2327: Aiming For the Longterm: Building Wealth Over Time | Client Case Study with Jonathan Hau

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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.

It is my pleasure to welcome one of our many, many wonderful clients, and that is Jonathan Howe. He and his wife have been investing for several years now and he's transitioning, or has transitioned, I guess from the software business and then being in a couple startups over the years to doing real estate full time. Jonathan, welcome. How are you? Hi, Jason.

Thanks for having me on.

Yeah, it's great to have you. Thanks for coming on. We always love these case studies. You know, the listeners tell us that's one of the best things is when they hear other people's stories and how other people are doing it. It's just great. So give us a little bit of your background maybe to start with. Jonathan, you lived in the Bay Area where all the startups are, and I know you were involved in a few of those.

Yes, yes. Yeah. So I lived in the Bay Area in San Francisco for most of my life up until around 2017 when I moved to Portland, Oregon with my family. And we were just, you know, trying to get out of the Rat racy Bay Area. And that turned out to be a really great move for our family. But while we were in Portland in 2018, we sort of became accidental real estate investors.

Right.

And that was sort of what started us on a journey of investing in long term rentals. And, you know, we've been really enjoying the.

Excellent, excellent. So you were in the San Francisco Bay area, then you moved to Portland and then became an accidental real estate investor. And what you mean there is you had a personal residence, you converted to a rental, right?

That's right. Yeah. We wanted to move to a different part of Portland that we were attracted to, and we found a home and we were thinking about the decision whether or not to sell our primary residence or to rent it out. And at the time, the interest rates were super low. So we were like, why would we want to give up that interest rate if we can just get another loan at a low interest rate?

Exactly.

Our existing home.

Yeah. And just to give the listeners some context on that, you know, we talked a little bit before we started the show. And you were originally of the mindset, you know, pay down your mortgages, pay off your mortgage if you can, and then you had a friend that told you to use leverage as a wealth building tool or.

Right, that's right. Yeah. Initially we thought, you know, we wanted to pay down our debt as quickly as possible so that we just didn't owe anything and we could keep our expenses low and just live humble means save up more cash for retirement and that sort of thing. But our really wise friend basically told us, you know, does it really make sense if the interest rates are low right now? Because, you know, you could take that time to pay it back slowly and use the cash to invest elsewhere. And of course, we didn't know what to invest it in at the time, but we thought about that and then we realized, you know, it totally does make sense to leverage and leveraging. Using the mortgage basically was. Was what we found to be really helpful in taking that money and investing it in another home, which was our primary residence.

Yeah, excellent, Excellent choice. And when people buy properties, you know, they have the choice they can either try and put as much cash into the property as possible, or they can put as little into it as possible and leverage that property. And you know, the famous philosopher, mathematician from ages ago, Archimedes, said, give me a lever long enough and a fulcrum on which to place it, and I will move the entire world. And that's what leverage does for us. It increases our power, you know, that's, that's leverage. And the thing people don't realize a lot of time is when they put a lot of cash into a property or maybe the property's appreciated and they've got a lot of equity into it. Same idea. There's an opportunity cost to that money sitting there, not doing anything. It's not working for you, you know, and so I'm really glad you realized that, and I'm glad so many others have. But there's still a lot of people that haven't realized that. And we have facts to back it up, because about 40% of the country owns their home free and clear. Can you imagine those people? Basically almost half the country is not getting the benefit of leverage. And so of course, the leverage magnifies your return and that's good. It reduces your risk. That's kind of counterintuitive, but I've talked about that on the show. And then of course it gives you inflation induced debt destruction. It's just the wisest choice pretty much always. Jonathan, I did a video a long time ago you may have seen, where I talked about, like the only time to ever pay cash for your house or to pay your house off. And it would be, you live in either Texas or Florida. Right. And you live in Texas. You're in the Dallas area. I know I used to live in Florida, or I guess technically I still do, but not for long. Those states have great homestead asset protection laws. And the only reason even then you'd want to do it is if you just have so much cash, you need a place to market. Right. There's really no other reason. So. Yeah, that's. It's great that you realize that. Yeah.

And I don't know if it was on your show where I heard basically this comment, which really kind of stuck in my mind, which is when you leverage, you would never take out a loan to put money in the stock market.

Right.

