Jason Hartman and investment counselor Doug have a chat about Warren Buffet’s recent statements on real estate investing. They discuss how it’s great to be in a fragmented market and the dififculty of buying and mangangin thousands of single family homes.

Investor 0:00
Just about mid 2011, I was I was leaving command I just taken over a position in a great job at the Naval Academy for a two year position there and had a lot more free time than I did on my submarine as you can imagine, and I was searching for a way to shift active income into passive you know, I’d read Robert Kiyosaki books over the years, I really just, I mean, they just spoke to me, Rich Dad, Poor Dad, and most of the others, you know, his prophecy, it all just made a lot of sense to me. So I was looking for, you know, following his model of shifting into you know, passive cash flow income, and I’m a mechanical engineer. And the thing that made most sense to me, you know, not buying the coin laundry machine, although i think that that facility may be a great idea to but for me, it was about real estate and buildings. And so I was looking into that you happen to have a great podcast and I started listening in the teens, I think it was and I’m starting to listen to all of them. And I just kept kind of become a junkie with that. I you know, so I forgot my first property in the end of 2011 and St. Louis. I bought a few more there. I’m up to eight and my wife, Susan. Is today In fact, we’ll we’ll get her first three and we’ll she’ll be at six by the end of this month. And hopefully if all goes well, we’ll have Susan topped out and then we’ll go back and start focusing on Gary again.

Announcer 1:11
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate basters

Jason Hartman 2:01
Welcome to Episode 1245 124 or five, we’ve got a jam packed episode today. So let’s dive right in. Got Doug here and we’re going to talk about that famous investor. Yes. You’ve heard his name, of course, the oracle of Omaha, as they call him, Warren Buffett. But what does he think about real estate? And specifically, what does he think about what he calls the best financial instrument in the world? Doug, do you think Warren Buffett’s listening to our podcast?

Doug 2:36
I think he might be Yeah, he might be a closet real estate junkie just like you.

Jason Hartman 2:40
Yeah, you’re not in the closet? No, I’m way out of the closet on the real estate thing. The interesting thing is, of course, most everybody listening knows about that rather famous Warren Buffett video from years ago. Maybe we’ll actually play a clip from that one to where he says he’d buy a couple hundred thousand single family home. If he could figure out a way to manage them, right, but here we’ve got a more contemporary video. That is interesting as he talks about the 30 year mortgage, let’s listen in. And here they are calling Warren Buffett, the oracle of real estate,

Doug 3:19
known as one of the world’s greatest investors, and while you may know him for his prowess in picking companies, it turns out that he’s also pretty good at picking real estate. We sat down with him recently and asked him why he’s selling his longtime vacation home and Laguna Beach, California.

Jason Hartman 3:33
I remember seeing that home that was in Emily Bay, which is a very exclusive area of Laguna Beach, very very ritzy area. And I remember his second home there I saw several times

Doug 3:46
for summers for many years. And then it became much more going there and Christmas for maybe three weeks or so and the kids would gather, they couldn’t get over those summers I got to be adult so and have all these great times there. I mean, maybe When we always had people there but when my wife first wife died in 2004 at that point I lost interest in the house and and my kids continue to use it to some degree subsequently. But now they’ve got other interests in terms of vacation spots closer to where they live or something of the sort. So the time has come to solid hundred $50,000

Doug 4:19
to $11 million. That is a phenomenal growth and as you said, this is just the listing price.

Doug 4:25
And when I bought it for 150 I I borrowed some money from Great Western savings amount so I probably only have 30,000 or something like that. The only mortgage I had for 50 years or something of the sort but i

Doug 4:39
i guess i thought interest rates were attractive.

Doug 4:43
mortgage on it. You didn’t need one, even in 1971 Did you

Doug 4:47
want more john? Well, I still thought I could probably do better with the money that haven’t been all like what a person’s house and 10 or 20,000. I borrowed I was buying Berkshire that I was buying Berkshire constantly in the early 1970s. So Berkshire was probably around 40, that I might have bought 3000 shares of Berkshire or something.

