1388: Foreign Investors, Property Profiles, ROI & Refi Til Ya Die

So I kept reading and listening and then went forward in the podcast. Then I went to your website and I looked at the sites you have for the different properties and the numbers. So I started learning about the numbers and what they meant. And being the skeptic I am and being a techie, I actually wrote a program to go and scrape your website and other people's websites and redo the calculations just so I could prove it out myself. And eventually I came to the conclusion that real estate is a great deal.

Welcome to the Creating wealth show with Jason Hartman. Your 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 involved 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 1388. 1388. Adam is here with me today. We have a variety of important things to talk about for real estate investors. And the first one is the housing market versus the coronavirus. You hear a lot about this coronavirus in the news and Adam, I have to just throw out my 2 cents on this before we even get into this housing market and coronavirus stuff. You know, this is a bit like Chicken Little, right? You know, the sky is always falling. Maybe this even is really as scary and tragic as the news media is making it out to be. But maybe it's just more if it bleeds, it leads sensationalism. I don't know. And probably nobody listening knows unless we have some infectious disease, people that work at the CDC listening or something like that. I know we have a lot of doctors as listeners and clients, but is this overdone? I mean, you know, we heard about sars, we heard about swine flu, we heard about mad cow disease. You know, what's new? They all, all of these things. You know, we heard about Y2K. We've been hearing about the next recession for the last 10 years.

How bad is it, Adam? How bad is it and what does it mean to the housing market? That's the question.

Yeah. Well, the question of how bad is it is it doesn't matter how bad it is, because the Chinese government is cracking down. So, I mean, we can think it's not that bad. But, you know, China has pretty much shut down a big part of their economy for. I think they may have opened it recently, but they shut it down for at least two weeks. So, I mean, even if it is Chicken Little, the sky is falling.

What. What does that mean? They've shut down a big part of.

They've told people. They've told people, don't come to work, stay home, don't do anything. You know, we. It's kind of like when the plague came through and people just hid in their homes and didn't come out. You know, they've just. They've said, unless you're kind of running skeleton crews, unless you're essential personnel, stay home. And, you know, don't come in. And so that.

I know that in one Chinese city, I was reading an article about it, they have cameras, and the cameras do facial recognition to verify that people are actually wearing face masks. And if they're not wearing a face mask, you know, of course, the Chinese government and their cameras and their social scoring system goes way down. Yeah, the social score goes way down. Yeah. In this case. Yeah. That's almost an irony the way that is, because this is a very social disease, obviously. So I've read about that, and I know that major US Airlines have canceled their travel to China. They've canceled all their flights. So the limit. There is a cruise ship quarantined in Japan, I believe, and several people are infected. I read an article yesterday about that and how people on the cruise ship are quarantined and they have to stay in their staterooms except for brief times when they're allowed to go out on the deck, but they cannot get off the ship. The crew members, you know, bring them food and towels and everything they need, but they're stuck. And it's for two weeks, I believe, after they notice the first infected person. So, yeah, there's no question this is a serious concern. And probably the biggest threat to humanity, by the way, which is somewhat related, is antibiotic resistance. That may well be the biggest threat to humanity. You know, everybody's talking about climate change, but antibiotic resistance is very likely the biggest threat humanity faces.

So our listeners are probably saying. Jason, Adam, why do I care about this? The big reason is, as many of you all probably know, in the cyclical markets, some of what props up all those values, foreign investors. But these foreign investors most of the time actually come over and look at the properties before they buy them. They're not like us buying our single family properties that for the most part.

They'Re buying much more expensive properties.

So if they can't live here.

Let me just outline that scenario for a minute, Adam. It is a very common scenario that for foreign investors of any type, Russia, Middle Eastern, Chinese, Japanese, whatever. Okay, Australian. Now the Australian investors and the New Zealand investors aren't doing as much in the US in the past several years. You know, currency changes and you know, investment opportunities domestically always influence this stuff. But it is very common for. And let's use a Chinese investor to buy an expensive high rise condo type property and literally leave it vacant or just use it when they vacation or when their family vacations in the States. So they might buy a million dollar condo in Miami or a $2 million condo in New York and just leave it vacant. That's why you see these, these high rise condo complexes and you know, at nighttime there's hardly any lights on. It's a pretty amazing thing. It's a terrible way to invest. But what they're really doing is they're simply getting money out of their country into a safer country where there's better rule of law. And America's always been known as the Brinks truck of the world because they can feel that even if they make a so so or bad real estate investment, they're just banking the money. There's. And maybe it's not the best investment ever. They do much better investing with us where they have good rent to value ratios, etc. Etc. But they're just looking to park money anyway. Go ahead.

