CW 2464: The 'Free Lunch Metric' Revisited, Client Case Study - Dave Porter

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Hey brother, I just finished listening to your July 5th episode, man. I just absolutely love your content, man. It gives me value every time I listen to it. It gives me a different perspective on how I view some of the stuff that I do. It's just always good, man. And I just, I want to keep telling you the same thing over and over and over. It does affect people. It does change people's lives. And really do appreciate all of the effort that you're putting into that because I know that you've really got better things to do than this, but yet you still sacrifice that time and do it. So hats off to you, bro.

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, selfless, Jason Hartman is a self-made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer, and entrepreneur who's owned properties in 11 states, had hundreds of tenants, and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your financial independence day. You really can do it. And now, here's your host, Jason Hartman, with the complete solution for real estate investors.

Greetings, Empowered Investors, and welcome to episode 2464. I have got an old guest and client, wonderful guy, back on the show with us today. And he just told me that the first time he was on the show, we were in the double digits, and now we're in the quadruple digits for show numbers. So it was before we even hit 100 episodes, and that's great. It's my pleasure to welcome back our client, great guy, David Porter. Dave, how you doing?

I'm doing great. But the way you started the introduction, you said an old guy, which is also true.

Well, you are retired now, in theory, at least.

Yes, yes, yes. Partially in thanks to you. Thank you.

Yeah, good, good stuff. Good stuff. So you started buying properties from us back, I want to say around 2008. Would that be correct? Yeah, great, great. And I remember the first day I met you, we were in our then office in Southern California. And Sarah, one of our investment counselors, came and kind of knocked on my door. And I was really stressed out. I had a million things on my list to do. And she knocks on the door and says, Jason, you got to meet this client of ours, because he's got a metric for investing. Oh, yeah. Which we did a show on.

Yeah.

the free lunch metric. You were buying properties in Indianapolis at the time. And you want to just tell us about that? It's just such a funny story, you know?

Sure. So this concept of buying properties outside my own backyard was very new to me, right? I did have a couple of rental properties already in Southern California, which is where I live. And I'm like, well, you know, how am I going to do a proper evaluation of these properties. So, it was just getting to the point where you could go and find all kinds of different information with Zillow and so forth.

And Zillow was pretty new back then.

It was.

It was.

And from Zillow, you could link into greatschools.com, right? And so, I started poking around on everything and I kind of noticed a strong correlation with the percentage of students in the local area that would be going to local schools for a property you'd be considering, that percentage, if it was in excess of 50%, in other words, if more than 50% of the local students qualified for free lunch, it wasn't in the quality of an area that I wanted to buy in.

Okay.

So, I just kind of used that as I was scanning through. I mean, you kind of have focused more on some of the nicer areas yourself, but also offered options for even other types of properties. Those are great properties, just not stuff I was interested in getting involved with, Section 8s and stuff like that. Higher risk, higher return potentially, right?

Yeah.

But I kind of want— I was working full-time in an executive position. I didn't have much time to deal with this stuff, although I always used property managers. I also wanted to have a pride of ownership in all the properties. And even today, like, if any of my kids lived in any of my properties, I would be good with it. They're all in great areas. They're in safe areas. They're real solid neighborhoods and you just have fewer problems, right? So, that was it. And that was my cutoff point, 50%. And surprisingly, I think especially now, it's fairly easy to get free lunch, right?

Right.

And so, you'd be surprised even what you would consider some of the best areas, 20-something percent of the kids qualify for free lunch. So, anyway, that was my free lunch metric, 50%. And I've Never violated it.

Yeah, that's great. That's a great story. That's a great story. So, so David, you purchased I think twenty properties or so through us. You did Indianapolis. That was your first one where you ventured outside of your hometown, right?

Right.

Okay. And what other markets?

Phoenix.

Okay. So Phoenix and Indy were just those two.

Just those two. And I already owned a couple in California.

