not making money, and that’s why I prefer income property: because you just make money every month. But with flipping, you’re always out there, it’s always a hustle. And it’s extremely competitive right now.
JASON HARTMAN: Well, I think one of the distinctions that investors need to understand, is that flipping is a business. Buying and holding is an investment. And that’s kind of a key distinction. And one of the things I always say, Steve, in my 20+ years doing this—you know, I almost gotta change that, because it’s now kind of way over 20—but if you were to round off like an accountant, you would say 30. But I’m not going there yet. But in a long time doing this, a long, long time, I’ve worked with a lot of investors, and taken them out, and sold them properties, when I was in traditional real estate, that they were going to flip and resell quickly, rather than buy and hold. And you know, when you’re in California, that’s about all you really can do, because buying and holding just doesn’t work there.
The cash flow just never works. The rent-to-value ratios are terrible. But, that’s what they would do. And what I’ve noticed—I mean, I had many of these clients for years and years and years, so I kind of followed them, and really took note of their growth, and their level of financial success, and you know, I would be in the back of my mind kind of adding up the deals I’ve done with them, and you know, they may have done some deals with other people, admittedly. I’m not sure they were 100% loyal all the time. But I kind of noticed that the people who flip properties have spending money. They have some quick gains. Of course, when they have to file their tax return, they’re gonna give a lot of that back, because short-term capital gain, rather than tax advantages of buying and holding, and tax advantages of doing 1031 exchanges, if you want to sell your long-term hold properties, your income properties—they’re fantastic. But flipping, you get killed on taxes! So you know, you give a lot of that back, and so, the people who flip, they have spending money. But the people who buy and hold, they have real wealth. And that is a big difference. I’d rather have real wealth. I mean, spending money is great. But real wealth is where it’s at, if you ask me.
STEVE: It is, and it’s a lot more stable than flipping. I teach my clients, look, if you’re gonna flip, you need to flip homes that are right there around the median, or slightly below the median, home price for the area. Because when a market turns, a la 2007, 2008—that was really a severe, quick turn. That’s not normal. But if you’re in the higher end stuff, where you could make hundreds of thousands of dollars, then you’re very, very exposed when a market turns. So if you’re in the stuff around the median, or a little bit lower, you tend to be a little bit safer. But like you say, it’s a business. It’s like selling a product. And many of my clients, I teach to assign their contract rights, or to just wholesale the deal. Therefore, you’re not stuck rehabbing, dealing with contractors, which is a whole new layer of complexity. And so, you can make money faster on the assigning and wholesaling, but it’s tough, it’s very competitive. You’ve got other investors, and in some cases the government, making this a lot harder. I’ll give you two examples, if you don’t mind.
JASON HARTMAN: Sure, sure. But first I want to distinguish for the listeners who—some may not know what you mean. The word wholesaling has many definitions, okay?
STEVE: Yes it does, yes it does.
JASON HARTMAN: So, you hear all these uneducated people, they go to the—I hate to say it, but the Robert Kiyosaki seminar, and they’re just about to get sold a $12,000 coaching program. But you know, that’s another discussion. And they go to the seminar for whatever guru, or buy the package, and—oh, I’m gonna be a wholesaler, I’m gonna be a wholesaler, and they’ve got their business cards printed up, and they’re at their real estate club meeting, and they’re bragging, and talking a big game, and there’s just a lot of definitions of that. But I think the wholesaler definition that you’re using now, and correct me if I’m wrong, is the concept of finding a property, which is a monumental task—I first want people to understand how incredibly difficult it is to find a property with equity locked up in it—for sure—that you can turn around and flip one way or another. And—we’ll distinguish those definitions here in a moment—to another investor. And so, a wholesaler, in the way I think you’re using it, is someone who finds this property, and goes through that monumental task of trying to find a property. And a lot of it is luck, frankly. It’s just, it’s like many parts of life, just being in the right place at the right time, admittedly. That—I think it would be crazy to say that luck, or good fortune, is not a factor. Now, of course, as Earl Nightingale used to tell me, luck is what happens when preparedness meets opportunity.
STEVE: That’s correct.
JASON HARTMAN: And that’s a great quote, because opportunity will only make the unprepared look foolish. So you gotta be ready for the opportunity. But say that you are, and you’ve done your homework, you’ve lined up your finances, you’ve got maybe some hard money financing from a private lender, or your own cash to do the deal with, and you find this property, you get a contract on it that is assignable. You get the seller to agree to allow you to assign the contract. Which, a lot of sellers—and I can tell you, myself as a seller, because it looks like I’m gonna be selling them one of my properties today—I’ve just been kind of managing my portfolio, and moving some stuff around a little bit. But, a lot of sellers won’t agree to allow you to put any kind of assignment clause in the contract. And rightfully so!
Because it just complicated everything for them. So, not only do you have to find a good property, but you have to get a contract that is assignable. And then, you find another investor, so now you’ve found the property, you’ve got the contract, you’ve got it locked up, you’ve got the right price, the right terms—all of this stuff, after days, maybe weeks or months of negotiation—probably not months, because you’re usually finding someone in a desperate situation who wants to sell quickly. It could be a bank, could be a private party, anything like that. But, then you’ve gotta go find the other end of the equation. You’ve gotta find the buyer! And do another contract with them! And negotiate all those terms! And assign it to them. And you know, the idea is, you make a markup on it. And you’re a wholesaler, because you’re not doing the rehab, you’re not doing the fix-up work. That’s what I think the most popular definition of wholesaler is, although there are others. Is that what you meant by wholesaler?
