CW 225: Adjusting Investment Strategies For Different Stages of Life with Ari & Sara

Welcome to Creating wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven't thought of before. And a new slant on investing fresh, new approaches to America's best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self made multimillionaire who not only talks the talk, but walks the walk. He's been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason's footsteps on the road to financial freedom. You really can do it. And now, here's your host, Jason Hartman with the complete solution for real estate investors.

This show will be in two parts. The first part, we'll talk about the recent Meet the Masters event. And in the second part, we'll talk about low vacancy rates with military tenants. Welcome to the Creating wealth show. This is episode number 225 and I'm your host, Jason Hartman, and I am here with 2 of our investment counselors, Ari and Sarah. Are you on with me? How are you?

Yeah, I'm great.

Good, good. Well, I wanted to have Sarah and Ari on just to debrief a little bit on our Meet the Masters event over the weekend. We had that at the Hyatt Regency in Irvine. It was just a phenomenal event. And Sarah, what you said to me at the end, you kind of always say that to me, but every time we do a Master's event, you always say it's the best one yet. And you said that again, right?

I did. Well, it just seems we seem to be getting better at this every time. The speakers were really great and it just was an overall great vibe.

Yeah, I thought it was an awesome event. We had probably somewhere in the neighborhood of 65, 70 people and just such a great crew of people. We started off Friday evening with just like a very social, fun networking day. Nothing educational then, but just to help people get to know each other. And one of the things that everybody commented on that was so valuable for them was the networking at the event and how the real world experiences just sitting down across the table from some of our other customers, people that had owned property before they discovered us, just hearing the stories about all of that and each investor hearing the personal experiences from other investors and getting great ideas from them. One of my former tenants, Daniel, came and he's just a great guy and he's been listening to the podcast, podcast. And I was able to get a hold of his notes and they're Very complete. He took 45 pages of notes and Daniel is Ari's client. Ari, what are your observations from the event?

This is my fifth or sixth Masters weekend. I've attended too, so it was definitely great. Every time I go, I always learn something new. I think the best thing about the Meet the Masters weekends are that every time you come, there are similar topics. But the more that you keep listening to our content and just educating yourself, it does stick in your head and you actually start taking away more and more stuff. It was really good. And like you said, Jason, many of the people really appreciated the fact that they were able to network with other people, learn from their experiences, whether they bought or haven't bought real estate. And that was a huge thing. So that was really great. And the other thing I'd say real quick is that we had a big portion of our audience that actually have already acquired real estate. I don't know if you'd agree with maybe like 70% of the audience had actually already purchased real estate.

Yeah, well, and not just purchased real estate, but a lot of real estate. So some of the people there were very experienced investors and some newer to the game. So we had a really nice mix, I thought, and just thought it was an overall great event. Before we kind of reflect on some of the other elements of it, I just thought I'd maybe go over and here I'm looking at Dan's notes on my own speech and it's just kind of interesting to see what someone else scribes when they're listening to you speak because of course it's a very different perspective, being the listener versus the speaker, and just kind of go over a few of those little bullet points from the Saturday morning, which was the opening keynote that I gave, just sort of talking about some general factors in the, in the environment, the financial environment, the economies right now. But we talked about establishing a five year plan and how important that is for people to have a five year plan of where they want to be by 2016. You know, I mentioned that the real unemployment rate, when you include the discouraged workers underemployment, is about 26 to 27%. I talked about the decline of the standard of living in America and how I think it's going to decline a lot further. And what this means when we talk about this kind of negative stuff is a lot of people say, and I know Ari and Sarah, your clients have said it to me and you've parroted that question back, is, well, with all these negative things going on, who's going to rent my properties. Well, the question is, that's not the right question. There will be a renter there. It's just that that same renter will have lived a much nicer lifestyle in the prior years. For most people, and I mean the vast majority of America and to some extent any advanced country around the world, lifestyle is decline, the standard of living is going down and people who are following our plan, I think can do a lot better and avoid this trap that most people will experience.

If I can chime in here, it's funny because like Ari, I've attended several of these events and I would say about a year ago, sitting in the event after the weekend, I thought, gosh, the world is coming to an end. And I was almost scared by all the talk on inflation and all of this. A year later, it's a completely different feeling. It's like you really did a good job at, at painting the big picture. And I left this weekend feeling really blessed to know what I know today, that there's so many people in this world that don't have this information that just don't get it and they're falling into this trap that you're talking about. I think everybody left the weekend feeling refreshed and glad to know what we all know. So we thank you for that.

You're certainly welcome. My take on it is, look, there are a lot of bad things. I'm not going to be Pollyanna and say that there's a bunch of good news and things like that. There's not. The news is bad. But the point is how can we exploit the bad news and make it in our favor? And we definitely can do that. And just comparing this event, I think this was probably our 11th meet the Masters event. I'm sort of losing count from the one that we held back in 2006, I think was our first and we do it twice a year. So there you go, whatever that number comes out to be. But it is amazing how easy it is to exploit all of these things that are going on. And right now, I mean as one gauge as a barometer, just looking at our business and what's going on in terms of our customers and it is such an amazing attitude that people have out there. I mean, you don't need to talk anybody into investing in real estate anymore. There's no salesmanship whatsoever going on. People want to do it. People see that there is blood in the streets and this is the time that the smart money moves in and locks in long term fixed rate mortgages. And locks in properties and commodities, packaged commodities, far below the cost of replacement, far below the cost of construction. One of the other things I talked about is how typically real estate only outperforms inflation by a fairly small margin. Nothing to write home about, in other words. But when you leverage the real estate, say, for example, you put 20% down on a property, that means you have a 5 to 1 leverage ratio. So if the property appreciates at a nominal rate of only 3%, which since 1968, the average has been about 6 or 7%, depending on which survey you're looking at. But say it only appreciates at 3%, well, you multiply that in a simplistic example by five, because you're only putting 20% into the deal. When you buy a mutual fund or a stock or a bond, you put 100% down. When you buy income property, you can buy it with only 20% down, only one fifth of the amount required to buy virtually any other investment, including a business, for that matter. Now, occasionally you can do some financing on this stuff, but nothing is practical and workable and desirable. It's only desirable when it comes to income property. And so you automatically multiply any appreciation you have by 5, so that 3% appreciation, which might just be keeping pace with inflation, now increases by 500%, or five times, and it's now 15%. So 15%, you're now outperforming inflation by 12% annually. And that doesn't include tax benefits, it doesn't include positive cash flow, and it doesn't include really any what we call regression to replacement costs. Because we're buying these properties so inexpensively nowadays, aren't we?

