1329: Jacksonville Market Profile, New Construction, 1031 Exchanges & Financial Terminology

I think when you combine the concepts of this inventory shortage, the fact that there's still a Runway and the fact that you can't use a standard tool to really figure out what the heck the price of the value of a house is, I mean, it's really good that you've got those investment counselors that can kind of help you navigate the waters. Because as much as we'd like to just automate everything, it really does take knowledge, experience and an overlapping of, you know, some, some helping hands, if you will, to make sure that you're investing in the right. Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants, and been in business in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your Financial Independence Day. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors.

Welcome to episode 1329. 1329. And I am still coming to you today from Puerto Rico and have more Mastermind meetings today and tomorrow and then headed back to the sunshine State of Florida. And speaking of which, we have a guest from Florida here with us. You've heard him on the show before. Let's talk about the migration trend and how it is continuing. I got a question for you, and this is strictly an impression. It's not a data driven thing that I'm about to say. But years ago we were always talking about how this huge migration trend was moving toward the big state, the Lone Star state. It was, all the discussions were about Texas, Texas, Texas. And I used to say on the show, maybe you heard it years ago, I would say things like if Texas were to secede from the union, it would become the Hong Kong of the United States. You know, in other words, as Hong Kong is to China, Texas would be to the US Right? But now it seems to have shifted. Just, it's just my impression everybody's just talking about Florida now. Is it just me or is that what's going on?

Yeah, no, I've seen the same thing. And I think it's interesting, you know, the further we get away from the 08 meltdown. For the most part, Texas kind of set it out because they were in the, you know, the 86 meltdown. They were on the forefront. But with ours, California and Florida, obviously California was way out of favor. Texas was in great favor during the meltdown. And then all of a sudden now as things have started to turn and recycle, it's kind of slowed down the growth focus on Texas and it's come to Florida. I've seen the exact same thing.

Yeah, it really feels like there has been a shift in the sort of the public discussion about the hot state where the growth is, where it's business friendly, where there's just this huge amount of migration. And a lot of these Texas. Texas markets have gotten more expensive. I mean, you know, we used to sell really inexpensive properties in Dallas, even Austin, which Austin's way too expensive to look at now. You know, in 2004, we were doing a lot of business in Austin. 2005, the prices just continued to increase. And then we did a lot of business in Dallas, San Antonio, of course, Houston. We've done hundreds of transactions in these cities. Now it really. I don't know if it's because, you know, when you live somewhere, I mean, I've only lived in Florida for less than a year and a half, you become more conscious of it, obviously, because, you know, it's your home. But really that just seems to be the hot discussion. Everybody seems to be going to Florida, you know.

Yeah, well, I mean, look at. You and I are just two test subjects really, when you look at it, you were a little tired of California. And I originally came from the Northeast in both those areas, when it comes to the affordability index, just the costs, the lifestyle, it's losing its draw. And Florida is really starting to net in not only from the west coast, but the Northeast. A lot of people. I'm seeing a ton of people where it's same stories as you and I. Oh, we were out there and just made to make a change. We were up in the Northeast, decided to make a change and there's some real reasons behind that drive.

Yeah, yeah, there sure is. You know, Florida has always had that draw for the northeastern states. The New Yorkers, I mean, you know, Seinfeld episodes, many of them about, you know, about his funny parents that lived in Florida and so forth.

Del Boca Vista, I think it was called.

Is that a real. Is that a real place, by the way?

No, I think there's ones really like it, but that I've looked it up before. I Have not found a del bulk of Vista yet.

Oh, you actually Googled that, huh?

I mean, back in the day, being a Seinfeld fan.

Yeah, that was the best written sitcom ever. Really great. By the way, you know, funny aside, here I had the opportunity to meet Jerry Seinfeld a couple of years ago. You can see the picture@jason hartman.com in the about section. What I didn't realize about him, I got a couple of photo ops with Jerry after his show in Las Vegas. And what I didn't know about him is, you know, he is worth. Well, according to the Internet. Not that you can believe what's on the Internet, but his net worth is 925 million million. He's almost a billionaire. That's.

