1784: War on the Middle Class, Cantillon Effect, Refi Till You Die, Index Fund Investing, Appreciation, Equity Build Up, Tax Benefits, Leverage, Cash Flow, Lou Dobbs

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Hi.

I really encourage you to get involved with Jason and his team. The whole group over there is just fantastic. I started working with them probably 10 years ago. They're helping me right now with a refinancing question that I have. But I think the world of this group, they've helped me a lot and, and I think that you'll really enjoy the process.

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 property 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.

It is my pleasure to welcome my favorite rabbi and one of our investment counselors back to the show. And that is Evan To. You know, he is so well read. I gotta tell you, this guy is super well read and he's always sending me really interesting articles and bringing up topics in our discussions and so forth about everything, all things related to the real estate market, economics, the different socioeconomic classes. And today that's what we want to talk about. We want to talk about what you can do, what you can do about the attack on the middle of the spectrum. And you're probably somewhere in the middle middle spectrum of the socioeconomic pyramid, whether you're middle class, lower on the middle or upper middle class. Right. Remember, to be considered rich depending while ultra wealthy is over 30 million in net worth. That's what they are now saying, adjusted for inflation, of course. So most people listening are probably somewhere in that middle class spectrum. And I gotta tell you, I love the middle class. One of my missions in life is to save the middle class because it is under attack. And speaking of which, before I forget, I want to mention a book recommendation which is by Lou Dobbs. I read this back in maybe 2004. It's called war on the Middle Class. I've mentioned that book before, War on the Middle Class by Lou Dobbs. Fantastic book. And really, you know, maybe 17 years ago, I read that book now and sadly, a lot of that's come very, very true. So let's help people avoid the perils that the elites are trying to foist upon the middle class. Let's talk a little about the problem first. How significant is this problem and what have you been reading and thinking about lately?

Well, Jason, I think a lot of it goes back to something you taught me about, and that's the Cantillan Effect. And the Cantillan effect is that the idea that the people that are closest to the money printer, to the central banks, to the most powerful forces the human race has ever known. As you talk about the bankers, they get rich first, they benefit from inflation and they are getting richer and richer. And it's almost like the more money is printed, the smaller the pie that truly benefits from it. So the richest 1%, I don't know what the richest 1%, the net worth is 30 million is real high net worth, I don't know, 1%, maybe it's 5 million net worth, I don't know. But the share of wealth from that small group keeps growing, whereas the next tier, the next tier, it's always a smaller. So I think a lot of it, a lot of the cause of the problem is money printing, which we all know about, and, and the fact that we live in a meritocracy and you interview the author, the fact that today in some ways a meritocracy is good, you know, it's better than a monarchy. But I mean, I have two kids, we get them tutors for freaking everything, math, English. And fortunately I can afford it, I'm lucky. But that gives them a head start over others who can't. And in some ways the meritocracy preserves those who have already made it. So I think that's another big part.

Of it, in another word. And let's distinguish that point a little bit because that's important. So the concept of the meritocracy is that you obviously earn your way to the top, right? Which is good, right? No one would argue with that. That's a good idea, right? But it becomes this self perpetuating machine where it kind of becomes like a monopoly a bit because there's this moat around that class of people and their children and their children's children. And it just keeps going on and on for generations because they have access to certain people, certain tools, certain educational resources, et cetera. And so it just keeps perpetuating and it's hard for people to break into that. Now, that's the downside. But I would argue on balance that of maybe any country on earth, or at least any major country on earth, America offers the most social mobility. Now, I know it's got its detractors and people will say, well, according to this survey, you know, this Scandinavian country that has no problems and no challenges like we do, you know, is an exception. Yeah, probably. Okay, I'm talking about a major economy. Just show me a better example where there's more social mobility. And hey, if you want proof, just look at me, okay? Because I had none of this good, good Head Start stuff. Right. But the social mobility is really amazing. However, that is lessening and I would, I would argue that that has actually declined over the years. So.

Well, I think part of it is the knowledge economy, you know, the jobs that pay a lot. Real estate is one of those exceptions that, you know, in some ways, if you're smart enough and you work hard enough, doesn't matter where you came from, you can become rich.

Entrepreneurship in general.

