Jason Hartman talks about his feelings on the Cap rate what he calls, “The Crap Rate” as a faulty metric.
In the second segment of the show, he talks with Jonathan Slain, a high growth leadership coach, founder of www.Recession.com, and author of Rock the Recession, about how to prepare your business to ensure that you not only survive but thrive through recessions.
Jason Hartman 0:00
From the initial market recommendation from yourself matures and it’s the property right through to the leasing process of the property manager. Everyone has been just totally professional and the communication is excellent, especially with being such a long distance away.
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it and now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 1:07
Welcome to episode number 1300 and 79 1379. And greetings from beautiful Aspen, Colorado. It is so gorgeous outside and many of my friends are out there skiing. And I got sick on the way here. I guess my body didn’t like the temperature adjustment from a Caribbean cruise for the last eight days to 19 hours at home in Florida where it was kind of cold. And then coming to Colorado, which was well, even colder. It’s like, what’s the temperature out here? It’s well, it’s actually a toasty 25 degrees outside right now. But it is it is beautiful. Okay, so today we’re going to talk about how to rock the recession. Let’s talk about rocking the recession and I’m up here in Colorado for a couple of speaking engagements and I One of them. I was on a panel last night. And this is a group of, you know, very sophisticated people I’m speaking to and really a high level group. And I’ll tell you, we did this panel. That was really fascinating. It was a bulls and bears panel, talking about the future of housing, you know, is housing in a bubble, or is the party going to continue? Right? And what do you think I argued for I argued for the bulls, right and most of the room was bulls, I’d say about 75% of the room or bowls and about 25% of the room were bears. How do I know this? Well, because everybody had a two sided paddle. They held up the paddle showing which side they were on. And then throughout the the debate by both sides, there were three bulls and three bears on the panel. So six of us debated away and they would hold up their signs to see if they change Their mind, and nobody really changed their mind too much. It seemed like about the same number of bulls and bears, even after we all talked and, you know, that just probably goes to show us that everybody sort of believes what they believe. And that’s what they’re going to believe. And, you know, forget about trying to convince anybody, right? Here’s the thing I found very interesting. As people, we are amazingly good at deluding ourselves into things that aren’t correct. Let me give you an example. And it’s one of the things I called out to one of my opposing panelists. We kept talking about multifamily housing and apartments, and how they’re overpriced. In the primary metric they’re using to evaluate whether or not they’re overvalued is, guess what I’m going to say you probably know what I’m going to say. It is Crap rate, yes, the crap rate the capitalization rate. I’m I’m misspeaking just to show you my snarky sarcasm with a little brain fog attached due to not feeling so well. But the crap rate or cap rate or capitalization rate is a faulty metric. Why is it so faulty especially right now? It is so faulty, because it does not include look it. If If you looked at the crap rate of an apartment complex 15 years ago or say 25 years ago or whenever, you know, just pick a point in time when rates were significantly higher. Okay, you know, they go up and down, right? So I don’t have a chart in front of me, so forgive me, I’m sick. me a little bit of a pass for not having all the data ready here. So if you looked at a chart of interest rates and say you go back to when getting a mortgage on that apartment complex would cost you 25% more than it would today. Now, I don’t mean 25% interest, obviously, I just mean, the rate would be 25%. Higher. Okay. So say that rate we’re 25% higher. So you know, might equate to a couple points, right in actual rate, but 25% higher than the rate today. Well, if the cap rate was compressed, which is definitely true, they’re absolutely right that cap rates, they suck, okay. They’re terrible compared to where they used to be, of course. But as I always say, every deal becomes a good deal, looking in the rearview mirror, and every deal seems too expensive at the outset, during