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Jason Hartman's introduction for today's Creating Wealth Show focuses around the notion of being an empowered investor. This is the main theme for the 2015 Meet the Masters Event, but is also a vital concept to keep in mind for all of your investment strategies.
Today's interviewee is none other than Jason's Aunt Joan, an incredibly successful real estate investor who, together with her husband, owns more than 70 single-family homes around the Sacramento, California area. 'Old-School' seems to be the buzz-word of choice, but Joan talks about how she got into real estate, why she still loves it and gives some great advice about property management and keeping your tenants on side.
Key Takeaways
02.27 – How do you become an empowered investor? Find out here and at the Meet the Masters event.
08.27 – The concept of win-win isn't enough. At least 3 levels means that everyone's interests are aligned.
16.42 – Jason Hartman asks his influential Aunt Joan about the beginning of her successful lifetime of real estate investing.
22.17 – Low-priced markets might look like the easy way in, but issues could mean big problems later.
29.36 – The Cyber Monday sale at www.JasonHartman.com is now on, with discounts of up to 40%.
36.39 – The information offered by Aunt Joan is available at www.SacRentals.com
42.40 – Be aware, both as an owner and a tenant, about who is paying the city utilities. Owners, flaky tenants could mean this is your responsibility.
45.45 – With tenant selection being so vital to success, you really need to master this in the early stages.
51.02 – One of the reasons that real estate retains such popularity is because it's such a tangible thing.
Tweetables
Self-management means you can deal with your own properties from 8,000 miles away and with tenants you've never even met.
The best advice for owners and landlords is to not even get into a situation where you have to evict someone.
You really ought to be aiming to get 1% in the rent-to-value ratio as an owner.
The success of real estate investing lies with you and your efforts as an investor.
Transcript
Introduction:This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit www.HartmanMedia.com
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:
Welcome to the Creating Wealth Show, it's Jason Hartman, your host and this is episode number 446. Thanks for joining me today, where you will hear a Thanksgiving interview of my aunt Joanie – I finally got her to come on the podcast. You know, the reason this is interesting is because as a child, my aunt and uncle in Sacramento (Joan and John) really, really influenced me a lot in my thinking about real estate investing. They were accumulating properties and it seemed like every time we went up there for whatever reason, whether it be Christmas or Thankgiving, or just for a visit some other time of year. My Mom and I would go around with them and see all these houses they owned and we were constantly looking at houses. I guess that's why real estate is in my blood. Joan claims to own over 70 rental properties. She would only say 'over 70′, I have a feeling it's quite a few more than that.
It's pretty amazing, if you think about it, and one of the things I've been focusing on a lot lately is this concept of alignment, and that's really our theme for our upcoming Meet the Masters event. There will be many talks and much focus on the concept of being an empowered investor. One of the themes here is 'How do you become an empowered investor?' Number 1: You follow my Ten Commandments, but especially Commandment #3 – you maintain control. You don't go and invest in someone else's deal. Now, this is also interesting because it brings up the concept that when you don't maintain control, you know the problem's there. You might be investing with a crook, you might be investing with an idiot – assuming they're honest and competent, they take a huge management fee off the top for managing the deal.
I was talking recently with a provider, a local market specialist in the Phoenix area, a couple of weeks ago and they said that they were going to open up a new fund to help people invest in single-family homes. Get this, this is such a crappy deal, it's not even on my radar. They said they thought they could return 8-10% to the investor investing in single-family homes and they claimed that they could 'cure' a lot of the problems that single-family home investors have. They do fund investing and like to group money together and get people to invest in funds and of course, we all know the problems with that. But then the interesting part is when he said 'We think we can return, pretty consistently, 8-10% by buying and fixing and renting out single-family homes within this fund.' I said 'Gosh, 8-10% is a terrible return.' You and I both know that investors can make 20%, 30% even 40% annually, all things considered, on their prudent, good, smart single-family home investments. I said 'Well, why would an investor do that?' His answer is 'There are just some investors that don't want to deal with anything'.
I thought that was amazing. If you just figure out how to deal with some stuff, it's not that difficult. It's really not that difficult. You can triple, or quadruple or make a return of five times what they were suggesting would be a good return of 8-10% annually. It's just mind-boggling. Part of the problem when you maintain control, when you follow Commandment #3, new challenges are presented, and all of you listening know this. It brings on some new responsibilities that you, the investor, have to deal with.
