CW 1122: The Hardest Parts of Investing in Rental Property & Hidden Inflation

I started listening to the podcast, did that for probably a couple years before I connected with your investment counselor, Sarah. She did a great job of holding.

My hand through the process.

I probably one of the more needy clients she worked with, but ended up buying my first property in 2011 in Atlanta and then waited a few more years until my next one. But 2014 purchased in Memphis. And so that's where I am at this point.

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, he's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants, and been involved in thousands of real estate transactions.

This program will help you follow in.

Jason's footsteps on the road to your Financial Independence Day. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors.

Welcome to episode 1122, 1122. This is your host, Jason Hartman. Thank you so much for joining me today. And here I am on the Treasure coast of Florida and it is a rainy, rainy day. It was rainy yesterday, much colder earlier this week, but now it is just rainy and a little warmer. And I'm here with Adam today. We got several things to talk to you about. We want to answer some, well, kind of a big compound real estate investing question for you relating to my own portfolio. And I'm always happy to answer those questions. So ask away if you have more questions. The good, the bad and the ugly. And believe me, it is all three, but mostly it's good. Adam, welcome. How you doing?

I'm doing great. It's just cool here. It's not even cold. It's not even rainy.

Well, there you have it, folks, the weather report. Okay, thanks for tuning in today.

You got to come to central part of the country. We just get the mix of everything.

Yeah, well. And Adam, just so you know, in case you're not aware, he is in Austin, Texas. So there you go. As a point of reference and just, just be glad we're not in Minnesota or I should say Minneapolis or Chicago because it has been so chilly there. But it is getting a little warmer, thankfully. And I talked to Brittany, one of our team members. She's been with us, oh, gosh, about 11 years now. She used to live in Southern California and work in our office back in the day when we were in Orange County, California, and we were not a virtual company. We had big trophy offices, class A office spaces. Our last one was, yeah, 5,500 square feet, 15,000 bucks a month. Plus plus plus plus they nickel and dime you with everything. You know, we got rid of that and we went virtual in 2012 because I just couldn't get anybody to come to the office. After a while they all wanted to work at home. So I finally gave in and said, hey, work at home staff, it's fine with me. I'm going to save all this money. But guess what? As people talk, Adam, about how there's not much inflation. Well, you heard me ranting today. I was complaining about a few things. Things, wasn't I?

Oh, yeah. It's about the piecemeal network of our society.

Yeah, the piecemeal network. Well, I call it the subscription syndrome. I got a name for it. Right. So what is the subscription syndrome? Well, all of you listeners are familiar with SaaS, I'm sure, S A A S meaning software as a service, which is a much better way to deliver software. You know, we used to buy a big box of software with a hologram sticker on it that cost a fortune. You know, everybody would pirate it and copy it. And you know that software piracy association would run commercials on the radio.

They make terrible commercials.

Yes, yes, they did. They did. But you know, we used to complain about the cost of software back then. And then when everything became sort of cloud based and web based, we stopped complaining for a while because it was really cheap. But now it is getting very expensive. And you know, this folks, why am I talking about this? Inflation, Inflation, inflation. We're going to play a audio that one of our clients wrote years ago about the termites in your real estate portfolio. Yes, those termites are called inflation. They are eating you alive. Well, they're not eating your real estate portfolio. They're actually benefiting it. But they're eating your other assets alive. So, Adam, in the consumer price index, the cpi, the most widely used measure of inflation, you know, they have this basket of goods, right? And it's the things that most people need to live on, right? And the basket is always changing and the weighting of the items in the basket is different. And you know, we've done whole episodes on this. So I won't bore our listeners with it today. Just go to jasonartman.com and type in CPI. You'll find lots of content on that. But no one counts software as a service in the basket of goods, so far as I know. I don't think it's part of the cpi. And let me tell you, my companies, I have several companies, and they subscribe to a lot of these softwares as a service. And the prices of these SaaS products have been escalating dramatically over the past few years. I mean, it is really astounding how expensive this stuff is getting. You know, whereas it used to be kind of like, oh, well, you know, it's $11 a month, now it's $200 a month.

