AMA 105 – Smart Indianapolis Real Estate Investing With David Porter

 

David Porter is a long time client of Jason Hartman’s real estate company. He has been working closely with Jason’s team since 2009 and has made several investments in both Indianapolis and Arizona. He catches up with Jason about how he is doing with some of his properties, talks about why the Indianapolis market is so great, China’s economy, the future of shipping, and more on this week’s episode of AMA.

 

Key Takeaways:
3:10 – David first bought his Indianapolis property in 2009.
8:40 – David talks a little bit about his background.
17:10 – You’re more in control with real estate investing than you are with stocks.
22:15 – Take advantage of your ability to borrow and invest it in a conservative way.
24:25 – David has since an increase in retail shipments this year.
28:45 – Will China be stronger than the US’s economy?
33:15 – Jason and David think the United States can stretch out their debt problem for a while.
41:50 – 3D printing, glowing trees, and more. Jason talks technology.
49:30 – David wants to buy homes he can see himself or his children living in one day.
53:50 – David has experienced a 700k appreciation since he started in 2004.

 

Tweetables:
Cash flow is a pretty reliable thing. I mean, it’s not perfect, it does change, but it doesn’t fluctuate a lot.

 

Mentioned In This Episode:
Abundance by Peter Diamandis
Makers by Chris Anderson
Khan Academy
David Porter’s first interview – http://www.jasonhartman.com/89-%E2%80%93-the-%E2%80%9Cfree-lunch%E2%80%9D-metric-what-it-tells-about-income-property-%E2%80%93-an-impromptu-discussion/

 

Transcript

Jason Hartman:
It’s my pleasure to welcome on of our clients back to the show. He was actually on a long time ago. I think it was maybe 5 or 6 years ago when he started investing with us. His name is David Porter and it’s a pleasure to have him join us today. Dave, welcome, how are you?

David Porter:
Great, Jason. It’s great to be back with ya, yeah, I think it was a good 5 years ago when I last joined you on a podcast.

Jason:
I remember that day all too well. I remember I was rather stressed out sitting in my office and your investment counselor, Sara, kind of came into my door with you and I was thinking, please don’t bother me, I’m so busy right now! Then Sara said, Jason, you gotta hear his story. This is David Porter, our client and you just gotta hear his story and it was a really cool story of, I think, your first investment property that you got from us Indianapolis, right?

David:
Right. It’s so funny, you think, Jason, when we first met the economy was crashing. It was 2008. Yeah, some of these foreclosure opportunities were developing. I purchased my first property with you guys with Indiana.

Jason:
Good stuff. Then you started buying up Indianapolis, you were kind of quite the real estate mongol there. I don’t really know what you’ve done all these years. I know Sara has been in touch with you, but I haven’t..I hear about you once in a while, but tell us how it all went and what you’ve been doing and so forth.

David:
So, let’s see, we got started, I just looked at some records before we got to talking here. We started talking late 08. I purchased my first property in Indianapolis in March of 2009. That was an unbelievable…You think about it now since the prices have gone up since then, but $85,000 in that foreclosure market, we picked up a 3000 sq ft, 5 year old home in a suburban, very, very nice neighborhood. It’s incredible. That property today is renting out for $1250.

Jason:
One of the things that I was talking about way back then and I’ve talked about it many, many times since then. I’m probably boring my listeners saying the same stuff over and over, but it was the concept of buying below construction cost. It was also the concept I’ve talked about a lot that I call regression to replacement cost. You have a background in financial services and then the transportation business, shipping and trucking companies and so forth. By the way, I wanna ask you some insights, because those are really interesting parameters about the economy and global and national trade and so forth, so maybe we’ll get to that, but you bought this house; I thought you paid $89,000 for that house and your insurance company told you you had to insure it for $240,000 or something?

David:
Yeah. Your memory is very, very good. Those numbers are almost spot on. That was the story repeatedly, because after that I bought 8 more properties in Indianapolis. When you think about it, it’s okay, the insurance company made a mistake, they’re trying to charge me too much, and all that kind of stuff, but it kind of makes sense when you think about it. To rebuild and buy all the lumber and to create a 3,000 sq ft house, it’s going to cost you a couple of hundred thousand dollars, it doesn’t matter what you pay for it. So, that’s kind of their thinking and that’s what I kind of had to do. I shopped it around.

Jason:
So you bought the house for $85,000 or $89,000?

David:
$85,000

Jason:
Okay, $85,000 and the insurance company told you you had to insure it for $240, is that?

David:
It’s real close, I don’t remember the exact number, but it was $240 or $250 or something like that.

Jason:
So, at first, that must have upset you. You’re thinking, why do I have to pay insurance on such a large amount when I only paid $85,000 for the house, but the insurance company was thinking, if that house burns down, that’s what it’ll cost to rebuild it, right?

David:
Right, as mad as I was, the only thing that would have been worse is if they’d say, no, we’re only going to insure it for $50,000, because you only paid for…

Jason:
Yeah, that wouldn’t have been good.

David:
Yeah, the way you put that. It was really a great way for me to think about it. There was blood in the streets at that time. Again, the economy was falling apart, people were very concerned about what was going to happen. I’m telling my friends, hey, I’m buying these houses in Indiana, so I’m here in California. They were like, okay, Dave, you’re buying houses in Indiana, that’s really strange.

