CW 928 - Rich Dad Advisor Ken McElroy - GOP Tax Plan's Impact on Real Estate Investing, Treating Tenants Properly, & the Myth of Home Ownership, Part 2

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Welcome listeners and happy holidays to all. This is Jason Hartman, your host and this is episode number 928. 928. We will have the second half of the interview with Rich dad advisor and very well known author Ken McElroy today. And of course he will be speaking at our upcoming Meet the Masters of Income Property event. We are wrapping up our five year plan contest, so get those final entries in. Submit your videos@jason hartman.com contest jason hartman.com contest for your chance to win up to $4,300 in prizes, including 500 bucks in cash on one of those prizes. So not a bad deal at all. And more importantly, as I've mentioned, more importantly than the prizes are what this means to you, what this will do for you in helping crystallize, helping clarify your five year plan for income, property, wealth creation, financial freedom, etc. Etc. So a lot of good stuff, so be sure to get that in. So wow, is there a lot going on right now or what? Here we are on the verge of the Christmas holiday and moving into a new year and the news cycle is just jam packed with so much happening. All of your social media feeds are jam packed with people commenting, liking, whining, complaining, up, down, sideways. They're mad, they're happy. And what are they happy and mad about? Well, there's a few things going on of course, but let me start with one that has really saddened me significantly. A brand. The concept of a brand is basically a virtual relationship, if you will. Right. It's kind of a proxy for a relationship and company, a very large company that I've had a nice relationship with for many years that I've respected highly. Even though one of Their founders was called out many years ago for backdating options and you know, basically scamming investors by doing that. Well, now they've got another big scandal and this is really, really sad. Apple, Apple has confirmed a long time conspiracy theory that when they are about to release a new iph, they deliver a software update that slows down all of the old phones. And you know what folks, we've all noticed this, haven't we? All of us iPhone users. Basically they're doing that to create functional obsolescence and make people upgrade, motivate them to upgrade. Because suddenly your phone turns to a piece of crap right when the new phone comes out and you gotta go buy a new one. You know, that is just a huge breach of trust. That is really, really sad. Apple, I hate to say this, I thought I would, but shame on you. Shame on you. And the options backdating, by the way, that was of course Steve Jobs, the late Steve Jobs, another, you know, kind of amazing brand, if you will, on person who did all kinds of great things but you know, backdated options too. So.

I tell you, who can you trust anymore? I don't know. I don't know. So you probably thought I was going to be talking about the GOP tax plan, didn't you? Yes, you did. I know you did. I know you did. There's a lot to talk about there. Estimates anywhere from 250 billion up to 5 trillion trillion with a T dollars flowing back into the American economy with this tax plan. Wow.