Some people do this and some data who are very confident, who have a long track record of being successful in investing in the stock market, can do this successfully. I would, as an individual, never take out a massive loan to leverage and invest in the stock market. But with real estate, it's very different. It's something that normal people do every day. You know, the system for getting a mortgage loan is designed for safety. And, you know, when my wife and I started looking at real estate loans. So these are investor loans, standard conventional investor loans. The banks do all the underwriting to ensure that the amount of rental income that can be generated from the property will cover the mortgage.

Right.

So even if you're not really great with numbers, and I'm definitely not one of those people, trying and attempting to get a loan from a bank is far easier to leverage and take money out in order to purchase an investment property. Yeah, than, than trying to do that in the stock market.

Right, Right. Now in the stock market, you know, you can usually do a margin. Right. And you can basically do 50% margin, but you can get a margin call, you know, when that stock goes down in value. And it can be very risky. And you know, the interest rate on those margin loans is pretty high. So it just doesn't make sense because the real estate has got different characteristics as we've talked about before. You know, I know you've been listening to my show for a few years and you've heard me say it probably right, where, you know, you've got the income and the income is what pays for the debt. And you just can't really get a margin call on real estate very easily. I mean, I guess you could, but it's just not very easy to have that happen. That's why it's just such a historically proven investment. And the whole system incentivizes the getting a mortgage and having a big mortgage because you get the tax benefit, you get lower risk. And you know, arguably now I'd say inflation is 5 or 6% in real terms. I mean, the government's telling us it's lower than that, but you know, 5, 6%. Right. So if you have a million dollars in loans, just inflation alone is paying off $50,000 a year. Can you imagine that? If, if you're making a hundred thousand at your job, Right. It's like getting a 50% raise. You're getting $50,000 in extra income. It's not income specifically, but it builds your wealth. It's wealth building, so.

That's right. That's right. Yeah. There's, there's so many advantages to it behind the scenes that I think people don't really think through long term. But I think in retrospect, as we've been slowly building our small portfolio, we've really seen the power of how leverage can really help build wealth over a long period of time. It takes, it takes a long time. I mean, it's definitely not a get rich quick scheme, but it's definitely something that I think has the potential to, to build wealth for many over a long period of time.

Yeah, yeah. No question about it. So what attracted you to real estate? I mean, it was before your wise friend told you to use leverage, you were interested in real estate, right?

Yes. And, you know, I think just as sort of like a natural knack, my wife and I, we love going to open houses and just looking at home layouts, room designs, you know, just the way that things are oriented. We're always looking for opportunities or, you know, homes that, you know, we think would be a great place for our family to stay in. And location matters a whole lot, of course. But I think the thing that really sort of changed my perspective on real estate investing was for a number of years, we had asked a property manager to help us manage our properties. And, you know, we paid, I think somewhere around 8 to 10% for their services. And we thought it's a relatively okay deal for, for them to help us out with that. But then we realized once the contract is signed and once, you know, the tenant is placed, it's really not that much effort. Yeah, I agree to manage tenants. And, you know, that was something that I started to look more into. And then I realized, hey, you know, why am I paying a property manager to manage my properties if I can manage it myself?

Couldn't agree more. And good property managers are extremely rare. They're like the unicorn. You're in the tech business or you were in the tech business, you know what a unicorn is, right? The rare. Definitely. So it's certainly true sometimes. And you've heard me say this on the show, of course, Jonathan, you know, I would argue that it's actually easier to manage yourself than having a manager because the manager has a separate agenda and they get in the way. And that wasn't always that way. You know, that wasn't always that way throughout history because we didn't have the tools and the technology we have today. But today you don't need a manager. Listen, I'm saying this, and the vast majority of our clients have managers, right. But I'm trying to talk them out of it. I'm trying to get them to see the virtues of self management. And what they usually do is they peel off one of their properties, two of their properties, they start managing themselves, they see how easy it is, and then they're just like, jason, I'm all in on self management. Much easier.

And let me tell you something. Could I share a story?

Yeah. And it's way more profitable, too. Not just to mention it.

That's right. So a couple of years ago in Portland, one of our properties had a tree that was damaged during an ice storm. And the property manager that we had hired at the time, called me up and said, hey, you know, the tenant has reported that this tree is sort of leaning in a dangerous direction, and we're going to need to kind of take care of having this tree cut down and processed. So I said, okay, well, how much is the quote from a tree company to take care of the tree? They said it's $3,000.

