CW 866 - Cranes & Housing Bubbles, Income Needed to Rent, Creative Destruction & Much More with Gary & Jason

Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's 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.

So you've heard my rants about how our financial system is rigged and, and I've interviewed hundreds of experts to back up those claims and help you align your investments with the most powerful forces in the world, governments and central banks. I'm also using a perpetual wealth strategy with my income property investments that you should check out. It has enhanced the security of my liquid assets, boosted overall ROI and shifted money away from the banksters. My friend Pat Donahoe, who's one of our Venture alliance members, runs Paradigm Life and he has a free report that you can download@be your bank.com. that's beyourbank.com. check it out today.

Welcome to the Creating wealth show. This is your host, Jason Hartman, and I am talking to you live. Not live. See, that's not even true. I'm talking to you from Europe. No, that's not true either because I'm recording this before I go to Europe. But by the time you hear this, hopefully I will be in Croatia laying in the sun. How's that sound? I don't know where I'll be, but we'll see. Anyway, it's episode 866. Thank you so much for joining me today. And I've got Gary back to join us. He's one of our clients Venture alliance members and he's been really active lately and contributing some good stuff to the podcast. So, Gary, it's great to have you back.

Thank you. I'm. I think I'm getting the hang of this and I really am enjoying it. It's a, it's always an honor, Jason.

Well, it's my pleasure. So there's a few articles that we've been looking at. Elizabeth, who's, you know, in the Venture alliance, of course, and has been on the podcast before, she posted this really interesting article about cranes and one of the jokes I used to make years ago in my creating wealth seminars about how my mom went on this China trip and she just couldn't believe it. And I've never, I've been to 81 countries, but I've actually never been to mainland China, only Hong Kong. And so I gotta get there. But you know, it's a big trip and I want to go see the Great Wall and all that stuff. But one of the things my mom said is when she landed in China, she saw from the plane, like these cities were ginormous. It's like New York City times seven. Right. They're just these incredibly giant cities with amazing numbers of people. Right. The main Chinese cities. And when, when she got on the ground and looked up, it's like bird of China was the crane. And that is an interesting sign. And I'm not sure exactly what it means, but some people have postulated that really, really tall, record breaking skyscrapers is the sign of a bubble. Right. You know, when, when people are initiating these giant high rise projects all around the world, that's the sign that there's too much money flowing into the market. Right. And so the cranes, though, interestingly, from Elizabeth's article, do you notice a common thread about where the cranes. Are you looking at the map, Gary?

I am, I am, yeah. It's every place where you do not focus on properties that's the common thread.

Because they're almost exclusively cyclical markets. There are three hybrid markets, Phoenix, Denver and Austin in there. Okay. And all the rest of them are, are very much cyclical markets. Well, actually, I'm sorry, Chicago is in there and that is a hybrid ish market. But where the cranes are in Chicago is the cyclical part. That's the high rise downtown. Okay, we just saw that. Yeah, we were just, we were on the 96th floor of the signature room for the Venture Alliance Mastermind Group. And that was an incredible view, Gary. I took one of the best pictures of my life from that building.

I mean, yeah, that sunset was incredible.

The, the photo I took with just the iPhone is amazing. Like, it's shocking how beautiful that photo is. Yeah, it's really incredible. But, but yeah, so that's the cyclical part. So you see how you can't even refer to Chicago and say it's linear, cyclical or hybrid, because the outlying areas of Chicago where, where we like to invest, you know, those are pretty solid and linear with a slight, you know, a little bit of hybrid ish ness to them. So, yeah, interestingly, yeah, very interesting about the grains. So what do you think? Do you think that's the sign of a market that's too frothy?

Well, it's the market, but it's also, you know, I think is also just the money bubble, you know, the credit bubble that's out there. You know, the money is sloshing around the entire economy, the entire world, not just, not just those local markets. So I think it's a combination. Personally, I think, you know, when there's millions and millions of dollars looking for a place to, you know, be put to work, similar to China where they built all the concrete cities, they're just trying to put money to work there. Here it's probably the same and it's much easier to do it when you can. I mean, it's expensive, I'm sure, to get these giant skyscraper cranes and build these massive buildings. So there's an easy way to put a lot of money to work doing that. So I think it's that. But also, you know, I'm sure it is. The market overheated, you know, every time, you know, we have a correction, we're not doing any building, but we need to. And now we're overbuilding with apartments and pretty soon we'll have, you know, a large bubble of those in many markets. So, yeah, I think it's a combination.