Yeah, most certainly. One website that was pointed out to me that may be helpful for some listeners is homecost.com and I think it's actually home-cost.com and you can actually, if you go to one of the tabs, you can type in the zip code of the property, and on all of our performas, you can see the zip code and also what the cost per square foot is on the property. Well, on this website, you can go in, type in the zip code, and it will give you what the replacement cost is for that area, how much it would cost to rebuild a home in that area. It's just so telling. The other day I looked up a property one of my investors was purchasing in Atlanta, was 50 bucks a square foot was what they were paying. And this website said it would cost $80 a square foot just to rebuild that same property in that area. So you know, I thought that was very telling.

Yeah. Are you sure it's homecost.com because I'm there and this looks like sort of a site with, I don't know, a bunch of various stuff, really. Kind of one of those advertising sites where they're just sort of linking to other.

No, no, no. It does look like that. I'm going to go on there right now because it does look like that.

Which, by the way, you know, I have to throw in an aria. I'm sure you'll agree with this. What just struck me more than at any other event we've had this last weekend was how much we learn from our own clients. And I gotta just pat all of us on the back because certainly I've been to our competitors meetings. Okay. And I don't go as a spy, I don't wear a disguise. I go up and shake hands with the speaker and they know I'm there and they know who I am. And so far nobody's asked me to leave and get out. But. But our audience is so much more sophisticated than when you go to these other groups. These other groups, it mostly just feels like these are the people that have been waiting for their ship to come in. They're dreamers. And there's nothing wrong with being a dreamer. Of course, I was a dreamer at one time. Everybody starts out there. But how much I learned from our clients. Our clients this weekend brought a wealth of knowledge to us, whether it was Dave or Patrick or anybody else in the audience. I mean, any other examples of that?

Oh, I remember. No, I remember Luke leaning over and I think it was David. I leaned over to someone I was sitting by in the back and I said, gosh, our investors are really smart. They've got some good, tough questions. I completely agree. So going back to that website, if I can just give you the Website Again, it's home-cost.com and it does look like it's a subscribed website, like a paid website. But if you just go to the blue tabs across the top, it's the second or it's the third to the last tab. It's a blue tab. It says construction cost per square foot. When you click on that, that's all free. You can go and you scroll down, there's a little spot to enter the zip code or state and then that's where you get the construction cost.

Okay. So I'm going to enter California zip code, which will be. Everything will be a fortune there. And yeah, $129 per square foot for Irvine, California. And of course that doesn't include land. The land is massively expensive. But now I'll include, I'll do an Arizona zip code here and let me just see how this, how different this looks. It'll be interesting. $97 per square foot. So even in a market like Arizona, we're buying far below the cost of construction and the land is free to boot. So just a phenomenal opportunity for investors. That's why the smart money is coming out now. So feel free to kind of interrupt me at any point. But I just wanted to go over a few more of these bullet points from Dan's fantastic notes here. We talked about the entry point where a person is entering. Are they an entry point investor who's just early, just new to the game. They want to optimize for rapid growth that can be reinvested for long term investing. And we showed a great example where if someone for the first five years and this in any other investment it sounds totally unrealistic but with income property properly structured, people can do it all day long if they can earn 20% annually and then for the next 25 years just earn a very modest 10% annually. Which I know in any other investment sounds like a really high number. But if you've been listening to the show for a long time, you know that, that very conservatively that is very possible with the right properties structured in the right way. 10 to 20%, not a problem. Look at the projections on our website@jasonhartman.com for more detail. Look at the properties complete performance there. And then the second category is the growing investor. They want to optimize for stable long term inflation protected wealth creation. And then there is the person who is very close to retirement and they want to optimize more for security and basically investing what we call income property bonds. We talked about how the peak spending age for most people is about 46 years old. We talked about Gen X only having about 40 million Americans, whereas Gen Y has about 80 million people. That's 4 million larger than the baby boomers and they're going to make a huge impact on the rental market. And that's why the institutional investors are wanting to buy income properties so much now because they see the demographics. When you just look at age, this is a very simple thing to do to be an economic demographer. And you just look at the age of people. They do certain things generally at certain ages in their life. And the 80 million people coming right at the rental housing market right now are going to change everything and create a very, very good future for income property investors. So the prudent person sees that, and that's why the smart money is just rushing into income property right now. New investors should seek returns in the 20 to 25% range. Again, very plausible. Take a look at the projections on our website. And the big problem people are going to have now with life expectancies increasing so much is that they're going to have too much life at the end of the money. So people have got to plan more than ever in the past. People have got to plan for their financial future because we know that the government is insolvent and it's not going to be there to take care of any of us. So very important thing. Any other reflections on the event or people who attended that you want to talk about, Ari or Sarah?

One of the coolest things I think that we have never done is we had a live musician play.

Oh, yeah. And Brandon, thank you so much for coming out and singing.

Yeah, Brandon, that was great. I think a lot of people kind of enjoyed that. It was a break between kind of like a mental break in the day that kind of helped people ease and relax their mind for a few minutes. But thanks, Brandon. That was really good. Jason, did we ever post that video on our website?