Jason:
They probably thought you were crazy right?

David:
They thought I was crazy, absolutely. I didn’t know at the time we were buying these homes over the course of 3 years. You never know if you’re buying at the bottom or really where you at. I’m a very conservative investor, I don’t like a lot of debt. I felt it was a very conservative investment, because based on what I knew the rents were and the rental market was relatively strong despite everything else because everybody else was losing their homes. The rental market is still a great place to be me. Even if it went down 10%, I mean, how much lower could it go given the fact I’ve got this plot of land in a nice suburban area and relatively new construction and good size, right? How much lower could it go? It couldn’t go to nothing like a stock.

Jason:
I agree with you. Even if it did, you’re still really a prudent cash flow investor. Cash flow is the name of the game if you get the capital appreciation. Hey, you’ll take it, I’ll take it, that’s the icing on the cake. Either way, cash flow is a pretty reliable thing. I mean, it’s not perfect, it does change, but it doesn’t fluctuate a lot. These investors, well, they call themselves investors, I call them gamblers, but who invest in these high priced markets just waiting for something incredible to happen, I don’t know, I think they’re in trouble.

David:
That’s speculation, right? One of the biggest regrets I have in my real estate career is one of the houses I first bought to live in. California went through one of its down markets and I sold it at a loss and wrote a check to leave and I wish I would have just held on to it, I’m sure you’ve heard that a million of times, but other than that I’ve never sold property. I think there’s only so much real estate. They’re not making new real estate. If you have property in a solid area, that’s a great long term investor. My whole strategy around this is to create a nice passive income stream to take me into retirement.

Jason:
Absolutely. I think you’re doing a great job at that. So, tell the listeners, if you would, Dave, how many properties did you end up buying in Indianapolis or greater metro area of Indianapolis?

David:
So, I bought 9 all together in the greater Indianapolis area.

Jason:
What gave you..I mean, you saw the blood in the streets. Back then you were in the shipping business. You were in the container shipping business and that was experiencing a down turn. I mean, global trade was suffering. I used to read articles and I remember asking you about this and there were just empty shipping containers everywhere. It wasn’t even wise to run these freighter ships, because, you know, there was so little trade. It was a scary time. What gave you the confidence to invest back then?

David:
You know, it was really the best place to go at the time with your money. So, I had a career in shipping for about 20 years at the point, so you’ll learn I’m not a very good market timer. In 2007 I left the transportation business to go into financial consulting for investors. We will putting together portfolio of stocks, basically mutual funds, of high net worth investors. At the time I heard you commercial, I mean, things were just falling through the floor. Lehman brothers thing was happening at that particular time and I was just kind of curious. There must be another way.

When I learned about the approach, when I saw, again, these assets in some over built markets that taken such a hit, but the rents had stayed solid and my goal was rents. My goal was the cash flow. My welfare would be independent of the value of the underline asset really, as long as the rents hold up. I really liked that idea. If you think about a stock portfolio, a mutual fund portfolio, the rule of thumb for advising clients for retirement is you can take out about 4% of your portfolio per year and that’ll last you well into your retirement, perhaps even 30-40 years. Things like that. They run a lot of back testing, there’s no guarantees with that, but it’s kind of safe.

So, when I looked at the kind of income I could generate with the portfolio of houses, I would need much more money invested in mutual funds to generate that equal amount of income. So, that’s the way I looked at it. What would I have to invest in order to generate a certain amount of income. Real estate was clearly the winner at the time. It was fact back. I saw the market was so beaten up, I didn’t see a big down side even on the value of the asset itself.

Jason:
I agree with you. When you were buying the properties in Indianapolis, which maybe we can get to, but when you were buying those were you paying cash for them or were you getting financing on them. I can’t remember, I think you mentioned on the show a couple of years back.

David:
It was a combination of the two. At the time when I went into this, Jason, I had zero debt in my life. Zero debt.

Jason:
And you met me and you got into debt, right?

David:
Yes, you corrupted me.

Jason:
I’ve done my job.

David:
I’m still conservative. My cash flow has paid off on several of these properties, but what I did I just had some other property that was owned outright. Basically, if you were credit worthy at time, they were throwing money at you, very low interest rates, historically low. I did take out a loan and I’m paying on it today. It’s 3.49% fixed interest for 30 years.

Jason:
Oh my gosh. Until recently, Dave, you’ve been getting paid to borrow that money, for sure. I mean, I would say, and I’d have to admit as much as I don’t like admitting this or even have it be this way, that inflation is actually pretty darn low this last year now. It was definitely higher in the last few years, but it’s calmed down. I’m really surprised. Do you listen the podcast regularly?

David:
Not regularly, but sporadicly. I’ve listen to a couple dozen of them over the years. I haven’t heard any recent ones.

Jason:
I’m surprised inflation rates aren’t higher, I’m surprised interest rates aren’t higher.

David:
I am too.

Jason:
I think inflation is coming back, I don’t think we’ll see it low for very long.

David:
It’s not going to last forever. I did hear, you interviewed Richard Duncan. He is my favorite economists and even he as bright as he is and he does this full time, you know, are we going to die a death of icey deflation or hyper inflation, I mean, it’s hard to tell. Neither one of those scenarios is very good, but clearly what we’re doing isn’t sustainable.