Wow. I tell you. Now look at folks, we all have to realize sometimes we are so busy in life looking at the micro picture that the small picture, just how will this immediately affect our little lives, right? So if we live in a high income tax state or if we live in a high property tax state, these would be obviously the west coast, the Northeast, South Florida, you know. Well, no, not South Florida, sorry about that. Only South Florida in the extent that it has high property values, okay. And thereby has high taxes. Right? So you got to parse this stuff up. Obviously it's, you know, more complicated than it looks. Florida is a no income tax state. The tax rate rates are actually fairly low. They're not the lowest, but they're fairly low. But you know, if you're in Miami and an expensive property or south beach, you know, your taxes are high, okay. And with a new plan, you can only deduct 10 grand a year of what's known as the salt, right? The state income tax or the local taxes or your property taxes, right? So this is going to hurt some people on the initial phase of it, obviously. Right. Some people will are not liking this plan for that reason. However, the marginal tax rates have gone down. So even if you live in a high income tax state, your combined state and federal marginal rate may actually be quite a bit lower. So make sure you evaluate that in your thinking about this plan. But beyond that, when we get past the kind of myopic picture of the plan, right. And we look at the big picture of the plan, yours truly, your humble host, personally thinks that this is going to be incredibly good for the economy. It is going to trickle up, down, sideways. It is going to stimulate almost every part of the economy and that is going to be huge for all of us. Now, you know, I'm saying that. And you might listen to this show on a flashback Friday episode. Five years from now when Trump is long gone, you know, tarred and feathered, kicked out of office in 2020, might be a year after maybe, who knows, maybe Michelle Obama is president. I don't know, maybe Hillary takes another run at it. Maybe it's another Republican. Unlikely because usually the incumbent is the one who, you know, runs again. Right. I think there's only been like one time in history where that hasn't happened actually. I don't know. Could be wrong on that, could be wrong. I don't know. But look, either way, you know, there's more to it than just a tax plan, obviously, right. There's a lot more to an economy than a tax plan. But the tax plan in and of itself, I think is going to be huge for the economy. Hate Trump, love Trump, be indifferent about Trump. Doesn't matter. Okay. This, you know, like I said, I have my huge reservations about this president. I not a fan. Okay? Like in the normal sense, you know, if this were Ronald Reagan, I would say, hey, I'm a fan. You know, looking back on, you know, even Slick Willy Bill Clinton, you know, he was as corrupt as the Clintons are. He was actually not too bad a president in many ways because he had a sort of a laissez fairish attitude about some things or maybe he just didn't have time to deal with them in his administration as a, you know, for it for a Democrat, usually a Democrat would be much more interventionist than Clinton was. So anyway, a lot of money is going to come back on shore. A lot of jobs are going to be created. Many companies have announced plans to increase wages because of this, this plan. It is going to be awesome for real estate investors in the vast majority of cases, I believe. So we will see that. Of course, there's an article here, a newser article that talks about the tax changes have some homeowners scrambling. And that is something that, you know, before year end, if you live in a high income tax state or high property tax state, then you know, you want to pay your taxes, right. So you can deduct them against your federal taxes and do that within the 2017 calendar year. Right. So you know, that's something that people are, are scrambling to do. And that makes sense. Makes sense to me. We will see, you know, how this all fares. But I think ultimately this is going to be a very good thing. And I think even if it affects you personally negatively to some extent, overall, it's going to be so good that it's going to be a positive to nearly every part of the economy and nearly everybody in the economy. One other thing, we talk about the mortgage interest deduction right now. This is for homeowners. This is not for investors income. Property is the most tax favored asset class in America, bar none. It is the most tax favored asset class. But I did a quick calculation back of the napkin here and assuming I am thinking of this properly, I did it at about 4:30 in the morning. So, you know, my mind is maybe not as clear as it should be at that time. I've had a sick dog and so I've been, you know, been up checking on her. So anyway, I just did a calculation on the delta. The difference between the. If you're talking about how this will affect the high end, many of them liberal elites, okay? And in these expensive markets, like the expensive northeastern markets, you know, New York City, certainly California, Seattle, all of these areas, right. Say you've got a $1.5 million home and on that home you have a $1 million mortgage. And now your mortgage interest deduction has declined. It's declined from $1 million in deductible opportunity to 750,000. So the Delta there is $250,000 now at 4.5% that mortgage. And you know, could be higher, could be lower, whatever, you get the idea. The vast majority of that mortgage payment in the beginning is interest. Now if you've owned that home for a long time and you are paying more principal than interest, remember the principal payment is not deductible anyway. So this effect on you is not even that significant. It's much less significant than here. But the principal and interest payment on a new mortgage would be $1266, 1267 rounded off. Okay? That would be mostly interest. Okay, let's say we'll take 100 bucks off for principal. I'm not looking at an amortization chart, so I don't know the exact amount, but let's just guesstimate it. Let's say it's $1,150 in interest at the beginning of that mortgage, or call it 1100. Okay, 150 bucks or whatever will take off. So it's $1,100 in interest. Now, depending on your tax bracket, the deductibility might be, you know, somewhere in the neighborhood of $3.

Month.

