Buy and Hold Investing

Mike: Welcome to the FlipNerd.com podcast. This is your host Mike Hambright, and on this show I will introduce you to VIP’s in the real estate investing industry as well as other interesting entrepreneurs whose stories and experiences can help you take your business to the next level. We have three new shows each week which are available in the iTunes store, or by visiting FlipNerd.com. So without further ado, let’s get started.
Hey, it’s Mike Hambright with FlipNerd.com. Welcome back for another exciting VIP interview where I interview some of the most successful real estate investing experts and entrepreneurs in our industry to help you learn and grow.
Today I’m joined by my friend Jason Hartman, who’s the CEO of Platinum Properties Investment Network, the Hartman Media Company, where Jason operates an entire podcast network and several other ventures. I’m really not sure how he does it all. But Jason is involved in quite a few things, not the least of which is helping assist investors in acquiring turnkey rental properties nationwide and building long-term wealth.
Today we’re going to discuss buy and hold investing. There’s a lot of opportunities right now to accumulate rental properties all across the country and Jason is going to tell us all about it. Before we get started though, let’s take a moment to recognize our featured sponsors.
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Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions as real estate investing can be risky.
Hey, Jason, welcome to the show.
Jason: Hey, Mike. How are you doing?
Mike: Good, good. I get to have an interview with the interviewer.
Jason: Well, I’m not always the interviewer: I’ve been interviewed many, many times, hundreds of them actually.
Mike: It’s funny, I’ll tell folks when we first connected earlier, you said, “Are you interviewing me, or am I interviewing you?”
Jason: That is what I said because I did not know.
Mike: Well, hey. I’m glad you’re here.
Jason: Well, thanks. I’m glad to be here.
Mike: Yeah. So, we look forward to learning more about you and sharing your knowledge for sure. Before we get started though, why don’t you take a couple of minutes and tell us about your background; it’s an exciting one.
Jason: Sure. I got started in real estate at the ripe old age of 19. I was actually in my first year of college, and I got my real estate license two weeks before my 20th birthday. I became interested in the real estate business because when I was 16 years old – so just backtracking a little bit here – I saw an infomercial. I grew up without many resources at all. We were fairly poor, and I didn’t like that too much. So, I went out and got the guru’s book, read three chapters, and put it down.
My mom picked up the book, though, and read the whole thing. She started going to all of these real estate seminars and then when I was in 12th grade, I was getting ready to graduate from high school and she said, “You know, Jason, you got me interested in this real estate stuff. There’s a big seminar in Anaheim this weekend, Anaheim, California by Disneyland. Why don’t you go?” And so I rounded up 9 of my friends from high school, got them to go to the seminar with me because at that age you never want to do anything by yourself, and so I just decided I’d get my real estate license to learn the basics after going to that seminar.
Mike: Who was the seminar, can you say?
Jason: Well, the seminar was one of those pitch fests, where you have a whole bunch of gurus and they’re selling info products. The first speaker, though, was a guy named Hal Morris. He was talking about points. And I thought, “Points? What are points?” One of my mentors at the time was Earl Nightingale and I remember Earl Nightingale saying, “Most people won’t learn the basics of anything, they just want to become a star.” He used an example actually, he said, “If you want to get rich in real estate, learn the business first.”
So, I thought I’d get my real estate license to learn the business. I did, and I’ve done very well in the business of real estate and also in real estate investing for my personal portfolio. So, both have been as the old Saturday Night Live skit guy used to say, “very, very good to me”. I don’t know if anybody remembers that from Saturday Night Live years ago, he used to say, “Baseball been very, very good to me.” So, real estate has been very, very good.
Mike: So, tell us how you evolved to basically start helping other people, teaching them?
Jason: Well, yes, I’ll tell you that but first, can I demonstrate a new toy I just got?
Mike: Sure.
Jason: Okay. So here it is. It is my height adjustable desk, so now I’m standing. Yeah, I was sitting. You know, this is really good for your health. You’re supposed to stand for 20 minutes of each hour and then sit for 40, so it’s a two-thirds, one-third ratio. How’s that sound? So there’s my new toy.
Mike: You can go up and down today as much as you want, my friend.
Jason: I can. I will go down and up. How many guests, Mike, have you had that could do that?
Mike: None. You’re the first one. Yeah, you’re the most recent so we saved the best for last.
Jason: At least I’m first at something.