Jason:
Who the heck knows. It would be sort of possible to predict economic scenarios with some accuracy if it wasn’t for central bank intervention. You just never know what they’re going to do. They just interfere with markets and they pervert the whole thing. You can’t predict stuff very well because of them. I mean, you could think, what would they logically do and you can sort of predict that, but it’s still, you know, it’s difficult.

David:
I don’t think we’re operating in a logical world right now. Richard Duncan puts it real well and I think he said it on your podcast. This is what really broke my heart. When I was in the financial services industry. I was with a very good firm. They were thinking about things, they weren’t speculating in stocks or penny stocks or any kind of thing. It was a pretty conservative approach, but people would like to think they’re investing in capitalism, but they’re not investing in capitalism.

As Richard Duncan says so well, it’s sadism, and that’s to your point. What is the government going to do with the banking system? What’s the reserve requirement? What are they going to do with interest rates? All these things throw stocks for a loop. You know, when you’re taught in school and I have an NBA, I am a fiance major, that’s my training. They tell you that you evaluate stocks by the value of earnings of the company. Well, I wished that was the case. It’s not the case, it’s part of the equation, but..

Jason:
It’s more about the story, right?

David:
Yeah, it’s the story and it’s what the government decides they’re going to do with their policy and how that’s going to impact a particular industry.

Jason:
That’s ridiculous.

David:
And there’s no way to factor that into a spreadsheet.

Jason:
I agree with you. So, what exactly was your background in financial services? Were you an adviser, did you work with clients and help them invest their money?:

David:
Yes, I was. I was a registered investment adviser. We dealt with high net worth clients and we put together portfolios of index funds, so within in the world of investing that’s a pretty conservative, reasonable, well-diversify way to go. We had all types of portfolios that would be in alignment with somebody’s age and risk tolerance, basically.

Jason:
Ladies and gentleman, what we have here is a defector.

David:
I still have a foot in the camp and..

Jason:
I’m glad you came over to the other side.

David:
I am too. So, going back to my investing in real estate story, I came to realize largely with your help and I can honestly say if I hadn’t attended some of your sessions and had some of the conversations, and read some of your material, I wouldn’t have thought about it this way, but having untapped ability to borrow, having that ability to borrow and not utilizing it is kind of like sticking money under your mattress, you know. Maybe it’s even worse than that because you don’t even get the money.

So, what I did is I took that ability to borrow and I put it to work in a very, very, very conservative way and it was clear to me my income stream would more than pay for debt service I would have and in addition you get all the benefits our tax code allows us to do with those interest payments. So, it really helped me a great deal. I don’t borrow as much as I could borrow. I’m comfortable where I’m at. I’m still in a very conservative position, but what I did was I took some money out of some property holdings I had and paid cash for a number of properties in Indiana.

Jason:
So, you didn’t really completely follow my plan. I would have said lever everything up.

David:
I know.

Jason:
Because it’s kind of counter-intuitive, I think the more conservative position is to actually be the borrow. I know, I know that goes against the grain to what a lot of people think. I completely get it, you know, I used to in the old days think pay everything off and, you know, I remember having this conversation with a friend of mine. We were on the board of a caner charity in Orange Country, California, where I used to live. Her name is Katherine. I remember her parents had some financial hardship and I remember thinking, gosh, they were losing their house.

They had this gorgeous home and they were going to foreclosure and I remember thinking, you know, the thing to do is to just pay off your own home so at least you own that and all the other investments could be leveraged and you’d never lose your house, but the reality is we have a perpetual lean on our houses called property taxes and in some cases a second lean called a home owners association.

You know, those agencies or their investors, because people buy tax leans as a trader-able asset, they look at those in a predatory fashion. If you’ve got a lot of equity, you’re target. I don’t like having big equity in real estate, even though I own some homes with equity, but if I could lever them more, believe me I would.

David:
So I’m kind of in between where I was and where you are now, but..

Jason:
Move the needle a little bit.

David:
You’ve moved it a lot really, you know. It’s worked out well. Also with Platinum’s help, I went into Arizona. So, that’s a different market. You told me at the time, I went into Indiana, you said, Dave, you were cautioning me, you said, you need to get more diversified. You’ve got too much in Indiana. You said, Indian is like a bond, you shouldn’t expect a lot of appreciation there, but it seems like the rents are pretty stable, so it’s good for that if that’s what you want to have and that’s what I was looking for. The income, the stable, long term income, but the Phoenix market, as you well known and you’ve taken well advantage of, got beat down awfully hard.

I think the dynamics of that market is you got the weather there and a growing economy and it attracts people and if you look at the demographics of North America, I knew people were going to come back to Phoenix again. So, we bought a couple of properties in suburban Phoenix, Gilbert and those have worked out extremely well. The thing I love about Arizona is the property taxes are low, insurance is low, and I did get some really nice appreciation on those properties as well.