One of the ways, and one of the things we're going to focus on at Meet the Masters, and you're going to hear about in my interview with Aunt Joan (who owns over 70 houses), and by the way, I want to just do a little math with you. She claimed to having 62 of those "over 70″ – we don't know what the exact number is, we just know it's 'over 70′; she's being modest and I have a feeling it's a decent amount over 70, but I just don't know. I always used to think they owned about 100-120 homes. If you just take a $450,000, or let's just make it more conservative and we'll take $400,000 as the average value of those homes. See, they did it the old-school way. When the market got really bad in Sacramento, California and we had the financial crisis, in some areas I remember reading a stat that said Sacramento was down 48% and Aunt Joan doesn't think her portfolio was down that much. Let's say it was only down 30-40% – that's still a pretty big loss, and it could have been prevented through diversification. This is the old-school way; you buy a bunch of houses in your neighborhood, manage them, do a lot of elbow grease, how around to the houses all the time and spend a lot of time doing that. It does have some pretty big rewards, even though it is the old-school way, and you could accelerate this dramatically with 're-fi 'til you die', with inflation-induced debt-destruction, with my risk-evaluator formula and with diversification. Still, Aunt and Uncle John and Joan did pretty darn well for themselves.
Let's take $400,000 x 62 free and clear homes, and that gives them a net worth, just from that real estate portfolio of $24,800,000. I don't know how many more than 70 Aunt Joan and Uncle John own, but I have a feeling it's a decent amount more. So just from their real estate portfolio, they're probably worth $25-30 million! Look at the number of people who are retiring broke. All they did is the simple, old-school form of keep buying houses, rarely sell them and manage them well.
So back to this concept of alignment and empowerment. If you have your interest aligned in your investment portfolio, you are going to be an empowered investor. When I was 17 years old and I discovered Denis Waitley, Earl Nightingale, Zig Ziglar, Jim Rohn – those are basically the people who brought me up. They were pretty good influences on me as a wayward teenager, and they really made a huge difference in my life. Well, one of the things Denis Waitley used to always talk about is win-win. Later, the late Stephen Covey talked about win-win or no-deal, in The 7 Habits of Highly Effective People.
This concept of win-win is a great concept, so as an investor, we would probably think 'Okay, well I'm going to hire a property manager and I'm going to have them manage my property. Then I need to make sure that the deal between my property manager and myself is a win-win deal'. That's one layer of it, but I say you really need to go on to one more layer. There really are more layers, but at least one more layer. It needs to be win-win-win, so that you as the investor win, your property manager wins (meaning your interests are aligned) and then your tenant wins, so that they're going to stick around and want to be a good tenant. Win-win-win.
Where does this stuff get out of alignment? I've been focusing a lot on this lately, and I have – as you probably know – a couple of apartment properties. Two were in Phoenix, one recently sold, and I heard from one of my partners on one of those deals that our property manager was charging the tenants a lock-out fee. For example, if one of your tenants in this apartment complex lost their keys or locked their key inside the apartment building, they would charge them $150 to let them back in to the property, or make them a new key. That is absurd, and my partner called me – he was pretty irate about this and I agree with him completely about what our manager, who we bought this apartment building with and partnered with, was doing. My partner said almost exactly this "How is your tenant going to feel if their rent is $700/month and they're charged $150 to get back in their unit?" This is an example of non-alignment, where the manager is basically screwing your tenant over, and your tenant is not going to want to be a good, long-term tenant in the property.
It's the same as the person who's saying "We can return 8-10% buying single-family homes inside of a fund". It's non-alignment all over the place here. It's not win-win. This is the kind of deal you want to avoid. You want to make sure it's a win-deal for you, a win-deal for your manager and a win-deal for your tenant. Your tenant is your customer. If you owned a business, if you had a restaurant, you would want your customers to come back, right? You need to insist that your customers pay the bill, and when they don't pay the bill (your rent, in other words), or when they don't take good care of your property, you need to be firm with them and make them live up to their part of the bargain. It goes too far, though, when your manager is basically screwing your tenant over. This all gets completely out of alignment.
That's one of the reasons I do like the concept of self-management. I'm working on some tools that can make it much easier for you to self-manage your property and buy à la carte services from your property manager, rather than whole completely services, the way the traditional management game is usually played, and buy à la carte from local real estate agents. It is amazing to me that you can really, really – and I've done it many times – self-manage a property you've never seen that has a tenant you've never met, from 2,000 miles away. It doesn't matter, it could be 8,000 miles, it could be 200 miles. The distance doesn't matter; the point is it's a property you've never seen and a tenant you've never met.
You can actually do that, and in our Members section, I believe two of our monthly Members-only conference calls were on self-management. I've done some podcast episodes on it as well, but I went pretty deeply into it in the Members section, and all of those calls are available if you just join for a whopping $120/year. You'll get some big, fat discounts as well. In fact, if you're coming to Meet the Masters, you can recoup more than your membership fee if you just join first, and then you buy your ticket for Meet the Masters. Check that out at www.JasonHartman.com and listen to the self-management conference call. It's all recorded so it's in the archives there, and it really would be a good opportunity for you. Also, go to the website and in the little search bar, just type 'self-management' and you can see all of the prior podcasts and some blog posts about self-management.