Right, right. But like to be a software engineer or, you know, to go into private equity, I mean, look at the private equity places. They all hire from the same crop of schools, the same business schools, so these, you know, law schools. And so there, there is some ways built in advantage. And what happens is, you're right, the moat is the perfect word. So people who, you know, 40 years ago scrambled their way up to the top, now they want to build a moat to, you know, protect it for their kids and not let anyone else get up that hill. And it is getting harder. It is getting harder. I mean, hasn't the American dream always been, my kids are going to do better than I did?

Yeah, right.

I don't think a lot of people believe that that's true anymore. I look at my friends, a lot of them haven't done as well as their parents, at least adjusting for inflation, of course.

Right, right. So in peeling that onion back a bit, I would say that on the whole, you're absolutely right on the large mass of people in the population. True. However, there are certain. The certain smaller elite groups are just doing better and better and better, and that's why that wealth gap is just increasing like crazy.

Right. And the pandemic, you know, the cerveza sickness just made it, made it worse. But one of the things that I love about what you teach is that you teach essentially a way out. I mean, it's not without its ups and downs. It's not instant. But you have said is, you can put down 20 to 25% of the price of a property using leverage. And you build wealth over time. You don't have to have, you know, $100,000 to invest. You can start with 25 and buy $100,000 house. And, and that is, that is the way out. Stocks aren't the way out. The people who, who, who, who have money in stocks, they made their money elsewhere and they use, they use equities to, to preserve it. Whereas with real estate, you can start small and build wealth.

Right, right. That's it. No, that's a very good point because, you know, concentration creates wealth and diversification perpetuates wealth. So that's what they do. They just diversify into the stock market. And by the way, you know, I'd love to get your thoughts, speaking of the stock market, about this. And I've been about this lately, and I'm not sure what to think of it, but I've been reading and thinking about index funds and index fund investing a lot lately, and I don't know if you've been reading that too. It's been in the news a little bit or in the media in general. And this idea that no one is really evaluating companies very much anymore, they're simply buying the index. Now, Jack Bogle, who kind of created that world, the Vanguard founder, and I just finished one of his books, by the way. It was really quite good, actually, how he just slams Wall street. Maybe I just loved it for that reason because he talks about what a bunch of crooks his peers are. You know, he was not well liked by everybody.

He's a real hero.

He is a hero to the public, but not to the insiders. The insiders didn't like what he did, but he democratized Wall Street. But go decades later, now where we are, right, so many are just buying the index, which means they're sort of delegating the responsibility of stock picking, of analysis, of real thoughtful investing. So that's one component that is concerning that really concerns me quite a bit. They're just buying, you know, it's like they're putting their chips on red and black. And the only thing that could screw that up is the zero and the double zero. And I'm roulette metaphor, of course. But that's what makes the casino win in Las Vegas is just a zero and the double zero. Those two spaces make that game so profitable for casinos because the law of large numbers, people are going to bet on red, black, odd, even, right? And those are kind of equal bets. But you got those two wild cards there, the zero and the double zero, the green ones. And it hits that enough that most everybody on the board loses, and that's how the casino wins. You know, this is happening in the stock market, which is really a real concern that people aren't analyzing these stocks enough anymore. And you might think, well, I don't care, I don't invest in the stock market or I don't care, I don't invest in these individual stocks. Well, that's the point though. That's why we all need to care about this, because this has become the proxy for the broader economy. And it's, it's a concern if nobody's really thinking about these investments. And the.

Well, I think from a logical point of view, like I have index funds and I used to buy individual stocks, but research convinced me otherwise because I remember reading this just pops out to me that 4% of the companies in the S&P 500 since like the 1920s, 4% of the companies accounted for like 99% of the gains. And most of the other companies barely returned as much as treasury bills.

Okay, so first of all, I don't think it happened back then because I think the S and P was invented in 1957.

But you forgot the Dow starting in the 20s.

Yeah, the Dow was like I think 1896. Forgive me if I got these years slightly off, but that's close enough for government work. But yeah, so it could have been the Dow. And the thing though, with the S and P, when you look at the s and P500 index, that's a, you know, a market cap weighted index. So, you know, that really is the same as what's going on with our personal lives. And the wealth gap is that the concentration of wealth is in so few companies now. It's, it's in these, it's in Apple, it's in Google, et cetera. Right. And so those companies, if you strip them out and look at the, the rest of the S and P, you know, strip away the top 10, for example, right. And look at the 490 other companies, they're not doing that well.

