1414: The 'Return Policy' for Real Estate, Commandment #22, Coronavirus Updates and Evan Moffic

Working with the local market specialist went really well.

I feel like I was able to.

Get the type of property that I wanted and happy with the price and the rehab job and the tenants have gone well. 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 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 1414. Wow. 1414. Yeah. That's catchy, huh? 1414. Okay, folks, as you know, there is so much news coming out, no one could possibly keep up. Certainly not little ol me. It is just amazing that we see this stuff going on in the world. My old hometown, Orange county now has shelter in place measures and it's interesting to see what the government considers essential versus non essential services. In reading that friends in Puerto Rico have sent me screenshots of their phone. Kurt, you're one of them. I know you're one of our listeners. So thank you for that showing. The curfew notifications, those come through like Amber alerts on your smartphones. There's no opt out or anything. You have to see them. It's really incredible. But no one could possibly keep up with all this news. It's absolutely staggering. It's astounding. It's impossible. It is what it is. But some of the news that applies to this episode has really developed because today we are going to talk about the return policy for real estate. I've long said that if you don't like a deal you make with an income property, you always have the opportunity to renegotiate that deal through time. But you also actually have the opportunity to return it. Yep, you can return it. Just like you can return things you buy at a store. Well, if there are any stores actually open. I know it's crazy, but this return policy for real estate is really interesting now. It's. It's something that many, many millions of people did during the great recession. And speaking of recession, there are people out there. There are people in the news. There are people in the lame stream media, otherwise known as the mainstream media, who are actually saying the word if we enter a recession or they are saying that we will not enter a recession due to the economy going into hibernation mode. They are lying. Folks, there is a 100% chance we will go into a recession. Okay, it's pretty easy to predict. Okay, I'm gonna just take that easy one and make that prediction. We've already begun the recession. I would say right now. Okay, let's get that out of the way. But does that mean there are opportunities? Does that mean there are silver linings to the cloud? Oh, it sure does. In fact, I will make another bold prediction for you. I predict that through this entire crisis, income property will be the best performing asset class. With the possible exception of Clorox sanitizing wipes and toilet paper. Those might outperform income property, but even then, probably not because they're not multi dimensional, they're simply one dimensional. Right? Buy low, sell high. Whether it be the product or the st. Yes, either one. Income property with its beautiful, wonderful multidimensional characteristics I think will be the best performing asset class. And by the way, I have history backing me up for that. You know the old saying in investing, past performance is no guarantee of future performance. Well, that's true. But hey, what else can you go by? During the Great Recession, I remember maybe 11 years ago, 10, 11 years ago, I remember showing a PowerPoint slide at one of our meet the masters of Income property events way back then. And the time when I had a lot more hair. Yes, that time. And I was showing the slide and demonstrating how income property, as devastating as the economic news was, I compared it to precious metals. I compared it to stock markets all around planet Earth and showed the returns of these different asset classes and showed how income property was the best performing asset class in the world. And I predict that will be the same this time around. Now there will be restrictions. Well, there already are in some very left wing cities restrictions against evictions during the the coronavirus pandemic. Because hey look, think about it. Evicting someone when there is a shelter in place or a quarantine law. Okay, that's sort of hard to work that problem through, isn't it? Yes, of course it is. But the other interesting part of it is the bailouts are already coming our way. Hey, Mitt Romney says we should send everybody $1,000, which is like, you know, even if you're a minimum wage worker, if you're in the working poor. $1,000 is only going to tide you over for about two, three weeks. Okay, so that's only the first of many things. Now, Andrew Yang, presidential candidate Andrew Yang, who has of course been a guest on this show. Oh, and by the way, speaking of all our fantastic high profile guests we've had over the years, yesterday's interview got some great feedback on that. Ainsley. Talk about a person in the know, right? Chairman of Lehman Brothers holding company to deal with distribution of all the assets during the Lehman Brothers bankruptcy. President and CEO of Sotheby's, you know, wow. What an amazing guy. All of the knowledge he has and could share with our audience. Got a lot of nice feedback on that interview. So glad you liked it. And we'll keep them coming. Of course we will. Of course we will. That's what we do here. But we can't get to all the news because we just don't have enough time. And you know, I know Kathy was saying I'm sick of hearing about coronavirus. Okay, Kathy. Yeah. Well, you know, it is only the biggest story of the century. And why do I say that? Look, I am not, when I say that I am not talking about whether the reaction is an overreaction or an under reaction or I'm not making a judgment on that. What I'm saying there is a reaction. So judge