Jason:
Yeah, Phoenix is a very desirable city. Now that I’ve lived here for a little over 3 years, it’s kind of a gem. A lot of people don’t know about it. People in California that lived in Orange Country, where I used to live and LA where I grew up as a kid, they think I’m nuts. I ask them like, when was the last time you were actually here? You know, it’s a really nice place. We’ve got super swanky restaurants and all kinds of nice things here. Other than three or four months, hot, but it’s a dry heat, it’s a pretty nice place. Although, right now, it doesn’t make sense for an investment stand point. It’s too expensive. It’s a hybrid market. Indianapolis is a linear stage of California. You’re in Southern California, right?

David:
That’s right.

Jason:
That’s a sicklier market. So, Phoenix is in between the two. We’ve moved in and out of Phoenix a couple of times. Sometimes it just gets over valued or at least, maybe I don’t want to call it over valued, I just want to call it where the cash flow isn’t good enough for us and that was one of those time.

David:
But, I’m holding on those properties there and I think that..

Jason:
Your basics are low.

David:
Yeah and it’s worked out very, very well for me and on top of that we’ve got a couple of properties I’ve held for a long time in California. So, yeah. I’m a happy real estate investor.

Jason:
Good for you. One of the things I wanted to go over was that concept you were…Oh gosh, forgive me, I’m having a senior moment here. See, I can finally say I’m having a senior moment.

David:
Are you over the line now?

Jason:
No, I’m not over the line. The AARP is still a long ways away I’m glad to say.

David:
Good for you.

Jason:
Oh gosh, it’s something you just mentioned. It was the concept of debt or…eh, I don’t remember. I’ll remember after we finish the talk here today, of course. But, what are your thoughts..you’re in the trucking business now, so what do you do exactly?

David:
So, the company I’m associated with in Southern California, we do local trucking and a large part of what we do is taking domestic shipping containers to the railroad from all the warehouses that are unloading all these containers that are coming from China, Vietnam, Japan, Korea, and so forth. We do a lot of local trucking shuttling goods from the harbor to the railroad most of the time and then we also consolidation/de-consolidation, and some warehousing work as well.

Jason:
So, your industry has a really good parameter on the economy. You know what the volume of trade looks like, where it’s coming from, where it’s going to. Are there any thoughts that you have or ideas that you just wanna share or maybe we can sort of hash them out?

David:
What I’m noticing..So, we deal with a lot of the large retailers from all over the country because the goods that we’re picking up here they wind up in Chicago, New Jersey, Atlanta, Dallas, Memphis, where ever for the large retailers. It seems to have been a strong retail session. At least, they ordered a lot of stuff. I don’t know if it’s going to sit in a warehouse on the east coast or not, but I can tell you in previous years we hadn’t seen this level of activity. This is, what we call, peak season in shipping is a season from basically labor day up until just after Thanksgiving leading up to Black Friday there and all the shopping that gets done. This peak seasons was unbelievable. It was extremely busy. I haven’t seen it this busy for many, many years.

Jason:
Are most of these goods coming from good old China?

David:
Yeah, especially in California. Our manufacturing zone is called Tijuana. No body is making anything here. What ships out of here is brought in from overseas or just over the border in Mexico or Tijuana.

Jason:
We can thank NAFTA for that for better or worse. What are those called, the Maquiladora zones.

David:
Exactly.

Jason:
I remember Ross Perot talking about them in the giant sucking sound.

David:
He was right about that.

Jason:
He was right about a lot of things. I wish he would have been elected as nutty as he seemed. I think it would have been the only guy who would have actually shaken things up and made something different.

David:
You know, it’s fumy, I voted for him and then I voted for him the second time and he kind of got a little off kilter with some of this theories about the Republican dirty tricks committee trying to ruin his daughter’s wedding and all that. You know what, even if that’s true, I wouldn’t say it.

Jason:
Makes him sound like a paranoid freak, right?

David:
Exactly.

Jason:
So, there’s a lot of talk about how China is really beginning to slow down and they are suffering and, you know, years ago you used to hear people like Peter Schiff and others like him, sort of the doom and gloom committee talk about the concept of de-coupling. How China will de-couple from the United States, meaning they’d create their own middle class, they’re own consumer base and they’ll have countries around them that trade with them and they won’t need us anymore and when they won’t need us they’ll stop buying our treasury bonds and our interest rates will sky rocket and we will be dead, but the exact opposite has happened oddly. It’s really interesting. They’ve just not been successful at creating their own middle class and their own consumer base. The people with money are bringing it over here.

David:
Exactly and that’s great for the real estate situation we’re talking about.

Jason:
It’s great for the everything situation.

David:
And the stock market as well. When I read about their real estate market, the bubble is finally..at least the air is coming out of it. So, it’s interesting, I mean, my view on that, you know, Peter Schiff. He’s interesting. I read his books, but, you know, I think maybe he’s got a little too much invested in that gold camp and all that type of stuff.

Jason:
Yeah, I agree. The gold camp really has gotten it wrong most of the time.

David:
Well, you know, they’re going to be right. What do they say? A broken clock is right twice a day, but I don’t discount it entirely. Overtime, I would not be surprised to see all of that to come to fruition over time. I don’t think that’s going to happen, you know, by 2020 or any time real soon. I mean, we just heard some statistics recently how China their GDP is going to surpass ours earlier than what everybody expected prior to 2020. Some measures of the economy would show that their economy is larger than ours right now, so I think over time you can kind of see how the trade is going and what the direction is, but no body wants to piss off their largest costumer and that’s us. For better or worse, it’s kind of hard to bet against the United States in the long run.