Mike: So, for those of you that are just listening, Jason is raising his desk up and down here, so cool.
Jason: It’s my height adjustable desk. I just dropped $2,300 on this thing.
Mike: Oh wow.
Jason: I like it so far.
Mike: Great.
Jason: So, anyway, how did I get started helping other people?
Mike: Yeah.
Jason: I was in the traditional real estate business for many years. I purchased a failing real estate company, turned it around, sold it to Coldwell Banker. I knew I would have a non-compete with Coldwell Banker so I went back to my first love, which is real estate investing, not the traditional real estate business. I started working on opening a company that was a financial services firm for real estate investors.
I looked around and I thought in the Wall Street world, you have all of these companies like Merrill Lynch and Ameriprise and all of the others and they sell a very mediocre, really – I’ll say it – crappy product, in my opinion. But they have an excellent salesforce and an excellent sales system. So I thought, “Why can’t there be a financial services firm for real estate investors?” I looked around out there and I didn’t see one, I couldn’t find one that did this and so I created one. And that’s what I do, the business I’ve been in for many years.
Mike: Still today, though, there are other turnkey providers out there and more solutions but there’s still, if you consider it as a percentage of the market, it’s nothing still.
Jason: It is nothing. It’s really, nobody offers an area agnostic approach to real estate investing, so most people if they think, “Let’s invest in real estate,” they’re going to pick up the postcards they keep getting from the person who does what they call “farming,” farming their neighborhood – that’s a real estate term, farming. They’re going to pick up a postcard from them, and they’re going to call them up and say, “Hey, you know, I want to invest in real estate. Can you show me around?” They’re going to get in the car, they’re going to look at properties in their specific market, in their specific neighborhood, and it may not be the place to invest, Mike.
You’ve got to take an approach that’s area agnostic. What if you went to a financial services firm, and they only had one product to sell you? Maybe they only had one mutual fund. So, what we do is we help people build a nationwide portfolio, investing in properties in many, many markets and really develop an investment plan, use financial planning techniques, but apply them to the most historically proven asset class – income property, not stocks, bonds and mutual funds.
Mike: That’s something tangible that you can see and feel. It’s funny because I was a finance undergrad. My wife was an investment banker on Wall Street. I worked for a company that did portfolio management that had, literally at the time, I remember when we hit a trillion dollars under management as custodian for a very large bank. I just got dismayed with it. It was like all the fund managers were trying to beat the S&P 500, and you start to think, “Why doesn’t everybody just invest in the S&P 500?
Jason: You could just buy a Vanguard fund and beat all of those fund managers.
Mike: It’s just, like you said, a lot of it is driven by salespeople who are selling sub-par products.
Jason: Sub-par is an understatement. One of my teachings, I have something I call “The 10 Commandments of Successful Investing” and one of them, Commandment number 3, my favorite, is “Thou shalt maintain control.” What I mean here is stop investing in someone else’s deal. Stop putting your financial future in the hands of some adviser and some CEO of some company, because when you don’t maintain control . . . look, in real estate, we’re almost always direct investors. We buy a property, we own it, we control it, we decide what to buy, where to buy, when to buy, how to finance the property, who to rent it to, how much to rent it for. All of these relatively easy decisions driven by market forces, and with good resources to help you do all of these things, are available to investors where we can be direct investors. We can be in control of our investments.
I’d like to say, Mike, that three things happen when you relinquish control to somebody else, when you don’t follow my 10 Commandments. They are, number one, you might be investing with a crook. Number two, you might be investing with an idiot. And number three, assuming they’re honest and competent, the next problem is they take a huge management fee off the top for managing the deal. So, be a direct investor, maintain control. Follow commandment number three, and I have many more commandments, but that’s a good one.
So, Wall Street is not the place. It’s amazing to me in all of the years of being in this business and all of the people I’ve met and you can probably agree coming from that Wall Street background, where are all the examples of all the people who got rich investing in stocks, bonds, and mutual funds? Crickets. There’s a big, long silence. Nobody who’s not an insider, and of course insiders are a completely different class, Warren Buffett is an insider, the people who started a company and took it public, they’re insiders so that does not apply. I’m talking about the passive investor.
Mike: Right. Well, clearly more and more people have caught on to real estate as an actual asset class because of some of the work that you’re doing and because people are becoming more and more agnostic to where they invest, where historically they want to be in their own backyard. So, where do you see things going from here in terms of the opportunity to buy and hold – let’s break these apart – the opportunity to buy and hold. That’s an interesting question; I’m saying my own question is interesting here. I don’t know if I can say that or not.
