Speaker 1: Welcome to this week's edition of Flashback Friday, your opportunity to get some good review by listening to episodes from the past that Jason has hand-picked to help you today in the present and propel you into the future. Enjoy.

Speaker 2: This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit hartmanmedia.com.

Speaker 3: Welcome to Creating Wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven't thought of before and a new slant on investing. Fresh new approaches to America's best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self-made multimillionaire who not only talks the talk, but walks the walk. He's been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason's footsteps on the road to financial freedom. You really can do it. And now, here's your host, Jason Hartman, with the complete solution for real estate investors.

Speaker 4: Welcome to The Creating Wealth Show. This is your host, Jason Hartman. We are at episode number 484 or 484. Hey, I hope you liked our Flashback Friday episode where we talk about the ultimate investing equation. What's interesting about these Flashback Friday episodes is, number one, you get to hold me accountable, see if what I said is true or came true or, you know, not true. I mean, I make predictions and I, I interviewed an interesting guest today for a future episode that we have coming up who is the author of a book called The Wealth of Nature, not The Wealth of Nations, that would be Adam Smith. The Wealth of Nature, and, and he's a really interesting guy and he said, "What do you call an economist who makes predictions? Wrong." (laughs) That's what you call them. An economist who makes predictions is wrong. (laughs) So that's what you get to do with my Flashback Friday episodes. They are raw, they are unedited.

Speaker 4: So whatever we- I published years ago, you're gonna hear it on every Friday for Flashback Friday. And today, to help me with the intro portion before we get our, uh, guest on who's going to talk about Chicago, yes, Chicago, the Windy City, one of our newer markets. We got a lot of interest and a lot of activity there, a lot of our clients buying there. So we'll talk about that in a few minutes. But first, we've got my friend, Randy, who is our mortgage expert, who's been on the show before. Welcome, Randy, how you doing?

Speaker 5: I'm doing great, Jason. How are you today?

Speaker 4: Good. Good to have you. And, uh, you know, I'm really glad you came on the show. You, of course, spoke at our Meet the Masters event just over, well, about a month and a half ago, little over a month and a half ago now. We've talked a lot about B2R, or which stands for buy to rent, buy to hold and rent as an investor, and FirstKey, which are two companies who are offering some unique mortgage financing. They're really kind of filling some of the gaps, and, you know, I'm pretty excited about some of their programs, and I wanted to have you on to talk about that as well as any other mortgage financing and lending-related things we might talk about. So what's going on with FirstKey and B2R, Randy?

Speaker 5: Well, Jason, first of all, thanks again for having me on. I always appreciate the opportunity to talk. Uh, and, you know, uh, regarding FirstKey and B2R, uh, again, just, uh, s- for people that aren't familiar with them at all, uh, in between the world of Fannie Mae and Freddie Mac, which would be our, say, our preferred A-tier lending, and the other end of the spectrum being the, um, (clears throat) excuse me, which would be like your private money lending. Now we have this, uh, more like a portfolio-type operation where, uh, these, these particular lenders are recognizing the value of real estate as a security and the value of real estate owners as being good borrowers. And so they're offering unique programs that allow properties to be financed inside of LLCs, which, uh, can't do with a Fannie Mae or Freddie Mac loan.

Speaker 5: Um, it's allowing people to bundle properties into a group, uh, a big- one bigger loan, uh, which, uh, you know, gives you some, uh, simplicity, if you will, instead of having a bunch of, uh, little loans. Uh, and it's, uh, giving people an opportunity to get cash out of properties that they may have paid, uh, cash for, and now- or they've appreciated, right? You sold in a lot of markets where home values have gone up. So they're doing all kinds of things to really help real estate investors.

Speaker 4: Yeah. Oh, I mean, and that's one of the big ones. We've had a lot of our clients, especially the ones who had the, the guts and courage and faith to buy in 2008, 2009, and even 2010, you know, they've all realized some really nice appreciation on their properties. So, you know, they wanna pull that equity out, engage in what I call equity stripping, which is, I, uh, you know, a really good practice as long as you can do it well and get some good rates, and they're fixed rates. Pull that equity out and use it to acquire more properties and grow the size of their portfolio so they can control more real estate, which, I mean, I don't wanna say for sure (laughs) but should lead to more wealth creation for them and more semi, semi-passive income. Nothing's truly passive. So that's been a really exciting thing for, for many of our clients. You can take and potentially buy many more properties when you can refinance them.

Speaker 4: So tell us what the rules are or the, you know, the guidelines here for purchase money loans, which means just money being used to purchase property, and refinance loans where you can refi and get cash out of the properties. Give us some of the guidelines. They're, they're, they're pretty good. I mean, this is not bad at all.