Who says there's no inflation?

Or even if it's not that, like, I remember back when I was working in an office, I needed an Adobe Suite license. And people like, oh, my gosh, they're so expensive, they're $900. Well, nowadays you don't have to pay $900 for a license. You only have to pay $50 a month. So after 18 months, you've already paid the $900. And I don't know what kind of updates they send me, but it doesn't seem like it changes much.

Well, they do update it all the time, right? Just the way anything, you know, SAS products. The beauty is they can just update it constantly, maintain it, fix the bugs all the time. But the thing is, these services and why these tech companies have such high valuations. Well, number one, it's just nuts and speculative and stupid. That's the first reason the valuations are so high. But the second reason is, is that the subscription model is extremely sticky. Right. So it's very hard to leave them. You're right. I had to buy a Microsoft Office suite for every desk in my office. And, you know, depending on which version we bought it and so on and so forth, it might be three, four hundred dollars. You know, everybody needed their own box of software for their computer. Right. For their workstation. And now you do this all on subscription. But let me tell you, the prices are escalating dramatically of all this stuff. It is really quite shocking to me how expensive it is getting to maintain all these subscriptions.

Yeah, I have a buddy who, whenever I was, I do some web design stuff on the side. And he told me, basically, if you see something that you like and you can buy a lifetime membership to it instead of a subscription, just buy it. Even if you think, maybe I'll use this, like, just buy it. Because they're going away.

If you can just get a lifetime membership and not pay the subscription fee, even if you just use it a couple times, it'll save you a world of money in the future as long.

As that company stays in business. Right? So, yeah, that's the one risk you really do have. Or. Or that their product doesn't just become obsolete and, you know, someone creates a much better product that you got to switch to. So.

Yeah, but even then, by the time they go under, you've probably would have paid more than the current price if you were subscribing to it. Most companies stick around two or three years at least.

I remember when I used to buy phone systems. You know, I've had seven office spaces for my companies over the years, right? And I used to, you know, get bids from phone vendors and buy a phone system. And the phone system that we would buy would be anywhere from about, I don't know, $25,000 to about $60,000. You know, we moved around, bought different systems over the years, but right now, if we did the same thing with a subscription phone system, well, that's what we do now we have a subscription phone system. And, you know, it seems cheap where you're paying this small amount each month, but over time, boy, they just get you and it's very hard to switch. So it's pretty sticky service, you know, and that's the thing. And it's kind of the death by a thousand cuts type of thing. And they can raise the prices pretty easily and effectively because they got you, you know, they've got you on the hook.

Where are you going to go? You're going to go to the next subscription place?

Yeah, yeah. You know, it's just one to the other. So. Interesting times. But what I want to say is, look, my investing strategy is based very much on inflation. It is a very mixed bag interpreting infl levels because some things look incredibly cheap. So, for example, the stuff that's cheap is goods. Goods are very cheap. I mean, there are a few things in the world that are just massive ripoffs, right? College education, health care, the legal system, audio, visual companies for your seminars and conferences. Those are really outrageously overpriced. Oh, the other one.

I wonder why that's on the top of your head.

