WIN 52 - How to Invest in Real Estate with Dr. Diane Hamilton

Welcome to win, the Women Investing Network, the podcast where you can learn from successful entrepreneurs, business leaders and real estate investors who are winning in business and life. Learning from others is the fastest way to grow your skills, gain knowledge and avoid pitfalls so you can win. Join our hosts, Elizabeth Embry and Jason Hartman. Elizabeth is a seasoned real estate investor, experienced corporate executive and skilled mentor. Jason is a self made multimillionaire investor, entrepreneur and highly acclaimed thought leader. Together with their successful guests, you'll get the tools you'll need to win.

I am here with Jason Hartman, who is a successful investor, lender, developer, entrepreneur and author. He is the president of Jason hartman.com, where he is the producer of 15 podcasts and 11 books, including the Creating Wealth Real Estate Investing Show. Jason is dedicated to educating investors on economy, markets and how to create positive cash flow from income, properties and other investments. So it's so nice to have you here, Jason.

Diane, thank you.

Well, you're welcome. And I think you've been Everywhere from Forbes, NPR, MarketWatch, Investor Business Daily, I mean, Wall Street Journal, I mean, you really getting your message out. And I think it's great to find out some of the tips that we can find out about real estate investing. And with the changes in the tax situation and we were talking before on the air, I'm not in one of the best states for tax situations. So I've got a lot of questions for you. So I'm looking forward to this.

Yeah, well, you're not in a bad state. I mean, I'm from California most of my life, the Socialist Republic of California. And that is confiscatory tax rate. Arizona is a lot better than California. But you can move to a no income tax state and pay zero in terms of state income taxes. So yeah, there's a lot of options out there. And you know, since we're talking about taxes, Diane, maybe we'll kind of start with that for just a moment. Okay. You know, the single largest expense in any of our lives is taxes. Taxation is our single largest expense. And so many people are bored by this topic. They kind of roll their eyes back. Oh, let my CPA deal with that type of thing. It is imperative that we as entrepreneurs, as leaders, as investors learn about taxation and learn how to minimize our tax burden because it's the single largest expense we have. I mean, if someone was shopping for a new car, they would spend lots of time researching, reading Consumer Reports, test driving many cars. But when it comes to the biggest expense in their life taxes, they don't usually do much. And I think that is that equation needs to be fixed.

It's a tough area because I mean just the number of laws out there and things that how it changes. And we're talking just real estate mostly today, but there's so many other factors and it is hard. I have had other experts on the show who, you know, were, you know, mentioning you can live tax free if you do this or that. And I think that some of us would love to figure out how to do it, but we don't know who to trust and we don't know what's the biggest tax draining areas are. I imagine real estate's pretty high if you don't do it right.

Oh no. Real estate is the most tax favored asset class in America.

No, but I mean what your options of what you could be getting, what you're missing.

I guess I should have said yeah, the tax deductions are fairly simple on the real estate side. You know, it's fairly easy to live tax free, just stop earning income and. And you'll be tax free. So. But that doesn't sound too appealing, does it?

Yeah, no, I guess what is it the 1041 exchange that people miss that they sometimes pay a lot of taxes. And I have a real estate license and I remember just there's a very slim window that you have to be able to do certain things in residential versus commercial I'm talking about. So are you dealing mostly with residential or are you dealing with commercial?

Mostly residential income properties that are held for investment. We deal. Our firm deals with 100% investors. We help people build real estate portfolios nationwide. What you were referring to earlier is called the 1031 tax exchange. And it is one of the great benefits of income property. But there are other tax benefits as well. There's the potential for tax deductible travel to where your properties are located. But the holy grail of tax benefits with income property is called depreciation. When someone buys a property, Diane, they usually think of that as one single component. But it's really two things that they're buying. One component of these two components. One component is land, the land that the house or the apartment building is sitting on. The other component is the improvement or the house or the apartment building or the office building sitting on the land. Now the IRS allows us to depreciate that structure, that building sitting on the land, that improvement. And they allow us, if it's residential, to depreciate it very quickly over 27.5 years. And I guess the theory behind this is that one day the house will fall to the ground, it will have no economic value. And at that point, since it's a business, if you will, you would be able to deduct the loss of your business equipment. Just like if you had a factory and you had a machine that makes widgets. And if the widget machine dies, you know, you could deduct it, but what you really do is you depreciate it over a schedule. The difference is, though, that the proper doesn't really depreciate, at least historically speaking. Right. It appreciates. So that's where the beauty comes in. You can have a property that is appreciating, producing positive cash flow, where the tenant is paying down the mortgage for you, inflation is reducing the value of the mortgage for you behind the scenes, and you can be taking a tax benefit even though you're making a profit. Normally, if we want a tax benefit, we have to spend money or have a loss with income property. It's the only asset class I know of where you can actually be making a profit and still have a tax benefit. It's a beautiful, beautiful thing. It's the most tax favored asset class in America.

