In this Flashback Friday episode, Jason Hartman discusses the mistakes that investors should avoid to achieve financial independence and investing success. He shares that investors should be wary of assets that are subject to greed, graft, and manipulation of CEOs, investment bankers, fund managers, and the government. Prudent investing is a prerequisite to achieving financial freedom.
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Jason Hartman 0:09
Hey, this is Jason Hartman, thank you so much for joining me. Do you know what day it is? Yes, it is flashback Friday, where you hear the best of the creating wealth show and you hear some good prior episodes, some good review. Remember, we’ve got almost 500 episodes out. And you know what? iTunes doesn’t even hold them all if you’re an iTunes listener, if you are listening on Stitcher, thank you for joining us. So we want to bring you some good review stuff. Now. What’s interesting about flashback Friday, it’s a little scary for me. I got to be very, very candid with you on that. Because you the listener, you get the chance to hold my feet to the fire. Did I make any predictions? Was I right? Was I wrong? I’ve been right about a lot of things, but I’ve been wrong about a few. So you can give me a hard time about that if you wish. But it’s flashback Friday, and we will give you the uncensored Best of the creating wealth show with a prior episode. So let’s dive in. Here we go. Remember, this is not current. It’s flashback Friday.
Welcome to Creating Wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before, and a new slant on investing fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine self made multi millionaire who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities, this program will help you follow in Jason’s footsteps on the road to financial freedom, you really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 2:06
On this show, what I want to do is just have yours truly show no guest because I want to talk about the mistakes that investors make when they kind of shoot themselves in the foot, they mess up their own investment plan, we’ve identified about 30 of these mistakes. And here, I’ll go over about half of them on this show. And then we’ll have the other half on a future show. So let’s listen in as we talk about the 30 biggest mistakes investors make and what keeps them from success in their investments. Good day, and welcome to the creating wealth show. This is Jason Hartman, your host, and I’m glad you join me today. And you know what, today we’re going to do something a little different, just like we did in the good old days. Today, we do not have a guest Yes, it’s just yours truly today. And I want to talk to you today about the biggest mistakes people make when investing, especially when they are investing in the best investment going still the best one we can find. And that is income property, these mistakes will apply to income properties, but also to other investments and really impacts every area of your financial life.
So let’s just kind of get into these mistakes. There are about 30 of them that I’ve identified. And I think it’s really, really important that you know what the potential pitfalls, roadblocks possible downfalls of the investments are so that you can avoid them. Because you’re aware of it. You’ve already overcome half the battle, haven’t you? So let’s get into some of the biggest mistakes investors make. And these are, by the way, in no particular order. They’re just kind of random. Okay, so let’s just go with a stream of consciousness here. And let’s make sure we are good prudent investors, and we are avoiding the mistakes that people make out there. Because I’ll tell you something, having this practice my company, platinum properties, investor network, and managing sales people for many years now and dealing with investors and for many, many years now. And having thousands and thousands of people come through my various educational events. I have heard it all and I’ve seen it all. In fact, I rarely hear anything new that I haven’t heard before. And that’s just kind of the way it is with human nature, isn’t it? You know, what’s interesting about human nature is that it just doesn’t really change. I mean, the times can change, the technology can change, the circumstances can change, but human nature is pretty darn consistent. And if you want to know this is true, just read, old, old stuff. I mean, read the scriptures, read the Old Testament, read the New Testament, and you just realize that human nature is pretty much been the same for about 3000 years of recorded history and I’m sure it was the same back before that. But gets a little murky in terms of the recording. So the investor mistakes, what do they do? Well, the first one I wrote down is that investors don’t get out of their own way. And this really applies to a lot of things. We sabotage ourselves sometimes in life, don’t wait. We engage in the paralysis of analysis, and agonize and analyze. And a lot of times we do this stuff really, as a self sabotaging excuse to not do something. There’s a great old quote that says, some people have thousands of reasons why they cannot do something when all they really need is one reason why they can.
Remember, you’re listening to flashback Friday. Our new episodes are published every Monday and Wednesday.
Okay, this is where people get into the sort of perfectionistic thinking too. And the old quote there is I would rather see a cooked furrow than a field unplowed, it’s better to do something in perfectly, and nothing flawlessly, okay, so you got to get in and get out of your own way and just move I find that there is a lot of wisdom in movement. And if you’re a longtime listener, you might agree with this statement I’m about to make about myself perception, I think of myself as a pretty analytical person, I really try to look at things from all sides and all angles. And I get in my own way, I do this all the time. It’s a self sabotaging behavior. It’s terrible. And what I have found in business, in investing, and in life in general, when I just jump in, and do it, that there is a lot of wisdom in just Action. Action is wisdom in many ways. Now, the caveat here is that doesn’t mean that you shouldn’t be the fool that rushes in. You shouldn’t just jump in without looking at things from an objective perspective, of course, but don’t get in your own way. Don’t overthink things, but don’t under think them either. So these all require some balance on your part. So there’s the paralysis of analysis. I’ll call that number two. It kind of blends right in with number one. But the paralysis of analysis mostly stems out of self sabotage, it stems out of fear, and it stems out of intellectual snobbery, okay, all of us as people, we want to sound smart, and we want to think we’re smart. have other people think we’re smart, too, right? But sometimes we do this. And these people, I’ve seen so many people, especially highly educated people, that that education actually becomes a huge disadvantage. And you’ve heard people talk about this on my show, because this education instead of opening up opportunities, it focuses thinking, and it makes people narrow minded. The word fear has been turned into an acronym, F E, A R, false education appearing real. Or another way to say it is false evidence appearing real so fear can cause the paralysis of analysis.