The whole focus here is become an empowered investor. Follow Commandment #3 and then take on these additional responsibilities when you do follow that commandment, so you'll increase your returns dramatically. You make these responsibilities easy for yourself, so you get the best of all worlds. You create a win-win-win deal, you capture much, much higher returns that investing in some fund or some pooled money asset where you might be investing with a crook, or you might be investing in an idiot. Even if they're honest and competent, they take a huge management fee off the top for managing the deal. You make the deal a win for your tenant, and that's what Aunt Joan is going to talk about in this episode as well.
So, I think you'll enjoy this interview; we did have a few times where guests were coming over for Thanksgiving and rang the doorbell at my Mom's Southern mansion, and Coco the dog started barking, so excuse those. Hopefully our editor got a lot of those out of there, and anyway, this is really interesting to hear from someone who has accumulated over $25 million, I estimate, in net worth, just being a very simple, old-school real estate investor. You can do it much, much better than this with some of the new techniques – the risk-evaluator, the rent-to-value ratio – Aunt Joan is getting lousy rent-to-value ratios – the 're-fi 'til you die' concept and the concept of inflation-induced debt-destruction. Those are the major things missed in the old-school investing concept, so you can take what she's done and amplify it dramatically. Maybe you can triple it. Maybe you can quadruple her results. Maybe you can do even better than that.
Make sure you get your tickets for the upcoming Meet the Masters event in January, where we're going to share all of our experiences and tools for you to become the empowered investor. Do that at www.JasonHartman.com now. The pricing is going up as more and more people register and we get near to selling out. Here is Aunt Joan with a Thanksgiving message for real estate investors.
Aunt Joanie, how are you?
Joan:
Just fine, thanks. I'm enjoying Gulf Shores.
Jason:
Okay, good. Well, thank you for coming on and recording with me today. I really wanted to just have you share with the audience a little bit about your tremendous success as a real estate investor. My first question for you is: When did you start investing in real estate?
Joan:
Probably about 1978.
Jason:
1978. Okay, so 1978 you started in real estate investing, and why did you start investing in real estate? What was it? Tell them a little bit of your background. My Mom's been on the show before, so growing up on a farm in upstate New York. What was that like? Just briefly.
Joan:
Well, it was a lot different from the world that I'm living in today, of course. I didn't have any ambitions about getting into the real estate market at that time in my life. However, when I came out to California, I went to UC Berkeley, and I majored in two fields: one was Real Estate, the other was Personal and Human Relations Management.
Jason:
Like Human Resources?
Joan:
Human Resources, yes. And so I've come to use both of them, and you have to use the Human Resources part of it when you are choosing tenants for your properties, big time.
Jason:
No question about it! And so my Mom also went to Berkeley, and you are her older sister just by a couple of years. She got a degree in Social Welfare – not quite so useful.
Joan:
Yes, which she decided she wasn't all that enthusiastic about after a while!
Jason:
Right, right. That's funny. Berkeley in the Sixties and a degree in Social Welfare – you would think my Mom is a flaming Liberal, but she's definitely not! Kinda funny. Okay, so you went to College; how long would you say it was after College before you started investing in real estate?
Joan:
Probably about 10 years or so.
Jason:
10 years or so, okay, great. Why real estate? What prompted you to buy your first property?
Joan:
At that time, we were in the restaurant business and we had absolutely no tax write-offs. We needed to have something for some income, so we bought out first house in Sacramento and just little by little, we kept acquiring more and more. We had come from the very expensive San Francisco real estate market, and when we got up to Sacramento, things were so cheap, so to speak, that we just went sort of crazy.
Jason:
Yeah, so a couple of comments before you go on. Number 1: Listeners, you know I always like to say that income property, or income-produced real estate rental property, is the most tax-favored asset in America. Aunt Joanie here really became interested from a tax perspective, and then you look at the relativity concept. I talk about the theory of relativity as it applies to real estate investment, and so you lived in a very expensive place, even back then in the Seventies. San Francisco was very expensive.
Joan:
Oh, we were in Hillsborough, actually, which is even more expensive. Over the top, you might say. Then coming up to Sacramento, I kept looking at these charming, darling, good craftsmanship houses, and I couldn't believe how inexpensive they were. The more I looked, the more I said 'Wow, why don't we buy one?' So we bought out first one.
Jason:
Right, so your first property that you ever bought – was that a home in which you lived, was it for you and Uncle John? Or was it a rental home?
Joan:
No. It was a rental home.
Jason:
So you didn't buy your own home first? That's interesting.
Joan:
Oh, excuse me! We bought our own home first.
Jason:
Oh okay, you did.
Joan:
Excuse me, yeah. We also bought a home in San Mateo first, before that. We bought our home in Hillsborough afterwards, but in terms of the investment property part of it, we bought our first real one in Sacramento.
Jason:
Okay, great. The theory of relativity concept is that you came from that very expensive real estate market in the San Francisco Bay area, and then moving to Sacramento, everything looked really inexpensive. So what happened there is things really worked back then. The cash-flow, back in those days, worked pretty well.
