How To Build Tax-Free Wealth With Real Estate Investing | Extract Real Estate Income With Zero Taxes

You can get hundreds of thousands of dollars out of even a small portfolio of just 10 little cheap rental properties. Okay. Just a million dollar portfolio, not a big deal. Okay. And you use that money as tax free income. So it's like you're getting 40% extra because you didn't pay tax on it. That's right. And that's what you live on. And when you refinance the properties, it will reduce your cash flow, so you won't be paying tax on high cash flow, on high positive cash flow. So you win both ways.

Hello and welcome to the Infinite Financial Freedom podcast where we empower you with financial literacy and guide you on your journey to financial freedom. I'm Josh Metal and I'm here today with Jason Hartman, folks, founder and CEO of Hartman Media Company and host of the Creating wealth podcast, which is thebomb.com you should check out the and subscribe to the Creating wealth podcast. Jason has been involved in several thousand real estate transactions and has owned income properties in 11 states, 17 different cities, and is my personal real estate guru. So, Jason, I am absolutely tickled to death to have you here today. Thanks for joining us.

Well, Josh, I am happy to be here. And let's cover some good stuff.

Let's do it. You know, we were just talking about our roots before we kicked off this.

Podcast and they were oddly similar.

Oddly similar.

Yeah.

The trees aren't that far apart. Same neck of the woods. Let's start back at the beginning, man. What got you into real estate? What was childhood like for you? And just walk us through the journey.

Yeah, well, you know, I grew up in Los Angeles, moved around a few different places in la. It was not great by any means. We didn't have much money, didn't have much access to resources, connections, or, you know, much of anything. And when I was 16 years old, I saw an infomercial for a real estate guru. And I just had always been conscious of success and money and wanted to get ahead, didn't want to live. I mean, even at a young age, I kind of realized I didn't want to live my life the way I had grown up. This inspired me to get that guru's book. I read three whole chapters, definitely did not finish it. I put it down and my mom picked it up and she read the whole thing. I was only 16. I didn't finish much of anything back then. As Kid Rock says in that great song all Summer Long, he says, my thoughts were short, my hair was long.

Funny things.

Yeah, yeah. And now my hair is falling out and. But my thoughts are long now, so kind of different. But my mom started going to real estate seminars. Really got intrigued by the topic. Two years later, when I was 18, I was about to graduate from high school. She says to me, you know, there's this real estate seminar in Anaheim, right near Disneyland. Why don't you go? And so I rounded up nine of my friends from high school, I kid you not, and I got them all to go. It was one of those, like, pitch fest type of seminars. And on Friday night, the first speaker was a guy named Hal Morris. And he said he was talking about a deal he did. And he said that this seller paid his points, and I didn't know what points were. And so, you know, about a year before, I was fortunate to discover one of my big mentors in life, Earl Nightingale. And I had listened to his audio tapes, literally cassette tapes. And I remember him saying, using real estate as an example, you know, he was just saying, generally, the idea of life is that if you want to get good at anything, learn the basics first. And the example he used was real estate. He said, want to get rich in real estate? Learn the business first. So after attending that whole seminar the entire weekend, Monday morning, I started looking for real estate schools where I could just get my real estate license just to learn, like, the basics. Because I didn't know anything. I was 18 years old. So I enrolled in Century 21 Real Estate School for $99. By the time I was 19, had my real estate license in hand, I was in my first year of college at Long Beach City College, and I started selling for Century 21, my first full month in the business. I was like, 19 then, turned 20 right away. And I sold five houses. And I thought, this is way too easy. And everybody in the office thought, there must be something going on here. This must be a scam. This kid is. I don't know, something is weird. But, you know, I just actually worked. And, you know, most real estate agents aren't used to working, you know, you know, they're kind of sitting around the office most of the time, and I just meet clients. I would place little ads in the Orange County Register and the Penny Saver, little tiny classified ads that would say, you know, government repo, HUD or VA Repo. And I would have all these phone calls go to my answering machine, and at the end of the day, I would listen to all my messages, call the people back, schedule appointments in the next day or two with them, drive them around in my Volkswagen Jetta, and Write bids for them on these really gross, tacky HUD and VA repo houses that were boarded up. You know, they were flea infested. They were disgusting. You know, I'd show the house with a flashlight. Literally, there was no power or water or anything. And I started selling and I did pretty well at that. And then one of my clients was an investor, his name was Jim Wool. I had sold Jim a few government repo houses and one of them he didn't like very well. It was a little condo, little one bedroom condo. And he said to me, you know, Jason, why don't you take the listing on this, sell it for me and then I'll buy another property from you. I don't really like this one. I don't think it's very good property. And I said, I don't want to sell it for you, I want to buy it from you. And so I was about 20 and a half years old then and. And I bought my first rental property from my client. And that was the beginning.