Yeah. Well, we'll see now if the shadow demand comes out of the market. Meaning the Gen Y millennials that live with their parents who and their, you know, 28 to 30 years old, which, you know, by American lifestyle, you should not be living with your parents when you're that age. Right, right. And the parents would welcome your leaving probably too if you would move out because they might like to have their life back too. So, you know, when that starts to get out into the housing market and that's what a lot of these apartment developers have banked on. And they've been right so far. But you are right, they probably will see a correction cycle in the, you know, in the high density apartment type, you know, housing that has really built for that millennial type of person. So that's interesting, but just to rattle off some numbers here, Seattle, and we're only talking about big, giant cranes, obviously, not small cranes. Seattle has 58 cranes. It's number one in the U.S. right. Boston, on the other hand, has seven. Washington, D.C. 20. Chicago 34. Los Angeles 36, San Francisco, 22. And Phoenix has five of them. Portland has 32, though that's actually probably the most surprising number there. 32, ginormous cranes in Portland.

Yeah. So do you remember, you know, another Venture alliance episode in when we were in Phoenix? We had, you know, wonderful speech from Kenny McElroy and a talk with him.

Ken McElroy is great. He was so gracious and you know, he just hung out, went to lunch with us. You know, I think we were drinking beers at lunch. I can't remember now but you know, that was really cool hanging out with him. It was awesome. Yeah, yeah.

And he, you know, he commented that both Portland and Seattle are things that are just really kind of out of reach for the, you know, the individual who's coming in to try to buy, you know, the inexpensive properties and add value to them residential. But he said, you know, that the economies there are really driving upward and he didn't see any change in that. And I don't remember the details. He did give a good justification for it. I don't think I could speak to it, but I'm sure Elizabeth and Neil could because, you know, they took that into consideration.

Yeah, yeah.

Before they became renters.

Yeah. And they just sold their home in Seattle, got way more money than they thought they'd get. So Neil and Elizabeth, you're, if you're listening, congratulations. They are our first Venture alliance members and you know, they're, they're just going to do really well with that. I mean that was, that was probably a very good decision. And I just, you know, if these houses continue to go up in value, which they well may look at, you can never time the market perfectly. So don't get too greedy because that's what everybody does. It's human nature. Right. We think we should have waited to sell and then if it went the other way, you'll say, oh, I'm glad we sold.

Right, right.

So, yeah, it's really true. Well, good stuff. Okay, so other articles in here. Let me get back to that. Gary, hang on. There were a couple others you wanted to talk about. What were they?

Well, one was about the, you know, the, the unaffordability of even just renting a little one or two bedroom apartment. This is, this is Los Angeles.

This is shocking. It really is shocking. Yeah.

100,000 to 120,000 to buy, you know, afford a two bedroom in Los Angeles. And I was just talking to a client of mine. His daughter graduated college in New York City and got an offer for a really good job in New York as a, as a professional and she can't find a place to live that she can even afford to stay. And you had mentioned that you know, some, you know, some people in their 30s and 40s that, you know, there are some friends comment that, you know, no one's got a bank account here, right? Well, she can't even.

New York City, I talked about that on the show. My friend Stephanie in New York City said no one's got a savings account. It's just not something people do like. It's shocking if you have a savings account. Isn't that scary? That's scary.

It is, yeah. And so, I mean, she can't even find a place where the, where she would even break even, you know, so that's a problem for these cities. And I know Google is, is, is challenged with that and many of the others in, you know, in the, in the tech sector or trying to figure out in San Francisco how can we still keep our businesses here. Right. They're considering moving businesses because the people can't afford to live there. Even that are making a quarter million a year as a software engineer.

Yeah, yeah, it's really shocking. Okay, so the article is you need to make $109,000 per year to afford a two bedroom apartment in LA. And you know, I'm sure that's not in a great area of la. Look, I grew up in Los Angeles and that's not a place I would want to live.

Yeah, yeah.