Right? It really is. And I think that the problem. I asked what I was alluding to with some of the people that have lost money. I used to work in subprime, and it's been a while since I've said 1031. Excuse me for saying 1041, but the 1031 exchanges and all the different things that happen to get people involved in the different kinds of investing, either home ownership or whatever, I saw a lot of people who got hurt when it was the subprime got kind of big because we all thought that the market would do something that it didn't. We thought that people who had poor credit would be able to refinance when things got better. And so they took out kind of a tough interest rate for a couple of years, hoping they'd fix their situation with their credit and all that and they'd be able to refinance and do a better rate. And, you know, everything's going to appreciate, so you're going to go up. So, you know, the supply and the demand thing kind of made things tough and the market crashed. So how do we know that that's not going to happen again? You know what I mean? Soon?

We don't know. We. Here's what we do. We do know it will happen again. Okay? We don't know it's not going to happen again. We know it will happen again. I would bet my money that it will happen. Probably won't happen that drastically again in our lifetime. I mean, heck, the Great recession was a 70 year recession, okay? It was a major thing. The only thing worse than that was the Great Depression 70 years earlier. So seven decades apart is not that terrible. Right? That's, it's a once in a lifetime event. Yeah, but, but we will definitely have, we will definitely have future recessions. There's no question about that. So here's what we do to protect ourselves. We follow one of my ten commandments of successful investing, and it's commandment number five. Diane. And that commandment is thou shalt not gamble. Thou shalt not gamble is commandment number five. And what that basically says is that the property, the property we're considering investing in must make sense the day we buy it or we don't buy it. So what does making sense mean? Let's define making sense. We don't buy properties for appreciation. We don't buy properties for speculation. We don't buy properties based on the greater fool theory which says no matter what I pay for this property, some greater fool will come along and pay more. That's crazy because there may not be. Eventually you will run out of greater fools. Okay, so what we do is we buy for cash flow, we buy for yield. Okay? Yield is pretty reliable, Diane. Appreciation or depreciation, not very reliable at all. Very hard to predict the cycles. So as I've become older and more conservative and I've been a real estate investor since I was 20 years old, that was my first property in Huntington Beach, California at age 20 and it was a rental property. I invest for yield, for cash flow. And if you do it relatively right, not even great, you can realistically earn, and I'm going to say first of all how this is possible before I say the number, you can realistically earn a very high return because the property is a multi dimensional asset class. Other investments are either one or two dimensional, okay? Income property is five dimensional, okay? So the typical investment, if you were investing in say cryptocurrencies or stocks, non dividend paying stocks or precious metals or non cash flowing real estate in expensive markets like the west coast or the Northeast or South Florida. Those markets are crazy. I wouldn't touch them with a ten foot pole. Those are called cyclical markets that have very severe up and down cycles. And, and when it's going up, everybody's a genius in a bull market when it's going down. It's tragic. And everybody loses their fortunes. So avoid cyclical markets that don't have cash flow and invest in conservative linear markets where the property makes sense from day one because it produces a yield based on the rent to value ratio. And then even through the Great recession, income held up on properties fairly well. It wasn't perfect, it's. Nothing is perfect, but it's pretty reliable. You know, people need a place to live. Most of them will pay their rent on time every month. You'll get a few bad apples here and there, but you'll get income. Now because of just the income component, the cash on cash return of the investment. It is very realistic to earn 10 to 13% on the cash on cash in the right properties, in the right locations and the overall return on investment with all of those multi dimensional features, you can earn well over 20% annually. Now the property doesn't have to go up in value. I'll just keep it. You know, there's, it's pretty simple. Just hold on to it. Why would you sell something that produces a good return? Just hang on to it for the long term?

Well, there's some factors. I've had my own investment properties and you have to deal with property managers umbrella policies and you, you know, and then there's also the non owner occupied situation if you're in a, you know, area where they don't want too many non owner occupied which are, you know, investment properties in a regular neighborhood.