Wow. Really?

I thought to myself, you know, this price doesn't seem right. I know that, you know, it's sort of extenuating circumstances. We have an ice storm in that area. But I decided to just make a couple of different phone calls and find a different tree service to see if I could get a better price while one phone call. And the very first tree company that picked up the phone said, they'll do it for a third of the cost.

Yep.

And I said, if it took me just like 10 minutes to make one phone call, and my property manager, whom I'm paying a monthly fee to help do a job for me, they're not doing any services to help save me any money.

Yeah.

They'Re usually getting some sort of kickback or incentive from the vendor. You know, look, compared to Wall street, the amount of ripping off that a property manager can do is pretty small. Right. But, you know, it's just irritating. We want to optimize our return on investment and get as much as we can. Now, Jonathan, you haven't been listening to my show long enough, but maybe you hear the flashback Fridays or got into the old episodes. But I told this story years ago about a tree. It was just like yours. I don't remember the exact numbers, so don't quote me on the numbers. The old show is up there. You can listen to it, but I'll just generally tell the concept. It was a property in Charlotte, North Carolina. I never saw the property in my life. Right. I had it for a couple of years. It was great. Everything was great. I did have a manager back then. That was before I was into self management. It was a long time ago. And a big tree in the backyard fell down. And it was a big tree and. And the property manager says, hey, we're going to have someone remove the tree. It's going to be thirty six hundred dollars. And this was years ago. Okay. So, you know, adjusted for inflation, that's like 5,000 today maybe or something. Anyway, what I did is I placed an ad on Craigslist and I put the property manager's information in the ad, and suddenly they're getting all these quotes, right. And they had to do something about it. They got a little angry with me. They called me up and said, what are you doing? I said, hey, I'm trying to get my tree. I'm trying to get some quotes on my. My tree problem here. And these quotes were coming in so much lower than the manager. Now, admittedly, okay, admittedly, on Craigslist, you'll get anybody in their brother, okay? You know, they're not necessarily professional companies. They don't necessarily have insurance. You gotta be careful, okay? But some of them are very legit, established companies that'll just look for opportunities on Craigslist, okay? And nowadays we use things like TaskRabbit and Thumbtack as well. Okay? But back then, it was Craigslist. That was the thing. And turns out I got quotes for, like, less than a third of what the manager's quote was, okay? And I. I forwarded them to the manager because people were emailing them to me, right? And somehow, miraculous Jonathan, it was just magic. Somehow, the property manager still used the same contractor and got that tree removed for, like, less than half the price. It was just magic. I don't know. We didn't even use another vendor. We use the one they suggested first. But magically, they just gave such a better deal. I couldn't believe it. Yeah. Yeah.

I love it.

Yeah, it was amazing.

Yeah. Yeah. It's the power of leverage. But, you know, I think that it goes to show that, you know, just a little bit of effort.

Oh, very little effort can make such.

A change in the way that the negotiation discussion occurs. And that's something that I think I've started to learn over the years, which I didn't realize was so powerful, but it really does have a powerful effect in being able to negotiate much better terms.

Absolutely. And you know what people have to realize, Jonathan? They have to realize that what they're paying their property manager is false advertising. Because if that property manager charges you 6%, 8%, 10%, whatever, that's not what you're really paying them. You're overpaying for things. You're having tenants that aren't as happy, that don't stay as long, that don't renew as much. The property manager is keeping late fees. A lot of times they're charging way more than they say. You know, I have talked to you many times about my experience with a gold dealer years ago, and the one major flaw of precious metals investing when it comes to gold and silver, and that is that it does not produce income. But what if you could make gold and Silver work for you just like your income property? Well, you can. Our new sponsor is Monetary Metals and people who own gold as a hedge against inflation like that feature. But the gold just sits there. It's collecting dust, right? But with their leasing program, you can actually earn a yield. So check out our new sponsor, Monetary Metals, and it's monetary-metals.com Hartman and you can learn more about this opportunity. Instead of paying to store your metal, you can now get paid to own it. Earning passive income, paid in more ounces of real physical gold every single month. With Monetary Metals, you can earn up to 4% in their leasing program immediately upon funding your account. Yields are paid monthly in ounces of physical gold or silver, which you can get in addition to any price appreciation from your gold and silver over the holding period. Fund your account with metal you already own or purchase it from them at less than 1% over spot. I liked this product so much, I signed up myself. Gold and silver are a great insurance policy. Again, I never really treated them as an investment. They were just kind of an insurance policy. But now you can earn a return of up to 4% on that insurance policy, so it just got a lot better. Visit monetary-metals.com and learn more about this program.