You know, it's just everything in Los Angeles is so high on the hassle factor. LA rent now averages $2,566 per month for a two bedroom apartment. And you know, the properties there are old, they're crowded, there's no parking, everything's expensive. It's just super high on the hassle factor. So. Yeah, that's just unbelievable. Really is.

So one that I thought was really good. Jason was, was the one that's, that's right above that. And I, I cut this one out, but it was from Bloomberg and it says what a London cabbie taught me about Uber. And so the article is really good. It, it just talks about how industries.

They oppose change. Right. And you think of Uber and the taxi world and you think of Airbnb and all the big hotels and. But it was really interesting that the industry, the taxi industry, at least in the profession, at least in England, has really modernized as a result of having to keep up with Uber. And I remember here in the US in major cities that.

You know, you didn't have great service. Right. The cabbie smelled, his cab smelled, you know, and they would show up late and, you know, give you a rough ride and overcharge you if they could get away with it. And in this article they talk about how. Well, you know, Uber's not that way. Right? It's extremely convenient. You get updates. You can call the individual and get updates from them.

Same with Lyft.

Pay with credit cards, right? I mean, so everyone understands Uber and Lyft. I mean they're awesome. And it has caused these cabbies to, or the cab companies to provide, you know, comparable service. And I, I really loved the, the last comment it says, and once again, the consumer benefits.

Yeah, absolutely. And look at the next thing I want to talk to you about is how Zillow and Amazon are making an attempt to disrupt real estate. This is what the economist Joseph Schumpeter called creative destruction. And it's really a wonderful thing. And folks, this is why you should never believe in or vote for big government and regulation and this and that. Just let the market do its thing. It's not perfect, it's just better than everything else. Okay, you know, right now I'm listening to this audiobook book. By the way, folks, we're going to get into some more specific real estate stuff here in a moment. But you know, we go back and forth on the show. We talk about economics and big broad macro things and then we talk about specific tactical things. So we'll get to that in a moment with some of your questions. But this book is called the New Human Rights Movement Reinventing the Economy to End Oppression by Peter Joseph. And I can tell that Peter Joseph is a total left wing guy and he's really bugging me. I'm starting to yell at him through my airplane pods and as I'm. But you know, I listen to this stuff because first of all I want to know what the idiots are thinking. But second of all, you know, it makes me think. I try to really listen to like opposing viewpoints that I don't, I know I don't agree with. Right? And you know, it's like he makes the case, but it's like a half baked argument. And he's obviously a very intellectual guy. You know, I'm going to invite him on the show and I can argue with them so all you listeners can hear it and we'll see if we get them booked on the show. But it's kind of like he makes the argument that here's why the free market fails because this, this and that. But he never looks beyond that to the bigger argument. Like he's talking about the financial crisis, right? The Great Recession. And he says, well, see, there Wasn't enough regulation. Right? And that's why all these companies did all these scummy things. He's right. But that's not the whole picture. There's way more to the picture than that. Because the question he never asked is, how did those companies ever get in the position to be able to do that in the first place? And what I mean by that is, how did those companies ever get so big? Right? How do they get so big? Regulation made them big. Because regulation helps entrenched players hold on to monopolistic positions. That's what happens every time. And Gary, I'll tell you something. If that wasn't true, if you wanted to let more people play in the game, then deregulate the market and guess what? There will be all kinds of new players that will enter. Or why is it that in this time of massive creative destruction, with taxi cabs, with hotels, through Airbnb and br, vrbo, and, you know, all of these businesses are being just massively disrupted, the private jet industry is being disrupted by all these innovative new companies that are using up excess supply, like a jet smarter, for example.

You know, and there's just all of this sharing economy stuff, and it's brilliant. It's just freaking brilliant. But why do we have all of this creative destruction, this wonderful creative destruction where the consumer is benefiting, and we don't have that on Wall Street? Why not? Because Wall street is highly regulated, okay? There is no new competitor rising up anywhere to compete with Goldman Sachs, Merrill lynch, you know, JP Morgan or anybody. Why? Why? Because it's you. The. The regulation. You can't get through the regulation. It's so insane. I mean, you know, why is it so hard to take your company public and to go to the public markets now? That's been. One of the great things Obama did, by the way, is he signed the JOBS act, right, which changed the structure of. Of capital. I mean, it didn't completely change it, but, you know, it. It's a. It's a light, right? And that was through crowdfunding and, you know, easing up on all this stuff that's been around in these securities laws since 1933. Just ridiculous, right? And so hopefully we'll see that trend continue. But that's the question. Like, you know, you can't hear the dogs that don't bark. And that's exactly, you know, that's exactly the problem with this myopic thinking. You know, it's like they get three steps into it, but they miss the fourth step. Right? You know, go ahead, I was just.