the Great Recession. If you bought properties in 2009 2010, at the ugliest point of the Great Recession, you would have thought you are totally overpaying. Okay, believe me, we had lots of clients doing that and they were worried that they were completely over Paying. Were they though? No, obviously not. Because looking back in the rearview mirror now, even if you bought them in, in 2012 2015 heck 2018. Okay, you did great. I mean, you did great. Right? So looking back, if you look at the cap rate on that apartment complex where that single family home if you want and you know, again, I don’t like I don’t like cap rate because it just doesn’t tell you enough of the story. Look at the difference. The cheap debt opportunity, the arguably negative interest rates we have today would have afforded you, it makes up for a lot of cap rate compression, when the cap rate is not as good if you can get super cheap debt, which is not even in the equation of the cap rate,
Jason Hartman 6:54
which is ridiculous. Why don’t people use cap rate it’s just a dumb metric you shouldn’t throw it out. Blow it up, get rid of it. It’s just an incomplete number. Okay, so, so don’t use cap rate. So that’s just one of the things I wanted to share with you from my talk last night. On another note, and we don’t have time to dive into this today because we got to get to our guests. But guess what, you know, commandment number three, Jason Hartman 10. Now 21 commandments of successful investing. commandment number three. It just always pops up everywhere you look. Well, I’m looking at an article right now, that says under suspicion of massive fraud. Top us landlord ordered to repay $63 million to investors, Robert Morgan ordered to pay $63 million back to allegedly defrauded investors. And this was the SEC the Securities and Exchange Commission otherwise known Sometimes as the scoundrels encouragement commission, because if they’re a big Wall Street firm, heck, they’re just going to offer that sec investigator a job, then suddenly, that whole interest in reporting them will not be there anymore. But I guess these guys weren’t smart enough to offer the SEC investigator a job. So Robert Morgan is in trouble. And it’s got to pay investors back $63 million. Now, what the article doesn’t say is how much the investors actually lost. And I’ll bet you dollars to doughnuts that it was a lot more than $63 million. It always is the investors always get a pittance in return of what they lost. And they almost always lose the opportunity cost. Even if they get repaid their original investment, the opportunity costs evaporated. And here’s what our friend Gomer Pyle has to say to that
Jason Hartman 9:00
up, you know, commandment number three strikes again, surprise, surprise, surprise. Okay, without any further ado, let’s get to our guests today be sure to check out Jason hartman.com for the latest properties and reach out to one of our investment counselors so they can help you be a direct investor so you don’t become the next victim of fraud in some sort of fund or syndication or scheme or something like that. All right. commandment number three, thou shalt maintain control. Here’s our guest, and let’s talk about rocking the recession. It’s my pleasure to welcome Jonathan slain to the show. He coaches high growth leadership teams across the United States to implement the entrepreneurial operating system otherwise known as EOS and, and there’s a well known book entitled traction which I read. I’m a fan of. He is also the founder, I believe, of a website with a great name. recession.com How do you like that? He’s author of rock, the recession, how successful leaders prepare for and thrive during, and create wealth during and after downturns. I think I messed up that subtitle a little bit, but you get the idea. Jonathan, welcome. How you doing?
Jonathan Slain 10:13
Let’s rock. Thanks for having me. Jason. Sounds good.
Jason Hartman 10:17
So people are out there saying, will there be a recession? And I say to them, there will definitely be a recession. One is always coming. The only question is when how deep? What will it start with what type? What flavor of recession will it be? But it’s definitely coming, folks. Okay, let’s put that idea too bad. There’s definitely a recession on the way exactly when we don’t know. But how can we prepare for a recession, not just in terms of battening down the hatches, and you know, being defensive, but as a famous football coach one said the best defense is a good offense. You know, how can we grow during a recession?