Okay, good. So so you are in three markets essentially. Three markets. Yeah, yeah. Good stuff. Let's just kind of go. rewind a little bit more and I'll ask you, how did you hear about us? I assume you were listening to the podcast back then, and that must have been in 2007, or did you find us?

Yeah, uh, that would have been— so actually what happened, it would have been late 2007 to early 2008. You were actually running radio commercials back in those days.

I remember, that was the old days.

Yeah, yeah. And I heard that, and I've been in logistics and transportation almost my entire working career, some form of it, right? I took a brief respite from that, and I was in financial services for a while. And that was at the time that the global financial markets were just melting down.

I was just about to ask you about that. So we were, we were literally in the midst of the Great Recession, the global financial crisis, and you were buying properties. That took some real courage.

Well, it kind of did other than the fact that I had been selling financial products, stocks and bonds to people, and that was no place to be. And I knew long-term cash wasn't anywhere to be. And at the time, I mean, the prices came down, came down, came down so much. You might remember this conversation. We could buy properties back then far less than the cost of construction.

Right.

And I said, well, The properties could go down more, but the rents, they weren't really collapsing, maybe a little bit, but not very much at all. I said, really, what I cared about was building a cash flow machine. And if the prices went down a little bit more on the basic property, I'd still be great with the rent. So, I mean, there's no such thing as a sure thing, but I didn't see how I could lose. So, I had plenty of people telling me I was crazy, A, for investing a lot of money in that kind of a market. Secondly, being an LA guy, you're buying in Indiana? What's with that? So, but I was just like, that at the time was the best cash-flowing area in the country. I love the area, 50%, you know, my free lunch metric. So, I just went in and bought 16 properties in Indiana.

That's fantastic. That's fantastic. And then, how much longer after you bought the 16 in Indiana, how much— and by the way, we're still in that market after all these years, if you can believe that. I mean, That's been one of our longest-running markets, that and Memphis. Those two have just been perennial machines for our clients. But how long before you started investing in Phoenix?

That was a little bit more towards the tail end. I started buying late 2007, early 2008 in Indy. I think I bought my— yeah, it wasn't the tail end. I think I bought one in 2011 and one in 2014.

Okay. And that was the Phoenix market, right?

Yeah. Gilbert, to be specific.

Yeah. Yeah, I remember we were doing business there. So over all these years of being a real estate investor, you're a buy-and-hold investor, you've still got all the same properties that you bought. You didn't sell any of them. Tell us about some of the experiences. And you know, there's always good, bad, and ugly. It's not perfect by any means. It's just better than everything else. That's what I always say.

And capitalism, right?

Yeah, absolutely. And, well, that, and that quote, I think, was a Winston Churchill, you know, capitalism isn't perfect. It's just better than everything else. Right? Right. So I agree. Any tools or techniques? Of course, the free lunch metric was one of your early techniques. Right?

Great.

Any, any others over the years?

You know, so I would say, you know, going back to my first 2 prior to investing with you, you know, I'd gone through a process where I kind of always wanted to do it, you know, and I'm reading all the books and Trying to learn. And just like, at some point, I said, you know what, I'm going to do the best job I can evaluating these, but— and know it won't be perfect, but I want to get in the game. Are you going to get in the game? Are you really going to do this or not do it? So, that was an important step for me. And interestingly, when I started, I bought 2 properties, and they weren't cheap there in Southern California. I mean, at the time. Now, it would seem cheap based on what I paid.

Right.

So, I think, A, just get in the game. Right. I tried self-managing originally, and I think if you're going to do that, you have to realize you have to be prepared to dedicate maybe not serious time, but at least serious attention to it. I found out that me and my wife were not the best property managers.

You've always had property managers, right?

Always.

Yeah.

And so, after—

Except for when you tried, you said you tried self-management.

So, I'm going to correct that. I tried self-management. And it worked great until it didn't. And I had to take somebody to court. I didn't even know how to do that. You know, all that stuff, right? So, okay, at that point I went to a property manager and said, hey, if you can get me out of this mess, you can just manage these for me. That would be great. And so I haven't managed a property for over 20 years now. But even with property managers, I guess another important lesson is you've got to manage your property managers.

