2481: Speculative Flipping Failures vs. The Warren Buffett Philosophy

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Dennis Prager here, and I'd like to talk to you about Jason Hartman. Now, they conduct educational events with new techniques for making money. Now, if you and your properties qualify, it is a tremendous opportunity to reduce your tax liability. Visit www.jasonhartman.com. That's www.jasonhartman.com. You'll be glad you did. And tell them Dennis Prager sent you.

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 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.

Alrighty folks, the real estate market without question is Challenging. But you know what? It's really challenging for the folks that got in in the last 3 or 4 years. For guys like Jason and I who have decades, we kind of look at this market like, yep, we've been here before. But we're going to talk about why lots of people are quitting real estate, why flips are blowing up left, right, and center, and then what does it mean for the future? Jason, how you doing, man? Thank you for chiming in. I know you're out in the cold weather of Napa, so we appreciate your time.

I don't know if you can see my breath, but it is 46 degrees. No, you don't see the breath. It's not that cold.

Not quite that cold.

For that. But man, it is chilly out here, and you probably can tell where I am. It's probably not too hard to guess. But, uh, yeah, anyway, so first of all, Michael, good topic. I didn't realize this until you kind of mentioned it before we started recording today. You know, when you say real estate, of course, we have to be very careful with the term real estate because it's such a huge industry. It's such a blanket term. What does real estate, quote unquote, mean, right? I know that flipping has been difficult for several years now. We're not doing much business at all with flippers. You know, in the mid-2000s, circa 2015, give or take, a lot of our business was selling remodeled properties to our investors. And now, it's almost all new properties, although we do have some renovated flips as well. So, it has changed. The market is always changing, no question. And certainly, the syndicators, you know, the people doing multifamily have experienced a lot of turmoil lately as well.

Yeah. What's really interesting to me because again, I'm, you know, obviously, we're both on YouTube and, you know, I have a little following, you have a massive following. But it's interesting to see—

Oh, come on, don't be so modest.

It's interesting to see how many people are truly quitting, right? The big name of last weekend was Ryan Pineda. And I actually interviewed Ryan over the weekend, so the video comes out tomorrow on his channel. But basically, he quit for solid business reasons, right? Real estate in his world took up about 1% of his time, and the business has been doing, frankly, terrible. And again, he's primarily a wholesaler. So really, anybody who relies on an exit in this market, aka flipper or wholesaler, they're getting spanked because—

You know, that's such a good point right there. You just made the point, don't exit. Exactly right. The exit is, is the kind of—

is the problem.

The exit from buy-and-hold rental properties is death.

Death or 1031, one of these.

And it's— well, 1031, of course, until death. That's a great exit, by the way, because basis steps up on the inheritance. It's fantastic. It's such a great deal. You should do the plan the government is encouraging you to do, and that's the plan they're encouraging. They're not encouraging flipping, you know.

No, I've talked about operators, right? Earlier last year, I talked about operators winning, and those are the people that are going to do the work, right? They're going to grind. They're going to write multiple offers. They're going to follow up. They're going to seek the desperate sellers and make a deal. But it's— if you rely on an exit like a flipper or wholesaler today, you are— you're gambling, and I don't like your odds.

I agree with you completely. That is the speculator's mentality, really. I think both you and I have the Warren Buffett philosophy of real estate investing, which is just value investing. It's just really simple. Just buy good stuff and keep it. And that's the mentality that wins the game. As I have been saying for 22 years, the people who flip properties, they have spending money.

Yeah.

But the people who buy and hold have real wealth. And this really tests your mettle, you know, when things are boring as they have been for the last 3 years. Nothing exciting is happening. No one's saying to you at a cocktail party, wow, you're so lucky you're a real estate investor, you know. It's just sort of boring, right?

Right.

This is the time you're an operator. You just chill out and you just operate your portfolio and you just hang on to it. Another thing I've said, when I used to train real estate agents in the '90s— this is a group of people who are pretty interested in instant gratification, real estate agents, okay? And I used to say to them, one of the secrets to success is staying in business long enough for something good to happen. Stay in business long enough for something good to happen.

