Jason Hartman reads a listener question about the rental rates decreasing and what to do about it. He also invites Jurgen Neugebohrn to the show and answers some of his personal questions. Jurgen is in the oil industry in Saudi Arabia and is interested in the real estate market. He has some very interesting questions for Jason to answer and picks Jason’s brain a little about investing in real estate.

Key Takeaways:

4:50 – You don’t hear about the people who have lost money investing in low rent to value ratio markets.

7:25 – Jason reads a listener question about rental rates decreasing.

12:15 – Remember to join our Memphis property tour!

13:50 – Jason introduces Jurgen, an online listener, to the show.

19:50 – What’s Saudi Arabia like?

23:30 – According to Jim Norman, the reason why oil prices are so low now is because the US is trying to economically hurt Russia and Venezuela.

25:00 Jason explains why he disagrees with Harry Dent.

32:00 – Jason doesn’t have a check list on what you should buy because properties vary depending on the investor’s needs.

35:35 – Jurgen asks one last question about Fernando’s independence day.

Tweetables:

“I rather be lucky than good any day of the week.”

“I believe income property offers the best strategy whether we have inflation, deflation, or stagnation.”

“The US is just too big to talk about real estate as though as it’s one. There’s 400 markets in the US.”

Mentioned In This Episode:

The Oil Card by Jim Norman

Transcript:

Jason Hartman:

Hey, welcome to the Creating Wealth show. This is your host Jason Hartman. This is episode 502. Thank you so much for joining me today and I so wish you can join me and be here for the few. I am in Virgin Gorda in the Caribbean today, heading over to Mercer Island and just less than two hours to hang out with Sir Richard Bronson on his private island. It’s really cool. That’s my second trip there. I went two years and you heard me talk about it on a prior episode. I wish you could join me for this view. It is phenomenal. I’m looking at this beautiful blue ocean and the green lush landscape against it. It’s just gorgeous. Pardon me if you hear a little background noise or wind occasionally.

Our editors will try and get most of that out in post production, but it kind of gives a live feel and I’m going to stick a picture of where I’m recording from my Facebook page so you can see it. I just wish you could all be here, but you’re here in spirit if you’re not looking at a view like this. This is probably the best view podcast I’ve ever recorded in the last 501 episodes.

So, today, what are we going to talk about today? Well, today we’re going to take a caller that’s a fairly in-depth call-in just talking about real estate and economic issues and so forth and I think you’ll enjoy that. Gets some good information there and also a listener question that comes from Hannah in San Francisco and Hannah is actually in the real estate business in San Francisco. Boy, talk about an area in which we would never invest, because we could never make the numbers work, especially with rent control that even makes it work.

When you look at these high priced markets, beautiful places like San Francisco or any of the coastal properties around the country pretty much anywhere or around the world for that matter, of course, you can never make rent to value or RV ratios work, but it’s really interesting because a lot of these people in these market, you know, this is a large part of our client base, having had my start in Southern California many years ago when I was in traditional real estate, of course, a lot of my traditional real estate clients have come to my seminars over the years and have listened to my podcasts and become involved with us as investors. It’s really a great way to do what I call equity arbitraging.

So, you know, if you’ve been in that California market or if you’ve been in the New York market or any of these expensive markets, as really I was thinking over the years that I was a real estate investor when I really honestly I wasn’t. I was more of a real estate gambler or real estate speculator, but you know, you can take this equity that you may have been lucky enough to develop in those markets, in those expensive markets either by just owning your own home or actually investing or, I should say, speculating, and if you’ve timed it and you’ve gotten lucky or if you’ve just maybe haven’t gotten lucky, but you’ve just sort of endured the bad cash flow over the years, but supported your properties and developed some equity, because you know, if you have one or two up cycles in one of these secular markets, of course, they can really put you in a pretty nice position to have some good money to do equity arbitraging with where you’re taking and you’re investing in a more sensible market with that equity in a market that produces income and good cash flow. That is a very good strategy.