Okay, multiply that by 12. And what do you have there? You have like $2100. I don't know, $2500, give or take. I don't have a calculator in front of me. And it's, you know, it's kind of hard to think while you're doing this. Okay. Think and talk at the same time. I don't know. Your host can't handle that all the time. With that in mind, you know, that is going to be a loss for these, these high end homeowners. And I know you're thinking, jason, I live in Manhattan. High end is not a million dollar mortgage over here, dude. Yeah, I understand that. This is just an example, but that's what you're looking at, okay? And then, you know, you lose some property tax deduction and so forth, but your marginal rate is going down. The benefits to the economy in general. And look, folks, if you're following my plan and my advice, you shouldn't be owning a high end home anyway, okay? Rent your high end home and own a lot of smaller lower end income properties that other people rent from you. And there you have awesome tax advantages. Now what remains to be seen is how this works inside of an llc. So say you have an LLC with an S corp election, right? That means that you've told the IRS that you would like your llc, your limited liability company, to be treated under subchapter S rules. So it's the equivalent basically to an S corporation. Now there's two basic types of corporation and corporations. And of course we'll have Garrett Sutton at our upcoming Meet the Masters event. The rich dad advisor. And he'll talk more about this stuff and, and then we will have. I'm selecting which CPA is going to come and talk to you at Meet the Masters. We got a good new one that I'd like to bring and talking to him. So we'll, we'll see. We'll we'll have them there. Someone, one or the other, will have either a former guest or a new one. And so you can get this, you know, right from the horse's mouth, so to speak. Remember, I'm not a lawyer. I'm not a tax advisor. Of course you know that. I'm just a humble hack economist and real estate investor. So that's, that's all I promise to be. So, you know, you, you treat it as an S corp so that the income passes right through to your personal tax return. So what remains to be seen now, the corporate rate has gone way down from 35% to, to 21%. But what remains to be seen is if you hold your properties inside of an S corp or an LLC or a C corp. Although not too many people do that one. At least not small investors, probably the llc with an S corp election is what most investors would do. How does that impact your tax rate? There's some talk about this because it depends on whether you're engaging. It's a complicated conversation. I spent an hour and a half on the phone with a CPA about four days ago or so and we got into this. So let me have them come back on the show or talk to you about it at Meet the Masters and talk to you about that in more detail. But look, folks, the bottom line is I think we're all going to benefit very nicely from this tax plan. I mean, it's been three decades, decades since we've had any real tax reform. You know, I'm bullish on it. I think it's gonna be good for us. So congratulations, Merry Christmas, happy Hanukkah, you know, good. I think this is, I think this is gonna be very good. Okay, let's get to the second half of the Ken McElroy rich dad advisor interview. And I want to remind you, go to jason hartman.com masters to get your tickets for Meet the Masters or upgrade your tickets for Meet the Masters as well so that you can have the meet and greet with Ron Paul and dinner with Ron Paul and all that good stuff. Access to the green room. Fancy, fancy stuff. We will look forward to seeing you real soon at Meet the Masters. If you have not been to one of our live events, you know, you really owe it to yourself to come, come meet some other investors, hear their stories, hear from the experts. I mean, the people we've lined up for this event who will be on stage are just nothing short of phenomenal. I'm so grateful and so humbled, really, for our speakers I mean Ron Paul, two of the rich dad advisors, economists. We got Danielle DiMartino Booth. We've got Andrew Zatlin, the Moneyball economist. The two leading real estate market researchers in the country, Jeff Myers and John Burns. Wow, what an event. It's going to be awesome. It's going to be awesome. So anyway, we will look forward to seeing you there. Jason hartman.com masters and Jason hartman.com contest to get those final entries in for the five year plan contest. And here is the second part of the Ken McElroy interview.

The right property. We help counsel people on the management side and we'll introduce them to the managers in advance of their purchase and all that good stuff. And then the right tenant screening, you know, maybe offer some other property management tip.

Well, I think that what's in your lease, the lease paperwork and how tight, there's a bunch of clauses and provisions inside of the lease that I think are very, very important that have to do with cars, have to do with pets, have to do with actually occupants. And so those can all be, they can be areas of revenue but they can also be areas of concern. Honestly things like drug activity or smoking or non smoking. I mean we just rolled out our first non smoking property.

That's awesome.

Yeah, those are rules that can be adhered to. We have huge late fees, NSF fees that you have to enforce. And I think what happens a lot of times is sometimes we've seen very, very weak leases. And so you need to make sure that you know, you've got all the best and greatest and then beyond that you have to enforce it. So we're, you know, we're 50 or we're $100 late fee plus $50 a day.

Whoa, that is tough man. I mean it's a lot of dollars. Isn't that bad. It depends on your base rent first of all, of course. But the hundred dollars isn't like the end of the world. But 50 bucks a day, can you do that?

You can do it. If it's in the agreement, they sign it. I don't want the 50 a day. Let me.

You just want them to pay? Yeah, right.

I do not want to collectly fees. Yeah, I'm not in the late fee business. You know, we want a big incentive to people come in and pay their rent. That's all I want. You know, but there are surprisingly cases where you know, people come in and pay late every single month. It just continues, I just continue to shake my head but they do it, you know, and Basically it's another 100 or $200 in rent, you know, but essentially what's in your lease is extremely important. You know, there's a bunch of other things on, you know, on efficiencies too, on maintenance, we have 24 hour turnaround on any maintenance items. And you know, we have a customer service full time. You know, there's there that falls under.

Tenant retention and ultimately hopefully lowering your overall cost of ownership by being a proactive manager and maintenance. Right.

Yeah, that's the other point I was going to bring up in the beginning. You know, this is a business. You're running a business period. And a lot of people think of it as an investment and it is, but it's not a passive investment. It's an active investment. It's something that you have to get involved with.