Speaker 5: Well, they are pretty good. And, you know, ba- back to your point just a minute ago, this is what we were talking about at the Meet the Masters was using leverage. Uh, remember I- the title of my presentation was Debt is Not a Four-Letter Word.Uh, and you know, basically when you refinance and take equity out of the property, you're shifting more of the risk of owning that property to somebody else, to this third party (clears throat) 'cause you took the equity out. That's the part that, that is at risk, that, that, that you own. And so really, this is, uh, just a smart way to not only just to grow your real estate investment portfolio, to leverage that portfolio to give you a greater re- return, but also r- actually reduce your risk. And it's just a, it's a, it's just a good strategy all together. Now, specifically to your question, um, we can do, uh, uh, properties that are one to four units with these types of lenders.

Speaker 5: These are, uh, one to four unit type properties, uh, not apartment loans. Um, we can get up to 75% loan to, uh, to value on these properties, both on the cash out and on the purchase, by the way. So 75% loan to value, leaving only 25% equity.

Speaker 4: Again, not bad at all. I mean, if you bought a mutual fund or a stock, you'd be putting 100% down. Here you only have to put 25% down, or you can get cash out. You can get 75% of your cash out of it, so that's phenomenal.

Speaker 5: Yeah, and if you, uh, like you said with the mutual fund, you're 100% at risk with your money. Now you're gonna be 25% at risk but you get the benefit of owning 100% of the asset. You get 100% of the rent. You don't have to give away 75% of that to the lender. So yeah, it- it- it- it- it- it- uh, definitely is something that, that works for the investors', uh, benefit. Um, you know, the, the BTR program, B2R program, initially it started out at $500,000 was the minimum loan size. Um, they have or they are about to lower that to $300,000. Um, and you know, a lot of people go, "Gosh, I own properties that are worth $100,000 or, you know, $150,000. How would I ever get that loan?" Well, this is what I meant about bundling, because we can take five or six properties worth $100,000 and then at 75%, that would be, let's say, you know, $500,000 at 75%, we would have, what, $350,000, uh, that would satisfy now B2R and we can get one loan for all those properties.

Speaker 1: Welcome to this week's edition of Flashback Friday, your opportunity to get some good review by listening to episodes from the past that Jason has hand-picked to help you today in the present and propel you into the future. Enjoy.

Speaker 4: So bundling the properties, and now they're allowing even a smaller bundle. So the bundle doesn't need to be half a million dollars worth of property. It can be just $300,000 worth of property, right?

Speaker 5: And that's with B2R. On First Key it's even lower. Um, you can, uh, uh, actually have a smaller loan amount. You can have a smaller pr- uh, value property as well. So you know, all these things are very specific, and you know, I don't wanna, um, necessarily get into all the detail-detail of it. Um, you know, if somebody has a question they can, you know, reach out to us and we can fill it in, you know, specific to their situation. But the point is they're getting better, and they're getting more flexible, and they're getting more available to more people because they're doing all the right things.

Speaker 4: I wanna ask how hard the underwriting criteria is, which isn't too bad either. But before we get into underwriting criteria and, you know, those, those kind of hoops that the investor has to jump through, what about the rest of the terms? I mean, 75% loan to value ratio, that's pretty darn good. What is the interest rate? What is the term of the loan, the length of the loan, points, fees, anything else someone should know?

Speaker 5: Okay. So, uh, the loans can be, um, adjustable loans, uh, ranging from three, five to seven years.

Speaker 4: Which is the fixed period, right?

Speaker 5: Fixed period of time, yes. So the interest rate is fixed for three years, fixed for five, fixed for seven.

Speaker 4: Up to seven year fixed, okay.

Speaker 5: Yeah, and it's not amortized over five or seven years. It could be amortized over 30 years so the payments are lower, uh, you just have the interest rate that's fixed for the three, five, or seven years.

Speaker 4: So, so is there anything longer on the fixed rate or is seven as far as they go?

Speaker 5: No, actually with our, with, uh, one of our investors, which is First Key, First Key offers a full 30-year product.

Speaker 4: 30-year fixed rate?

Speaker 5: Uh-huh.

Speaker 4: Okay, great. How high is the rate on that? And I, and by the way, this is all subject to change, of course, so.

Speaker 5: Yeah, I was gonna say, it's February 27th, right? It's the end of February in 2015 'cause this is gonna be on the internet and live forever. Um, but you know, on the 30-year fixed rate you're, you're looking at the 7, uh, mid-7%.

Speaker 4: Give us a comparison. I mean, what could you get for an investment property, not a owner-occupied property, what could you get for an agency loan, a Fannie Mae/Freddie Mac type of loan that you'd just get from a bank?