And you know, we live in a world where people really value transparency. And there are like four industries I can think of right off the top of my head that are extremely opaque. They're awful. Property management is one of them. Law is another. I mean, these lawyers just rip people off left and right. We all know that. Government, of course, government is not that transparent. And medicine, the way medicine is handled in this country is just awful. I'll give you an example. Maybe your next tech startup venture will be to make one of those more transparent. But in medicine, what I do a lot of times is I am a cash patient. I have insurance, okay, But I don't even tell them my insurance company's name. I submit the bills myself. And it is amazingly magical how much less expensive my medical care is when I just pay cash. Yes, they don't know the price. Like, nobody knows the price at any doctor's office. Miraculously, they just don't know the price of anything. How can any industry operate that way? It's. It's insane. You just pay cash, you submit the bill to your insurance company, and you're saving your insurance company some money, which is fine with me.

You know, a sort of like a tangential idea here, but very similar to this. I recently had to replace a windshield.

On my car oh, yeah, that's.

You called Safelight, right?

I called Safelight, but I've done that.

A couple of times. Three times, I think.

But I was just flabbergasted because, you know, I realized that there's this whole scam between companies and insurance companies.

Oh, yeah.

And, you know, one thing that I think insurance companies could do much better to get real smart is just to simply ask their policyholders to get cash, quoted price and send it to them in writing. Yeah, that's all policyholders need to do.

Folks. The reason our insurance is such a complete ripoff is because the insurance companies are getting ripped off. Okay. And the Safelight thing, exactly. You know, they said, well, we can submit it to insurance. And it's like, you know, I don't know, $400 or something like that and. But if you just pay cash, it's 199.

Exactly.

It's like the same exact windshield, you know, it's so ridiculous.

Yeah.

I think it's fair to protect your insurance company. Okay. I mean, you know, it's just the right thing to do, you know, don't let them get ripped off. And don't you get ripped off by a property manager or anybody else, for that matter.

Yes, yes. Yeah, I think that that rings so true. I think that that goes for anything that we're paying or through a different party, you know, like, always ask what the price is on your own, independently.

Yeah, yeah, just say cash, patient. And, you know, in Florida, there's so much international tourism there. Like, you know, the big hospitals and medical providers, they all have a international division and the international people pay cash.

Okay.

And they deal with their insurance from their own country or what. I don't know what they do. And so when I figured out that trick, I just started paying cash for my medical care. And it's amazing how cheap it is. You know, I'm. I'm going to save these insurance companies some money.

Yeah, it's really crazy. But anyway, we're off on a tangent here. So what are your plans for your real estate portfolio? Any questions you have, feel free to fire away.

And, you know, speaking of the whole cyclical versus linear market cycles in hybrid markets, you know, I think we are very much, you know, in the Sara Liski camp where we like to invest in both linear and cyclical. And look in markets where there could be a potential increase, you know, if things are not, you know, there's really.

One market where you can kind of play both sides of that fairly well, and it's Phoenix, you Know, the Phoenix Metro is a boom and bust town right now. There's a lot of properties on the market here. I happen to be in sitting in Scottsdale when I'm recording this. You know, this is a market where you can get those big upswings without the terrible cash flow and the tenant friendliness and landlord hatred that you get in a place like California or Oregon or Washington state. You know, all of those markets are just, they're just terrible to landlords. Okay. And by the way, that's a cost that doesn't show up on the performer. Okay. So, you know, if you have a, like a California property, for example, or Oregon property and you have a tenant problem, it's going to be very difficult. The courts and the regulations will side with the tenant, not with you. And that could cost you a lot of money. Whereas in a place more like Arizona, you know, which is much more landlord friendly, not the most landlord friendly. The most landlord friendly state in the country is Arkansas. But, you know, Arizona is pretty good and you'll just have a better overall experience in a market like that.

Yeah, yeah. You know, to me, areas where either there's strong job growth and strong commercial growth always means that, you know, families and households are going to want to move into those areas.

Yep.

And for, for those reasons, you know, those will always be areas where, you know, long term there will be appreciation.