Yeah. Well, because I'm hiring one now for Meet the masters coming up. Jasonhartman.com masters and hotel prices, too. You know, hotels for conferences. When we used to host conferences 10 years ago, it was dramatically less expensive than it is today. And of course, you know, 10 years ago we were in the Great Recession. I mean, I get it, but it seems all out of proportion to any inflation rate that you could possibly calculate. Right. And so inflation is here in a lot of items now, where it's not, where the opposite has happened, of course, many types of technology, not necessarily the SAS technology we were talking about, but goods. I find that every time I furnish a new house, like I've been doing, because I've been furnishing my house, a lot of this stuff is really very reasonable. I think the prices are pretty low for a lot of goods, a lot of physical goods. So that's kind of interesting. You know, I was telling my girlfriend about that the other day. It's like all this stuff, she says, you gotta stop buying stuff. And I admit I have a little bit of a consumer addiction, but hey, I can afford it, so. And it's really so inexpensive compared to buying that same item 20 years ago. I mean, when I would furnish a house back then, and I've moved around and had many, many new homes over the years, the stuff is pretty reasonably priced nowadays. And I think what you're seeing is the materials are still expensive, but the technology that brought that item to you, that whole supply chain behind it, that a lot of times, just in time delivery, has made it very inexpensive. Of course, you know, offshoring to China has made things inexpensive. It's just this is a lumpy, lumpy equation when you talk about inflation or deflation. So just understand that. It's not simple, is it?

No. We need to be thankful the Fed's not looking at it or else they would think that more than 2% inflation is coming and they'd hike those rates up.

Yeah. Well, hey, speaking of inflation, let's take a pause here and let's play this clip. This, by the way, the reason I thought of it is because I heard it on a L E X A, you know, the Amazon Echo. I don't want to say her name because she'll start listening. Well, she's always listening, which is another scary part of life. So be sure to enable the Alexa Skill, Jason Hartman's Real Estate Investor Update. And if you just go to Amazon.com and search Jason Hartman, that skill will come right up. As well as my very old book that I'm looking at here and a couple of my other books and a couple that are. I don't know what the heck these books are. They must be another Jason Hartman. You know, there's a website you can go to that'll show you everybody in the country with your name right. There are 397 people with my name.

But no one has approached me to buy the.com from me. I guess. So whatever. But yeah, be sure you enable the Alexa skill and get the Flash briefing. It's great. We got some great stuff there. So let's go ahead and play that right now, Adam, because I think this is very topical to what we're talking about. Here we go.

Does your investment portfolio have termites?

Termites?

By Mark McVeigh, M.D. do your investments have termites? It may sound like an odd question, but if you're like many Americans with typical savings accounts and mutual fund stock portfolios, then you are subjecting yourself to the ravages of a specific type of termite, which is slowly and clandestinely devouring away at your financial portfolio, taking away the prospects of a secure retirement with it. What type of termite could do such a dastardly thing, you ask? This termite is called inflation, and it is both the scourge of financial security and the product of our current monetary system. Allow me to explain. Most of us have been brought up to believe that saving and investing are good and getting into debt is bad. While I certainly agree with this general sentiment, it contains one important fallacy. It presumes that the money supply in our economy is static. The reality could not be further from the truth. The money supply is increasing at an ever faster pace. You see, every dollar added into the economy cheapens those already in existence. And the Federal Reserve, in conjunction with the government, are increasing the supply of dollars and credit at an alarming rate. This means that your savings and portfolio accounts are being reduced in value as the dollars they convert into by progressively less and less. Sadly, this termite assault on your wealth is ongoing and relentless. But you ask, I heard on the radio that inflation was under control, that the CPI.

Was relatively low. What gives? Suffice it to say that the CPI is sufficiently manipulated by the government to give the public a much more benign view of inflation than actually exists. To see just how ravaging this inflation termite is, simply look around you. Oil, commodities, health care, education, housing, food, and now even postage have been going up substantially in the last few years. These increases far eclipse the relatively modest gains in the stock market over the same time period. Now, at this point, I presume you're scratching your head and asking, well, how do I eliminate this termite? How can I secure my financial house from this destructive insect? The truth is that there is no Orkin man, no Terminix for this type of pest that would require a major overhaul of our monetary system. Alas we are stuck with this troublesome termite for the foreseeable future. However, and this is where it gets interesting. While you can't eliminate this pestilence, you can use it to your own advantage to maintain and grow your wealth rather than have your wealth eaten away. How you say, by properly turning the tables on our financial system and becoming a debtor. Heretical, no? If you recoiled in disgust, I understand, as it runs counter to the way many of us have been brought up. But allow me to elaborate. By debt, of course, I don't mean going out and indulging yourself on fancy meals, cars and vacations. There is no long term benefit of purchasing those items using debt. In contrast, by selectively purchasing tangible assets which throw off cash flow, and by buying these assets with the bank's dollars and in the form of a mortgage or loan, you achieve the financial equivalent of a double play. Long term, your asset most likely increases in price as more and more dollars flood the economy. Just as importantly, you are paying for that asset year after year in progressively worthless dollars, thanks to the inflation termite eating away at the dollars you're now repaying to the bank. Not only is this a shining example of leverage, it can also be thought of as a form of financial.

