312: What We Can Learn From Kobe's Letter On Money & Common Investment Property Questions

This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit hartmanmedia.com.

Welcome to the AIPIS Show. For accredited income property investment specialists and those who aspire to be. If you're a real estate, mortgage or financial professional, this is the place for you. We'll explore innovative investment analysis, sales, marketing and income generating strategies for the most historically proven wealth creator income property. Learn from the experts as they show you how to build a better business and a better life.

Thanks for joining us today. Naresh has not been on the show for a while, but here he is. Welcome back, Naresh.

Hey, good to be back on.

Now something big has changed about you since you were here last and that is that you are now a dad. So I want to wish you a happy Father's Day. Tell us about your new arrival.

Thank you. Yeah, he's two weeks old, actually 15 days old. So a little over two weeks old and as healthy as can be. Keeping us busy late at night. Definitely our lives change for the better. And actually I didn't tell you this, but we listened to your podcast late at night when I'm trying to put him to sleep, I'll just turn on the show and it serves as a little bit of white noise for him and he actually, so far the results have been quite good.

You mean you have him listening to the podcast?

Yeah, yeah, both of us listen together.

I love this. This is great, folks. This is great. Okay, so we have our youngest listener now. Okay, fantastic. That is absolutely great. And a fantastic future real estate investor. Well.

He'S going to be asking a couple of questions before preschool Naresh in the next couple of years. Number one is what property should he buy? Number two is when he should refinance. Your son is going to be way ahead of the game here. So let's talk about a property. You've got a couple you wanted to talk about today.

Yeah. And I know that you really like the new home constructions and there are two new home constructions that I really, really like. They're currently up on your website, Jason hartman.com. the first one I want to go over is a Jacksonville new construction fourplex.

Yeah.

So this is again, for those listening, you can go to the Jacksonville section of Jason hartman.com. these four plexes are, I mean they look, they look great. They're brand new. They're in awesome growing areas in Jacksonville property. Not in kind of a, not in a suburb 40 minutes away. There are four units. So four doors. Each one is two bedroom, two bathroom. Estimated rent is $4,100. And of course, that's compared to what the price of the overall fourplex is about $486,000. So this is on the pricier side because it is four units. It's a fourplex. But the rent to value ratio is almost 0.9%. It's 0.85%.

You know, Naresh, you just reminded me of something, and I've chronicled this story many times. I got ripped off by a property manager years ago. It was a fourplex that I bought in Missouri. Interestingly, the rent to value ratio for this property over 10 years ago was not that far off of this one. And this is in Jacksonville, a more desirable market. Yeah, it's 10 years later. This is a really good looking deal.

I mean, $485,000, projected rent of $4,100. I don't know how you're not going to get $4,100 for four units. I mean, these are. These are two bedroom, two bath. And they're only renting for. What is that, 1050? No. Less than 1050 each.

Yeah, less than 1050.

How is that? They're 1025 apiece. How is that. How are they running so cheap? This is.

I'm not sure why the rents are. They're not single family. They're two bed, two bath.

Well, I know, but even then, I mean, a two bedroom, two bath for 10:25amonth is pretty good new construction.

It is. It is quite good. You brought up $486,000. So the down payment, 20% down, is going to be quite steep. We're talking close to $150,000 in down payment on this, including closing costs, all the other expenses that you're going to.

But you got projected cash flow of $817 per month and projected cash on cash return of 8% for brand new construction in Florida. This deal. I love this deal.

I absolutely love it.

Yeah.

And the pro forma you're looking at, that's assuming a 25% down payment.

Oh, so the cash on cash is actually.

So it would actually be probably 9% or. Yeah, 8%. 9%. It would be higher. The numbers would be even higher.

Okay, good. Yeah, check that out@jasonhartman.com. all right, Naresh, so anything else on this fourplex? This deal looks pretty great.