Yeah, so let's, let's, let's unpack that and address some of those. Those are really good points you bring up. I'm glad you brought those up. So first off, management, a lot of property managers are crooks. They're just crooks. Okay? They are and I will be the first to say it. Oh, if they're listening, they're criminals and they should go to prison. Okay. There are crooks out there in every industry. It is really quite discouraging. Okay, so the first thing is my company vets and recommends property managers. But regardless of all of that, what we do is we exert a lot of leverage over them because we are a volume customer. And so we get to dangle the carrot of future business. And that is what makes them perform. I'm not saying anybody is doing anything out of goodwill or charity. I'm saying they're doing it out of pure greed and capitalism. And so because we have such a volume of customers, they pay attention. Okay. That's the first thing. The second thing is we teach people how to self manage properties from a distance which is something that we don't have enough time to discuss today. But I will tell you this. I own properties. At the peak of my diversification, I owned properties in 11 states and 17 different cities. Okay. I made the mistake of over diversifying. My recommendation from my lesson that I learned personally is to diversify into three to five markets. At least three, not more than five. Okay. Nationwide. And you know, if people go to JasonHartman.com and click on the properties page, they can see the different markets that we like and recommend right now, which will change in the future. So if someone's listening to this show a year from now or 10 years from now, those markets will change over time. And so diversify in least three to five markets. So you hedge your risk. You take the most historically proven asset class and diversify geographically, but don't overdo it. Not more than five markets. Don't make the mistake I made. So that's the first thing. And then the other thing is you can self manage these properties from a distance. Before about seven years ago, when I fell into self managing a property that was too thousand miles away from me, I never would have thought, Diane, that was possible. It is. A lot of our clients do it. I've done it with a lot of my properties. And today with the technology and tools available, it really is quite easy. In fact, sometimes it's easier than having a property manager. Okay, so that's the self management thing. You talked about the owner occupancy ratio in a neighborhood where there might be too many rentals or too many investors. And what I believe you were referring to mostly was the homeowners associations in areas that have an HOA or homeowners association. Well, the first thing I'd say is I don't love associations. I would try to generally avoid them. Or if you don't avoid them, be in an area that has what I call HOA light. It's a third less filling than your regular hoa, to coin a famous commercial for still white. And in those areas, Diane, you're paying basically a small homeowners association dues maybe $30 a month. Nothing big. They don't exert a lot of control over the area. They do exert some control to make sure your neighbor doesn't paint their house purple or repair their car on the lawn or, you know, whatever. Right. Those are fine. Those are tolerable. But we do not really recommend condos. Condos are problematic on many levels. Look, I don't want to say never, because I have, I have made Money on condos. But the deal has to be really good to intrigue me. Okay, if the deal's really good, I'll do any deal. But apples to apples comparison, I'm definitely the single family home is the most historically proven asset class in the world. I mean, right.

Yeah, I agree, I agree. You know, and trying to get loans are very challenging. And it is a lot of underwriter training in one of my jobs and I found it really interesting to see what they approve and what they don't approve and different things. And of course it takes money to make money. And so it takes money to buy these houses. Even if you can get a low down payment, you eventually have a certain number of mortgages versus how much income you make. So this is not for just any person. I mean, you have to have a certain level of income to be able to afford this. Now how. What percent are you putting down when you're saying that you can buy multiple properties like this? I mean, not owner occupied.

20%.

Okay, yeah, that does. If you're invested, you've got skin in the game. And it's, you know, something that you want to make sure people realize that. But what do you think is the thing that makes you pick a certain area as being the place to go? I mean, you said it changes like I don't know where we fall right now from Arizona in your, on your map, but what is it that you say you're looking for? I figure you have an algorithm of some sort to calculate that of where to go. Is it based purely on taxes or what other factors?

It basically our major thing. I mean, look at, there's more to this. People can listen to my podcast, the Creating wealth show and hear the in depth detail about it. Okay, so after they're done listening to yours, they can listen to mine and get a lot more detail than we have time for. But let me just give kind of a very cursory outline of your question. There are three basic types of real estate markets in the entire world. It doesn't matter what country you're in, where you are. There are only three types of real estate markets. One, linear, cyclical and hybrid. Linear, cyclical and hybrid. The cyclical markets we talked about before, they are the west coast of the United States, the expensive northeastern markets, Washington, D.C. new York, Boston, et cetera, Connecticut and then they South Florida. Those are the cyclical markets. They're the ones that make all the news. They're the ones you hear about all the time. They are the famous markets, okay, around the world the cyclical markets are London, dubai, Hong Kong, etc. Okay. Markets like that, you get the idea, right? The linear markets, the linear markets by contrast are the boring markets. The places you don't hear about on the news. They're places like Atlanta, Memphis, Indianapolis, Little Rock, Arkansas. You know, these are pretty boring places. Honestly, there's not a lot to talk about. So they're not reported in the, in the media. Okay. There's no story to tell. Except the only story to tell is the investors are getting great returns on their money, but they're not, you know, high flying markets that are going through the roof. And they're also not markets that are dropping through the floor in the next recession. They're pretty consistent. So that's the two types, linear and cyclical. Now in the middle of those two is hybrid. The hybrid markets as the name would imply, it's right between the two and where you are and where I lived for six years in the Phoenix metro area, that is a hybrid market. Phoenix is hybrid, Denver is hybrid. Austin is hybrid. Okay, Even Atlanta's kind of moved to the hybrid. I said it was linear before, but it, it was, but it's kind of hybrid now. And so these are the markets that are kind of in between the two. Now. We used to do a lot of business in Phoenix and we used to do business in Denver and Austin, but we don't do any business in any of those now because the hybrid nature of those markets means that the prices are too high in comparison to the rental income. Okay, and let me give your listeners a target for that. What we want in terms of what's called RV ratio. RV ratio or rent to value ratio. A very simple rule of thumb, Diane, that your listeners can use to just instantaneously analyze a deal. Now, if you want to spend 28 minutes on this, if anybody listening wants to spend 28 minutes, there's a great free video@jason hartman.com that's entitled how to Analyze a Real Estate Investment. And it takes them through, through in 28 minutes the entire pro forma and is the free crash course on real estate investing that everybody should take. Okay, so it's just right on the front page of Jason hartman.com so the rent to value ratio we want to see is approximately 1% per month. So for example, if it's a $120,000 house, we want to get around 1200 hundred dollars a month. If we can achieve that, we're doing great. By contrast, in Phoenix, in like a suitable rental property, you would pay 220,000. And you might only get 14 or 15 hundred dollars per month. Okay. In Los Angeles, by supreme contrast, okay, you would pay $600,000 and you would only get about 20, 22 to 2500, maybe $3,000 a month if you're lucky. Okay. See how that rent to value ratio in Los Angeles is only 0.5 at best versus 1%. Right? Yeah.