Now, what you don’t hear about, of course, when I talk about things like this is all of the hundreds of thousands or really millions of people in markets like this all over the world that lost money in these markets, because they invested a significant chunk of their savings, bought an expensive property in markets like California or South Florida or the North East or in other markets in Europe, Asia, or anywhere in the world for that matter, and they didn’t get lucky and they didn’t get the cycle right and of course the cash flow never made sense, so they’re not able to do this strategy unless they have income or savings from some other source. So, that’s what you kind of don’t hear about and I just want to make sure the good and the bad of that is conveyed.

What’s really interesting when you look at these linear markets, the markets we recommend versus the cyclical markets, the expensive markets, New York, California, the North East, South Florida, expensive markets anywhere in the world where typical rent to value ratios are .4% and of course those are not good, because the rent to value or RV ratio that we want to see is some where in the neighborhood of 1% per month.

So, again, I hate to repeat myself, but I just have to. If it’s a 100,000 property, we want you to get $1,000 per month. If it’s a million dollar property, we want you to get $10,000 per month. Typical deal in one of these expensive markets, these cyclical markets, the non-linear markets is a .4 where you’ve got one million dollars into a real estate, one piece of real estate or maybe a couple of pieces of real estate and it’s only generating about $4,000 per month, 0.4%, definitely not good enough, but if you time that right. It can look like you’re a good investor, right, because if you get lucky and you see a bunch of appreciation, then you think, heck, I’m a genius, and, you know, you’re really just lucky.

I have never met over the years that can truly time those markets with any degree with real accuracy. As I’ve always said, I rather be lucky than good any day of the world. I definitely rather be lucky than good, but unfortunately luck is not predictable, so we’ve got to be conservative and good if we can’t make luck happen, right?

So, Hannah’s question just to kind of take the long route to it, of course, and I’m trying to read it here with the sun and the glare in my screen, so pardon me. She says, “Hi Jason, I’ve been listening to your show for five years and I have to admit I’m almost an addict at this point. :). I like your flashback Fridays episodes for the record. I have a quick question, don’t mind bothering a business like you, you may have already addressed it in one of your 500 episodes or so, so forgive me. I’m just wondering if it’s always a good time to buy a rental,”

So, that’s the fundamental question I want to address here, okay, “It’s a silly question, I know, but I recently became curious/scared that what if my rental rate ever goes down significantly in the future? I see the property values and rental rates went up a lot in Memphis or Dallas where I already own rentals and I’m currently trying to buy more. I’m buying a property at the current value, assuming that I can get a rental rate of today, but what happens if the rental rate goes down by $100 or $200 per the month in the next five to ten years, which would significantly eat up my cash flow. Do you think it’s something I should be prepared for or will the rental rate tend to stay stable in markets you recommend. Sorry if it’s a silly question, but all of a sudden it just scares me too much to move forward, so I just wanted to ask your advice. Thanks again Jason for making the best podcast ever. Hannah in San Francisco.” And Hannah happens to be in the real estate business in San Francisco, of course.

So, good question, Hannah and, you know, no. It’s not always a good time to buy, necessarily. Now, some people will say that every real estate promoter says, you know, the typical thing, it’s always the best time to buy real estate. Well, is now the best time? No. It’s not the best time. You know when the best time was? It was in 2008 or maybe in 2009. 2010 was pretty darn good too, but we can never go back in time. We always, as Voltaire said, “We can not choose the cards we’re dealt, but we must chose how to play the cards in order to win the game.” The great thing about income property is that it is a multidimensional asset class, so we can always adjust our strategy to play the game as well as possible.

So, if we followed commandment number five and that basically tells us that the property must make sense the day we buy it or we don’t buy it, then we know we’re going to be in an advantageous position from the start and so, if the property values aren’t doing well, we just sit tight and we milk our investment for cash flow. If the property values go up a lot, we may want to consider selling that property on a 1031 tax deferred exchange and equity arbitraging to another area where cash flow is better and prices are low.

