Investment Property Tips

Michael Quarles interviews Jason Hartman

Hello everybody. Michael Quarles with The Michael Quarles Real Estate Show. I have with me today Jason Hartman. I’m excited. You know, one of the things I like about these interviews is I get to learn so much from these people. I mean, they’re fascinating to me. They’re all over the place, meaning they have all kinds of different topics to talk about but Jason, man, he hits it home. He’s a real estate investor. He’s gotten 600 real estate podcasts out there. He’s passively investing. Just an outstanding individual. So, we’re going to get going here. Here we go. Hi Jason, tell us about yourself.

Well, I have been around real estate pretty much all of my life. I got inspired to get in that business when I was 16 years old and started formally, my career, at age 19. I just love real estate investing and I think it’s the most historically proven asset class in the entire world. That is my main focus. However, I do a bunch of other things as well, and just have a lot of different areas of interest. That’s why I developed my podcast network to cover a lot of interesting topics.

For those of us that don’t know about your podcast network, tell us about that.

The Hartman Media basically started out publishing one show about 10 years ago called ‘The Creating Wealth Show.’ That is a real estate podcast, it’s my most popular show, still even today. We’ve got over 600 episodes and I’ve interviewed a lot of famous guests on my show. Basically, we just talk about real estate investing, and economics, and things like that.

But, in about 2009, Michael, as the economy was going through some pretty tough times, I started my second show, which was a survival show entitled ‘The Holistic Survival Show’, gained a big audience there, and then started a whole bunch of other shows in various topics that I just had a personal interest in. So, whether it be a longevity and bio-hacking, travel, monetary policy, a bunch of things like that. I’ve got a variety of shows which cover a lot of these different topics, and it’s just a lot of fun as I’m sure you will agree to learn so much by interviewing all of these thought leaders and experts in various fields.

You know, I come away every time I chat with someone, with at least a big nugget. I have a lot of little nuggets, but man, it’s like I have a gold mine at the end of every show, and it’s fascinating.

Right.

Now, I have to admit I’m a little jealous. I’m going to say it right now. Just, okay, I’m a lot jealous. Truth be told, you were 16 when you got your feet wet in real estate? Tell me about that.

No, not when I got my feet wet, just when I was inspired to do it. I was listening to an infomercial about a real estate guru and I went out and I got his book, and I read 3 chapters. I mean, I was in high school, and after growing up relatively poor in Los Angeles, California, and not liking that very much, I thought, “there’s got to be a way. What do I do? Do I start a business? Do I get into investing?” Whatever, and I read 3 chapters of guy’s book, I put it down. My mom picked it up and read the rest, and she started going to real estate seminars, reading books about investing, and so forth.

Two years later, she says to me, “you know, Jason, you got me interested in this real estate stuff. I’ve been learning about it for the past couple of years. There’s a big seminar in Anaheim by Disneyland this weekend, why don’t you go?” So, I rounded up 9 of my buddies from high school and I got them all to go, and Friday night, they were all there. By Saturday morning, only one was left besides myself. By Sunday afternoon, I was the only one that attended the whole weekend. All of my friends went to the beach and had a good time. But, I was really serious. I was really motivated about this.

Then, after that seminar, I decided I should just learn the basics, learn the business. So, I got my real estate license in my first year of college when I was 19, and I just went to work for Century 21. I started working with investors because that was my reason for getting in the business, and I started putting little ads in the Orange County Register advertising government repo properties, HUD, and VA foreclosures, and I just started showing them to clients and selling them.

Then, about 6 months after I was in the business - I was only 20 years old now - one of my clients, his name was Jim Wool, had purchased a few properties from me and he said, “you know Jason, this one property in Huntington Beach, I don’t like it very much. I’m not having very good tenant experiences. Why don’t you take the listing and just sell it for me?”

I said, “you know what, Jim? I don’t want sell it for you, I want to buy it from you.” That was my first investment property when I was 20 years old. It all just went from there, and I just started investing. I was in the brokerage side of the business, and I loved dealing with clients and learning from them, and helping them with their properties. Then, building my own portfolio on the side, and that’s really how it all happened.