Joan:
Well, that's sort of a yes and no. The point was that in relation to the San Francisco-Hillsborough market, prices in Sacramento were extremely inexpensive, but at the same time, the rentals were considerably lower. We were never in most situations, in a case of penciling out.
Jason:
Okay, in terms of cash flow?
Joan:
Yes.
Jason:
Because even then, California didn't really work, from a cash flow perspective!
Joan:
That's right. At the same time, I never wanted to buy in lower property areas because I just didn't want to have the problems connected with rentals in very low-income property areas.
Jason:
I agree with you. That's one of the deceiving things, and I talk about that on the show a lot – in lower priced markets, those deals look good on paper, but in reality with collection problems and the eviction problems, they just don't work. Whatever city you're in, I think you should be just below the median price, is kind of the ideal. If you're in a $150,000 median priced market place, or even a sub-market – it doesn't have to be the whole city or the metro area – then if you're doing something at $120,000, that makes sense. That works because you'll have a decent quality tenant in that scenario.
Just to entice our listeners a little bit, Aunt Joanie, where are you now? How many houses do you own now?
Joan:
Well, a little over 70.
Jason:
That's over 70.
Joan:
Most of them are single-family residences. We have a few duplexes and we have one fourplex, but I've never gotten into the apartment situation.
Jason:
That was my next question for you: how come you stuck with single-family homes all those years? Why was that the thing? Why not apartments?
Joan:
Well, we just heard a lot of horror stories about running apartments, and we just wanted to stay away from that and deal with families living in single-family houses.
Jason:
Yeah. So this is one of the things, folks. I own apartments myself – I have two apartment complexes, now. I had three before but sold one of them a while back, and then I have a bunch of single-family homes too. I've definitely done both. I've done many more single-family home deals than apartment deals in my career, but the apartments – they can be good and I know a lot investors kind of have their eyes on the idea of 'Oh, I'm going to do this big stuff and do big apartments and I'm going to be big and I'm going to build an empire' and all that. That's great, it's ambitious, it's wonderful, but apartments are more complex for sure.
Joan:
They can be extremely troublesome.
Jason:
Tell us about that. What did you think about that?
Joan:
Well, for one thing, you have to make sure you get a good manager, and that can be a very, very hard thing to do. Then you're really at that manager's mercy if he decides to take another job. Then you've got a major problem.
Jason:
You're talking about like a resident manager, who's usually living there.
Joan:
Yes, that's right.
Jason:
It's usually a tenant that lives on the property.
Joan:
It's over 6 or 8 units, something like that, where you have to have a live-in person.
Jason:
That may be a California rule.
Joan:
Excuse me, that is, yes.
Jason:
I don't know those rules State by State, but it sounds like something they would do in the Socialist Republic of California, because there's a role for everything there!
Joan:
Right!
Jason:
When you look around the country, every lawyer you will talk to in every part of the country and every business person you talk to in every part of the country – when it comes to the legal climate and laws, California and New York always have their own set of additional laws, on top of everybody else. If the rest of the country has x number of laws, California and New York have 50% more laws.
Joan:
Exactly.
Jason:
It's crazy and you're rolling your eyes. You know this! Okay, so what else did you hear about apartments?
Joan:
Well, I'd just heard quite a few horror stories. In fact, we had a manager of our restaurant whose wife was a manager of an apartment building. I just heard many tales from him, and I just realized that I didn't have the time nor the interest to get into possible situations like that.
Jason:
Yeah, and look at it – apartments are like my second favorite real estate investment, after single-family homes. I'll just state that, for the record. I like the idea of mobile home parks, I've tried to do many mobile home park deals but have never completed one. I kind of like self-storage but I do not like office, I do not like retail property, I do not like industrial property. Housing, housing, housing is where it's at.
Joan:
Right.
Jason:
In the single-family homes, you get, generally speaking, a much better quality tenant.
Joan:
Yes you do. But also, in our fourplex, which is just a one-bedroom fourplex, we get excellent quality tenants. We just have professional people – no pets, no smoking. It's that type of atmosphere and that works very well, too.
Jason:
Now, tell us about some of your property management practices. I remember the funniest things, growing up as a kid, and I tell you – if you ask me where I put my keys, I couldn't tell you, but if you ask me what happened 20 years ago, I can tell you! I have a funny memory like that, and I remember all of your funny little property management practices, where you would give your tenants colored envelopes. They were the kind of envelopes that a greetings card comes in, like a Happy Birthday card.
Joan:
It would be a long, legal colorful envelope. They were in very bright colors, so when these would come into the PO Box, we would know that those were our rent checks!
Jason:
[Laughs]. I bet you loved getting those colored envelopes!
Joan:
We loved them.
Jason:
What other property management things would you like the listeners to know about?
Joan:
Well, frequently, people will call our office and they'll ask if we're a property managements firm. We'll say 'Yes, we are, but of our own properties'. They say 'Well, wouldn't you work for us?' We say 'No, we've got enough on our plate just doing what we do, and we really just take care of our own properties'.