Gotta stay in long enough, yes, yes.

And it will. You just gotta, you know, you just operate your portfolio. Quit trying to make all these decisions, okay? Just the decision is—

Yeah, there's something to be said for boring.

Stick with it, yeah. The decision is stick with it. That's the decision.

Yeah, it's funny you brought up Warren Buffett, 'cause I learned something last weekend that I didn't know, and I've read every Warren Buffett biography, both official and unofficial, and I did not know this.

And you reminded me of it too.

Yeah, so there was a third partner who Warren Buffett says was just as smart as him, just as smart as Charlie. In fact, this third partner's name's Rick Sorin or something like that. He was responsible for See's Candy, Green Stamps, you know, all like big part of Berkshire Hathaway. He wasn't just some fly on the wall, he was in the mix. But Warren Buffett goes on to tell the story, much like you just said. Warren and Charlie were like you and I. We knew with certainty If we stayed in the game long enough, we would be wildly wealthy. That's what we knew. And that was Warren and Charlie. Unfortunately, Rick wanted it quick. So because he was in the stock market, in equity game, he went out on leverage. And unfortunately for Rick, he ran smack dab into the 1974 bear market and lost everything. And the moral of the story is, again, invest for the long term, enjoy the boring. But also, interestingly enough, being liquid when people have to rush out is really beneficial because guess who bought Rick's shares when Rick went to zero?

Warren Buffett.

Freaking Buffett bought the shares because he was liquid. So again, I think there's a lot to be told by understanding that this game that we've chosen to play is real estate is a decade. You've got to stay in the game. Don't have adjustable rate mortgages. Don't bet on appreciation. Don't do stupid things like that. And just enjoy the boring, you know, be like Buffett, be like Charlie, don't be like Rick, don't bust out.

I want to ask you to unpack though your statement about be liquid, which I don't think is a great idea. I mean, everybody needs a little bit of liquidity. You know, we always say, and it's right on our pro forma in the Property Tracker software that's free, by the way, propertytracker.com, shameless self-promotion. But it's not really a self-promotion. It's a you promotion. It's a gift. Take it. But anyway, 4% of the property value or portfolio value in reserves as a minimum. You know, that—

so if you had a $10 million portfolio, you want $250 grand? Am I doing the math right?

No, $400,000.

Oh, $400,000. Okay, got it.

4% on $10 million or $40,000 on a million. Yeah. So that money is for unexpected things, you know, vacancies beyond your pro forma of 1 month per year, surprise repair items, problems, whatever. That will get you through the storm. You know, the thing you don't want to do is be forced to sell at inopportune times.

Exactly.

So that liquidity you do need. But if you have too much liquidity, then your money's not working for you, right? So tell me what you mean by liquidity.

So again, you got to remember, I was referring to Warren Buffett, right, in the story in 1974. He doesn't go on margin, right? Think about Berkshire Hathaway today. They have, I don't know, $250 billion in treasuries. He's liquid because again, what does he do? He buys companies. So realize when I said that statement, I was speaking to Bob Buffett, not me. But that said, in today's environment, I have more cash than I've ever had. I look at this cash as an opportunity cost, and I have built this reserve beyond normal because I expect to deploy it in the next 12 to 18 months on deals that could potentially double or triple my net worth.

Okay, so that's deal money. That's not— you're not sitting on cash just to be in cash.

No, no, I purposely— yeah, yeah, I have, I have created capital that I want to be able to write. I have written an offer, for example, in an apartment building that I could close in 7 days because I have the cash available, right? I'm, I'm using this.

That's attractive to the seller.

Yeah, yeah, I'm using it as a sledgehammer, and the seller in this case is a bank.

Right?

They, they're, you know, looking to foreclose. So yeah, I have more cash than ever, but on purpose, because I want to go shopping. And the best way to go shopping is to be liquid and have, you know, receipts.