No question.

Real estate investing, people call it passive. I mean, I don't dedicate a ton of time to it, but don't think you can just kind of ignore it and not pay attention to it, right?

Nothing is passive. There is— I even say a bank account is not passive. And I've told the story before, I've had bank accounts over the years that really required management. In fact, I will tell you, I am in litigation with a credit union I banked with. I am suing them because they literally distributed $234,000 of my money out of an account that they shouldn't have distributed. I mean, it's insane. Like, there's no such thing as a passive thing. You know, banks during the Great Recession were going out of business left and right. And I got letters saying, you know, this happened 7 times to me, that you've got to move your money, this bank is going under, we're transferring it to so-and-so, your account's going to be different, you're going to lose this. I had to like deal with all this stuff. And Taxes and inflation are eating you alive in a bank account. And that, that would be considered by anybody to be the most quote unquote passive thing you could possibly do. That's why I give that example. Of course, stocks, bonds, mutual funds, that all requires lots of attention, you know.

Right. Well, I'll give you another example. So what I was involved with was index funds when I was a financial manager. And so there's this school of thought, passive management, Right. Invest and relax, risk-appropriate portfolio and just relax. That's better for sure than active trading.

Sure.

Nobody wins in the long term. Everybody's got a good story or two, but they don't tell you the bad stories, right?

Right.

But even with that, with all the hackers and everything, you better be checking in on your account once in a while because you've just got to do your due diligence. So, anyway, with the property managers, I've had to switch 1 or 2 of them out. Not a big deal. There's plenty of property managers and you can get referrals like from your group or other people that you get to know. So, I've had to swap out a couple of property managers over time. But so, that would be it. Manage your property managers. Invest in properties that you're proud of, that you like. I like my properties. Like for my spreadsheet, I've got a spreadsheet with all my properties, the financial metrics, my insurance and taxes and all that.

Mm-hmm.

I've got a little picture at the top of cell A or row A going all the way across. I've got pictures of every little one because I like looking at them. I feel good about them. If they were ugly properties in a bad area of town, why would you want to look at them, right?

Yeah.

So, those are just a couple of things. The other thing I will say, I think the people that have gotten burned in real estate went in without an adequate buffer. And so you don't want to do that. Save up a bit of money so you have a cushion. So if somebody doesn't pay the rent, because that's going to happen at some point, you're not going to be forced to sell or get into trouble.

Right now, we actually have, you know, since the old days, you know, I know you're familiar with our Property Tracker program. And you use it? Okay, great. We've actually added to the pro forma, the minimum 4% reserves. So of the purchase price of that house, you've got to earmark 4 It's not that you invest, just money you keep in the bank for emergencies, for vacancies, for surprise repair items and things like that. Because too many people get their whole plan derailed because they just don't have a buffer, they don't have a cushion. And that's just crazy that they allow that to happen. Yeah.

And so the people that I've met that have gotten killed in real estate was just because of that. They went out on a limb and it was back in the days when the market was just going up, up, up, up, up. I can't lose. I can't lose.

They were the appreciation investors rather than the cash flow investors.

Speculators, speculators. And they got burned. And then they ended up losing their personal residence as a result of, you know, silly, you know, taking out a second on that to buy that and all that kind of stuff. So anyway, don't do that.

But—

Let me just elaborate on that one for a minute. What I always say is nothing extraordinary should have to happen for you to make a good return on your investment.

Right?

If And by extraordinary in real estate parlance, I mean appreciation. If you're expecting some massive appreciation, you are part of the Greater Fool theory. Okay? And, you know, the Greater Fool theory works until it doesn't. It's basically a Ponzi scheme. You know, no matter what I pay for this property, some greater fool will come along and pay more. You shouldn't view it that way. Just buy and hold properties just like you've done, David, just like I've done. Excellent point. Yeah.