STEVE: It’s very close. You’re—a wholesaler does do that; they assign contracts, exactly like you’re talking about. And I think you alluded to the fact that the hardest part is getting the deal. Going and finding the buyer in today’s economy—that’s actually, if you have a pretty good deal, those buyers start coming out of the woodwork, because everybody’s starving for deals with equity in them. That’s how hard it is to do. I went and saw a house yesterday here in Denver, and it had been reduced on the MLS that morning, and we got there at about 11:30AM, and there were two investors there already looking at it. And that was just 11:30AM. Imagine the rest of the day what was happening.
JASON HARTMAN: Right. When did it come on? It was on MLS, that one?
STEVE: It had been on the MLS for a while, but the bank lowered the price yesterday morning, by about $50,000. This had some really bad mold in it. You had to wear a mask going into the house. It was pretty nasty.
JASON HARTMAN: Well, tell us about that. You mentioned that to me before we started, and this is kind of an amazing story. Some of these properties, when you’re flipping or wholesaling, you could get yourself into a real—you know, you could open up Pandora’s Box here. So, things can definitely go the other way, where you’ve taken on a whole bunch of responsibility that you weren’t even planning to take on. Tell us about this one with the mold situation.
STEVE: It was disgusting. You walk in—and it was in a good neighborhood. I think the after-repair value, or the market value of the average home in this neighborhood, was a half a million dollars. This was in Broomfield, Colorado. So, you go into this house, and at first it looks normal, other than the smell, right? But then as you get back towards the kitchen, you see drywall in the ceiling all torn out, and then black splotches up and down the walls, up and down the tile, the black splash in the kitchen, you can tell that it’s gone behind the tile, and the cabinets in the kitchen, and then clear across the room, up and down those walls in the side rooms and down into the basement, it was everywhere!
This is about a 3,000 square foot house, and we didn’t even go in the basement. There was a mold remediation company there giving a bid to one of the other investors, and these guys came up from the downstairs in their space suits, saying that yeah we’re gonna have to tear out everything down there, and most of the sub floor in the house, and most of the sheetrock. Cabinets are all gonna have to go, because when you see the mold on the drywall, and you can see it like that, it’s probably three times worse behind that, inside of the wall. So, you gotta gut this thing. And I asked the remediation guy, he said, ah, it’s gonna be six figures. I mean, I’ve seen worse. I’ve seen houses where I recommended that they just knock it over and start over.
JASON HARTMAN: Right, right. Sometimes it is better to just rebuild the house, you know, rather than trying to fix it. And there are cases like that for sure. So, how did this mold happen? I mean, what was the problem?
STEVE: Broken pipe and a problem with the roof. So, water was getting in, wind was getting in, moving the water around in the house, and the broken pipe—it was on for about a week, they said.
JASON HARTMAN: I wonder how long it was vacant.
STEVE: It’s been vacant since 2011. And it’s a great neighborhood. But yeah, it’s a disaster. And kind of to your point, I was talking with one of the other investors, and saying, I wouldn’t buy this house. I’m just too worried about liability. What if the mold company doesn’t get everything out of here? Or what’s gonna happen? It’s just a big problem of liability. This was black mold. Bad, bad news. So, these are the kind of things that you can run into. When you get a seller who’s desperate, a lot of times it’s a situation like this. But do you want to take on the liability? And there are much cleaner flips that you can do. But like I said, there’s tons and tons of investors. The successful flippers and wholesalers, if you will, out there right now, are spending a lot of money on direct marketing. They’re trying to find these desperate sellers before the property hits the MLS. Because when it hits the MLS, it’s too late. You have, for lack of a better term, Jason, a lot of dumb money out there that’s buying properties at the auction, and right off the MLS, for just too much. You know, many of these guys will buy properties for 80 to 85 cents on the dollar, they’ll go up that high. But when you think about it, when you go to resell this thing, you’ve got 6% in realtor fees, you’ve got closing costs. Many times you have hard money costs. If you’re not right on the money—
JASON HARTMAN: Oh, you can lose your shirt. It’s—
STEVE: You can rehab yourself right out of business.
JASON HARTMAN: Yep, you sure can. And a lot of these—you know, we talked about this in past episodes, how the foreclosure auctions work a lot of times. And this works out in the marketplace of wholesaling, too, even if you’re not at a foreclosure auction. But I’ll use the auction analogy, since it’s sort of easy to demonstrate here on the show, and that is where people who are professionals, who are in that business, and it is a business, it’s not an investment. There’s nothing passive about it. I mean, just think of the concept of dealing with contractors in general. When you want to get quotes on things, you want to understand what you’re getting into, and God forbid you want to actually get things fixed or improved through rehab—that is a monumental—I mean, I don’t know about you, listeners, but when I’ve had a landscaping job at a house that I just lived in, you know, when I wanted someone to come and either fix the landscaping, or if I bought a brand new home and there was dirt, and I wanted them to put in a yard for me—I mean, just getting these guys to show up is a monumental task!