Did you ever see that movie by the way? I thought this was a really I mean, wasn’t exactly a deep movie, but I thought it had a good deep life lesson. And it’s the movie called Yes, man. Remember that one with Jim Carrey? Well, Jim Carrey is pretty funny actor and by the way, I love the movie Liar Liar, where he’s the lawyer, lawyers. I think a lot of them just lie for a living so that movies particularly funny, but in the Yes, man movie, the story is that he was I am if I remember correctly here, I think he was hypnotized. And he had to say yes to everything. And what happens in the movie is that he’s saying yes to a lot of really stupid things. The guy at the airport soliciting for a donation? And he just says yes, and gives the person all his money. Well, obviously, that’s stupid. But what the movie shows is that by saying yes, he tends to sometimes do something that appears to be a mistake. And later, through this kind of winding, circuitous route, it turns out to be a blessing. And the advice I would give all of you listening, and the advice I’m giving myself, is to say yes, more often point number one on getting out of your own way that we just talked about in business, I find that sometimes I want to, I’m thinking about engaging in a business deal with somebody or some company, and I just find that when I do things, profits are created. Sometimes it doesn’t go right. Certainly, problems are created too. But the more I do, generally speaking, the better off I am. And the more I agonize and the more I analyze and the more walls and barriers I put up, the less happens and the less rich I become. And the less growth I experience. Okay. And I’ll bet you that’s true in your life. So your homework for that one is do like Jim Carrey, and just try saying yes, more often.
Okay, number three over magnifying bad experiences and playing down true return on investment. I’ll give you an example. Today, I went to lunch with one of our investors. By the way, this, this guy is an old friend of mine. I’ve known him for a long time, many, many years. And he’s been investing with us and good friend of mine, great person, I will tell you, though, he’s indecisive. And it takes him a long time to make a decision. He wants to really analyze everything to death, over analyzing, I would say, and he’s talking to me about how his investments are going. And he’s trying to buy another property right now. And at lunch, he kept talking about over and over, about how he lost this last deal. And he’s upset about it, because he had put in an offer on the property and the property sold out from under him. And this happens all the time, right now. And our market conditions obviously changed. But he put in this offer, and the property was sold to somebody else, because it didn’t have his offer and quickly enough agonizing and analyzing, and he wanted to direct the whole conversation toward the fact that he was upset that the agent didn’t return his call quickly enough and didn’t send them an email fast enough. And I’m like, why are you magnifying all of this? I mean, really, who cares? A lot of this stuff, folks, it’s just never going to be right. Nothing is ever going to be just perfect. And just right. You got to just jump in with both feet and do things. And if things don’t go, well do something else. Okay? Look, I’ll tell you something. Back in 1999, I published a book called become the brand of choice, a book about personal branding and marketing, and how to develop exposure for your business and yourself and so forth and create income through that, which I think is a great idea, by the way. And I coach people on that all the time. And for many years before that I wanted to publish a book, and I was so perfectionistic about it, that I just kept agonizing. Well, you know, what’s the structure of the book gonna be? What’s the outline on it, let’s do all of this stuff. And I’m not sure that’s the right way to do it. And you know, I could have published a book years earlier, but I just kept agonizing over it. And I’ll tell you something that happened.
Now, books usually don’t really make any money, occasionally they do. But what they do is they they give you a huge credibility boost. And if you’re a speaker, or consultant, you can really increase your fees if you’re a published author. Okay. And that happened to me, that was a very good thing for me. But had I just published a book sooner, even if it wasn’t perfect, I would have had had been able to increase my speaking fees a lot sooner than I did. Okay, so just another example of over magnifying, here’s another way people do it as investors, they’ll have a bad experience or a semi bad experience, say they’ve got a property manager that isn’t really doing the job for them, or isn’t super motivated about taking care of their property or getting at least fast enough. And they’ll get on the phone with a manager and they’ll talk to them for all of 20 minutes or 15 minutes. And they’ll magnify this 2015 or 20 minute conversation, like it’s some big deal. Like, wow, what a hassle. I gotta manage my manager here yet they spend their whole life engaged in their job, okay? They spend 40 to 60 hours a week doing their job, which is many times that go nowhere job, okay, that won’t make them wealthy. That’s just a means to basically the basics of life, nothing great in life, okay. And their property portfolio is the thing that is really going to create real wealth for them, assuming of course, they have a good portfolio that they and they followed all of our other advice, which if they did, they do have a good portfolio. And they over magnify this little tiny problem that they had this little discussion they had to have, they’re really bugged by it. And something will happen like, oh, gosh, my property was vacant for two and a half months. Isn’t that terrible? It’s the end of the world.
