Lessons from One of the Industry’s Leading Experts (Jason Hartman)

Welcome to Short Term Rental Riches. We'll discuss investing in real estate, but with a specific focus on short term rentals. Quick actionable items to acquire, manage and scale your portfolio. I'm your host, Tim Hubbard.

Welcome back everyone to the Short Term Rental Riches podcast. Every week we talk about investing in real estate, but with a specific focus on short term rentals. And a big part of investing is making sure we know the fundamentals. And today we have a great guest with us, someone that I've been following for a long time and that's Jason Hartman. Welcome to the podcast, Jason.

Hey Tim, it's great to be here.

We're, we're excited to have you. You've got a lot of just industry wisdom and you've been investing in real estate for a long time. Do you mind just giving our audience just a quick elevator pitch snippet about some of your background?

Sure, yeah.

It's been really my only major career in life. I got my real estate license when I was 19 years old in my first year of college and I bought my first property actually from a client about six months into my career. And so I was 20 years old owning a rental property while still living at home. So kind of, kind of did it backwards from the way most people do it. And then I was in the traditional brokerage industry for years. I was one of the top readers max agents in the world.

I had purchased a lot of rental properties over those years. And then I purchased a real estate company and I ran that for eight years, turned it around, it was a failing company. Turned it around, sold it to Caldwell Banker. And as I was negotiating this like one year long deal with Coldwell Banker, I started another business which was the business of helping investors buy properties nationwide. And I'm still in that same business. And working with investors has always really been my first love. So now my businesses work with 100% real estate investors. We help them buy properties and build portfolios nationwide. We don't work with anybody who just wants to buy like a house for themselves. You know, it's, it's 100% investor business. And in doing that we analyze different markets around the country. We, we've looked at international markets. So far we have not been that tempted to dive into them, although it's always something to consider. And mostly our clients are buying long term buy and hold rental properties. We have dabbled in the short term rental market, but it's never been our main thing. And of course you know this from listening to our podcast. But just so your audience Knows too. And that's kind of the summary. I also have a software company called Real Estate Tools, which helps people evaluate real estate deals and then manage them on an ongoing basis.

Well, you do. You just have a ton of experience, Jason. And software. We talk about software all the time on this podcast because it's a big part of helping us manage properties remotely. I know something that's something that you encourage as well, even with the long term rentals. So before we talk about short term rentals, I mean, short term rentals are real estate, and so they're totally related. And you have a unique way of breaking down real estate markets to three cyclical, linear, and hybrid. And do you mind explaining that just a little bit for our audience?

Yeah, absolutely. So I will go ahead and just share my screen for those watching on video. If not, we'll just explain what we're seeing here. But in a country as large and diverse as the United States, there are almost 400 metropolitan areas, there are over 3,100 counties, and there are over 9,000 cities. So it's a big country. And it drives me crazy when I hear people talk about the housing market or the real estate market as if it's like one thing, you know, I don't know where the housing market or the real estate market is, if it's in Miami or LA, or Seattle or Memphis or, you know, or Boston or what. Right. The fact is, all real estate is local and around the world it's the same thing. So what I'll share right now is a way for people to break down the entire country and the entire world into three basic types of markets. Because these three types of markets do act differently. And while one is going poorly, the other might be going very well. And it can really surprise you. So just to understand things, the three types of markets are really important. And the first type is the linear market. These are the markets we like to invest in. They're pretty boring. They're characterized, if you're looking at a chart or a graph of appreciation levels over time, they're pretty slow and steady. They're pretty boring, nothing too exciting happens. And for this reason, they don't really make a lot of headlines. They don't get in the news very much. But. But they're characterized by lower prices, lower land values and good cash flow. And they also, many times tend to be right wing leaning political markets. Why is that important? Why would I even mention that? Well, it's important because in a right leaning political environment, landlords have more rights and tenants are expected to fill their contracts. Whereas if you're looking at a left leaning environment like California or pretty much the whole west coast of the United States or the northeastern markets, then tenants have the upper hand. And if they don't pay rent and you have to evict them, it's very difficult to do so. So we like to invest in markets that are friendly to our cause as landlords and also markets that perform very well. The second type of market is the cyclical market. Now these are the markets. If you're looking at a chart of appreciation over the time, they look like a roller coaster. Big ups, big downs, absolutely craz. These are the markets that get all the attention. They're newsworthy, they're the high flying markets. I grew up in Los Angeles, California. That is most definitely a cyclical market. They're much more expensive and they tend to have very bad cash flow and they tend to be left leaning politically. So they're not landlord favorable markets. And then the third type is the hybrid market, which as the name would imply, it's just in between the two. Okay, so let's go over some examples of these. And we've got a chart up on the screen here that shows Memphis. This is a market that I've invested in for many years. You have property there as well. And this is a very linear, boring market. Like nothing too exciting happens in Memphis. Okay. Ever since Elvis died, I guess. Right. So it's just slow and steady. It's got good cash flow, large renter population. It's the logistics capital, the U.S. it's got federal Express there. And another example would be Indianapolis. This is a market we've been involved in for many, many years. Slow, steady, boring, good cash flow. I've owned a lot of properties here over the years. Great market, not too exciting, except for the Indianapolis 500. Okay. But here is a cyclical market. This is where I grew up, Los Angeles, California. And you see on the chart here, the appreciation and depreciation is all over the board. It looks like a, you know, it looks like a roller coaster.