Did you ever invest with your mom? Did that ever come to a partner?

No, that would not work out well. It would cause too many arguments. I would not invest with my mom.

Our past our eerily similar. And you know, as you were talking, I was thinking, you know, you're talking about those ads that you were placing that created the leads and answer the voicemails. And what came to my mind is winners find ways. And what I mean by that is when you're hungry, when you're always searching for angles and you're willing to get in and try something different, you know, there are all those realtors sitting in those offices and you were the one who are able to try something different, find a system and make it work. And that's money in the streets that we should pause for a minute and discuss.

Yeah, but you know, the thing, I mean, look, you know, later I bought a real estate company and I trained thousands and thousands of real estate agents over the years. I used to do seminars, training them on direct mail, on just general success as a realtor. Right. And I'm amazed at the number of people who will just not humble themselves to do the work. I mean, even now, you know, I became financially independent almost 20 years ago, right. I don't need. I haven't needed to work in years. But, you know, I'm a worker bee man. I just work every day. I work. A lot of people, they just won't work. They'll find every excuse under the sun. And some of them sound like really good excuses. You know, they'll find every reason why things don't work. They'll talk themselves out of everything. And you know, there's this great quote that I like and it goes like this. I don't know who said it, but he said some people have thousands of reasons why they cannot do what they want to do when all they really need is one reason why they can. And you know, that that's the thing. It's like just do it. It's just amazing how many investors, how many people in any profession or in business, entrepreneurs that just start something but they don't finish it, they just give up too early. And the world belongs to those who are persistent and tenacious and bold.

That reminds me of that story in Think of Go Rich of the gold miner who had been mining this gold for years and finally gave up, sold all of his mine and his mining equipment and the next day one of the biggest gold mines ever to be discovered in California.

That sounds eerily like the Acres of Diamonds story. I wonder which is true. You know, these might both be folklore, but, but the Acres of Diamond stories, the same idea, right? And that was by Russell Herman Conwell, right? He used to give speeches on that, you know, 150 years ago or something. And you know, you know, the point is we are sitting on so much opportunity around us and all we have to do is get to work and look for it and explore it and it will show up, but most people just won't do the work. Like it's, it's amazing to me how many people are just on the verge of success. How many people, when I used to have a traditional real estate company that I had sold to Coldwell Banker in 2005, you know, they would just give up when it was just a about to work for them. It was so sad. They just give up too early.

Well, I think the universe is here to test us. Whatever higher power you believe in, you know, everything is possible here on this earth, but not without a price. And the universe wants to test your mettle. They want to test how much fortitude you have. And I remember as you were telling your story, you know, when I got started in the mortgage business 20 plus years ago, I would have a piece of paper with 100 names and phone numbers on it. And I would call, I would start the calls at about 5 o' clock in the evening and I would call until one of three things happened. I had exhausted the hundred calls, right? I had woken three people up from bed because it's Gotten too late. Or I had three full loan applications.

Right.

I did that every single fricking night, and it sucked. And my friends would call me and they'd say, bro, we're going out to the bar. We're going out to dinner. And I'm like, yeah, I'll be there as soon as I wake three people up. I'd come in the next morning with three loan applications, and I'd sit there with the processor, and we would sit down and work those loans for six or seven hours. I'd go to the gym, I'd come back, and then I would make phone calls until I woke three people up. And I did it until I had success.

That's it.

It's not any. It's not rocket science.

It's really not. Another one of my favorite quotes is success is largely a matter of hanging on after others have let go.

Amen. That makes me think about real estate. And so maybe let's pivot. One of the things that was a great blessing in my life, and it's interesting you kind of told that pivot point of that seminar you went to. For me, one of the great blessings in my life coming from a less fortunate or less wealthy family, we'll put it that way, was I started listening to Robert Kiyosaki. And I know you know Robert and are friends with Robert.