You are harnessing the energy of your opponent inflation and using it against him. Of course, one of the best asset classes with which to follow this path is investment real estate, a proven path to wealth for many and a good hedge against inflation. In the interim, your tenant helps pay your debt obligations while you allow the aforementioned economic forces to work their magic. Of course, you have to do your due diligence and choose your properties and loans carefully. Nevertheless, this is a powerful technique to build long term financial wealth. How ironic that the best defense against the termite of inflation is an investment property with a big mortgage.

So there you go. And that was written by a client of ours several years ago. So it's interesting to see how they view inflation back then. All right, hey, let's jump over to a listener question. Adam, how's that?

All right, sounds good. So Fred went to jasonhartman.com ask and said first off, a very nice comment. He said the thing he likes most about the show is your transparency in regards to real estate investing, and he thinks that it provides a level of reality and shows your genuine desire to teach others how to help them create wealth. So he wants to say thank you for that.

Well, thank you, Fred. I appreciate that. And you know, I tell you, this is not all a bed of roses it is difficult. There are challenges, but, you know, everything in life is that way. And it's almost always harder than it looks. But that's not the right question, right? Is it easy? Is it difficult? The question is, is it worth it? And compared to what, right? I mean, nothing valuable that provides a good return for you is easy. Right. But, you know, it gets easy when you get some experience behind you and you kind of know what to do and you have a support network. That's what you have us for. So, you know. Yeah, thank you. I appreciate that. And I will continue to tell it like it is. So fire away with these questions.

All right. So the first thing he wants to to know is, he wants to know if you think there's a number of single family properties that you can own before it becomes untenable for you to do it yourself or to have in your portfolio.

Yes, the number is 37.5. That is the number.

But what he really wants to know.

Is, okay, so obviously, you know I'm kidding, right?

He really wants to know why you haven't filed an insurance claim for that other half a house.

Yeah, exactly.

What he's wondering is if you would share the number of properties you have currently. And then wondering. He knows that you've mentioned talking about how you also invest in apartments and mobile home parks, and he was wondering if you started investing in those because you reached a ceiling of single family homes that you felt you could manage or if there were specific opportunities that were only available in apartments and mobile home parks.

