On this Flashback Friday episode, Jason Hartman shares an abridged real-world Portfolio Makeover™ and some thoughts on empire building. In the interview segment, he talks to Chartered Financial Analyst and Finance MBA, Daniel Amerman about inflation and how to create wealth with prudent debt. In this episode, you’ll also learn how the “Three Boxers” fight with powerful economic forces and who wins in the ring.
This show is produced by the Hartman media company. For more information and links to all our great podcasts visit Hartman media.com.
Welcome to the flashback Friday edition of the creating wealth show with Jason Hartman. As he rapidly approaches 1000 episodes of this podcast, he has hand picked individual episodes that he feels is going to be good review for you to prepare you for the future by listening to the past. Let’s dive in.
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 Get 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 1:19
Welcome to the creating wealth podcast, Happy Thanksgiving to our American listeners. It is Thanksgiving day tomorrow. So we want to wish you and your families a very Happy Thanksgiving. And today we want to talk about several things. But we’re going to start off with one of the commandments. We have a prior podcast on the 10 commandments of successful investing, which kind of sums up our core philosophy of investing. And why don’t we just start with number one today and that is what we’re doing today. And that is what we do in all our podcasts and our seminars, and that is thou shalt become educated. It is so important to become educated so that you the investor can be your own best advocate are not relying on anybody else not even relying on us, okay, to some extent, be your own best advisor and know the market. I did a radio interview the other night. And it is amazing to me how many people still are so unaware of what is going on in the market, people that are still wanting to invest in crazy places like Las Vegas and Miami overvalued markets, California, many of them so we will keep you educated. That’s our commitment to you here and make sure that you have the latest and greatest and most innovative new thinking on real estate investing in America’s most prudent investment. at one of our recent seminars. We had a successful investor. In the front of the room. Her name was Evelyn. Hi, Evelyn, if you’re listening, I know you’re a podcast listener. So it’s good to have you with us. And she shared her what we call a portfolio makeover with us. And this is an exercise that any of our investment counselors here at the office would be happy to do For you, and we also do it as just a quick sample in our seminars. So I thought I’d share this one with you. She has a property in Southern California that’s valued at about two and a half million dollars. And this is so amazing how much money people have that is not working for them and we want to put this money to work. And Evelyn being very sharp saw this right away and wanted to jump on this and make it work for her. So the property worth two and a half million dollars rents for about a point for RV ratio. And if you’ve listened to us talk about RV or rent to value ratios on other podcasts, you know what that’s about. Our ideal target is a point 7% Rv ratio. So the before and after picture here is really wonderful, really exciting and really awakening. Because if she were to sell or refinance this two and a half million dollar property and do it on a tax free event to 1031 tax deferred Strange with 20% down on the new properties she could buy, assuming she could qualify for all of the loans, which won’t be easy, because this is a big number, about 34 properties in diversified markets around the country. I mean, think about that one property non diversified all your eggs in one basket in Southern California, which is a declining market with bad cash flow at the current time, or 34 properties and basically a kingdom, an empire of real estate spread all around the US in diversified markets. Now, the portfolio value would go from about two and a half million dollars. And by the way, this client we’re talking about has other assets. But this is just one asset and we want to put each asset to work at its highest and best use. So the before picture is one two and a half million dollar property 34 diversified properties are around the country would be a value of about $5.8 million. And look at the difference in the rental income. Currently, it’s 90 $500 a month. But in the diversified markets with all of these properties, assuming our target of the point 7% Rv ratio is achieved, the rental income here would be $40,600 a month. Remember, you’re listening to flashback Friday. Our new episodes are published every Monday and Wednesday $40,000 a month versus 90 $500 a month, and there’d be a whole lot more tax benefits, and of course, a whole lot more diversification. Now, that’s our basic idea on the portfolio makeover. Let me just give you a suggested portfolio and this is much smaller than this particular client could do. She could do a lot more than this and put a lot more money to work and I’m sure she is working On that now because I know she was very excited after attending our last two seminars. But if you wanted to buy 10 properties, and you wanted to buy those properties, assuming you could qualify for all the loans, it’s always subject to qualifying based on 10% down, it would only take $248,000. Now, we always suggest that our clients keep at least 4% of the value of all the properties in reserves cash reserves a 4%. So downpayment closing costs $248,000 cash reserves of just under $74,000 for the total cash needed to have a little mini real estate Empire here. Donald Trump would probably be eventually worried here that you’d be catching up to them of 10 properties and diversified markets is only $322,000. Do you know our typical client comes to us with about $300,000 So equity sitting in their home not working for them, that equity is earning exactly zero percent interest. And there is no FDIC insurance. That is sleepy money. It is lazy money, put it to work at its highest and best use. That’s just a little taste of the portfolio makeover. Again, there’s more to it than that. Our investment counselors here would be happy to help you with that. And of course, you can call us at any time to have your own portfolio makeover done. And make sure you’re using your assets, whether it be stocks, bonds, mutual funds, a savings account, equity in a rental property equity in your own home, make sure it’s working as hard as it can. You work hard in your career. You want your kids to work hard. If your spouse is working. Maybe you want your spouse to work hard to make your money work for you. It’s really easy to do and a very prudent thing to do. So that’s a taste of the portfolio makeover. All right, I want to do something kind of different today. For the podcast, I have one of our investment counselors and area managers here, Linda Molly, and we are going to be on the future podcasts, constantly answering a lot of the frequently asked questions we get from our clients. So Linda, what is your question?