Yeah, he's been on my show a couple times.

Yeah, he's. He's fantastic. And I remember there was actually a moment in time when I was listening to Think and Grow Rich also on a tape player. And I was driving down the road on the freeway, and I literally had this moment. He was explaining the cash flow quadrant, and I literally had this moment where I was like, I just figured it out. I know how to get rich now. And from 12 years old, I, you know, you asked my mom, I was watching cnbc, and I'd watch the stock tickers across the bottom, and I'm like, all right, it's Mandarin. Somewhere in there is the code of how I'm going to get rich.

Right? Yeah. Yeah.

And at, like, 19, I'm listening to Think and Grow Rich, and it all just comes together for me. And I go, okay, here's what I'm going to do. I'm going to spend less money than I make. I'm going to find partners. I'm going to buy real estate that has cash flow, and then I'm going to do that again, again for 20 years, and then I'll see what happens.

Right.

It's worked out pretty well.

Yeah, it, it has now. You know, the thing is, I don't want to make this whole interview and I know you said you, you want to pivot, and I think we're doing that now, but I don't want to make it a rah rah. Just try harder, work harder. There are definitely shortcuts, right? There are definitely better assets than other assets. There are definitely hacks and things that you learn along the way, for sure. And as I always say, income, property is the most historically asset class in the entire world. It's the most tax favored asset class in America. And taxes are typically the highest expense in anybody's life. Even if taxes bore you, you've got to learn about taxes, okay? Because if you can save on taxes and you can lower your tax bill or reduce it to almost nothing, think about 40, 50 or even more percent of your income, how much faster you can create wealth if you're not paying big tax bills. And of course, this is all leg. It's just knowing the strategy and doing what the government is incentivizing you to do. And one of the big things they're incentivizing is people who provide rental housing. So if you're a landlord, the government loves you, the IRS rewards you, so do what they want you to do.

Yeah, well, that's right. And so let's make that pivot into real estate. And you know, we're recording this at a unique moment in time where we've seen roughly 40 years of lower and lower inflation and lower and lower interest rates. It's possible that we're at one of those pivot points. You know, I was reading essay from Ray Dalio and some of the excerpts from a couple of different of his newsletters talking about this pendulum of inflation and how, you know, it can run 40 years in one direction and 40 years in another direction. And the question is, do you think we're at one of those pivot points? And if so, how does that impact your decisions and thinking around real estate investment?