I do have some very serious concerns about this house of cards we have with our debt situation and all that, I don’t know how that’s going to play, but again, going back to Richard Duncan, I hate to keep quoting him, but this could continue for much longer than what for most people think it could continue. Japan has shown that. Their economy is not like the model economy or anything, but people would rather hold yen than rupees right now. People thought Russia was the way to go not long ago.

Jason:
I just think as illogical and unfair as it may be, the United States finds itself in a really impressive place in history and has benefited from a lot of that. As mismanaged as it is in so many ways, I think they can kick this can down the road for decades long.

David:
That’s exactly right, you know. So, to prepare your entire life for something..hey, it could happen. China could make some nutty announcement next year, I kind of doubt it, it could happen, but I would tend to agree with you some time after 2020 we’ll be well into retirement and who knows. You can’t live your whole life in fear.

Jason:
I agree with you. The interesting things about China, and we don’t have to talk about this forever, with China as soon as they start to maybe gain a foot hold, say things go really well for China, then they’re going to be facing this really huge ugly demographic problem and that’s the same thing is really behind hurting Japan so much or at least inhabiting their recovery. They just don’t have any young people.

China has far too big a male population, not enough females, and the one child policy in 10 years, they’re going to be looking at a really tough demographic problem. If they ever hope to get any real social safety nets there…I just don’t know if that’s ever going to happen. I hope it goes well for them. Listen, it’ll be nice if the whole world would prosper and we all live in harmony and it’ll be great, but if you’re comparing countries, like you say, it’s really tough to bet against the United Sates. I just don’t know how you could really do it.

David:
Yeah, it really is. The one thing that really is very interesting and I’m sure you’ve read about this, how China and Russia are gaining away from…

Jason:
They’re trading outside of the dollar.

David:
Of the reserve currency of the US. The thing that saved us, I think, the only thing that saved us that can’t save a Greece or an Italy is no body will allow them to indefinitely print their money and accept it. You know, we’ve got this weird license that allows us to do that. Other people can’t do that or they would be fined too. So, I don’t think that we’re so smart or so great or whatever. I think you’ve put it well. We’re in a unique spot in history. I think we’re allowed to do that. It’s kind of relic of what we used to be. It’s not rational or logical, we do get to do that and it’s saved our butts. No body gets to do that.

Jason:
I agree, I agree. We’re just kind of…We worked our way through the industry revolution, we won that guy, and now we’re just kind of lucky.

David:
Let’s hope we can catch up. There are some unique things going on right now. I’ll throw out a book too. Have you happened to read Ray Kurzweil’s Abundance?

Jason:
Oh, that’s actually Peter Diamandis.

David:
Oh! I’m sorry. Peter Diamandis, thank you.

Jason:
They talk about Ray Kurzweil a lot in there and Steven Colter was actually on the show. I love that book. It is amazing. It leads me to another question, but what were you going to say about that?

David:
I was just going to say that there is a lot of reasons to have home and there are with the advantages of technology and with the speed that things are moving along, people don’t even realize, you know, you’ve got technologies increasing every year and a half or so for the same cost. We’re at the point now, initially, we’re making experiential gains in what we’re capable of doing and what we’re going to have access to and that’s going to provide a better standard of living for everybody. I think the next 10 years is just going to be an amazing time for us.

Jason:
For the whole world. The whole world is going to benefit from this. We’re in a position where we have, what I’d like to call, the democratization of everything. You know, other than the wall street and cronies and the crony capitalism and the unholy alliance between, you know, government and mega business. I’m not even going to call it big business, it’s mega business, whether it be pharmaceutical companies or the banks or whatever, right. Elizabeth Warren, I’m definitely not a democrat, but she gave a great speech that I just posted on my Facebook page where she just outed all these criminals with Citi bank. Criminals, I’m using this word loosely, obviously. Just my humble opinion. You know, it’s just a total scam what’s going on, but the technology is just leveling and flatting and flatting the earth. I mean, crowdfunding, 3d printing, all of these things, gene sequencing.

Last night I watched a TED talk..Have you heard of this kick starter, this glowing plant?

David:
No, I don’t know about this.

Jason:
Oh, it’s mind boggling! Basically what you can do is you can go to a website now, and you can do this today, and you can design, for better or for worse, you know, it is scary I’ll admit. It’s Frankenstein whatever, but you can design your own life form made of whatever DNA sequence you want. You can put your credit card in and you basically, this website, helps you make this blueprint, and you can order this life form and the UPS guy will deliver it to you. Someone did that and made a glowing plant. It’s a kick starter project, they raised a ton of money, and they hope they ultimately trees will replace street lights. I mean just fathom that for a moment! It’s incredible.

David:
Oh my god. I’m going to check it out.

Jason:
Google it, you’ll find it. It’s an amazing time to be alive!

David:
So everything is leveling out. Another great example, they were talking about the Sony hacking situation with North Korea.

Jason:
Right, that’s kind of scary.

David:
I haven’t followed my way on to it, but this is dark side of the internet that you can get to do to, the dark net, what I heard yesterday, if you or I wanted to do that, it would cost us about $1,000 to find somebody in Russia or China that will do that for us. To take down a corporation for $1,000 bucks!