At one point we did not. And what Brandon did is he wrote a song for us all about investing and how to invest and how he likes the podcast and all of the main points that he's learned from the podcast. So maybe we'll get a recording of that and get it up on the website or play it during a podcast. But yeah, that. That was awesome. Ari, thank you for bringing that up. And. And Brandon, thank you. I'm sure you're listening. So thank you so much for coming out, bringing your guitar, and flying all the way from Durham, North Carolina, out to attend the event. That was great. You know, we had a lot of people come from other states. I think we had nine different groups or couples come from out of state outside of California. Huh?

Yeah, I think that was our biggest out of state attendee list this time around. Your podcast is definitely growing.

And that doesn't. Of course, that doesn't include speakers, local market specialists who regularly come from out of state. This is just attendees and guests, so that was fantastic. So that probably totals around 15 to 18.

Yeah.

Well, and it was really great to have Rodney and Carol out again from Chattanooga. They came about it a year ago and have purchased some deals in Atlanta, and now they're looking to diversify, but just great people, great dinner conversation. As well as Philip, also from Tennessee, came out. This was also his second Masters.

No, I think Philip's been to more than two. He's been to three.

Yeah. Actually it has been three. At least three. Yep.

Yeah. So it was great to see you, Philip and Rodney and Carol, by the way, thank you for the book recommendations. And I'm looking those up and I'll check those out. It's just great again, how much we learn from our clients. One of the other things, speaking of learning from our clients is, is what Patrick presented to us on how he. He's purchased, I think eight properties through our network. And he talked right at the end of the weekend on Sunday evening about how he researches rents and all the different websites he uses and all the different techniques he uses to research rents. And really, I mean, some of our investors do an incredible amount of due diligence. And in many cases, I have to say, and I'm just going to admit this openly, they've one upped us because they're taking everything we do and then just adding to it.

Yeah, no, I was just going to say I'm so thankful he did that. You know me, I'm not real big on speaking in front of a group of people. I'm more of a one on one kind of a person. And so when he got up and did the rental presentation, I was like, sweet.

That was. That was really good. Ari, any other thoughts from you on the event?

Well, I have to real quick say thank you to David and Tina for coming out there. They came out from the Chicago area. That was great to see them. And Brandon, who's a fighter pilot, I want to say thanks to him. He brought his dad out from Colorado, so that was very cool. And also Roger and his son, Roger brought his son Garrett out and they're from the. Well, they're from Longview, Texas, but the Dallas area, east of Dallas. Anyway.

But.

But Roger said something to me about his son. His son told Roger, which is his father, he told him that this seminar, actually, it almost makes you feel stupid if you don't buy real estate right now. Of all the stuff that was going on. He says at the seminar, it makes you feel that if you don't buy it, then you're doing something wrong.

And I have to just add to that. You are doing something wrong if you're not buying right now. If you have the ability to purchase income properties in this environment. And of course, always, if you happen to be a first time Listener and you haven't been listening for 225 shows, then you know, you may not know. So I want to just clarify that we're not talking about property and overvalued bubble markets. We're talking about prudent markets across the country where the properties make sense the day you buy them from a cash flow perspective. And cash flow is pretty darn reliable. We're not looking forward to any big appreciation numbers in the future or anything like that. That's pretty much in the rear view mirror. And there's a lot of tough times ahead in a lot of ways. But things are lining up in the favor of income, property really like never before. And a lot of it comes from our government being so irresponsible and profligate with their spending and the inflation that's going to create and the way monetary and fiscal policy are interacting. But the day after our Meet the Masters event, and that was Monday, the day after I filed my personal tax return on the very last extension. Nothing like getting a head start on it, right? October 17th was the drop dead day you had to file. And I was talking to my CPA Mike, who happened to speak at the event on Sunday morning. And you know, he's always great because he's such a technician. He's not a slick speaker type. He's just a technician who loves saving people money on their taxes. And so I talked to him the next day and he filed the return for me as I was on my way back to Arizona. And it is amazing how tax favored income property is. I mean, you can make, you can make a fortune. You can make an unlimited amount of money. And if you play your cards right and do all the right things that the IRS incentivizes you to do, you can literally pay no tax. I mean, it is as much as I complain on this show about big government and intrusive government and high taxes and high regulations, I don't really pay much tax at all because of my property holdings. And when you go through the course of several years or a lifetime and you have a get out of tax free card because you're an investor structuring your investments properly, I mean, just think of the difference that makes to you. Income taxes will account depending on what state it is that you live in, income taxes will account for anywhere between, for most people listing 30 to 45% of your income. 30 to 45%. Imagine if you could save 30 to 45% of your income every year and then take that savings that you didn't Pay in tax and invest it wisely and also use it to enjoy life, to travel, to buy nice things, to send your kids to good schools, whatever it is. I mean, that is a phenomenal opportunity. The compounding effect of a household makes 100,000 a year of saving between 30, 30 and $45,000 a year and adding one additional rental property every year or two additional rental properties every year, more than you would normally buy because you have figured out how to not pay taxes by doing the things that the IRS wants you to do. Provide rental housing to people that it's incentivizing you to do. That makes an amazing difference over the course of 5, 10, 20, 30 years. It's incalculable. I mean, a total difference in your life and your friend's life who isn't following this plan? Just an amazing opportunity.

Well, I was just going to comment, and this was a little while back when you were talking about what an incredible time we're in. I was thinking about Tammy, who is one of the property managers in Atlanta. She was a new speaker, came out, poor thing, she was so nervous doing her speech. But I thought she did a great.

Job and she did fine. She was great. She talked about property management and about lease to own and rent to own programs. We had her on our members only monthly call just a couple weeks ago. And yeah, that was great. So what about Tammy?