Lynda Mulley 8:15
The question I’ve been getting a lot lately, and I think it’s a recurring one and a good one from our investors, is the concern about buying real estate out of state and that is the question on what do we do for property management when we purchase a property? And we’re buying it out of state where we may not necessarily go look at it or even see it in the first year that we own it?
Jason Hartman 8:37
Absolutely. Linda? That’s a great question. I have never seen most of my properties. I kind of think about my other investments too. I think about my stocks that I own. And you know, I’ve never visited any of those companies either. In fact, I’m not a customer of most of those companies. I have no idea how they run their business. Now, I don’t think this is a good way to invest, okay, because we believe in direct investing. So what will do is we help people diversify and build national real estate portfolios so that they are in many markets. A long time ago, I remember reading back in the early 80s. In my first real estate book, it was a Robert Allen book, where he said, try to have all your rental properties within one hour of your house. And you know what? That would be reasonably good advice. It doesn’t work today, but it would be reasonably good advice if I lived in a market that made sense to invest in, but I don’t, I live in a very expensive overvalued market here in Orange County, California. And it doesn’t work here. Investing doesn’t work here. So what do I do? What are my choices? Do I either not invest in real estate at all? Or do I invest only in other things like stocks and bonds and we know the lousy performance of those investments? Or do I decide I’m going to be a sophisticated national investor. Now what we do here at Platinum properties investor network is we of course, provide the complete solution for real estate And investors. So we have a national perspective where we look at properties all over the country, or not attached to any one market. When the market stops making sense, we don’t recommend it, we just go somewhere else. And then we make it very easy for our clients to coordinate national portfolios of real estate. So you’re an area manager, and I know what you do, and I know what our other area managers do. You go to markets, you visit the markets, you get your shoes dirty, you look through the tracks of homes as they’re under construction, or the tracks of commercial properties when a commercial property is under construction. And then you interview at least in each area, at least three property managers, you try to meet with them all face to face and you ask them tough questions about the rental market. What is going on with the rental market, our properties renting easily, or are landlords being forced to give concessions, and one of the nice things about talking to property managers versus real estate agents and developers Is it the property managers like us here at Platinum properties investor network, they have to live with the investment. They have to live with a client on the ongoing basis. And so they’re much more likely to give you the real picture of what’s going on out there versus the Pollyanna picture of, Hey, we just want to sell you a property. So our area managers research markets, and that’s what they do. And they’re not attached to any one market. So if a market doesn’t work, they just go somewhere else. We’re completely disloyal to markets, we only want to be in working markets. And then the other thing we do is we of course, provide a lot of leverage over that property manager to make sure our clients get good service. So the example is we tell you as a client, diversify, be in several markets. The problem with diversification, it’s good advice. But there is one downside to it is that when you’re diversified, you might have one or two properties in each city. So you don’t represent a large account to anyone property manager. And I always say that property management is a thankless low paying job. So a property manager might have two or 300 accounts under management. And if they lose one plant because the plant gets upset or the property’s not rented, and they’re not receiving income, it’s no big deal to them. But we, on the other hand, have referred maybe 234 dozen 100 over 100 clients to that one property manager. And so if our client has trouble getting good service from the property manager, email or call your investment counselor here at Platinum properties, and we will call them and see what’s going on for you. And you know, we’ve only fired three property managers since we started our nationwide network about three years ago. But I tell you, if they lose our account, they lose a lot of business. So it is valuable to them. And so if they get a call or an email from us, they are responsive. So just Does that answer the question? Or was there more to it than that?
Lynda Mulley 13:02
That’s exactly what we do. And I think we also have a rental coordinator here that works with us and don’t can supplement.
Jason Hartman 13:10
Thank you, I forgot to mention that.