Speaker 5: Sure. Um, and same, same date, same time frame, today we'd be looking at maybe 4.5%, so we're looking at, uh, what, 250 basis points higher interest rate because of the uniqueness of this, this loan. Again, it's, it's that world in between the agency Fannie/Freddie and the private money loans which are gonna be more like 9%, 10%, 11%, 12% interest.

Speaker 4: That's, that's pretty darn good. I mean, you know, remember, the comparison we have here, dear listeners, is we have hard money or private lending type of financing. That's all we had before, you know. Now it's really nice to see that there is, there, there is a lot of money here that is kind of filling this gap. So this is, this is not bad. This is not a bad deal at all.

Speaker 5: I also see a big benefit that people that have taken the, you know, the extra steps for, uh, asset protection, to have their properties owned by an LLC, um, these lenders are willing to make loans directly to the LLC. And, uh, Fannie/Freddie just won't do that. Uh, if, um, uh, you have, uh, uh, you know, corporations, whatever type of entity, they'll, they'll lend to those entities where you can't, you can't do that with an agency loan. Um, they'll also do, um, loans for people that have properties in self-directed, uh, like, uh, retirement plans, 401 (k) s or IRAs, uh, that are non-recourse. So that's also available, uh, through these types of programs as well.

Speaker 4: Just out of curiosity, will they even finance owner-occupied homes, or are they strictly for investors?

Speaker 5: You know, I guess they would. Um, but again, given the choice, why would you if you didn't have... You know, if- if- if you could get an agency loan and the interest rate's 250 basis points lower, you'd wanna go that route.

Speaker 4: Oh, no. I- I agree with you, but I'm just kinda curious as to what their mindset is, you know. Uh, they really do cater to investors, you know, the fact that you can use entities and they don't have a problem with it. Whereas we've always, in real estate, been trying to, you know, kinda make the square peg fit into the round hole in that we're using residential type products that are not really designed for investors or investment properties, and we're using them to finance them. But these companies are really just totally catering toward investors.

Speaker 5: That's what they're desi- they're- they're built and designed for investors and, you know, so to answer your question, I don't even know for certain that they would lend to somebody with an owner occupied property. Um, I don't know that it even fit their guideline. These are made for people that own investment properties for financing investments. That's what they're doing.

Speaker 4: Good. Good deal. Okay, so tell us more. We talked about the rates. Did you wanna talk any more about the fixed versus adjustable or do you want to jump into the underwriting criteria?

Speaker 5: Well, I think I'd like to go to the underwriting criteria a little bit 'cause I want to talk about this thing called debt coverage ratio. We've mentioned that before.

Speaker 4: The DTI as it's known. The DTI, the debt coverage ratio. Yes. Okay, go for it.

Speaker 5: Yep. So DTR... DCR actually. DCR, not DTI. Debt- debt- debt to income versus debt coverage ratio. So, you know, a lot of times I ask people, uh, to tell me about their properties and they're all happy that all these properties cash flow. Well, cash flow to some people is not the same as what the- the- these lenders are looking for in terms of. They don't wanna see breaking even. They wanna see positive cash flow and they wanna see typically about 120% of the, uh, income after the expenses, not including the mortgage, that cover the mortgage debt. So if I have a $1,000, um, uh, mortgage payment, I wanna have $1,200 of net income after paying property taxes and insurance and setting aside money for, uh, property management and, uh- uh, and vacancies. So the debt coverage ratio is very important and you can fix that (clears throat) if you find yourself, uh, with a- a cash flow that's not quite right by borrowing less or having more equity in it.

Speaker 5: But on a- on a Fannie Mae loan, so they don't care. They- they'll let you have negative cash flow, right? Uh, these loans you can't. You have to have a positive cash flow and it has to be positive by 20% more than the- uh, than the mortgage payment itself.

Speaker 4: Basically that means that the... if- if someone goes to jasonhartman.com and looks at the performance in the property section, when you look at the debt coverage ratio, okay? And you see 1.2 in there or you see 1.4, 1.5, which you will see on a lot of our properties, that's just a totally easily financeable deal, right?

Speaker 5: That's absolutely right. And if you happen to see one... I don't think you have any of these right now, but if you happen to see one that was like 1 or 1.1, all that would mean is instead of putting 25% down, you may need to put 30% down or 31 or 32 or whatever the number is to get the debt.

Speaker 4: Yeah, that's- that's fantastic. Wow, th- there's some good opportunities here people, this is nice. Now what about the underwriting though after that? I mean, you know, are they- are they gonna ask for your credit report? Are they gonna nitpick every little thing in your file or are they gonna be easy to work with?

Speaker 5: I mean, e- everything changed in 2008 and, you know, whether... You know, this is a product designed for a purpose and if you fit the box and fit the purpose, it'll work and you'll get the loan. But if you j- do that round peg, square hole, whatever, it isn't gonna work again. And so it's not made... it's... this is not the, uh, fog and, you know, fog a mirror type loan. You still have to qualify for it and the property has to qualify for it and there's underwriting criteria, but if you fit, it's a fantastic opportunity.