Jonathan Slain 10:57
The first thing is that I don’t think we’re just talking to about economic recessions. So if you’re an investor, and your largest investment goes sideways, then you’re in a recession, regardless of what’s going on in the economy, if you’re doing a deal, and you find out that one of your partners embezzled $50,000, from you or a million bucks from you, that’s going to put you and your investment in a recession. And so a lot of these things or if there’s a regulatory change, like has happened in many states recently, you can be in a recession agnostic of anything going on in the greater economy. And so I gotta, I gotta ask you about that one. Are you are you referring to my former home state, the Socialist Republic of California, and they’re, they’re crazy. I mean, is California trying to commit suicide or by us like, that’s what they’re doing? So I people have always said that, but I’m referring specifically to rent control and the new killing of the gig economy through a B five regulation, that is nuts. It’s like just chase people out, you know, what were you talking about? Not California. Guess why not was talking about California was a different regulation that recently passed the legislature outlawing single use plastics. And so for one of my clients that’s in that business, all of a sudden their entire business model will have to change. The whole point of rock. The recession, though is how could you take advantage of some of these regulatory changes? If you are the one company that was really thinking about what you could do if that rule was ever in a pass, if you could somehow leverage all the chaos that’s created in order for that to be a big break for you? That’s what the book is really about. I know that the common thing, Jason is that for recessions, what you should do is you should cut overhead and you should cut expenses and you should fire people and just try to survive, right that book had already been written. Interest is a lot more and what would we need to do now as investors or business owners or entrepreneurs to be able to thrive in a recession since those opportunities only come around once every seven years? And in fact, we haven’t had one a little bit over a decade now. So we’re,
Jason Hartman 13:16
we’re getting right, I miss it. You know, I love me a good recession. There’s a lot of opportunity in recessions. And you know, as a little aside, and I’ve said this often, and I think you’ll be interested in this idea is that I think a booming economy is really bad for human character. Everybody stops appreciating their customers. They stop appreciating, they just stopped being grateful. It’s all too easy. And all these like, sleazy people come out of the woodwork. It’s just, yeah, you know, recession is a cleansing in a way right. cleans out the bad apples to some it’s like
Jonathan Slain 13:58
it’s like the forest fire for the country. Me, hey,
Jason Hartman 14:00
give me a forest fire is good. You need them every once in a while because they create a lot of new, like mineral deposits and, you know, just cleans things up.
Jonathan Slain 14:08
Yeah. And I think we are what I’m seeing is a lot of complacency. And a lot of I’m guessing a lot of our audience may have started their business may have started investing within the last decade. That means they’ve never actually even been through a recession. And so for us, it’s like, what could we do now? If we’ve never had that experience to get ready so that we can be looking forward to it so that we could pounce when it actually gets here?
Jason Hartman 14:33
Right. And you know, you are so right. I remember years ago when I was in the traditional real estate business, you know, I was always pretty willing to spend money to grow. I’ve never been too terribly conservative or cheap about that. And when you spend into a recession, that’s when you really can increase your market share, because there’s this vacuum, where your competitors are just sitting on the sidelines. Doing everything you said cutting expenses, letting people go, etc, etc. And so that’s powerful.
Jonathan Slain 15:06
On that point, though, Jason, what I wanted to say is that one of the stories I had the chance to interview Christy Hefner in the book, and she I met her yet, so he was daughter. And what she was telling me is that you’re exactly right when it comes to spending in a recession. That’s what playboy was thinking about in the great recession was that for every dollar they could spend on marketing, they knew they would get a bigger ROI. And I know that that’s the podcast that we’re on. Because people paradoxically spend less than recessions on marketing, they start to cut back there, even though everybody cuts back. And so if you do have the guts, the intestinal fortitude to spend more on marketing in a recession, you’ll get a much bigger ROI. those dollars go further, there’s less competition. And so you can build market share. The whole point of what we’re talking about is that you need to commit to that Now in the cool, rational light of day, rather than the emotional heat of night when we’re actually in the recession, because it’s very hard to follow through on spending into a recession once we’re actually in it, right. That’s why I want the audience to really commit to that now, put it down on paper, so that you’re just following through one more in the recession, so that you don’t have to create the plan and then execute it. I
Jason Hartman 16:23
think that’s a good way to look at it. I want to remind our real estate people too. I know there’s a lot of people doing good stuff with Airbnb properties right now. But Airbnb has never been through a recession. You know, every year of that company’s existence has been an upswing in the economy. So just a word of caution. Okay, what can we do? Let’s get down to some brass tacks here. What do we need to do? So decide now? You’re going to spend into it right? You have a quiz on your website. That’s interesting. What are some of the questions we need to ask ourselves?