Jason Hartman 5:11
And by the way, I gotta mention, the house is surprisingly modest compared to some of the other mcmansions and Emerald Bay, but he’s basically alluding year to how good this financial instrument is the 30 year mortgage. What do you think

Doug 5:27
what Warren said that I thought was especially good was that, you know, when you lock in a 30 year mortgage, what you’re essentially doing is you’re freezing a cost of capital for three decades. So in this case, you know, say it was 1971. He bought it at say six and a half percent. I’m just making that up, but it’s probably pretty close.

Jason Hartman 5:46
Well, actually, we know that the rate was probably about 7.3%. Okay, because that happens to be the time in which we use the example of in the inflation induced death destruction exists for When we used right remember,

Doug 6:01
yeah, I do remember that. Yeah. But anyway, say 7.3%? Well, in that case, if he feels like he can do 10 1214 18% somewhere else, in his case in Berkshire, then it makes sense to borrow the money at a low rate and then reinvest it at a higher rate, and you get to keep the spread, you know, people get really rich, right,

Jason Hartman 6:19
definitely playing that arbitrage between that. But again, we’re not advising anybody here to do that with the stock market because we don’t like the stock market. Now. Warren is an insider in his own business, right. So that’s a completely different position than any of us would have as an outsider. He had control over that business and those investments as well. So let’s get back to the CNBC video.

Doug 6:44
That with the proceeds from the loan, so that’s 750 million dollars

Doug 6:49
$50 million,

Doug 6:51
putting it into the house instead of having an equity purchase, right? What about now people

Doug 6:56
can get a mortgage for three and a half 4%

Doug 6:59
You get a 30 year mortgage. It’s the best instrument in the world. Because if you’re wrong, and rates go to 2%, which I don’t think they will, but they pay it off. I mean, it’s a one way renegotiation. I mean, it is it is an incredibly attractive instrument.

Jason Hartman 7:15
That’s what I always say, you know, with income property. The greatest thing about it is the deal you agree to when you buy it, Doug, is not the

Doug 7:24
deal you end up with, you can constantly renegotiate the deal along the way, how beautiful is that? It’s outstanding. I mean, the thing that’s just utterly amazing is that since you have that rate locked in, if rates go up, just keep it if rates go down, you can refinance. If the market completely crashes, and you can’t pay, you can go back to the mortgage company and say, Hey, I can’t pay Why don’t you cut me a deal? right? Exactly. Yeah,

Jason Hartman 7:50
it’s it’s an incredible instrument. It really is the best instrument going.

Doug 7:56
You’ve got one way but first, you can’t do that. We cannot issue a 30 year bond. And habits so we can call it off tomorrow at par.

Doug 8:04
No, no way. And then use an individual can do it. It’s a great instrument for most people their home

Doug 8:10
is their most valuable. Absolutely.

Doug 8:12
Is that the way it should be, should be for a great many people. If you know you’re going to live in a given area, everything is very likely for a considerable period of time. You have a family, I mean, the home is terrific. The home I live in now I bought a 1958 here, and I would trade it for anything. I mean, it’s got all kinds of good memories to the kids. It’s home to them. It’s home to their friends. I mean, it

Doug 8:38
is amazingly modest home for the one time richest man in the world. And not too far off from still being the richest man in the world. His own is amazingly amazingly modest. Doug, any thoughts on that one? I think that one’s really, really getting out here that he’s kind of hinting at but not saying is that even a house that You own where you are, to pay the your own mortgage can still be a really good place to grow leverage equity, because then like for example, you know, say you decided that you want to go invest in something now you can refinance your house and you can tap equity for a very low fixed rate. Now, just think about how much better that deal gets if we’re talking about something where somebody else is paying the mortgage. Yeah. And, by the way,

Jason Hartman 9:24
how do you actually do the math on that? Because the example I give of inflation induced death, destruction is based on a homeowner, someone living in the property and how literally over the course of three decades, they got paid to live there. They got paid to borrow the money after inflation and tax benefits. But when you outsource that debt to another party called a tenant, it gets so so much better, especially if you have some positive cash flow, and you get depreciation tax benefits. What an amazing, amazing instrument. Warren’s just talking about the flat idea, I’ll call it the flat idea of a 30 year mortgage on your home. And that’s pretty darn good. But on a rental property on an income property, it just becomes exponentially better, doesn’t it?