Now, rents over time, Hannah, they tend to go up. We know this. As long as they’re not controlled by the government, as of course you have rent control in San Francisco, you always see rents hedge very, very effectively against inflation, but always remember when you looked at linear, cyclical, and hybrid markets as we’ve talked about in prior episodes that rents lag prices, especially in the cyclical markets and that’s why we don’t like cyclical, expensive markets like the coastal areas, because they just don’t work and rents always raise much slower than prices do.

So, I’m glad you’re investing in Dallas and Memphis. Those have been great markets for us over the years and of course we have a Memphis property tour coming up, but I don’t think you really have to worry too much about this. The rent to value ratio still make sense, they still work. They are deteriorating, they are getting worse, so there is definitely some urgency, because as prices creep up, the rents lag even in linear markets, even in the markets we like, but they lag a lot more in the cyclical and hybrid markets.

It’s still a very good time to buy. I don’t know if it’ll always will be, but if you’re buying in linear markets, there is almost always a good time to buy, because you can adjust strategy and cyclical markets, you don’t have that opportunity. Anyway, I kind of hope that makes sense. I’m a little distracted here by the wind and the environment, of course. We’re going to go to a listener call, so Hannah, thank you for that question. It is a very good question and it’s a common question, so I appreciate you asking it, because I’m sure a lot of our listeners have the same question. Be sure to join us for the Memphis property tour. You can resister at the JasonHartman.com for that.

I would look forward to talking to you on the intro of the next episode in just a couple of days here and I am off to see Sir Richard Branson and I hope for our sake, we’re going to be able to get him on the show soon. Maybe I’ll be able to put the microphone in front of him this afternoon and we’ll hear what he has to say about business and real estate. He’s obviously quite good at those things. Anyway, let’s get to our caller and discuss more real estate stuff. Here we go.

Hey, it’s my pleasure to Jurgen to the show. Jurgen, you have been listening to the podcast for a while and you’ve got some questions for me about investing and monetary and fiscal issues, I believe.

Jurgen Neugebohrn:

Yes, Jason, thanks a lot. Yeah, I’ve listened to many of your podcasts and I really like the idea of the turnkey property, but I’m concerned about all my other research, which seems to be indicate that the dollar is going to have a collapse soon and all asset classes are going to adjust with it, including real estate, stocks, bonds, and so on. So, the immediate thought I have is before investing in a property like this and risking losing 30-40% like many people did in the stock market and so on. I’d like to hear your thoughts on what you think the future looks like and how this type of investment might protect us against that a little bit.

Jason:

Well, as you’ve heard me talk about on the show. I’ve just got to believe that inflation is coming. The only legitimate force that can keep us from having a very inflationary future and I’ll define legitimate in a moment is technology. That’s really it. Everything else is a game of smoke and mirrors, it’s a Ponzi scheme, it’s a shell game, whatever way you want to refer to it and that’s all the stuff that the government does and the central banking cartel does and basically defying gravity is shocking they’ve been able to do it this long.

I mean, if you asked me years ago, Jurgen, would we have lots of inflation. By now, I would have said yes and, you know, we did have a pretty decent bout of it there for a while, but about a year and a half ago it really started mellowing and it’s surprising and the problem is none of us can tell is the reason because, it’s certainty not because we have a responsible government, really, when I say government, I mean the whole world. I’m not just talking about the US, but since the US is such a big player in it, but also because there are just kicking the can down the road with these debt obligations and it’s sort of amazing that they can actually get away with it. It can’t last forever.

So, is technology improving lives so much and making things so much less expensive. Is that the reason and that’s a legitimate and great reason or is it just that it’s a shell game and it’s a game of smoke and mirrors and the gig is going to be up at some point. I don’t know. None of us really do. It’s hard to tell, you know, so as far as investing strategy. I believe that income property offers the best strategy whether we have inflation, deflation, or stagnation. However, it’s a home run in an inflationary environment. That would be the best scenario for investors, investors who are using leverage, especially.