Well, so I was just something she said stuck out in my brain and it was that she. Well, her little background on her is that she's got over 18 income properties herself that she's just slowly acquired over the years. And she's a property manager, but she's got her own growing portfolio. But the thing that stuck out to me was that she was looking at a listing that was closed, close to one of her properties that she bought like 20 years ago. And that you could buy that same property for the same price or just slightly less than what she paid for it 20 years ago. I mean, that's what kind of times.

We'Re in today that spells opportunity. It gives everybody listening the chance to turn the clock back. A lot of people listening feel like they missed the boat. And you know, sometimes I read that poem called the Reluctant Investors Limit and sometimes I read it at the end of a seminar, like a Creating wealth seminar or Meet the Masters weekend or something like that. And it goes, you know, I hesitate to make a list of all the countless deals I've missed and many people listening feel that way. But this financial crisis, like the Chinese say, a crisis is an opportunity. Riding the dangerous wind this crisis has brought with it, huge opportunity where people who did miss the boat and who may be kicking themselves that they didn't start investing in real estate 10, 20, 30 years ago, they can turn the clock back. Depending on the market, they can turn the clock back and get their chance to start and create that wealth. So very good point, Sarah. Very good point.

Well, if I could just say one thing in closing, you know, that I was thinking over this weekend is that I wish I could get everybody to come to this event. So many people I talked to from out of state and everybody's a little skeptic of there's so many different real estate groups and they're not sure which one to pick. And it's like everybody who attended this event, meet the masters event, just really appreciated all the networking, putting some faces with the names. I just think it was so valuable. Again, we thank you for this event.

The thing that differentiates us from other promoters out there, like the Internet marketers and people like that that are selling educational products, certainly education is important, but the problem with all of these other groups is that they're not usually selling real estate, and so they have no attachment to the actual outcome. What we say in our seminars, in our podcast on our educational products has to come true in real life, or at least get close to what we talk about in real life, because we're attached to the outcome. We are the referral network that is providing people through our connections and our local market specialists with actual properties or actual private lending deals where they can loan money and earn a return on it. That attaches us to the outcome. We can't just sell someone a set of audio CDs or DVDs and send them on their way. We're in the business. We're really doing it. This is where the rubber meets the road. And then the other thing I'd say, and I got this from talking with one of our local market specialists at the Friday night night dinner because he works with a lot of our competitors that do have referral networks that sell real estate. And I kind of hate to almost think this way, but I got to be honest that I did think this way. And he said, jason, I was talking to him about all these other groups because of course, I want to get the scoop on all our competitors. And he said to me, he said, jason, you don't have a competitor, really? And I said, well, what about so and so? I think that person has a good business, you know, I mean, they're my competitor. I don't love them because they're my competitor, of course. But I thought, you know, I thought this one person that I mentioned was running a good business and then I mentioned another one that I thought was running a pretty good business. And he says, you have no idea. These people are doing the deal of the month. They have no consistent program, they have no consistent philosophy, they have no money is what he basically said. They're not investing like you are. They're not doing the things you're doing. Your business is the real deal. And I gotta say, that's the one theme I keep hearing from our clients and from times like that. Sometimes our vendors, our local market specialists who do business with some of our competitors as well. So it just makes me feel good and it makes me feel like we're really doing the right thing and we're really helping people and we're really providing a good service. This is not a just a let's make money business. It's a mission. It's a mission to save the middle class and help the middle class not move into the lower class, which is what's going to happen to tens of millions, if not a couple hundred million people here in the coming years as things in many ways get a lot worse in the US and in many places around the world. So, yeah, thank you for listening to this debrief about this, Ari. Did you want to mention anything in closing?

No, that's it, Jason, thanks.

Okay, good. Well, thanks to both Sarah and Ari for coming on and talking about this stuff. And up next, this show is not over because we have a whole presentation here where we're going to talk about one of our markets. And we've got an interview with a local market specialist from St Robert, a very stable, interesting military type market. One that's definitely off the radar of institutional investors. One where I purchased a 10 unit building a few months back with a couple of our clients and boy, that thing just leased up lickety split. We're going to talk about vacancy rates and we're going to look at some historical studies of vacancy rates in this market. This is sure to amaze you. So we will be back with that in just less than 60 seconds. So stay tuned. We'll be right back in less than a minute.

What's great about the shows you'll find on jasonhartman.com is that if you want to learn more about investing in real estate in different markets, there's a show for that. If you want to learn 17 ways rich people think and act differently. There's a show for that. If you want to know how to get paid to buy, there's a show for that. And if you'd like to know why Amsterdam doesn't take dollars or why pools are for fools, there are even shows for that. Yep, there's a show for just about anything only from jasonhartman.com or type in Jason Hartman in the iTunes store.

Hey, it's my pleasure to welcome Zach back to the show. He is going to talk about vacancy or how not to have dreaded vac vacancies. And we're going to talk about that in one of our markets, one of our markets that I'm invested in with 10 units of my own. And then we're also going to talk about special pricing and how that is really true, how you can actually buy below what other people are paying right in the same time frame. And you'll be kind of amazed at how this is possible. So let's talk about that, Zach. Let's dive into vacancy here. We've both got some vacancy reports in front of us for this particular market that we're going to talk about today and they are nothing short of amazing if you're an investor, if you're a landlord, right?

Absolutely, that's correct.

Well, so what are they? I mean, I'm seeing vacancy rates below 3% in an almost three year period. Wow, that's amazing. I mean our performance go with 8% vacancy. But you're beating that like crazy, aren't you?

We are and we have consistently done that since. Well, you're looking at the reports January of 2009 and we've done that across the board on our duplexes, on our two and three bedroom duplex units and on our one bedroom apartment type units.