Speaker 4: Are both lenders pretty much mirroring each other? I mean, I know there are some slight differences, but would you say that overall they're- they're pretty similar?

Speaker 5: Um, I'd say they're similar in that they both lend to investors, but I- beyond that, I think the products are very different. Um, you know, a- again, B- B2R has this- this minimum $300,000, First Key doesn't have that. Uh, First Key has a property... uh, a loan design just for fix and flips, which, uh, B2R doesn't, you know, they're more the buy and hold.

Speaker 4: Mm-hmm.

Speaker 5: Um, so yeah, there- there's some, you know, there's- there's nuances and subtleties, product differentiation, which, you know, you want. And, uh, and that's again, why you gotta really sit down and find out what it is that you need to accomplish and then we can find the right program and lender to- to fit that- that scenario.

Speaker 4: Any other advice or tips that you wanna share on lending in general? Or borrowing, I should say more than lending.

Speaker 5: Well, uh, we are- we are once again in a super, super low interest rate environment and everybody should be looking at refinancing anything they can right now because this opportunity, you know, we said it wasn't gonna come along again and it did, but it- it's just not gonna last forever. This is not normal. And to get 30 year financing at these below, uh, you know, 100 year interest rates, if you will, um, and be able to lock in that interest rate for three decades into the future, this is gonna pay off in spades if you can take advantage of it today.

Speaker 4: It really is. It's an a- it's an amazing, amazing time. Any thoughts on when interest rates are gonna go up? I was reading an article two days ago and it talked about how Janet Yellen was kind of setting the path for rate increases, but still inflation is very low. Uh, what are your thoughts on this?

Speaker 5: Yeah, I think that's a, that's a really great question because, you know, fundamentally we look at all the money that- that's been pumped into the system, uh, through the Federal Reserve since, uh, you know, since the financial crisis and everybody's just waiting for this inflation to happen. Now I have an opportunity as a lender, of course, to see what's been going on with rates going down but I'm also a financial planner and I work with, you know, life insurance annuities, the other side of the equation if you will, right? And so I've been seeing interest rates being lowered-... on the payouts from the insurance companies who are looking as, as far into the future as, as possible. Um, they basically, they're saying, hey, you know, there, in the, in the, in the near future, and I'm not talking, like, the next six months or a year, I'm talking, like, years, they still don't see a big rise in interest rates, uh, ahead of us 'cause the world...

Speaker 5: You know, that- that cold that we caught back in 2008, the rest of the world's got it now and they gotta get over it.

Speaker 4: Yeah. Right, right. (laughs) Um, they... It's contagious. Economics are contagious, no question about it. I wanted to just mention to our investors, before we jump into our guest and hear a little bit about Chicago, uh, in addition to that, Indianapolis, I mean, wow. A lot of our investors... I mean, that's just been a perennial market for us. We've got some different providers there. We had problems with one of our providers and we're really kind of phasing them out and welcoming some more business with some of our other providers there. There's just a lot of great metrics about it. Um, USA dubbed it the number one convention city in the US. Now, you know, I... When I hear that, I say, "What about Las Vegas?" Well, it says, but according to Visit Indy, 62% of visitors to Indianapolis came to see family members and friends. The number has risen from the 50s in recent years. They've got just a ton of good things going for them.

Speaker 4: The New York Times said, they listed it as one of 52 places to go in 2014. Now, uh, you know, there- there's just a lot to brag about in Indianapolis. It's kinda surprising. I mean, the reason I'm saying this and surprised about it, is that I would never really consider Indianapolis a tourist destination, unless I'm gonna go see the Indy 500, right? But, you know, I'm looking at this ranking right now from USA Today, in terms of the best convention cities, and here they are in order, according to USA Today. Indianapolis, number one, Boston, number two, Nashville, number three, Salt Lake City, four, Atlanta, one of our markets, five, Denver, another one of our markets, although kind of expensive. We can't do much in Denver 'cause the prices. New Orleans, number seven. Denver was six, by the way. D.C., number eight. Minneapolis, nine. Chicago, another one of our markets, that's number 10. So, some of this stuff actually kinda surprised me. Does that surprise you, Randy?

Speaker 5: It does surprise me. I mean, I- I wouldn't think of going to Indianapolis on vacation either (laughs) .

Speaker 4: (laughs) Well, bu- and- but for conventions, you know, it's like, it's gotta be a lot less expensive for companies to have conventions there than in Las Vegas, right? So, I think that's one of the reasons it's really... it's just really attractive. I mean, whenever I go to Las Vegas, I just feel like everybody is in my wallet. You know, everything costs money there. It's just mind-boggling how expensive that place is now. I mean, I remember in the old days, Las Vegas, you know, they used to have $1.99 buffets. (laughs) What happened to all of that?