Yeah. So combination of things. So first of all, there is no ceiling on the number of single family homes you can manage, but many would consider that to be one of the downfalls, or not downfalls, but limiting factors, I'll say, of single family. But look, there are big investors who own thousands and thousands of single family homes, so there really is no limit. Now, if someone asked that question 20 years ago, it would have been a different answer. Number one, because the technology wasn't the same that enabled a lot of this. But number two, it just wasn't common. I remember, I don't know what year it was, but I want to say 2007. Ish. I remember hearing someone talk about a new home development that was single family homes. And I want to say this was like 70 units, something in that neighborhood, I don't know, I can't remember. But a new home development and how it was all rentals, it was all a single owner and every home in there was a rental. And how weird that was. Right. But now lots of investors and institutional investors, you know, with more money and more capital, they're doing this build to rent model where they're building whole neighborhoods of single family homes but treating them like apartments. The mindset really has changed and people have realized what a fantastic asset single family homes are. I think it's the best asset class of all. So I've still got a bunch of single family homes and I'm in Texas, Indiana, Tennessee, one, another state, Alabama, I think maybe one more state. I can't think right now. But anyway, the point is that the single family homes are still very good. But I just thought when I was thinking about the multifamily and the bigger stuff, I thought, hey, I want to graduate, I want to try some bigger stuff. And I've explained about the complexities of that and so forth. But one of the mistakes that I made, I've talked about it many times, is over diversification. Do not over diversify. Definitely diversify, but not too much. There was a time when I was in 11 states and 17 cities that I owned houses in and that is just way too much, too hard to keep track of, too many different parties to deal with. So do not make that mistake. That is one of the lessons I've definitely learned. Diversify three to five markets, but hopefully not more than five. So why did I do some other stuff? Right? Well, number one, pure and simple greed, right? Greed is good. I can hear Michael Douglas in the Wall street movie right now. I wanted to do some bigger stuff. I felt like, hey, I've owned a lot of single family homes. I've had many, many tenants. I've been doing it for, for, you know, a couple of decades. I want to be big time, right? So I bought this first apartment complex with our client and partner and that was 125 units and that was in Scottsdale, Arizona and we sold that one and then we stayed together, did a 1031 exchange and we bought two properties out of that one property. And one of them is a hundred 39 unit apartment complex and then a 120 unit mobile home park. And let me tell you something, if you think, if any of you are having challenges with your single family homes from time to time and you think, well, I'm just going to do commercial real estate. Oh, you have no idea how complicated it can be.

I mean it is just, it's really a whole nother thing. It's just a different animal because the complexity of, number one, putting a bunch of your tenants together where they're talking to each other and kind of ganging up on you, right? And demanding that you do this, do that, improve this, improve that, don't raise the rents, all of that kind of stuff, that's an element for sure. The idea that you are really running a business, not an investment, your properties will have Yelp reviews, okay? It's a business. It's like having a restaurant, okay? You got customers, they're tenants. But it's a different dynamic and the tenant quality is so much lower. It's just not the same type of person who rents a nice single family home in a class A or B neighborhood. Now, you know, certainly you can do C and D class single family homes too. And we've had many discussions about that over the years. It really is a different animal. And then you have big expenses that can really surprise you. For example, in our mobile home park, we need to redo the electrical throughout the park. That's what it looks like. The city is redoing our gas lines. And you know, we're really like a, you know, you're like a community developer now where you've got a, you're doing infrastructure, you're not putting paint on the walls and, you know, putting in some new carpet, you're doing street lights, you're doing, you know, utility hookups. It's just a whole different thing. And in that mobile home park, we're going to be actually developing part of it and building some single family homes within the park. Because we've got this one area where we're going to build. We haven't decided how many yet, but somewhere in the neighborhood of like a dozen single family homes in there, you know, built from scratch. And those will be alongside the mobile home parks. It does make sense to do this. And so it looks like we're going to do it. It's just a whole different level of complexity. It's a business and there's a difference between a business and an investment. With single family homes, you can treat them more like an investment and you know, just get organized. View it as, look, if you're gonna buy a lot of them, you might want to hire a bookkeeper or a manager to manage your managers or a manager to be your self manager. And a great example of that is my aunt, my aunt Joan, right? So she has an office in her house and she has two employees and you know, they're both like part timers. It's not like she's running a big company or something, but she has a whole bunch of single family homes. She's been on the show. She spoke at Meet the Masters last year. She was on stage and she was also at our Profits in Paradise event in Hawaii a few months ago. You know, you've heard from Aunt Joan and what she does, and she doesn't say exactly. She won't admit to owning more than 80 houses, but I think she's numbers about 120 from what I recall. But whatever her reason for that is.

I don't know, maybe she'll stop counting after 80.