Fascinating. I was 19, well 18/19, so we were both teenagers, which, when you say it, almost makes you feel guilty saying ‘I was a teenager when I bought my first property’. By the way, we’re kind of connected because I bought my first property from a Century21 Realtor. Go figure, you know? Century21 was big back then. The gold jackets.

Small world, and cheesy gold jacket. I still have mine, by the way. I’ve worn it as a Halloween costume a couple times over the years.

Yeah, I’ll have to borrow that one from you.

Yeah, there you go.

On your first transaction, did you buy it traditionally? Did you go out and get bank financing? Did the seller do some seller creative financing with you? What did you do there?

Great question. It was a little bit creative. Since the client had just purchased it from me, I was able to assume his FHA loan and put basically nothing down on the property. I just paid the closing cost, so it was a no money down deal, and took over for him. So, that was a creative deal and you know, you can do creative deals. But Michael, as I’m sure you’ll agree, they are hard to find.

A lot of times people in the name of creativity in a deal, end up overpaying for the property. So, I find there’s almost too much emphasis on that nowadays, because so many people have seen all these infomercials and they’ve heard all of this stuff. They’re really not always serving themselves through creativity. I just want to put that out there as a cautionary tale.

There are some though that are absolutely preaching creativity that isn’t truly an asset builder, if the person buying the property really truly looked at the numbers.

Oh yeah, it definitely can be. I just think that a lot of people become very misled by it. So, I just want to put that disclaimer out there a little bit.

On that, you assumed that FHA, now that was … I’m just assuming, maybe at that time it was a non-qual FHA assumable loan.

I don’t even remember the details of that.

Was it like pre-74?

Of course. Yeah, it was long after the due on sales clause was upheld by the Supreme Court. So, there was a due on sale clause, but it was relatively easy to assume it. I don’t think I did it to, I just can’t remember. It was obviously a long time ago. In either case, I got into that property for pretty much no money down.

Then, my second property was kind of interesting. I got conventional bank financing on my second one, but I structured a creative deal there, too, by borrowing the down payment from my grandmother. So, my returns were pretty much infinite on that deal, too, because I sold it 11 months later, made a very nice margin. The market was appreciating, paid my grandmother back with interest, and made a huge return on that property.

So, that’s the great thing about income property as an asset class. It’s a multidimensional asset class. There are many ways you can make profits. You can make it from cash flow, from leverage, by doing creative financing, doing lease options, by restructuring I mean, there’s just an endless amount of creativity available to you because it’s a multidimensional asset class.

If you compare it with stocks, and bonds, and mutual funds, those asset classes are terrible! Because, you don’t have these multidimensional aspects. You have maybe one, or maybe two dimensions. If you take non-dividend paying stocks, or say precious metals, or other asset classes where it’s just a capital appreciation play, it’s one dimension. If it pays a dividend, it’s two dimensions. Maybe you’ll make appreciation, maybe you’ll make a dividend in the meantime, but you can’t do anything creative. You can’t add value. I mean, Wall Street is what I call the modern version of organized crime.

I think a lot of people might second that opinion.

Yeah, yeah. I’m sure they would. Even the insiders agree with that sometimes, a lot of them. But, they’re just cogs in the machine, you know? So, real estate or income property, it’s just a fantastic asset class. I think it’s the most historically proven asset class in the entire world.

I love it. I fell in love with dirt when I was 19. It took me away from the Air Force, I had enlisted in. I’ve sat on dirt since then, and I love it. I guess when I was 5, I loved the dirt, too, but it was a different type of dirt that I loved.

There you go. Well, you fell in love with the right thing. Everything, if you really think about it, all value comes from the earth, right? Whether they be agriculture, precious metals, real estate, oil and gas, all of this value, all of these commodities come from the earth. As a national association of Realtor preamble says, “under all island.”

Yes.

It’s a great asset class.

Can we touch on your thoughts on leverage? For those of us that maybe leverage poor, knowing what that means. Explain to us your ideas of leverage.

Well, I think leverage in any field is an incredibly powerful tool, because the concept is that it allows you to do more with less. Archimedes had a great quote, he said “give me a lever long enough and I will move the entire world.” It’s really true. You can do a lot more with less.