Speaker 5: (laughs) That's why they have all those big, beautiful casinos there now. I- I- I have to say, the one thing I love about all of these types of properties in these communities, is that the land to value ratios. Uh, you- you know, when- when you look at, uh, you know, say, coastal property like California, where 80% of the property value is- is the land and 20% is the property, you go to Indianapolis, it's completely the opposite, and what a difference that makes on the net cashflow. The money you get to keep after Uncle Sam. Yeah, it- it's huge. It's just huge. You take the same dollar value and move it from the coast to one of these communities and you're gonna increase your income by, you know, 100%.

Speaker 4: Well, Randy, that harkens back to one of our clients, Dave and Rebecca, that you referred to us, and we did that fantastic exchange together with them. And by the way, I have to tell you that I was just at, uh, one of my mastermind groups and one of their brokers came up to me and said that they were... you know, they brought up our names. I just heard this the other day and (laughs) , you know, I thought, "What a small world it is." Here this guy is, 3,000 miles away, across the country, and he says, "Oh, yeah, we were buying properties through Jason Hartman's company and we got a whole bunch of them," and they bought one locally through him there in Pennsylvania. So, he- he- he just said, "What a small world.

Speaker 4: I'm- I'm gonna see Jason next week." (laughs)

Speaker 5: (laughs) Yeah, that was, uh... That was quite the exchange. That was, what, a $3.7 million property into, uh, I think we did... ended up with 27 single family residences that we had-

Speaker 4: No, I'm... I- I'm gonna correct you. I... Well, I don't know. Maybe. I... You know, I could be wrong, but I thought it was a $2.7 million beach property in, like, San Clemente, and I think it- they bought 36 or 37 properties with that exchange. Could be wrong.

Speaker 5: Nah, y- you know what? You might be right, but the- and the point was that we did all this in 45 days (laughs) , right? And I- we closed them longer, but 45 days, we identified that many properties that- that worked. That was a... That was fun.

Speaker 4: It's really just phenomenal. You know, that's really... And Randy, you've heard me talk about it enough times, it's the Hartman Risk Evaluator. There- there's just so much to that, you know? I- I mean, if you want to be a real investor and not a speculator, buy...... the commodities, the packaged commodities. Buy the structure, the house sitting on the land, because that's gonna give you two things. It's gonna give you much better cash flow and it's going to dramatically reduce your risk. There's, there's no question about it.

Speaker 5: All good. All really good. Yeah, that was, uh, that was quite the experience. W- we'll have to do that again sometime. (laughs)

Speaker 4: (laughs) Absolutely we will. Hey, Randy, I notice we're going a little bit long here, so I think we're gonna run Chicago on the next show. Why don't we just talk for a little bit longer here for the listeners? I, I just wanna ask you another question. Remember Douglas Andrew?

Speaker 5: Oh, of course.

Speaker 4: Or Doug Andrews? He wrote a few great books. One that I read, uh, maybe 11 years ago called Missed Fortune, and then he wrote Missed Fortune 101. And it's kinda like, I loved half of his philosophy, I didn't like the other half. I talked about it on the show many times before, especially in the old days. Maybe some of our listeners on one of my Flashback Friday episodes will catch some of those interviews. That guy's whole concept was, was half great, I thought. You know, have you kept up with him? Whatever happened to him and his stuff, you know? Is he still around or what's his thing nowadays?

Speaker 5: Well, he, uh, he's definitely still around. Uh, the concept is still around, sort of. Uh, and just again for the, for the listeners that don't know what we're talking about, basically the, the book was about taking the equity in your real estate, uh, that, uh, in Doug's words, uh, was not safe, not liquid, and provided no rate of return.

Speaker 4: And, and I couldn't agree more, you know. There's no... By the way, Randy, before you go on, you know there's a metric, and I'm sure you've heard it, it's called, uh, it's called ROE. Not ROI, like return on investment or return on inflation, as I've coined, but ROE, return on equity. And I say that return on equity is bogus. There is no such thing. There is no actual return on equity. And that is a metric that, especially commercial real estate people use all the time, return on equity, you know?

Speaker 5: Yeah, it's kinda like, uh, I guess the opposite of opportunity cost, right? So you're, if you finance to 100% it costs you X, if you finance it 75%, that savings would be your return on equity. Um, so you could, you could argue it. I mean, uh, obviously, so I was talk- I was just having that conversation today, if you had a home that you paid cash for, you go, "Oh, I have no mortgage. And so I have, I have a $500,000 house I paid no cash, I paid cash for it, I have no mortgage payment." True, but you also lost the opportunity to earn, let's say, 5% on that $500,000, so still it's costing you $25,000 a year to own that home free and clear. Right? That's, that's kind of the, the opposite of return on equity, but, but back to, back to our point, Jason.