Jason:
Wow.

David:
When they started to talk about this, I thought the person would say 10 million dollars or something like that. $1,000 bucks! You could do it.

Jason:
Wow, that’s mind boggling. Now, that might cost you your freedom and your life, but wow, that’s mind boggling. The power is moving to the people and it is really, really cool. Now, one thing I wanted to ask you, because you’ve got so much familiarity with shipping and in the book Abundance and I’ve been talking about it for years on my show, but 3d printing. Is that going to move a lot manufacturing back to the US? It’s not for mass production, I understand.

3D printing is for more like artisan-type production and there’s a great book I read last year when I was in Europe and it’s by Chris Anderson who has written three great books that I know of. He is the editor of Wired magazine and I believe he owns TED now, the conference, and the book is called Makers. It’s all about the 3d printing revolution. I mean, are those ships be needing to come here quite as much because we’re just going to print stuff? I read an article yesterday we basically emailed a wrench to one of the astronauts at the international space station and what I mean by emailed is emailed the design for the 3d printing they have now and four hours later he had a wrench in his hand made of matter, made of atoms.

David:
Isn’t that amazing?

Jason:
It’s incredible!

David:
So, I’ve sat in some of these conventions I go to in transportation and logistics and that’s a very real thought. I mean, it’s not going to happen real soon, but to kind of ask two questions. Is 3d printing going to have a big impact on shipping? Yeah, I think it will in time. The second part is a lot of things are coming back. Again, with the dynamic in China, wages are increasing there. They’re calling it near shoring. It’s not necessarily coming back to the United States, some is, but a lot of it’s going back to Mexico. Some stuff was in Mexico and those Maquiladors moved to China, now it’s coming back.

Jason:
Wow, it’s really quite fascinating what’s going on in the world. What an amazing time to be alive. Just sit back and witness this stuff. Certainly we have our share of problems, but like I say, technology might save us all.

David:
Well, I think so too. I think that for our kids, I really believe there’s never been a better time to be alive in terms of there’s never been more opportunity for everybody. I mean, you could be the poorest poor person, maybe not the poorest poorest, but if you have the access to the internet, you’ve got unlimited education and access to information, role models..

Jason:
For free! You’ve got the Khan Academy, it’s free! You can learn, you can get 10 PhDs at the Khan Academy for free, it’s amazing.

David:
That’s just tremendous opportunity. I read where they’re predicting in the next 10 years, we’ll have our first high school billion. We already have plenty of kids that dropped out of college to become billion, but imagine a high school kid becoming a billion, not just because our currency is debased, but because they’re creating real value. Yeah, so it’s an amazing time. There’s unlimited opportunity out there. Yeah, there’s problems, but Jason, you’re a little younger than me, but when I was growing up and you probably heard some of that stuff too, I literally, my elementary school teacher in third grade told us, “You know what? I don’t think you guys will live to see 30, because there’s going to be a nuclear war.”

Jason:
Wow, really?

David:
What kind of manic teacher was..

Jason:
Today you’d get fired for that.

David:
I think justifiably so. That was a ridiculous thing to say to young kids, but that’s what we were worried about. Nuclear annihilation, cold war, all these stuff. There’s really, we’ve got these terrorists, but not massive nuclear annihilation as a very real possibly. There’s always something to worry about.

Jason:
There’s always something to worry about, but hey, before you go, I just wanted to ask you about real estate for a moment. Have you estimated your returns on your portfolio or do you just like collecting your checks and you don’t think about it too closely?

David:
Yeah, I tend to do it each year as I’m getting the taxes done. I can tell you that..well, just over the last 10 years, which is really kind of my real estate timeline outside of personal residences and vacation properties we use for our families and so forth. We’ve seen a 7 digit, I shouldn’t call it that, because that could imply up to $9 million dollars, but over a million dollars in just in appreciation and the return that we’ve earned, again, it could have been much greater because we didn’t chose to use a lot of leverage, but..I’ll tell you this, when I was running the numbers when I was doing the analysis in terms of what I was going to buy, routinely my returns with a moderate amount of leverage, not a lot of leverage, was 25% to 30%.

Jason:
Annually?

David:
Yeah and that was only assuming a 4% annual appreciation and I have received much more appreciation than that. I haven’t figured it out in terms of what is my appreciation. Really, the right way to think about this, I think, is what your appreciation has been, what your cash flow has been, and what’s your…and think of that cash flow in terms of the tax benefits you’re getting. Here’s the other thing, the great advantage of these properties that we bought in foreclosure. You get your statement from the county and it gives you the assessment.

Jason:
Your property tax assessment.

David:
Yeah. The 80% of the value was in the building, right. So you get depreciation on all that. So, I’ve had some very nice sessions with my CPA, because these properties I get to depreciate so much. It’s totally legitimate. I’m using the documents that the government is giving me, so it’s very much a tax advantage return. I’m not paying any taxes, obviously, on the appreciation and on my cash flow I’m getting a nice tax flow benefit.

Jason:
Yeah, depreciation is the holy grail of tax advantages. It makes income properties the most tax favorite asset in America by a long shot. I mean, I don’t know of anything even close, because it’s a phantom write off. You don’t pay anything to get that. Your property could go up in value, have positive flow, and the way IRS looks at it you’re still losing money, which is good in that sense.