Wow.

That's incredible. From being a comedian, you know.

Yeah.

Yeah. Wow.

That is an accomplishment.

Making people laugh is a lucrative business. It's a skill I didn't get, but some people have it. Yeah. Any more thoughts about that? And you do a lot of business in the Jacksonville Market and St. Augustine? Of course. A lot of our clients have purchased properties that you offer through our network. Give us some insights into what's going on. And you've got some inventory in Jacksonville you want to talk about, right?

Yeah. And the overall Jacksonville market, kind of our central hub market. I've been here for almost 17 years now, and coming out of the 08 correction, Jacksonville has continued to be the steady eddy. Nothing like a huge bounce bounce. This steady eddy continuing to climb. And there's great fundamentals. So, like, we were ranked this year number six by U.S. news for best place to retire, which is fantastic. We were ranked number nine by best large city to live in by Money magazine, and we were ranked again year after year, the number one affordable large city in Florida. So when all that migration is coming, it's coming our way. In fact, we had a 9% increase in population. And when people start to review it, they say you just have miles of riverfront and beachfront living that attracts people in. And that affordability index which you brought up before, Jason, why are people leaving California? Why are they leaving New York? Well, because of that. And if you can get the lifestyle and the affordability and the jobs, it's really important. In fact, they said job growth here through 2022, and this is interesting, is supposed to continue to grow to 7.7% increase. That's fantastic. And we know when people have good jobs, they can pay rent. And the tech industry, believe it or not, is a big draw here. People don't Think of Jacksonville as a tech industry. You know, they have a large port industry, the medical community, the universities. But the tech industry here is really growing and that's a big draw of all of it, which brings younger people. Right now, the average age in Jacksonville, 46, actually, which to go against Seinfeld, seems very young. But a lot of that drive of the lifestyle and tech industry, the numbers and the stats continue to be healthy for Jacksonville. What I like best about it, Jason, is that solid core of affordability and coupling that with our new construction model. It's been a really good combination because the need is there. We're having such good performance on this new construction model because it's in high demand. We're able to start right from scratch. And I've done five rehabs for over 20 years. But we found the new construction, starting from scratch really gives ourselves and investors, we work with such a powerful grounding and a long term approach with lower maintenance and repairs. In fact, looking over our whole portfolio of hundreds of properties, new construction, do you know that the overall maintenance, repairs, these are properties that have been out there for a few years? So that would include turns, and that is about $360 a year.

Okay, totally. You just passed over something really quick and I want to make sure people get it. So you're talking about the maintenance cost and maintenance and repair cost for these properties that investors own in your portfolio that they. Well, it's their portfolio, but properties they've purchased through you and your affiliated company manages them. So this is brand new construction. And when you said turns, you meant tenant turns, right? When the tenant.

Yeah, yeah, exactly. So that and maintenance and repairs combined, we sat down and we. And we averaged out all the numbers. So my property manager partner is kind of a spreadsheet geek, which is great. And we went through all of them and the average price per house for the year was about $360, $365 to be exact. So one of our goals was to curb maintenance and repairs because nobody likes to deal with it, especially looking long term. So that is a phenomenal number that we're seeing with the new construction because we're able to start from scratch. There's a 210 warranty into place. And so it just really gives people a power position.

Okay, now 210 is an actual company name. That's a home warranty company. Okay. So I just wanted you to know what that means when he says that. So I'm looking at a performa of one of these properties and the projected maintenance and repair cost is $504 per year. So you're actually coming in under that so far at $360. That's great. And let's just go over the property. So we've got in this one, okay? This is just one 1459 square feet. Purchase price $177,900. So that's 122 bucks a foot for brand new construction. Projected rent of $1,400 per month. Is that all correct?

Yes, sir.

Okay, great. Projected positive cash flow of $149 per month on new construction. Okay. Now, I know you can beat that on older renovated properties, but new construction, that's pretty good. The overall return on investment is projected at 27% annually with a real estate appreciation rate projected at 6%. Vacancy rate, 8% or one month per year management fee, 8% and then maintenance of 3%, which actually the performer is worse than the reality in the case you just mentioned.