I remember in my last house that I owned—that’s kind of why I like being a renter. The dishwasher broke. And it’s like, here I am sitting at home when I should be at the office, waiting for some guy to come and do the dishwasher. And you know they don’t show up, they’re late, they’re flaky—I mean, that’s just a whole nother part of the discussion on this. But back to the point. And the point was, that your competitors, who you may not even know are your competitors yet—but they’re just other people out there in the marketplace that want to squelch competition. They will let you get a deal, knowing that the deal isn’t a good deal. And they might even help you get the deal. I’ve seen this happen before. This is one of the dangers of going to real estate club meetings, I’ve kind of noticed. You know, there are benefits. People can help you, and you can make friends. But you can also make fake friends that actually hurt you.
STEVE: They are at those meetings.
JASON HARTMAN: The sharks are swarming around you, you know. And they’ll let you get a deal that they know is—that you’re gonna lose your shirt on. And these deals are razor thin in terms of profit sometimes. And you know, when you add all the costs in, and everybody—the one everybody forgets—well, first of all, a lot of them forget carrying costs. So if they get stuck, and they’ve got a property that won’t move, and they’ve got two, three, four months into it, that just—their margin is gone, many times. But in addition to that, they always forget about the taxman! These are short-term capital gains. And if you take a $200,000 property that you buy for 70% of market value—you get a 30% discount. I mean, most people would think that’s a pretty good deal, right? But by the time you pay a couple months of carrying costs, the rehab cost, and you know how every project—every project goes over budget. That’s just the way contracting works. There’s—and people are late, and the delay you, and they cost you money in terms of time, because they don’t get the job done. And then you take—you pay the closing cost to go into the deal and out of the deal. Remember, those add up to about 10% total, because you’ve got realtor commissions, plus you’ve got closing costs on the way in, plus other closing costs on the way out. All in all, you’re looking at about a 10% cost structure in and out of the deal, and then carrying costs on top of that. You can’t even make money with a 30% discount, a lot of the times!
STEVE: I know! And these guys are—many of these big, big funds and big flippers that have money that’s not doing anything else, they just—they need to move it, they need to keep it moving, and a lot of them have hired transaction coordinators. They get paid commissions if they buy properties, and that’s why they do it—because they still get their 3%, or their 6%, because they bought a property. But for the end investor, it’s just barely making them money. It’s just—look. Some people are doing well with this. It’s a unique personality type. If you’re gonna be a flipper, you gotta get really serious about it. Some people think they’re gonna casually waltz into the flipping business and pop $30,000 here, $45 there. That’s not gonna happen. This is a very, very serious business that you have to treat that way if you’re gonna be successful at it, because of that competition. And also, too, flipping is getting—it’s got a dirty reputation, kind of. You know that word, flipper, is not necessarily looked on with much positivity.
JASON HARTMAN: Yeah, I think investor is more prestigious.
STEVE: Uh huh. But you’re not! That’s what’s funny. Is you’re not an investor, like you said, right? If you’re flipping properties, you’re a businessman that buys and sells houses. Unless you’ve got your own capital and you’re actively investing it. But—you’ll appreciate this, Jason. There are other things that make this more difficult. If you’re a legal geek like I am, try Googling California Civil Code Section 1695.
JASON HARTMAN: What the heck is that? You are a legal geek.
STEVE: I’ll read you the first sentence, okay?
JASON HARTMAN: Alright.
STEVE: The legislature finds and declares that homeowners whose residences are in foreclosure have been subjected to fraud, deception, and unfair dealing by home equity purchasers. And you can imagine where they go from there. They’ve got an equity purchaser law, where if you’re buying a house from somebody that’s in foreclosure or has equity but they’re in some kind of distress, now you have to disclose to them that basically they’re getting hosed. That you’re buying their house for a huge discount—
JASON HARTMAN: You’re ripping them off.
STEVE: Yep. You’ve gotta say, you’re getting ripped off, and you’re okay with that? You’ve gotta give them a five-day cancellation period—
JASON HARTMAN: Rescission. Rescission, that’s what it’s called—
STEVE: —To change their mind, and all this has to be in writing to them. Like, if you know about sales, they’re basically saying, yeah, you gotta talk them out of the sale.
JASON HARTMAN: Right, right. And other states have laws like that too. California—California always seems to lead with stuff like this. Either California or New York. But a lot of states follow this stuff, and other states have this. So you—now, the saying used to be, there’s the Latin phrase for it, what is it, caveat emptor, let the buyer beware. But now, it’s really, let the seller beware. And so, you know, you’ve got this whole new layer of responsibility! It’s like, it used to be, oh, let’s protect the buyer. But now, at least in California, and you know, a few other states that have followed these types of laws, the buyer’s the evil guy! You know, if you’re an investor buyer.
STEVE: Yeah. And that’s what—you should see these huge paragraphs of verbiage that are gonna scare any seller, right. And investors have to do this or suffer the wrath of the revenue-starved Socialist Republic of California, who undoubtedly are gonna hit you with administrative fines and maybe worse. So, it’s other investor competition, it’s the government. I can do this business. I can flip properties. I have the personality and the skill set for it, and many other people do as well. But, if you want to sit back and invest and make cash flow, you should buy and hold. If you want another job, flipping might work for you. But I’ll tell you. Many of the clients I go do freelance consulting for, I sadly have to leave concluding that I just don’t think that person has what it takes. You have to have an aggressive, outgoing personality to be successful at it.
