CW 89: Packaged Commodities Investing & Utilizing the ‘Free Lunch Metric’ to Evaluate Investment Properties

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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 success, 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.

Before we start today's show, I want to make a couple of very important announcements. Our twice yearly event, the Masters Weekend, a gathering of Experts on Saturday, March 7 and Sunday, March 8. So join us for these events. So that's what we do. Let's get into the show now. I wanted to have you join in on a very impromptu discussion. A few minutes ago, one of our investment counselors, Sarah, who's here with me. Hi Sarah. Hello. Just walked into the office and introduced one of our clients, David Porter, who I'll have on in just a moment here. And Sarah wanted me to have him on the show because he has some very interesting metrics as to how to choose an investment property. So we're going to hear about that in just a few minutes. Sarah, thanks for bringing David in.

Sure.

Yeah. We just getting ready to close some properties in Indianapolis or I should say David is getting ready to close some properties. He purchased some bank owned properties with our local market specialist there and so far he's had a pretty good experience. But he definitely has his own metrics for choosing the specific properties to purchase. And I would love to share it with all of you because I think it's a really great idea.

Excellent. Well, Sarah, we appreciate you doing that and I think you'll find this fairly interesting. Little quick chat. David, thanks so much for joining us with no notice whatsoever.

Well, surprise, it's great to be here.

We're glad to have you as a client and just want to hear a little bit before you tell us about one of your unique metrics in looking for properties. Tell us a little bit about your background because it integrates into the concept of packaged commodities investing and global trade and you have an interesting outlook on the global economy based on what you do for a living. So why don't you Tell us what you do.

Yeah, absolutely. Well, since 1988, for most of that time, I've been in international transportation. Basically, what my company does is provide the inland or the North American transportation for all the containers that are brought in from China, Malaysia, Singapore, Taiwan, Hong Kong, so on and so forth.

Big part of what we do when we're thinking about world trade. You know, obviously the economy is pretty connected together around the world now. And we have Maersk just three floors above us in our building, and they are closing the office here, subleasing their space. They are a big shipping company that ships containers all around the world, and business has slowed dramatically for them. Do you want to give us an outlook on what's going on with container shipping, Jason?

What I've seen since 1988 is an explosion in the amount of transportation that we've been providing, because those ports have just exploded, as you can witness. It's impacting our traffic here in Southern California, for example. These trucks and containers are just absolutely everywhere.

And so you got into the business right when the global trade boom was really picking up in 1988, and then you saw it kind of peak and you changed careers.

What's happened here with my capacity that I provide, which are the trucks and the rail equipment to bring these shipments inland? I had excess capacity of my trucks and rail equipment. I had to discount my prices because there wasn't enough of these containers coming in. In the late 8 and early 90s, that started to shift to the point where we would literally auction off our capacity because there weren't enough of my services, of my trucks and containers to bring all of these imported goods inland. We were in a shortage situation, and my rates increased by about 100% for me to provide my services. We were charging double from 1990 to, say, 2000. It increased exponentially, almost.

Wow. So what we had happen during that time is we saw more free trade agreements, we saw more of an open, less protectionist policy, and we saw more of the Greenspan bubble as he was just feeding credit into the system and just pumping insane amounts of money into the system through credit creation.

Yes.

Right now we have that being done through creation of fake money.

Yes.

Okay. So it's a different kind of pump. Now.

It's interesting, in Southern California, we don't have much of a manufacturing base anymore. Our manufacturing base in Southern California is called Tijuana and Mexicali. And that's where most people that live in the United States may not realize this, but all of your televisions are made either In Mexico, in what's called the maquiladora section.

Last time I drove down there, which I wouldn't dare do it today. The crime is outrageous. I mean, Mexico has become another Colombia. It's like a drug cartel country now. It's amazing. You drive across that border, all you see is all these big corporate names.

Absolutely.

Right across the border from San Diego because the environmentalists have chased out all the manufacturing out of California. You know, you can't afford to do business here.