Well, the fourplex is definitely a go to. But I also like another property or a few other new home constructions outside of Memphis. So not in Memphis proper. It's actually in Robinsonville, Tunica Resorts, part of Mississippi. I myself closed on one of these homes recently, and there are new constructions. We have one available. It's $150,000. For those who don't know, Tunica Resorts, at one point, maybe 15, 20 years ago, it was named the number three resort city in the United States after Las Vegas and Atlantic City. Think of like the Vegas of the South.

That's really interesting. I'm surprised even Branson, Missouri didn't make that list. That's interesting. So this Tunica was number three, huh? Wow.

Tunica was number three. And I think it's because I went to Branson, to the Ozark Mountains a couple of years back. And I think the difference is in Tunica, it's like a casino capital. So it's like Atlantic City in Vegas. I mean, you got casinos everywhere, whereas Branson, I don't think there are any casinos. It is an entertainment capital. There's a lot to do there. It's good for the kids. But I'm not sure that they have any casinos there.

Yeah, I can say. I remember I don't gamble, so I don't think much about casinos, but interesting. Okay, cool. Yeah.

So this property, it rents for 1295. Again, about $150,000 home. So the rent to value is close to 0.9%, which is for a new construction. That's pretty great.

It is. It is. Wow. Okay, so projected rent, 1295. Price is 149,900. And with 20% down, that'll give you a cash on cash around 9%. And even though I don't like the metric crap rate or cap rate, this one, 7%. That is good. And overall return on investment projected at 32% annually. Now, if you're a new listener and you think 32% is, like, really crazy, ridiculous high number. No, it's not. Learn how to do the math of income property, because income property is a multidimensional asset class. Go check out the free video on the front page of Jason hartman.com on how to analyze a real estate deal. And I will explain in detail how we come up with the overall return on investment. These are conservative projections, and they take into account vacancy rate, management fees, maintenance expenses. You'll see it all there on video where we look at a pro forma in depth for 27 minutes, and every single number on that pro forma is explained to you. That's a free video on the front page of Jason Hartman dot com. Beautiful. That's great. Projected cash flow $283 per month. Okay. Fantastic. Naresh. So my old neighbor from back when I lived in Newport coast, California, sadly died recently. And everybody is going to know who we're talking about because it's been in the news. A world famous person, that is Kobe Bryan. He had some good advice to his younger self. A letter that you discovered, right?

Yeah. So this is a letter he wrote. What really impressed me was he retired in 2016, and when he wrote this letter to himself, he could have talked about his accolades, his championships, he could have talked about any of that stuff. But instead, he decided to talk about money and economics and. And specifically the value of money and when it's okay to give money to your family and how you should give money to your family and your friends. And his philosophy on money, I think aligns with you and me and many other guests who you've had on your show, which is give people enough so that they can invest in themselves to improve themselves. Don't just give them a bunch of cash whenever they ask for it so they can buy houses. He specifically lays out cars and houses. I guess those are the two most popular things people like to buy. But he wrote this just really, really good piece a few days after he retired. And it came back with, after his death, different economics. Actually, the foundation for Economic Education is the one who reprinted this and added commentary to it and tied it into the government and said, look, this athlete got it. And he breaks it down like an economist would on the benefits of giving money to people or giving them enough so that they can help themselves. I think we should link to this piece. We'll probably put it in the show notes. But he makes just a lot of good cases through experience because he had family members take from him. His parents, his mom, his dad, his sisters. They basically took from him, spent all the money, and then kept asking for more, and he cut them off. He specifically says, get yourself an education, learn a skill. But I'm not going to give you money to just go and buy a house. Obviously not a rental property, but yeah, good stuff.

A hand up rather than a handout. And I couldn't agree more with that philosophy. Interesting coming from Kobe Bryant. You know, you don't usually see an athlete. Usually these guys are not that smart, okay? They blow their fortune. They spend stupidly. You know, they spend like drunken sailors. And a lot of them, for example, in the NFL, of course, yesterday we had the Super Bowl. You know, we're recording this before the Super Bowl. So, hey, we don't know what happened, folks.