Yeah.

And so ups, downs. And what happens in these markets is if you get lucky or if you're somehow some timing genius and can time the market, you can really hit a home run in terms of appreciation. But it can also go very badly for you if you get it wrong. And it is very hard to predict those appreciation and depreciation cycles. So for our investors and for my personal portfolio, I like things that I can just invest in, put my money on it and let it ride and create wealth over time. That's what investing is. It's not speculation, it's not gambling. It's a pretty conservative approach and it's very reliable. So that's why I like it.

Right, right. Yeah, awesome explanation and something I've incorporated in my own personal investment philosophy. In fact, I sort of. So first of all, short term rentals exist in all these three different market types, right?

Oh, of course.

And they sort of have some.

There'S some other fundamentals with short term rentals. Right. We need to know why people are going to stay there. And so people are visiting all these cities. A lot of times when people think about short term rentals, they think of the Los Angeles, they think of the Miami, they think of Seattle, and they don't think of the places like Memphis and Indianapolis, but those are sizable cities that have lots of people visiting. And one of the things that I found interesting is that you can invest in these linear markets in properties that make sense as long term rentals, but they can also make sense as short term rentals.

Yeah, they can do both. So if the economy gets really bad, I mean, the first thing people cut out is vacation. Right. Because that's very much optional. So they'll tend not to spend money on that if money is tight. If we're in a recession. And you know, in, in a, in a linear market, you'll pretty much always be able to turn that property into a long term rental and the numbers will be pretty good. Whereas in Los Angeles, you're not going to be able to do that in a, in a cyclical market. By the way, I should give your listeners examples around the world of cyclical markets. Yeah. So in the US they're pretty much the whole west coast of the US from, from San Diego to Seattle and everything in between is pretty much cyclical. The expensive northeastern markets, Washington, D.C. new York, Boston. Cyclical. Right. Expensive markets. Where I live, I live in Palm Beach, Florida and just south of me is Miami. So Miami, Florida would be a very much a cyclical market. However, Florida has gotten a special pass because during the COVID era, everybody really fell in love with our government here and our Governor DeSantis. So a lot of people have moved to Florida. The other thing that characterizes linear versus cyclical markets is that linear markets tend to be much more business friendly, whereas cyclical markets tend to be business unfriendly. So businesses are leaving those markets and they're going to the linear markets in most cases, most of Florida's linear or hybrid, but it has changed a bit because of all the migration after the COVID lockdowns ended.

Around the world though, let's think about cyclical markets, okay? Around the world. Just think of all the trophy markets. Think of London, Paris, Dubai, Hong Kong. Cyclical markets, okay? Very expensive trophy cities that everyone's talking about paying attention to. But most of the country in the US and most of the world is a linear market, okay? The vast majority of real estate is in linear markets, whether it be in the US or around the world. So that's just important to understand. The, the famous cities tend to be cyclical.