what's an overreaction or not? You know, fine, but that's not the question. The question is, and you always got to ask the right question so you can get the right answer, right? The question is, what is the impact for investors? What is the impact on our lives? Okay, yeah, a lot of people scoff at and they say this is ridiculous. People are going crazy. It's, it's, they're out of control. It's nuts. Okay, fine, but that's not the right question. What we're here to do is help you survive and thrive through the changes that are happening and will inevitably happen in the economy. And there are some really good opportunities on the doorstep here. We are going a little long on this intro, but I did promise that I would tell you about the new metric that I have developed for analyzing a real estate deal. And it also includes a new Commandment. Commandment number 22. Yes. The ten commandments of investing are now at number 22. And this is something that I actually predicted many years ago. But when I predicted it, I was relating it to autonomous vehicles, to the future of the self driving car. And that was the rise of suburbia. The rise of suburbia so what IS Commandment Number 22 in the light of virus concerns and contagions? And this won't be the last one. It's not the first, it won't be the last. There will be another one. You know, just wait another year, wait two years, we'll have more. Okay, so this, this is our future. It's just going to happen as mankind pushes more and into the wild environment and comes in contact with wild animals that aren't affected by viruses that affect us. They jump. They're what's called, what are they called? Zoonotic. Right. They're zoonotic when they jump from animals to humans. And not all things do that, thankfully, but some do and there will be more outbreaks. So commandment number 22, thou shalt invest in low density living. Thou shalt invest in low density living. Why? Well, hey, I predict a migration out of high density living environments. New York City would be the prime example. But Los Angeles, downtown Seattle, whatever, right? San Francisco quite obviously, don't want to miss that one. Hey, downtown San Diego, you know, any places where you have high density living, I think for another generation, a generation, okay, people are going to remember this. They're going to be thinking about it. People want to have a little bit of distance now. They want to live in a single family home in Indianapolis or Mobile or Little Rock or Atlanta or Memphis or any of the markets you can find@jasonhartman.com properties and having that single family home or even an attached townhome type environment, that's low density, much safer environment. Okay? Much safer environment. And people are going to be looking for that. So after they are allowed to leave their home again, their mindset over the next weeks, months, maybe a year or two is going to be, hey, you know, I want to change my lifestyle a bit. I want to live in a lower density environment. It's a lot less expensive, it's more pleasant, there are plants around, People aren't pushing and shoving. Everything's less expensive. Not just the real estate. That's going to be the desirable commodity. That's my prediction. Mark my words, I created a new commandment for it. Commandment 22. So there you have it. And what is the primary metric by which you can judge whether or not you're following commandment number 22 about the low density investment opportunity? Well, the primary metric is something that could even happen in suburban markets. I'll take Phoenix as an example. But any suburban market around the country, you will always see the typical three or four, five story apartment Complex. And what does that three or four or five story apartment complex have? Especially if it's newer? It has something that starts with an E. That thing that starts with the E has its ups and downs. It's an elevator. And if it has an elevator, you're probably not abiding by commandment number 22, because you are probably talking about a high density environment. In fact, the elevator button itself is one of the biggest places that germs switch to new hosts. Okay, so don't touch that elevator button. I know. We all have to develop OCD in today's world. Yes, we do. See this. You know, they had that old movie, I think, in the 80s called Revenge of the Nerds. Then we saw the rise of Bill Gates and you know, he's the quintessential nerd, right? And all the nerds took over the world. The movie really was, was very predictive of what was about to happen. Revenge of the Nerds, the nerds became the super rich. Right. Well, now we have Revenge of the Loners with ocd, because those are the ones that are not getting sick. Okay, so it's a good time to be a loner with OCD. Right? There you go. Okay, so commandment number 22, remember it. If it has an elevator, proceed with caution or don't proceed at all. All right, let's get to part one of the return policy for real estate. And by the way, since we recorded this segment, Italy has now put a moratorium on mortgage payments. Articles are coming out left and right. We'll try to get into some of those in a little more detail in part two tomorrow. Talking about the bailouts, which, which this, this interview was recorded just a week and a half ago, and now there's just so much more evidence for how true what we're about to talk about how much more true it is. Okay? It, I mean, you know, it's all, it's all coming back right now, right here. Okay. Reach out at Jason hartman.com contact one of our investment counselors at 1-800-hartman and we will be happy to help you do a portfolio makeover and position your assets to survive and thrive in pandemic times. Let's get to part one of the return policy for real estate. Welcome, welcome, welcome. And Evan Moffick, our client, is here with us. Evan, welcome back.