People, and especially if they're running their property for the first time, want someone to take over and they're nervous and frightened about the prospect of doing this. We branch out to the point that a lot of first-time landlords get a little course from us. The course has expanded itself over the years, and now it's about 2.5 hours long, and at the end of the session, depending on how many questions they ask, it could even be 3.5 hours.
Jason:
Do you charge for this property management course?
Joan:
Oh yes! It's a very minimal price.
Jason:
I didn't even know you were doing this until today when you told me.
Joan:
We charge $185 and we give them all sorts of materials that they need. We don't give them leases, but we give them all sorts of materials.
Jason:
Oh really? Okay, cool. Good stuff. I think we ought to record that and turn it into an info product so we can sell it at my website, www.JasonHartman.com
That reminds me – I'm always forgetting this stuff – we're having, not a Black Friday special, but a Cyber Monday Special on all our digital products next week. You get 40% off all of our digital products. This is our biggest sale of the year, it's our Cyber Monday sale – the retailers do Black Friday, the online people do Cyber Monday, so that will be available, I believe, until December 4th. It's just a few days' long and 40% off all the digital products at www.JasonHartman.com
Joan, we should add your course to that in the future!
Joan:
Ours is a one-on-one here, so it's a little bit difficult. However..
Jason:
Share some of the tricks of the trade.
Joan:
Okay, well, let me tell you something that we learned maybe 10 years into doing this. We've been doing this for at least 30-40 years, but about 10 years into doing this, we realized the fantastic necessity of having house rules.
Jason:
House rules? Okay, tell us about house rules. There's a movie called House Rules; what are your house rules? What are Joanie's house rules?
Joan:
We expand them as things occur in our residences.
Jason:
And as you learn stuff.
Joan:
Yes, and some people, when we're going over these, think that maybe we've had some wild things in the middle of the night, but all these things that have happened, all of these house rules, are based on actual situations that have occurred.
Jason:
Okay, tell us about some.
Joan:
For example, most of our houses, or at least in the market that we're in, want to have hard-wood floors. The whole world loves hard-wood floors. However, there are a lot of people who have no idea how to take care of hard-wood floors. It's very important that they have pads under larger pieces of furniture and small little pads that you can just paste onto small things like coffee tables and chairs.
Jason:
Tell the listeners the average age of your houses. Your houses are older – what are they typically?
Joan:
I guess our oldest one's about 1916.
Jason:
Okay, so that's like 100 years old and that's your oldest house.
Joan:
Yes. Our most modern house is 1960.
Jason:
Wow, so 1960 is the newest house. That's 54 years old, wow.
Joan:
In the market that we're in, everyone wants to have houses with character.
Jason:
Okay.
Joan:
And my real estate agent, when we were doing this, said 'Joanie, why are you wanting these oldie mouldies?' That was her expression, and I said 'Sally, I love these oldie mouldies and I think a lot of people like these oldie mouldies.'
Jason:
'Oldie mouldies!'
Joan:
These are craftsman houses with ironing boards that come out and little mail boxes with fancy little drill work, and make little holes at the front door where you open up the little door and see who's outside. They're full of nice little things like that.
Jason:
Okay.
Joan:
They're definitely houses with character.
Jason:
Now, one of the funny things is I can always tell your houses – if I just drive down any of the streets in which you own properties, I can tell which ones are yours because of your address placards.
Joan:
Oh yes, right.
Jason:
Those are like your trademarks. That's kind of neat. Do you want to talk about that at all? No, okay. What other tricks of the trade or house rules are interesting? Most of our investors, number 1 don't have houses that old, and number 2 are not micro-managing them that much. Any tips for the nation-wide investor? You did it the old-school way, but nowadays people are diversifying, technology allows them to do that geographically and be in multiple markets and so forth.
Joan:
That's true. The other thing that's very important is to have a very good background crew that can take care of rental problems. We don't just have a handyman who does it all; we have electricians, we have plumbers, we have contractors. Everyone is a specialist in his field, and this is very important. Things get done properly. We even have a fence person. We could probably name 15 different tradesmen and specialists that we use.
Jason:
Right, and those people are getting repeat business from you?
Joan:
Oh yes, and they take very good care of us, especially the plumber!
Jason:
Why do you say the plumber?
Joan:
He has all of our houses, and we always recommend him to our landlords. I'm wondering when I'm going to stop doing this because sometimes I don't want to come off as enhancing his business.
Jason:
Exactly. He might then get too busy for you! Here's one of the things that's interesting: one of the strategies that I haven't talked about very much on the show, but that I want to recommend to our investors who want to build big portfolios, is your strategy. I want to take your strategy and recommend that people do it in 3 different cities. If they want to have a portfolio of say 60 houses or more, they should get 20 in each city. I want them to diversify. You did it the old-school way, and that's fine, but the new-school way is diversify in 3 different cities. The thing is, they can get some economy of scale when they have 20 houses in each of those markets.
Joan:
Yes.