Yeah, yeah. Another thing that's interesting too is these cyclical markets, like you said, a lot of times they're less landlord friendly. I'm from California myself as well originally. And one of the things when it relates to short term rentals is that a lot of times these less landlord friendly markets are also more strict with short term rentals. Just found that's true. And so we have people moving to more affordable places that also happen to be a little more landlord friendly. One thing, Jason, I, we see these lists all the time. Like best markets to invest in especially.

Those lists are so amateurish, you know, they totally are. I always read those things and they're just so shallow. It's, you know, the media does not understand investing. Don't expect to look at a list and get the idea or listen to a soundbite on cnbc. I mean, you'll just make so many mistakes. You know, it's, it's ridiculous. But sorry, what we're gonna say.

No, no, I agree. I mean a lot of times the lists are the exact markets that, that you're trying to deter people away from. And with short term rentals, it's like we'll see this list very often. For example, it says best markets invest in short term rentals. Miami, Los Angeles, Seattle and all these places. If you look at it, they're also that most highly regulated. So while they might have the highest average nightly rates, it might be because they're only allowing, you know, who knows, like a thousand properties in that market. So the supply is limited. So how do you go about sort of deciphering between good and bad data with so many sources out to choose from these.

Well, you know, look, I mean I've been doing this so long that it's just sort of second nature now. But I'd say for people who this is not your main thing and you're not going to spend, you know, years and years studying it. Like I Have get a good advisor. Okay. You know, listen to your podcast, Listen to my podcast, check out my YouTube channel. You know, just look up Jason Hartman and you'll find all our stuff. I mean, this is what we do. We, we, we go really deep on this stuff, so you don't have to. Right. That would be the first thing. But just understand that there are a lot of cross currents. Right. Like, I remember seeing one of those lists years ago, and this was maybe, I don't know, 18 years ago, I saw some article on, I think it was Yahoo or Money magazine or one of these completely shallow sources. Okay. And it said, it said, like it was talking about the lowest and highest rents, and it said that the lowest rent of the markets that they surveyed was Oklahoma City.

And the article basically said, you wouldn't want to be a landlord in Oklahoma City. The place you'd want to be landlord is Los Angeles because it has the highest rent. But what it didn't tell you is it also has the highest prices. What's important is the ratio. We call it the RV ratio, the rent to value ratio. Okay. So ideally you want to have your rent to value ratio somewhere around 1% per month. What does that mean? If you pay $200,000 for a property, you want to get about 2,000amonth. Now, it's pretty hard to do that lately, you know, but if you can get.8 or 0.9 or even as low as 0.7, you're okay. All right. But in Los Angeles, you'd be lucky if you get like point four. Okay. You know, you'll pay $1 million for a property, you'll get 4,000amonth. That's 0.4. Okay, so that's an example. And that's why that ratio is so important. Not to mention the landlord friendliness aspect and all of the other things.

Right, right. Yeah, that's, that's one of the things that I've, you know, I always look at as well is how much money I'm going to get back based on the purchase price. And that's one of the reasons I went to short term rentals. But of course, short term rental rents are not as stable as long term rents. There are fluctuations. Like you said, when we're in a bad economy, people cut out vacations. So how would you say that short term rentals are affected by these markets? I mean, we have markets like Medellin, Colombia, for example, which is outside of the US and it's being flooded with people because it's affordable. It's Being flooded with people from the US they can work remotely. And so that's been a huge sort of wave, especially after Covid. How do you see that playing into these three different types of markets and maybe as it relates to short term rentals?