Well, if you looked at the Performa, when you bought the property, or if you’re using the property tracker software to keep track of your property, the performer return is probably something upwards of 20% annually. That’s phenomenal. Okay, so say it doesn’t go that well. Say you have more vacancy than you expected, or say you have a repair cost or your manager overcharges you for something, a 25 or $40 overcharge, right, for some reason, some people and I say this as a self sabotaging behavior. This is a bad habit, this will keep you from the good life. That’s how important it is they over magnify these little, little pebbles, these little pebbles in their shoe. And they make them like they’re some big deal, folks. It’s important for us as people to constantly step back from situations to step back from our life, if you were a painter, right? And you were painting a beautiful painting, would you be looking right up at the Canvas? Where your eyes are four inches away from the canvas, looking at the brush on the canvas? Or would you back up and appreciate the whole picture? The big picture, right? Hopefully, you can see the forest through the trees. As the saying goes, hopefully you would step back and look at the big picture and keep that in perspective. Because when you don’t, and you let these little things bug you, you derail big plans for wonderful things. All right? There’s an old saying, and I’m sure you’ve heard it, remember, don’t sweat the small stuff. Rule number two, it’s all small stuff. Pretty much everything that bugs us, in our daily lives, is pretty small stuff. Let’s not let it derail our big plans.
Okay, here’s another one. People don’t become educated. People spend a lot of time in school, they go to college, they get a degree, they get an advanced degree. And it is amazing to me the perspective people have on education and how completely wrong It is sometimes. Why do I say that? Well, the reason I say it is because the vast majority of the stuff we learn in school, whether it be grade school, undergrad, or graduate school, pretty much doesn’t teach us the most important thing. And the most important thing is how to succeed in a world where most people do not, that is the most important type of education, the education that you get here on the creating wealth show, the education that you get in my products, in my coaching program, in my newsletter, and at my live events is the kind of education that will teach you how to succeed in a world where most people do not remember, you don’t have to outperform everybody by a huge margin, you just have to do it consistently, for a certain period of time. And the effect of that over time is like this. Have you ever looked through a telescope and maybe looked at the moon, I’m sure everybody listening has done that at one time or the other, right? And you looked at the telescope, and you were looking at the craters and all that kind of stuff, you know, it is made of cheese. Just kidding. And you were looking at the moon, and then you accidentally bumped the telescope. And when you bump the telescope, you were looking out into interstellar intergalactic space across the universe, right? And that little tiny bump set you off millions of light years into a whole different world, whole different galaxy, whole different part of the universe, right? That’s how getting the right kind of education and acting on it can change your life over the course of time. Okay, so that’s very important to do.
All right. Number five, being too greedy, the famous movie Wall Street, right? Remember that greed is good. Well, as a fellow capitalist, I actually agree with that to an extent. But greed can also be a self sabotaging behavior. So it is good to be greedy. In a sense, I’m saying that in a good sense, obviously, not in a malicious or unethical or indecent sense, which it has that connotation, I understand. But it’s good to be greedy and want success for yourself and to want to see your financial life grow. But as income property investors, a lot of us can be too greedy, in that we try to get a small amount of extra rent 50 or $100 per unit. And in so doing, we sabotage ourselves because our unit stays vacant for one extra month, per year, for example, well, $50 a month times a year is how much that’s $600. Right? So one month a vacancy on a unit that rents for say 1200 dollars a month just cost us a lot more. So we need to always keep our greed in check to make sure that we are not actually sabotaging ourselves. being too greedy and wanting to get that little bit of extra rent. Sometimes you can do it and when you can do it, I say go for it. Okay, you definitely want to raise your rents whenever you can, but you don’t want to make your tenants move. Okay. It’s a fine balancing line. And if your property is vacant, don’t be too greedy. The most important thing is to get it rented. Okay, number six, Not listening to your property manager. So it kind of dovetails into the other one not listening to your property manager now is your rent too high and is your manager telling you it should be lower is your rent too low is your property manager telling you it should be higher. That’s why you have us. That’s why you have your investment counselor at Platinum properties investor network to help you determine that and to get a second opinion, when you have a property that you might be struggling with. I know it happens from time to time, as market conditions change, you can always call an investment counselor here and you can bounce it off of them, we keep our finger on the pulse currently of 42 markets nationwide. Okay, so we are in impartial, objective opinion, but not listening to your property manager can definitely be a mistake.