Lynda Mulley 13:11
a property manager is doing as an area manager. And I know the other area managers that we have here, also are talking to these people on a weekly basis, or
Jason Hartman 13:20
Weekly or sometimes daily
Lynda Mulley 13:22
Sometimes daily basis. We’re always watching the balance of what’s out there to be rented and how the rental market is going. So hopefully that makes people comfortable that we we have this under control.
Jason Hartman 13:33
Yeah, it is. So we look at the absorption rates, the amounts of incentives we have to give, and all that kind of stuff. So great question.
Now, let’s listen into the continuation of my interview with Dan Ammerman. And this was the second part, Dan is really one of the most insightful people on inflation and the benefits of debt versus inflation. It’s really the best way to win and beat the inflation game with your mortgage. There are particular ways to use this and listening to the rest of this interview, and then we’ll be back for more. Dan, welcome to the show. Thank you so much. It’s great to have you. Something else you talk about is boxing with inflation. Can you explain how someone can box with inflation?
Daniel Amerman 14:16
Well, what I’m talking about with in boxing with inflation, is looking really in constant dollar economics. But there’s a problem with constant dollar economics. It’s so boring, it’s very difficult to follow. So what is cost in dollar economics? It says that you look at what the dollars are and you strip out the inflation,
Jason Hartman 14:37
okay, when you compare them across time, so that’s really just adjusting dollars for inflation.
Daniel Amerman 14:42
Yeah, okay, which is easier said than done. All right. And what I’m doing with boxing with inflation is to make it easier for people to follow the concepts that are involved. Instead of talking about economics. I’m taking three different boxers and I’m putting them in the ring with inflation and the first one has a glass jar. And by a glass jaw, I mean they own dollar denominated investment.
Jason Hartman 15:04
Yeah. So they’re, they’re gonna be very delicate when someone hits them.
Daniel Amerman 15:08
It takes one hit to the jaw and down they go. Yeah, the only question is how hard the hit is, and their assets are going to be wiped out. And unfortunately, that can be true of an awful lot of people.
Jason Hartman 15:18
I know. It’s just so sad and I hope our work and your work helps correct this and many people will take action feel so bad for the unfortunate that don’t take action on this topic. Okay, so the first boxer with a glass jaw, he gets a punch to the jaw and it breaks and so he’s wiped out because he’s living his life in dollar denominated assets.
Daniel Amerman 15:39
what he’s doing in the boxing ring essential is he’s kind of standing there design and by thought and kind of leaving for the job.
Jason Hartman 15:47
Just a reminder, you’re listening to flashback Friday, or new episodes are published every Monday and every Wednesday. Okay, so we don’t want to be the boxer with a blast jaw, who’s the second boxer
Daniel Amerman 16:00
The second boxer is our control, because he shows the difference between tangible assets like real estate, and tangible assets plus death. So our second boxer is someone who, let’s say owns a million dollar property, but he owns a debt free. And what this boxer has has, he has a right jab. And he can use that right jab to keep inflation at that.
Jason Hartman 16:26
How does he do that though, because he didn’t borrow Unfortunately, he didn’t borrow on his property.
Daniel Amerman 16:31
Right? Well, his million dollar property, let’s say that dollar becomes worth a quarter. If he’s fortunate, and really doesn’t work that way, probably won’t do quite as well and deflationary time, his million dollar property will become a $4 million property. Okay, so you divide by four than to account for the inflation and he’s still got a million dollar property in real dollar terms in real dollars. Yes. In fact, if we go into an inflationary environment, high interest rates tend to drop the price beneath that. So Probably wouldn’t quite stay there. But he’s pretty much keeping inflation at bay. So it looks like if you look at it in nominal dollars, he turned 1,000,004 million and he’s doing really well
Jason Hartman 17:10
explain to the listeners if he would nominal dollars because we use that term quite a bit. I know what it means. But what does it mean you’re the expert.
Daniel Amerman 17:18
A nominal dollar means $1 is $1. It means that $1 is worth the same right now, as $1 was worth, let’s say, in 1970, when the average price of a house was $17,000. Now, when we look at a difference, that great, it’s easy to see that $1 is not $1. In fact that there hasn’t been any year in our lives where $1 spent $1 between years. It shifts every single year, but we tend to lose track of that. So anytime you talk about dollars, but you don’t adjust for inflation, you’re using nominal dollars, and then when you adjust for inflation, you’re using real dollars. So our boxer with the right jab is pretty much keeping inflation at bay. But is turning 1 million to 4 million is an illusion.