Speaker 5: So Doug's theory was, you know, let's take the equity out of your house, and then that's the part that you did like, and then the part that you didn't like is he was putting it in, uh, equity index universal life insurance policies, uh, where you would have advocated putting it in real estate. Right. And, and we, and we- I still would love to have that debate. It's not today, 'cause it'll, it'll take some time, uh-

Speaker 4: (laughs) The debate will take a while. (laughs)

Speaker 5: Yeah, it'll, it'll take a while. Now, now, and, and so now fast forward, he wrote that book I think back in 2002, um, so we're looking at, uh, 13 years later. Um, I would, I would say that, that people that followed that strategy and, and didn't, you know, panic and, you know, when the home values went down and they were ne- had negative equity possibly, uh, and, you know, the stock market went down, uh, you know, if they held on, they probably did really, really well. Uh, those insurance contracts made, uh, made lots of money. The, uh, equity in the real estate, uh, you know, it was sure went away, but so what? They had it, some in an- in another place making, making money as well. Um, and, uh, you go fast forward 13 years and now probably the equity's back. Uh, the real- the returns inside the investments are, are, have done well as well. It's, it, it, it's a good, it's a...

Speaker 5: The point is that the equity in your real estate is just the part that's at risk, so who do you wanna own that risk? Do you wanna own it or do you wanna let the bank own it? It's much better to let the bank own that risk.

Speaker 4: Right, right. You can, you can basically outsource your debt obligation to the tenant. You can outsource your risk to the bank. You can outsource your tax liability (laughs) to, you know, give that back to the government instead of it being on your head, if you can qualify for all of the depreciation and so forth. I mean, it's just the, it's just the best thing going, you know? It- it's, it's amazing. Why, why don't, why don't some people get it? I mean, you know, you're, you work with a lot of people, you know, you've got a financial planning practice in addition to your mortgage practice. How is it that some people just get it about this real estate thing and some just don't?

Speaker 5: Yeah. Yeah, well, you know, if they, if they get on the internet or they, you know, they'll listen to the, you know, the, the popular gurus, uh, uh, whether it's Suze Orman or Dave Ramsey, whatever.

Speaker 4: Well, Dave, Dave Ramsey owns quite a lot of real estate, but, you know, he loves to brag about how it's all free and clear. And I mean, this is just idiotic. I'll tell you two things I wanna say about this. Uh, number one is that I had Dave Ramsey's number two guy, he would not come on my show, Dave, okay? Uh, and, but I had his number two man on the show, I can't remember exactly his title, like the CEO of his company or something, or maybe the C- CFO, I'm not sure. Anyway, he was on the show a while ago and he talked about how, "Well, the reason Dave doesn't like debt is because he had all this real estate and his loans were called." And I said, "That's impossible. You can't. They changed that law in the Depression. No lender can call your loan, okay? If it's long- If you're making the payments, they can't call your loan.

Speaker 4: If you're not making the payments, heck, they can take the property." Great, that's the implicit e- your- that's the, your implicit exit option, is you can let it go, okay? So what, I mean, that's just, it's just amazing how people don't get that. Now fast forward to today. I was doing an interview with a very bright author and she was an anchor on CNBC and on a lot of things, but, you know, it's not her fault, she just doesn't understand real estate, right? And-We were talking, and this interview will be published soon, by the way. And, you know, she was saying that people shouldn't view their home as an investment. Now, of course, I agree with that, okay? Your home is an expense, it's not an investment. We're all... In the final analysis, we're all renters, okay? We don't own anything, we're not taking anything with us, (laughs) okay? Out of this life, right? There's no... Like they say, there's no suitcase on the hearse, (laughs) okay?

Speaker 4: Or no suitcase rack on the, on the top of the hearse. Okay. So we're not taking anything with us. We're all renters. We just have our house that we use for utility, and that's all there is to it. There's nothing more to it, okay? So you're either gonna pay rent or you're gonna pay a mortgage. Now, if, if that property is a $100,000 property, and that means it's at the lower end of the spectrum, then y- you know, you should own that property. You should buy that property. You should not be paying rent. But if it's a million dollar property, you should rent it. You'd be much better off renting it, because you can rent that million dollar property for a lot less than you can get the return back from a million dollars invested in other properties that are rentals. So, you know, that's one thing. And then she said, "Well, you know, it's been shown over the years that, you know, real estate doesn't really beat inflation." And I agree with that.