Okay, so we've had a lot of clients buy duplexes in your market and a couple buy small apartment buildings in your market. Tell us about the duplexes.

I guess the duplexes typically we either do 2 bedroom, 2 bath, 1 car garage type units or 3 bedroom, 2 bath, 1 car Garage type units. Overall. They rent obviously very well and they stay rented. You can see the vacancy reports where you can see the average move in and move out times. You're looking at typically 12 days or less and typically two weeks. It's very, very tight turn times. A lot of that has to do with a very strong rental market and very strong demand. And strong demand coupled with a supply shortage along with I'll tooar the horn here, a management company that really Understands and understands the P and L on a property and understands how to decrease vacancy by being highly proactive, active whenever they know a unit's going to go.

Yeah. So I've got a few different reports here that I'm looking at. There are three different reports, but let me share one summary of one of the reports with our listeners here. Okay? And this is history. This is not a projection into the future. This actually occurred. This is real life. So we're talking about a total of 20 different units here where in this period of almost three years, 980 days is the exact time period. There were 39 move outs. Now that sounds bad, but remember, this is almost three years. So you didn't even get one turning a year on average. And the average days vacant between tenants. Get this. You listening, everybody? 11.66 days. Not even 12 days of vacancy. Okay? On average, the total vacancy percentage here is 2.34%. 2.34%. And again, we won't allow you to project anything below 8%. So you're beating the heck out of it. And we've been working with you for a few years. And just so as not to keep everybody in suspense here, we're talking about St. Robert, Missouri. Okay. I don't want to keep the listeners in suspense for too long as to what market we're talking about with these great records. But Zach, what is going on in St. Robert? Why. Why are you having such good success there? I mean, other than tooting your horn with the management, which is great.

Obviously. Obviously with St. Robert, you have Fort Leonard Wood, which is the units that we're discussing in these vacancy reports are within four miles away from Fort Leonard Wood. And these obviously, these vacancy reports go all the way back to January 1st of 2009. And since then we have seen the base in Fort Leonard Wood expand substantially, which has obviously increased demand. It's now graduating over 100,000 soldiers and students per year through it, which in turn obviously creates a very good rental market.

Yeah, and how long have you been operating in that market?

We brought our first unit online back in 08. So I've been there almost four years now. Going on four years.

So four years and pretty good success, that's for sure. Pretty good success is an understatement. Now I bought a 10 unit property there with some wonderful clients of ours who are probably listening to this show right now, dancing and Elton. And how is that one going?

That one we brought online in May and I think by mid June we were actually by first of June, I believe we're eight out of 10. And I think through June we got the last two leased up. So I believe first of July or mid July, we were 100% occupied and I believe we're 100% occupied right now on that building.

Well, it's hard to complain about 100% occupancy, that's for darn sure. So good. Good job. Let's look at another one of these reports, Zach. Now this one, we're talking about 24 units here and we're talking about a slightly longer period of 900 days. We had 70 move outs, but the average days vacant between tenants was 9.71 days. 9.71. This is on the report you just gave me. And this equates to a 2.88% vacancy rate. Pretty awesome. And I'm looking at a report here with the actual names of the tenants. And this is the real deal. Unless you're just completely making this up.

Okay, I don't have that much time on my hand.

So tell us a little bit more about what you're doing to get these units and really keep these units leased and get them leased so quickly between tenants.

Well, these units we've actually found a target market of. We do a lot of one year less leases on these type of units. And these are actually identical to the 10 unit building you're involved with. These just have been online since February 1st of 2009 is when we actually been using up these two 12 unit buildings and stabilize them. But the units are identical to the current 10 unit buildings. You're involved with just a longer time period obviously stretched out over 949 days. You can see what happens with 2.88% vacancy rate. We are targeting with these a niche market of a lot of people that are coming in for captain's courses. And these are a lot of times higher ranking soldiers that are renting these things. And they're coming in for a six month captain's course. And as those courses come through, they gradually and then the next one comes in. And you can obviously tell by our vacancy report an average number of days vacant of 9.71, that even if we turn over more than one time a year on a unit, it's a very quick turnover and it works very, very well. Obviously we tapped a very, very strong need in the area.

And talk to us a little bit about how the. Well, before we switch from vacancy, actually before we start do this, I want to just go over one more report summary. Okay, but before I do that, Zach Tell us about the product types. Mainly duplexes, right? Is that what you're working on?

Mostly a combo, actually about 50, 50 between apartments and duplexes.

And when you say apartments, what unit sizes are those?

These are one bedroom, all our apartment buildings that are, we do anywhere from four unit buildings all the way up to 16 unit buildings. And it's just a different variation on the size of building. All the units are identical. They're all one bedroom, one bathroom, they have a carport for their unit and they're all right around that 640 square foot per unit.

And so you're finding that those small really almost efficiency type units are really the most desirable in your market, huh?

They are for this. And with the apartment buildings now, once we go to the duplexes, we get in the two bedroom, two bath type units and the duplex unit. On a two bedroom unit we're right around 1104 square feet of living space per side. And then on the three bedroom duplexes we're 1380 per side.

So let's take one of those three bedrooms as an example because I want to switch to that in just a moment, but let me just share one more vacancy report summary here. Now this is a total of 16 units and there were six move outs. This is a shorter time period. It's 615 days. And the average days vacant here in this report was 6.8 days vacant. So not even a week, not even, even seven days. And the vacancy percentage here, only 1.48%. That's phenomenal. Now let's, let's switch gears here. But you know, before we switch gears on that, I know I keep saying I'm going to switch gears to get to the price thing because I got a question for you about that. But when landlords are looking at vacancy rates, it would be deceiving to look at. And I'm going to spring this on you, Zach, because you're probably not ready for this one because we didn't talk about it and you were not expecting it. It would be be deceiving just to look at vacancy rate and think that that's your total issue. Because what it assumes, Zach, is it assumes that everybody's paying their rent. So you've also got to look at collection issues. Now I know from the military tenants I've had over the years and I've had several of them, the vast majority have been great, just great tenants. And I don't have collection problems with military tenants.