Jurgen:

Because interest rates are likely to go up dramatically and so on.

Jason:

Well, interest rates are a response to inflationary pressures. There are not necessarily the cause of it. What happens is a couple of things, number one, you’ve got the government and central banks want to see inflation be more tame. So, as a way to do that, they put upward pressure on rates to slow the economy down and cool off and cool inflationary pressure, but number two, as the dollar is getting debased, or this applies to any currency as it’s being debased, like if you look at Greece, that’s such a disaster and so many other countries. They’ve got to pay higher rates on treasury bills to entice investors to invest because the investors know that the face value, the nominal value of that instrument at the currency being debased through inflation, so there’s really two reason for that response. Two primary reasons.

If the dollar is debased, of course, your debt is debased, the value of your stocks is debased, and the value of your savings account is destroyed. So, these are reasons that income property makes sense and as if you’ve heard me talk about on the show. It makes sense from two aspect, primarily, really three, but two main ones. The first one is that it’s a commodity, so commodities, the ingredients for a house or an apartment building, they go up in value, at least, they hedge against inflation, because all of those commodities get more expensive, so that’s good for an investor who owns those commodities, number two is if you use leverage and have debt against the asset. if you have a long term fixed rate mortgage, that debt is also devalued, because you pay it back in cheaper dollars over time and the payment, the monthly payment to service that debt is also devalued.

I’ve used the example many times of my mother in the first house that she purchased and how she thought, you know, a $416 a month mortgage payment for a house in west Los Angeles was insane, but as the years went by and she still happens to own that property, as the years went by that $416 payment looked like nothing years later. Why did it look like nothing? It wasn’t because her income rose a whole bunch, it was because inflation made it look meaningless. Now, $416, you can’t even buy a nice car for that, much less a house, right?

Jurgen:

Yeah, it doesn’t seem there are a lot of options, because if you leave cash in the bank, there’s always the possibility of bailing. If you buy gold, silver, you know, you might get taxed on that. I can see why these countries are putting a lot of money into hard assets and paying a premium for them, because you can’t just leave it somewhere. You can’t just put it in a treasury bills or leave it in cash.

Jason:

No, you’re absolutely right and when you refer to bail, I think you’re referring to the situation that happened a few years ago in Cyprus, right?

Jurgen:

Exactly and I think it’s coming here.

Jason:

When you say coming here, you mean to the US, right?

Jurgen:

Correct.

Jason:

Yeah, because we should say to the listeners, you are..tell us where you’re located by the way, you’re in an exotic place.

Jurgen:

Yeah, I’m located in Dhahran, Saudi Arabia. It’s near the eastern side of the country.

Jason:

What are you doing over there? Are you in the oil business or something?

Jurgen:

I am. I’ve been here almost three years now in the desert.

Jason:

What the heck is it like? I mean is like, I don’t know, maybe you can’t speak freely about this, so I’ll appreciate that if you can’t, but I would just imagine that Saudi Arabia is a very oppressive kind of place. The US sort of looks the other way on human rights in countries that it’s doing so much business with, obviously, if it wasn’t. It might be a news item. You know.

Jurgen:

Yeah, well there’s a few things that aren’t allowed here like alcohol and a few other things that western culture enjoys, but for the most part if you have an open mind and a bit of liberal bias about how you deal with people and deal with different cultures. It’s just fine.

Jason:

Are women allowed to drive there? Can women drive in Saudi Arabia?

Jurgen:

Well, I live in a camp. I think it’s about 11 square miles and on these camps that the company has, women are allowed to drive, but not outside of the camps.

Jason:

Wow, unbelievable. Do you care to say what company you work for? Do you work for a big oil company like Exxon?

Jurgen:

Sure, yeah, it’s Saudi Aramco, so Saudi Aramco is a nationalized or government-owned oil company. It’s owned by the Kingdom of Saudi Arabia.