Well, you know, be careful because if people actually end up moving to Medellin, like, you know, I, I totally noticed this trend in the post COVID lockdown. The first time it happened, all the short term rentals just were fully booked. They could command really high rates because what people would do is they would go and live in a short term rental for a month to go find a house in a new city because they wanted to leave the urban areas and move to the suburban areas, which is, by the way, I have to pat myself on the back. I predicted this in February of 2020, before anybody was talking about it. I said that would happen and it did. It's exactly what happened. Because in high density urban environments, not only are those markets really expensive and if you can work remotely, you arbitrage, you geo arbitrage your high paying job with a low price city to live in, right? So why would you live in a one bedroom apartment in New York City and pay, you know, four, well really 4,500 to now, maybe $6,000 a month for that tiny little apartment versus you could live in a three bedroom, two and a half bath, brand new house with a two car garage in a suburban market with a yard. You can do the same work from either place, right? So one of the things, and you've heard me say this I've been saying on my podcast since 2012, is geography is less meaningful than it's ever been in human history. Geography is less meaningful than it's ever been in human history. Now look, geography still matters. It just matters a lot less than before. I mean, think about it. If you were living in the olden days, go back even to caveman days, right, you needed your cave to be near food and water, okay? That geography was like really important. And over the years that's always been true. And that's what caused this mass migration to urban areas in the Industrial Revolution, because that's where the jobs were, right? Geography was very meaningful, okay? You had to live in a city. And then after, in the sort of the post industrial revolution, in the information revolution, because people were exchanging ideas, they were mostly doing that in person, right? Until the telecom revolution came. And then they were doing it electronically and digitally. But what's interesting about it is we had the technology to do what we're doing right now, essentially back in the early 2000s, yet Covid forced the adoption of it. So, you know, Zoom was there, Skype was there. Right. It's not a new technology.

You know, but people really weren't forced to adopt it. You know, there's an old saying, necessity is the mother of invention. Well, these things weren't invented because of the necessity. They just started to be used more widely and accepted. And so now that people can work remotely, they're taking advantage of that. And so, you know, Long answer, But you know, you typically rent a place for a month in the city, so you'll get a short term rental and then you'll buy or rent a permanent place. So that changes the demand equation. So just be careful of that. I would say be mindful of it.

Yeah, I think there's a lot of that testing out a new market. It's just an easy way to do it now with all the short term rental options.

Myself and a lot of my friends, we've kind of been living this lifestyle for a long, long time. And so for us, or for digital nomads, or what you might call the remote worker these days, which could be someone from any level of profession, you know, someone that's backpacking to someone that's making millions of dollars a year, one thing that we're seeing with short term rentals is that the average reservation length is continuing to get longer. So for air, just with Airbnb, for example, 20% of all of their reservations are for a month or longer and they're still getting longer. And so I've sort of seen, I like to invest in markets that have the good fundamentals, but that also have the most amount of reasons for someone to want to visit that city for short term rental, I think that makes it a little less risky. But what would you say to someone that's looking to invest in a market or what do you think about the idea of maybe the normal one year lease and three night short term rental stay sort of like merging? Do you think that that's going to continue merging and.

Well, I don't know what you mean by merging, but the thing you kind of alluded to but didn't quite say is midterm rentals.

Exactly. Yes, that's it.

Yeah. Yeah. You know, there's, there's always been a thing of traveling nurses. Right. And there are websites that cater to this and Airbnb I know, does it a little bit too. But this, this whole idea of like a midterm rental and I guess that means different things to different people. To me it might mean like three months. Okay, maybe one to three months. I don't know. What does it mean to you?

I would say over 30 days. Because a lot of times you're not regulated as a short term rental in pretty much all the Cities in the US if you're over 30 days.

Right, yeah. So that's another interesting trend. And I think people have just discovered a newfound freedom and they want to use it. They want to just experience some different cultures and different places and, you know, I think that's great.

So yeah, Jason, the markets are, they're constantly changing. We got to keep an eye out on all the demographics and how people are living and working, where people are moving to. I think one of the things in today's market that's maybe intimidating people are the prices of properties. And everyone thinks properties are really high. And now we also have interest rates that are really high. But one thing that a lot of people don't consider is inflation. And you may be better than anyone, explain inflation.

Just really well. So you mind breaking that down for us and how it relates to real estate?