Right.

The index is doing well only because it's so weighted. And these company. There is such a massive difference now between these multi trillion dollar companies. Amazon, Google, you know, Facebook.

Isn't that part of the nature of, of modern capitalism though?

Yeah, but it's, it's also this winner take all thing and it's, it's risky. I mean, yes, it's the meritocracy the same idea goes with companies as for individuals and that's fine. But you know, once you get certain point of power and resources, it's just all the capital chases these few big names and that becomes very risky. There's a risk in and of itself, right?

Yeah. If one thing can go wrong at that company level, it's like when Facebook shut down for that six hours of.

Bliss, which I thought was great.

Although it happened to be on my birthday. You know, I wasn't too pleased that people couldn't wish me a happy birthday. No.

And that's part of the joy of birthdays. You get to read all that. Yeah, that, yeah, I think that that's true. In some ways everything is flowing to a small percentage. Is that, I mean, I don't know much about venture capital. You probably know much more. But is that how venture capitalists work? Like you invest in 30 companies and you hope one is a slam dunk, you know.

And the other thing about that is these VCs, you know, go into a VC, try and get a pitch with a VC firm. If you start an industrial era company, they don't care. They're not going to listen to you, you know, oh, I want to actually make widgets. Right. I want to make something physical. Right. That everybody needs. They don't give a damn. They just want software companies that have these huge high upsides that they can just sell at ridiculous valuations. Companies that make no sense whatsoever. It's a really imbalanced world.

So the true thing is this is why your strategy makes the most sense. You actually get more diversification by buying income properties than you get in the stock market. Because you get, we get diversification geographically. I mean, I think of my own portfolio. I've got a short term rental that is, you know, in good times, prints money. It's fantastic. Then I've got these other properties in Memphis and Little Rock that are just churning it out. Thing happens, you know, let's say tourism takes a big dip and the short term rental isn't doing as well. I'm going to actually have diversification because, you know, and, and, but you can't get that in the stock market because it's all dependent on these big companies. It's much more correlated.

Yeah, right. Now I know. And we all know Wall Street's a scam anyway. We don't need to get into commandment number three. Yeah.

The legal version of organized crime. Isn't that what you call Wall Street?

I call it the modern version of organized crime. But you could call it the legal version of organized crime. That, too. Yeah. Absolutely. Well, okay, so what do people do about it? Obviously, I think people know what we're going to say. They buy properties. They are in control of their investments. They follow commandment number three, thou shalt maintain control. You're a direct investor. This should be the core of your strategy. Okay. Not to say you can't do a few other things. Sure you can. But the core of your strategy should be putting your money into things that you control, that you understand, that don't have a bunch of middlemen in there skimming the profits off the top. That's very, very important. And, Evan, you know, I was looking at a property you sent me today, by the way, and I think you sold a couple of these to one of our clients recently, right?

Yeah. And he's been very happy. It's a 1031 exchange that this. This client did. But you know, what you just said that kind of about maintaining control. I have noticed a lot of my clients, they are small business owners. I have a few doctors and so forth, too, and they're great. But there is something about maintaining control that you have estate that you can't get anywhere else, and that is so profitable. I mean, I have another client that is doing a couple of refinances. You know, he's following the Jason Hartman refi till you die strategy.

Yeah.

We can take advantage of the fact that there's been extraordinary appreciation the last couple years. And he doesn't want to sell because we don't want to sell. We only want to sell after 28 and a half years. Right.

We lose the depreciation 27 and a half.

27 and a half years. And so he hasn't held these properties for 27 and a half years. So he's going to refinance and pull this money out. Still going to have cash flow. He's going to have the ability to buy more properties. That's control. It's beautiful. And you know what I would say, even if you don't have a job where you have control, let's say you work for a company or a doctor or lawyer, it's actually more important to have investments where you do have control.

So if you're working for a company, you're probably in a position where you're invested in a 401k and those investments are not under your control, or at least not very much. Maybe you can choose one stock versus another or something, but really no degree of control in reality. And so that's Absolutely. Another reason you would want to own some rental properties because at least you know a good part of your investment life will be under your control. Which is, which is it changes your.