Jason Hartman 18:10
It didn’t happen in real dollars. It’s just happening nominal. Okay, so now that begs the question before we go into the third boxer, Dan, is we’ve seen such radical real estate appreciation prices in the past few years, especially the post 911 marketplace, where the Greenspan interest rate cuts, which were, they were too much they he pumped way too much liquidity in the system, in my opinion. And so we saw this huge real estate inflation. But here’s the trick is that real inflation hasn’t really been as much as the real estate inflation, although real inflation has been, in my opinion, higher than what the government tells us by at least double maybe three times what the government says, but the real estate inflation has been far above that. Now, of course, if you live in Southern California, like I do, Your most expensive part of life is your house. And that’s not necessarily true. All over, for sure. But what are your comments on that? It seems like the people in this market have won, because they got that radical appreciation that is above inflation. So they can go out and buy cars, watches, home theater systems, etc, etc, go on vacations that haven’t gone up as much as the gains they’ve made from their real estate.
Daniel Amerman 19:25
Yeah, you’re talking about almost a matter of economic philosophy, and what we call inflation, because inflation is an artificial construct. There’s no such thing really, the way people usually do it is they look at changes in the Consumer Price Index, which is itself an artificial construct. I would argue, as with many other people with economics, inclinations, that asset inflation is every bit as much inflation as inflation in the cost of a hamburger that if a house doubles in cost, that’s inflation. It cost you twice as much about But we don’t include that in our official government inflation measures. That’s completely ridiculous what we do from a government perspective and it looks really good for winning elections and so forth, is that we say if a house costs twice as much as it did five years ago, that we take that all into income, but we ignore the expense. So
Jason Hartman 20:25
yeah, okay, so who’s the third boxer?
Daniel Amerman 20:27
Third boxer has a right jab, just like the second boxer. Okay, let’s say they owe a they own a million dollar property, but they have a left hook.
Jason Hartman 20:40
Okay, so the third boxer is the best equipped he’s got a good right jab and a good left hook.
Daniel Amerman 20:45
He’s got the defense in terms of the right tab and what his left hook is. It’s his mortgage. Oh,
Jason Hartman 20:52
so his mortgage is an asset is that what you’re saying?
Daniel Amerman 20:55
Here is mortgage is how he goes on the offense against inflation. Inflation into Well, okay, well, here’s what happened. And you can look at it in nominal dollar terms, you can look at it in real dollar terms. If you had an $800,000 mortgage against that million dollar property, and then a dollars worth a quarter, he pays the mortgage back with dollars that are worth a quarter each. Okay? So
Jason Hartman 21:20
let’s put it in maybe a perspective, the listeners can understand a little better. So you have an $800,000 mortgage,
Daniel Amerman 21:27
and it’s now worth 200,000.
Jason Hartman 21:29
And it’s now worth 200,000. But like how many years went by? How much time has elapsed?
Daniel Amerman 21:35
Oh, that’s a really good question. If you’re talking about history, in terms of recent years, it may be a number of years, if we’re talking about when the crunch is really hitting with the baby boomers retiring over the next 10 years. That can happen in a fairly short period of time. Yeah, the problem is once substantial inflation really gets out of the box. It’s tough to put it back in. Okay, so comment on that before we move on, because this is really, really Really important Damn. What is your projection? What is your outlook for inflation? My outlook for inflation is that I think it is highly likely that the dollar is going to be severely damaged within the next five to 10 years, but it’s already
Jason Hartman 22:19
so low. I mean, the dollar is it one of its lowest value points compared to other currencies. But since it’s been in like 76, or something like that, I mean, it’s really low right now.
Daniel Amerman 22:29
Yeah. But what you have to remember about what we’re seeing with the dollar and interest rates right now is they have nothing to do with the free market. They have to do with manipulations on both the long end and the short end. Right now, what we’re seeing with the dollar and with interest rates is we’re seeing in my opinion, fairly frantic attempts by the Fed to contain the damage from the subprime mortgage debacle by pumping more liquidity in the system to keep interest rates artificially low. Now, if you look at the long And and this is something that’s really changed in the last 10 years from classic economics from people who took in college, even from the mid 90s or before is that our long term interest rates are kind of driven by our trade deficit. And if you’re if you’re familiar with that approach, but effectively because we are buying much more goods from China and Japan and other other seas, nations than we can pay for, they have excess dollars, right. And to keep this trade going for their own reasons they prop.
Jason Hartman 23:32
They prop up our dollars. This is a very dangerous thing, by the way, in my opinion, because this is an artificial deal. China could pull the rug out from under us at any time. And when they don’t need us as customers so much when they create their own 1.3 billion customers by creating more wealth in their country. And that’s a scary scenario. It really is.