Jonathan Slain 16:56
The first thing would be Do you have a written plan for the recession One question. Another one is, Do you have enough debt available to you to be able to buy lots of good stuff in a recession, and that debt could be a line of credit that you have as a home equity line, it could be a business line of credit. It could be a signature line, I don’t care what the sources but in a recession, you want to have a war chest available to you, so that you can be a buyer when everyone else is trying to sell. Jason, I think on that one, the reason that I bring it up is because I’m getting tired of every business book of all the advice being that you need to hustle and grind. And that’s the only way to really get ahead. Really, there’s an opportunity that if you can just have a war chest of money, and if you’re in a good buying environment, then investing in real estate all of a sudden gets a lot easier. If you have access to capital, but without it, then you’re not going to be able to make any moves. And so that’s one of the questions Also, I don’t know any of your audience have personal guarantees? I don’t know, you know, it depends. One of the questions is, Have you discussed with your bank, releasing personal guarantees, putting a cap on them, or extinguishing them all together? Right now you can actually have that conversation with your bank, right? Because banks are hungry for your business right now. But when we’re in a recession, when you see that being announced on CNN or Fox, if you go to your bank and ask them to limit or cap, your personal guarantees, they’re just going to laugh at you. And so again, that would be one of the things I’d be looking at is what are the opportunities to limit your personal exposure? And then from there, looking at things like how can you make your business or your life leaner now so that you have more resources available to you? So PR earlier conversation, I think a lot of us have become complacent. Maybe we have bigger cars than we need. More expensive cars. Maybe we have several country club membership. That we don’t need. If you could take 10% of your overhead or 10% of your personal expenses, and use this as a wake up call to trim that fat, and then start putting that extra 10% into savings, then by the time that we’re actually in a recession, you shouldn’t have a nice pot of money to be able to go out there and buy and really get great deals.
Jason Hartman 19:23
Okay, good. What about I think you’ve addressed to some extent, but you know, maybe any other words on the psychology of dealing with oneself. It’s amazing to me how, you know, the day after Lehman Brothers collapsed, for example, over 10 years ago, that was sort of the landmark where everybody thought that’s when the Great Recession really began. And interestingly, nothing really changed in terms of real assets in the world. You woke up the next morning, after the terrible news and you know, thinking Oh, the whole world’s falling apart, there was the same amount of oil, the same amount Gold, the same amount of real estate. It was all still there. There were no nuclear wars, nothing got destroyed. It’s like we’re in this super symbolic economy and real assets didn’t really change. They didn’t evaporate. You know, it’s just kind of interesting to look at things that way. But yeah, what are your thoughts?
Jonathan Slain 20:22
Well, we’re human. So again, I always prefer that we make decisions when we’re rational when we’re thinking in a logical way instead of when we’re emotional. So from personal experience, part of my issue in the Great Recession, was that I borrowed money from my mother in law in order to survive the Great Recession, in part because I didn’t have a plan going into it. And without a plan, I borrowed a quarter of a million dollars. The worst part is it wasn’t all at once, Jason, it was every two weeks when I needed to make payroll. Right and so that was over 12 phone calls grow. Falling for money. And that was because I was in the thick of it without a plan if the audience is listening and can somehow get ahead of that and commit on paper to what the maximum amount is that they would be willing to borrow, or to what they’re going to do in terms of investing more in a recession, then they can look back on that and have that bedrock figured out now. But if you don’t have it, it’s going to feel like you’re trying to change the wheel on a car going down the highway at 70 miles an hour, right, a lot more difficult than when it’s standing still. The other thing is that we looked at academic research when we were putting together the book, tell validate the stories that we got from business owners. So we got stories from business owners that use the last recession to invest and make amazing amounts of money, and to try to capture all that. But on top of that, to answer your question, we’re looking at the research, and that shows that humans are fickle. So we even will change our confidence in the economy or Confidence based on how many pessimistic ruminations there are, and popular songs. That’s just a fancy way of saying that when popular songs are negative, we tend to get more negative as a country, they can put us into a dark mood. And that causes people to spend less. And when people cut back on spending that puts us into a recession. In other words, if we go back and look at things like the song puff, the magic dragon, and the other contemporary songs of the time, those pessimistic songs happen on a predictable basis, right before the economy starts to go into recession. And these are academic stunning it not me coming back later and saying I think because of that song, we went into recession.