JASON HARTMAN: Here’s the thing I want to leave people with. And Steve, I know you gotta go. But look. It’s fair to ask, as the listener is listening to this conversation, well Jason, how does anything in the supply chain occur, then? If flipping is not a good business, then why does anybody do it? I mean, there are properties out there to buy. Obviously, all of our local market specialists—they’re flippers, basically. And the reason is because the thing that creates success in any business, is scale. Okay? When you have scale, or you know, Verne Harnish calls it the Big Mo. Momentum. When you have scale and momentum, you have power. When you can source deals, and everybody in your town knows that you have the money, and the wherewithal to source deals at scale and do it repeatedly, then you have relationships with dozens and dozens of brokers, and dozens and dozens of banks, and lenders, that have REO or foreclosed properties—REO for real estate owned—and you have scale there. And so, you can get a good buy, because people know that you’ll close on it, they know that you have the ability to execute on the deal. So that’s stage one.
The second part of it is when it comes to the fix-up or the rehab situation. When you have scale, when you’ve thrown a lot of money around in a given industry or a given town, you have your own team that you’ve basically bought them off, and you become their primary income source. So, that’s when they show up for appointments, they get stuff done, they don’t go over budget, and you can really start to manage a good business when you have that scale and power. But if you just do this as a one-off, or ten-off, or even twenty-off type of person, it’s—you’re gonna just have lots of hardship, and that’s the problem. Everybody in business knows the importance of scale, resources, reputation, leverage—these are all the things that make businesses really, really work. When a vendor is selling something and they say oh, you know, we’ve got a presentation for Google, or Apple, or some big player in whatever field, they’re excited about that, because they know, this company’s got resources. They’ve got scale. They can—I can make a homerun with them. But some person that’s unknown, just, nobody gets excited about that. And that’s one of the things that we offer our investors, is leverage. I always say that we’re an education, referral, and leverage network.
Those are really the three big value drivers that we offer to our clients. And so, when a property manager or a local market specialist is not doing their job—we give them so much volume. Once we’re in the groove with them, they start to see it. And their eyes light up, and they’re like, wow. Working with this company, this is for real. Okay? Because we can direct a lot of business to or away from someone. And that gives us scale and power and reputation in our industry, so that people do things for us. You know, occasionally we have a problem with a new provider who doesn’t know us yet, and hasn’t seen these buyers come in in any big way. And they’ll kind of go rogue on us, where they’ll just do a lame job, and we’ll start putting pressure on them to get their act together, and you know, some of them rise to the occasion and some don’t. That’s just the way it is. But yeah, that’s an important part of this. So. Steve, I know you gotta run, and go out with your consulting clients, and look at more flip properties today.
STEVE: Yeah, excited.
JASON HARTMAN: But, any closing thoughts?
STEVE: Well, buy and hold is still better. I tell my clients that if you’re gonna flip, you gotta generate capital so that you can buy and hold, so that you’re not out driving all over creation every day competing and rehabbing, and you can just make money through passive cash flow. I think that’s the best way to do this business, and if you’ve got ways to get buy and hold properties without having to flip, that’s probably better. Because it’s just not for everybody. It doesn’t mean it doesn’t work for the right people. It can be very lucrative for the right people, so.
JASON HARTMAN: If you’re willing to work hard, run a real business, and scale it up, it can work.
STEVE: That’s all we’re saying, yeah. People think that’s it’s gonna be just checking your computer for a few minutes every day, cashing checks. It’s anything but. And I think that that’s what we wanted to illustrate to the listeners today.
JASON HARTMAN: Well Steve, we all know that the only place success comes before work is in the dictionary.
JASON HARTMAN: Alright. Hey, thanks for joining us.
STEVE: Hey, no problem. Talk to you later.
JASON HARTMAN: So, that was a really interesting talk about flipping with Steve, wasn’t it? And, since we’re on the subject of contractors and money and getting quotes and bids and things like that, we talked about that a little bit, I thought I’d also mention to you—you know, with your property managers, for the properties that you have nationwide, and in all these different markets as you’re building your portfolio, one of the things that it’s I think really important to do, is be a good manager of your managers. And we’ve talked about this many times in prior episodes. But let me just give you one example that happened to me just yesterday. And this is a property I have where it’s in a very heavily forested area. You know, lots of big trees and so forth. And I think I mentioned it last year or the year—probably the year before, where I had to cut down and remove a big tree, and that was the first time I ever dealt with something like that. And the property manager at first gave me a really high quote on the job. And I forced them to shop around. And I shopped around myself a little bit, and basically got it done for I think it was about one third of the originally quoted cost. So, don’t just go with the path of least resistance. When your property manager tells you something costs x, don’t just buy into it, especially if it’s a major expense. All it takes is writing an email that literally takes 5 or 6 seconds. It’s like no time at all to do this kind of stuff.