Daniel Amerman 23:55
So we have this kind of artificial islands of stability and power. Look at it and whether that could last three months or three years. I don’t know. I don’t think anyone else knows either. But the problem is, the longer we keep things at this artificial level, the more severe the adjustment is going to be. When things finally break loose, which makes me think there’s a very good chance it’s gonna come fast and hard.
Jason Hartman 24:23
I have another theory about that. And I don’t think I’ve even said this on a podcast before. But I think that the reason there is a lot of inflation coming at us in the future, is because so much wealth is being created outside of the US. You’ve got this giant growing middle class in China in the many other countries I leave for Ukraine on Wednesday. And just reading an article as I’m researching the real estate market there about how everybody’s got so much money now. It’s just amazing that all of these economies around the world are moving up. And I mean, that’s a good thing for people certainly, but what that means is that people In other countries, we can’t find the cheap labor pools to keep outsourcing to forever. I think those are going to go away. And as they go away and people demand more pay, then what happens to the shelves of target and Walmart and Costco and all of our stores here where we’re getting the benefit now, of, in my opinion, artificially or at least temporarily cheap consumer goods? Do you agree with that?
Daniel Amerman 25:27
Oh, absolutely. I mean, that’s the long term bigger picture is depending on the source you go with we in the United States have been fortunate enough to as four and a half percent of the world’s population to be consuming about Yeah, depending on who you believe about 25 to 33% of the world’s resources. That’s been very lucky for you and I growing up and the lifestyles we’ve enjoyed so far, but the rest of the world doesn’t really want that situation continue.
Jason Hartman 25:52
Why don’t they want it to continue?
Daniel Amerman 25:55
Because they want to enjoy the same benefits. Oh,
Jason Hartman 25:56
yeah, no, I understand that. I didn’t mean it in that sense, but so they Enjoy the same benefits, they become more wealthy. There are studies that say over 200 million Chinese have been lifted out of poverty due to globalization, and many more to come. So as they become more wealthy, they will start being more expensive. They will start demanding more from their employers, they may form unions and everything that happened in the US 80 years ago, 100 years ago, 120 years ago, even I think we’re going to start seeing that happen around the world. And as it occurs, it’s going to drive up the cost of all of these cheap consumer goods, exactly plus the cost of the resources, it’s going to drive up the cost of the food, it’s gonna drive up the cost of oil can drive up the cost of natural gas, as there are more and more middle class people around the world who are able to bid against the American consumer for the rights to those goods. Absolutely. So they’re consuming more and more and it’s just a simple supply and demand equation. You look at China now. 10 years ago, people were driving bicycles. Now they’re driving cars, and what happened to the price of oil and what happened to all the building materials due to all this construction that’s going on all around the world. So it’s just getting more and more expensive everywhere.
Daniel Amerman 27:11
And what we risk is something that economists call and I apologize for using the term supply side shock. What does that mean? That was what really got inflation going in the 1970s, where the dollar lost 57% of its value in a 10 year period. And that is if the cost of buying supplies and in this case was because of an oil embargo rises sharply. And that sends a shock into the system. And prices start rising all around. And then as that happens, it becomes built into people’s expectations and then more prices rise, and then you’re in a cycle where it becomes very difficult to get out of it. And we’re risking that with commodities kind of across the board. Yeah, so
Jason Hartman 27:51
that has definitely happened in other countries to where we’ve seen this rampant inflation, Argentina Zimbabwe These countries have just experienced massive debilitating rates of inflation. But if people owed money, do they benefit their?
Daniel Amerman 28:09
Well, let’s go back to our example, with a person who had a million dollars in property and they had an $800,000 mortgage. If you look at it, and just the dollar being $1, what happens is the property’s now worth 4 million, the mortgage is still 800,000. So instead of having $200,000, in equity, they have $3.2 million. We do I love real estate, at least so far. Yeah, in my opinion, if you want to understand why that statistics get thrown around that seven out of 10, or eight out of 10 millionaires in the US made their money in real estate. It has more to do with what we’re talking about right now than it does the property itself. Yeah,
Jason Hartman 28:51
that’s a good point that might on its face Bode poorly for real estate investors. But the question is, what else can you do with your money?
Daniel Amerman 29:00
Well, it’s an arbitrage opportunity. And that’s why I’ve ended up getting into looking at this turning in flesh and dwelt business is that right now, because of governmental policy, we have not only the danger of very high inflation in the future, but we have artificially crappy interest rate levels. So you can’t go out and buy a bond or buy a mortgage, this can incorporate the risk of future inflation. So when you take an arbitrage perspective, instead of saying, well, that’s a real problem, I can invest at the right rate, you say, what an opportunity, or what a perfect opportunity to lock in long term low cost tax advantage on what I say, Dan, my podcast and at my seminars, I say, here’s the opportunity that really may never come again in our life is low, low interest rates. So here’s the opportunity to lock in your cost of borrowing for three decades.