Absolutely. You know, let me share my screen and just show you a couple things. I know some people will be listening on audio only, but some will be able to see the video. And we'll explain what we're talking about, even if you're only audio. So it'll make sense to you either way. But, you know, I've identified six ways that the government can get out of the mess they're in. No one would disagree that the government overspends. Whether you're on the left or Right side of the political spectrum. We are in massive debt in this country and around the world. You know, this is pretty much the story of every country. But the US Is in a very unique position, okay? And it's actually much better than other countries. So we've got this mess of debt. We've got all these unfunded mandates, all these obligations coming in the future that we simply can't afford to pay mathematically. So there are six ways that I've identified that the government can get out of this mess. And let me just go through them if I can. So the first way is the government can simply default on its promises. This is very unlikely because it's very politically unpopular. It's very unlikely that the government will say to everybody receiving some sort of government aid or all the government employees, which, you know, are like 20% of the economy or something now. It's ridiculous how big the government is or, you know, all the people getting Social Security, look, sorry, we can't afford to pay. We're broke. Tough luck. You know, that's just not going to happen. No politician can run and stay in power on that platform. So the other option is the government could raise taxes, right? How much could they raise? Tax? Well, not enough. The problem is so big, there is no mathematical equation that would give them enough tax revenue to pay for the problem. It's just impossible. It won't work. Tax everybody at 200% and the problem cannot be solved, right? So say, look, if your income is 50,000 a year, you have to pay 100,000. It still won't solve the problem. It's absolutely insane how big these numbers are. The government could have a yard sale, right? It could sell off assets the country owns to other countries. We could sell the ports to Dubai. We could sell military equipment to other countries that we probably shouldn't be selling that equipment to, whether that be Libya or whatever, right? The Bureau of Land Management sells off land on a regular basis. So we could sell assets, Right? We could use the military to steal assets from other countries. Right? Some would argue we're doing this now and we've done it in the past. It is the history of the world. That's just the world. It's sad, but it's the way the world works. I mean, the greatest military leader of all time, Napoleon, was basically a thief who had an army. If you read about Napoleon, he would go to war to get assets, okay? That's the way the world has worked. On the good side, a really positive thing could be some big innovation. That saves the world, right? Energy, biotech, nanotechnology, whatever it is, 3D printing, there's all kinds of of cool stuff in the works. Maybe this would be an America centric thing and the country and the world would prosper from it. We'll see. But the most likely and almost, I say the 99% sure bet is that the government and all governments, not just the US will inflate their way out of the problem. And what I mean by this is, look, if the government owes a trillion dollars to China, for example, and it debases its money by printing more of. Just understand that there are two things that make anything valuable, according to me, okay? This is just my own way of saying it. Other economists have other ways of saying it, but only two things. Scarcity and utility, okay? And money, just like copper or corn or steel or lumber or coffee beans, that's a commodity, okay? Or I really should say currency. The dollar is a currency. It's not really money, okay? The yen, the peso, the Brazilian real, those are all currenc. And they're just backed by a promise that each government makes, okay? Or each Federal Reserve or central, each central bank makes. And so as they create more fake currency out of thin air. And last year was absolutely staggering. I mean, estimates say that 20 to 35% of all dollars ever created, ever, ever were created last year. That's unbelievable, okay? And that must inevitably work its way through the system. And the classic definition of inflation is too many currency units, dollars, in this case, creating a limited supply of goods and services. So we're already seeing this in the housing market. The housing market, everybody knows right now is absolutely psychotic. I mean, I've never seen it like this, and I've been doing this since I was 19. Okay? So a long. And you know, you've got all these dollars out there chasing a limited amount of housing stock and the prices are going through the roof. It's absolutely staggering what's going on. Okay, so inflation must. Well, it already is occurring, but I think it's going to get significantly worse. But that's not bad for everybody. It's really good for people who know how to play the game. And one of the strategies I teach is called inflation induced debt destruction. Okay. And I can go into that, you know, time permitting, but you go ahead.

That's exactly what I would like to share more about. Because, you know, in the mortgage industry right now, Jason, what I'm seeing is rates have started to go up, as you well know, just a little.

I mean, historically they're still very low.

Absolutely, yes. We're, you know, it's half off when we're talking the price of money right now. No doubt. But what we're starting to notice a lot of mortgage companies do, is to start to advertise 15 year debt now. Why is that? Because they can still sell a 15 year mortgage below 3%. And that is the exact wrong approach if you understand inflation induced debt destruction. So I'd love you to go there, please.

Yeah, absolutely. Okay, so a couple primers on this before we get into it too deeply. Number one, to understand inflation, we need to understand the difference between real and nominal. Remember, the word nominal simply means in name only. What's the name of something? So if I were to pull out a hundred dollar bill, and I said, josh, what is this? You'd say, it's a hundred dollar bill. And I said, okay, Josh, well, if it were 1970, what would it be? And you'd still say $100 bill. The name has not changed, but the value has declined dramatically. Okay? So we need to understand that. We also need to understand that inflation is an insidious hidden tax. You know, we are not taxed in one way through our income tax. Of course, there's sales tax, property tax, you know, everything else. But just the two big taxes are income tax and inflation tax. But most people don't think of inflation as a tax. But why wouldn't they? I mean, think about it. Inflation destroys the value of our savings, our stocks, our bonds, the assets we own, and even the equity in our real estate. So inflation is a thief. It takes this from us, right? But thankfully, on the good side, it also destroys the value of debt. So I like to say, and you've probably heard me say it on my podcast Creating wealth show is that debt is my favorite four letter word. And so we can play the game by using debt as a tool and managing that tool and attaching it to inflation. Indexed assets, commodities that are the ingredients of houses, okay? Lumber, concrete, copper wire, petroleum products, you know, glass, steel. All of these commodities are traded worldwide. Every human on earth, if they want to have shelter, needs them. And they are not attached to any one currency. They have their own intrinsic value. Okay, that, that is not. It doesn't matter what the value of the dollar is, and it doesn't matter what the value of this dollar is. This that I'm holding up is a Zimbabwe dollar. Well, actually, it is 100 trillion Zimbabwe dollars. So I'm pretty rich, huh? Yeah. One of my podcast listeners sent these to me A few years back, I only recently found them. Here's 20 trillion Zimbabwe dollars. These are not really worth much of anything except as a collectible. Right. So it just goes to show you what happen. Government inflates their way out of a problem. Right. It's a mess. But some people benefit because the value of the debt is reduced. And inflation is the most powerful way the central planners have to redistribute wealth. It redistributes wealth from lenders to borrowers. Why is that? Because if you borrow money and you pay it back in cheaper dollars, you're paying back less. You might think you're paying an interest rate, but if the inflation rate is higher than the interest rate, you're actually getting paid to borrow the money. Right there. Now with real estate, though, it gets way better than that. And I should say, really, not with real estate specifically, but with income producing real estate. With income property, it gets significantly better because we leverage it because we outsource the debt obligation to a tenant. We don't pay our own debts. With real estate, with income property. Okay, okay. So very significant benefits there. It also redistributes wealth from old people to young people. Why is that? Because typically, and hopefully old people have assets. They have savings, stocks, bonds and equity and real estate. Right. And young people typically have debt. So it's an intergenerational wealth transfer that's happening without the need for anybody to die and someone to inherit money. Money. Okay. It's just happening every day, this wealth transfer. So it's a pretty amazing thing and it's a pretty amazing tool. And this is why income property is the most historically proven asset class in the entire world.

