162: Investing In Real Estate With Jason Hartman
Business success is largely about the model of the business and not about the industry or anything else. Investing in real estate can provide you highest returns, greatest values, and the least risk. A master of real estate investing and the CEO of JasonHartman.com, Jason Hartman shares his tactics and tips in real estate investing by building his own network. He talks about a system he created that will allow real estate investors to step in and work with his own people to secure real estate and use it as an investment vehicle that could potentially last a lifetime. Learn more about Jason’s one-stop shopping solution for real estate investing.
Investing In Real Estate With Jason Hartman
We have a special guest who has perfected his own version of investing in real estate. Before we get to him, I want to make sure you know, you can now talk back to me. My show is now a two-way conversation. Go to YourFirstThousandClients.com, pick an episode and anyone you want to comment on. Click on the red button that says, “Speak to Mitch.” I will get your message.
Our guest is a genuine self-made millionaire. He owns 21 businesses with real estate in eleven states, has hundreds of tenants and has been involved in several thousand real estate transactions. He’s also the host of twenty different podcasts with over 5,000 episodes and sixteen million downloads. Before he figured out what you will see is brilliant to invest in real estate with a little risk as possible, he needed to go to the school of experience first. Readers, I know you’ve been to the school of experience, I have. In 1997, he purchased a real estate brokerage at the worst possible time. You’ve got the hint there, 1997. 9/11 happened. His franchise fell apart, he wasn’t exactly sure what he would do. His entire fortune was hanging on a thin thread and yet he found his way out. That’s how it all started. Welcome, Jason Hartman to the show.
Thanks, Mitch. It’s great to be back on the show. You and I were on each other’s show years ago. It’s nice to reconnect.
Much has changed in these last several years. For heaven’s sake, this is a different world we live in.
I think it was the famous management consultant Peter Drucker who said, “One thing constant is change.”
Think about all the stuff that’s going on in the world. We talk about the Federal Reserve. We talk about personal investing. We talk about Bitcoin and gold and all of the possible ways that you could either make money, lose money or just keep busy, one way or the other. You can sit and play with your Bitcoin all day long or all these other ways of investing, but the thing I’m most interested in, Jason, is the way you got involved in real estate. Let’s go back to the beginning and tell your story for those who didn’t listen to your first episode, how you got involved in this whole business?
I grew up poor. I lived in Los Angeles, California. I didn’t like being poor. About ninth grade, I realized the rich kids at school were getting all the attention. I went to mixed schools that were integrated. I saw every class of people. I saw wealthy LA kids who lived in Cheviot Hills and Westwood. I saw poor kids that were bust in from the other side of the tracks and everything in between. It was interesting to see the way the different socioeconomic classes were growing up.
One of the key words to success in life is leverage.One of the key words to success in life is leverage. Click To Tweet
I didn’t want to be when I was an adult. I heard a real estate guru when I was at a young age and started getting into it. I realized it was the investment, the asset class with more leverage and power to create wealth for the common person than any asset class in the entire world. I like to say it’s the most favored asset class in the world in terms of ROI, Return on Investment. It’s also the most tax-favored asset class in America. Taxes are a large expense that many of us have in our lives. I got into the real estate business to learn about investing. I’ve made both of these careers in parallel over the years since I started in my first year of college when I was nineteen years old. I’ve been on the brokerage side and I’ve been investing for my own personal account along the way. Overall, both have been fantastic, not without their ups and downs like anything. It’s been a great ride, I can share any advice or experience from the school of hard-knocks, on the business side but also on the investing side.
Those are two distinct paths, you have a lot of entrepreneurs reading your show, Mitch. One of the things we find with our entrepreneurial clients, most of them have their eggs in one basket, their business. That is dangerous, that is a risky thing. If their business is successful and hopefully it is, because they’re reading the great advice on your show and the other great teachers out there, they’re paying a fortune in taxes. The taxation is such a critical thing, to most people it’s a boring topic, but you’ve got to realize, even if you’re bored, it is the single largest expense in any of our lives. We will pay anywhere between 40% and 65% or even 70% of our income during our lifetime in some form of tax. You must learn how to legally reduce your tax liability by doing the things the government wants you to do, what they’re incentivizing you to do. One of which is to provide rental housing to people.