Example, they make a lot of furniture down there. Now, California chased them out because they didn't want the lacquers and these emissions in the air. We saw large screen television sets, furniture, all that. We import all those goods from Mexico. Then all the other various things that you see at Walmart, Target and other places almost everywhere that's coming in from the other Asian countries. That's what we were importing it. And that activity was huge. It was great for our business. In fact, I made pretty good money doing that for a number of years. And as you were starting to ask me, after a while, I went to work for my investment advisor. Right, right. I was making money. I needed a place to invest. So I said, okay. I liked what they were doing. I was also making a lot of money in the stock market at the time. And I said, you know, I want to be part of that. So I went to work for them.

You get a securities license and everything?

Yeah, yeah. Did the whole deal. Yeah. So this was 2007, when I made this great move.

And you joined the vast Wall street conspiracy.

Yeah, I guess you could say, yeah. With no evil intent. But I was part of it. Yeah, absolutely.

A lot of good people in that industry. But unfortunately, the overriding theme of that industry is it's just a big scam, you know?

Well, there's all levels of that. The thing that's scary about it is you have no control. You don't know what's going on. And every day, almost lately, literally, there's some new revelation about these people thought they had their money invested. The guy actually never invested their money. You know, the CFO did this or that. It's a scary thing. You lose a lot of control.

And, you know, certainly you're right, David. The difference with what we recommend and the other scams you see in the real estate industry are you see things where people join these partnerships or these tenant and common deals and they lose control of their money. The thing I love about investing in income properties is you have a deed, you know, you own it. You're receiving the checks every month. The only intermediary party in there is really the property manager who could rip you off. But the amount of damage they could do is so small, it's no big deal. You know, what are they going to do? Mark up the cost of the repair of the garbage disposal and take a kickback of 25 bucks from the repairman?

Well, interestingly, I was doing both at the same time. I mean, while I had money invested in the stock market and I was an investment advisor for stock market investments, I also had rental properties. And the interesting difference about that is that, you know, my stock investments, they went way down. Some of the stocks in my mutual fund, I mean, those companies don't exist anymore. And you know what, my property values went down too. But you know what? My rents didn't. And that's what I really, really like about my investment properties is that cash flow actually increased. I took my rents up a little bit. So, you know, my theory on investing in properties is, you know, I'm investing for the cash flow. The appreciation is the icing on the cake. I know I'll get it sometime, I want to get it, but I'm not banking on that. I'm just investing for the cash flow.

And in the meantime, if you did it right, you have a sustainable investment. So you're never in a position where you're forced to sell. And you know, that's really the key. Never be forced to sell at the wrong time.

Yes.

And if the investment is self sustaining, you're never put in that position.

Exactly.

So that's good. Okay, so you had your brief foray into the securities and stock market world and Wall street world, and then you got out of that.

Yes.

And you came back into transportation.

Yeah, back into the transition quite a bit. Things changed.

Now why I'm having everybody hear this is that this is a firsthand outlook on what's going on in the global economy.

Yeah, it is. So what's happened is, as Jason mentioned, within the building where Jason has his beautiful offices is Maersk. These people in just recent years, very recent years, built and purchased tremendous investments in these giant container ships that can hold 10,000 of these steamship containers that you see at one time. And they're just mothballing them because they don't need them. The trade has collapsed, people. The United States consumer has tapped out. They're not buying anymore. And so what I talked about before, the rates were going up and up and up each year. Now they're coming down the other way because there's excess capacity.

Sure.

I have excess capacity. The steamship lines have excess capacity. The factories in China have excess capacity. In fact, they're closing many of them. Yeah. So that's what we're seeing.

Yeah. I just saw a thing recently and I don't know if I mentioned it on the show before, that 20 million or 26 million Chinese workers moving out of the cities back to the countryside because they've just been laying off, closing down factories. I mean, it is bad out there, you know, no question about it.

And not even just the new kind of emerging economies, if you will, of China, but even great names. And Toyota of Japan, for example.

I mean, Toyota for seven decades, Toyota never showed a loss.

Yeah.

And then last quarter was the first time.

Yeah.

Toyota is a great company. And even they're having troubles.

Exactly. I mean, because they now too have excess capacity. We're in an era now of excess capacity.

Yeah. So what I call this in the housing world is the inventory hangover. And this inventory hangover represents huge opportunities for people because as we were talking, you know, you follow commodities a bit.

Yeah.