No, we do not either.

Yeah. So is the Vacancy. Right. I guess the way to say it is, is that an economic occupancy rate or a physical occupancy rate? In other words, someone could be in the house but not paying the rent or are they paying the rent? What are collections like? Do you have collection issues?

That is technically a lease date to lease date. So that is a physical occupancy date report. Now as far as collections and stuff, we could figure those in. Those are not enough to even make a blip in this radar though, due to it being 95% of our tenants being military.

And what does that mean? Milit? I mean, I know what it does, but I want you to explain to the listeners because you have more first hand experience than I do. I just have several military tenants I've had over the years. But when a military tenant doesn't pay their rent, what do you do?

We go to their commanding officer and we have some ins there. Typically we can find out who their commanding officer is. Most of the time we get that information if at all available in the very front end when they're moving in, we request their commanding officer's name and contact information. So if we ever have an issue, we go straight to them. And generally speaking, we get our money very quickly. Yeah, much more than the pure normal non military.

Yeah. The civilian tenant doesn't have to do like 6000 push ups if they don't pay their rent, right?

That's correct. The military definitely frowns on any kind of financial hardships or anything like that. And they definitely step in and try to get them straightened out on any kind of off base private issue.

Yeah, military people are great. I mean they're so disciplined and generally just very, very good people. Okay, so let's switch here finally and let's talk about price because something that's very interesting is all of these investor groups out there, my competitors, you know, their marketing properties as though they're below market. And I won't allow any of our local market specialists, whether they're developers or rehabbers, we have different deals in different markets. Sometimes we have developers that are building brand new stuff. Stuff as it is in your case. But sometimes we have rehabbers that are buying properties at auctions and rehabbing them and then getting them ready for investors to buy and rent or buy and flip. And they all want to say, you know, the properties are below market. And I think that a lot of times that's really, really a misnomer. It's not true. And that's the reason I won't allow our Local market specialists to, for example, put it on the Performa that the market value, initial market value, value versus cost. I won't let them make those numbers different because if they make them different, the roi, the return on investment on that investment, it goes through the roof. Like if you were to say a property is just $3,000 below market value, it would turn an ROI projection of 20 to 30 to 35% into 250% annually. I mean, it's just, it's crazy. The numbers just, they go, they go nuts. Nobody would believe it. And plus it creates too much liability for us. So we won't allow that. Okay? We just think it's wrong. But now, but I want you to explain what goes on with the pricing of your units. And let's use a duplex, a three bedroom duplex as an example. So you've got 1380 square feet on both sides. Our clients can buy these for 189 nine, right?

That's correct.

Okay, so 189 nine and we're going to take 1380 square feet, we're going to multiply it times two, okay? That gives us 2760 square feet. Okay? So everybody remember that number, 2760 because we're going to come back to it in a minute. Now, Zach, what's the highest price you've sold one of these duplexes for?

I believe it was 236,000. Right around 235. How long 235 was sometime in 2011. That buildings have sold for that? Yeah, five to seven months, somewhere around that.

So this year, so earlier this year for $235,000. Now if we take. Now here, here, here's the BS detector, folks, for everybody listening. This is the BS detector when you're talking about a brand new duplex, okay? Any brand new structure, all you do is I want you to take your calculator like I'm doing and take $235,000 and divide it by 2,760 square feet. And we see that the cost per square foot there is $85 per square foot. Now that is a legitimate number for brand new construction, $85 per square foot. So the first thing that comes to mind is why would anybody come along and pay you $235,000? Wouldn't they simply check the comparable sales and realize that you're selling these properties to our investors? Investors for $189,900. Let's just call it 190. What don't they know?

They do not know how we structure the deals. And that is where our competitive advantage, if you will, kind of lies with being the construction company, the property management company and the full on developer. We have the ability to do things that most other investors don't have access to or provide different ways to finance things that other investors don't have to access access to.

Okay, but let's, let's get specific about that because what you do is our client really is not buying the property from you per se, they're hiring you to build it for them, right?

That's correct.

So when they hire you to build it for them, the price that they ultimately pay never really shows up as a comparable sale, does it?

That's correct. And this is not marketed locally. I so nobody has access to it, nobody even knows about it.

So they're not in the mls, in the multiple listing service. So it's a different deal. And there's nothing to prevent you from building a home for someone. You can do that. You're a developer. Now if you build a home for what they call for spec, which is the way you're doing it for a regular consumer, you stick it in the MLS and you get them to pay $235,000 for it. But you can't get the accommodation of scale where you're selling a lot of them to investors through our group in that scenario. So for those, you really do have to sell them for more, don't you?

That's correct. So the investor, we own the land, we develop the land, we own the lots. The investor would come in, execute a lot purchase contract to acquire the ground that we would build the duplex on. At the same time that they execute that lot purchase contract, they would execute a construction agreement, a specification agreement and a floor plan agreement. And what those things state is that we're going to build you a building, turnkey it to you, and we're going to give it to you for X amount of dollars and build it. And once you're done, you're done. Now we actually even. I'll take it a step further and I'm going to spring this on you, Jason. We actually cover all of your interest during the construction inside that turnkey price. We cover all the appliances, the yards, everything. The building is absolutely rent ready whenever you're done. So much that we actually cover your interest until the there is one tenant in place. So as a developer and owning the property management company, we're assuming that risk that you will not take over an empty building, take over any Kind of a payment on an empty building. So you will at least be 50% occupied. So by doing it this way, you're not buying a building, you're having a building built. And while on the surface and at first glance it doesn't seem like much of a difference, it's a huge difference in the marketplace. And as Jason was saying, in no form or fashion is this on the multilist, because it's never technically, the only thing we are selling would be the lot. And we could put that in a multi list. That's no problem. That wouldn't hurt anything. But the building itself, you're financing in your name. You're acting as in a sense a mini developer because you're providing the financing to build the building, which in turn is not a sell, that is a build out and a build to suit, essentially.