Jason:

Yeah, very interesting and what do you actually do? Are you in like the exploration business or? What side of it are you in?

Jurgen:

Background CPA for finance. So, I help them with their managerial reporting analysis and do a lot of performance measurement and management, essentially help them be a better company and help them achieve their goals and objectives.

Jason:

Yeah, fantastic. That’s awesome, that’s awesome. I assume you grew up in the states. I mean, you have a very American accent. Where are you from?

Jurgen:

A little bit of time in Ohio, some time in Florida, some time in Seattle, but I was born overseas in Germany. Kind of a child of the world.

Jason:

I was born in Germany too. Good stuff. So, I gotta you a question and I know we’re not, maybe, not finished with the question you have for me, but you know, I sort of issued, you may have heard me say this on the podcast. I issued what I called kind of a yellow light warning on Houston and I own property in Houston, not selling it, I think Houston is a great market. We’ve done lots of business there over the years and, you know, probably hundreds of our clients have invested there through our network. You know, I’m kind of concerned with low oil prices that, you know, there’s only been really one sort of decent sized story I noticed about lay offs and so forth, you know, first of all, are oil prices going to stay low. Do you have any thoughts on that? No body probably really knows for sure and then any thoughts on maybe the Houston market. I’m going to ask you that question. How do you like that?

Jurgen:

No, that’s a really great question. You know, what really surprised us here was that none of us and you would think finance people will see it coming, none of us saw the price drop by 50% and you have to wonder what’s the machine behind that, because we do the math on a daily basis. We know the output, we know everything, we know the sales, and none of us saw it. So, I don’t know what’s behind it, but it’s not what you might expect. It’s not the marco economic is all I can tell.

Jason:

Did you happen to listen to the episode I did with Jim Norman who wrote a book called the Oil Card? You would enjoy that episode. It was, you know, a few months ago, maybe three months ago or two months ago I did that episode and that was on the Creating Wealth show, of course, you know, multiple shows here. So, I don’t know which one you are listening to primarily, but Jim Norman, you know, he’s like an oil industry analyst and he’s retired now, wrote a book called the oil card and his thesis is that the oil price is really controlled by the futures market and the reason it’s low now, and I may not be, you know, conveying his idea correct, but the reason it’s so low now is because the US is controlling the futures market as a weapon to hurt Russia and Venezuela. That’s sort of his premises as I understand it.

Jurgen:

Yeah, conspiracy theories. Same thing with gold being controlled by Stalin.

Jason:

Well, gold is manipulated. I mean, that organization. I got to get someone from GATA on, you know, the Gold Anti-Trust Action Committee, they’re interesting, yeah, but when you say conspiracy theory are you kind of dismissive then, is that how you’re saying that or is that just a label? I don’t know.

Jurgen:

No, no, I try to listen to anybody has any kind of credibility and merit and hear their opinion. For example, Harry Dent, I’m sure you’re familiar with him. He just came out with a book..

Jason:

He’s been on the show three times.

Jurgen:

Yeah, yeah, exactly. In fact, that’s where I got his name and got his recent book, but he says oil is going down to $20-30 and he actually warns about getting into turnkey properties. If you think that’s the future, you know, think twice and look on page 77 and so on.

Jason:

Yeah, okay, let’s address that, because my mom has been talking to me about that a lot lately and I’ve had Harry Dent on the show three times and I’m a big fan. I’ve been reason Harry’s work since the mid 90s, like a long time ago, and I also had the president of his company on the show who is also a very – Rodney Johnson, I think was his name, who was really interesting too. It was kind of almost interesting in a way more so to interview Rodney than Harry because it was sort of a different take on the same work, you know, which I really enjoy. His latest book, the Demographic Cliff, he talks about real estate, but the problem with Harry, well, there’s a few, but I mean, I think his work is over really fascinating, but the problem with his real estate thinking is that he talks about real estate as if it’s one single entity.