Number seven, here’s the corollary to that listening to your property manager, that can also be a mistake. Sometimes your property manager over estimates your rent, I don’t know why they do it, maybe they just don’t know maybe they don’t have the right information. Occasionally, maybe they just want to make you happy. And they want to tell you what you want to hear. So don’t listen to your property manager too much. But listen to them. I just don’t know of any other better way to say this, you have to balance this out with your own intelligence. And you have us here to bounce this off of and get a second opinion from so it can be a mistake to not listen to your manager. And it can also be a mistake to listen to them. Use your own judgment, bounce it off of us, and we’ll be happy to help you. What I do find is that on renewals generally speaking on lease renewals, property managers tend to want the status quo and they don’t want to raise rents, okay? So a lot of times you can easily raise the rent, ideally, in a good environment, you can raise your rents 4% per year. So if you have a unit that’s renting for $1,000 a month, you raise rent $40, which is 4%. Now, there are many factors that come into play, and we’ve talked about them in prior shows, and we can coach you on this and our live events. We talked about this too. I don’t have time to go into it here. But there are many factors in the marketplace that affect rents, interest rates, the rental market, the competition, all sorts of things. But generally speaking on renewals, property managers are reluctant to raise rents, and you as the owner, managing your managers needs to push them to raise the rent. Okay. Next Big mistake investors make not having an investment counselor, not having someone who is area agnostic, like we are, okay. When you go directly and you talk to brokers, are sellers, or banks that have reo or foreclosure inventory in a certain market? You’re not getting a very objective opinion or you know, you’re not when you go into a stock brokerage firm a wall street type firm Merrill Lynch, Ameriprise, whatever, all of these companies are basically wanting to sell you mutual funds, stocks and bonds. And I asked you how many people do you know who created any real wealth out of the products like life insurance, annuities, stocks, bonds and mutual funds that are sold at these Wall Street firms?
Well, I don’t know anybody who got rich doing this, okay. And I’ll bet you the person sitting across the table from you didn’t get rich doing it either. The way they got rich is by selling that junk, those mediocre financial products, hey, this is just my opinion. Okay, those mediocre two lane financial products, they got rich selling those to unsuspecting people, like you see the people that get educated, that go out and do their own thing, okay, that control their own investments. Those are the people that get ahead in life, while all of the lower and the middle class investors, they just give their money to some money manager, okay, that doesn’t have their interest at heart and has a total conflict of interest in so many ways that I’ve discussed before. Okay, so have a professional investment counselor, work with a company that practices what they preach. I’ve been an investor for decades, okay, I’ve made millions of dollars investing. I am a person that has actually been there and done that. You can listen to me because I have credit. As they say, you know, the kids, they say, do you have credit? Yeah, I’ve got credit. Okay, I’ve got the street credibility, because I’ve done it myself. Okay. Next Big mistake, failure to communicate, failure to communicate with who? Well, a failure to communicate with your investment counselor. It amazes me how many times this happens. I mean, we try to communicate to everybody out there and all of our past clients and occasionally one of our past clients, they’ll come to some obstacles, some bumps in the road with their investment portfolio, and they won’t call us They won’t email us. And they, they’re not talking to us. And I’ll give you an example. Okay, one of our clients recently had a property in Indianapolis, one of our many markets. And they were told that they had a $2,000 repair bill. And they didn’t check with their agent in the local market the person, we refer them to the local market specialist, and they didn’t check with their investment counselor here. And they were getting really bugged, because they thought they’d have to spend $2,000. Well, finally, somehow, rather, they got in touch with us. And we made them aware that they had a warranty on the property that they did not even know about, and we saved them $2,000.
So stay in touch with us stay in touch with our investment counseling team here. And if you ever have a problem, let us know we’re here to help, okay, communicate with your property manager, communicate with your local market specialists, and communicate with your investment counselor here at platinum. We’re here to help don’t have a failure to communicate. All right, next one. Next Big mistake investors make panic buying. Have you ever been like this, or maybe if you have children, or somebody you know, you’ve said this to them, you spend money like it’s burning a hole in your pocket. Sometimes people are so anxious to buy something, that they’re the fool that rushes in, okay, and they make big mistakes through panic buying. I have to say though, this one is actually pretty rare. It does happen from time to time, but it is not the one that you probably need to guard against as much as the next one. And the next one is panic selling panic selling is where people, they have some little bump in the road that’s quite manageable, quite solvable, if you will, I don’t even solvable a word, I’m not sure. But it’s something that can be taken care of just with some little bit of work, a little bit of communication and all of the other things I’ve mentioned, and they all panic, sell the property, stupid mistake, these properties are usually such fantastic little investments, why should you be selling them? Keep them? Okay? a property that has a performer return of 20 or 25% annually. So you have a problem and you take off, you subtract from that return. And this little problem might cost you 5% annually? Well, if you started with a 20%, projected return on investment, and things didn’t quite go that well. And you got down to a 15% return on investment that year. Shouldn’t you be overjoyed? Shouldn’t you be happy? Shouldn’t you be backing up from the Canvas? Shouldn’t you be gaining some greater perspective and realizing that you still have a phenomenal investment here?