Let me take a brief pause. We'll be back in just a minute. A minute.

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Really? Now how is that possible at all?

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So one of the big risks people have with building their own property is this. And my mother's going through it right now, so I'll share that experience because many of our listeners have been kind of interested in the story about my mom building her house. And it's exactly this. It's that you go and you finance project, and this happened to thousands of investors in Florida. I mean, there's a lot of litigation out of this stuff. Russ Whitney was selling a lot of properties like this. Marshall Reddick was selling a lot of properties like, like this. And it was a big problem in Florida. We never did that main Florida area. We did a little bit of business up in the panhandle, in the military areas like Pensacola, where I own property myself. And those have fared much better. But the rest of Florida is pretty much a bloodbath. And what would happen there is people would do deals similar to this. And the way they got burned is because the builder would never get around to building the house or finishing the house. And so, so my mother is building this 9,000 square foot house, her dream home, this southern mansion in Gulf Shores, Alabama. And she's having the same problem because she can't get people to get their job done. To get the work done. The painting contractor comes in and makes a promise, oh, I'll have it painted in a month. And here we go. Months later, the painting still isn't finished. And they use every excuse in the book. Oh, the weather, the this, that. And that's where the risk really comes in for the investor developer, because our listener is really an investor developer. And what they're doing is they're hiring a developer to take that risk, put their money where their mouth is, and carry all of the cost. Until when? Until the property is rented, right?

That's correct. Until there's one tenant in place.

Okay. Oh, one of the two tenants. So they do have the risk of not getting the other tenant, but at least it'll be half occupied and it'll be finished. Because it has to be finished to get the certificate of occupancy, correct? Yeah. Okay, good. What else should people know?

Typically it takes two to three weeks. Obviously, you can see by the vacancy reports that we were discussing earlier, it takes typically two to three weeks. I mean you're going to have your second tenant in place. So it's typically a very short period of time before the second tenant is in place. So very overall, traditionally there has been a little risk there as well. So that's a very good thing.

And you've got a new financing plan that we're going to talk about about on a future show. You've got to get it cleared, accounting, legal, get all that done. And it's pretty exciting and pretty interesting. So we will have you back here on a future show to talk about that. But just give us a little overview of the area and why it's desirable and the product that you're selling. You know, we started in kind of backwards on this one where we talked first about vacancy, then we talked about the pricing issue and how to build in a profit for oneself as a developer. Basically a $45,000 potential profit there. But talk about the market and the profit, if you would.

I'll start with a 10,000 foot view. The reason we are a question I get all the time from investors is how can you do this at 189,000 to us and then still take them for 235? Aside from just the appraisal and those types of things, how can there be that much margin in there? Because if you do the calculations 189 to 235, that's a huge developer margin. Typical construction margins are not that big, let alone for us allow us to to do the building to the investor 189 and still have enough margin in there for us to survive. And there's a few different reasons for that and factors at play. The first one that comes to mind is by doing 189, we get our economies of scale. We can run for the area a decent amount of volume. We can run anywhere from 15 to 25 duplexes a year. So anywhere from 30 to 50 units a year. And that in turn gives us in this size of an area, in this demographic of an area, that gives us a substantial control over and a substantial control over materials and pricing and everything in the area and gives us buying power to in turn bring down our net build price to allow us to be able to build for the 189 and have enough margin in there. If we were coming in on a retail side like we were talking about $235. The reason $85 a square foot is completely legit on new construction and it is actually completely legit in this area because. Because for typical volumes and typical absorption of sales for a developer or builder to build that on spec. They're not going to do 15 to 25 buildings a year. And to put it bluntly, if we could come in and build and sell 15 to 25 buildings a year retail, we would probably do that and not even mess with taking anything to investors. To put it very bluntly, you used.

To be able to do that. I mean during the heyday, during the roaring 2005 era, I'll call it the money printing era. And that craziness, anybody can get a mortgage. You know, a developer could do that and they would make obscene margins. They could build a tract of 40 properties with no buyers. They just built. They could get the financing to build them. First of all, they could just build a tract of 40. Well really, they could build a tract of a couple hundred units and the buyers would just come on in and buy them. If you build it, they will come. The field of dreams. But, but you can't do that nowadays. It just doesn't work work anymore. And so that's why the investment model is much more efficient for you as the developer, right?

Absolutely. And also, just as you were saying, we don't have to build it and they will come, which in my conservative stance is that equates to risk and I'm very risk averse. And we do not build it and they will come. We make the investor come and then we will build it, which in turn decreases our risk substantially, which in turn makes our risk reward from a construction company and developer and everything. It puts it in line to where it's a comfort level that I'm okay with by having the investor already speaking for it and carrying it on, technically carrying the debt and the loan and everything on the investor's balance sheet versus us carrying it on our construction balance sheet, construction company's balance sheet. And those are the two biggest contributing factors to allow us to come in and hit these type of price points because we are building substantially cheap, cheaper than market value in the area. One more quick thing I want to add to that is that's not going to last forever. While labor pricing just as a construction industry as a whole, labor pricing is very, very cheap right now. Labor is not going to get any cheaper. Material pricing, Material prices are rock bottom. They are not going to get any cheaper at the first opportunity for construction. The pick up enough. Here's what we're going to see in the construction industry. There's enough subcontractors that have went out of business that the few that are still standing are getting all the current business and they're just coasting and they're just surviving, if you will. And they're going to survive. They're the best of the best that are left. But as soon as the volume of construction picks up, you have a much smaller labor pool to pull from. So in turn that's going to enable them to brace their prices very quickly. And the same analogy is in place on the material supply side. So as an investor, when you're getting in for these type of price points that are really below market value, you're going to, I believe, correct me if I'm wrong here, Jason, you always say the factory replacement cost. I can't remember your exact verbiage that you always use.