And they're of the mindset for the most part that, you know, the cyclical markets are going to go up, up and up and even when they burst, they're still going to get better returns than a linear market, which we know is not true.

Absolutely false. You know, there is a certain concept of people wanting trophy properties and also the gambler mentality, and certainly the gambler mentality is very prevalent in the Chinese real estate markets as we also have.

To remember, you know, if they're buying these properties for when they come to the United States. No offense to our markets, but people aren't likely to come in from overseas to go spend time in Jackson, Mississippi or Memphis, Tennessee.

Yeah, you got it. So anyway, we do not have properties in sexy cities, folks. Sorry about that. And we do not have sexy properties. They just have great returns, great return on investment. But yeah, they're kind of boring, for sure.

Yeah. So the Thing is, they can't come to the United States right now. And whenever they are able to come to the United States in a while, they may not have the same amount of money because they're expecting this slowdown in China to potentially impact worldwide GDP by I think I heard between 3 and 5% this year. So I mean, there's just not going to be as much money coming over and investing in cyclical markets here. So, you know, we've seen it softening, we've talked about it in the past, but if this comes in, we could be seeing a plunge, not a softening in these areas as the money's just not there to prop it up. You know, suddenly the greater fool theory, there's no fool to sell to. Even if he's willing, he's over across those seas. Even if he's willing to, he can't.

He can't do it. So. And Adam, just to explain, for those of you who don't know, I want to remind you of the greater fool theory of real estate investing. And basically it goes like this. No matter how much I pay for a property, some greater fool will come along and pay more after me. So that theory is basically the game of musical chairs and eventually the music stops and you're left standing and you got no chair. So do not go by the greater fool theory. It is a very dangerous strategy. We would never recommend that. Okay, so U.S. housing markets, good old days came to an end thanks to coronavirus. That's of course the cyclical markets where you've got Chinese investors. Chinese investors have played a key role in propping up the market. Definitely not the case in any of our markets. But hey, if you're in a flagship city, New York, San Francisco, Vancouver, Seattle, Los Angeles, Miami, that is very much true. But those cities we would recommend.

Yeah, it's also good news because you have the home buyers in the markets we're looking at. If they see bubbles bursting in the cyclical markets, even though their market might make sense, it's more likely to scare them off from, from buying. So even if it's not in their market, and even if our market's stays linear, it's the whole mental game, they're going to be seeing these bubbles bursting and think, oh my Gosh, I remember 10 years ago, 12 years ago, is it happening again?

Let's look at this. Citing data from national association of realtors, NAR, they say that Chinese buyers spent $13.4 billion to buy homes on US soil just from April 2018 to May 2019. Now, I don't know why they picked that funny time period. Why don't they just say 12 months instead of 13? But interesting. Okay, but this was already 56% lower than the same period a year ago when Chinese investors pumped in over $30 billion into the US housing market. Wow, that is quite a stark difference. And what if that goes to just a couple billion dollars? Right. That's very significant. Very significant. Yeah.

That's a lot of money not coming in.

Yeah. Yeah. Wow. Okay, let's talk about some prudent properties, Adam. Some properties that actually make sense. Not these properties and high rise condos the Chinese and other foreign buyers are buying. Well, I guess they're not buying so many anymore, but they used to. And let's talk about properties that make sense the day you buy them.

Yeah. So we've got one in Hammond, Indiana, and I wanted to highlight this because it's an area that we don't get a ton of inventory in. But there's a couple came in just yesterday. So I wanted to highlight them because they're ready, they're there for you. And this property is three bed, one bath, built in 1960. It's $125,000. It rents for $1,350. And with an 8% vacancy rate, the 10% management fee, and an 8% maintenance, we are expecting it to cash flow. $249.

Okay, so just a note, disclaimer. Those are all projected numbers, of course. Even I want you to understand that even a property that is already rented, it is still a projection. Because as landlords, we all know the idea of the tenant paying the rent the next month is not guaranteed. Okay. Now, most of the time they do pay, but, hey, sometimes they don't. Yeah, so those are all projected number. Now, what is the projection on the overall return on investment on that property?

So total return on investment, we're expecting 31% with an 8% cash on cash return.

Wow, that is phenomenal. And what is the crap rate? Just for curiosity?

7.1.