But you know, they end up broke, these guys. I mean, you know, these NFL players that make millions and millions and millions of dollars that just go bankrupt. You know, how do you use or lose your money like that so irresponsibly? It's really, it's really sad. But you know, Kobe talks about wise generosity and economics and human in this article. That's pretty interesting. And I like this group fee. I've donated money to them myself. Foundation for Economic Education. That's a good group. So this article is on their website and we'll share it in the show notes.

Yeah, let me just read one paragraph from the article, which I think the listeners will like. And here it goes. Quote, invest in their future. Don't just give. Use your success, wealth and influence to put them in the best position to realize their dreams and find their true purpose. Put them through school, set them up with job interviews. Help them become leaders in their own right. Hold them to the same level of hard work and dedication that it took for you to get to where you are now and where you will eventually go. As time goes on, you will see them grow independently and have their own ambitions in their own lives. And your relationship with all of them will be much better as a result. Before you sign that first contract, figure out the right budget for your parents, one that will allow them to live beautifully while also growing your business and setting people up for long term success.

Good. That's good advice. That's good advice. He could be seen at the grocery store, the same one I would go to all the time in Newport coast. The Vons Market on Newport Coast Boulevard. He lived right around the corner from me.

Oh wow.

Just. I lived on Coral Reef and he, I don't know, I can't remember what street he lived on, but I used to walk my dog near his house and you could walk to Kobe's house from mine in seven minutes, five minutes maybe. Yeah.

Oh, wow.

Right there.

I had no idea. Well, you lived in a hot spot of la, so I'm sure there are many.

Yeah, yeah. Well, you know, Newport Coast, California, Orange County, California, south of LA is a really, really high end area. So there were, there were lots of mostly business celebrities, I'd say that lived there, the Broadcom people. And. Well, they didn't live in Newport coast, but they lived in I think Cameo Shores, which is technically Corona del Mar right around the corner. But yeah, Orange county is, they call it Orange on the Riviera. It's a ritzy place. So no surprise that Kobe lived there. Dennis Rodman Lived there, you know, all kinds of Dennis Rodman, our ambassador to North Korea, you know. Oh, yeah.