Look, folks, the crooked scumbag Bernie Madoff, who made off with over $60 billion of people’s money, you know what his big promise was, to the investors he duped out of so much money, his big promise was that he had some unique technique. And I can’t remember what it was called. But I remember hearing it on the news that would yield his investors eight to 12% annually, consistently, year over year, with the right rental properties structured and managed the right way, you can easily outperform that in most markets, okay, you can do much better than that. I mean, last year, in the worst economy in seven decades, 70 years since the Great Depression, we have an example a specific real life example of a client who got a 36% return on investment. And you might be thinking, well, Jason, that was because the property appreciated a whole bunch. Not last year, it didn’t. Okay, well, that was because he got a great deal. No, didn’t get a great deal. He just got approved and good deal. Like the vast majority of our properties, this property appreciated about 2%. Yet, because of the special multi dimensional characteristics of an income property investment, the true return on that investment, all things considered, was 36%. Now imagine if this investor, this real person that I’m talking about here, and you’ve actually heard him on the show before, but I won’t mention his name this time. But you’ve heard him on the show before this real world story, which by the way, there are many stories like this, this is not a special story. This is a fairly normal story. Okay. Imagine if he would have had a call from his property manager saying that the garbage disposal broke and he has to spend $200 to fix it and that bugged him and then imagine if the tenant moved out And he had to find a new tenant and the property was vacant for two months in between, he might have gotten discouraged. And he might have sold this property that had a return of 36% that maybe would have been diminished a little bit through a bump in the road here, and it would have been diminished to a 25% return on investment.
Perspective is a very important thing. We get upset at these little things. And we forget about the big picture. A lot of people you’ve heard the saying a lot of people go through life and what do they do? They major in minors, okay, that’s what little people do. That’s what people that never get anywhere in life. Do the winners major in majors, the losers major in minors, they let little conflicts little upsets derail their whole plan. The mature, prudent person doesn’t do that. They major in major things. Stephen Covey. I’m a huge fan of Stephen Covey. In fact, you know what we should get Stephen Covey on the show. I met Stephen Covey on a cruise ship. Oh, I guess that was about eight or nine years ago in Russia, of all things. Yeah, there was a little event in in one of the restaurants on the cruise ship. And they announced I can’t remember his wife’s name now, but they said this is so and so covey from Salt Lake City, Utah, I thought is that Stephen Covey’s wife? And sure enough, it was and I got to meet Stephen Covey, one of my all time favorite authors. Well, he’s written the book, the famous books, the Seven Habits of Highly Effective People and many others. And one of the things that covey says, and this is very important to remember is, here it is, this is a lot of wisdom in this little statement. The main thing is to keep the main thing, the main thing. Let me repeat that the main thing is to keep the main thing, the main thing. So don’t major in minors, major in majors, okay. Do what matters. All right.
Okay, let’s move on next mistake, saying no. saying no. Do you know that it is very possible and likely, although I have not researched this, that no, is the most overused word in the English language second only to the word AI. People say no too much when they should say yes more often. Okay, so yes, you could make the mistake of being a panic buyer, you could make the mistake of being the fool that rushes in. But that’s the much less likely mistake than the mistake of saying no more often than Yes. So I encourage you to say yes, more often. And no less often remember, yes, opens the door. It creates opportunities, it creates possibilities, well, no, puts up walls, closes the door shuts you in and insulates you from life. And if you want to be insulated from life, because you’re more concerned about seeking security than opportunity, then there is one place, I can guarantee you complete security. And it’s certainly not going to come from the government. It’s not going to come from your spouse, it’s not going to come from your parents or your kids or anybody else. And it’s not really going to come completely from you either the most secure place is to be dead. That is the ultimate security because there is no risk in being dead. Okay, well, we are alive. We are the very definition of insecurity. Everything about life is tender and delicate, and it can be taken away at any moment. Your Money, Your health, life is a very insecure thing. And that’s just the way it is. Say yes, more often, you might as well because nothing is guaranteed. open some doors in your life. Create some opportunities, stop using the word no so much. No is a limiting word. Okay, the next big mistake investors make overextending themselves. I talk a lot about and recommend leverage when we invest in real estate, the power of OPM other people’s money. It’s one of my favorite characteristics of the multi dimensional wonders of an income property investment. And people misinterpret that a lot because they see all these people getting themselves into trouble with debt and with financing, and they tend to misinterpret that and some people get themselves over extended. And that is a very dangerous thing.