Sure, sure. So on the screen, for those watching on video, I put up our logo for a strategy that I created many years ago called inflation induced debt destruction. I actually trademarked this. And it's a technique that basically allows people to borrow money at the value of today's dollar, but pay it back at the value of tomorrow's dollar. And that doesn't just have to be a dollar. It can be any currency unit. It can be a peso, a Brazilian real, a euro, a yen, it doesn't matter. Right. It's just the concept of inflation. And this is the hidden wealth creator with income property that is so great. Now the US has a very special real estate market because of the fantastic financing. After the Great depression in the 1930s, the government was looking for some solutions to pump into the housing market. And they created a whole bunch of programs and entities, not the least of which is Fannie Mae, Freddie Mac. So we have the secondary mortgage market in the US that allows for these beautiful, wonderful, incredible 30 year fixed rate loans. Okay, so that's inflation induced debt destruction. But before we go into that in too much detail, I want to just explain another aspect of inflation and that is just the more maybe the simpler aspect of negative interest rates. So basically, if you can borrow money at below the rate of inflation, you're getting paid to borrow that money right out of the gate. Okay, so, you know, now inflation has Been really high in the U.S. lately, unusually high for the U.S. world. And at one point it got to about 9%. Officially. That's the official rate. The official rate is determined by the Consumer Price Index, the cpi. And that is a complete lie. I call it the CP lie, okay? Because that's what it is. It's manipulated through weighting, substitution and hedonic indexing. And we don't have time to go into all that. But even if you agree with the CPI and think it's accurate, that's fine. You know, if inflation is 9% yet you can get a 30 year fixed rate mortgage at 7% right there, you're getting paid 2% to borrow because you're paying the money back in cheaper dollars and borrowing them at the value of today's dollars. So that's a beautiful, beautiful thing. But one of the things that happened to millions and millions of people throughout the last several decades is they actually implemented this inflation induced debt destruction strategy unknowingly. And it made a lot of people very, very wealthy. So I'm going to put a chart up on the screen and this is going to be pretty mind blowing to people. For those who are not watching this, we'll just explain it to you in audio format. But this is a real life example and I'll just go through it super quickly. Okay. In 1972, one year after Nixon took us off the gold standard, where dollars were no longer tethered to any real asset, it was really fiat money. And you hear that term thrown around by gold bugs and bitcoin people and so forth. And fiat. The word just means by authority or by decree, right? That's all it means is, you know, we tell you a dollar has value, so you have to listen to us, right? That's basically what it is. And the typical house in the US was about $18,000. So if you went and got a mortgage on that house and borrowed 80%, you'd borrow just over $14,000. Back then, in 1972, the mortgage rate was just over 7%. And that works out to a payment of $101 per month. That's what the check says, $101. But by the time you have some inflation happen and you fast forward 12 years to 1984 down here, that dollar that you borrowed in 1972 is now only worth 40 cents. So it's lost a lot of its value to pay your mortgage every month. You're still writing a check that says $101. Whoops. $101 per month. But the value of that check is a lot lower. It's only $41 now. Okay, so it feels a lot lighter to write the check for $101 than it did 12 years earlier. Well, that's because of inflation induced debt destruction. And by the end of this loan, that dollar from 1972 that you borrowed is now only worth $0.24. So that monthly payment of $101 is now only equivalent to $24. So it feels like it's almost free to live there. Okay, now let's just recap what happened here. We borrowed just over $14,000. We paid back in what's called nominal dollars. That means in name only. It's still called a dollar. It's just the value of it has changed so much with interest. We borrowed about 36 or we paid back about 36,000 nominal dollars. But after inflation attacked the value of them, they were really only worth 16,393. So you see how we got this big inflation discount. And after tax benefits, and this is estimated because everybody has a different tax bracket, obviously we really only paid back $12,600. Okay, so what happened? We thought we were borrowing at 7.37%, but after inflation, our effective interest rate was really 1.06%. And after tax deductions, because the interest on the mortgage is tax deductible, we were actually paying a negative interest rate of 1, negative 1.16%. So we literally got paid to borrow money. This is the hidden wealth creator with income property. You know, most people think, oh, you know, real estate's a great investment because it hedges inflation. You know, I bought the property for X amount of money and then I sold it for more. But really that's not what usually happens because the appreciation is mostly a result of generalized inflation in the economy. What they didn't notice is that they were paying the debt back in cheaper dollars. They got a discount on the debt because of inflation induced debt destruction. And that's the hidden wealth creator that's happening behind the scenes all the time. That really, really makes income property the greatest thing. It doesn't work unless you finance the property, though. You got to finance it for this to work.