Yeah. And I love the appreciation, but I view it like the icing on the cake. It's like, oh yeah, this feels good, you know? And I do have this thing I run and say, oh, they're all worth that now. Realize, of course, what they're worth now is not what you would get in your pocket after taxes and commissions and all that other kind of stuff. Yeah, but it's nice to see. I mean, boy, since those '07-'08 days, you know, doubling, tripling, quadrupling.

Oh my gosh. Now I want to mention that. So you were buying properties. I remember one of the properties you bought. I, you know, vaguely, I think you bought Like, it was basically a new home through our network in Indianapolis for like $80,000, a big 5-bedroom family house. You got a good memory.

I remember this conversation that it's been 15 years since we've had this discussion or more.

Yeah, absolutely. And that, that property today is probably worth $350,000.

Yeah, yeah, bingo. Yeah. So that was— I'm just guessing, but yeah, that was an $80,000 property, 3,000 square feet. I remember you and I talking about it because the insurance company wanted to charge me so much money to insure it.

I know they wanted to charge you the replacement cost and you bought below the replacement cost. Yeah, it was far below.

I said, you know, why would I pay so much insurance? Because to replace this, it would cost that much money.

And then I told you that was a good problem.

That was a good thing.

Yeah.

Yeah, that's a good thing. So yeah, and that honestly was, you know, fairly typical.

You know, that was, that was basically $29 a square foot you were paying.

Yes. Yeah. A lot of 20s and 30s back then. Yeah. Yeah. Yeah.

Amazing.

And that was an unusual, unusual time, you know, but—

But David, here's the key for the people listening. Okay. Look, folks, there is never a time when you know anything for sure, right? During that time, like, we have to really remind ourselves of how negative the news was.

That's right.

I mean, it was, it was like the world was falling apart. The country of Iceland went bankrupt. I mean, just think about that. Lehman went bankrupt. There were omnibus giant, nearly trillion or trillion-dollar bailouts by the government. Hank Paulson was the Treasury Secretary. You know, everybody was talking about every conspiracy in the world. Stock markets around the whole planet had plummeted. I mean, we thought this was the end of the world. All of the news was, this is the end of the world. Yet you had the courage to buy these properties and look at where you are now.

Well, thanks. And, and something else, and I'll give you credit for this, uh, Jason, is, uh, You taught me something. And what you said is your good credit is an asset.

Yeah.

And in my case, it was an untapped asset. And I've always been very conservative, still am. And at that time, I owed zero on any property, my rental properties, anything. I had money saved and all that. And not only, you know, I borrowed— it doesn't sound like a lot of money anymore, but, you know, over $1 million. And use that in small little down payments to— I mean, not small, but, you know, 50% down payments to buy a whole bunch of houses. And nobody was doing that back then, you know, and it seemed like—

It was hard to get financing. The banks, when you were buying, David, the banks didn't even want to finance the properties. They were limiting loans to saying you could only have one, and then it went to 2, and then to 4 other loans for rental properties beyond your personal residence. I mean, it was like, yeah, The whole market was just shrinking, you know, and everybody was worried.

Super risk-averse. So all those, almost all those were foreclosures that we bought, almost all of them. And then so the other thing that I would share with your viewers is there's foreclosure opportunities here and there still today.

And hardly any right now.

Yeah, yeah.

Hardly any.

To the extent you run into them, What I found is you'd see a lot of kind of just surface problems, like the carpeting's trashed, the walls have holes punched in them. These are all easy things if they're in nice areas to get fixed. And it's great for you because they don't show well. I remember one of those properties in Indiana, somebody had taken a can of paint. They were mad, I guess, because they were losing their house.

Threw it all over again.

Paint all over the cabinets. I was like, all right, these are like Couple thousand dollars here and there, whatever. And at the end of the day, you still get a great economic— you probably want to repaint and get new carpeting anyway. So the extent they trash that, who cares? It's great if it doesn't show well, gives you more opportunity. So we did some of those.