Let me, let me comment on that, folks. Newsflash. There is no such thing as a passive investment. If you invest in someone else's fund, a stock, a bond, you better be paying attention to that. It may not be quite as active as your real estate investment, but everything requires attention. You know, I used to think that there was such a thing as passive. I just don't think if you're going to be a good investor, I don't think it exists. If you play the stock market or any sort of investment game, you got to be educated.

It's so true. You know, you need to actively manage it. I have, as you know, lots of different investments and lots. I have condos, I have townhouses, I have obviously a ton of apartments and they're all different and people have needs, they move in, things break. You got to be responsive. You want to keep them there. You don't want to have to re rent the place. You don't have to put in carpet, clean the carpet, you know, do the maintenance, do the, you know, all the things that are, you know, you don't want the vacancy downtime and all that stuff. So, so retention. They're your customer, they're paying you. Their, their money is paying your mortgage. You know, we treat all our, our residents, you know, as if they're our customers.

Yeah, and I'm so glad you said that because I say that all the time. You know, like real estate investors and property managers like to sort of belittle the tenants, you know, oh, they're like children. They're like irresponsible. No, they're your customer. If you own store and someone was coming in buying stuff, would you do that to them? Would you talk about them like that? You better not because they're not going to be your customer for too long. So they're your customers.

Yeah, you're right. Think about the number they're paying. Like, you know, it's a big number. I mean, these people are paying 10, 12, 15, 20,000 a year. That's a lot of money, you know, and, and they deserve your respect and they deserve your time and they deserve the responsibility that you owe them under the terms of the lease to make that place safe and habitable. When you do that, you, you've created a relationship with your resident. They're less apt to move.

Yeah, good point, good point. Okay, Ken, I hope you bring us some more of these great tips to meet the masters when you speak there. But let's switch gears just in the interest of time here. The economy, the rental market has been booming, booming, booming. The real estate market has been booming, booming, booming. There's some talk about the business cycle, but man, I don't know, you know, Trump wants to loosen the strings of the money. He's our first real estate president. You know, love him, hate him, doesn't matter. You know, he wants to dismantle Dodd Frank. There's just a lot of money out there chasing deals and there's a lot of people who don't want to be tied down with homeownership. I think this homeownership thing is a myth. I mean, who says the homeownership rate needs to be high? George Bush. Right. You know, I think that's an old fashioned idea. I think people need to be able to move to where the jobs are, move to where the opportunities are. We as landlords, serve those people. I used to always own big, beautiful homes. You know, I owned several homes up in Newport coast California, this beautiful area, one of the most expensive zip codes in the country. And, you know, I've been renting for years now and honestly, I love it. It's like so carefree. And I own lots of rental properties that other people rent for me, but I personally rent, you know, and I think about buying a house like every other day. But, but I don't know, I'm just not that motivated, honestly. I've got investments, so, you know, I'm in the game.

Yeah, you are. I actually agree with you. I think what happened under Bush, and unfortunately, again, I'm not too political, but Obama got the brunt of, you know, the, all the poor loans and things under the Bush administration.

Well, that really happened back to Clinton, you know, that was way back to Clinton Carter, actually.

But yeah, community reinvestment what drives homeownership is typically interest rates and the ability to buy a home cheap, with cheap debt and almost no down payment. And that's kind of what. That's what pushed it in the early 2000s. And, you know, those are gone right now. And, you know, everybody's still kind of cleaning themselves up from that. I think that whenever we've seen an issue, you know. Cause it's the opposite of renting. Obviously, in the height of it, we would deny people. We were talking about credit a little while ago to rent, let's say, $1,000 apartment, but then they would go out and buy a house, you know. You know, which basically means that they had really poor credit and we wouldn't rent to them. But, you know, somehow, some way, they. They were able to buy a home. And so those days are gone. I do, however, Jason, think they'll come back again.

Yeah, they're coming back a little bit. I mean, you know, there's millennials are entering the market and they're buying a bit, so, you know.