Remember, leverage borrowed money that other people’s money that is a very powerful tool for wealth creation, but it is a tool that needs to be used with the respect and prudence it deserves. Some people say that nuclear weapons are an evil, terrible thing, because they can destroy all life on the planet in a matter of minutes. Really right. But others say that nuclear weapons are a wonderful thing because nuclear war weapons, through mad or mutually assured destruction that was used more during the Cold War with the Soviet former Soviet Union have really saved a lot of lives. Now, why would I be saying that? Well, because the threat of nuclear weapons has caused people to be much more careful with dialogue with diplomacy with moving their armies around and doing things to each other. Okay, so the threat of mutually assured destruction or mad, many would argue that that has saved millions and millions of lives. Which one is correct? I don’t know. None of us really know, do we. But what I’m saying with leverage is leverage is a very powerful tool. And just like nuclear weapons, you got to be careful with it. Okay. So what do you need to do? First thing you need to do when you use leverage is have proper reserves. So we recommend a minimum reserve of 4% of the value of your properties, your portfolio, so if you have a $100,000 property, you would have at least $4,000 in the bank that you are not spending that is the dedicated reserve account for that property and think about it. If you have vacancies, then that could cover you for a few months, couldn’t it? If you have repairs that could cover you, if the reserve account is ever diminished, you need to replenish it. Okay, as soon as possible. So if you have a million dollar portfolio, $40,000 in the bank, earmarked as reserves, this is not money you can spend, it has to be reserved for the property, if you have a $10 million portfolio, how much $400,000 now as your portfolio gets larger and larger, you can probably and it depends on the age of the properties depends on some other circumstances, but you can very possibly lower your reserve account. Why is that because the likelihood is if you’re diversified, and you may not need quite as much money in reserves, okay, that’s an individual case by case thing, but just go with my rule of a minimum of 4% of the property value in reserves.
Okay, the other thing, and it kind of goes to the same note about over getting overextended, don’t mix reserve money for income properties with your personal financial reserves, okay. So if you’ve decided that in your life, with the threat of the economy the way it is, and the threat of getting laid off from your job, that you want to have three months living expenses in the bank, or six months living expenses in the bank, or whatever the number is for you, okay? I’m not saying what number is right or wrong, but that reserve account is different than the income property reserve account. It’s not to be commingled, now, it doesn’t have to actually be a separate bank account. But in your thinking, you dedicate Look, if I’ve got a million dollar portfolio of properties, I have $40,000, dedicated set aside for that portfolio. And if I want other reserves, other savings, that is in addition to this, okay, the other problem people have is not planning for contingencies, not understanding what could happen. So I want you to think about some things that could happen. Okay, now, I don’t want you to get all mired in negative thought and worry and so forth. Because worry is usually a pretty useless pursuit, okay. But do understand and just think, as a prudent, educated investor about things that could go wrong and plan for possible contingencies. All right, next big mistake people make. And I’ve really already addressed this one. So I’ll just mention it quickly. Not seeing things in context. Okay, making irrational decisions when a crisis occurs. And so that’s just really what I was saying before about stepping back seeing the big picture, okay, see things in there broader, bigger context, Major, and majors don’t major in minors. Okay, next one. And this is also related, letting one problem sink the whole ship. Okay. And this is where the investor gets all worked up about some dumb little thing that really just doesn’t matter that much in the bigger picture, and they assign blame incorrectly. Give you an example. This is a real life example of a client from a few years ago, okay, this client made a series of mistakes and blamed the wrong people. She kind of blamed us to some extent, okay, and here’s what happened with this person’s life, okay. They had a live in relationship that ended and they broke up, expenses increased, and at the same time, this particular person decided it would be a good time to change careers. And so let me see increasing living expenses, losing income, not a good picture so far right. And then listen to the next thing that is sunk. The ship here purchased a property not from us from another Group imprudent property that never made sense the day it was purchased in Arizona. At the time, when Arizona was a totally frothy bubble market, they bought this property on speculation, property never made sense. And it turned out to have a huge negative cash flow, it was a very bad deal. And then the next mistake is that this particular person did not communicate with their investment counselor here at Platinum properties investor network. And the combination of all these mistakes sunk her ship, she ended up letting several properties go into foreclosure because she just threw her hands up. And instead of cutting off the bad property, the one bad property that was really sinking the ship and understanding that there were no reserve accounts. Okay, that’s another mistake. I didn’t even mention no reserve account did not listen to us on a reserve account overextended on this property that she purchased from another group, and was basically gambling and speculating on that, not the prudent cash flow type properties that we recommend, obviously, the combination of these mistakes coalesced, to really cause a lot of emotional strain, and just sink the whole ship. Okay, so don’t ever put yourself in that position.