Going to say that, you know, regulation certainly does crowd out innovation and competition. And competition as you know, as the, the Uber and Taxi article comments, you know, we see it all around us, but it, it is, it is always good. Competition is always good in a free market.

Yeah, absolutely. It's a, it's a great thing. Not perfect, just better than the other choice. Okay. Hey Gary, thank you for sharing that and that in. Okay. Innovation is great. Let's talk about some questions here. Okay, perfect. Okay. This is from the contest for the AirPods and I think we've announced a winner by now, but we're still getting through some of the questions. You guys submitted some great questions, so let's take a few of them. So Stephen did not have a question, but his comment was. It's a. Regarding the podcast, the Creating wealth show. It's a wonderful source of information and his network, that's my network, Jason's network of local market specialists, can help you confidently buy cash flowing income properties. Thank you, Stephen. I appreciate it. Derek asked and Derek has kind of a complex question. I have a defer. I have deferred comp money and California real estate that I'd like to use to buy out of state single family residences, otherwise known as sfrs. The real estate is cash flowing nicely, but Los Angeles rent control slash section 8 is pathetic. I'm sure it is.

In which order would you recommend me moving the assets to out of state investing out of state single family residences use deferred comp funds first. Okay, so it's hard to know exactly. Like I'd have Derek, I'd have to ask you a few questions, but since I don't have the ability to do that. Let's take a stab at this one, Gary. So the deferred comp, like if you have a self directed ira and I think that's what you mean, but you didn't say that, Derek. So Gary, do you think that's what he means?

It's similar, I think, I'm sure there are some minor differences, but basically he has pre tax dollars or, or at least dollars that even if they're a Roth, where he's already paid the taxes. And I think with deferred comp it's all pre tax but basically he's got retirement dollars that he can use as long as he stays within the fairly restrictive requirements on using it for investment.

Right, right. Okay, so should you use that first or should you sell or refinance? And you didn't say what you wanted to do with with your Los Angeles property. So, you know, of course I'm going to tell you, if you've listened for any length of time, get out of that Los Angeles property, okay? Because it may be cash flowing, but it's only cash flowing because you've got a huge chunk of equity in it. And look at. You have so many risks in la. Number one, of course, it's a cyclical market. Number two, it's highly overvalued. It's very frothy. Granted, it could go on for a few more years, but. And none of us know when the game of musical chairs will end. And you might be left standing, Right? But we are certainly way past the point of fundamental value in any of these cyclical markets around the U.S. okay, the linear markets, not so much. They still make sense. The deals aren't as good as they used to be, but they're still pretty good. The hybrid markets, you just can't make them work anymore, okay? They're too expensive. And in the cyclical markets are way too expensive. So I would say, get out of that property. The other risk factor you have in Los Angeles, and I'm not kidding, this is a risk factor. You know, most people aren't thinking of it too often, but it's the big earthquake. You know, I doubt you have earthquake insurance. Very few people do. And even if you do have earthquake insurance, earthquakes are different than other natural disasters in the sense that they destroy everything. Okay? If you have a tornado. Tornadoes are surgical. Yeah, they're terrible, but they're surgical. You can have a tornado destroy one house and the house next to it could be fine. Okay? But it could destroy your neighbor's house. Right? So the, What I, what I getting to when I say that is that even if you have earthquake insurance, you don't know if you'll ever recover in a claim, you know, I mean, wipe.

Out the whole company, right?