Jason:
And the other thing they can get is certain vendors, like you just mentioned, to really take good care of them.
Joan:
Yes, because they know I'm going to be calling them up maybe 2 times a week.
Jason:
Right, with an issue. Now, the other thing they can get is this 'bumper pool' or 'pin-ball' type concept, I'll call it. The thing I'm trying to convey here is when the ball sort of bumps around there – what I mean by that is that you have a semi-monopoly in your market where if a tenant is looking in that area, they're looking at a few of your houses, usually. You then have some control over rental prices, where you can start pushing the rental market up and you can improve the area and make it look better, thereby bringing the values up. Tell us about that.
Joan:
We have a website – should I tell them the website?
Jason:
Yeah, if you want.
Joan:
Okay, www.SacRentals.com.
Jason:
Now my Aunt's being a promoter; I didn't know she was going to do this!
Joan:
Any rate, weekly, we hear people say that they go to our website all the time. I don't know if they're trying to rent a house or if they're trying to see some nice furniture arranging tips or something. Some people say 'Oh yes, I love your website', and it is done very well. At first, we were just putting our own houses on our website, but pretty soon when we've got everything rented out, we'll be out of inventory. We had this nice big website and people kept seeing us and called us up saying 'How about putting our house on your website?'
Jason:
They want you to manage their properties and you only do it for your own.
Joan:
Right, but we help market their properties.
Jason:
Oh really?
Joan:
Oh yes. They love it, we have these magnificent pictures – maybe 20 pictures of a small, three-bedroom, two-bath house, or maybe a two-bedroom, one-bath house. We have backyard pictures, frontyard pictures, front door pictures. The pictures sell the whole thing, and my son is responsible for doing that. He has a real gift for photography.
Jason:
Yeah, that's my cousin.
Joan:
Yeah. Then we have a little blurb on the site with 9 bullets for the description of the house. We put the price on, we put a nice big picture on, and then there's a button for 'Inside Pics'. We also put a satellite map on, and the rental application. People are renting our houses from afar very frequently. I can't tell you how many houses we've rented this last summer, but people have been in New York, Los Angeles, Florida, Michigan. They're renting our houses without even seeing them most of the time.
Jason:
Right, right. That's great, that's awesome. Talk to us, if you would, about your strategy. It's pretty much the old-school strategy of pay off your mortgages, right?
Joan:
Yes.
Jason:
Do you have all your houses free and clear now?
Joan:
There are just about 8 that we don't have free and clear.
Jason:
So you have a little over 70, but let's just use 70 for round numbers. You've got 62 of them free and clear?
Joan:
Yes.
Jason:
Why couldn't I have been your son?
Joan:
[Laughs].
Jason:
Boy, your kids are going to inherit a nice portfolio there! Okay, 62 free and clear, and your average price in Sacramento has got to be, what, $400,000?
Joan:
Now, that's where it is, yes.
Jason:
And this is why I like diversification; during the financial crisis a few years ago, Sacramento basically got cut i half.
Joan:
Yes, but here's the interesting thing. Most of our properties are in this East Sacramento and land-park areas, which are the best areas in town. Our properties changed, yes, they went down, but nothing like what would happen in the outskirts.
Jason:
Now, tell us what happened with rents, though, during the financial crisis. This is the odd thing. I think I know what you're going to say, but tell me anyway.
Joan:
Well, naturally, rents went down somewhat.
Jason:
How much?
Joan:
I don't know in terms of percentage, but maybe 15%? Maybe even 20% in some?
Jason:
That's pretty big, wow. I'm actually kind of surprised.
Joan:
But they weren't a lot of them. Maybe it was 10%. It depends – some houses are very rentable, and some houses are maybe a little harder to rent.
Jason:
Well, it also depends exactly when you catch them. If that lease comes up for re-renting and the tenant moves and it's during the depths of the financial crisis, like the worst time of all when the value of your house went from $450,000 to $225,000.
Joan:
That never happened.
Jason:
Not that bad, okay. That might be the 15% down, and then the rest of them might be 10%. What are your numbers like? Is your average house about $450,000?
Joan:
I'd say between $335,000 to maybe $450,000.
Jason:
Oh, so $450,000′s the high.
Joan:
Well, actually more than that, but that's just for comparison.
Jason:
I'm not talking about the house in which you live, okay, which is a palace! It's right near where Ronald Reagan lived when he was governor, so…
Joan:
It's called the Fab Forties.
Jason:
The Fabulous Forties, the Fab Forties. That's the street in Sacramento where they live, and I've been there many, many times. So tell us about your rents. For a house that's $330,000 and a house that's $450,000, what do those rent for? I can tell you! I can guess and I'll probably be pretty close.
Joan:
Actually, a lot of our two-bedroom, one-bath little craftsmans which can be anywhere from 1,000 sq feet to maybe 1,250 sq feet, they probably have a minimum price of $1695.
Jason:
OKay, and that house is about $330,000.