You’ve been successful all these years involved in real estate. When you bought your brokerage, what was your thought? Was it, “I want to make money, I want to learn about real estate, I want to have access to deals?” What did you think when you first bought that?
I’m not sure what I was thinking, it wasn’t a good idea. It was like the E-Myth book says, “I was a technician with an entrepreneurial seizure,” I’m not sure why. Before that, I was a successful RE/MAX agent, during the time I worked at RE/MAX, when I was 24 years old, I was number 59 in the entire world as a kid. I was making a lot of money, thought I could do no wrong. I went through my first recession, learned some lessons through that for sure. I wanted to duplicate myself. In any endeavor whether it be business, investing, relationships, experiences, or whatever, one of the keywords to success in life is leverage. In business, much of that leverage comes from the ability to duplicate oneself, duplicate your own efforts. The delusion that I was suffering at the time was that every real estate agent was as motivated as I was. That was a mistake. I found that to be untrue.
Before buying this business, I saw all sorts of evidence out there. I don’t know why, I thought I would be different for some odd reason. I struggled with that business, had lots of problems. In the few years I owned it, it did work out okay. Coldwell Banker bought the business from me in 2005. It turned out to be a good deal overall. Could I have done better not buying it? The money perspective, probably, yes. From a lifestyle perspective, yes. Being a successful independent agent, probably would have been better but I learned a lot more through the business that’s for sure. I became a much more educated and battle-hardened business warrior. It was good from that perspective.
What you gained more than anything is perspective. Your keyword is leverage, mine is perspective. In many cases, things look different from different perspectives. Looking from the outside in, that perspective said, “I need to be in real estate and I want to buy an agency.” Obviously, your perspective shifted quite a bit after you’re an owner of that agency but the key thing here was what you learned. It’s the lessons you learned and once you sold that brokerage, did you feel at that point like, “I’m done, I can buy my yacht and go sail the seven seas,” or did you say, “I’m going to start using what I learned owning this brokerage?”
The first thing about the yacht is I already owned one during the time I owned that business. I had a 48-foot Carver Trojan Express with some friends. That was a terrible deal, do not buy a boat. It’s true what they say about boats, a bad investment. I did ponder the idea of retiring. I certainly had enough money to. I had some real estate I did well-over the years and the money from the sale of the company. I could have done that but that’s boring. I don’t think it’s healthy. The people that lived the longest are the ones who are engaged in a mission or a cause. I don’t think business, at least after you become successful, is about money. It is about making a contribution to the world. It’s about proving an idea in the marketplace. It’s about doing something meaningful.
In the famous book, Man’s Search For Meaning by Viktor Frankl. That is a brilliant book everybody should read. He profiled his life in the concentration camps. The title of it is profound, Man’s Search For Meaning. We’ve got to have a meaning and the meaning of life is not money. Money is simply a byproduct. The meaning of life is to do something useful, to use our talents. In fact, I would argue that the meaning of life is not even happiness. Happiness is highly overrated, honestly. To be frank, I don’t consider myself some super happy person, I’m successful, I guess. The meaning of life is to have a mission, to do something, to contribute something. There’s a different kind of happiness that comes from that. We all the stories of the rock stars and movie stars that have these meaningless lives. Everybody would argue they’re successful, but they have drug overdoses and suicides. That’s not success. They have broken relationships everywhere you look.
Be engaged in something that one considers important and making a contribution to the world is great. Doing that through entrepreneurship is the ultimate way to do it. Maybe it’s being a cause entrepreneur or a philanthropic entrepreneur or whatever, in some way you’re an entrepreneur. That means you create something, that entrepreneurship is in its core. You assume the risk, you create something new in the marketplace, I think that’s important.
What I created is I started looking around for my next gig. As I was negotiating that sale with Coldwell Banker, it took about a year for it to happen. I started thinking about investing in properties nationwide rather than in Southern California where I had lived in Irvine and Newport Beach for so many years. I started researching different markets around the country, I had gone through a couple of recessions. I realized that all real estate was local as I had gone through those recessions in the past. I saw clients abandon their properties in Southern California and move to areas where the economy was on the upside. I didn’t want to go through that again, I was older, more conservative and prudent. I wanted to be a nationwide real estate investor. I tried to do it myself, it was difficult. What I decided to do after struggling to do this myself, was I created a business that would help investors invest nationwide. I was my own first customer, born out of my frustration of trying to invest in a nationwide perspective with my own money and own portfolio.