Well, it could wipe out the government. Okay? I mean, you know, it's. If the big one comes, you know, it could be like the Superman movie with Lex Luthor's plan to, you know, make part of California fall into the ocean. I mean, you know, I don't know. You know, I'm not crazy saying that. I'm just, you know, none of us are geologists. But it could be devastating and it will not devastate a small number of homes. This could equal just zillions, not an exact number of dollars in damage, okay? And, you know, there may be no recovery. So. And then you've got this overreaching Ridiculous government. Like you said, rent control, Section eight is pathetic. Okay, In Derek's comment, that's his words, not mine. And it's true. I mean, it's like in, you know, Gary, as long as I am, when I got started employing people in my own actual company in California in 1997, when I bought this real estate company. God, that was 20 years ago, wasn't it? Wow, it's a long time. When I bought this real estate company, it was 1997. You know, I swear to you, all the years that I employed people in the Socialist Republic of California, I swear to you, they never wanted me to employ anybody. They just. It was just a constant struggle. Paperwork, regulations. If you ever have a bad apple and you need to fire them, you're scared to death to let them go because you know what's coming. It's the labor board. It's the lawsuits, you know, the way they do the overtime, you know, they. They just assume the comp. The employee is always right and the employer is always wrong. And it's just. I just hate operating in places with big liberal left wing governments and people that vote for that kind of stuff. They haven't experienced it, owning a business before most of the time. Either that or they're just so rich and they're such a big business that it doesn't even matter. You know, it's like I call it, you can afford to be liberal if you're a billionaire. Okay, I would be too.

Hey, yeah, you know, I agree. I agree with you, Jason. And there's some urgency in collecting that beautiful appreciation that you've gotten. I mean, maybe you didn't intend to play, to gamble and make money, but you did. I mean, you have a lot of money built up in that property. I've known so many people who used to invest in California, and the only ones that still are and went through that 2008 crash, held on too long and still had and couldn't get rid of it. But people who, for some reason, you know, sold their properties in 2007, eight, those people change their lives by taking a massive amount of appreciation and plowing it into a bunch of properties in Texas or the Midwest somewhere and change their lives. And so there's urgency in that. I don't see an urgency in using your deferred comp dollars. It's not my favorite way to invest in real estate anyway. With, you know, with, with.

It's okay. It's just not great. Yeah, yeah, it's okay. Right? I mean, you know, it's Just not great. Because, you know, your deferred comp plan is a tax efficient vehicle and you're buying a tax efficient asset within a tax efficient vehicle. And it's just, it's not the best thing. It's okay, you know, it's better than nothing, okay? It's better than putting that money in the stupid stock market, right? Where you're probably going to lose it as long as you hang on long enough. But you know, Gary, our friend Kenny Rogers, right? He. He spells out exactly what you're saying pretty well. And you know what I'm going to say, right?

Yes, I do.

What am I gonna say?

Count your chips.

Oh, no, don't never count your money when you're sitting at the table. Right?

That's right. Yeah, that's right.

But what I was gonna say is you gotta know when to hold them and know when to fold them. Ah, good one.

Another good one.

Know when to walk away and know when to run.

Yeah, yeah.

That's such a great song.

Yeah. And they're really the same statement, right? Like, don't say, do you have appreciation as long as it's still in that property, because tomorrow may not. Not, right?

So every day, understand this, investors, every day you don't sell a property or an asset that you own, you are in essence buying it back from yourself.

For the next day.

Yeah, okay, so that's right. That's okay. When you don't have overvalued properties and when the properties are in linear markets and they make sense and they continue to produce yield, and you're a yield oriented investor rather than a capital appreciation gambler, speculator, you know, but every day you don't sell it, you're buying it back. And so my question, Derek, would be, you know, knowing what you know now, right?

Would you buy today?

Would you buy that property today as a buyer? Would you be the buyer? And you're probably thinking, no way, I wouldn't be the buyer. Because earthquake risk, big government, Section 8's pathetic, rent control, and it's massively overvalued.

Yeah, that is a great way to look at it. Kind of like Jim Cramer's buy, sell or hold, right? I mean, hold. That's a stupid. That shouldn't be there. Buy or sell.