Joan:
It could be $330,000 to maybe a $400,000.
Jason:
Okay, so you said it was $1695/month for a $330,000-$400,000, so you're getting about a 0.4-0.5 RV (rent-to-value) ratio.
Joan:
Right, but the tenants do not just pay the rental price. They also pay the city utilities, which Sacramento has a very neutral situation. Five services are all racked together in city utilities.
Jason:
Well, of course they pay the utilities, that's normal. They do that everywhere.
Joan:
That wasn't the custom in Sacramento.
Jason:
Oh really? You would pay the tenants' utilities? I never pay the tenants' utilities.
Joan:
I'm not talking about gas or electric, I'm talking about water, sewer and the three garbage cans.
Jason:
Yeah, I never pay water, and in most places, water and sewer go together. Trash pick-up, I never pay that either. I don't pay for anything. Not the gardener, nothing.
Joan:
It used to be the situation in Sacramento, but we changed that.
Jason:
You did, you changed the custom.
Joan:
Yeah, we said, 'Hey, that's a user fee, we don't pay that.' They then paid that, but we had a real quick lesson in not having the tenant send it in to City Hall. We found out that some of them weren't quite so conscientious and we got a few leans on our properties.
Jason:
Oh, because those weren't paid.. I hate when they do that, by the way. Some cities do that – if the tenant doesn't pay their utility bill, they actually lean the owner and the owner becomes responsible for the flaky tenant. Tell us about late fees and eviction policies. I want to make a note, Aunt Joanie – I said 'How long are you going to talk for?' and you said 'Oh, about 3-5 minutes'. We're 30 minutes into this! We're not going to do our guest; this is going to be a whole episode unto itself, but this is really great information and I love hearing it.
Again, folks, this is the old-school style of investing, and it's awesome. You obviously created a ton of wealth with it. How do you deal with tenants when their rent is late or with evictions and stuff like that? You're in California, which is not landlord-friendly at all.
Joan:
That's true, and so the idea is to try to not get into a situation where you're having to evict someone. In our earlier years, we made some wrong choices in tenant selection, and this happened. I think that in our total experience, we've had no more than 4 evictions.
Jason:
Are you kidding?
Joan:
I'm not kidding.
Jason:
And how long does your average tenant stay?
Joan:
I'd say 2-3 years.
Jason:
Okay, so 2-3 years is your average. Your vacancy rate and the turn-around between guests is about a month?
Joan:
Our vacancy rate is like zip.
Jason:
Yeah, but what I'd say to the listeners is that your rent is too low. We like to get 1% of the value every month, but you're only getting 0.4-0.5% of the value. But then that's how California is. That's just the way it is in California.
Joan:
Well, we find that proper tenant selection is the most important thing.
Jason:
Yeah, okay, so tell us about tenant selection. What are your practices there?
Joan:
We have to make sure that they're properly employed and that they've been there a little while. We need their rent to not exceed at least a third of their income. Also, we always check landlord references and we always run credit checks. Those are pretty good indicators right there.
Jason:
When you do the credit check, do you do an unlawful detainer check and a criminal check?
Joan:
No, we don't. We used to, but we found out that this was completely unnecessary.
Jason:
You just do credit only?
Joan:
Yeah, we just do credit only.
Jason:
Wow, and what do you charge for an application fee?
Joan:
$30.
Jason:
$30 for married or single?
Joan:
No, it's $30 per person.
Jason:
Okay, and you probably only pay about $10 per person to run that, right?
Joan:
Maybe that, but then it's our time. We've then got to get back to the landlord, or to whomever we're running the checks for. $30 is the deal.
Jason:
Right, yeah, I get it.
Joan:
Some of our customers who are not anything to do with our ownership just come in as a way of life to run credit checks. They will not move until they get our report on the credit checks.
Jason:
What do you mean by that? I don't understand.
Joan:
For the last so many years, we always insist on running credit checks.
Jason:
Well, I would think that would just be standard practice.
Joan:
Well, for a while we didn't do that with everyone, but now we do.
Jason:
Oh, really? You didn't do credit checks, wow. Now, your philosophy is 'Let's prevent the eviction'.
Joan:
That's right.
Jason:
So how do you prevent the eviction from happening? I want to just say, that's an amazing track record with 70 houses and only 4 evictions in all the years you've been doing this. That's amazing. How do you prevent it?
Joan:
Well, for one thing, we make sure that people are gainfully employed, and that sort of thing.
Jason:
Okay, so tenant selection, we got through that.
Joan:
Then we try to keep people happy. If they have a report that there's a sewer blockage or something, we try to get a plumber or electrician to them right away. We also, in our house rules, have several ways to make sure that they don't have plumbing problems. We have a whole list of things not to put down garbage disposals, and we also do drains in bathrooms and dishwashers and that whole subject.
Jason:
But how would you check that? How would you know if they put a q-tip or something down?
Joan:
These things come up when the plumbers look.