Thank you. It's always great to be with you. And last week was an exciting week for real estate, for stock market, and there's just a lot going on, a lot to think about.

Well, you say that as though it's a positive. I guess you're an optimist. But the world is in the grips of possible epidemic with this virus alert and stores are sold out of water and toilet paper and pasta and rice and Campbell's soup stock is soaring. So it's a crazy time. Also, Zoom, the company that helps you hold virtual meetings, their st is way up and boy, it's way overvalued. It looks like it's going to take a long time to grow into those earnings, I tell you.

And it was a cartoon on, I saw it on Facebook. I think it's from the New Yorker. It was like a robber, you know, in a mask stopping someone on the street and saying, give me your hand sanitizer now.

Right, yeah, yeah. That's a new paradigm, isn't it? And people wearing masks and all, it's crazy. But the virtual home based worker, this is the time. And the interesting thing is it's kind of like that cliche, that metaphor of letting the cat out of the bag. Once an idea is sort of out there, it's kind of just out there. And I think this is really showing how valuable the home is and how not so valuable the office space or the commercial space is. And I've been telling you all that for, oh, going on 17 years now that it's all about housing. They can outsource the, the factory jobs to China, the workshop of the world and, well, you know, at least for now. And they can outsource the call centers to India and the Philippines, lessening the need for office space and the factories, of course, lessening the need for industrial space. And they can outsource the sale of products to the Internet. But at the end of the day, everybody needs a place to live and let them rent that place from you. And that's what we want to talk about. But we want to talk about kind of an interesting aspect of that today. And as consumers, we all go out in the marketplace and we buy things from retail stores or we buy stuff online. And one of the things that makes us feel comfortable about buying is when the merchant has a good return policy. A good return policy. And so what I want to talk about today is what if you, as a customer, as a consumer buy a property and you're unhappy with it and you want to return it to the store? Right. You know, most of you don't think you can return your real estate. And we're going to talk about that today. Also, of course, you know, you can exchange your real estate. Right. Some Merchants say, well we accept returns and we'll just let you return it. We'll give you a refund. We might charge you a restocking fee. So they might charge you a little fee to return it, maybe 10, 15, even 20% restocking fee to take the item back. They also say, well, we don't take returns, we're not going to give you a refund, but we will give you an exchange. Right, so you all know about the 1031 tax deferred exchange, one of the several tax benefits that makes income property the most tax favored asset class in America. But what about a return policy? Can you return your real estate? Say this happens, right? Say you are super motivated like many of our clients are. Listen, I've been getting the messages, the emails, the calls and just hearing the interest from all of you, listening how you want to lock in on this free money. I mean the rates are so low. In fact, Freddie Mac came out and said we now have the lowest rates ever. Yeah, that's just kind of unqualified. It's ever. So is that long enough for you? And you want to take advantage of that. You want to get some of those awesome mortgages which are a big part of the asset. But then you're thinking in the back of your mind, what if the market is going into a tailspin? What if we are on the verge of a black swan event? What if we are on the verge of a. Another global recession? It could happen, right?

It could, could. I just saw there was an essay posted on CNBC about Sequoia, the venture capital fund that sent a letter to all of its companies. And the letter starts off talking about this is our 2020 Black Swan event. And so it is. It came out of nowhere.

That's good. Now one of the things that actually you just made me think of something. I think venture backed companies and tech companies should be viewed similarly to. Let's make the comparison to real estate. They should be viewed like the cyclical real estate markets, the high flying markets. Right, the volatile markets. Tech companies volatile, very overvalued. And then people realize the emperor has no clothes. And then the stock crashes.

Well, and the society always make money. You know, the venture capitalists, I mean they, they lose money sometimes too, but they usually end up getting out before it really crashes.

So.