David:
I don’t want to ruin that. It’s a beautiful thing. If you go back to the bond analogy you gave me all those years ago, it’s almost like it’s municipal bond. You get those wonderful tax advantages. The other thing I want to share with you too, Jason, kind of the experience of being a real estate investor is a person who has a full time job, a family, 3 kids, you know, on the go, some people are like, Dave, okay, you’re buying these out of state properties. First of all, that’s nuts. How are you ever going to see your properties? My answer to that has been, well, I’ve had rental properties in California and they’re in the same city I live in and I very rarely went by there. If you’ve got good property mangers and you’re kind of managing your property managers. My management of my property mangers consists of calling them when I see I have a vacancy or sending them chocolates at Christmas each year. I don’t spend a lot of time doing it.

Jason:
You send them chocolates? Wow. I never give anything to my managers, maybe that’s why they like you better.

David:
I’ll give you a great example and this is one of your property managers that one of your local market specialists turned me on to and, again, this was in Indianapolis. I wasn’t happy with my insurance premiums out there, so your local market specialists is the one that turned me on to the property management company. The property management company turned me on to a insurance group that allowed me to package all these properties and reduce my insurance premiums by 50% in that market. I wish I could remember right now, but I checked it out at the time, very high rated insurance companies. So, they can take very good care of you. I want them to like me more than the other landlord they have when they have one tenant and two houses and need to decide where they want to put the tenant.

Jason:
You want them to think maybe we’ll get some chocolates from this.

David:
Exactly. Let me get that chocolate benefit. You know, I spend very little time on this because I do use property managers. I’ve gone the other route and tried to manage it myself.

Jason:
You did self-management from a distance, because I do both and I’m just shocked that I could even do that. How was your experience? It sounds like you weren’t keen on it.

David:
I wasn’t. Well, I tired to be a property manager here on the properties in California what happened is when it started south. I wasn’t going by the properties enough and then when it started going south, quite honestly, I didn’t know what to do as far as taking people to court stuff and all that.

Jason:
Tell us what happened. What do you mean? Did you have an eviction?

David:
Yeah, I had an eviction. So, what happened at that point in time, I found a property manager and said, hey, get me out of this mess and you can manage the properties from now on and that’s what we did and it’s worked out great. I think these people earn their 7-8% or whatever it is that you’re paying them for me. Now, maybe if I was a retired guy and I liked doing that stuff, fine. So, the work I think with getting these investment properties was really deciding which ones you were going to buy and doing your due diligence in that regard. Certainly you were a big help, your team was a big help in helping locate the appropriate markets that had the good returns in certain areas in those markets and all that, but even after that you have to decide, okay, which house are you going to buy? I really enjoy that process. Again, with all this technology we have, you can drive down the street, you can look in your neighbor’s backyard.

Jason:
You can do it Google maps. You can drive down the street.

David:
Yeah. I did it with every single one of them. One of the earlier podcasts, I would look at the schools, what is the whole situation with the schools.

Jason:
Dave, I forgot, you are the guy that created or discovered the free lunch metric!

David:
You remember that!

Jason:
Yes. I remember naming it that. It’s a good idea. Feel free to tell the listeners. It’s on the old podcast, which I’m sure is still posted, you can find it at JasonHartman.com and maybe on iTunes. I don’t know, those old ones on iTunes, I think they drop off after a while, but it’s on our webiste, I’m sure. It’s still posted. That was a great idea that you did. Tell our listeners about that.

David:
Everyone has their own view the types of properties they want to invest in and there is a need for section 8 housing, there is a need for penthouses, and there is a need for solid single family residences, which is what I was looking for. I didn’t want any trouble. What I looked at was what was the percentage of children in the local school that qualified for free lunch. So, if it was below 50% it was an area that I was comfortable with.

Now, the houses that we purchased, I always wanted to think about it as, you know what, I’d live there or my kids totally comfortable and happy with them living there. I’m very proud of our real estate portfolio. I think they’re very nice properties and I’m proud to own them and I think we provide a very nice housing arrangement for people. That kind of was one of those tests for me. If less than 50% of kids in the local school get free lunch, I was happy with it. I considered it a reasonably solid economic area.

Jason:
That’s a good metric. Like you said, there’s an investor and a property type for everybody and you like the A properties, kind of the nicer properties. We have those and we have B properties and we have C properties. Honestly, the C properties, they have the great numbers, the tenants are just more flaky. They’re just more difficult to deal with. The thing I say about C landlords is it’s going to require a little bit more of your attention and it’s going to require you to manage your emotional state better, because you’re just going to have more trials with C type properties. We’ve got them all, we used to only do A and B type properties. We got into the C stuff because a lot of our clients wanted it. So, they can take their pick and you know, you’ve got your pick and your model and it works for you, so that’s awesome. I love it.

David:
That’s worked well with me, but you know, there were some of these properties that I bought that I hadn’t, I certainly had never seen them, because they were out of state. I may have driven through the general area and I didn’t go to see them after a couple of years after the fact. I mean, that happened. I would talk to people about that and they’d say, how could you do that? How could you just trust that everything is okay?