So, here’s what happened. Yesterday I was emailed saying, we’ve got to remove another tree. It’ll be $1,075. And I wrote back, no way! I need three written quotes. And by the way, they—she emailed me back saying, well, the first quote—no. I don’t have a quote. $1,075 is not a quote. It’s an email from you. I need written quotes from the actual vendor. Not from you. Well, I got the written quote from the one vendor. She said no problem. I’ll get you three written quotes. And there’s a difference, and a distinction, between a quote and an estimate. An estimate is an estimate, right? It can vary. But a quote is a quote. So I want you to use the word quote. Not bid, not estimate. Quote. That’s the word you use. So, you want these quotes to be written. Any repair expense about $300, I want to have three written quotes from the vendor. The vendor who’s actually providing the final service. Not the property manager. The actual vendor. The actual tree removal company. The actual air conditioning company that’s fixing an air conditioning unit, or whatever the issue is, okay? So, just be a prudent, good customer. And be a prudent, good manager of your managers. Very important to do.
I want to give a shout out to a Chris and Don Allen, who hired me to do a private tour in Memphis just last week. And I gotta tell you, I had a great time with these guys! It was father and son came out, and we went and we looked at properties. We looked with three different vendors, and spend some time together, had some meals together, talked about investing plans and so forth, and it was just really a great time. And then the next day, we went to Graceland! Elvis Presely’s former home. And thank you Chris and Don for treating me to that, by the way. That was very nice of you. And just had a great time there, and looking around at the King, Elvis, and all of his memorabilia in his home, and stuff like that. So, note that that private tour—I don’t really talk about it too much, but it’s on the website at www.jasonhartman.com.
And if you’d like me to come out and meet you in a market and do a private tour, you can purchase that. And you can also purchase, for a lower price, having our investment counselors—one of our investment counselors that you select—that would be your investment counselor, obviously, if you’ve already got one—come out and meet you in one of the markets and tour you around with the vendors, and actually walk through houses. Totally hands on, roll up your sleeves, really do the thing, see the properties, talk with the vendors, possibly negotiate with the vendors, or the local market specialist, I should say. Have several meals together, get some private coaching, some one on one private advice, and that’s a really great thing. So take advantage of that on the website at www.jasonhartman.com in the products section. And by the way, I should let you know. We are rebuilding www.jasonhartman.com, the website, as we speak. So, look forward to a brand new updated website coming out soon, and we’ll announce that.
The other thing I wanted to mention to you before me talk about James Rickards’ book, Currency Wars, I want to do a little piece on that, and play a little part of the audio book for you. And then also mention a personal note about my mother, and seek advice from you the listeners. If you have any advice or input on this, I’d really appreciate it. So I’ll get to that in a moment. But first, we just put up on our website, in the events section, a new, much-requested Creating Wealth in Today’s Economy Boot Camp, and that will be in Irvine, California, at the Hotel Irvine—same place where we had the Meet the Masters event, formerly the Hyatt Regency Irvine, and that will be Saturday, June 28th. So, a great time to come to Southern California in the summer. Head to the beach before or after the event. Head to Disney Land, which is only about 20 minutes away, 15-20 minutes away in Anaheim. And you know, you can head down to San Diego, go to Sea World, Legoland—there’s just all kinds of attractions, of course. So come to this! It’s June 28th, and we’ve got a super early bird price right now that will go away pretty fast.
So, register now. The super duper early bird price is only $97. And you can register for that at www.jasonhartman.com in the events section. And this is basically the core content. And a lot of you have been listening to the podcast. You might have been listening for years and years now to the podcast! But you’re not really getting sort of the big picture, the core content. The podcast is—it’s great guests, it’s news, it’s updates on things, it’s insights on things. And that’s awesome. However, this is sort of the foundational stuff that we do at the Creating Wealth Boot Camp. It’s a 9-hour day, from 9AM to 6PM on Saturday, June 28th. We don’t do very many of these anymore, because, you know, mostly we’re doing a lot of our content and training online, and of course we have a home study course that many of you have purchased for this.
But we’re gonna learn how to expect 20-30% annualized return on investment, how to profit from the economy and the debilitating effects of inflation—or deflation—how the cuts to the thieving middle man, you know, if every investment, how we can avoid those, and how we can be direct investors. How to provide true diversification. How to benefit from the most historically proven asset class in America, and also the most tax-favored asset class in America. How to turn the banks’ profit model against them, and to basically get paid to borrow, and all of this is really such a conservative philosophy that your grandmother would love it, okay? Your grandmother, who might have grown up during the Great Depression—she would love this very, very conservative investment. And it’s a 9-hour day, it’s a very intensive bunch of real estate learning there. You know, you can learn how to properly use leverage, cut through all the BS out there in the marketplace with all of these gurus spouting their hokey theories, and pie-in-the-sky formulas and techniques. How to avoid negative cash flow, and select properties. How we do the research for that. It’s gonna be great.
So let me just share with you a few testimonials from this event. Michelle Hamilton, after attending the event, she said, “wow-factor = 10.” What we do is we have people write something, and then also give a rating, a 1 out of 10 on the evaluation. James Burns, an attorney, said, “very, very informative. It was a 10.” Richard Jagger said, “very informative and well-presented. I’m really excited and cannot wait to get started.” Ann Alden said, “Jason had great high energy. He’s clear and interesting with a sincere quality. Jason comes across like an expert. It was a 10.” I’ve got bankers’ boxes full of these testimonials. Literally, two of these bankers’ file boxes, stuffed with paper, full of these kinds of evaluations. So, these are just a few that we pulled out here. Let me see, who’s this one from? Well, I gotta—oh, you know, it cut off.