Well, but, you know, all this brings to mind, though. You know, there's all these different states. I mean, if you're like, I have a real estate license in Arizona. If I want to buy something in Arizona, I have the license. That's one fee I don't have to pay. And the convenience of having a real estate license. And also the people not calling me in the middle of night with the convenience of having a property manager. How do you get. I mean, I know you say you can do all these things through technology, but aren't people still interrupting you in the middle of the night? And how are you able to get these properties in other states? You don't have a real estate license or do you?

Well, we. That's our business, basically. We help people. For the last 14 years, I've been helping people invest nationwide. I used to be a regular local Realtor. I spent many years in the real estate business in Orange County, California, in Irvine and Newport Beach. And I had a traditional real estate company. I sold it to Coldwell Banker in 2005. I had 64 people working there. I sold that company, and then I got into the investment business about a year before, and I was doing them both together for a year. And so we help people source the right properties in the right markets. We help them them manage them. We provide software and tools to make it all work. We call ourselves the Complete solution for Real estate investors. And you can learn more on my podcast and Jason Hartman dot com. Okay. Okay.

So they don't need their own real estate license. No, you're buying.

Of course not. No, we're a referral network, and we help people. We match them up with the right providers of properties in all these markets. But I want to address that property management myth that you just repeated. And many people have repeated the myth. So, Diane, I don't blame you for repeating it because I've heard it so many times.

I've had it happen to me, though.

Here's the myth. Here's the myth. Listen. Okay. Okay, well, what happens when the toilet jams and the tenant calls you at 3 in the morning? Look, I. Hundreds of tenants. Hundreds maybe over A thousand. I don't even know. Okay. I have never received that phone call ever. Okay. And I have never heard of anybody ever receiving that phone call. But assume you do. Listen, my phone is off at night. I have my cell phone sitting by the bed, but it's off. It's on airplane mode, so I wouldn't get that call anyway. I mean, nobody is new to come to their house at three in the morning and unplug the garbage disposal. I mean, you know, it's just not. It just doesn't happen. Okay.

Yeah, but you have a network of people that will go to the house when the phones start ringing the next morning, I imagine, right?

Yes. But I want to ask you a question. I want to ask you a question. Does the property manager answer the phone at three in the morning? Does the property manager go to the house at three in the morning? No, they don't do that either.

I don't know what they do, but I was glad I didn't have.

They don't do that.

I'm glad that you cleared that up and this has been really interesting. Thank you, Jason. I think everybody can learn a lot from this.

My pleasure.

And I. I hope everybody take some time and to check out your site one more time. You want to share your links?

Yeah, sure. It's Jason Hartman.com and I have a very popular podcast that's been running. It's one of the oldest, if not the oldest, real estate investing podcast on itunes or Stitcher Radio or whatever podcast platform. You can just type my name, Jason Hartman, and find the Creating wealth show. It's all 100% free. We. We've got over a thousand episodes now and have interviewed a lot of famous guest experts on the topic of economics and investing. And it's much broader than just real estate. We talk a lot about a lot of interesting things. So check it out. Podcast is all free. Any podcast platform. It's on there. Just type Jason Hartman.

That's awesome, Jason. Thank you so much.

All right. Thank you, Diane. Happy investing to you and your listeners.

Thank you so much for listening to the Women Investing Network. Be sure to subscribe, rate and review the show on itunes or the platform of your choice. You can find the show notes and resources for today's episode@womeninvestingnetwork.com remember that guest opinions are their own and information is of general nature, so be sure to consult appropriate tax, legal or other professionals for specific advice.