Yes, sir. Yeah, that's the beauty of this, where it's. There's just measurements that we can really follow. With the new construction, that's been easier and it's been a lesson for me because I own a lot of rehabbed home. But the new construction, you're just starting from scratch. You're going, you're building that a newer model of home, one that's more durable, one that's more set to tenants preferences. And it's just, it's worked out for all involved.

Now one of the things that a lot of people listening might be concerned about is they're saying, hey, I'm about to start the clock ticking on a 1031 tax deferred exchange. And with a 1031 tax deferred exchange, there are some extremely strict. Well, not extremely. They just are or they aren't time limits. You don't get any exceptions on these. And so you have to identify the property or properties you're buying. Within 45 days after you close on the property, you're relinquishing to do the 1031 tax deferred exchange. And I'm in one of these myself right now, as you well know. And you've got 180 days to close on the. What's called the upleg property or the replacement property. Right. Or properties. You know, there could be several. And a lot of times with new construction, you can't do a 1031 exchange because you can't rely on the closing to happen in time or, you know, in advance. It won't happen in time because it's going to take them too many months to build the property and complete it. Right now with these, this is only some of them. You've got. You've got a few that you can do this with that you can do a 1031 exchange because you can. What's your closing date projected? January, February.

Yeah, January, February. So we have a few. When you're finishing out developments, there's always, you know, one or two properties, not a lot that can be built within a short time frame. So that's why it's always good to stay in touch with your counselors because as these things start to come up, they move very quickly. But we always have, you know, one or two at the end of developments. We're not talking a lot, but if people really want to get into a 1031 exchange with new construction in a growth area, we've been able to do that with our market. But you have to be kind of following pretty closely because we don't get many of them. But yes, we can get them. And like you said, a few that we have finalizing out this year. Yeah, they'll be able to close in January, February. So that's very good timing for 1031 exchange where you're not flirting with that, you know, pretty serious deadline at all.

Yeah, yeah. So if you need a couple of more properties to complete your 1031 tax deferred exchange, go to jasonhartman.com, reach out to your investment counselor. If you're already a client working with an investment counselor at our firm. And if not, just go to jasonhartman.com fill out any web form or look at the property section and one of our investment counselors will reach out to you and they can help you with that. What else do you want people to know about the Jacksonville market, about these properties? Whatever.

I think it's important to know. We've been able to keep with our model where 90 plus percent of what we did, because 90 plus percent of what I did for myself is in solid, strong neighborhoods as well. B neighborhoods. You can build new construction houses in C minus D neighborhoods. But I just don't believe some people thought that. Would you be able to, with new construction, attract a B plus tenants to a D area? I haven't seen that. So we have been able to keep a model where most people who come to visit us for our tours and we've had a lot of, you know, people through the Hartman Network come, they say we have A properties in B neighborhoods. So when we're getting these numbers that we're getting as well. We're really picky. And as you saw coming to visit and tour, Jason, we have land guys out there with my building partner looking all the time. We throw a lot out. If we can't match that criteria of building an A property in a B neighborhood. That's what we've stuck to with our new construction model. It's really served everybody well.

Cool. Now talk to us just briefly about. I mean, it's funny because in the two Florida markets. Well, you're in more than two Florida markets really, but in the two that we started with you in, you have the largest city in America. That's Jacksonville by geography and then by geography, and then you also have the oldest city in America and that's St. Augustine where we have some short term rental properties. Through you. Do you want to mention St. Augustine or your Atlanta or Ocala properties or anything else?

One of the biggest draws to Jacksonville is St. Augustine. It's a part of the greater Jacksonville area. As you know, Jason, we loved it when we toured.

I lived down here.

It's just a magic city for draws, not only for the investment part of, you know, short term rentals, which we do some of, but the Jacksonville. Why are people moving to Jacksonville? They really love to have St. Augustine there. It's next to Disney World. It's the most visited city tourist wise in Florida. It's just because of that draw. So it. That is a huge draw there. And as you know, we've already. We always try to look for the fundamentals of Jacksonville, you know, as we kind of branch out the web of what we've been doing. We started with that core and Ocala and then southwest Atlanta have just been such strong brothers and sisters to our Jacksonville market that, you know, again, I'm kind of that old dog that learned a new trick. I'm really sticking with the new construction, Jason, just because the numbers and the stats are in. That started as an experiment almost five years ago, but they really do work. We do the occasional turnkey still if I'm pulling something out of my portfolio. But normally the new construction has just served everyone involved so well.