Sorry, I can’t give the name on this one, because it cut off on the printer. But it said, “as novice real estate investors, we appreciated the footwork and research Jason Hartman and his team did in locating and evaluating investment properties away from the local market. Their obvious experience in the field was put to our benefit, and we feel very comfortable with Platinum Properties.” Oh, actually, no, it didn’t cut off! “Platinum Properties Investor Network agents, and the teams they selected. Much care has been given to their careful selection, and they have been very pleasant and easy to work with, and eager to do a good job. We are buying two properties through their network, and feel we are finally on our way to owning a truly diversified investment portfolio.” And that was Sylvia and David Jonathan, who said that. And then Elizabeth Lewis said, “appreciate the presentation’s goal to give realistic and helpful information. It wasn’t pie-in-the-sky, and gave us a sense of confidence in being able to become a successful real estate investor.
Rating: 10.” Roger Lindsey said, “I’m going to tell my investor clients—” this is, I guess, a broker who’s in the business—“investor clients to attend Platinum Properties’ Investment seminar before they sink another dollar into investment property. Rating: 10.” Gordon Shay—and I believe he was a—he came a while back, and I remember him. I think he was a professor at UCLA, and he said, “best real estate presentation I’ve ever been to, including mine. Rating: 10.” [LAUGHTER] So I thought that was great. Kathy Toombs—you’ve probably heard her husband Dave, who eventually came to come and work for us! After attending the seminar, she said, “honestly, I’m here with my husband to be educated and justify my “no” to his investing idea. Jason had me at the break.” Now, that’s reminiscent of Jerry McGuire, you know, you had me at hello. “I’m really excited to learn more. My rating: 10++.” And that was Kathy Toombs. Paul Marthaler said, “this was awesome, and the best investor seminar I’ve ever been to. I appreciate your upfront, conservative approach, and how you detail both the financial and non-financial market aspects of investing. Rating: 10.” So, come to that! Get that super, super early bird price at www.jasonhartman.com, and we will see you there.
Okay. I want to play a—you may have heard of the audio book, Currency Wars, by James Rickards. And you know, I can’t remember, honestly. But I think I’ve had him on the show. I gotta get him back, because now—in reviewing this material again, it’s been very, very interesting. But I want to play just a small part of this. You know that I commonly talk about inflation-induced debt destruction. And here, James Rickards, in the book Currency Wars: The Making of the Next Global Crisis, talks about the first currency war in the early 1900s, and he talks about the Weimar, or, as they say, Veimar, Republic, and how they inflated their currency, and the reasons for that. And what happened—inflation, when it occurs, or deflation—creates a very predictable set of winners and losers. And in this podcast, I’m always talking to you about how to game the system. How to beat the banks, how to beat the government, how to beat the central banks, which are different from the regular banks, to some extent. To beat them at their own game. That’s what we’re here to do. We’re basically doing what they’re doing. We’re outsmarting them. We’re benefiting from the same exact techniques they use, but we’re doing it really in a better way than they are. Because we can take advantage of this very fragmented industry that they can’t directly take advantage and benefit from like we can, because of their scale versus our scale. So, this is an awesome opportunity for us as investors. So, here I will play just a very small segment from the audio book Currency Wars, and throw in a few snarky comments for you along the way.
JAMES RICKARDS: Currency War I. 1921 – 1936. There is hardly a part of the United States where men are not aware that secret private purposes and interests have been running the government. President Woodrow Wilson. Currency War I began in spectacular fashion in 1921 in the shadow or World War I, and wound down to an inconclusive end in 1936. The war was fought in many rounds and on five continents, and has great resonance for the 21st century. Germany moved first in 1921, with a hyperinflation designed initially to improve competitiveness, and then taken to absurd lengths, to destroy an economy weighed down by the burden of war reparations. France moved next, in 1925, by devaluing the Franc before returning to the gold standard, thus gaining an export edge on those like England and the United States, who had returned to gold at a pre-war rate. England broke with gold in 1931, regaining the ground lost to France in 1925.
Germany was boosted in 1931, when president Herbert Hoover placed a moratorium on war reparations payments. The moratorium became permanent as a result of the 1932 Laussane Conference. After 1933, and the rise of Hitler, Germany increasingly went its own way and withdrew from world trade, becoming a more autarchic economy, albeit with links to Austria and Eastern Europe. The United States moved in 1933, also devaluing against gold, and regaining some of the competitive edge in export pricing lost to England in 1931. Finally, it was the turn of France of England to devalue again. In 1936, France broke with gold and became the last major country to emerge from the worst effects of the Great Depression, while England devalued again to regain some of the advantage it had lost against the dollar after FDR’s devaluations in 1933.
JASON HARTMAN: So you see that one of the big reasons we have these currency wars is that countries, even though it hurts their citizens terribly—yeah, I mean it’s awful for their citizens. In almost every case. Not exactly, because it depends what business their citizens are in. But they try to suppress the value of their currency, or devalue or debase their currency intentionally, sometimes, because it increases the attractiveness of their exports, and that hurts the vast majority of the people. That’s inflation. Now, the other major reason that countries do this, is that they debase, or decrease, the obligation or the burden of their debt. And the United States is doing this right now massively! I mean, it has been doing it massively since 1971, when we went off the gold standard. Of course there are ups and downs; of course I’ve talked many times about how this is not just simple math.