Jason Hartman 29:50
And not just your cost of borrowing is locked in for three decades. But if you ask yourself a question, well, if you invest in a house, for example, just a simple single family Home, how long does a house last? And the numbers are all over the board. But I say a house lasts about 50 years before you want to do an extensive remodel to it. But think about what happens there. You’ve locked in your cost of construction, your cost of those commodities that make the house for five decades, your cost of borrowing for three, interest rates go up. Inflation does its thing. And the cost of those commodities that form the house, I call this packaged or assembled commodities investing. So when you buy a house, what do you buy, you buy a bunch of concrete, lumber, maybe some steel, glass, copper wire, petroleum products, etc? And it seems like you just win from every perspective there, right?
Daniel Amerman 30:47
Yeah, I would put that as a right jab. Yeah, okay, you’re right jam is the commodity in the house that are maintaining their value. The left hook is the value of the debt that gets destroyed by inflation and What happens then? Is that your real wealth leap upwards to cover the difference?
Jason Hartman 31:06
Yeah, it’s incredible. So are you finished on that example, the $800,000 mortgage, million dollar property, you have inflation that basically causes the house to quadruple in value. So it’s worth 4 million. The debt, you’re only paying back 25% of it. So it’s only 200,000 is that we’re saying?
Daniel Amerman 31:24
Well, I’m saying do is ignore the million going to 4 million. All right. That’s what everybody focuses on. So they think that you made your $3 million off the property. He didn’t. It’s like we fall with the right jab only investor. All you did with the property was maintain where you made?
Jason Hartman 31:47
Yes, yes. Okay. Okay.
Daniel Amerman 31:48
Where you made your money was in real dollars. What was an $800,000 mortgage is now really only $200,000 in purchasing power terms. You went from owning 20% of a million dollar property in real terms for 200,000 to owning 80% however, million dollar property, that’s a graph where the real money is it’s in the data. Oh, damn,
Jason Hartman 32:13
that is a great way that you say that the real money is in the debt because now you own so much more of that same property in essence, right?
Daniel Amerman 32:22
Yes, it was the left hook that didn’t hear enough.
Daniel Amerman 32:26
I use that analogy, people, everyone looks at the right job. And they say that’s where you made your money. But when you run the numbers, and you look at it the right job, all it does is defensiveness. The real money with inflation is made with that laptop.
Jason Hartman 32:41
Okay, so there’s the three boxers. Yeah. Excellent, excellent point. This all sounds good in theory, but is there any real historical hard evidence, Stan that this works in practice?
Daniel Amerman 32:52
Oh, tremendous. Tremendous, and it forms a good part of probably the background of most people in this country today. And if you recall, I talked about working with savings and loans in the aftermath of the last big bout of inflation. That was a previous financial crisis in this country. And what happened there that I think is not generally recognized is that when the savings and loans lost about $2 trillion, you’re talking about the 80s, early 90s, Charles Keating era,
Jason Hartman 33:23
Lincoln savings as an oil crisis.
Daniel Amerman 33:25
Yeah, but what that was really reflecting was the delayed effects of the 70s and early 80s inflation, because what happened was that the old rule with the savings and loan was five, four and three, you lent out money at 5%. He bought 4%. And you were at the golf course, by three o’clock. It wasn’t rocket science. It was when we had bankers hours. Yeah, exactly. And then the inflation hit in the 1970s. And all of a sudden, they were paying 10% for fun and then that really destroyed the banks is what you’re saying. It destroyed the industry. It could absolutely destroy the industry. What people miss is that for every dollar of law, that the same as loans were taking, there was a family on the other side that was benefiting because you had 10s of millions of households across the country. And this is something I track in exact terms, for exactly average households with exactly average homes with exactly average mortgages and real historic inflation rates. During the 10 year period at the height of the inflation of 1972 to 1982. An average family that bought an average home would say 20% equity, where their equity would have been equal to about 25% of their mortgage amount would have seen their equity climbed to 500% of their mortgage amount.
Jason Hartman 34:45
Isn’t that amazing?