Great, good stuff. Any of the other markets you want to mention?

Ocala has been a really good market for us. Again. We saw, as you know, Jason, the first group of duplexes that we closed on earlier this year. We had projected the year before that they would be renting at a certain level. All of them rented at $75 more per unit. The average days on market out in Ocala was 22 days on market for all units and single family homes now.

For rent or purchase. That's for rent, right?

That's for rent. Yeah, that's for rent. So the rentals are coming in strong. So yeah, it's we've really been happy with the sister companies and the Atlanta Townhouse project in southwest Atlanta, which is one of the hottest areas with a lot of younger kind of hip growth there. We're really excited about that complex that's coming together quite quickly and a number of your people are already involved with that.

Good stuff. All right. Thanks for joining us on this again. If you're interested in any of these markets or others around the country, go to jasonhartman.com and we will be happy to help you.

And we're going to wrap up today's.

Show with a lesson from Frank Gallery Gallinelli, founder and president of Real Data, about financial terminology.

We've had Frank on several times before.

On the Creating wealth show. We've given you some of his excerpts before, but today we're going to focus on financial terminology.

Here's Frank.

If you're thinking of purchasing an income property as an investment, you're going to want to do some financial analysis, some projections about the potential financial implications of owning that property. You're going to want to ask yourself questions such as, well, what is a fair price to pay for this property or what kind of a return can I expect from my invested capital? And to do that sort of analysis, you're going to begin, as we discussed in the previous lesson, with a process that we called due diligence. And as we discussed in that lesson, that due diligence begins with collecting data, data about the market in which this property resides and about the property itself. The market data would include items such as market rents, competition for tenants, vacancy rates, cap rates, financing terms, and the general condition of the local economy. While the property data should include the actual lease contracts, the history of occupancy, operating expenses and improvements, as well as your own estimates of items such as maintenance and repairs and perhaps costs that have been left unmentioned. And once we have that, we want to go on to the next step in our analysis process, which is the building of what is effectively a profit and loss statement for an income property, something that in the industry is called an apod, Annual Property Operating Data. We'll be talking about that a fair amount in our upcoming sessions. Now, in order to begin that apod, that profit and loss statement, we have to be sure that we understand the terminology that is specific to real estate and real estate investing. Real estate investing, like other businesses, other professions, has its own special language, its own terms, which people who invest, people who do the lending and so on, are familiar with, are comfortable with, and all understand to mean the same thing. And it's surprising, really, how many beginning investors I've seen who don't make the effort to learn this terminology and do themselves a considerable DennisService. At least two problems arise from not understanding the vocabulary. One of them, in the words of Cool Hand Luke, is what we've got here is a failure to communicate. If a buyer is trying to explain to a seller, for example, why the property should be worth X rather than Y, but does so with non standard terminology, well, the message just doesn't get across. Or if you're trying to get a mortgage to finance the purchase of a property and you make a presentation to a lender that has terms that simply don't exist in nature, at least don't exist in the business, the lender looks at you and you've just lost your credibility. So it's really important, I think, to make sure that you understand the basic terminology. We're going to start with a little subset of that terminology right now. The terms that are necessary for building that apod, that profit and loss. Okay, the first of these terms is gross scheduled income. And that's the total annual rent value of all units in the property. This amount includes the actual rents generated by occupied units as well as the potential rent from vacant units. Essentially, this is the top line on your P and L on your apot. And by the way, this has, as several terms in real estate do, this has an alternative name. It's also called potential gross income. So that's our top line. The next item is vacancy allowance, which is also called sometimes vacancy and credit loss. Now, this is usually expressed as a percentage of the gross scheduled income, and as its name suggests, it's an estimate of the amount of potential income that will be lost due to vacancy. Credit loss, by the way, is when the unit is in fact occupied but the check is no good. There's a loss there due not to the lack of occupancy, but the lack of good funds. So some investors do indeed prefer to call this category vacancy and credit loss allowance, so that it accounts potentially for the uncollectible rent as well