So the crapitalization rate is 7.1. That is phenomenal. Absolutely phenomenal. I want to remind listeners, of course, you've heard me bash the cap rate. I call it the crap rate because it just doesn't tell enough of the story. The one Adam mentioned, cash on cash is much better. Even that one, of course, doesn't tell the entire story. And even the overall return on investment, perform it at 31% does not tell the entire story because there's an additional couple of things that happen. Number one, of course, is inflation induced debt destruction, which will add to that overall return on investment, assuming inflation happens. You have to have it happen for it to add. But the other part of it is the returns associated with a long holding period in a portfolio philosophy. What I mean by that is that I was speaking last week in Sarasota at a large mastermind group and I talked about refi till you die. And we have a short clip to play about refi till you die today. And we've talked about this subject before, of course, but with the ability to do 1031 exchanges and to refi till you die, this adds a whole new dimension of return over a longer stretch of time.

That really goes into your entire life and the way you manage your real estate portfolio over the years and why it is the most historically proven wealth creator in the entire world. So, Adam, this might be a good time to play this little clip. Sound good?

Sounds good.

Here we go. This is a very, very short clip. And one of our clients actually produced this for us years ago. A shout out to Michelle Hawkins, who did this for us. You may remember, a few years ago at Meet the Masters, another video that she made for us won the contest for the best five year plan contest. Anyway, here is a short clip from a video that she did for us on refi till you die.

Let's talk about one of the game plans that we have talked about for many years, which is the concept of refi till you die. Okay, you've heard of the rule of 72s, right? And that just means that things double, okay? And we'll see how they double at different rates. So in this example, let's talk about a property portfolio where you purchase 10 properties in diverse markets and say the properties were $100,000 each. So you've got 10 $100,000 properties to buy them. 20% down is $200,000. And then you've got closing costs, that's about 35,000. And then you've Got reserves. Remember I did say 4%. 4% of a million is $40,000. So 275,000 total. And here's how it works.

So what that goes on to talk about is what I explained when I did refi till you die in the quickest possible way ever last week when I delivered that speech to that mastermind group is in about six and a half minutes. I went through the numbers, which are hard to do here. We've done them in more detail on prior episodes. If you want to dive into this topic in depth, go to jasonhartman.com, use the search bar and type refi till ya like ya slang ya die refi till you die. Or just type in refi and it'll come up. Basically, it shows how your portfolio value atom doubles every 12 years based on the rule of 72s and a average appreciation rate of 6% annually. And how you extract money in the most efficient possible way from that real estate portfolio because you are not paying tax on the money you extract from and live on your portfolio because beautifully, there is no tax on borrowed money. So it is an absolutely wonderful strategy and our listeners should definitely avail themselves of it. One thing I do want people to understand though, is that if they do the refi till you die, they make a decision not to have the big boring idea. Okay?

Those two are mutually exclusive, so you do have to decide one or the other. And the big boring idea being of course, what we call roa, not to be confused with roi. ROA is return on amortization. Now if your refi till you die cycles are every 12 years, then you do get the amortization for quite a while. You get some good ROA in there, but you will eclipse the really, really big ROA that you start to get at year 15 and after that on that beautiful long term fixed rate 30 year mortgage.

Yeah, you're just resetting it over and over. But hey, you know, you can put that money to better use. You know, if you can take money out and get, you know, another 31% return on a property, then you know that'll beat your roa. I think at the Meet the Masters it was about 15% after 15 years. Was that right? Somewhere in there?

I don't remember the exact numbers, but at the Meet the Masters we had last year in Newport Beach, California, we did show some numbers and it depended on the year, of course, how much ROA or return on amortization you're getting. But yeah, it got up there. I mean it interestingly, in fairly early years in that mortgage, as I recall, you were getting an additional 7 to 8%. So let's go back and look at that pro forma you just went over, Adam, where the cash on cash return was projected at 8% annually and the overall return on investment was projected at 31% annually. Now that's the all in return. We've got some very conservative assumptions. We have a vacancy rate imputed, we have property management fees imputed. And still, because of this beautiful multi dimensional asset class, you are able to achieve some fantastic returns there at projected 31%. But think about keeps getting better and better as you go on and own that property. In a few years down the road, if you add 7% annually through return on amortization and the rents don't even go up and nothing good happens. Okay, Nothing good happens. The rents stay the same, you know, eight years, seven years go by, you don't even raise the rent. You're a terrible landlord. Well, your tenant probably loves you, but we're not going to give you any awards for not raising rents. We're going to give you awards. When you raise them, as you should, every year, then you're basically up to now a 38% annual return on investment by doing nothing, by sitting there. Now, what if you increase your rents? You know, you're going to bump a couple of percent every year or two to that return on investment. If you're raising your rents on a nice schedule where you're probably going to be up over 40% annually just eight years into the deal or so, it's really pretty incredible. And this is why it just keeps getting better and better as you let time go by.