Daniel Amerman 34:46
So it was the very same decade that the dollar lost 57% of its value. The Dow Jones Industrial Average if you look at an inflation adjusted terms, which most stock firms prefer
Jason Hartman 35:00
Yes, because it would show how much money they’re losing, or how little people are gaining
Daniel Amerman 35:05
the Dow Jones went down 62% and inflation adjusted terms in one decade. And the very same economic conditions that made that happen. The average homeowners the wealth in terms of their equity in their home, from about 25% of their mortgage to 500% it was one of the greatest transfers of real wealth we’ve ever seen in this country. That’s amazing.
Jason Hartman 35:29
And so what really happened there though, is that the people that won more the people that owned real estate number one, but number two borrowed money to own real estate.
Daniel Amerman 35:39
Exactly if you track and something else again, I use a control much longer right jab only boxers Yeah, so the people that didn’t borrow only have the right jab. They weren’t the boxer with the right jab and the left hook correctly, the average home went from about 17,000 to a little over $41,000 over that time, but when you initiate adjust for inflation, someone who didn’t own a mortgage would have lost about 3% of the value of their home.
Jason Hartman 36:06
Yeah, they wouldn’t have made a dime. But if they had the mortgage, they would have been one of the best investments they’ve made in their life. So the people with no debt, no mortgage on the property are basically treading water, at least they’re not being being destroyed by inflation, but they’re not making the gains, in essence, right?
Daniel Amerman 36:23
They’re not even really doing that. Well, although there’s some exemptions with home when you consider tax, which we can talk about a little more in a bit. Okay.
Jason Hartman 36:31
So they’re they’re doing a little less than treading water, but they’re not getting completely wiped out like the others.
Daniel Amerman 36:37
Exactly. Yeah. They’re kind of maintaining their position with that right jab.
Jason Hartman 36:41
Okay. You’ve been talking about changes in property values and loan values. What about making the mortgage payments, don’t they pull down the benefits to the owner?
Daniel Amerman 36:50
The mortgage payments are really the best part.
Daniel Amerman 36:54
Where you do the best is not when you sell your house. Okay, let’s take an example. And let’s look So 1982, someone who’s been in the inflationary situation for 10 years. And I don’t remember the real estate market at that time. But the last thing most people wanted to do was to sell their house and recognize that big profit they had in it. And the reason why it was they still had loans that six or 7%.
Jason Hartman 37:21
Yeah. And they wanted to keep that asset, those cheap loans, right.
Daniel Amerman 37:24
Yeah, instead of going out and getting a new mortgage at 1213 14%. There was a tremendous value to them in keeping for year after year, a loan that was at a well below market interest rate. And the other thing that happened is that if you’re looking at the amount of income, they’re putting in their mortgage, maybe on average, they would have started off putting in 28% of their income, which is a good mortgage underwriting figure. Right? inflation had devastated the value of the dollar after 10 years. On average, they were putting in About 10% of their income. So they had just freed up 18% of their income for other purposes. And that’s huge.
Jason Hartman 38:09
So you’re saying if the mortgage was a fixed rate mortgage, and 10 years go by in this example, then you’re paying much less every month later than when you started in real dollars. Exactly, because the dollars have depreciate in value. And you know, damn, I can actually share a very specific example, about my own mother. In 1976. She purchased her first home in West Los Angeles, and I remember it well, and it was $62,500 in 1976, for this little house in West Los Angeles. And I remember her being stressed that the mortgage payment was $416 per month. Now it turns out that she moved out of that property later and kept it for many years as a renter. property. And over the years, five years later, 10 years later, you know, she kept it for a long time. And over the years that $416 mortgage payment seemed like nothing, like, why would I be concerned about such a tiny little payment, but at the time in 1976, it seemed like a high payment.
Daniel Amerman 39:21
And that’s exactly where the big benefit comes in. If you had bought, say, an average house nationally in 1972, just four years before that, but inflation had already really kicked in and getting that payment up to where it was the average mortgage payment was only $101. Yeah, this is for you know, a three bedroom house in the suburbs. And if you look at the amount of money that was costing, particularly with even been able to deduct part of that, as an interest rate deduction, there are millions of families all across the country, where that’s how their kids went to summer camp. That’s how their kids went to college. That’s how they paid for those European vacations because they were making $100 a month payments at the same time. Time that everyone around them was paying $500 a month, $1,000 a month, whatever the case may be.
Jason Hartman 40:05
The benefits of inflation are just wonderful. There are numerous benefits. You know what’s even better though, Dan, is we’re just talking about the typical homeowner living in the house that they’re paying this mortgage on. But what happens when you invest in you buy a rental property is twice as good if not even more, because the tenant makes the mortgage payment for you. And so the tenant is paying the bank back and depreciating dollars on your behalf. And you’re getting the benefit of a loan balance that is being reduced through inflation and a property that is appreciating in value through inflation. So it’s just a win, win, win, win win everywhere you look right. I love commercial property. Yeah. for inflation, it’s really hard to come up with a better investment or you say commercial property. But residential rental property is even better because you can borrow more and the rates are lower and there are longer term fixed rates.