You know, he doesn’t segment it by price, he does a little bit by price, but he doesn’t segment it at all by geography much, okay, now in some of his books, The Roaring 2000s Investor, he did a little bit of geographical stuff when he was recommending Ashland, Oregon and some other geographical places, but Harry’s main thing abut real estate as I understand it and I’m not saying this because I have an agenda, I think real estate has its share of problems and pitfalls, I just think it happens to be better than anything else.

I think everything else has more problems, okay, so that’s my take, but you know, Harry’s thing is the mcmansions will be terribly affected, because, of course, you have all these retiring baby boomers and they may have financial pressures, they just want a simpler life, and we are moving, you know, in the next fiveish years, depending on what segment of it, we’re moving right into that.

A lot of these baby boomers will be unloading their big expensive houses and he really said that will start happening in a major way in 2012 and it didn’t so much, because as far as I can tell, big mansions are still roaring and they’re selling for very high prices, but when he talks about real estate. I think that’s mostly what he’s talking about, that and the expensive real estate markets, not cash flow type properties. Do you disagree with that by the way? Please tell me if you do, do not let me control the conversation here. I want to hear opposing view points.

Jurgen:

Well, I haven’t had a chance to read his book yet. I just ordered it and getting it over here is a bit of an ordeal, but he did mention turn key properties specific and a page number, so I’m really excited to get the book and have a look at it and assess what he thinks about it.

Jason:

See, the thing is with Harry Dent and he said it on my show, he said, look, I don’t know what else you can do to get yield, because, okay, let’s say we have deflation, the rental properties still produce yield. In a deflationary environment, there’s no way to get yield anywhere, pretty much, right. He said gold is going to go to $750 dollars an ounce then it might go down to $250 after that, after it breaks through 750 and its plummet and so far he’s been on the right side of gold. It hasn’t gone that low as he predicted, but it has gone down. Stock market has got to be a bubble. I mean, that’s just, it’s getting ridiculously frothy. What else would you do, you know? It’s more a question of elimination of investments than it is saying, hey, this is the greatest investment. It’s really like a process of elimination, you know?

Jurgen:

I like to diversify what I’m doing. The one thing I can’t do is have cash sitting there idle, so I think for me it makes sense to get involved in that and as I mentioned in my short message to you, I already have a property that’s generating cash flow and, you know, I don’t like having one large property that has a lot of asset buildup, because that’s putting all my eggs in one basket and I rather just sell the place and buy several, you know, it’s the same approach more diversified, right. I think owning hard assets, whatever it is, if it’s gold, if it’s real estate, you know, you don’t have a lot of choices, you’re going to have to over pay for it right now, but at least it gives you some piece of mind.

Jason:

If you believe in inflation, then you would probably be a gold bug. If you believe in deflation, you gotta just look for yield. There’s really not much to choose from in a deflationary environment unless you got some ideas you want to discuss, but deflation just leaves you with like nothing, except yield. That’s all you get.

Jurgen:

Yeah and I have bought some gold, unfortunately, most of it is paper and come to find out a year after I bought that the organization who backs it could simply default on it if it reaches a certain price or change it up cash.

Jason:

Yeah, no question about it. If you’re going to own precious metals, hold the metal. You’ve got to actually have the metal in your possession, you know? That’s my opinion, because paper gold whether it be stock in a miner or some sort of gold derivative or ETF or something like that, that’s just fiat money and I mean, gold bugs, it’s so funny how they contradict themselves, because one of the whole premise of being a gold bug is that you think disaster is upon us and you want to hold hard assets. Well, if you don’t have the gold in your possession or the silver or the platinum or the palladium, then what do you have? I mean, these people that want to buy into things where you have gold in a vault somewhere that you don’t even know is yours. I mean, there’s so many scams in that world. It’s just, it’s just crazy.

Jurgen:

I agree.