In real estate, for example, when you’re putting 20% down on a property, you have a 5:1 leverage ratio. So, you can basically be 5 times bigger, if you will, than you really are. You can increase your results by a multiple of 5, by 500%.

If you look at people like Donald Trump, and so many other wealthy people who’ve created their wealth from income property, from real estate, they did it by using leverage. Leverage is an extremely powerful tool. It magnifies results. Of course, you have to use it prudently, you need to be careful. It is a powerful tool, but you’ve got to be prudent about it, obviously. It’s just a very, very powerful tool for anything we want to do in life. We’ve got to gain leverage. Leverage, leverage, leverage. Very powerful.

So prudently, what would be an example of not being prudent as we relate to leverage? What are the danger signs that folks should be conscientious and cautious about when it comes to leverage?

Well, certainly if you buy a property, for example, and you don’t get a non-recourse loan, meaning that the lender can go back to other assets that you have outside of the property. If you do that, and you become over-leveraged, and you get yourself into trouble with the investment, then that could really be a disaster. Most residential income property loans are non-recourse loans, so they can only look to the property as their collateral. That really dramatically reduces your risk.

Commercial properties, on the other hand though, many times will be recourse loans. So, those can be very, very risky. I have this thing I call the 10 Commandments of Successful Investing, and it’s really a part of my core content. Commandment number 5 is ‘Thou shalt not gamble’. What I mean by that is that the property must make sense the day you buy it, or you don’t buy it. Never buy a property with the expectation of a capital gain. If appreciation comes, it’s icing on the cake, but buy it because it makes sense from day one from a cash flow perspective. So, it either breaks even, or hopefully has positive cash flow from day one and that is the way you will avoid getting yourself into trouble.

Look at a metric called the debt coverage ratio. The debt coverage ratio is really … might be more simply stated is the “what’s the likelihood I’m going to get myself into trouble with this property?” If you have a debt coverage ratio of 1, where it’s basically 1:1, you’re just breaking even. Where you have a debt coverage ratio of say, 1:5, you’ve got a good margin, basically a 50% margin that’s going to keep you out of trouble in that property. So, the likelihood of you getting into trouble with that good debt coverage ratio is very, very low. Balance that. Use leverage, it’s a powerful tool.

It’s like nuclear weapons, right? Many people would argue that nuclear weapons have saved lives because the deterrent factor of the massive destruction they could cause has prevented many wars. It’s kind of counter-intuitive.

Right.

A lot of people don’t realize that offhand. Leverage is also this very powerful tool, like nuclear weapons, but you gotta be careful with it, okay?

You want to share the other 9 commandments?

Well, not all 9 of them. But, let me give you another really good one. It’s been very popular and has resonated with my audience and my clients very much, and it’s commandment number 3. It says ‘thou shalt maintain control’. What I mean by this is be a direct investor. Don’t invest in pooled asset classes. Invest in something that you directly control. You don’t want to relinquish off your money to somebody else. You want to be in control, and that’s one of the other wonderful things about income property as an asset class. You can maintain control. You decide what to buy, where to buy, when to buy, how to finance it, how much to rent it for, whom to rent it to, when to sell it, when to refinance it, when to do a 10–31 exchange. It’s all in your control.

When we make the mistake of not following commandment number 3, of not maintaining control, of relinquishing control to somebody else when we’re not a direct investor, we leave ourselves susceptible to 3 major problems. Number 1, we might be investing with a crook. Number 2, we might be investing with an idiot, okay? So either a crook or an idiot, you’re likely to lose money. Or, assuming they’re honest and competent, the third problem is they take a huge management fee off the top for managing the deal. We want to go direct and that’s one of the great things about income property, is you can be a direct investor. You don’t have to relinquish control to somebody else.

Right. Even for the person that may not be as experienced as we are, they can still buy an investment property successfully.