Jason:
Yeah, they'll get it in the snake when they snake it out. OKay, that's interesting. Any other points on preventing evictions? Tenant selection, house rules; when they're late on their rent – certainly you must have people who are late on their rent?
Joan:
We always have some people that are late payers.
Jason:
So it's sort of just their way?
Joan:
I say to my assistant 'Have all the rents been in?' and she says 'All but the usual'.
Jason:
How many usual is that?
Joan:
About 4 or 5.
Jason:
OKay, so out of 70, you've only got 4-5 that are late every month.
Joan:
Yeah, but I mean that some of these people have been running for us for ..
Jason:
10 years?
Joan:
Yeah.
Jason:
And they're late every month.
Joan:
Yeah, we know them.
Jason:
OKay, so what do you do with them? What's your policy? How strict are you?
Joan:
Well, first of all, the rent is due on the 1st, we have a brace period from the 1st to the 3rd. After the 3rd, it's late. We don't use punitive practices here in charging some huge late fee. We charge $25.
Jason:
That's pretty light, wow.. that's light.
Joan:
Yes, and here's the thing – after the 5th day, if it's not paid, then there is an additional charge of $5 per day until the rent is paid in full.
Jason:
Joan, for a rent that's $1600-$2000 a month, you are easy! That is not bad at all. That's a cheap late fee.
Joan:
Right. It is.
Jason:
And you're okay with that?
Joan:
We're okay with that because most of the time, people pay really well. We don't have that much of a problem.
Jason:
Okay, good. As we wrap up here, we've gone 13 times longer than we said we would! What other things would you like people to know about real estate investing? After all these years, do you still think it's the greatest thing?
Joan:
I do. My husband is into stocks and a little bit of the bonds, but he's into investments like that. I really like real estate because it's a very tangible thing, and it pretty much depends on yourself and your efforts as to how the whole thing works. We have such a very small vacancy fee and we have a minimum of problems because most of our properties are in very good areas. We just have a high caliber of tenants.
Jason:
Yeah. Do most of your tenants work for the government? Sacramento's the capital of California.
Joan:
Not most of them, but quite a few do.
Jason:
Or government-related jobs.
Joan:
We probably have the medical profession too. In terms of just East Sacramento, we have 6 major hospitals within 5 minutes of our houses.
Jason:
Some of our areas are like that. For example, Houston's got tons of medical opportunities. Medical's pretty good because those people make good money.
Joan:
And these places keep expanding.
Jason:
Yeah, right. I call that the medical industrial complex.
Joan:
Yes. The med center looks like a five-star hotel.
Jason:
It really is. Good, so anything else about real estate?
Joan:
Nope, I'm happy. We got into it and my husband was always opposing it. Then we got a house and he said he would buy, and then he said he thought the house needed to be step-loaded.
Jason:
Step-loaded, like torn down.
Joan:
Yeah, removed from the face of the Earth. I'd say, 'John, it just needs a little TLC'. When we first started out, I didn't even want to be involved if the house didn't have closet doors that were working and things like that. After a little while, though, we got into all sorts of things and problems, and of course, we got workers to handle these problems. We got very inventive with them – we got into kitchen remodeling, bathroom remodeling, adding rooms to properties.
Jason:
Oh, you add rooms to them? Wow.
Joan:
Oh yes, we've done a lot from making them from 2-in-1s into 3-in-2s, because the whole world wants to live in this Sacramento area.
Jason:
Interesting.
Joan:
These little 1920 houses are not exactly suited immediately if someone comes in with 2 children, and then they want an office too, but we can make it work.
Jason:
That's fantastic, good stuff. Well, Aunt Joanie, thank you so much for sharing this with my listeners today, and it was just great to have you on the show!
Joan:
Thank you so much!
Jason:
Well, there you have it, folks. That is the word from my rich Aunt Joanie. Don't wait to buy real estate, buy real estate and then wait! You've just got to stay at this and let time and all these great factors just be on your side. You just can't help but make a lot of money in real estate. I think she has one more thing to say here.
Joan:
Even with these ups and downs in real estate, people still say 'Wow, the real estate has lost this much money', but I say 'Yes, but I'm not selling. Why do I care?'
Jason:
Yeah, you treat it as a value investor, like the Warren Buffett philosophy applied to real estate – value investing is where you hold it for cash flow. Don't be a speculator, just buy them and hold them.
Joan:
Exactly. That's my best philosophy. In fact, in all of our lives, we've only sold 2 houses.
Jason:
Wow, I regret most of the houses I sold. I should have just kept them, so I agree. Well, good stuff. Aunt Joanie, thank you so much and happy investing.
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Outro:
This show is produced by the Hartman Media Company, all rights reserved. For distribution or publication rights and media interviews, please visit www.hartmanmedia.com or email media@hartmanmedia.com. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate or business professional for individualized advice. Opinions of guests are their own and the host is acting on behalf of Platinum Properties Investor Network Inc. exclusively.
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Guest: Aunt Joan
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