Doug 10:18
It does well, and here’s something to think about For comparison, because as real estate investors, we’re used to seeing things like you know, 1520 25% 30% ROI. You know, when you’re talking about a pension funds that are diversified between equity and debt investments, I think the long term treasuries right now are going off at I think, a yield of 2%. So you know, you’ll get a risk premium, if you’re talking corporate said maybe a half point, if you go down to B’s, you might get another half point on top of that. So let’s say it’s about three three and a half percent on bonds. And then equity side of the USA average is 8%. But the range is you know, from like, say plus 22 minus 15%. And so the whole thing is that right, you know, pension funds are struggling to get an 8% blended rate of return. And so the thing is, you know, if you can generate better than that, really from doing nothing, it’s kind of a no brainer. I think that you know, what we’re in favor of business models are things that require no intelligence or direct action is stuff that’s as simple as humanly possible and you know, capitalizes on doing nothing.

Jason Hartman 11:24
Yep, absolutely. That’s for sure. So Doug, the famous video that every real estate promoter has used ad nauseum is this 1000

Doug 11:35
single family homes and I had a way of managing the management is enormous really problem because they’re one by one, they’re not like apartment houses. So but I would load up on them and I would I would take mortgages out at very, very low rates, but but if anybody is thinking about buying homes five years ago, they couldn’t buy them fast enough because they thought they’re gonna go up and now they don’t buy them because they think they’re gonna get down Interest rates are far lower. It’s a way in effect to short the dollar because you can you can take a 30 year mortgage out of it turns out your interest rates too high next week you refinance lower. And if it turns out it’s too low, the other guys stuck with it for 30 years.

Jason Hartman 12:14
There’s more shorting the dollar than that. It’s the inflation abuse, debt destruction. Isn’t that really just shorting the dollar?

Doug 12:21
Exactly, yeah, that was actually my favorite part of that video is that, you know, Warren correctly sees that having that long term war mortgage essentially gives you the option to short the dollar.

Jason Hartman 12:31
Yeah, good point.

Doug 12:33
It’s a very attractive asset class. If you

Doug 12:35
are a young individual investor at home and you have your choice between buying your first home or investing in stocks, where would you tell someone if I thought I was going

Doug 12:43
to live

Doug 12:46
where I want to live the next five or 10 years, I would buy I would buy a home and I’d answer with a 30 year mortgage is a terrific deal. And if I literally if I was an investor, that was a handy type which are not I’d buy a couple of them at distressed prices and find writers. I think that’s, again, take a 30 year mortgage. It’s a leverage way of owning a very cheap asset now, I think I think that’s an attractive investment as you can.

Jason Hartman 13:17
Yep. And couldn’t agree more. And even though, you know, that video was from a few years back, you know, that’s still great advice is long has you’re buying in conservative, prudent linear markets. That’s the stipulation.

Doug 13:37
You’re willing to wait

Jason Hartman 13:38
yeah. And as long as you’re willing to be a buy and hold investor. But if you’re doing that in a cyclical market, or even a scary hybrid market, which isn’t nearly as scary as those crazy cyclical markets, you could get yourself into trouble. So that’s the key. You know, you can’t say real estate as though it’s one single entity. You’ve got to really define it by the market. Doug, any take home other take home points for investors. I think

Doug 14:07
one of the things that I’ve heard from a few conversations with people lately is that a lot of people feel like the markets starting to get overvalued, which then may be right. And a lot of people are kind of thinking, Okay, you know what, I just want to wait for things to feel more like they were in 2008. And then I’ll come in and scoop up all the deals. Yeah,

Jason Hartman 14:24
everybody starts to feel that way, including yours truly, but I hopefully rightly correct myself from that thinking. But what were you gonna say?