So, Jason, I want to take it from a theoretical conversation to a practical conversation.

Sure.

I started investing in real estate roughly the same time you did. I was 20 and a half, 21, I think I was when my mom and I purchased our first eight plex together. And we were scared crapless. I mean, man, were we out of our league, Jason. And I'm proud to say we still own that 8 plex today. It's the Wall street villa. It's right off of Salt Lake City, Capitol Hill. And when we bought that property, Jason, the average rent in that eight units was $285 for a two bedroom, 800 square foot with a view.

Jason, isn't that amazing?

Oh, my gosh, it's on Capitol Hill with a view of the whole downtown.

And what's the rent of that same place today?

13 $75. Yeah, it's gone up 4x. But here's, here's the point I want to drive home, Jason. The debt that I borrowed on that property has been the same the entire time. In fact, it's gone down because I've owned the property for 20 years. I did a 10 year fixed commercial loan. I refinanced it 10 years ago. And now 20 years into the property, the. The amount of dollars it took to pay off that loan was so little relative to my income when I got 20 years later that when I got to the point of refinancing it again after the 10 year term, the second 10 year term, I was like, screw it. It's just too much work to do. The loan, I'll just pay the dang thing off. But that is inflation induced debt destruction. The rents go up, the value goes up, the debt stays the same or goes down. And the way I like to explain it is the price of the debt is constant, but the price of the money, the cost to borrow that money is constant or has gone down in my case, over that period of time. But the value of the money is variable. It's variable. So you want to pay that debt with tomorrow or 10 or 20, 31, you want to pay it back in $2031. You want to pay it as far out as possible.

Well, think about it. If you get a mortgage today, you're going to pay it back in $2051? That's right. For part of it, for the last year of your payments. Yeah.

Hey, Jason, Fun, real quick. Will you allow me to share the screen?

Yep.

So what I'm aware of, Jason, is a lot of our listeners may not have been buying and doing accounting in the 70s. What I'm aware of is that when we talk about inflation, it's theoretical. But let me just show you this real quick. And I'm sorry, I don't.

I know, I saw that. I just, I talked about that chart on my podcast recently. Yeah.

Oh, that's great. I'm glad you used it. So think this through, friends. Jason just talked about, you know, over 30 years, the change in the value of things. But look at the average income. This is the thing I want to focus in on. The average income in 1971 was $10,622 and the cost of the house was 25,200. Well, we all know as time goes on, the income goes up, but the cost or the price of the debt stays the same. If you do a 30 year loan, the cost and the price of the debt stays the same. So you don't want to pay that loan back faster?