Whole, you know, Jason, we talk specific strategies and properties to buy, but I also think there is a deeper way of thinking that happens when you own your own properties. You actually, you know, there are so many people who just mindlessly send money into a 401k and if you have zero interest in money, that's probably fine, put it away. But if you want to have some degree of control over your wealth, when you own income properties, you, you think about everything differently, right? You start to take it more, you start to save more money. You don't waste as much money on, on, on frivolous stuff. You actually invest and you live a higher quality life. It's like a, it's like a domino effect of changes about how you live comes from just buying one property.

It's a nice little addiction, getting addicted to collecting these properties. The kind of collector mentality with that is, is great for sure. Yeah. So this property, I want to talk about it because you sent it over to me and I think we should share it with our listeners. So this is an Oklahoma City property. And again, we have properties in many parts of the country that we like and recommend and give us the overview. You know, maybe just that top square there.

Well, it's a nice size 2035 square feet, bigger than we typically do. But bigger houses are better these days, especially with people, more people working from home. It's a three, two, so three bedroom, two bath and two car garage, which I love. So one of the reasons I like this property is first of all it's new construction and we love new construction. And over and over again I have seen with my client and my own properties that the new construction properties perform so well because you have better tenants because they want to stay there longer because it's a new house and you have fewer repair costs. So while it may be a little bit more expensive on the front end, it saves you enormous amount of money on the back end. The second thing I notice about this house is it's big, well, big relative to other houses. It's 2,035 square feet which is so desirable these days. People want more space at home because we're home more. And it's got a two car garage which is phenomenal. So you can have a family would rent this house or two working couple or roommates who are working who each have a place to park their car. That's what immediately jumped out about this. And the rent is pretty close. It's not the 1% rule, which you rarely get with new construction.

We can't come close to that anymore. But remember, the 1% rule has been debunked by low interest rates.

That's right.

So, you know, low interest rates have just change that whole criteria nowadays.

But even if you can't get 1%, you're going to get rental increases. I mean, I, I have seen rental increases on every single one of my properties.

Oh, the rents are going up like crazy. I mean, we've talked about that a lot on the show. But let me just go through some of the numbers here. So the projected rent, 1750 purchase price, $253,900. And that means $129 per month. Positive cash flow is the performa and almost $1,600 a year. And the amazing thing, Evan, is we have never, even in these times of incredible appreciation, which we all know, you know, depending on what survey you're listening to, you know what? 17% less incredible, right? Incredible. Amazing. We're still only projecting 6% appreciation, which has been the national average for many, many years. And of course, this all depends which survey you're looking at, which markets, you know, how they do it. This is why this stuff, stuff gets complicated because we've done shows before in the indexes, right? Case Shiller just takes the 20 big metro areas. Some of them take the same house as it sells over time. But remember, takes a long time for the same exact house to resell. And it's hard because the house might have been remodeled. And so these things are complicated.

Obviously, the other thing I like about this house, and obviously I love all of our markets, but I actually think Oklahoma City, you know, a lot of people find Texas is too expensive. Now, Texas is expensive. And Texas has high property taxes. What's right next to Texas? Oklahoma. Oklahoma City. It's the capital city. So you've got government jobs. It's a good market.

You know, the most amazing thing is I remember last time I was in Oklahoma City looking at property or. Well, really the time before. But, you know, whenever I go to Oklahoma City, what amazes me is that you'll drive through a suburban neighborhood and you'll see where home might have been. There will be an oil well.

Just right in the middle of the neighborhood. People have just come to accept that because, you know, it's an oil. It's an oil city.

So, yeah, it's fun, nice It's a good market. I like capital cities too. That's one of the reasons I like Little Rock. I like Oklahoma City. Got so many jobs that aren't going away. Even in a recession, we know government's not going to cut jobs.

The government's a pretty consistent employer. But I just wanted to give, give people the overall return on investment projection for this property, which is 31% annually with the conservative appreciation rate of only 6%. So just look on the Performa if you're watching the video. You might only be listening to audio here. 31% overall return on investment. And remember, income property, being this multidimensional asset class, will you earn your return in many ways. Appreciation, tax, depreciation, tax benefit, equity buildup, leverage and cash flow. And not to mention mine, inflation induced debt destruction. So it's a pretty awesome asset class for sure.