Jason Hartman 22:44
Yeah, that’s, that’s really quite interesting. I would agree with you. One of the Rothschilds years ago, you know, sort of considered to be the founders of the central banking system around the world, said, you know, Let me control the money supply and I care not who not makes the law. I would argue, Let me control the music. And I care not who makes the laws or even controls the money supply because the music’s pretty powerful. Obviously, it’s led to
Jonathan Slain 23:10
listen to it puts us into a mood. And I think in the US, we definitely have a mood. So I’m always trying to think about what is our mood right now as the country? And where are we going? I do think that in later 2020, with the big election coming up, that I don’t know if we’re going to have a full blown recession. I do think that will have an event of some kind. In other words, I think that with the uncertainty surrounding the election, that will probably see a cut back and consumer spending will probably see a cut back in what businesses are willing to invest. And when those two things cut back, it tends to lead us to a downturn and maybe even a full blown recession. I do think though, that if people are listening to us soon enough, that there is still time to be able to start saving up that word chest making sure that you have your line of credit in place. May Ensure that you have access to capital so that you can go on a spending spree. When we do get into the next downturn,
Jason Hartman 24:06
you know, I want to make sure people understand that because you and I agree on this and your advice. And my advice is counterintuitive to many, but our advice is better, frankly, and that is borrow before the recession, have the money out of your properties in advance, because during a recession, refinancing them will be difficult. So get control of that equity. Now, before you need it. You know, there’s that old saying, you know, the banker, never loans money to you when you actually need it. They only loan it when you don’t really need it. So I think that’s a really, really interesting point. Who are your customers and clients? I mean, obviously, you know, people read your book and so forth. Tell us what you really do, like what’s the business on the backend.
Jonathan Slain 24:56
So I’m a strategic planning consultant. I work with leadership. Teams of companies that are looking to double their revenue and or their profit over the next three to five years. So generally high growth companies that are looking for opportunities, like a recession to be able to get tremendous growth. That’s typically who I’m working with. And those companies are all over the United States and just started with my first Mexican client. But looking at those, it’s not the typical strategic planning. It’s more looking at if we’ve already done the things to start to get our business in order to start to have a repeatable business. Now, how can we take it to the next level? How can we really break through and what does that look like? So it’s the more creative ways for us to grow business from five to 10 million or 10 to 25 or 25 to 100? What are those situations tend to look like? And how can we make that happen?
Jason Hartman 25:53
Can you share a couple of anecdotes so those ideas with us,
Jonathan Slain 25:57
a lot of the times it may be that You’re doing something that’s really weird. So for a construction company, what does that look like if you invest heavily in your IT department, so for most contractors, it’s just about building something. But if you can go from building a building to providing a service, like helping the buildings that you build be more energy efficient, then you’ve really created intellectual property, that adds a lot of value for the people that you’re building the building for. And so it becomes less of a transaction, and more of an intellectual property service. And so for all the audience out there, how can you take whatever you’re doing and make it less of a commodity? You want to get out of being the same as all your competitors, but a little bit cheaper or a little bit more valuable to making it so that your competition is just irrelevant? Like what do you need to do to your business to make the competition irrelevant, because you’re the only place on the planet that they can Get what you have. And so for me personally, there’s a lot of people that do strategic planning, consulting, there’s not a lot to do strategic planning, consulting through the lens of how can we use the recession as an opportunity for massive growth. And so if you’re piqued by that idea, and interested, there’s only a few places on the planet to get it. And right now we’re talking to one of them.
Jason Hartman 27:23
Now, very interesting, very interesting. Many have heard those stories about how some of the great ideas, industries and companies got their start during bad economic times. You know, the movie industry, for example, really got its foothold during the Great Recession, or Great Depression. Sorry, Great Depression in the 30s. What do you say about that?