Regression to replacement cost.

There we go.

That's my famous phrase, regression to replacement cost.

I'll send you your nickel that I owe you for using your term, my royalty, your royalties on that. But you're going to see the same thing because you're going to see inflation in the construction industry. And it may be two years from now, it may be a year from now, it may be three years from now, and every market is going to be different for that. But every market you're going to see a very quick ramp up of construction costs due to the decrease in size of labor pool and the decrease in the amount of material suppliers. And there's going to be a disproportionate supply to demand and it's going to to go the polar opposite direction very quickly when supply, or excuse me, volume does pick up in the construction industry.

Yeah, well, you know what I think it's going to be, I think it's just going to be inflation driven basically. And we should just differentiate. In all fairness, most people will say, well, prices will rise. Well, that's true, but that's in nominal dollars maybe or maybe not, I'm not sure yet. In real dollars. The significance in real dollars will be much less. But the thing is, is that you arbitrage that nominal versus real dollar equation with financing. And that's the beauty for a real estate investor if there's 10%. And we've talked about this in prior shows, so I'm not going to go into it in detail. Listeners, go back to prior shows, creating wealth, home study course, come to the meet the Masters event, whatever. There's a lot more to this too long to explain now, but basically it's like this. If you get a 5 to 1 leverage ratio, say you're ultimately putting 20% down on a property Just for a simplistic example, you have a 5 to 1 leverage ratio. If inflation is in the future 10% then you normally just by owning the property with cash, you're going to keep pace with inflation because real dollars to real dollars, it's just a real dollar increase. It's not a true gain. But if you finance it, you're going to outpace inflation by a multiple of 5 or 500%. This is why people become so wealthy owning income property properly structured. And that's what we're here to help our listeners do. So go to Jason hartman.com and have us help you with that. But yeah, absolutely, that's an amazing opportunity. No question about it. What else do you have to tell.

Us on that, Zach, along with the construction pricing and where we're at with that with investor versus retail pricing points and that market value, the market itself and the local economy is booming. With the military, you don't have job loss in the military, you don't have wage decreases. If there is inflation, military people will get, generally speaking always get cost of living increases which in turn means you have nice rental increases. So those two things coupled together really help to hedge this area against inflation. When and not necessarily if, but when it to comes that coupled with just the economy and what's going on in the area with the growth of installation, the growth is outpacing the supply side by far because construction financing is still very tight. And it is still, I'll be honest, nobody in the area focuses on multifamily. Nobody in the area understands it's a smaller demographic and it's not big enough to attract larger money pools to come in and drop 2 and 3 and 400 units at a time on the area. It's smaller development. We develop more multifamily than anybody else in the area and we develop about 60 to 100 units a year. And we'll keep on that pace. It's a solid good pace that we can absorb and it's strong without getting way too ambitious and increasing the supply side too much. It's good and we'll keep a good thumb on that market.

Well, what you seem to have really done and you've succeeded at it quite well, my hat's off to you is you're a big city guy because you don't even live in St. Robert. You look in Kansas City. So you're a big city guy that came into a small town that's largely a government funded small town through the military, through gigantic military base and you're in A place where there aren't a lot of like really sophisticated real estate development type people that are competing with you. So that was really a brilliant strategy. Hats off to you.

Thank you. A little bit dumb luck.

Really, really good. Well, dumb luck, brilliant strategy. Hey, you know what I always say, I'd rather be lucky than good any day of the week.

Exactly. No, the rent to value in the area, rent to build cost is highly disproportionate in the right direction from an investor's point of view. And it's a very good opportunity that jumped on and definitely pounced on it.

Well, it's that way in a hotel as well. And the problem with hotels is they can't keep their units occupied enough. But because of just the hotel industry and the way that whole business model works. But what a hotel is providing in service to its very short term tenant is it's providing convenience and mobility. And I said it to someone yesterday, I was at the W Hotel in Scottsdale, Arizona and I was talking to this girl, she was there with her dog. We were going to Doga class. I know it's something you'd think you'd only do in California, but yoga for dogs. I know, it's hilarious, right? And she said she was interested in real estate investing and she said she just moved here with her fiance, say for a job from Dallas, move to Scottsdale, Arizona. And what's interesting is that I said to her because she was thinking of should I buy a place for myself, should we buy a place for ourself here or should we buy rental property? I've been reading rich dad, poor dad, et cetera. And I said hands down rental property. Because the best thing you can have on a resume nowadays is mobility, the ability to move for a job. That is what will keep you employed. So as investors, as landlords, that's what we're providing to people. We're allowing them to stick mobility on their resume where they only have a one year lease instead of a house that they are just completely stuck with. So I think we're providing a great service. I think landlords, investors like us will literally help increase the rate of employment and decrease the rate of unemployment. And so it's a great thing that we're doing. And with military people, they need mobility so they're not looking to buy stuff as much, they're looking to rent stuff, right?

Absolutely. They definitely look for mobility. Most people there there for three years or less and generally speaking, they can't buy a single family home, recoup commissions and everything between the time they move there, buy it and need to sell it again. So it makes perfect sense for them to be renters and for tourists three years while they're there.

That's a great strategy. Okay, good. Well, hey, thank you so much for sharing this today. We look forward to having you back on to talk about a financing opportunity and we appreciate it. Good luck keeping those vacancies as low as they are. Good job.

Appreciate the time. Jason. Thank you.

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