Well, I didn’t just trust. I did my research. I can walk through the house virtually, I can walk through the neighborhood virtually, I know everything about the schools, I know everything about the crime report in the area. I can pull everything, and I did pull all that information up, when I would ask them though, what about these companies you’re investing in in your mutual funds, do you know what’s going on? Do you sit at the board of directors meeting? Do you know if they’re about to get sued or are in the middle of a lawsuit or are considering being bought or buy something or some legal problem?

Jason:
Or the CEO is just about to get nailed for some huge sexual harassment case, you know, you don’t know this stuff.

David:
I know more, virtually, of the fundamentals of the investment on this real estate if I never, ever go there. People, if they’ve own Apple stock, they’ve been to Copertino, and visited with the manager, they don’t do that, but they’ll have no problem putting $50,000 in Apple stock. So, people really need to understand how they’re talking about things. Everybody hears about the nightmare land, tenant stories, and..

Jason:
Like the one story, right, that everybody has had to discourage them.

David:
Yeah, but I don’t know my tenants, they don’t know me, I’ve got great property managers. I spend, it’s really just the accounting stuff. I spend an hour a month on it and it’s not a big deal and it’s just an investment I’ve been very happy with.

Jason:
An hour a month for how many properties by the way?

David:
13 rental properties.

Jason:
So, 13 rental properties only takes you an hour a month? See, I tell people, and I know this is high, but occasionally if there’s like a problem property, it could suck up a little bit more time, so I just tell people assume one hour per property per month. So, if you’ve got 13, I’d say 13 hours a month, but you only spend an hour a month for all 13 properties, huh?

David:
I’ve had good fortune, I guess. I mean, I just don’t have big problems with my tenants. I mean, you’ve got the occasional dishwasher, air conditioner, it’s an email in the middle of other stuff I’m doing, I’d say yeah, do that. No, get another quote. It doesn’t take much time. Once you’ve got them established and you’ve got the property manager taking care of it, I don’t see how it could take me 13 hours a month.

Jason:
Yeah, I agree with you. I think as humans, I mean, certainly we all do this. I know I do it, I’m sure you done it at time, everybody listening probably has to, we all kind of get into our way and we sometimes mirco manage stuff, we get upset about something and then we just get all freaked out about it and then it sorta just occupies our emotions and then we go dump on other people. It’s not exactly a good quality, but we all have to admit we’ve all done it.

David:
Well, I’ve been more than willing to pay, whether it to be property managers or the initial stage by these properties that aren’t new properties that need aren’t new properties and need a little bit of rehab. Now, my brother in law who is a client of yours, I referred him to you, he kind of had a different approach. He took vacation time, he flew down there, he helped rehab the properties,

Jason:
He’s a hands on guy.

David:
Yeah, little more handy type guy. I didn’t want any type of experience like that.

Jason:
Me either. I don’t like that. We don’t do that stuff.

David:
You know, he slept in the property.

Jason:
Oh my gosh, he’s like my mom. My mom is like that.

David:
Working on it and painting it and stuff, but he likes that. God bless him, if that’s what he likes to do, then that’s what he should do, but I consider that some type of torture and I don’t want to do that.

Jason:
That’s called work and I don’t like work like that.

David:
To me it’s all about passive income, so we’ve developed that and that provides some nice benefits from pay down some of these and not only that, but we’ve used the proceeds to investment in another business, which is doing quite well right now and generating even more passive income. It’s just been really good all the way around.

Jason:
Good for you, that’s awesome. So, just to recap. I’m keeping you long here, but it’s just been a great conversation, so thank you so much for coming on the show. So, you’ve made over a million dollars in appreciation and how many years? When did you start?

David:
So, that would be starting in 2004.

Jason:
Oh, 2004, but when you started with us..I mean, that was your California stuff.

David:
Right, so I started with you in 2009. So, those properties, well, all I have to do is black out my California properties there. It would be about $700,000 in appreciation in the California and Arizona properties.

Jason:
See, that Arizona, it’s a hybrid, but you gotta be careful you don’t give it back. Well, you bought early enough, you’ll be okay. If someone were to buy today or in 2006 in Arizona, they could eat it.

David:
Right.

Jason:
Same with California.

David:
I think, you say, there’s no such thing as bad…you know, there’s all these different markets all over the country and everyone raises and falls and that’s the great service that you and your team provide, which market makes sense to be in right now based on what your goals are, right?

Jason:
That’s what we do, that’s what we watch for people, and the comparison though is the Indie properties gave you much better cash flow than the California and even the Arizona properties.

David:
Yeah, absolutely. Those are going to be hard to beat from a crash flow perspective. I’ve been very pleased with the stability, the tenant base, the economy there, and, you know, because we did buy at the time we bought, we got much greater appreciation than one would expect normally to get in Indianapolis. I think you could still by in Indie and still do real well from a cash flow stand point.

Jason:
Oh yeah, Indie’s still good. The prices are still higher than they used to be, but you can still make your cash flow numbers there, which is why it’s kind of our market. I mean, we’ve got other markets that are great too, but Indie has been a very good market for us. I personally made a lot of money myself buying properties there. I love it, it’s good, good stuff. Well, Dave, it’s very inspiring story and thank you so much for sharing it with our listeners and coming back on our show again. I really appreciate it. It was great talking to ya.

David:
Alright, my pleasure, Jason.

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