Yeah, right. You're always buying or selling. Yeah, that's an interesting way to look at it, Gary. Yeah, yeah, yeah, good. Well, that was, that was good advice. I hope it helped you, Derek. And again with these questions, you know, we can't ask clarifying questions, so obviously there's always more to it, and that's why we have a team of investment counselors to help you. Derek's comment was what he likes about the show is the level of depth in content, competency and advice keeps me anticipating, looking forward to hear each new show and review past shows. Well, thank you, Derek. I appreciate it, and thank you very much for listening. Gary, tell us a little bit about how these down payments work, how you can borrow the down payment to buy a property from an insurance policy. Now, I've purchased two of these policies so far, and again, I was skeptical about it at first, but I've kind of. You guys have moved the needle, you and Pat. And what is the process by which someone borrows money from their policy? And like, what are the terms and how much interest rate do they have to pay them? They pay it to themselves or to the company or how does that work?

Yeah, so you'll hear a lot of people say that you're paying yourself the interest, and that's a little bit inaccurate. To go back to the purpose of why there are loans on whole life or permanent insurance policies, you go to the early 1900s, and there was this time, you know, in the Great Depression era, where a lot of people were having to cash in their life insurance policy to get that value that they had created in there, that they wanted the insurance, but they needed the cash at that moment. And so insurance companies realized, because that was the only option, then they realized that, you know, if we enable them to access the value of that without cashing the thing in, then both win. We have a very loyal client there, a customer that we want to keep, and they want the product. They just can't afford it at this exact moment. So that evolved into just allowing, you know, the insurance company, allowing policyholders to borrow money from them by pledging our own money as collateral in a policy. So, you know, my story is that I took a couple hundred thousand dollars from the stock market and mutual funds after just seeing one too many crashes. And this was in 2011, when there was a flash crash there in 11, if you remember. And so I moved money into policies and then that became available collateral for investing in properties. And. And really before I learned this, I was in escrow on a property that was a couple months from completion and the money was going to go there. And I realized after learning and educating myself on this and a lot of tremendous help by my mentor, Pat Donahoe, you know, that. That there was a better way. And so I put my money in the policy it gets protected, it's growing tax free. But then I can turn to the insurance company and say, listen, I have X amount of dollars, I have 100,000 in my policy, I need to buy, borrow 50 or 100,000 from you. They'll loan me up to as much as is sitting in my policy as collateral, as cash collateral for them. They'll loan me their dollars. And it comes at what I call, I refer to as an unstructured loan. And what I mean by that is there's no loan terms, there's no qualification for it. It's a couple minute phone call or a piece of paper and the money gets deposited into the my account. And then I use it as if it was my own cash. And I'm paying, I'm signing up to pay an interest rate that's, you know, it is floating on the Moody's bond index, which really just reflects the cost of money in the economy. That index that it's tied to, and it hasn't changed in over 10 years, for example, 4.76, maybe 5%.

That's pretty reasonable for what is in essence a second trustee, almost like a second mortgage, because on a normal second mortgage, if you can even get one, you'd have to pay way more than that. And in essence, this is like you borrow money to pay your down payment on the property at 4.6 or 4.7%. That's phenomenal. Gary, how much can you borrow? Like say you put a hundred thousand dollars into a, into buying one of these policies. How much can you borrow from it?

So you can borrow whatever is there in cash value, which really, after any significant amount of time is as much or more than you've put into it. And that's generally around four to five years at the very beginning, depending on how efficiently I design it. And not everyone wants to design it to have the maximum amount of money available right up front, but most of my investor clients, and I certainly personally did. So we design it with maximum available upfront if the goal is to use it to invest. And, and I've been successful in getting 90, 91% at times. But generally, but very easily, 85% of the money that, that goes in is available on day one. And I literally used mine four days after. In fact, I was pushing Patrick along. You know, we need to speed up because they're telling me I have to close here soon.

So four, four days after you bought it, you use 90% of its, what you paid to buy it as a down payment.

I really used about 70 of mine, but it would have been available. I was keeping the rest in there as reserves in a much more efficient way. That was the other thing, is that I got very frustrated about my money sitting in this checking account, needing six months of all this just sitting, you know, in a checking account and seasoning.

Right. Is that what you're referring to? Yeah.

No, no, not seasoning the reserves. The six months of principal, interest, tax and insurance that Fannie Mae will, will force you to show is available on all of your other properties, not the one you're buying. So as you build a bigger portfolio, quite a bit of money, you know, sitting around that could otherwise be growing pretty well sitting in here. So I did it that way.