All right, next one, changing the financial picture or changing the playing field, well, that really weaves into what I just talked about. So changing careers, or changing relationship status, because that could change your lifestyle and your expenses right at a time when there are other risks being taken, or other growth opportunities being pursued. So we have to have a certain foundation of stability, sometimes, to kind of make the leap into a higher plane or a higher plateau, you know, it would be kind of like working out, if any of you work out, I like to go to the gym, I like to try and eat reasonably well and be healthy and stay in shape. Okay, I’m not totally into this or anything, but I certainly think it’s good to work out and stay in shape, and look to stay in shape. So you go to the gym, and you just get all motivated, all of a sudden, although you’ve never really spent much time working out or being in shape, and your ligaments and your tendons are not built up and your muscles are not built up and you go into the gym and you work out like a fiend and you What are you going to do, you’re going to sprain your muscles, you’re going to overwork them, you’re not going to build the proper Foundation, to then jump to a new plateau. Same is true with our finances, isn’t it. So we’ve got to have a decent foundation. So be very careful making changes in your life. If you are taking big growth risks, make sure your life is reasonably stable before you take big risks. Okay, now this doesn’t mean you find a reason to say no about investing. If you have a reasonably stable job and you have some reserves and you’ve been prudent about your financial life, you can buy one or two properties. Maybe you don’t want to go out and buy a dozen properties that might be way too big of a risk. That would be like going to the gym and working out like a theme when you haven’t built the foundation for fitness for general fitness.
Next one listening to your sphere of influence. So our friends or relatives, they’ve always got a lot of advice for us, don’t they? I think I got a fortune cookie that said this once it said advice is usually worth what it costs nothing. Now, we’ve got a lot of people that are always willing to be armchair quarterbacks, don’t we, we all have this in our lives that are always wanting to give us advice about this or that yet they haven’t been there. They haven’t done it themselves. So we got to be very careful. The role models we choose, don’t we, because we want to make sure we’re listening to people that actually have credibility. All right. So if your parents have never really made a success of themselves financially, they may be wonderful people that you love very, very much, but they may not be the best people to go to for financial or investment advice or business advice. So make sure you understand to whom it is you’re listening, before you decide to let their advice influence you. Enough set false expectations, having false expectations. When you go into a deal. When you go into an investment. What are your expectations? The first thing is you need to know what they are. I mean, are your expectations reasonable? Or are they completely unreasonable? So know your expectations before you go into a deal and just have proper prudent realistic expectations that aren’t too low, you’re not being a pessimist, but they’re not too high. You’re not being a stupid optimist. Next one, not maintaining control. So my commandment number three, which as you know is one of my favorites, if you don’t follow Have them all and you at least follow a couple of them. This being one of the important ones, thou shalt maintain control in my 10 commandments of successful investing. If you follow this commandment, and you don’t leave your financial future in the hands of somebody else, incompetent, unethical, greedy investment advisor, who may well have a total conflict of interest. When I talk about maintaining control of your investments, we got to talk about the stock market. Let me play for you a little clip. It’s seven minutes long from one of our video podcasts that talks about why the stock market can be dangerous in the current economy listening.
‘Audio clip’ 45:45
Taking stock why the stock market can be dangerous in the current environment. Conventional wisdom has long held that the way to become wealthy over the long term is by compounded investment in the stock market. Now the reason for this was quite clear when one looked at the chart of historical returns. By making very modest investments at regular intervals over a long period of time, small investors could create very large amounts of wealth. This line of thinking is what has prompted most employers to source their 401k retirement plans with mutual funds that invest in the stock market. Unfortunately, the movement of stock market investment into the mainstream of America has caused it to become less of an investment vehicle and more of a gambling casino. The primary purpose of the stock market is to provide companies with the means to raise capital for business investment by selling a partial ownership stake, also known as a share of ownership. Typically, investors were rewarded for their investment by the payment of dividends from the company profits. Thus, stock market investing was originally based on the notion of finding a company that was likely to make sufficient profits to pay healthy dividends. This sentiment changed as the secondary market for trading stocks became more popular. A primary issue of stock happens when a company issues more ownership shares. A secondary stock transaction happens when one investor exchanges and existing ownership share with another investor. This is where the stock market turns into a casino. When the focus of investment shifts away from the ability of the company to viably pay dividends on a consistent basis toward the probability that the secondary market will pay more for the company stock at a future date, stock investment becomes much more akin to gambling. When returns are primarily based on price appreciation, continued growth and market value requires a perpetual stream of new buyers. This phenomenon is true for both stocks and real estate and it explains the recent booms and busts very thoroughly. the only factor that can push up the entire stock market is if there’s an aggregate increase in investment capital similar to how increases in the money supply from the Federal Reserve drive price inflation. When corporate profits grow, it’s natural to assume that more capital will be attracted to the market. However, when market values rise faster than corporate profits, the only cause can be a net influx of investment capital. In the United States, there were two sledgehammer events that sparked a colossal 25 year bull market for stocks. The first was the passage of the Employee Retirement Income Security Act, or Arista in 1974, which created standards and stability for company sponsored stock market investment plans to dramatically increase the supply of equity capital. The second was the pairing of tax cuts in the 