It’s not just a simple fiscal and monetary policy issue, because the US is in a very enviable and unique position, because it has the reserve currency. So, having the reserve currency, having the largest military, really puts the United States in a very different position. It’s not the Weimar Republic. It’s not Hungary. It’s not Argentina. It’s not Zimbabwe. Because of these special circumstances. It really does have the bully pulpit, and it really can throw its weight around. So, that will benefit us dramatically, as investors. But what do we want to do? Well, we want to invest for either side of the equation. So, if we have a deflationary environment, we will have a situation where as an investor you’re just simply looking to get yield. You’ve gotta find some place to get return. In a deflationary environment you look around at the investing landscape, and there’s really no place that you can get any yield out of your money. You just can’t do it. And that’s kind of a situation we have right now, although we have some inflation. Although it’s fairly moderate, at the same time. But in an inflationary environment, that’s where people become very, very impoverished. And we want to use my trademark term, and that philosophy, inflation-induced debt destruction. Now, keep listening, and just watch how he points out what happens.
JAMES RICKARDS: In round after round of devaluation and default, the major economies of the world raced to the bottom, causing massive trade disruption, lost output and wealth destruction—
JASON HARTMAN: So, that’s the race to the bottom he’s referring to. See, virtually every currency on earth is a fiat currency. In other words, it’s not backed by gold, it’s not backed by anything. It’s just a piece of paper. And it’s a race to the bottom, as everybody devalues their currency, either through irresponsible government spending, which is probably the most common way, so that creates inflation, and devaluation of currency, or intentional devaluation to increase exports. So we see these currency wars going on all over the world, and here he talks about the massive wealth destruction, but also, how some people benefitted quite dramatically.
JAMES RICKARDS: The volatile and self-defeating nature of the international monetary system during that period, makes Currency War I the ultimate cautionary tale for today, as the world again confronts the challenge of massive unpayable debt. Currency War I began in 1929 in Weimar, Germany, when the Reichsbank, German’s central bank, set about to destroy the value of the German Mark through massive money printing and hyperinflation.
JASON HARTMAN: Sounds kind of like what we’re doing here in the US, doesn’t it? Massive money printing, massive government spending—I mean, it’s hard to argue that that is going to hurt the value of the dollar pretty dramatically. But not totally, because of that enviable position in which the US finds itself.
JAMES RICKARDS: Presided over by Reichsbank’s head, Dr. Rudolf von Havenstein, a Prussian lawyer-turned banker, the inflation preceded primarily through the Reichsbank’s purchases of bills from the German government to supply the government with the money needed to fund budget deficits in government spending.
JASON HARTMAN: Hmm. Sounds pretty much like what Ben Bernanke and Janet Yellen are doing at the Federal Reserve, the United States’ central bank! Sounds very familiar, doesn’t it?
JAMES RICKARDS: This was one of the most destructive and pervasive monetary debasements ever seen in a major developed economy. A myth has persisted ever since that Germany destroyed its currency to get out from under onerous war reparations demanded by England and France in the Treaty of Versailles.
JASON HARTMAN: See, that is the common thing, that he’s talking about. Everybody thinks—and he’s gonna bust that myth here in just a second. But everybody thinks that Germany did this intentionally to debase the value of its debt, to make its obligation smaller. So when we buy—now, that’s not the reason, as he says. However, it is a reason lots of borrowers do it, lots of debtors do it. They do this to their creditor to make the burden of their debt smaller. And that’s what happens to us! When we buy income property that will be nominally tracked by inflation—so, we own all these commodities, and those commodities keep pace with inflation, because they’re real—they’re not fiat, they’re not pieces of paper.
All of the ingredients of a house—the copper wire, the concrete, the lumber, the energy, the petroleum products, the glass, the steel—all of those things are just commodities, and those generally keep pace pretty well with inflation. Sometimes they exceed inflation. But the debt against that real estate is devalued as we invest. That’s inflation-induced debt destruction. And it’s the same technique people accused Germany of using! Although, he is gonna bust this myth now. granted, of course, this is James Rickards’ opinion, and other people do have different opinions. But there can be no doubt that the United States is doing this today to its biggest creditor, which is China. And also another big creditor, Japan. And other creditors that we have. We are devaluing our dollar, to keep something of an export market, which is not much, granted, in the United States. Not compared to some other countries. But, it’s also to just devalue out debt. I mean, let’s make the trillions of dollars that we owe less burdensome for us to pay back.
JAMES RICKARDS: In fact, those reparations were tied to gold marks, defined as a fixed amount of gold—or its equivalent in non-German currency—and subsequent treaty protocols were based on a percentage of German exports, regardless of the paper currency value. Those gold and export-related specifications could not be inflated away. However, the Reichsbank did see an opportunity to increase German exports by debasing its currency, both to make German goods more affordable abroad, one typical reason for a debasement, as well as to encourage tourism and foreign investment. These methods could provide foreign exchange needed to pay reparations without diminishing the amount of reparations directly. As inflation slowly began to take off in late 1921, it was not immediately perceived as a threat. The German people understood that prices were going up, but that did not automatically translate into the equivalent notion that the currency was collapsing. German banks had liabilities nearly equal to their assets, and so were largely hedged. Many businesses had owned hard assets, such as land, plant equipment and inventories, that gained in nominal value as the currency collapsed—
JASON HARTMAN: See, that’s the part of the equation in your real estate. You own real, tangible things, as he’s talking about. You own land, you own commodities. Just like the plant and equipment that he refers to. Those are real things. So those are hedged against inflationary fears. But when you add debt to the equation, that’s when you make the big, big gains on that investment.