Jason: Yes you can. You can laugh at your own jokes, too.
Mike: I am the best looking guy at this end of the camera right now.
Jason: And you’re the only one there.
Mike: Don’t say that. So obviously there’s a different opportunity now for buy and hold when you become market agnostic because now you go in and out of markets as the opportunities present themselves. But why don’t you talk about that a little bit, just the general opportunity for buy and hold investment moving forward here into 2015 as – and a lot of markets are feeling a lot of heat right now because the markets have gone up so much.
Jason: Well, there are certainly overvalued markets in the country, no question. We like to divide, when we talk about different cities around the country and around the world, of course. I have traveled to 74 countries now and I still think the good old US of A – I look at real estate deals almost every place I go, and the good old US of A definitely holds the best real estate investment opportunities.
One of the reasons for that, by the way – and I know I’m not answering your question so I’ll circle back to it – is since the Great Depression, real estate has really been subsidized in the US by the federal government, through Fannie Mae, and Freddie Mac. The U.S has such good infrastructure in terms of supply lines, parts and improvements, and the MLS system is so mature here for comparable data. It’s got good rule of law except for Wall Street and the government, they don’t have any laws because everybody else has to. Not that I have an opinion about this or anything. There are just some great features about U.S. real estate that are not available in other countries. So, that’s one of the reasons I really like it.
But when you look at markets around the US, one of the things that we’re seeing now, Mike, is that this industry is really at the beginning stages – it’s not there yet, far from it – but it really is starting to show signs of real maturity. What I mean by that is if you look at traditional real estate over here, we’ve got ReMax, Coldwell Banker, Keller Williams, Prudential, all of those companies. That’s not our business. Those are not our competitors. Nobody from Century 21 is going to take my customer in any legitimate way if the customer has got any brains.
Then there’s real estate investment industry over here, and that industry is starting to mature where you and I both know a lot of players in the business who are becoming very good at this business and very business-like and very well-funded and they have big teams, and big resources, and employees, and systems and software. That’s a great thing. It’s great for the consumer and it’s also great for us ultimately because competition is what will inspire greatness ultimately and make everybody better at their game. So, that’s really interesting.
So when you look around the country – you asked me about different markets – and we like to divide different real estate markets into three categories. Number one is the linear market, and that’s the market that just sort of chugs along. It will average probably somewhere between 5% and 6% appreciation over decades, maybe even 7%, it depends on what time period and who you’re talking to and how they calculate those numbers or some fudge factor there.
Then you look at the cyclical markets and one that I spent most of my life in, pretty much every city in the state is this, and that’s California, where you’ve got these big ups and these ugly downs and you’ve got an up-cycle again and then it goes down and it just repeats that pattern. But the overall trajectory is up.
Then you’ve got what I call a hybrid market and that is where I live now. I moved here three years ago and that’s Phoenix, Arizona would be considered a hybrid market where you’ve got a little bit of this craziness on upswings and a little bit more on the downswing. It’s kind of mixed with a linear feel as well, where it’s not crazy, it’s not New York City, it’s not Boston, Massachusetts, it’s not Miami, and it’s not virtually every city in California.
Mike: Right. Right. So, in terms of strategies to select what markets you go after for buy and hold, I guess talk a little bit about the philosophy that you use at your company to target opportunistic areas.
Jason: Look, the older I get, the more conservative I get. I just don’t like gambling, okay? I go to Las Vegas now and then. I don’t even touch gambling. I just have no interest in that. It’s just not my thing. I probably saved a lot of money having it not be my thing.
The same is true with investing in real estate. Appreciation is not very reliable, it’s not very predictable and neither is depreciation. But cash flow is pretty darn reliable, so I like to invest for cash flow and I like linear markets.
I’ve got to find this old PowerPoint slide I used to use many years ago in my seminars and my presentations. What it showed, Mike, is it compared two markets. I used to live in Newport Beach, California, for example, and that’s a high flying market, Orange County California, the OC. There are television shows about the OC. This is a cyclical market that goes up and down. Kansas City, Missouri would be a linear market that just chugs along.