They are. Yeah. Yeah. But also the other piece of that. Well, you got multiple things happening. You got population growth, obviously, is a big deal, and migration and where people are going is a big deal. So if you follow where the baby boomers are going, you're going to have real estate issues there. For example, I think there's 50,000 people turning 55 every day, I think is the number. No, I'm sorry, it's 65. Yeah, 50, 50,000 people a day. You know, that's part of that baby boomer generation. You know, they're moving to hot places. Texas, they're moving to Arizona, they're moving to Florida. Yeah. Why? Those states are always, you know, number one in growth. Right. You know, when people move to an area and they're retired, it's not necessarily job growth, but it's definitely puts pressure on real estate because there's more demand, there's more supply of those people for a limited number. And if there's not a lot of home building, then there's going to be, you know, there's pressure in that market. And so that's what you see. That's what you're seeing in Arizona. That's what you're seeing, you know, in Florida. And I think as people retire and consider moving from the Midwest or Northeast or wherever to where it's warm and perhaps affordable, that's one real estate play. The. Another one though, is jobs. You know, as you start to see these younger folks, they're Mobile, you know, they're going to go to where the jobs are and, and honestly they don't require a lot of space. You know, that's why the new 350 square foot apartment is starting to pop up.

Yeah, right. Well, that's, I call that the portable society. And you know, I was just talking about that on another episode of how, you know, if I wanted to be a minimalist and live in a much smaller space, all my stuff has just gotten smaller. My electronics, my stereo system, system, my TV set, you know, like everything is just much more small and portable. You know, it's just these devices that matters. You know, that stuff used to take up real space. My stereo speakers used to be giant, now they're tiny. You know, it matters. Yeah.

I tell you, I, I just converted my whole house to wireless. You know, everything.

Right.

It's, it's incredible. You don't even need IT components anymore.

I know.

It's all cloud based.

Absolutely. Okay, so, so just finish your thought on the other play there, the jobs and the younger people. And did you conclude that thought?

All I was saying is that, you know, I don't blame them. There's a bunch of kids coming out of college and they're looking, you know, where do, what do they want to do, where do they want to be? And it's kind of cool, I love it that, you know, they're moving to Austin, they're moving to San Francisco if they can afford it, or they're, you.

Know, or they're moving to Denver, they're moving to Nashville, they're moving to, you know, they're moving to, to. They moved to Arizona too.

You know, they do and they go there if there's jobs, you know, so that's traditionally what they're doing is they're moving for work. And I, so I think as long as the city or the state or, you know, is progressive from that standpoint, you know, completely different from the baby boomer situation I was talking about earlier. You're going to start to see jobs. So, so we just support example here in Tempe, Arizona State Farm just did a big relocation and, and built a big, big campus here and hired over 2000 people. Now a lot of them moved from other places as well, but that was a big, big, nice boost. And those are things that can change little sub markets very, very quickly. And so those are very exciting things that I like to see all over the place.

And those, the overall concept though, I think that you're talking about, you know, we had Meredith Whitney on the show before and she wrote a great book and it's called the State of the States. Okay. And Ken, you'll, you're probably familiar with it, but you know, it talks about how people are basically leaving the liberal states. Right. Because the taxes are too high, the real estate's too expensive, they're crowded, the cost of living is very high and they're moving to these more business friendly states because that's where the jobs are, that's where the businesses keep setting up shop. You know, that's.

Yeah, that's not new though. You're right, that's not new. I mean I, I lived in Las Vegas in the 90s and that was going on. You people, companies were moving from California to Las Vegas and relocating. And so yes, that's absolutely what will happen. You know, when, if an employer is big enough and they're deciding to locate somewhere, for example, they're not opening up in. One of the big factors is how much are the homes there for my employees, how much am I gonna have to pay them? Because, you know, it's, the wages are different in Phoenix and they, than they are in la. Yeah.

No question about it. Absolutely. Couldn't be more true. Okay, well, good, good stuff, Ken. That's all, all great stuff. Do you want to mention any thoughts before you go on, you know, the economy or what to expect or just, just anything. I haven't asked you, you know, to wrap it up.

Sure, sure. I actually think we're pretty healthy. I mean, certainly there's some areas of real estate that are overpriced, that's for sure.

Yeah.

But there's still so much opportunity in this market. You know, I mean, I'm in the, I'm doing self storage, I'm doing office buildings, you know, and you know, we're doing some, you know, to the ground up construction. And so there's still a lot to be done, you know, and just keep your eye open and find the right mentor coaches for the area.

Absolutely. Good stuff, Ken. Give out your website, MC companies.

So www.mccompanies.com that's my company. And then my personal one is kenmcelroy.com www.kenmcelroy.com.

Fantastic. Well, Ken, I will look forward to seeing you in just about a little less than a month now at Meet the Masters of Income Property. We can't wait to have you speak there. Thank you again for coming back on the show and sharing your wisdom with our listeners. We really appreciate it.

Anytime, Jason. Anytime.

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