Jason:

Did you have another question there? I mean, I know, you know me, I get on tangents here, so I apologize, but any other things you wanted to discuss?

Jurgen:

Yeah. I noticed you’ve gone through a lot of rules about how you evaluate properties, coverage, and cash on cash ratio and one plus or 1% or 0.1%, I forget which it is.

Jason:

You’re referring to the RV ratio. The rent to value ratio that I believe should be 1% of the value per month. So, $100,000 property, you get a $1,000 per month, give or take a little bit.

Jurgen:

Okay, do you have a check list published somewhere that you use to source your properties?

Jason:

You know, we have over the years. I can’t say we do now. I wouldn’t be able to find it if I looked for it, probably, but there isn’t a checklist like that that is an existence nowadays, but it’s a good idea.

Jurgen:

Well, here’s the real question. If I went on one of these tours, I think the next one is on the second or third of May, I would have to do it pretty quickly. I wouldn’t know the area at all. What is it, Memphis, I think?

Jason:

Right.

Jurgen:

Even if I went over to Little Rock, which I don’t know either. It’s pretty difficult doing something like this cold without having. You have needs that doesn’t meet that.

Jason:

I understand what you’re saying. You know, unfortunately, I don’t know, I’d be sort of worried about going by check list and that kind of stuff, because there’s a lot of little nuances and that’s why you just sort of need a human guidance and that’s why we’re there, you know, I’m there, investment counselors are there on the property tours to guide you along with our local market specialist.

There’s so many factors, the neighborhood, the school district, there’s just a zillion little new nuances to it, of course, but yeah, you know, I guess, you know, the real check list is the pro forma, so when you go to JasonHartman.com and you click on the properties page and you look at those pro formas for those neighborhoods, you know, the first mark is rent to value ratio, you know, is it at or near or above 1% and the second big market I’d be looking for, because you can still do this.

Now, a few years from now I might say don’t even think about this one too much, but right now, you can still get a pretty good deal on it and that is cost per square foot and that cost per square foot is a real insulater and how long have you been listening to the podcast, by the way, or how many episodes have you listened to?

Jurgen:

Probably about a year and half.

Jason:

Are you listening like to all three episodes a week type thing or just when you can catch it, oh, okay, so you’ve been listening for a while. Good. Thank you for listening, first of all, but when you look at the concept of regression to replacement costs, right, that cost per square foot really does offer you some protection. So, right now for example I’m looking on our site and I’m looking at a property in Little Rock, okay, well, we’ve only got one property for sale. There’s very limited inventory, but this property in Little Rock.

You know, it’s $53 per square foot, okay, and granted, it’s not a new property, but if it burnt to the ground and you had to build a new property on that site, you would have to spend a lot more than $53 per square foot to build it. So, I think the rent to value ratio and the cost per square foot. The cost per square foot, if you’re really concerned about down side risk, that offers you some good protection and it offers you some good upside potential as you have what I call regression to replacement cost and if you want me to dive deeper into the regression to replacement cost then I’ll be happy to.

Jurgen:

I think I’ve heard you talk about it on at least two or three episodes and I get the idea. You’re saying like the land is freeing over, you know, something to that affect.

Jason:

The land is free or cheap and the price of that property is ultimately going to regress toward the replacement cost, which to build new in this market is probably about $75 per square foot, at the cheapest, okay. You know, probably $85-90 a square foot to build something a little nicer. So, that’s not the really the same as appreciation in my opinion and I don’t have like an empirical way to sort of prove that with an equation, but it’s just a, you know, kind of from experience. I don’t think it’s the same thing as appreciation. So, even if you don’t have like a frothy market where you see really significant appreciation, you’re ultimately going t have that regression toward replacement cost or regression to replacement cost, yeah.

Jurgen:

And my last question, I don’t want to keep you too long. I know you’re a very busy, but I heard one episode about Fernando talking about his independence plan or independence day plan or whatever.

Jason:

He calls it financial independence day, yes.