I created a system to do that, a financial services firm for real estate investors. One of the things that you teach and I’ve read both of your books. I love them before I knew you as a friend, we became reacquainted after I read both your books. I realized that business success is largely about the model of the business, not about the industry or anything else. What I did was, I took that model from my traditional real estate brokerage, the model that didn’t work well and struggled with for so many years. I flipped it on its head and I created this financial services firm for real estate investors where the company generates the business. One of the things we did following your invisible organization advice is in 2012, we went virtual.
We used to have big gorgeous offices in class-A buildings, they were expensive to maintain. I found it to be a struggle when technology kept improving over the years to get my staff to come into the office. I thought, “Why am I fighting this?” When our last office lease was up in 2012, we became an invisible organization. That’s not without its challenges too, everything has its pros and cons, but if you install the right systems, technologies, SaaS software products and have the right model and compensation plans, it can work well. You can attract talent not limited by geography anymore, which is wonderful. I have people who have been working with for eleven to twelve years that I’ve never met in person. It’s a different ball game when you do that. I’m a big believer in the invisible organization for sure.
The meaning of life is to have a mission, to do something, to contribute something.The meaning of life is to have a mission, to do something, to contribute something. Click To Tweet
That’s good to hear, Jason. I’m always happy when someone adapts some of the tools and ideas that I promote and write about. The business model is the clue and the key to every successful business. There’s a book that had a huge effect on me I read many years ago, it’s called Blue Ocean Strategy. In a nutshell, if you’re going to create a business, you would rather create a business where you’re already walking into several hundred competitors at all different price points. You’re doing nothing but offering a commodity product at a lower price. Which is what most people do, even if you think in the coaching industry, the only differentiator is the people, the coaching is all the same. However, in the Blue Ocean Strategy, what you’re doing is you’re creating your own market. Let’s take a look at iTunes and Apple, the market they created was in fact the marketplace that revolves around iTunes which is the App Store, there is your own market. When I built Timeslips, I didn’t have that strategy. I had not even been aware of it at the time. We entered into a crowded market, except we knew we had a huge technology advantage when we did that.
Since then, I’ve entered markets through the work I do with clients, what we then do is create markets. Obviously, when you create a market, there’s nobody there to buy it. You have to create your own buyers, infrastructure and ecosystem. In many cases, it is not only easy to do, but pent up demand will come flooding your way if you choose the right model. As far as what you’re doing, when you say a financial services firm for real estate investors. I don’t know exactly what that means. Would you mind giving us an overview of what financial services you provide real estate investors?
I was in the red ocean, opposite of the blue ocean, it was terrible. I was a commoditized business in the traditional world of real estate brokerage. Even though some brokers are better than others, some are pathetic and some are great, the public does not see a difference. It’s important to get out of that commoditized environment, even if it’s not truly a commodity, if the consumer sees it that way it doesn’t matter. It’s a commodity to them. What I did is I created this new model. I looked around and said, “The industry of Wall Street, the financial advisers, financial planners, the people who sell stocks, buy and mutual funds, they have a mediocre investment but they have an outstanding model and sales force.” They have sophisticated people selling mediocre products. On the other hand, if you look at the real estate industry, they have the best product but they have a mediocre sales force and a terrible business model for selling it.
I remember one evening as I was negotiating the deal with Coldwell Banker, this was going on for a year. I sold one of my properties, I had a check for $500,000. I took this and dropped it off at Charles Schwab. I put it in my account there, I stuck it in there and remembered thinking, “I handed this guy a $500,000 check. With that check, you can buy a $2.5 million worth of income property.” At the time, because the loan regulations were more liberal, you could buy $5 million worth of property. I remember the guy at Charles Schwab taking my check and him like, “No big deal, people drop off $500,000 all day long. We don’t care.” It felt like there was so much money throwing into the world of Wall Street in the financial services industry that it didn’t even faze them. It struck me a little bit.