Okay, fair enough, fair enough. So it was interesting when you brought up the Warren Buffett third partner besides Charlie Munger and Warren Buffett, because I remember watching a video about that a few years back and sort of forgot about it until you mentioned it again. But also, I believe both Apple and Microsoft had third partners as well.

I believe so, yeah.

Sold out too early.

Like way early.

Can you— I mean, we all have regrets, but can you imagine those regrets, uh, for Warren Buffett's partner, Steve Jobs?

Yeah, I think that— I think the Apple guy got like $5,000 or something, like just pennies for like 3 or 4% of the company.

It was—

that was early. He sold pretty early.

Sure was. Yeah.

The reason I wanted to bring up everybody's quitting, I actually see it as a good thing, frankly, because I want the pretenders gone.

Yeah.

I want the stupid money syndicators who live in Hawaii and buy in Katy, Texas to bust out and, you know, and only work 1 hour a week. Yeah, 1 hour a week.

They only work 1 hour a week. Yeah.

I, I want that mindset gone. I want the mindset of an operator because, you know, real estate can make you wealthy. And it's real estate to me, Jason— I don't know if you agree with this, you may not, so this, this might be fun— real estate in my world is not a get-rich-quick business. It's a giveaway for sure.

Absolutely.

So if you treat it wrong, that, that just— it irks me. And again, if you start telling people, Jason, you can in one year generate $20,000 In passive income.

Well, it depends how much you start with, right? Well, that's not the average person. Come on. But that's not the normal deal of, well, you know, in the world, you got better chances of winning the lottery than doing that.

That's crazy.

So yeah, it's— I just— crazy making.

I don't like that mindset. So I love the fact that operators are going to win. Guys like you and I that are just plugging away, being boring, we're going to win. And the people that bet on appreciation, the people that get adjustable rate debt, the people that bought 3-cap or 4-caps hoping they become 3-caps, they're going to lose. And it's gonna be fun to be right.

I agree. Let me tell you about a client of ours. He's been on my podcast a few times, and he recently came on again, years after the fact. This guy started buying properties through our network in Indianapolis in 2008. Okay. And he got very rich with his portfolio. And at the time, everybody told him he was crazy. And I remember I was sitting in my office in Costa Mesa, California, and Sarah, one of our investment counselors, came in and knocked on my door, and I was quite busy. And she says, you got to meet this client. And I'm like, okay, you know, interrupting me here. And so he comes in and he starts telling me about his plan. And I said, we got to do a podcast. I bust out the recording equipment right then. And I put him on the show in maybe circa 2008, I think it was. I'm pretty sure it was right about then. And he said he had a funny metric, okay, for investing. And he was looking at properties that we were offering and so forth back then. And his metric was something that I dubbed the free lunch metric. Okay.

Okay.

And he wouldn't evaluate areas and properties and school districts by what the websites told him. He would just look up how many free lunches are being offered at that school.

Oh.

And the higher the proportion of free lunches, he thought, I'm going to avoid those areas and I want where people are paying for their lunch, their school lunch more. Okay. All right. So this was his funny metric. But what he was really doing is he was buying stuff during the Great Recession.

Sure.

At or below the cost of construction. I created something way back in 2004. It was kind of a discovery. I call it the Hartman Risk Evaluator. This is a really good guideline for people to minimize downside risk when investing. I'll tell you, if these syndicators and these flippers had used this model, they would not be in trouble because it is such a simple—

They wouldn't have done the deal.

Yeah, they wouldn't have done the deal. All of the people you mentioned a moment ago, They made the cardinal mistake of expecting something incredible to happen for their deal to work instead of just buying a property that makes sense from day one, right? That's what they should have done, and they wouldn't be in trouble if they did, whether it be Ken McElroy, Brandon Turner, you know, all the others, right?

S2 Capital— the list is getting long and longer.

It's, it's getting longer. And, you know, have you checked out this website? People keep keep telling me about it. Well, now I've been looking at it for a while, but it's called Invest Clearly.