Right, yeah, your markets, the insiders make it. And the reason the insiders always make money is they often sell before a company goes public. So for example, for Uber, even before it went public, even though the stock went down or Lift when the stock went down, the people who had invested earlier, the Sequoias and so forth, made all their money, probably 10x their money before it even went public. So we have to take some of their words with a grain of salt. But they do have a pulse on what's happening in the high flying stocks. But again, as Jason's pointed out, those high flying stocks are the equivalent of the cyclical markets that we don't invest in. We focus on in some ways, if you want to compare it to a stock, we focus on the tried and true, the Colgates and the General Mills and the American expresses, these same kind of companies, Warren Buffett, Coca Cola, same kind of companies Warren Buffett focuses on that are consistent cash producers. Now the disadvantage is in a bad market, even those consistently profitable stocks go way down because they're so tied up with the market. Whereas in a recession, houses in Little Rock and Memphis, they may not appreciate, but they're not going to have the big drops that even the value based consistent stocks would have.

Evan, that's such a good point because in Benjamin Graham's book, and Benjamin Graham is the mentor for Warren Buffett, okay, he basically says that same thing you're saying about the property markets, the linear boring markets being the better markets in which to invest. He basically says that these sort of boring, stayed companies that aren't sexy, the ones that just chug along and make money, they're undervalued because they just don't get the attention that the high flying stocks get. And same with real estate, the linear markets don't get the attention those high flying cyclical markets get on the west coast, in the expensive northeastern areas or South Florida or around the world in Paris, London, Dubai, Hong Kong, they're just not sexy, but they're just stayed good conservative markets.

I remember, I don't know if it was you who was teaching this or a guest on the show, but someone pointed out that a lot of these cyclical markets around the world actually have around the same RV ratios, that there's actually this consistency. Like Paris would have a similar RV ratio as New York.

Absolutely. Yeah, you can count it. And it's like I've done on the show before with guests. Give me one number and I'll give you the other one. I just tell them, give me the rent you're paying and I'll tell you what the property's worth. Or give me the property value and I'll tell you the rent you're paying. You know, it's amazing how Easy, that is, and how consistent it is around the world. So like in the venture backed companies, the hot IPOs, the tech companies, all of these crazy stories we hear, the cryptocurrencies, those are the cyclical markets, okay? We don't invest in those markets. We don't play like that. We're not dumb, okay? We're not gamblers. Okay? I don't mean to say that it's totally dumb to play that game. If you've created some wealth, you can take 10, 15, 20% of your net worth and gamble with it and you might hit a home run once in a while, okay, no problem with that. But by and large, the core of your portfolio, that 80 to 90% of your portfolio should be in the conservative linear markets in the dividend paying investments, the cash flow properties, okay? The properties that follow commandment number five, thou shalt not gamble. Properties that make sense the day you buy them. Okay? But even with those properties, if things get bad enough, okay, you might have buyer's remorse, you might want to return your property to the store.

Okay, how do you do that, Jason? How do you return a property?

Yeah, how do you return a property? Well, it is what some might call the nuclear option. It is something that millions of people did during the Great Recession and many of them really cut themselves quite a good deal doing it. And we profiled a lot of it on our shows way back then in 20 2009, even 2010. And we profiled this where people were doing loan modifications, they were doing strategic defaults, they were walking away, they were doing short sales, okay? And that's basically the return option, okay? Now you're going to get charged a restocking fee most of the time if you do a return like that. This is not a 30 day return policy. You, you could have the property for yours and you could return it, okay? You could do one of those options. You could do a loan modification and the loan modification really is in return, but you know, it changes the terms of the deal and makes them more desirable for you. So we'll call that a, well, I guess we'll call it what it is, a loan modification. But you could do a short sale, you could do a strategic default and a walk away. And many times the banks will were literally paying people to give the properties back. They were giving them, if they were occupying the property, they were giving them cash for keys, saying, hey, look, you got to live in the property for two years. You didn't make any payments, so you got a free house for two years. And now we'll give you $3,000 if you'll just move out within the next 30 days. Try not to destroy the house and steal all the copper pipes when you go.

You know, kind of like much smaller scale, but if you're a landlord and your tenant doesn't pay and you have to evict them, sometimes you say, okay, I won't file an eviction if you leave quietly. You won't destroy their credit if they do that. This is a much smaller scale version of that.

Yeah, yeah. In our culture in the US that restocking fee is going to be a ding to your credit report. Your credit score is going to take a hit almost always. Now, there have been times when the lenders didn't even report. You know, it's up to the lender to report the activity, whether it be, you know, you missed a bunch of payments or you had a foreclosure. And sometimes the lender doesn't even report it. Okay. There are people and, you know, stories I've heard where people just walk away from their properties. They kept receiving all the rental income for a year or two. They finally gave the property back to the lender and the bank took it back. Then they look at their credit report and they think, oh, my God, my credit report. I can't even look. It's going to be, it's going to be really beat up. And they look at it and there's nothing. It's, you know, they, they still, they still got that 700 FICO score. You know, it's crazy system.