Yeah. Right, right. Which is another lesson of why you don't want to have too much money in reserves. You want to have at least 4% of the value of your portfolio. So if you have $1 million worth of property, you should have 40 grand on the sidelines for emergencies, vacancies, whatever, you know, surprise repairs. And the rest of it should be in the pro forma. And you know, you can see those properties obviously, Jason hartman.com in the properties section and you'll see the assumptions are conservative in there and they're realistic. You also want to have some cash on the sidelines. So same concept there.

Yeah, good stuff. And so on those loans. So you have an interest rate, but your money that is pledged as collateral does not stop doing its primary job. And it's probably primary job was, well, gosh, it was doing a lot of jobs, right? It was providing insurance. It was, it was being protected in private. But, but the key one when you're thinking of it as a bank is that it was earning guaranteed interest and dividends because it's a mutual company and we're getting all the company profits as policyholders. So my policy was getting maybe 4.5% at the time and, and I was paying a loan of 4.76. And actually it's still at that rate of 4.0.4.76. So a very small spread in the interest rate. But it's interesting that over time, as your money is compounding there in the savings account side, because I didn't interrupt it like I would in a savings account of taking it out and using it. Right. And having to rebuild here, it's just continuing to compound year after year. That amount of interest earned is going to far outpace what I'm paying on that amortized bank loan back to the insurance company. But really for me, the Big thing. You know, anyone who's been in real estate knows that there's a lot of bumps in the road. Right. Last year I had a tree fall on a property that I just put a brand new roof on six months earlier. It destroyed not the root, not just the roof, but it landed in the first floor through the second floor, took out a bedroom.

Wow.

I had to displace the tenants.

One time I had a fire in the house. Yeah, I only had one fire in all my years, but yeah.

Yeah. And so, you know, there was a complete disruption in cash flow there for quite a while. I stopped my policy loan paybacks to the insurance company for several of my loans. And that freed up quite a bit, you know, a couple thousand dollars a month of capital that compensated for, you know, not having that rent coming in. So, you know, that was a huge benefit. And I didn't get any calls from the insurance company. They don't really get into that business. And in fact, so much so that we at Paradigm Life teach you how to be the banker and set up your own amortization schedules and repayments and kind of set out your own plan to repay your, your own bank back because insurance company is not going to come foreclose on you. Remember, they're backed by the cash collateral in my policy and so they're in a safe position no matter what I use the money for.

Yeah, right, right. Yeah. Very interesting, very interesting stuff. And again, it qualifies for the Fannie Mae Freddie Mac type requirements that it's the only way that I know of that you can actually kind of borrow the down payment money and still be okay. So.

Yeah, just a moment. Yeah, and just on that, you know, sometimes it makes, it doesn't make any sense on that that you could actually borrow it. But you know, if again, from Fannie Mae's perspective, from any banking institution's perspective, and they have a lot of this bank owned life insurance themselves, you know, the reason that you can borrow this is, is because it is backed by cash. So any moment I could wake up and say, listen, I'm not comfortable with the loan on this one property, I'd like to pay that off. And they'll just take the cash from my policy and pay it off. It really is backed by your own personal cash, which is why Fannie Mae is okay with it.

Yeah, very interesting, Gary. People can check that out. You guys ended up sponsoring the show, so I appreciate that. And they can check that out@beyourbank.com and so you'll hear those announcements once in a while and hey, let's wrap it up. Happy Investing to all of our listeners. Be sure to go to jasonhartman.com and check out the Properties in the Properties section and all the free resources. If you haven't checked out the new, newly updated, beautified version of Property Tracker, you can go to the Resources section of Jason hartman.com and get a nice discount on that. A great software tool to organize your real estate portfolio and your investments. We will talk to you all on the next episode. Happy Investing.

Thank you so much for listening. Please be sure to subscribe so that you don't miss any episodes. Be sure to check out this show's specific website and our general website, hartmanmedia.com for appropriate disclaimers and terms of service. Remember the that guests opinions are their own and if you require specific legal or tax advice or advice in any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to itunes or Stitcher Radio or whatever platform you're using and write a review for the show. We would very much appreciate that and be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.