Uh-uh.

What is that?

Oh, investclearly.com has reviews and ratings on all the syndicators.

Oh, really?

Yeah. And it's really pretty telling because, from my understanding, the people that are writing the reviews are verified investors.

So they're actual LPs.

Yeah, they're actual limited partners. You just see that most of these deals, they just enrich the promoter. They just enrich—

The bigger the name, the lower the return.

Yeah, usually, right? Yeah, yeah, yeah. So go read some of those reviews. They're quite enlightening on Invest Clearly.

I'm gonna throw you a curveball. This is, uh, something that maybe would warrant its own show. Maybe we'll do it next week. But I just read MBA, Mortgage Bankers Association.

Bankers Association, sure. Yeah.

They're predicting 7% mortgage rates throughout 2027. How's that? How's that hit? How's that feel? And this is MBA. This is, this is not, you know, yeah, that, you know, they would want rates lower.

I know.

What do you think? 7 rates, 7% plus all of '27. What do you think?

Well, I think that's a bummer, but at the same time, I think that it shows you how much inflationary pressure is in the economy. And it also shows you that we're going to see higher rents, and we're going to see the market slowly improve even into that higher rate environment. Why would that be? Well, I'll tell you why it would be. Because incomes are rising, and the prices are only very modestly rising. Incomes are rising faster than prices.

Correct.

And I'm talking about the single-family home market when I, when I speak most of the time. So housing is getting more affordable very slowly. Okay. But it also puts upward pressure on rents because it keeps this huge pool of people in the rental pool.

Yeah.

That's the doom loop that people are missing is that another year of this sluggish slog stuck in cement means rent inflation's coming. Oh, and also because supply is going to just not— you're not going to build anything.

Yeah, no, and look at the builder stocks, right? Those will tell you that the builders are very pessimistic. Okay, the home builders. And so supply is doing the opposite of what it needs to be doing.

Correct.

It's doing the opposite of what the Trump administration wants it to be doing. You know, increasing housing supply is the only answer for the affordability problem. So I've been saying it for years, there's a lot of pressure like a tsunami. You know, when you're in the middle of the ocean and a tsunami is developing and you're in a boat, it just feels like a little— no, nothing. Okay, nothing. But then it hits the shore and it's devastating. And that's exactly what's going on with rent inflation. You don't feel it, you don't see it, but I've been saying for years that there is a lot of pent-up rent inflation pressure under, under the surface.

Yeah, so I did a whole video on the The, the unexpected outcome of this doom loop, which ends with higher rents, and it's not very far away, it's 9, 12, 16 months, it's pretty relatively close. But the problem with that scenario, given that shelter is a third or 30% of CPI, it's just going to mean inflation stays higher for longer as well. That's, that's another reality that we're looking at, right? We're all hoping to get back to 2%.

Yeah.

You're not going to get there if rent inflation is 5%. It's—

and higher inflation means upward pressure on mortgage rates or all interest rates. Yeah.

Yeah. Or they just stay above 7% all year or whatever.

Yeah. When I got into the business when I was 19 years old, interest rates were about 14%.

Okay.

And people thought they were low. The market was starting to boom because they were down from the prior—

What was the highest mortgage rate you ever paid? Do you remember?

Paid?

Yeah, paid or took money on a loan.

You know, I don't know, but I'm gonna say it was probably 11%. I certainly had, I certainly had many mortgages in the 10.5%, 11% range when I was—

Again, just make sure the number, make sure the math works. The cost of capital is not my concern. I want to make sure the yield is there.

So understand the real interest rate, and we now state the real interest rate on Property Tracker. The nominal rate is the rate you think you're paying, but to understand the real rate, you need to subtract 2 things from it. The tax deduction on the interest, that's the first thing you subtract. And by the way, Property Tracker's not doing that part because we don't know what your tax rate is.

True.

But you can do that yourself. And then after you subtract the tax deduction, which for most people listening is probably, you know, a third Okay, so if you—

certainly 20%.