I thought, “These guys have a great model.” If you wanted to go in and invest with them, they make it so easy. You’re going to sit across the table from a guy or a girl wearing a nice business suit, they went to a good college, they know how to talk the talk and professional. Nobody says they get rich in stocks, bonds, and mutual funds. I’ve asked that question to thousands and thousands of people over the years at my live conferences that I host. Lots of people, we all know them to say that they get rich in real estate, but you’ve got to do it yourself a little more. It takes more thinking, more work. It’s not as passive but it’s a far superior asset class. There’s an old joke in the world of Wall Street where a broker brings a friend of his down to the marina to show off his brand-new beautiful yacht. He says, “See my new yacht.” His friend says, “That’s spectacular, congratulations.” The broker points at the other yachts in the harbor and says, “That’s my friend at the other brokerage’s yacht, that’s the other guy that works in the other office down the hall from me at my brokerage and his yacht.” His friend says, “Where are all the client’s yachts?” It’s an insider’s game. I wanted to take that Wall Street model and apply it to a better asset class. That has been a phenomenal experience over the years.
What are the financial services that your firm deliver to potential investors?
What we do is we educate people and teach them how to invest conservatively in the traditional buy and hold strategy that has worked for tens of millions of people, and around the world, maybe hundreds of millions of people. We teach them how to do that and then when they’re ready, they reach out to us and our investment councilors have a meeting with them. They will do a portfolio makeover. They’ll analyze their current assets and show them how moving those assets to income properties could generate a higher return on investment. They use the traditional financial planning techniques, they’ll analyze their risk tolerance, their time horizon, investment goals, like all the Wall Street guys say they do. They have software that shows reports with pie charts. By the way, the thing I realize back in 2004, as I was negotiating with Coldwell Banker, a real estate company.
I started going around all these financial advisers. I had meetings with their private client groups. What I realized was, they all said the same thing. No one had any unique ideas. It was simply modern portfolio theory like, “Here’s the pie chart. Small-cap, large-cap, international bonds.” You could have taken the logo off the top of any of these reports since they were duplicates of each other. It seems so uncreative to me. The advisors I’m seating across the table from, hasn’t made a fortune following the plan they’re telling us to follow. By the way, Nassim Nicholas Taleb in his book Antifragile talks about this. He talks about how there’s a complete contradiction of what Wall Street advisors are doing versus what they’re recommending. That’s a tragedy.
You know the traditional brokers make their money because we saw the yachts. Let me follow that up with step one is teaching them about how to invest. Step two is counseling them on investing. Do the portfolio makeover and then potentially suggest moving into more traditional real estate investments. Beyond that, does your firm help your clients make the investments? How does that work?
What we do is we provide the properties people can purchase through our network. We’ve set up a referral network where we source properties in market areas that we like across the country. We could do it internationally, we’ve just never found anything that was very impressive internationally. We have always stuck to the US market. We have clients all over the world that buy properties through our affiliates through our referral network. After they buy the properties, we offer ongoing support and software that can help them track and manage their investments.
That’s the package. Our tagline, the complete solution for real estate investors. As far as I know, nobody had ever done it this way before I started this business. I was the first from what I can figure out. There have been several copy cats seeing my blue oceans throughout the years that have come out to compete. Some will say they have been doing it since 2004, which is simply not the case because they were dabbling in some real estate, but it wasn’t this.
You’ve basically created a one-stop shopping solution. I come to you. I learn about real estate. I work with your advisers. I then select properties from your pre-selected portfolio and then, if necessary, your advisers would help people get financing if they didn’t buy with cash and then the management. I’m an investor, for example, I invest in the stock market and several other things. The good thing about the stock market is that everything is on my screen and I can control my portfolio with a click. When you invest in real estate, you’ve got broken toilets and leaky faucets. Does your system work to provide a way for people to become investors as opposed to homeowners?Be engaged in something that you consider important. Click To Tweet
Our people are investing because they don’t live near the properties. They’re not involved in these day-to-day operations. We teach them to self-manage if they want to. We can help people do that from a long distance with technology through the invisible organization model. We also offer a network of property managers who can manage the properties for them. One of the things I want to address is what you eluded to about the ease of trading stocks with a click of your mouse. The Wall Street people I talk to that like to invest in stocks says that exact thing. They say, “I can go and login to my account. I can be in and out of a position quickly. It’s got liquidity.” I would argue that liquidity is a detriment to the stock market, not an advantage. Liquidity is a disadvantage, the lack of liquidity in real estate, meaning if there’s more friction in the transaction. It takes longer to sell. You can’t sell it with a mouse click is actually a benefit. Because liquidity creates volatility. We’ve all seen this. Especially as the high-frequency traders have moved into the market. We’ve had these flash crashes and things like this where the market can quickly crash because you can trade with a mouse or even worse with a computer and an algorithm. With real estate, you have time to react to changes in the market because the changes happen slowly.