JAMES RICKARDS: —and therefore were also hedged. Some of those companies also owed debts that evaporated as the amounts owed became worthless, and so were in—
JASON HARTMAN: Did you hear that? They had debts, and the amounts owed on those debts evaporated and became worthless. And if we have big inflation, that’s exactly how we’re going to really, really turbo-charge our wealth creation: with our investments. Most people think, over the past few decades, that they created huge wealth in real estate because the property went up in value. And that’s mostly just a nominal gain. It’s not a real gain in real dollars. But the hidden wealth creator in that equation was that the debt evaporated; the debt went down in value. The debt was debased: inflation-induced debt destruction.
JAMES RICKARDS: —enriched by being relieved of their debts—
JASON HARTMAN: Relieved of the debts.
JAMES RICKARDS: —many large Germans corporations, predecessors of today’s global giants, had operations outside of Germany, which earned hard currency, and further insulated their parent companies from the worst effects of the collapse of the market. Capital flight is a traditional response to currency collapse. Those who could convert Marks into Swiss Francs, gold, or other stores of value, did so, and moved their savings abroad. Even the German bourgeoisie was not immediately alarmed, as losses in the value of their currency were offset by stock market gains.
JASON HARTMAN: And those stock market gains? They’re fake! They’re nominal! Because they’re just tracking inflation. You know, look at what’s going on now. I mean over the past, what, 10, 12 years, there have been almost no, if any, when you adjust for real inflation—literally you’ve lost money in the stock market over the last 12 years. If you just look at the Dow, it’s a joke. But very few people really understand that! Because they really don’t understand the effects of inflation. Anyway, the book goes on and on for hours, so I can’t keep playing it here. But get a copy of James Rickards’ Currency Wars; it’s really quite interesting, so check that out.
I just want to close here with a personal note. You know, my mom’s been on the show a few times, and she is kind of finishing up her southern mansion, in Gulf Shores, Alabama. And you’ve heard her talk about that on the show, and many of you have been very interested. You’ve asked me, how’s your mom’s house going? I’ve seen the pictures on Facebook, it’s amazing. Blah blah blah. Well, about six weeks ago, she had a pretty severe accident, and this is I guess the perils of building a McMansion. She and a friend of hers were—she had a big chandelier installed, 110-pound chandelier installed, and they were hanging the—what do you call them, the little crystals that dangle on the chandelier, they were hanging them on the chandelier, and the chandelier fell. This 110-pound chandelier fell on my mother. And so, she went to the emergency room, and it is amazing to me how resilient my mother is. She just—nothing slows her down. It’s really amazing. And she got a whole bunch of stitches. But, has recovered from that. Thankfully.
However, this—really, this accident may have been a blessing in disguise. It probably is gonna turn out that way. Because what they discovered, is that she has two other very serious issues. One of them is she has an aortic aneurism, and another is a carotid artery that is clogged up. And so, she’s going to get two surgeries, but she may well have to have open-heart surgery. And I am, of course, extremely worried about her. But if you have—the reason I’m telling you this on the show, is that if anyone has experience with this, if they have any advice, I would totally appreciate hearing it. And she’s been shopping around for doctors, and you know, we’ve been looking at different places.
This is really—it’s a huge research project, is what it is, just to find the best doctors. And it appears that the Cleveland Clinic is the #1 place for cardiac issues in the United States, and one of my friends who lives in Cleveland, I asked him about it, and he said, it’s unbelievable. Privately owned, 747s and other giant private planes fly into Cleveland all the time from places like the Middle East, to have medical care there. You know, isn’t that incredible, how good we have it in the US, that literally, princes from Middle Eastern countries like Saudi Arabia fly their private 747s in to have medical care at the Cleveland Clinic? It’s amazing. And it shows you the importance of having a few bucks to take care of your health.
So, you know, this is probably gonna happen pretty soon. I’m kind of hoping she doesn’t have to have the surgery, obviously. But, the carotid artery isn’t that big a deal; that’s just a procedure, one night in the hospital. But open-heart surgery is obviously a huge, huge deal. And I’m of course very, very concerned about her. So, if any of you out there have ever dealt with this kind of thing, or have any advice for me, please reach out. I’d really appreciate it, and so would my mom. So any advice on that would be appreciated. And again, thank you so much, and thank you for listening, and we will look forward to talking with you on the next episode.
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ANNOUNCER: This show is produced by the Hartman Media Company. All rights reserved. For distribution or publication rights and media interviews, please visit www.HartmanMedia.com, or email [email protected]. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate, or business professional for any individualized advice. Opinions of guests are their own, and the host is acting on behalf of Platinum Properties Investor Network, Inc. exclusively.
Transcribed by David
The Jason Hartman Team