That'S a joke, by the way. Oh, good stuff. Okay, well, hey, you had a couple of questions you wanted to go over. So refinancing, that's a question we get asked all the time. Naresh, when is the best time to refinance my properties? What is the reason to refinance my properties and so forth. And the answer to that question is multi dimensional. But the thing I want to say about it, and by the way, pardon my voice, I'm still a little bit sick here, so hopefully when you hear me tomorrow, I'll be better. On the mend, but on the rules for refinancing. First off, keep in mind my refi till you die plan, okay? That refi till you die plan, which is the model of how to refinance and extract wealth from your real estate portfolio in the most tax efficient manner possible, which means zero tax, because there's no tax on borrowed money. It's an absolutely beautiful thing. So that's the first thing to keep in mind. Now remember, refi till you die, which is the plan I've been teaching people for, oh, 15, 16 years now, is mutually exclusive from what we talked about at the last Meet the Masters, which was the big boring idea, which is roa, or not to be confused with roi. Roa. We made that one up. It's return on amortization. And it isn't quite as sexy or impressive as some of the other stuff we talk about and some of the other techniques we teach, but it isn't bad either. It's deceivingly good, actually. And we showed at that Meet the Masters how much return people could get from simply letting their tenants pay off their loans. That's it. Because when you get later into that cycle, 5, 7, 10, 12, 15 years into that cycle of amortizing those loans down, just the return on amortization becomes pretty significant. For example, Naresh, one of the properties you just mentioned offered a projected return of 32% annually. Now, what people need to realize is this is a first year performa when we quote those numbers, okay? All those projections are based on first year performance. On first year, your principal pay down is almost nothing. It's nil, okay? But when you get 7 12, 15 years into your loan, you are really chunking that loan down. And that return on amortization can add 4, 5, 7, 8% to your annual return on investment in a very simple fashion. But you don't get to Refi till you die. Now what I want to tell you though, there is a best of both worlds option. A best of both worlds option because one of the things we never really get into on the refi till you die plan, but we'll touch on it here just quickly, is that when you refinance, it doesn't mean you have to refinance, per se. Okay, and what do I mean by that? What the refi till you die plan is really all about is simply pulling cash out of your properties, out of your portfolio because there's no tax on borrowed money. So this is cash that you can just simply take, you can keep, you can spend, you can enjoy, you can go buy crappy depreciating assets like yachts and sports cars, or take vacations and you can blow it, okay? And you don't pay tax on that money that you get to blow. So it's, it's pre tax dollars essentially. But that's implying that you're actually refinancing the first loan you have against that property. You don't have to do that. You could simply do a HELOC or a second loan on the property and take your cash out that way. And that may be an acceptable alternative. Now why do I say maybe and not for? Well, because I don't know, it depends on what's being offered at the time that you're thinking of doing this. As regular listeners and clients will know, the refi till you die plan is based on either a 7 or a 12 year cycle of refinancing your properties. And that's just used as an example because with the rule of 72s in seven years at a somewhat average, and we can slice and dice that Discussion Forever of 6% appreciation, your portfolio will increase in value by 50% in seven years or by 100%, it will double every 12 years. And so we just use that as an example of how you might refi till you die. Okay? But you could also do a second loan and pull cash out that way and leave the first loan in place and continue to get the full ROA or return on amortization. So this stuff, it raises several questions. It's complex. And this is why we have investment counselors to help you with these things. We've been catering to investors only for the last 16 years, before I was in traditional real estate. There's a lot to some of this stuff. So just reach out to us when you're having these questions and thoughts and we'll be happy to help you with it. Okay, Naresh, you had another question about down payments.

I get this question quite a bit, and that is, when should I consider putting down 25% or 30% instead of 20% down? What are your rules for that?

There's not going to be a good hard and fast rule for this. And the reason is that I would always, always, always want more leverage rather than less. The mathematician and philosopher Archimedes of ancient times said, give me a lever long enough and a fulcrum to place it on, and I will move the entire world. And that's literally true. Okay. You can move anything with a long enough lever, a fulcrum, to put that lever on. Right. Because that leverage makes a small amount of power much, much bigger. And so we all understand that concept of mechanical leverage. Of course, with income property, the beauty is we have an incredible amount of financial leverage, and you get more leverage when you put less into the deal. When you put less money down, that makes your lever longer. Your lever is shorter, and it gets shorter the more money you put into the deal. So if you put 100% down, you have zero leverage. If you put zero down, you have infinite leverage, and everything else is in between the two. So your lever is longer when you have less money down, your lever is shorter, meaning you have less leverage when you have more money down. So I always want as much leverage as possible. However, I can only play within the game that the lender will allow. And currently, the lender will only allow 80% leverage maximum and 20% of my own cash, my own down payment. However, the lender will give me a better rate on the mortgage if I put more down. Sometimes many times. Most times, actually. So if you put 25 or 30% down rather than 20%, you. You're probably going to get a little bit better rate. So it is very, very difficult to analyze. If the rate is a quarter point, should you put the extra 5 or 10% down? I don't really know, because you can't really do math on that. What would the math be? Well, I can tell what my payment difference will make, how much less interest I'll pay. Right. That's easy. But the hard part is analyzing what is the opportunity cost of having less leverage and having that cash outside of the deal to do another deal with. Because if it was 5% more down and I was buying four properties, if I didn't put the extra 5% down, then that would give me another 20% to buy one more property, Right? So I could buy five properties instead of four. That's Kind of how you have to look at it. It's a little bit hard to analyze that. So generally speaking though, my answer is put less down if you can, so that you can have more cash to do more deals, that's going to be the better option almost always.