The other great thing about income property is that you can adjust your strategy as you go. You can constantly renegotiate the deal. Unlike stocks bonds and mutual funds, precious metals or any other asset class is a multi-dimensional asset class. For example, if you have a stock that doesn’t pay dividends, it’s one dimensional. It’s buy low, sell high. That’s the entire game. If you have a dividend-paying stock, it’s buy low, sell high, collect some income during the time that you own it. It’s two-dimensional. Income property, however, is multi-dimensional. It’s buy low, sell high. It has income, tax benefits, leverage, and then when you sell it, you can do 1031 tax-deferred exchanged. You can also get to reinvest all of your assets rather than your after-tax profits in the next deal. The compounding effect of doing that over a lifetime is absolutely staggering. It takes years to see that. When you trade a stock or you sell a business, you’re paying tax and then you’re reinvesting whatever’s leftover. With income property, you can just buy it.
I sold an apartment complex that I own with a client of ours. We bought it for about $2.7 million and we sold it for $5 million. We owned it for 3.5 years. I’m doing a 1031 exchange with that. Buying that property was also with a 1031 exchange. The property that I owned before that one was sold for $8.2 million and was purchased with $4 million and change. I never paid tax. I traded all that money into the new deal, now I’m out of the new deal, into another deal and I’m not paying the government. I get to reinvest all of it.
I’ve been a real estate investor on a smaller scale. I do understand the benefits, what you did and how it’s worked for you. That’s assuming the market continues to go up. We’ve traveled the pathway from 2008 to 2019 with no significant downturns. The point I’m making is that when everything is going up. What you’re saying is absolutely right. The real benefit of things like the stock markets is that you don’t have to trade in an up fashion only. With the stock market, you can do options.
You can do options but you don’t have control over the assets. Here’s the benefit I haven’t mentioned yet. It’s the ability to renegotiate the deal forever along the way. I teach a strategy called refi until you die. It’s the most efficient way to extract wealth from your real estate portfolio. What you do is you borrow the equity back out of it because there’s no tax on borrowed money. You use that to either buy more properties or live on and enjoy the money. Whatever you want, it’s up to you.
When you buy a stock, you agree that’s the deal you took. That’s the deal forever. It’s got to go up or it’s got to pay dividends or you’re not going to make money. When you buy a property, you might buy it and yes, the price is fixed but the financing is not fixed. The interest rates might go down in the future and you refinance and you’ve renegotiated the deal. You might improve the property, it’s looks, it’s income, raise its rent, and you’ve renegotiated the deal. You might sell or lease the property on a rent to own basis, or lease option basis and you’ve renegotiated the deal. There’s no end to the amount of creativity that you can add to an asset because you control it.
I have something I teach called The Ten Commandments of Successful Investing. One of the most resonant commandments with all of my listeners over the years is commandment number three. Thou shall maintain control. It means that you should invest in things that you have control over. When you relinquish control, you invest in a fund, a pooled money asset, a stock, bond, and mutual fund. You relinquish control to somebody else. The investment bankers. The brokerage houses. The executives are managing the company. The board of directors managing the company. They’re all in control of the deal, not us as investors.
You leave yourself susceptible to three major problems. Number one, you might be investing with a crook. There’s no shortage of scandals on Wall Street. We all know about Enron, Global Crossing, WorldCom, MCI, Bernie Madoff, the list goes on. Number two, you might be investing with an idiot. Either through their criminality or their stupidity, you’re going to lose money. Assuming they’re honest and competent, the person managing this fund or company you’ve invested in. The third major problem is they take a huge management fee off the top for managing the deal.