Yeah, yeah, I agree. And you're paying for the privilege of having that big upswing that, you know, will inevitably come when, you know, market's crazy again. Rates are crazy. It's pretty boring right now, obviously, but you know, it'll, it'll come for sure, you know. Hey, speaking of which, are you interested in note investing? A lot of our clients are doing that right now. And you don't have the multi dimensional aspects. It's not as good as owning the properties for sure. But I mean, hey, getting, you know, 12% on your money for just a year is a pretty good roi.

It's definitely very good. It's actually something that I've been discussing with my wife. I think we have been waiting to pull the trigger mainly because I think we're hopeful that we can find something in the next six to eight months that we can pull the trigger on.

And for another property.

Yes.

As your portfolio.

Yeah. Yes. So I think that's really where we're at and we don't want to tie up all the money in a note right now. So we've been thinking about it. It's, we've been receiving your emails and I really, all the really great content that you've been sending about it because I think that that's been really, very, very helpful.

Yeah, that's, that's one alternative for you. You know, the other thing in terms of, look, you know, I'm not a market timer. Right. But if you're going to time the market, okay, I would say the key is to get in the market and get properties purchased before Powell leaves, Jerome Powell leaves. We are most assuredly going to see lower. I mean, I would bet a lot of money that we will definitely see lower rates. And you know, Powell is probably going to do two cuts before he goes. God. Seems to be. He'll do two cuts this year, then he's gone. You know, next what? Next spring for sure. If Trump can't get him out sooner. But as soon as that changes, things will change very, very rapidly in terms of the market. I mean, existing supply will get gobbled up quickly and prices will start to go up and we're going to see, we're going to see some bidding wars again. Unless the population declines or we add a whole bunch of millions of new houses suddenly.

Somehow I don't think that's happening anytime soon. Yeah, you know, it's interesting. I appreciate that insight, you know, and I think when it comes to timing, like nobody really knows for sure, but I think that you have a really strong hunch about that. But I think we are always actively looking and we're always looking in different pockets, going to open houses and seeing what's out there. But I appreciate that insight because I think it's really wise advice.

Good stuff. Hey, I got to ask you, are you using my AI Chatbot? Everybody listening needs to start using that.

I have not tried it yet. I'll look into it after the call.

It is trained on almost everything I know so you can, you can ask it questions and it's just available 24 7. It's, it's a great tool. The folks that are using it talk to us about it all the time and they just absolutely love it. So take advantage of that. It's Jason hartman.com AI just a great free tool for you.

Okay, I'll definitely look at that.

Good stuff. Good stuff. Well, Jonathan, you know, thanks for sharing your case study and just chit chatting with me about some other stuff too. And a few rants but anything you'd like people to know before you go about investing or anything.

You know, I think the, the main thing that I would tell myself my earlier self if I were Thinking about investing is really aim for the long term and think about how property appreciation can really build over time. And be patient with your investing, because there's nothing like being patient and waiting for something to grow over a long period of time. You know, imagine if suddenly got rich really, really quickly. Well, then you would spend the money really, really quickly as well.

Right?

But saving it over a long period of time teaches individuals how to be patient and know how to spend it wisely as well. You know, when you get into your.

More mature years, you know, that's a really good point. And, you know, I guess you could look at that from two sides, right? Saving to buy the investment is one side, but the other side is, at the very least, in the worst case. You know what real estate is? It's a forced savings program. In the worst case. I have a friend who I recently saw on someone else's YouTube channel. He's made a lot of money in his life and lost a lot of money, and he's very reckless about his spending. Okay. When he's got money, he just blows it all, like, immature, okay? And, you know, he's not young anymore, but he just blows money. You just can't save it. And I saw him being interviewed by this other guy and he says, the thing that's been the best for me in all my life is the real estate, because it keeps me from spending all my money. It's hard to get to the asset, right? You know, you got to refinance it or, you know, get a home equity line or something to get the cash out. And, you know, it's just hard to access, you know, so he didn't spend that money. And he built up substantial wealth over the years with a. With the real estate.

So, yeah, my words.

Yeah, it's good, good stuff. Well, Jonathan, thanks so much for sharing your story. We really appreciate you coming on. All of you listening out there. We'd love to have you on the show. If you're a client, you've got a case study to share. We've had some great ones over the years. And Jonathan, thank you very much.

Thank you, Jason.

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