And what's interesting here, everybody, is that there's this huge gap between the market cost of something or the cost to replace something and the situation where the value of what it really is. Okay? So we see this artificial deflation that I think is quite temporary, where we see a lot of funds, investment funds and so forth, unwinding positions, forced to sell things quickly to raise cash in order to stay afloat and stay in business. In our lobby, if business got bad enough, I guess I'd sell those two big flat screen TVs in our lobby. Right. Maybe some of our furniture, I'd sell it for a lot less than it's worth.

That's right.

This is what's going on around the world. And overall, if you look at oil, for example, it literally costs $70 a barrel to bring oil out of the ground. And oil is trading at what, about $44 last time I noticed, somewhere in that range. So you know that that cannot continue. This deflation is very artificial and it's built on markets and speculation and shorting of markets and so forth. Tell us your thoughts about the packaged commodities investing and maybe you can share that experience also about.

Yeah, I'm happy to share it. Yeah. Yeah. So I purchased my first two properties through Platinum. They were in Indianapolis, and one is 3,500 square feet, five bedrooms, four years old. Okay. Purchased it for $85,000. In the process of purchasing it, we had to get the insurance. So I went to the insurance company, I said, hey, I've got this property. Gave them the specifics on it, and they said, the insurance on it is going to be higher than what you expect. I said, well, why is that? Well, we're going to have to insure it for $300,000.

Now, this is a big deal, folks. Everybody listening. How much did you pay for the house again?

85,000.

85,000. And your insurance company told you they would require you to take $300,000 of insurance on the house?

Exactly.

Wow.

Yeah. And the rationale was they said, dave, it seems like you got a really good deal here because it would cost about $300,000 to replace that property if something happens to rebuild the house.

So if it burnt down, they're saying, now it's 3,500ft.

You said, yeah, it kind of makes sense when you think, yeah, so that's.

Less than a hundred a foot. It's probably. What's that? Maybe around $80, $70 a square foot, which is about the minimum cost of construction, as we can tell. So you bought that property for potentially. Now, this is not firm, and I'm not saying you could sell it for that today, but potentially the intrinsic value, if you will, of that property is $300,000, $215,000 more than you paid.

Yeah. In terms of, you know, when you talk about a basket of commodities, you know, all the steel and the cement and the wood and appliances, all these.

Types of things, the glass, the lumber, the energy cost, the petroleum products and.

The labor and all these things that go into producing the house is worth 300,000. Yeah, to your point. I mean, yeah, I could sell it for more than 85, but not 300. Eventually, I believe, and I don't know how long it'll take, that type of value will be realized. I mean, I believe that it has to be long term. These are scarce commodities. There's so much steel that we can produce, for example, and there's a huge demand for it all over the world. And so I kind of have it tied up on a nice piece of land in addition to that, in a beautiful neighborhood that has a PGA golf course nearby. And it's very, very nice area. So, yeah, it was very interesting to me.

As you were talking, I just got an email from Brittany, who is coordinating a lot of our properties. And a new property was uploaded to our website. It's a foreclosure property in Indianapolis. And so this one, I'll just tell our listeners real quickly. This is built in 2002, so it's six years old, basically. Three bedroom, two and a half bath, plus a loft in Indianapolis. It's a foreclosure. 1700 square feet. It's priced at $70,000.

Yeah.

The cost per square foot here is only $41 per square foot. Now that sounds just like oil. Oil should be $70 a square foot, $80 a square foot, and here it's $40 a square foot or so. Today this house is the same thing, because cost of construction should be 70, 80 bucks a foot. Just like oil. It's parallel to oil. Interesting thing.

Yes, it is.

And here they can buy it for $41 a square foot, and it'll rent projected for $1,000 a month.

Yeah, exactly. You know, and to your point, I'm from the Midwest originally, and I transplanted to California, so I might have a different view on the Midwest than you, but the people there, when you visit them, they love it there and they have a quality of life. While I personally, it sounds like you value the sunshine and the ocean, all that, they value uncongested streets, low crime, and they have certain qualities in their life that we don't have that are just fabulous and overall a relatively low cost of living too. So they want to be there. It's a great, great area, great schools, and so it works for them. Everybody has different needs and interests, and there's a great demand in Indianapolis for rental properties.