This interesting chart that I’ve got to find and start presenting again, because it’s really timely now, it compared over the course of, I believe, 18 years. It took Orange County, California, and Kansas City, the high flying Orange County Market, where it’s very expensive to live, it’s always in the news, it’s a renowned place. Kansas City, not expensive to live there, not in the news too much. Most people would consider it a boring real estate market. Over the course of that long time frame, guess which market appreciated better?
You only have two choices, so it’s a 50/50 chance.
Mike: I’ll go ahead and I’ll say Kansas City.
Jason: You know what? And you are right. That was a trick question because most people would pick Orange County, the high flying market. Kansas City actually did 5 points . . .
Mike: That’s total appreciation, so that wasn’t like, “Well, if you would’ve bought in the valley and sold at the top of each boom.
Jason: Anyone can be accused of picking favorable timeframes, but this over the course of 18 years. The time it takes from a newborn to become a legal adult. It’s a decent sample. So, Kansas City, 5.7%. Orange County, California, the high flying cyclical market, only 5.3%. The reason is any stock investor will tell you this because stocks are so volatile mostly is that when you lose, if you have $100 stock and it goes to $50, you’ve got to get back 100% to get back to even.
So, in a market like Orange County that does this or in New York or Connecticut, any of the high-flying Connecticut markets, Boston, whatever, Miami, those kinds of markets, you give back so much on the down cycle that it’s so hard to recover from that. Plus in any of those markets, Mike, your cash flow is terrible.
Mike: Right. Absolutely.
Jason: You just can’t get any decent cash flow in these markets.So, I much prefer linear conservative markets with good cash flow. Those are my favorite places.
Mike: So, talk about from an economic standpoint, where you see things going here, because I know you’ve got your ear to the ground in a lot of these things. Going into the 2015 here, it feels like the markets have gone up in a lot of major markets for sure. Some of the opportunities, I know for a fact even in my market, the Dallas market, I found myself buying couple of rental properties this year that I know I’ve bought other properties in that market in the last five years for half of that price. There’s a lot of that going on, so where do you think things are going from here?
Jason: Well, predictions are difficult, that’s my first disclaimer. They’re really not that difficult from an economic standpoint, Mike, but you know what makes them difficult? Government interference and pseudo-governmental entities, the Federal Reserve, our Central Bank, makes it very difficult to predict a lot of this stuff. So, with that in mind, assuming the government doesn’t interfere too much, I think we’re going to see some of the high-flying markets really soften a bit.
I don’t think we are in a legitimate economic recovery. There are lots of statistics and a lot of them are manipulated to show that things are going great, so that the people who hold public office can maintain their position. Overall, I think we’ve definitely got some real problems economically.
Now, the central bank can make interest rates artificially low and have quantitative easing, which just means creating money out of thin air, not a prudent strategy overall. They can juice the market, and they can give it caffeine and give it steroids and make things look better than they really are underneath all of that. I think the linear markets, the good, prudent markets are going to be solid and they’re going to continue to do well and we’re going to continue to see rent increases and they’re just going to be good, solid investments. We’ve got clients making upwards of 20%, 30%, 40% annually on their investments in boring markets.
Mike: Yeah, those are probably some of the best markets to invest in, are the ones you don’t really care about appreciation much because it’s all about cash flow.
Jason: Yeah, yeah. The non-sexy markets that are just these boring linear markets, those are the good places. Those are the markets I like.
Mike: The great thing is as people become more and more agnostic as to where they invest, then you just move in and out of those markets as the opportunities present themselves, right?
Jason: Right. I should say we’re not much for moving in and out of markets. We’re more interested in buying and holding.
Mike: I mean, going into markets, you can shift gears and say, “‘Hey we’re going to stop buying here right now. We’re going to move into Des Moines, Iowa because . . .”
Jason: Great distinction. Absolutely. A great example of that is Charlotte, North Carolina, a market that we’ve been in and out of for years. If you had to enter that market as a new landlord and find a tenant and you had what we call a “non-stabilized property,” there have been times where that would be really difficult, where you’d want to avoid it. But if you already have tenants and they’re going well, just keep your tenants happy. Don’t try to raise the rent too much. If there’s too much supply coming on the market, then just hold course and keep her steady.
Mike: So, if anybody’s listening to this right now, you know what else is interesting that I want to cover is this is something I’ve thought a lot about over the past year in my market where I primarily invest in the Dallas/Fort Worth market . . .
Jason: That’s a great city, I like Dallas.