Yeah.

Yeah.

So, you know, just for round numbers to make it simple, if your mortgage rate was 6%, which is not going to be right now, but just for simplicity, then you take away 2%. Now you're down to 4%. Okay, just for my example. And then you subtract the inflation rate. And if you want to use the government's number, you know, maybe you're looking at 3.5%, you know, 3.5% or so. Okay. So, your real interest rate is really quite a bit lower than you think it is. Okay?

I like that.

It's the way you have to properly calculate it and evaluate it.

Yeah. Again, folks, at the end of the day, we are in a tremendous market. Again, write offers, know your numbers, don't bet on appreciation, get fixed-rate debt. This is the time operators win. This is the time that you could really create some deals of a lifetime. I certainly plan to do that, hence I've raised some capital. Jason, thank you so much for doing this. I know it's cold where you're at. Go get inside. Go warm up.

All right. Thanks. Happy investing. And before we go, let's hear an interesting clip of the day. Everything you're about to hear has been public for a hundred years. You just weren't looking.

Shots, the frequencies, the mind reading rays that everybody's looking for. Guys, I'm going to show you why there's no one ray that does it, and why that's way, way. It gets worse, guys. Pay attention to this most informative video you're gonna see on all of this ever. Don't need a ray to control every piece of you, and I'm gonna show you every part of it. See, if you start here, you're an electrical system. That's not spiritual talk, that's physiology. Every neuron in your head sits at about -70 millivolts. You think something, ions rush across that membrane, the voltage flips, and a pulse runs down the line.

That's a thought.

That's an actual measurable voltage event. You move your hand, electrical signal. You remember your mom's face, electrical signal. Everything you have ever experienced was current moving through tissue. And here's the part people skip. Current doesn't stay put. Moving charge makes a field. Your brain is broadcasting right now, constantly. And it's never the same twice. We've been picking that up for 100 years. Hans Berger recorded the first human EEG in 1924, electrodes on the scalp reading the electrical chatter underneath. Then MEG, magnetocardiography, reads the magnetic side of it, and we're talking femtoteslas, billionths of the strength of Earth's own magnetic That's how sensitive we've gotten. The signal is real, it's complex as hell, and we've had the tools for decades. The piece that makes all of it work and almost nobody talks about? Joseph Fourier, 1822. He proved that any complex wave, no matter how messy, is just a stack of simple pure tones layered on top of each other, and you can pull them apart. That's the Fourier transform. 200 years old. It's the single most important piece of math in the surveillance world, and it's not classified. It's in every engineering textbook on Earth. Your voice right now isn't one sound. Mine isn't either. It's dozens of frequencies stacked together. Run it through a Fourier transform and you get those bouncing bars, a spectrogram. Every pitch, every tone laid out separate. Bell Labs was doing this in the 1930s with the vocoder. They used it in World War II to encrypt Churchill and Roosevelt's phone calls. This isn't new technology, guys. Here's where it opens up. The math doesn't care what kind of wave it is. Sound, sure, but light, same thing. Every image on your screen is frequencies. That's literally what you're touching When you slide the touching bar of the contrast on your phone. Radio waves, same. Microwave, same. The entire electromagnetic spectrum, visible and invisible, every bit of it decomposes the same way. Bats already figured this out. They're screaming at a frequency you can't hear and reading what comes back to build a picture of the room.

Same principle. Different bands.