as the missing rent from vacant units. The third item is simply the difference between the first two. And this is called gross operating income. That's the gross scheduled income less the vacancy allowance and this one has a second name as well. It's also very often called effective gross income or egi. In my experience, appraisers tend to prefer the term effective gross income. Most investors tend to prefer the term gross operating income. But both terms can be used interchangeably. They mean exactly the same thing. And the short version is that this is the amount you actually collect. So this is the total potential income from the property minus what you've lost from vacancy and credit. What's left over is the actual money that comes in, which is the gross operating income. The next item which would be subtracted from this are operating expenses. And these are items such as property insurance, taxes, repairs, utilities, management fees. Now, there is a more or less standard definition for operating expenses in regard to real estate. An operating expense is one that is necessary for the maintenance of a piece of real property and ensures its continued ability to produce income. There are some opportunities for confusion here that are entirely understandable because there are costs that we typically associate with owning property, but which may not necessarily be operating expenses. Perhaps the most conspicuous of these is your mortgage payment, your debt service. Perhaps the easiest way for me to try to explain that is to say you may indeed need a mortgage in order to be able to acquire a property, but you don't need a mortgage to operate a property, therefore it's not an operating expense. Less obvious is the fact that the interest portion of that mortgage payment is also not an operating expense. And that's particularly vexing because we know that mortgage interest is typically tax deductible, in particular mortgage interest, when the mortgage is against investment property. But the fact that something is tax deductible doesn't necessarily mean that it is an operating expense. It could be an expense for tax purposes, but not something that we treat as an operating expense. In a similar fashion, depreciation is a tax deduction. It's tax deductible, but it is certainly not an operating expense. Then there's the question of capital improvements. Is something that we spend money on a repair or is it an improvement? And that's a harder one because to some extent that's governed by tax law, not necessarily always by common sense. I had a student some years ago who raised a very good question with this example. He said to me, what if I own a five story office building and it has a single elevator in it and that elevator dies? It's unrepairable. Isn't the cost of replacing that elevator an operating expense? Because I have to do it in order to be able to maintain the revenue from that building. My fifth and fourth floor tenants aren't going to pay the rent if neither they nor their clients can get up to the offices. Unfortunately, although that makes perfectly good sense. In fact, it's not going to work if you have a face off with the tax auditor, that auditor almost certainly is going to say no, you can't treat that as a repair. It's got a long life expectancy. So perhaps the easiest way to try to understand what is likely to be legitimately an operating expense of repair versus an improvement is if it's a cost of running the property on a day by day basis. Those kinds of costs generally like property taxes, property management, property insurance, supplies, and so on, those costs typically very clearly are operating expenses. I want to stress that this is not a semantic issue whether something is an operating expense or not an operating expense, as we're going to see going a little further down the road here, really quite essential that we are consistent with our use of this definition along with other investors, with appraisers, with lenders, because these definitions are going to lead to some key metrics which would be skewed if we didn't stick with the same definition of what is an operating expense that everyone else is using. So keep that in mind. We're going to see more of that as we go forward. The bottom line on our profit and loss statement, on our APOD form that we're going to see in a while is a very important term, a very important metric called net operating income. And that is the gross operating income less the operating expenses. In other words, it's what's left over of your total potential income after all the vacancy and expense items have been subtracted. And again, I want to remind you that mortgage payments, capital expenditures, depreciation, have no impact on NOI net operating income. So let's wrap up this collection of definitions here, if you will. We start with the top line, which is the gross scheduled income. That's all of the income that you might potentially get from the property. It includes both the currently occupied units and the potential rent from the vacant units. You subtract for that what is lost to vacancy and to credit and that gives you the gross operating income. Then you subtract all the operating expenses and that gives you the net operating income. That's the basis for our profit and loss statement, our so called APOD form.

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