Yeah, maybe she's, you know, she's getting old. Okay, So I don't know. But yeah, so, you know, it's just a different animal. You know, look at, I've said it many times, you can make money in anything in real estate. You can make money in office and retail properties. But I wouldn't buy either of those because we're in the midst of the retail apocalypse. You know, people can work out of the house. There's less demand for office space. To me, those two asset classes are an uphill battle. You can buy industrial properties, you can buy apartments. You can buy single family. You can buy a class B class C class D class, you can buy in all these different geographical areas. Everything has an opportunity, but everything also has its upside and downside, its pros and cons. That's basically the scope. Okay, then my answer to that question is I love single family homes. I think they are the best, they appreciate the best, they have the highest quality tenants, they are the simplest to deal with, and they just, they're the most reliable thing.

So what would you say if you had to break it down to the hardest part of investing? If you wanted to tell you the very hardest thing for a single family, that you've had the hardest part of investing in apartments and the hardest part of a mobile home park, your one hardest thing you've had to do well.

On the bigger properties. One of the hardest thing is dealing with contractors. Because look at, this is amazing to me and I think I've mentioned it on the show, almost nobody has anything good to say about lawyers, right? They always, you know, there's lawyer jokes and people are always complaining about lawyers, right? But really the reality is I don't think I ever hear anybody say anything good about a contractor. You know, and when you're dealing with those laws, larger properties, you are dealing with a lot of contractors that are doing stuff. And these are big invoices. These are not small amounts of money. You know, it's not like the guy's ripping you off 200 bucks. Okay. This is maybe tens of thousands of dollars you're talking about. So I would say one of the harder things about the bigger properties is the contractors. Okay. And the lower quality of tenants. I'll pick two things for those. Okay. And then the hardest thing about the single family homes, I'd say, is the property managers. I'd say that's one of the hardest issues with single family homes. And that's why. And listen, you know, if you have a great property manager, keep on trucking. Good for you. It's awesome. There are many great property managers out there, but there are more terrible property managers than there are great ones. Okay. You know, it's the 80, 20 rule, but it's probably 95. 5 in the property management world. You know, you just got to keep on them. You've really got to manage your managers. And you know, we, we try to vet managers and offer good ones for you and most of the time that turns out that way. But we have found, as I've said, that a good booming economy is not good for human character. When these property managers get too successful, when the, when the local market specialists, the providers get too successful, they either lose their gratitude or replace gratitude with arrogance. You know, it's just human nature. I'm not saying anybody's immune to it. Okay. It's not, you know, but it shows up up in this area a lot. I notice it quite a bit.

All right, well, that sounds good. And I would also remind people that if you really want to talk about the hardest parts of investing, the best.

Place to do that would be with your investment counselor.

With your investment counselor. And also at Meet the Masters coming up in March.

Yeah, absolutely. And register for that@jason hartman.com masters. And meet the Masters has a master. Another price increase. The second price increase is coming on Wednesday. So hurry up, go there to jason hartman.com masters remember, our show is five days a week now. Adam, you know what? I think we gotta just put the mortgage update on tomorrow's episode. What do you think?

I think that sounds like a plan.

Okay. Because as usual, we've gone a little long here. So mortgage update will be tomorrow. We try to do that the first, first Monday of the month. But hey, we're going to fudge it a little bit this time. It'll be on Tuesday. We are five days a week now, folks. So thank you for all your support of our five day a week program. We will talk to you tomorrow. Until then, happy Investing.

Join us March 23rd and 24th for the 2019 Meet the Masters of Income.

Property let's break this down and look at some of the strengths of income property at an asset class. I found that this event is really helpful because I'm totally a newbie to real estate investment and so I picked up so much information. One of the great things about it is that it's so fragmented. Right? Embrace the fragmentation.

I've actually been learning a lot about tax benefits to real estate and a lot of I've been investing actually well over 10 years now, and I learned a lot of new things today. The other advantage of this weekend is networking, meeting new property managers, meeting new area specialists and seeing the product they have to offer that changes year by year.

Register now@jasonhartman.com masters.

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