Multidimensional, especially these new construction properties. And the new construction will appreciate even better. I think you get appreciation, of course, it's based more on the market than the exact property. But new construction, it's just so desirable. So this one jumped out at me right away.

Absolutely.

We have a good team in Oklahoma City. Our investors there have been very happy.

Great. Well, let's wrap it up with just anything else we want to share about this subject. The middle class has been under attack for many, many years. And it's our goal to help the middle class at least tread water and not move down, but hopefully move up and advance. And the way you can do that is to not let the elites and the central planners control your life. Beat them at their own game. And the only way I know how to do that is with income property, the most historically proven asset class in the world.

It is the other thing. You know what? One thing that I remember my grandmother, who was the first to invest in our family, once told me, she said, you can never make enough money with your own two hands. And, and I think that we all work hard. Everyone who works with you, Jason, we all work hard. I'm sure a lot of people on this show work hard and that's great. But truthfully, that will only get you so far. It's the investing and the pat. It's not passive. I know you teach us it's never really passive. Even if it's in a bank account, it's not passive. But when you have your money and the government's money and the bank's money working for you, that's how you truly build wealth. The job is just almost a pathway, a means to the end of acquiring assets, that, that really builds wealth.

The job, the career pays your living expenses, and it pays you enough leftover, hopefully, to have money with which to invest. And the investments are how you become wealthy. Absolutely. And Evan, you know what, you didn't mention about that. And I just want to remind people of this concept. And at our last Empowered Investor live conference in Orlando, I said this. You know, after you've been doing this as long as I have, which is a long, long time, you know, you sort of think about different ways to explain things that might register with one person more than another. And what I said at that live conference in talking to the audience is I said, look, what company do you spend the most money with? And then I asked people to raise their hand and I say, how many people of you use Apple products? I mean, that's, you know, most of the time one of the biggest companies in the world, right? Not always. Sometimes it loses the title briefly. And how many of you have an iPhone? Do you get the new one every year? Is that $1,200, right? Or $1,500 or whatever? Every couple of years, do you get a new laptop? Do you have the Apple watch? Do you have all these other things? Right? What's the average you spend with Apple every year? Maybe? And if you've got a family, you're buying stuff for your kids, are you spending $2,000 a year with Apple? Think about that. Well, with your tenants, you are capturing a bigger market share of their income than the most successful company the human race has ever known is capturing. You're capturing $2,000 maybe per month in the rental income. And so it's just a phenomenal thing that they are basically working for you for 12 to 15 days every single month to pay your mortgage. So it's truly an amazing, amazing thing that you can capture that much of their pocketbook, that much of their income. More than Apple, more than Exxon, more than, well, Google sort of paid in a different way. As we know in Facebook, you are the product. But, you know, more than Tesla. People don't spend that much with Tesla, right? If you, if you go buy, you know, the most expensive Tesla, you know, you'd be a richer person, first of all. And your car payment might be twelve hundred dollars a month. Okay. I bet they're spending more on rent than twelve hundred dollars a month. So. Interesting, interesting way to look at it. When you think about the share of income that you as an investor capture, it is truly, truly phenomenal.

Be sure to join us for our upcoming Creating Wealth Live and Virtual event. This is over two days. We might even add a free follow up session to this. And this is the event that I have had thousands of people come through over many many years and it is just super highly rated. I literally have two banker's boxes full of paper testimonials for this event. It is something you will love. We'll take a deep dive into the current state of affairs, the state of the housing market, the economy, the Hartman Risk evaluator, inflation induced debt destruction, and the ten Commandments of successful investing. This is my long, longest running content. You'll benefit in huge ways from this and it's easy, it's virtual and there will be some networking opportunities. We'll have a fun happy hours part of the event and we'll do it all on Zoom so it's right from the convenience of your home or office. And you can go and register for this by the way. It's a very inexpensive ticket, I must mention that. And we've got Early Bird pricing while it lasts@jason hartman.com it's right at the top of the page@jason hartman.com Just look for the red banner up there and join us and register quickly while those Early Bird tickets are still available@jason hartman.com and we'll look forward to seeing you in January at Creating Wealth Live and Virtual.

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