Speaker 4: But, uh, Robert Shiller said that in his book too, the famous Robert Shiller, the name behind the Case-Shiller Index, the author of Irrational Exuberance Number One and Irrational Exuberance Number Two. He borrowed that phrase from Alan Greenspan and then wrote those books. I, I read the number two book years ago, and I just thought, "I- is the guy an idiot or is he a liar?" It, it... You know, it's one or the other, because to say that real estate only keeps pace with inflation is true on its face, but the reality is that, in practice, most people finance their real estate. And when you finance it, and say for example, inflation is 3% and real estate that same year appreciates at 3%, or say inflation is six and the real estate appreciates at six, doesn't matter. When you only have 10% of the money into the deal, you multiply that return by 10 times. So you...

Speaker 4: Inflation did, in the first example, or in the second example, 6%, and the real estate did 6%, but your gross, you know, simplified return on investment is 60%, because you only have 10% of your money in the deal. I mean, (scoffs) that's when home ownership, even if it's your own home that you're not renting out where you're paying the debt yourself, it's still a phenomenal deal.

Speaker 5: And you still get the, the tax benefits that you get to deduct from it, and you get the property taxes you get to deduct from it. I mean, that doesn't even include that. You're just looking at pure appreciation. So yeah, with leverage and tax benefits, it's g- it's hard to see how you can't beat the stock market.

Speaker 4: Now it gets even better, because then you add to it... And you spoke about this at our last Meet the Masters event. You add to it, which, you know, one person argued with me that this is... "You're just talking about leverage." But no, I'm not talking about leverage. Leverage is what happens on the top of the deal, right? So the $100,000 property goes up $6,000. If you've only got $10,000 in the deal, then your return on $10,000, in gross numbers admittedly, this is simplified, is $6,000. You just made 60% on your money, in one year. In one year.

Speaker 4: But if the inflation rate is 6%, then you take a $90,000 loan that just got debased or devalued by 6%-

Speaker 5: That's another 5,400.

Speaker 4: Yeah. (laughs) I mean, now you've more than doubled your money in a year. I mean, you take the leverage, which most people get the leverage concept, except Robert Shiller and, and this lady didn't wanna understand that, but fine. You know, and Jim Cramer doesn't either, because Jim Cramer on Mad Money, I, I... You know, I, I saw him talking about it. Or maybe this was on his radio show on KFI in Los Angeles. I'm not sure. But it was either on the Mad Money TV show that's on CNBC or on his radio show, and he was talking about how stocks outperform real estate. Well, I mean, the vast majority of people don't pay cash for real estate. And the vast majority of people... I mean, the vast, vast, vast majority pay cash for stocks. So, uh, that is a lie on its face. The- these people are just lying to the world. They just are not telling the real story. I mean, Robert, the, the highly credible Robert Shiller, okay? Who, you know... I mean, it's just... It's amazing to me.

Speaker 4: So you've got the leverage, then you've got the inflation-induced debt destruction, and we haven't even talked about the other benefits (laughs) . I mean, you know, that's it. Right there, you've already doubled your money in that example, in one year.

Speaker 5: Well, a- and- and just to bring you back from this, like, tangent here (laughs) -

Speaker 4: You know me, I am...

Speaker 5: ... your question was, "Why-" (laughs)

Speaker 4: Someone needs to buy me a shirt that says, "King of the Tangent."

Speaker 5: King of the Tangent, with a bunch of lines going all over the place. So th- you know, the question was, "Why don't some people get it?" And, you know, I... Because I'm a financial planner, I run into all different types of people, and there's certainly... We can just... We can take out the group that can't qualify. That's not about getting it, they just can't do it. But there's still a bunch of people that could do it that won't do it. And, you know, some of them are just fearful. Some of them are j- uh, are, um... They're just ignorant of all these things like we've been talking about. That's certainly a part of it. And f- and frankly, Jason, some of them are, are, are just lazy, because real estate, you know, it's a... It's...... IRS calls it a passive investment, but it's the most involved passive investment you could ever own. Wouldn't you agree? I mean, you gotta find the property. Uh, there's a lot involved with it.

Speaker 5: You take away a lot of that work, but buying real estate is, it's not just like sticking money in the bank account. There's, there's stuff, um, you, you have to do. That make sense?

Speaker 4: You do have to do stuff. But I argue, and my listeners have heard me say this a lot, is that there's no such thing as a passive investment. And, you know, one of my friends who, who's owned over a thousand houses, okay? A thousand houses. He, he says the same thing. Nothing is passive. Even if you put your money in the bank account, you're subject to taxes and inflation, of course. But, uh, you're also subject to, if you're a, you know, if you're really a, a doom and gloomer, you're subject to bank failure. So, you can't really say that even the bank, which would be considered a truly passive investment, is even totally passive. Because you're getting passively screwed. Okay? Yeah, call it passive if you want. You, y- you know, it's like there's those different things in life, you know. There's playing to win, playing not to lose, and there's playing to lose. If you put your money in the bank, you are most assuredly playing to lose.