Jonathan Slain 27:49
Again, we want to look for disruption, because that’ll provide opportunity for the entrepreneurs that are savvy enough to find it. So for me, one of the things I’m thinking through for like Airbnb, what happens if that does go sideways? What can you be doing as an investor now to hedge if that were to go sideways? If Airbnb were to crash? What would you pivot to? Or what parts of the market would still be stable for Airbnb? Again, if they have a regulatory change by the government, or if Airbnb board makes a change, then what are what can the audience do to capitalize? And then it’s starting to think about creative, like what really happens in a recession. So we know that if you’re investing in things like jewelry stores, you’re probably not going to have a great ride in the recession, right? Because people are obviously going to cut back on discretionary spending, like buying diamonds. However, things like veterinary clinics, those actually did fine in the Great Recession. Because what we learned is people don’t care if there’s a downturn in the economy. They’re going to spend whatever they have to to keep their pet health. fee. And so they’ll put that on a credit card. So again, as an investor, you know, what could you do in terms of being creative and thinking about the fact that if you’re positioned with veterinary clinics, which I don’t think there’s a lot of competition for right now. But it will provide a lot of stability. And I think that there’s a lot of simple research that can be done online through networking to find those opportunities. Again, we know that tortillas are growing in popularity right now, in the US that trend, I bring it up only because I know it’s a weird one. That’s funny, you know, but but tortillas are cheap. People love burritos in a recession. burritos are cheap, they’re going to probably eat more of them. And so if you can somehow invest in tortilla manufacturing, I think it’s only going to get
Jonathan Slain 29:47
better. So funny. It’s so specific.
Jonathan Slain 29:52
I know. I know. It’s a specific, but I Jason, I just read a research report about it. Because I’m always looking for these ideas that are sitting Specific that I’m hopefully one of the only couple people and now I’ve just shared it with the entire audience. So I gotta look okay, folks.
Jason Hartman 30:08
You heard it here first tortillas and that’s the next big thing. tortillas. All right? Course someone say tilos
Jonathan Slain 30:19
been far afield today we’ve talked about Puff the Magic Dragon. We’ve talked about 40 years we have Yeah, I just want the audience to be creative. I believe that the fringes of creativity, that’s where the big opportunities will be. And I’m tired of thinking that the only way to get ahead is by you have to work 40 hours at your day job then you have to do real estate is your side hustle for 40 hours and then you have to drive an Uber for 30 hours and then whatever time is left over, you can sleep Yeah, the audience can just slow down and really think about some creative interesting places then I think there’s going to be massive opportunity when we do finally hit the downturn.
Jason Hartman 30:58
Yeah. Damn good stuff. I really applaud you for thinking about how to as the title of your book says rock the recession and thinking of this differently and borrowing now while the borrowing is good, now we don’t mean crappy consumer loans, we mean investment grade debt, that on your properties, stack that up, have it ready, and you can dollar cost average into the recession that is coming. We don’t know exactly when it’ll come. I would caution anybody on trying to really time the market that’s very hard to do. If you were doing that, you know, you would have said 2017 was the recessionary year and obviously that didn’t happen. So be careful of that. But do be ready you’ll know when you’re in it. Okay. You’ll know when you’re in it, but trying to time it is rather difficult thing. The website is recession calm. The book is available in all the usual places rock the recession. Jonathan, any final words to wrap it up for us?
Jonathan Slain 31:58
It’s really for the audience. Just Understanding that I know that when times are so good consumer confidence is at record highs, unemployment at record lows. I know that nobody wants to think about the next downturn. Again, it’s not about preparing so that you can survive it. It’s about if you’re one of the few that can spend some time now getting ready for it, then you’ll be able to crush the next crash. He’ll be able to dominate the downturn, you’ll be able to rock the recession. But now is the time when you have to get ahead of it. Because once they’re announcing it on the national news, everybody’s going to rush in in the market with cash to start making deals, and then you’ll be too late. So again, it’s spend some time now getting ready, and you can be a hero when we do hit the next recession. Jonathan, thanks for joining us. All right, rock on. Thanks for having me, Jason.
Jason Hartman 32:53
Thank you so much for listening. Please be sure to subscribe so that you don’t miss any episodes, be sure to check out the show. specific website and our general website heart and Mediacom for appropriate disclaimers and Terms of Service. Remember that guest opinions are their own. And if you require specific legal or tax advice, or advice and any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to iTunes or Stitcher Radio or whatever platform you’re using and write a review for the show we would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.unk