Mike: Things have gotten kind of tight here, and I’m very thankful that I’ve built a portfolio around properties now because we have those other streams of income. There are a lot of real estate investors that you and I know, they may be huge wholesalers, but unless they’re building up some other revenue streams, some passive income streams or more passive income streams, then they can never stop buying. The market gets hot and if they stop buying, they die.
Jason: They’re giving a lot of tax dollars to the government. Income property, when you use the buy and hold income property strategy, it is the most historically proven asset class in America. It is the most tax favored asset class in America, and oddly it is the most debt favored asset class in America. When I say that, I mean debt in a good way. Where else can you get this incredibly cheap, three decade long, fixed rate debt? It’s just an unbelievable opportunity to use 80% of somebody else’s money to control assets that produce positive cash flow and you don’t even have to pay your own debts; you outsource them to your tenant. That’s my kind of outsourcing.
Mike: Well, Jason, tell us a little bit about Platinum Properties and what you guys do there.
Jason: So basically what we do is three major things. We basically teach people how to invest. We have live seminars and conferences and stuff like that. We’ve got one coming up here on January 10th in Irvine, California. That’s called our “Meet the Masters of Income Property” event and we do that once a year. We do our podcast and that’s really popular. It’s called “The Creating Wealth Show.” It’s all free. It’s available on iTunes or Stitcher Radio or SoundCloud and so that’s a great thing. Lots of followers and listeners to that over the years.
We basically teach people how to invest and then we set up referral agreements with what we call “local market specialists”, or LMS, not to be confused with MLS. LMS. And these providers provide turnkey properties to our clients in markets that we vet, we research, and we like.
So, I’ll give you an example. We have contracts with probably 40 different local market specialists in different cities around the US. But if you look at our website, if you go to JasonHartman.com and click on the “Properties” section, you’ll only find seven featured markets because these are the markets we happen to like right now. We’re area agnostic and we move in and out of these markets as they make sense. If they don’t make sense, we stop recommending them.
It doesn’t mean, like we talked about earlier, that our clients that already own properties there should sell them and leave. It just means they’re stabilized; we’re just not going to reenter that market. They may have a lower cost basis where they paid on average $80,000 for a single family home and maybe they bought five of them in that market. But now you’d have to pay $100,000 or $110,000 and it doesn’t make as much sense to enter the market today.
Mike: By definition, if your investment does well, you should be prepared to go somewhere else with future dollars. Hopefully.
Jason: We want to see investors be diversified into three to five markets. So, don’t have all of your eggs in one basket. Even if you live in the greatest market in which to invest, it doesn’t mean you should put all of your eggs in that basket because you’re not diversified. What we want to have you do is take the most historically proven asset class and diversify geographically. There’s an old saying in real estate that all real estate is local, all real estate is local, and that’s really true.
Mike: Well, Jason, thank you so much for your time today. We’re going to add links for your shows and to your company down below the video here. Any kind of final thoughts or words you want to give to folks about buy and hold in 2015 and moving ahead?
Jason: Just the idea of just being patient and investing for the long haul, that is the surest way to wealth in this business and probably in any business. All the people that have the deal of the month and the thing they’re doing now and the thing they’re doing tomorrow, they keep changing course and changing their mind, they never seem to get anywhere in life. All you’ve got to do is live a little bit to know that that’s true.
There’s a great quote and I’m probably going to butcher it a little bit here. But it goes something like this. I can’t remember who said it. But it goes, “Successful people make decisions quickly as soon as all of the facts are available, and change them very slowly if ever. Unsuccessful people, on the other hand, make decisions very slowly and change them often.” So, that’s the difference.
Learn the business. Don’t learn it too much where you get the paralysis of analysis problem, because that’s a whole other problem. Learn the business, get some decent, solid education. It’s all free nowadays. If you want it, just listen to your podcast, my podcast. You get lots of free education. You don’t have to pay for this stuff anymore. Then, make a decision and do it and follow through with it and stick with it. That’s how you’ll be rewarded.
Mike: Absolutely. Awesome. Hey, Jason, thanks so much for your time today. Thanks for sharing your insights and your experiences. I appreciate it and I’m sure everybody else will too. Thanks so much.
Jason: My pleasure. It was great talking to you.
Mike: All right, have a good day.
Thanks for joining us on today’s FlipNerd.com podcast. To listen to more of our shows and learn from incredible guests, please access all of our podcasts on the iTunes store. You can also watch the video versions of our shows by visiting us at FlipNerd.com.