Then what are your thoughts on pmi? So a lot of lenders will allow you to put 10%, 15% down, but they'll charge you the PMI.

Well, that's. Now we're not talking about investment properties anymore. We're only talking about owner occupied properties. And pmi, by the way, for those who don't know, is private mortgage insurance. So whenever the loan to value ratio is below 80% LTV or loan to value, lenders will require private mortgage insurance or pmi. Even then, I would say it's usually worth paying the PMI to get more leverage. So if you're buying your own home, you know, and you can put 10% less money down just by carrying that mortgage insurance policy, that by the way, goes away when your property appreciates to have that loan balance below 80% LTV, you can just go and ask the lender to take away the pmi. At that point. I would usually want more leverage. That's pretty much, you know, the least risky thing is to have less cash in the deal. That's always the least risky way to invest. And that's what we would recommend. As I always say, Naresh, the best insurance is a high loan balance.

So hope that makes sense. Let's wrap it up. Naresh, thank you for talking about those properties. Did you have one more you wanted to talk about very quickly?

Yeah, I do have one more. If we do have.

Yeah, just quickly.

Okay, so this is one close to the Sarasota, Florida area.

Oh, I love Sarasota. I'm going there this week. That's such a beautiful area.

Yeah, so it's in Citrus Springs, Florida. So I'm about half an hour outside of Sarasota. It's a duplex and this one has it sells for $230,000 approximately with a gross rent estimate of $2,000 per month. So we're looking at a rent to value ratio not at 0.9%, but about 0.8% which is still new home construction, new home duplex, solid cash on cash, return of 7%. Cap or crap rate, as you say is.

We shouldn't sarcastic because a new listener doesn't know what we're talking about. So the cap rate. Yeah, go ahead.

Yeah, so cap rate somewhere between 7 to 8% assuming 20% down. So the cash on cash return would actually be about somewhere between 8 to 9%. Total ROI would be 31%. So similar to the other new home constructions that we talked about earlier, numbers look good. I think Citrus Springs people may not be as familiar with Citrus Springs or even Sarasota as much as they are Jacksonville or Orlando or some of the other markets that we cover. But here the numbers make a lot of sense. It's a new home duplex, two doors. And what are your thoughts, Jason?

I think that's pretty good. And when you say two doors, you don't mean the number of doors the house has. Probably has a back door and a front door on each unit. A door equals a unit. A duplex is. It's two units. Okay, good. That sounds like a great deal. And by the way, folks, if you're listening to this and you haven't at some point or another explored Florida a bit, the next time we do Prophets in Paradise in Florida, which probably be later this year, we did it in Orlando last time. Give yourself some time and explore some of these areas, like Sarasota, for example, just a charming area. St. Augustine, many of our listeners own properties in St. Augustine. Just a absolutely charming, charming area. You know, of course there's Jacksonville, which has been great for a lot of our clients. And really, really just it's such a big world out there and I couldn't believe it. You know, when I lived next to Kobe Bryant in Newport coast, there was this mentality that Southern California is the whole world. And you know, it's pretty nice area. You may live in SoCal or some other nice area, but there are many, many very, very desirable areas around the country. And 16, well, really 17 years ago when I started getting interested in nationwide investing and I started flying to all these different cities and exploring all these different markets, I was just amazed at the quality of life one can achieve. The great investments they can get the opportunity to live in no income tax or low income tax states and still have great opportunities. So just want to throw that out there to any of you. And that's not just from an investment perspective. It's from a where you might live someday perspective as well. So just wanted to make you think about that. Go to jasonhartman.com for more properties. The video on how to analyze a real estate deal. If you've already seen that video, you should watch it every six months or so. Get yourself a review of that video and make sure you are staying focused on how to really be a disciplined investor. Thanks for joining us everyone, and until tomorrow, 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 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.