Just what is it? Don't wait to buy real estate. Buy real estate and wait.

Yep.

And while you wait, collect those rent payments.

Absolutely. Absolutely. Good saying, Adam. Don't wait to buy real estate. Buy real estate and then wait. Very good thing. All right. Anything else you want to talk about before we wrap it up today?

No, I think that about sums it up. I mean, I think. Yeah, looking at this, like I said, the couple properties, the Hammond area, that whole area is up close to Chicago. I know some of our investors have properties in Chicago. There have been other properties coming in as well. So just, you know, talk to myself, talk to other investment counselors. You know, we've got new stuff coming in all the time. Subscribe to the property cast. We'll put a link to that in the show notes so you can stay up to date.

Adam, tell them about the property cast a little bit. This is the coolest thing ever.

Just. Just you pitch it this time. I've pitched it before. They're sick of hearing from me. But you gotta subscribe to this it. First off, it's free. Second off, it's super unique. No one else has this. There will be copycats, though. Trust me.

Yeah, that's great. I can pitch it this time because I don't get much love whenever you pitch it. So here's what happened. Jason had an idea and he said, adam, I want to do a podcast where we send people to pro formas. These Facebook groups are telling me it's not possible.

Yep.

And my response to him was just, of course it's possible. Let's figure out a way.

You didn't say that. Yes.

No, it was. I'm not saying it's not your idea. I agree. It was your idea.

No, no, I'm not. I'm not arguing that. I'm just saying. I recall you saying it wasn't possible.

No, it was not me. It was the Facebook groups that told you it was not possible.

In other words, surely there's a way. Let's make sure the listeners know what you mean by that. Okay. So I went into a couple of techie and marketing and podcast Facebook groups, and I said, hey, can anyone tell me how to do a podcast that sends people PDF files? And everybody said, oh, it's not possible. You can't do that. You can only do audio or video on a podcast. And I said, no, I know it's possible. You. And, you know, they all told me I was crazy, just like they told Walt Disney was crazy and Einstein and everybody else. I'm going to get in the same, try and put myself in the same league.

Worth a shot.

Yeah, yeah, it was worth.

You're also remembering you're talking to, like, a podcast Facebook group. Who that you're even. The idea of PDFs is like sacrilege to everything that they. They believe in there. But. So, anyway, we went in. I found out how to do it. It was very simple. I don't know how. These people didn't think it was possible.

So now what does that mean, the list?

All you have to do is subscribe. When these properties come in, we download them onto our computer, upload them into the RSS feed, and all you have to do is look at your phone, hop on the. Hop on your computer and look at it. And pro forma after pro forma, just listed there. We list the bed and bath through the square footage.

The general rents, and then the PDF is there as well. So, you know, we don't list, like, the debt coverage ratio, your appreciation rate. We don't list that out on the post. But it's in the PDF that's attached.

Right, right, right. Oh, I got it. I got it.

We only do the hardcore stuff on.

The post, is what you're saying. That's the show title and the show.

Descriptive, the show notes and everything.

Yeah, yeah. But what's attached to it is instead of an audio file, like you're hearing now. It's a PDF file, so you just open it up. It opens up beautifully on your smartphone, on your computer, on your iPad, whatever, and you can really look at the properties in detail and visually get the whole scoop. So all you do, whatever podcast platform you're using, itunes, stitcher, radio, whatever, doesn't matter. Just type in Jason Hartman property cast, one word property and then cast property cast and you'll get these and you can subscribe. And it's just a really handy thing for investors. And all of you copycat competitors out there, shame on you for not coming up with your own original ideas. If you're going to copy me, I'm sure they will tell you it's a dog eat dog world out there. Adam.

Not that Jason has any solid, firm convictions about this, but no, no, I.

Don'T have any big convictions about it. You weasels get your own ideas anyway. Sincerest form of flattery, right? All right, Adam, let's wrap it up for today. You can reach out to any of our investment Counselors through the jasonhartman.com website or by calling 1-800-hartman Again, that's 1-800-hartman or jasonhartman.com we'll be back tomorrow with another episode. And until then, happy investing.

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