Yeah, yeah, no, I love that. And that's exactly one of the reasons why it's, you know, for someone getting into investing and wanting to go internationally, just if you're not a citizen of that country, pretty much can never take out a loan. And so, right. There is enough reason to stay in the US And So thank you for that explanation, Jason. You're just. There's. There's so much that we could talk about, but as we wrap things up here, I want to just ask you real quickly. You know, the name of this podcast is Short Term Rental Riches. And a lot of times people associate the word rich just. Just with finance. But I was wondering if you have something that's enriched your life or a habit that you have in a lifestyle way that enriched your life, but not in a financial sense.

Well, you know, I would just say lifelong learning. I mean, everybody always told me when I was kid, you know, that I was so curious about everything. And I would just say, you know, stay curious. Don't lose that ever. Learning is a lifelong process, and it really is very enriching. And, you know, it usually turns into money. Okay. So, you know, just. Just be engaged in things. Be interested in things. I think the people that live the longest and have the best lives are constantly engaged. They're interested. They're engaged in life. Right. You know, they're always asking questions like, why does this happen? Why does it do that? You know, I have a dog, so I tend to walk a lot. And, you know, sometimes I'm listening to audiobooks and podcasts and so forth, but sometimes I'm not listening to anything, and I'll just listen to the birds talking to each other, especially in the morning, you know, and it's just fascinating, like these whole conversations they're having, you know, And I was kind of woken up to this because I use an app called Vox a lot to communicate. And one of the people that worked for me years ago, she was in Canada, and it was winter, and so it was snowing, and I sent her a Voxer message in the morning, and she said, oh, Jason, it's so nice to hear all the birds. And I realized I didn't notice the birds, and I thought I'm missing out on a whole thing in life here that she noticed because it's winter and she doesn't have any birds, right? They all flew south. And so, you know, she picked up on that because she didn't have it right. I didn't notice it because it was just the normal thing for me. And so notice the normal things, the little things in life that are just happening, that are just. You know, there's a lot of meaning in these things. And I think people who study, and I'm no big student of it, but people who study things like Zen. Zen Buddhism are really aware of this. These kind of, like, small things There, there's an old book that was really big years ago called Chop Wood, Carry Water. And it's just about, you know, finding meaning in just little everyday things in life that most of us just kind of take for granted, you know, And I think that's, that's part of lifelong learning.

Totally. And I think traveling helps us do that a lot of times, too. We go to an environment that's totally different. We recognize things that maybe we didn't recognize before, so. Well, Jason, I really appreciate your time. I'd love to have you back on in the future. I know there's, there's a ton of wisdom in this episode that's really going to help our audience to make better investment decisions with their real estate investments. Hopefully have more time to learn and do the things they want to do. So how can people find you, get more information, follow you?

Yeah, so my main podcast is called the Creating wealth show and you can just look up Jason Hartman. That's J a s o n H a r T M a n on any podcast platform or on YouTube. I've got a lot of great videos on YouTube. Almost 2,000 podcast episodes is the date of this recording on my main show. And I even have some other podcasts as well. And so, you know, just follow the work there. Go to our website, Jason hartman.com and get on our, you know, sign up on any web form there, get on our newsletter list. We send out some great emails with some really interesting articles and, you know, this is all free stuff that's available to you, so just check it out. I have a lot more strategies I teach that, you know, we don't have time to talk about, but they're all there for, for the taking, so check it out.

Well, we'll make sure to get all your information, all your links in our show notes, and again, thanks for coming on and we hope to have you again in the future.

All right, my pleasure. Happy investing to everyone.

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