I mean, and that speaks. There are ways that you can repair your credit, too. So it's not guaranteed, but there are a lot of ways. So in some ways, your restocking fee can be minimized.

Yeah, no, your restocking fee definitely can be minimized. And there's a lot of credit repair companies out there and credit enhancement things and so forth. Some of them are marginal, some aren't. There's lots of stuff you can do. Okay. You can set up additional trade lines and pay them promptly so that you improve your score that way. We've done lots of shows on credit enhancement.

When you first started, talked about this concept, I thought, but aren't we supposed to pay back our home? Isn't that, you know, in some ways, I started thinking about it on a moral dimension, but then I said, this is part of the deal. That's when you take out a mortgage. It's you either make the payments or you return the house.

Right.

I mean, so this Isn't. It's not. We're not. We're not violating anything. This is not an unethical thing to do. It's part of the deal, right?

And hey, by the way, you are something of a moral authority. You are a rabbi, okay? And, you know, you study this stuff and you with it. Now, it would be immoral if you stripped the house, took out all the faucets, ripped the copper piping out of the walls, stole the air conditioning unit and took all the appliances out. Okay? That would be very immoral. You would be a thief and a crook. But if you simply follow the terms of the agreement, the agreement is basically. And this is not a legal opinion, by the way. I'm certainly not an attorney or a tax advisor, okay? I'm just investor with experience, okay? And lots of clients and feedback that I get from listeners and clients and so forth. But, you know, you return the property to them if you don't make the payments, and that's the return policy. And the restocking fee is the damage to your credit report. You might be able to recover from the restocking fee much more quickly than you think, okay? So this is a nuclear option. Look, none of us want to do this, okay? It's not. You don't want to plan for this, but you do want to understand that real estate, just like many other products, has a return policy in essence, okay? And there are many other things you can do to mitigate losses. I just couldn't believe the stuff I witnessed in the 90s when there was a very big recession in Orange county and everybody was doing short sales back when $75,000 was considered a lot of money. It still is, but back then it was a lot more than it is today. Just go adjust for inflation, listeners. You know how to do that. We talk about that all the time. And I remember one time, this wasn't my client, but it was a friend of mine, another realtor friend. His client sold a property in Tustin Ranch, which is on the Irvine Ranch in Orange County, California, and they were $75,000 short, and the lender just reduced the loan balance by 75 grand so they could move out, do a cooperative short sale, and just let the new buyer take over the property. And that was during a recession when values had gone down a lot. So it's truly amazing how durable this asset class is and how many ways there are to deal with issues and problems and setbacks. It's. It's multidimensional and it's just absolutely beautiful. In that way, many people during the Great Recession were literally getting paid. And bank of America was one of the big ones doing this, calling investors, not even homeowners, investors who owned rental properties, calling them up and saying, look, if you will do what we call a cooperative short sale, we're going to make it really easy for you. You don't have to supply us with any documents. No tax return, no. In other words, what was happening to do short sales in some cases was you'd have to do the opposite of qualifying for a loan. You'd have to unqualify for a loan. You'd have to show the lender that you couldn't afford the loan, that it was a hardship for you. Whereas when you buy the property, you're trying to show your best self. It's like being on a first date, right? Oh, I'm so well qualified and responsible. And then five years later, when you want out of the deal, you're saying to the lender, I got a hardship, I can't pay the payments. Let me go.

One of the reasons you teach that you should a high loan balance is great insurance because the banks will work, will work with you if you owe them a lot of money. Whereas if you paid all their money back, what incentive do they have to work with if you paid them incentive? Happy to work with you.

Absolutely true. Join us for part two of the return policy for real estate on tomorrow's show. So the next episode will have part two of this, and we will dig in even further to this discussion. And we'll also, of course, have another intro to update you on a lot of news and how it is affecting investors. We'll talk to you tomorrow. Until then, Happy Investing. Thank you so much for listening. Please be sure to subscribe so that you don't miss any episodes. Be sure to check out the show's specific website and our general website, hartmanmedia.com for appropriate disclaimers and terms of service. Remember that guest opinions are their own, and if you require specific legal or tax advice or advice in any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to itunes or Stitcher Radio or whatever platform you're using and write a review for the show. We would very much appreciate that and be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.