There’s a great book that I discovered in 2004 called War On The Middle Class by Lou Dobbs. In chapter two, Lou talks about the money, the compensation that the board of directors, CEOs and executives of companies are getting is disconnected from what the shareholders and the employees are getting. This is legal but it’s completely inequitable and unfair. For example, Lou Dobbs talks about Larry Ellison, the Founder and CEO of Oracle. From 2000 to 2002, Larry’s personal take from Oracle was $761 million. In a couple of years, he got almost $1 billion out of that company. That would be fine if all of the shareholders were making a ton of money. In that same two-year period, the stock was down 60%. There’s a disconnect and that is the problem. Commandment number three, thou shall maintain control. Don’t leave yourself susceptible to those three pitfalls.
I’m fascinated with the topic and you’ve got so much to share. I’ve read somewhere on your website that you have an event coming up. Is that an event that’s open to the public or is that for your members?
It’s called Profits in Paradise. It’s an annual event we do and it’s in Orlando. People can find out about it in JasonHartman.com, it’s a great event with a variety of speakers. We’ll have properties being presented and talk about financial analysis, saving money on life’s largest expense taxes. We’ll probably talk about asset protection and state planning. We’ll have various experts and it’s a two-day conference in Orlando. If you’ve meant to visit Disney World, you can combine the trip and do both at the same time.
The event is where people can go to learn about all the things that you’ve mentioned. If they’re serious about real estate investing, they could find out about properties at this event. Is that right?Business success is largely about the model of the business, not about the industry or anything else. Click To Tweet
At the event or on my website at JasonHartman.com, they can reach out to one of our investment counselors. Listen to the Creating Wealth podcast. We’ve got tons of free information. One of the things I’d also say is that we live in the golden age of self-education. Most of this education is free or almost free, so take advantage of it. It’s awesome that we can do this nowadays.
Readers, Jason Hartman is a master at real estate investing and has proven so by building his own network substantially over the years. He has created a system that will allow us to step in and work with his own people to secure real estate and use it as an investment vehicle that could potentially last a lifetime. Jason, I have a question that I like to ask my guests and it’s the question that helps readers get to know you a lot better. Who, in all of space and time, would you like to have one hour to enjoy a walk in the park, a quick lunch or intense conversation with?
You make it so difficult to pick one. When I was seventeen years old, I discovered four great mentors: Jim Rohn, Denis Waitley, Zig Ziglar and Earl Nightingale. I was fortunate enough to go on a speaking tour with Zig Ziglar. I had Denis Waitley on my podcast. I did some work for Jim Rohn for a little while. I’m going to have to say the late Earl Nightingale, I would love to talk to that guy, he was a true great intellectual. It’s hard to pick one because there are so many.
Occasionally, I’m able to arrange a meeting with some of the people that my guests talk about. In this case, I’m not sure I can handle this one. If I could, would you mind if I come along with you and hang out?
You’re welcome to come.
The grand finale, the change the world question. What is it that you’re doing or would like to do that truly has the potential to change the world literally?
I have a little legal text startup that I’m working on called FreeCourt.com. That could be a disruptive game-changer business. I’m excited about it. It came out of my own frustrations in business and providing access to people, access to resolve disputes for free. Nobody can afford to go to court to resolve disputes. The law is the foundation of civilization, I love the law, but a few people have access to it. Even people that are successful don’t have access to it. It’s too expensive. Especially people in foreign countries with poorly developed systems. This is a way for people to come together, resolve disputes online for free. That could be a game-changer business. It’s a passion project for me. I’m certainly not doing it for money. I haven’t made a nickel with it. I’ve only spent money on it so far. I’d like to see it come together and see how it goes.
It sounds like a great idea. It sounds like a game-changer and I’d love to hear more at another time. Jason, I want to say thank you for sharing so generously so much information and wisdom about real estate, about you and investing. I know you have a free giveaway. Why don’t you tell the readers what that is?
I want to handpick some of my eBooks, which are notes on podcast episodes and details about them and so forth. Of course, a lot of my content is free on my website. For your readers, I’m going to handpick five of these eBooks, provide them to you so you can provide them to your readers.
This has been a great episode, lots of learning, lots of wisdom. I can’t wait until we get a chance to talk again soon.
Happy investing to you and your readers.
Resources Mentioned in This Episode:
- Jason Hartman
- Episode – past episode with Jason Hartman
- Blue Ocean Strategy
- Creating Wealth podcast
- Denis Waitley – previous episode of Creating Wealth Show
- Man’s Search For Meaning
- War On The Middle Class
- Profits in Paradise