1980s and a significant reduction in the cost of debt capital that spurred a rapid growth in corporate profitability. These two events combined to generate a massive increase in stock market investment that pushed values sky high. However, these massive gains came with a bit of a shadow. This problem has been created as investors stopped directly buying stocks of individual companies and started investing in funds where a manager buys and sells the stocks. Now these brokers and managers have control over incredible amounts of other people’s capital. This control gives them the power to create or destroy tremendous amounts of value based on the decisions that they make. It also channels market activity more and more toward gambling as managers seek to maximize value appreciation. The set of incentives is very adverse to investor interests as managers have incentives to take insane risks since big gains mean tremendous bonuses and losses only mean that they get fired. Furthermore, most managers charge very hefty fees for their services which cut into the net investor returns. Now thus far we’ve assumed that the fund managers are honest when the crook dynamic is factored in the risk increases significantly. Fundamentally, there are four principal risks implicit in this kind of stock market investing number one your broker may be a crook. Number two, your broker may be incompetent. Number three, even if your broker is honest and competent, they’ll take a big slice of your profits in the form of fees and commissions. And number four, these problems are not limited to your brokers but include all of the middlemen like stock promoters, CEOs, bankers, and all other flavors of hucksters are salesmen. On top of all these risks, there is a bigger dynamic to consider. Currently, corporate profits are taking a very steep tumble relative to their prior levels. In addition to this, most of the working population is already invested in the stock market, so there’s no large pool of capital to attract so that valuation can continue to inflate. Finally, the current market price earnings ratio is well above its historical average. This means that the market is discounting in a future increase in corporate earnings. If that increase does not come or takes longer than expected, it will most likely result in market values decreasing. Finally, there is a longer term risk of very average performance. Even if the anticipated recovery happens as expected, there is no looming influx of capital to push the market up at explosive growth rates. This means that future market appreciation will look very average by historical standards. Granted, nominal values will be pushed up by inflation, but real returns will still be very much in the average category. Ultimately, the stock market is in the midst of a return to reality from the large rates of return in prior years. The fundamentals are pointing toward difficulty in maintaining prior growth rates out into the future, including the risk of more near term price compression if the forecasted economic recovery does not materialize as expected. Granted, there is a probability that the stock market will recover better than expected and produce favorable returns. However, prudent investors should seek to diversify their investment activities into other emerging areas of opportunity to limit exposure to the stock market situations such as prudent real estate investing with a small to negligible downside and significant to infinite upside, or what economists call a free option. principally because the investment volatility runs mostly in the up direction because of the downside risk mitigation. Needless to say, these are the investments that we would like to create.
Welcome to the Platinum properties investor network, the source for innovative, forward thinking investment property strategies and advice. Founder Jason Hartman spent two decades developing the complete solution for real estate investors. Jason appears regularly on television and radio at speaking engagements seminars, and with this ultra hot creating wealth podcast.
Jason Hartman 52:51
See, when you’re investing with someone, you want to make sure your interests are aligned, okay, that you have the same interest and usually your investment manager in the typical Wall Street type model stocks, bonds, mutual funds, life insurance, all of those junky products out there, again, just my opinion, don’t sue me Merrill Lynch, I don’t like your investments, I think they’re pretty bad. Okay, just my opinion. You listeners can judge for yourself, but they generally have a conflict of interest, they want to charge you high fees, and they want to keep you in the deal. They want to keep you invested in the market. I’ve talked to many investment advisors who say be in the market when the market is collapsing all around, okay, because they don’t make any money. When you’re in the cash fund in the money market fund, they want you invested, I have heard of many people that have worked at firms like Merrill Lynch or the other financial firms that say that they are under huge pressure to keep a minimum of 80% of the client’s money invested in the market at all times. So when you have a brokerage account at one of these firms, you’ll have a money market account that will go along with it. So when you’re between investments, your money will sit in cash in the money market account. And guess what? They’re not making money when it’s in the cash account, are they so they want you invested and you may be invested in a bad time. Okay. And of course, they usually haven’t followed their own plan, which is obvious. But the one thing I would say that’s the most important is you may need to be a direct investor. Three major problems when you are not a direct investor. Number one, you might be investing with a crook number two, you might be investing with an idiot. Number three, assuming they’re honest, assuming they’re competent, which is rare, but assuming you pass those two hurdles with them, they take a huge management fee off the top for managing the deal. You’ve heard me talk about this enough before. I’m not going to go into it anymore in the interest of time. All right, we better conclude there. We’ve gone over a lot of mistakes. We’ve got a lot more coming up and we’ll play those for you on a future show real soon. We’ll get to the rest of the 30 or so mistakes that investors commonly make. And we see these all the time. So the best way to avoid these mistakes and not make them yourself is to understand them. self knowledge is the first key to understanding so we’ll go over the rest of these mistakes later. Be sure to join us for the creating wealth in today’s economy boot camp on January 23, and the Masters weekend in March. Also, be sure to join us for our 2010 market forecasts teleconference call on January 7, at noon, California or Pacific time and three o’clock eastern time that is free. Just go register for any of these events. Jason hartman.com talk to you on the next show. And until then, happy investing.
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