Listen, I gotta tell you, I've lived in California since I was 5 years old, and I am really beginning to think California is about the most highly overrated state in the country. As you travel around to these other states, you just realize California just ain't that great. Back in the 60s and 70s when it was uncongested here. And, you know, that's. That's when California must have been great. But I think it's largely riding on a reputation created 30, 40 years ago.

Yeah, I think it is. And not only importing televisions and other goods from Mexico and Asia, but people are coming too. Right? And it's making it very congested here.

Yeah, it definitely is. This property. The projected return on investment is 39% annually. Okay, folks, are you listening? Don't try this in a mutual fund, okay? 39% annually. Of course, that's projected. Of. Of course, it may not work out that way. But look, what if it's only half as good as projected? Then your rate of return is 19 and a half percent, the total cash you'll need to buy this property. Is about $22,000. Okay. That's 25% down with closing costs. And your monthly payment here, your property tax will be $105. You see, your mortgage payment here is $284 a month.

Yeah.

Okay. You'll have $354 a month. Positive cash flow.

Yeah.

If it happens as projected.

Yeah.

The is very, very low. Now, this property does need an estimated $8,700 in repair. No big deal. Okay. We have contractors go through all of these.

Yes.

Most of them are just pretty cosmetic in terms of what they need. Downside risk. Very low.

Yes, it is.

Tell us, David, about your kind of funny metric, which I, which I like. When Sarah brought him into the office, she's. Jason, you just got to hear this.

I'm an out of state investor living in California, investing in Indianapolis. So I'm trying to get a feel for these areas. And there's different areas within areas too, Right. I mean, a certain city can have all types of different demographics within it. And ideally, I'd like to invest in the best demographic area I possibly can. People that are more likely to be able to pay my rents on a continual basis. So what I do is I go to the Zillow.com website and I'll put the address of the property in there. And if you do that and you scroll down far enough, it'll show you the schools that you would go to if you lived in that house. Those are all hyperlinks. You can double click the names of any of those schools and then it'll go to another page and you scroll down and it'll show you all types of demographics of those students. And the one that I kind of key in on is what percentage of the children at this school are getting free lunch or subsidized lunch.

Who says there's no free lunch?

There is no free lunch.

We're going to call this David's Free Lunch Metric.

Okay? Dave's free lunch. Well, that's the key thing. And you can remember it that way, too. There is no free lunch if a hundred percent of the kids are getting free lunch. Unless you're specializing in Section 8 properties, then maybe you want to think twice about it. I mean, some people love those properties, have done very well with them. That's just.

My mother has, you know, and it's, it's not my thing either. But she made lots of money over the years doing Section 8. Just remember, it's a different business.

Yeah.

And if you want to be in that business, it's a Different kind of landlording. It's a higher maintenance. You'll have more collection problems, but certainly there's opportunity there.

You know what? There absolutely is. And you know, I have two other properties. I just bought two more through Platinum Network, so I'm a little bit of a newbie and I wasn't ready to go there yet. So what I like to see is something less than 50% of the children in a school getting free or subsidized lunch. And that indicates to me that the people in that neighborhood are probably going to have enough money to pay my rent.

That's a great metric. That's really, really interesting. So you get a sample there of what type of tenant you're going to have. Is it going to be someone who's depending on the state to feed them, or is it going to be someone who's resourceful enough to feed themselves? Exactly. And if the state's not paying your rent, you better hope they're resourceful enough to pay your rent.

Exactly. And I would just mention, too, it's just an indicator. It's part of the overall evaluation. I would still buy a property if it was over 50%, but it's one of the things I like to take in consideration, amongst many other things.

All right, well, anything you'd like to say in closing?

The people that I've been introduced to, from Sarah to Karen next door, the person that handles your organizational things around our operations manager. Yeah, the people in the markets to the financing people, property managers and your local real estate experts, they've been just more than helpful. I mean, seriously. And that's why I'm back for more. I'll be buying more properties this month, and as you point out, it's a little bit of work up front. Really, the work's up front. And later on, as with my other properties, it's really not too bad and the returns are just outstanding. The downside is it's not that significant. So I think it's just a wonderful program. You're doing a great service for people, so I would just like to add that.

Good. Well, thank you so much. I appreciate it. And thanks for being on the show. You know, I was going to put produce a show today and I was going to talk about the 10 or 12 biggest mistakes investors make. But now I can leave that till the next time.

Good to be on the show.

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