It runs both directions. That's the key. You take it apart and you can put it back together. Decompose your voice into its components, send just the numbers to a computer on the other side of the planet that has never heard you speak. That computer rebuilds your voice from the data alone, from scratch. You already know this works. That's a phone call. That's literally how it works. That's what your phone has been doing every day of your life. So when someone tells you a signal can be captured, broken down, transmitted, and reconstructed somewhere else, that's not a theory, that's your Tuesday. And now you don't even have to wait for something to broadcast, you can go get it. Send a signal out, read what bounces back, that's radar. Been doing it since the '40s, but look what that turned into. MIT's lab Dina Katabi's group published work in 2018 where they used ordinary Wi-Fi signals to track a person's body position through a wall, full skeletal pose, through solid walls. 2 years before that, same lab, a project called EQ Radio, they bounced RF off people and read their breathing and heartbeat closely enough to classify their emotional state, around 87% accurate. No sensor on the body, no contact. Peer-reviewed and public. Do it enough times and you build a profile. This is the important part. Signal out, response back, log it, repeat. That's called channel characterization. The environment leaves a fingerprint on every signal that passes through it, including you. Here's the thing, why would you ever go through walls when the target is carrying a sensor package voluntarily? Your phone has an accelerometer, a gyroscope, a magnetometer, a GPS, multiple microphones, multiple cameras, and several radios that are constantly measuring their own environment. That front camera can read your pupil dilation. That's pupillometry, and it works on consumer cameras. MIT demonstrated pulling a heartbeat off a face video back in 2012 by amplifying Color shifts too small for a human eye to see. Your pupils respond to cognitive load, emotional arousal, recognition. You don't control it. You can't lie with it. So here's the part I actually came to say. People are looking for one magic sensor that reads thoughts. That's why they never find anything, and that's why everybody gets dismissed as crazy. That's not how it works. It's fusion. Every one of these streams by itself is weak and ambiguous. Pupil dilation alone tells you almost nothing. A gyroscope reading alone tells you nothing. RF return alone tells you nothing. But you cross-reference them— pupil response plus voice stress plus typing rhythm plus movement plus time of day plus what you were looking at plus how long you hesitated— against a database of millions of people doing the same things. Now you're not reading a mind, you're inferring one, and you get to the same destination. That's why there's no ray, guys. You don't need a ray if you have enough ordinary sensors and enough computational power. Now, who's behind the show? Tina Dugan ran DARPA from 2009 to 2012. She left and went to Google. Then in 2016, she went to Facebook. And ran Building 8. You see the switch? In 2017, Building 8 announced they were building a system to type 100 words a minute directly from your brain. Facebook funded brain decoding research at UCSF. They got published in 2019. They shelved the head-mounted version and pivoted to the wrist. They became the neural wristband Meta ships today. Reading the electrical signals in your arm before your hand even moves. And this pipeline is old. And QTEL is the CIA's venture capital firm. They funded a company called Keyhole. Keyhole became Google Earth. Then Snowden in 2013 showed us the platforms were already piped in. Military first, commercial second. Always. You stack enough of this and you're not You're not collecting data on a person anymore. You're building a model of one. Engineering already has a word for this. It's a digital twin. They build them for jet engines. A live simulation that projects how the real thing will behave before it does. Do that to a human being with enough sensors and enough history, and you've got something that can be queried, tested, run ahead of you. That's not reading your mind. That's worse. That's predicting you. What if you could do that to a person? Now I'm gonna say something, and I don't care what you believe. I don't know your faith. I don't know if you've got one even, and that's between you and whatever you answer to. But I believe in a creator, and I think that's exactly why there's no magic mind-reading ray. No ray that controls and takes your free will, because it all has to run through free will. Every single piece of it. They can't take the brainprint. You have to build it. Every terms and conditions you scrolled past, every permission you tapped accept on, every app you opened, every night you couldn't sleep and picked up the phone instead. That's what's writing it. Not them.

You.

They didn't reach in and take anything. They built a room and waited for you to walk in and hand it over. One tap at a time. That's the design. That's why there's no being. It only works if you do.

You're right.

If you give permission. Look at what's real. Thorough wall body tracking, emotion from bounced RF, pupils through your camera, heartbeat from your video, neural signals off your wrist in a shipping consumer product, a brain print that identifies you with perfect accuracy, and a military-to-platform pipeline with names and dates on it. I don't need the sci-fi version of a mind-reading ray, the documented version Is enough. Stay sovereign, guys, and I hope the world sees this.

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