Yeah, yeah, it's really something. But I think the key, the key thing, the key secret to your success, I think, is the fact that you were willing to do it when all of the news was negative. You know, everybody would have discouraged you, and nobody would have faulted you for saying, oh, no, this is, you know, I don't want to be investing in real estate. This is too risky. I mean, that was a, that was a really risky, crazy time. Like every piece of news coming out was so discouraging and so negative back then that you just got to remember, people need housing. It doesn't matter. Like if there's not enough housing, you're gonna do great. And that's the, that's the market we're in now even. So yeah.

Yeah.

The other thing that I loved about Indiana that some southern part of Indiana, if you're still representing that same area, just south of Indy, there's a lot of great suburbs there. And again, the schools are great, shopping's nice, they're beautiful areas with great people. Employment's growing there. I keep an eye on it. And I really like that area.

Yeah, yeah. Good stuff. Good stuff. Okay, any tools in particular that you're using or other things that you've learned over the years?

I just want to make sure we cover anything else Yeah, I guess what I would say is one of my property managers gives me some— I don't know if I could share the name of the company if you want me to or not.

Maybe not the name, but—

Okay, yeah, I don't even know the name of the platform they're on. I don't think it's proprietary, but this gives me some great metrics, and I appreciate that. Um, in Indy, I used to have 2 property managers there. One wasn't doing so well, so I did consolidate them under one. I like the idea of some diversification, having couple different property managers, but this particular one, uh, is— has done a good job with me. I've been with them since the beginning, uh, and that's worked out well. So I like the tools they have. For me, the way I manage these properties for myself is I've just got a, a giant spreadsheet basically with a column for each property with all the accounting categories coming down this way. You can see what they're all doing. I can see the percent return on each of them, you know, at the end of the year. And for my tax man, at the end of the year, it's just a cut and paste and it gives them everything, all of my expenses. You know, the property managers give you reports on that stuff.

Yep.

With taxes and insurance typically being the largest expenditures other than when you have a move-out and you have some minor rehab that can be, and that's going to happen. Don't worry about that.

How long are your tenants staying and what do you think about rent increases? How do you manage that?

Yeah, I rely on the property managers to help me with that. We talk about it when we have a vacancy, what the market's doing and what we need to do to rent it out fairly quickly. You know, the great thing about property managers is since they get a percentage of what the rent is, they do have some incentive to try to get the rents up a bit for you. What we've been seeing, though, is in Arizona, In particular, it's definitely leveled out. I was getting like maximum rent increases every year. This last round wasn't so much that way. You know, I think things have kind of cooled off a little bit.

I agree.

In Phoenix. Um, Indy's just— Indy's like, you know, you're not gonna get the Southern California or even the Arizona appreciation there. Typically we've gotten good appreciation, but it's kind of been steady over the years. You know, that's a steady kind of market that you have there with kind of steady rate increases and steady appreciation.

It's a linear market. Yeah, absolutely. It really is very linear, but, but solid in returns. Was there ever a time, David, where you thought, you know, this is just too much hassle? Like, I don't want to deal with this. Too many problems. There's a big repair that comes up. You got to replace an air conditioner, a roof, you know, a water heater, even that you just like, I don't want to hassle with this. And maybe that wasn't for your whole portfolio because that wouldn't happen all at once. You're diversified into 22 properties. But, you know, maybe you thought, I'm just going to get rid of this property. I just don't like it, you know?

Yeah.

You know, and you never did. You kept them all.

Yeah. I mean, I've gone through that thought process before. You know, it does take— you know, the biggest work that you have with this is just the financial tracking for tax. reasons and, you know, paying your tax bills. So you got to, and you should be keeping good account of all your expenses and stuff like that. But getting that together at the end of the year is a little bit of work. I have all my insurance bills on all properties. I got them synced up so they all come due the same month. So I'm not writing checks all year long, you know, for, you know, $1,000 for this property and that property. Something else that I did, I mean, that I think is a good idea, and I'd be interested in what your thoughts are on this. You know, insurance costs have gone up a lot.