No, you want to pay back slower. If you could get a 40 year loan, take it. If you can get a hundred year loan, take it. You know, paying off. This idea of paying off a mortgage is just a terrible idea. You know, people have to understand the mortgage is an asset, okay? As long as it's a fixed rate loan at a low interest rate and these rates are artificially low, don't pay them off. Keep the mortgage as long as you can. And one of the other strategies I teach on my YouTube channel and podcast, create the creating wealth show called refi till you die. Okay, I actually trademarked that phrase. And the refi till you die plan is a way to efficiently extract wealth from your real estate portfolio, which might be a portfolio of one property or a hundred properties. Doesn't matter over time. And you've got to remember something as you borrow money out of the properties, there's no tax on borrowed money. This is why people that invest in real estate and just wait a few years and work the system correctly, just create so much wealth for themselves. It's an amazing asset class. It really is.

I want to ask you one more question and then I actually want to ask you 100 more questions. But I want to ask you one more question and then I want to share one more story. The question is this, Jason. Okay? If we don't do a 15 year debt and we do 30 year debt, we refi till we die, alright? The question is, what do we do with that cash flow? What do we do with that money? How do we make that? Because people think, look, wait a minute, Jason, if I pay it off in 15 years, it costs me $100,000 in interest. If I pay it off in 30 years, it cost me 250,000 in interest.

Not when you adjust for inflation though. Yeah, yeah, absolutely.

And the reinvestment of the cash flow, right? So can you speak to that? If we have a lower payment, what do we do with those dollars?

Well, I'm going to help you with that because I'm going to help you make sure that your cash flow isn't too high. Remember, you and I know that sounds completely contradictory because everybody who doesn't get it, who's like making comments below that this guy doesn't know what he's talking about. No, you don't know what you're talking about, people. I know what I'm talking about. Okay? So I always get these comments on my YouTube channel from these uninformed People who just, they just don't understand how it works. Okay? Remember, you have to pay taxes on positive cash flow. So you want to actually minimize your positive cash flow. I know that sounds weird, okay. Like it should be the opposite way. No, that's the way to do it. Okay? You pull the money out by borrowing against the property. So think about it. There's something called the rule of 72s, okay? At a modest 6% appreciation rate, your real estate will double in value every 12 years. Okay? So as it appreciates over time, you want to engage in what I call equity stripping, and you want to pull the equity out of the property in chunks. Okay? Then you take that money and you invest it. Hopefully you buy more income properties. Right? But you don't have to. You could just take the money out and stick it in the bank and you can live off of that money. It's borrowed money. So you don't pay taxes on borrowed money. There's no tax on borrowed money. So you're getting this tax free money. In my Refi T u die example, and by the way, you know, it's. I give all the actual numbers on the podcast on the YouTube channel where I go over this in detail. It takes a half hour or so to explain it. Okay. But on that example, you can get hundreds of thousands of dollars out of even a small portfolio of just 10 little cheap rental properties. Okay? Just a million dollar portfolio, not a big deal. Okay. And you use that money as tax free income. So it's like you're getting 40% extra because you didn't pay taxes on it.

That's right.

And that's what you live on. And when you refinance the properties, it will reduce your cash flow, so you won't be paying tax on high cash flow, on high positive cash flow. So you win both ways.

Yeah, Jason, so that was exactly where I was hoping you were going to go with your advice, and I thought you would. And I want to give you an example to follow that up. We, you know, we have another building that we, as a 16 unit building, we bought about, I think about six or seven years after the first aplex, right down the street. And so we've owned that building now for going on 12 or 13 years. And we are now refinancing from 5.75% because commercial loans are typically fixed for five to 10 years.

Yeah, they're not, they're not as good as the residential loans. The residential loans, better.

That's right. So fixed for 5.75% I'm refinancing right now. I've got locked in at 3.375% and I'm pulling out a million dollars. Now, Jason, how much taxes am I going to pay on that million dollars?

00.

Not a penny of taxes.

I know, but if you made a million dollars, you'd give probably 40% of that away, maybe 45% of the way. It depends what state you live in and so forth to the government. Okay, so it's a big deal, folks. That's a big difference. It's like almost double the money.

Well, and think about it. My alternative is I sell the property. I pay the capital gains, I pay the real estate commissions. I have to go through, you know, all of that work and then keep.

The properties, refinance them.

Yeah, that's it.

Absolutely refi till you die and spread.

That debt out as long as humanly possible and allow inflation.