Daniel Amerman 41:00
You’re exactly right. I was using commercial generically. Yeah,
Jason Hartman 41:02
in the sense of anything
Daniel Amerman 41:04
you’re doing for money as opposed to your personal residence. Absolutely. But the benefits are tremendous. And as you said, you’re getting them simultaneously, you’re getting them on the asset appreciation side, and you’re getting them on the cash flow side. If you start off with let’s go back to that example, with a million dollars, it’s not just that you’re going to go from, let’s say, 200,000 equity to 3.2 million in equity, it’s that you’re going to have a tremendous amount of cash flow freed up on a monthly basis, because your rental payments will more or less rise with inflation, your mortgage payments will stay down. And that means that you’re going to get a a rapid increase in real cash flow. And the stronger inflation is, the more powerful you’re increasing in real cash flow. Excellent.
Jason Hartman 41:53
Yeah, that’s just a very powerful, powerful tool. Well, Dan, we’ve been talking for a while here about these things. principles. And I’d like to get into the subject of taxes on a future podcast with you if that’s okay. Okay. But in closing on this part of the subject, I mean, it sounds like the rule is buy real estate in appreciating asset, borrow as much money as you can to do it. And would you recommend borrowing that money as a fixed rate? See, I think to
Daniel Amerman 42:22
believe in fixed rate, also would not recommend necessarily borrowing as much as you possibly can. How much would you recommend borrowing? I think the key here is to borrow prudently. Because the other thing that you need to keep in mind is that I think there’s a good chance we’re gonna be hitting a period of economic turmoil coming up already, you may be starting right now. So the thing about debt is, I think of that is it’s a tool, whereas many people think it’s, it’s a moral judgment. It’s a tool, and you want to carefully select the right amount of that tool. So That if you do hit an adverse year or three or something like that, your debt doesn’t take you down.
Jason Hartman 43:06
Yeah, that’s a really good point. I’m glad you said it that way, because the game of real estate investing is always a game of staying power. And when you acquire a good asset, like a good property, you want to be able to keep it through a storm through some rough weather. But also when you acquire that property, like if you’re acquiring it today, another good asset you’re going to acquire with it is a good mortgage, because the mortgages, even now are just historically excellent, even though it’s become a little bit harder to borrow, fortunately, due to the mortgage situation going on, but you want to keep that mortgage asset too. So you’ve got to manage that prudently, and according to what you can afford, and what the really the property can support or the property can afford, but also have a little bit of depreciating cash in reserve, to pay for vacancies and so forth.
Daniel Amerman 43:59
If I can Kind of reinforced that from another perspective than I think when people look at real estate, they’re concentrating for the most part on the right jab. They want the best possible property. And many people don’t really look at their left hook other than borrowing as much money as possible. But if you want the best long term strategy for fighting, inflation and winning, you really need to be looking at your left hook every bit as carefully as you’re looking at your rights. Bam.
Jason Hartman 44:30
Very good advice. That’s Dan, Adelman, and Dan, where can people learn more about your principles and your book, tell us about your book.
Daniel Amerman 44:37
The book is the secret power within your mortgage. It’s about a 200 page book that starts off by spending that three chapters talking about how things have worked in the past. So we’re not just talking theory here. We’re talking how things have actually worked out. And then it spends the next 12 chapters kind of talking in detail. About how people can take these principles and today apply them to make them the best decision.
Jason Hartman 45:07
Excellent. Where can they order the book
Daniel Amerman 45:09
from the website mortgage? secret? power.com.
Jason Hartman 45:14
Excellent. Excellent. Dan, any words in closing and we’d like to have you back for a future interview on taxes and some other subjects as well.
Daniel Amerman 45:21
Well, I sure appreciate that. I guess my only closing words would be to concentrate on that left hook.
Jason Hartman 45:26
Alright, thank you, Dan Ammerman. Such great advice. And we look forward to having you back on a future podcast.
Daniel Amerman 45:32
Thank you so much, Jason.
Daniel Amerman 45:34
Hey, so we’ve been Platinum members for a couple
Daniel Amerman 45:37
of years now. And we’re just real pleased with the way things are working
Jason Hartman 45:39
out. We can
Daniel Amerman 45:41
be happier and it’s really changed
Daniel Amerman 45:42
our lives for the better.
Jason Hartman 45:45
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Daniel Amerman 51:44
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Jason Hartman 52:38
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