Yeah, you know it’s very easy. Just buy some humble, single family homes. The good old-fashioned, humble, single family home is, I would argue, and I really have been saying this for a long time, Michael, and I haven’t really heard anybody argue with me on it…

Now, my last name is Quarles. Now just, you know…

Well, yeah, so quarrel with me. Yeah. Good warning, good warning. That is the single family home as an income property investment is the most historically proven asset class in the entire world. I don’t think anything can come close to that. The other asset classes I would like after it are I like apartment buildings. I like mobile home parks. You notice that those are all housing, okay? I do not like condos, because condos have their own set of problems. Then, my next choice is a business, your own business.

Right. Well, as a foolish person, in 1993, when someone showed me email for the first time, he actually said, “let me show you something.” I said, “sure, show me something.” So, he went to his computer, to his little 64 way back then, he sent his friend an email, called this friend said “hey, I sent you an email, call me back.”

I’m thinking to myself, ‘oh boy, this is not going to work.’ Because, if you’ve got to call someone to tell them that you’ve got an email, why don’t you just talk to them? Well, had I been a little bit more savvy, I would have bought as much as I could in the dot com world, and I would own quite a bit of real estate in the dot com world because I think that piece of real estate’s pretty magnificent.

Yes. Well, you know certainly people have made money in that, no question. People continue to do it today to a lesser extent. But, I remember when a business dot com sold for 7.5 million dollars, it’s worth nothing near that today, though. Domain names, I own about 300 of them. They are little pieces of real estate, really, but unless you have really prime names, I find they’re pretty difficult to sell, honestly.

I have paid really good money for them, and I have sold them for really good money. When prior to everybody else noticing that they were also a good asset to invest in. In 1993, had I been wiser, I would have bought quite a few of them.

Well, I agree with you back then, but who would have thought the internet would turn into what it did, right?

Yup. Who would have thought, who would have thought?

We all have those stories, “shoulda, coulda, woulda,” you know? We thought of some little gadget or gizmo we could have invented and we thought, “you know the world would love this.” Six months later, someone else did it. The way life is, my friend.

Yeah, and being a massive investor, I don’t get real excited over passive income. So, I don’t like rentals. I have rentals. I have a mathematical theory behind when I have a passive income unit. But, I’m basically a massive person, so I’ll go out and I’ll buy a house at 55 to 65 cents on the dollar directly from the owner of the property. Then, flip that thing to somebody that either wants to keep it as a rental after they fix it up, or fix it up and flip it again.

I could kick myself some days as I see in 04/05 as we were seeing real estate climb by the hundreds, the thousands of dollars in a year. I was kicking myself because the previous year, I had sold quite a few units at top dollar pricing. The next year, I would have made another two, or three, four million dollars in appreciation because I was a massive investor, not a passive investor.

Right, right. Well, look it, we all have stories like that. But things can all go the other way, too.

Oh yes, as a lot of people found out.

Tens of millions of people found that out. When you’re a speculator, you just don’t know. I mean, look at many years in this business, I have never met anybody who can reliably predict appreciation or depreciation. All of the gurus out there doing it, they’re right until they’re wrong. There’s always a time when they fall on their sword.

I’ll give you an example. In Orange County, California, there was a guy who, for years, and years, and years, was really well known locally, who was always speaking at the Realtor meetings, and he was on the local speaking circuit as a pretty big name. I mean, every year he’d come out with a forecast, and everybody would wait with baited breath. His name was Gary Watts. You know, Gary was always right until he was wrong. In about 2005, or maybe it was 2006, he kept saying, “oh, the Orange County market is going crazy. It’s going up, up, up!” And, it went down the tubes! Now, you never hear from him, right?

Yeah.

So, they’re always right until they’re wrong. I know that sounds like a funny statement, but just remember that. Nobody can reliably predict these market cycles. Not even the Federal Reserve, for God’s sake, and they control the market cycles.

But wait, there’s more!?

This post has been adapted from The Michael Quarles Real Estate show. Listen to this past episode for more on the inspiring story of JASON HARTMAN!

Don’t forget to visit www.JasonHartman.com!

About
Michael is an accomplished real estate broker, contractor and expert specializing in residential real estate. He bought his first property before age 20 and has contracted thousands of deals since then. As an active and current investor, Michael understands what it takes to be successful in today’s market.

Follow Michael on Twitter at @michaellquarles. We welcome your comments.