Jurgen:

I thought that was funny. He seems like quite a character, very organized, very methodical, and focused in whatever he’s doing.

Jason:

He’s super organized. Yeah, much more so than I am.

Jurgen:

Well, the thought was if I have this one property, which is somewhere between six and seven hundred thousand and it’s paid off, it’s in Seattle and it’s generating $2,500 a month, which is a very low with your ratio and I use that money to hopefully time the market well and cash out and put that in to several other properties, I would be very interested it about speaking with Fernando about how he would model something like this, because you know, if it’s 20% down, I think gets a lot of houses and my credit is stellar.

Jason:

That’s something you can certainty talk to him about. You know, we might actually do a show. We’ve kind of done it, but really do a show just on the very narrow topic of financial independence day, because the first time I sat down with him, we were at a bar in  Tempe, Arizona and I didn’t know who he was. He just said he wanted to meet me and it was a Sunday afternoon, so he pulled out his laptop and showed me the spreadsheets and his financial independence day target was two years after he started investing.

So, he listened to my podcast, met me, I said, heck, I can help you do that. I can help you execute that plan. It took three years, not two, so it really took an extra year, because it was a lot slower to acquire the properties than he thought it would be, especially in one of our markets in St. Louis. They had some problems being slow there in construction and so forth and so, you know, it kind of slowed him down a bit, but it happened and he retired from Apple, so yeah, yeah. That’s a good plan and you’re certainty welcome to talk to him, absolutely.

Jurgen:

How would you recommend I move forward with that?

Jason:

I can talk with you off air about that and put you in touch with him, okay?

Jurgen:

That’s great.

Jason:

Good stuff. So, Jurgen, thank you so much for calling into the show and asking some good questions there. I’d love to even have you back on after you do read Harry Dent’s book. You know, Harry Dent is one of the few deflationists out there and would love to see what you think of it as you really got to dissect the real estate thing by geography, by price, by the market segment, a whole bunch of things. US is just too big to talk about real estate as though it’s one entity, you know, 400 markets in the US and lot of differences and segment by price, segment by geography, a bunch of things. So, good questions and thanks for asking them. When are you moving back from Saudi Arabia, do you have plans to leave and come back to the states or?

Jurgen:

That’s a really good question. A lot of people come over here middle aged and retire here. It’s kind of the last hurrah where you try to work as hard as you can and save as much as you can and plan for the rest of your future. So, if all works out well, another ten years and that will be it.

Jason:

Oh wow, you’re going to stay there a while, wow, yeah. Is it expensive to live there or is it cheap? I mean, you are kind of in your own world probably on this camp, but what’s it like?

Jurgen:

Well, the housing is subsidized. There’s no electric bill, there’s no water bill, there’s no maintenance, and the car you just need it for a few miles to the offices and back, so you don’t spend a lot of money, but you can get away with $500 a month, even eating out a few times.

Jason:

What if you were outside though, what is it like for regular people that live in Saudi Arabia? Is it expensive? Is there inflation, deflation, what’s going on?

Jurgen:

There’s a bit of inflation. Housing is pretty expensive, but this particular company helps subsidize a part of that cost and it makes things a bit easier, but the cost of living is much lower here than it is in the US, by far, there’s no where I’d be able to save as much as I can and that’s why a lot of Americans and other expats are here and the first 975 of our income is not taxed.

Jason:

Yeah, right, right, because you are living overseas. So, you get $97500 free and then the IRS, the only taxing entity on earth that requires tax on all world wide income.

Jurgen:

Right, right, and no social and no medicare as well.

Jason:

Very interesting. Yeah, it’s a good deal. You can save a lot of money there, yeah, good, good stuff. Well, hey Jurgen, thanks for joining us, I appreciate you calling into the show and I’m going to stop the tape now so we can talk off air.

Jurgen:

Thank you Jason.

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 individualized advice. Opinions of guests are their own and the host is acting on behalf of Platinum Properties Investor Network Inc. exclusively.

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