Yeah, they've actually come down though, just this year, maybe last year a little bit. They got really bad there for a while, but now they're actually coming down, believe it or not. So, that's kind of nice.

Yeah, I have a renewal.

On your next renewal, you're going to notice it.

Yeah, I hope so. So, I went with like max deductible not long ago on all that. I mean, I just want to be insured against kind of a catastrophic loss. And you're never going to make a claim on a $2,000 thing anyways, because then your rates are going to go through the roof. So, I think kind of taking that max deductible is not a bad strategy. So, I did that and it brought my insurance—

How much is that? $5,000?

Yeah, it's like $5,000, I think, $5,000 to $10,000. It depends on the carrier and the market and stuff like that.

Right.

But yeah, I prefer the lower rate. Yeah.

Honestly, in all these years, I've never filed a claim. I've never filed a claim, so I just haven't had anything. So thank God. Yeah. Yeah. So I mean, I guess I think that that would be the main thing. So I've got my big spreadsheet. I track everything that way. I stay in touch with the property managers, the ones that I have now stay in really good touch with me, have a good relationship. I send them Christmas presents every year.

Wow.

Yeah, you know, I mean, because these guys are very important to me and I appreciate them, right? So I want to have a good relationship.

Yeah, good, good stuff. Good stuff. Well, hey, thank you for sharing your wisdom of 19 years or so since we first met and you've been investing with us and really appreciate your business. This is one of the problems with our business. When it seems like we have so many clients that are in your kind of situation, they get up to about 20 properties. And then they're just not customers anymore. Because they're done.

Yeah.

Yeah. Yeah.

It's kind of funny. It's kind of funny how that works. We've noticed that with a whole bunch of our clients, folks. Yeah, we really have. And it's a good thing.

It's good.

Yeah.

Well, Jason, look what you've done for all these people. I mean, I think they're probably in a similar situation. They've got a nice kind of cash flow.

I mean, machine.

And that's what they wanted, you know, and that's what they've got. And I mean, I've thought before, should I just roll all these up and go buy an apartment complex or do something like that? And I don't want—

well, you would have, you would have suffered massively with that in the past few years.

Okay. All right.

That is not doing well, the multifamily component. Now, you know, everybody just wants a single-family home. And one of the other great things about your single-family homes is the tenants are dispersed. So they're not talking to each other. They're not ganging up on you.

There's no mutinies.

There's There's no rent strikes, right? They're all, they're all like individual relationships. And I really love that about single family. I've owned both. But I think the single family is much better as an asset.

Yeah, yeah, I've been, I've been happy with it. And you know, you do get some of those people, I mean, you know, having a tenant for 5 years plus, and that's not unusual, where that would be an unusual thing in an apartment typically.

Oh, yeah, they're much more transient, you know, in the single family homes. You know, as I always say, The best tenant you can ever have is a nice family where their kids are in the school districts. They will like fight to stay there. You know, that's a great tenant. There are other great tenants too. But I just kind of particularly like that particular avatar. Because if their kids are in the schools, they're entrenched in the community, they're just gonna stay, you know, they're just not gonna move.

And, and that was another reason the free lunch metric, the quality of the schools was so important to me. Because if a family cares about that, you know, if they really care that the schools are good, that just kind of speaks, I think, to just their commitment to life, right? And hopefully they'd be well committed to my house.

Yeah, yeah, yeah. Good stuff. Good stuff. Well, David Porter, thank you so much. You know, if you're not seeing this on video, you're hearing it on audio only. He's got the Tesla electric semi-truck on his virtual background. So that's very cool. And that speaks to how you're in the transport— you work in the transportation business before you retired. And sounds like you're enjoying your retirement through income property. So that's fantastic. Good news. Good news. Anyway, thanks again for joining us the 3rd time on the show. First time was like 19 years ago. So great to have you back.

An honor.

My honor. Thanks, Jason. Good seeing you.

Thank you.

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