Speaker 4: The only time that won't be true is in a true deflationary environment where your cash becomes more valuable. And in that environment, I would submit that if there's a significant portion of that environment, you run a very strong risk of bank failure. Okay? So... And, and believe me, the FDIC, and Randy I'm sure you know about this, the FDIC does not have anywhere near the reserves to insure the banks, okay?

Speaker 4: (laughs)

Speaker 5: No, they don't. They don't. They don't, they don't, but they also have the, you know, the treasury to, to prop them up if they... Uh, not the treasury, but they have the FDIC printing presses.

Speaker 4: You, you are right. And they would, they would print to make good on the loans, I bet, right? Because they have that right. But guess what happens? See, the FDIC says that you'll get your money back. They insure up to $250,000, right? So they say, "You'll get your money back," but they don't say what the money will be worth when you get it back. And what I mean there is that the printing press is inflationary. So, they can pay you back in nominal dollars, but the value in real dollars is a huge question mark.

Speaker 5: Yeah. And, and, you know, I guess my point is that if, if you're willing to put a little time and effort into this, the returns are well worth it. And, and so i- w- if it's fear or laziness, I don't know which or the, one or the b- or the other or both that are holding you back, y- you really just gotta think through that. What else could you do with your time that's gonna give you those kinds of returns?

Speaker 4: The funny thing is, uh, you know, the people that are all into the stock market thing, they spend all this time thinking ab-... I know those people. (laughs) You know, I know lots of those people. They spend tons of time thinking about this stuff. They spend a lot of time watching Bloomberg and CNBC, listening to it on the radio, on their, you know, satellite radio in their car. They, they read the Wall Street Journal and Investor's Business Daily and Barron's and, you know, all these publications. They, they have expensive newsletters to which they subscribe, that they pay, you know, $2,000 a year. They look at the Morning Star reports. I mean, my God, do they actually think what they're doing is passive? (laughs) You know, their online trading stuff. Ne- there's nothing passive about this.

Speaker 5: That's, that's how it works. And yeah, and, and if you listen to the, again, the pundits on television, th- they're talking the same thing. It sounds like you're at a racetrack. Did you ever hear that?

Speaker 4: Oh, yeah. It's like a total casino mentality, you know?

Speaker 5: (laughs) Totally. It's, it's...

Speaker 4: It's... That is... I, I would, I would submit to our listeners that CNBC, and maybe to a lesser extent Bloomberg, are, are designed, literally designed by psychologists the same way Las Vegas casinos are designed. And, you know, probably our listeners have heard about this stuff. They've heard about the way in these casinos they manage the lighting, the way they manage the ventilation, the way they pump oxyg- extra oxygen in through the HVAC system. The patterns of the carpet, the colors on the walls. They move the needle on this stuff by just a little bit, and that can mean millions and millions of extra dollars to them every single year. And so I would submit that the set, the design, the talk, the voices, the modulation, all of that stuff on CNBC is designed to encourage people to invest.

Speaker 5: And it works.

Speaker 4: Yeah, yeah.

Speaker 5: (laughs)

Speaker 4: And it does work.

Speaker 5: (laughs)

Speaker 4: Yeah. Because there are people who are just... I remember... Remember when day trading was such a big thing years ago? Whatever happened to that? I don't know. But anyway, it was, it was like a huge thing. Like every other person I met in Newport Beach used to... was a day trader for a, uh, for a time there.

Speaker 5: Flash crashes is what happened, Jason. They, they went, "Wow, I can lose that much money in a few seconds?" Really? (laughs)

Speaker 4: Yeah. Then, then they were done with day trading, right?

Speaker 5: (laughs)

Speaker 4: Well, I remember these people, like literally, Randy, quitting their job, s- and all they would do, like you couldn't talk to them during the time the market was open. They would not talk to you at all. They would not plan anything. You couldn't go to lunch with them. And they would sit there in their, in their room with CNBC on the TV, and they would just be watching it, watching it, watching it, and they'd have their computer in front of them and they'd just be trading stuff. Uh, I don't know what people think, you know. That... I mean, you compare all this stuff to income property, and income property is really easy.

Speaker 4: (laughs)

Speaker 5: (laughs)

Speaker 4: So...

Speaker 5: All a point of view, all a matter of perspective, right?

Speaker 4: Yeah. It, it most, it most definitely is. So anyway, hey, thank you for joining us today and talking about this stuff. So again, Randy, thanks so much for joining us, and happy investing to everyone.

Speaker 5: Thanks, Jason. (instrumental music)

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