Doug 14:34
Well, the thing to think about is that okay, well, cuz, you know, I thought that in 2010, and it’s been now almost a full decade of a really big run that I largely missed out on because I thought the market was gonna go, I thought there was going to be a double dip recession. And

Jason Hartman 14:52
you know, the thing is, right, you didn’t completely miss out on massages you should have Yeah,

Doug 14:57
yeah, I just didn’t buy as much as I should. Yeah, I think of it. terms of I think in terms of opportunity cost, not just accounting. But the big thing is that we don’t know how much longer The run is going to run. And we don’t know how deep it’s going to fall when it falls, my guess is it probably won’t fall as much as 2008. Because that was the second time in a century kind of situation. Most likely, the next pullback a won’t be led by real estate, and be won’t be quite as severe because you’re not going to have a de leveraging of the entire financial system. Even as as much as things are levered up, I don’t think you’re at the point where you’re going to have a broad scale deleveraging I think you’re going to have a whole bunch of defaults in auto loans, you’re going to have student loans, you’re going to have a lot of difficulties in personal credit, and you’re going to have a lot of defaults and small business credit, but none of those things are going to be big enough to where they’re going to create a broad de leveraging spiral. And so in that case, then let’s say the train runs another couple of years or so. Okay, so you know, say you pick something up and it goes up at say 4% a year and then goes down. 5% Okay, well for two years. Increase 4%, increase 4% down 5% You’re still ahead and you’ve been making cash flow this whole time and you’re advertising out the mortgage. As long as you buy something that’s sensible. Your timing really isn’t that important to

Jason Hartman 16:12
know. That’s the key thing. And you’re amortizing down the mortgage. Really, your tenants are doing that for you the big boring idea, but not only that, and this is what everybody forgets in the simple to math that the mainstream people of the world do, right? Not our listeners, because our listeners get it. But the simple to math is, well, I’m just going to keep my powder dry. I’m gonna wait and when prices go down 20% I’m going to scoop up deals like crazy, but what they forget is all number one, nobody’s good at timing the market but let’s assume they are right let’s assume they are give them map and say that they can do that. But they lose the return. Well waiting for the decline. You know, assuming you could time the market. Perfectly which nobody can you lose that return for the next two or three years waiting. That’s the huge part that people don’t calculate. Think about it if you’re going to get 20% annually on an income property investment, and that’s because it’s a multi dimensional asset class, that’s not return on cash flow. That’s overall return on investment. Go to Jason hartman.com, click on the property section, look at the performance. Watch the video on the front page, understand how that’s calculated. Really, if you just watch that 27 minute video, it will make you a Great Investor that more than anything, sums it up. Okay. And so you can lose that 20% for two years waiting and then say you time the market perfectly and prices are down by 20%. Well, why did prices go down? Well, maybe interest rates are higher. And so now you’re paying a higher rate for the privilege of having the lower price and You might be right. Maybe the prices will go down. I, you know, certainly there are cycles, there’s no question about that. And we are late in this cycle, these conservative linear markets, they don’t have the big swings, you’d have to time it perfectly, you’d lose the return on the way. And

Doug 18:15
let me actually amp it up even more, because you’re saying maybe the interest rates will be higher, maybe what if the interest rates are exactly the same? The current run goes on two more years, and then prices go down. 20%. Okay, well, if you been in now, you would have two years at a 20% ROI to increase cash and equity. And so you would actually still be better off buying now, even if prices are going to go down 20% in two years, right.

Jason Hartman 18:42
I agree. And this is the problem of this wrong thinking of waiting for the deal. Now if you were strictly a cash buyer, right, so you’re a cash buyer now and you’re going to be a cash buyer at the lowest part of the market at the trough. If you’re a cash buyer both times, then the stuff we’re talking about right now does become less pronounced. But even still, even still, you’d probably be better off buying now, just because of the risk of not timing that market, right? There were a lot of people in 2014, as we were coming out of the Great Recession, we were coming out of it for, you know, the prior four years, for example, in the end by 2014 tons of people were saying things like, you know, I think it’s too high. Now. I’m gonna wait, I’m just gonna wait till the next cycle and the crash, and then I’m going to scoop up heels. And now here we are five years after that. Yeah. And those people, maybe they’ve been keeping their powder dry for the last five years, right. market timing is a fallacy.

Doug 19:59
And I think when Things that you hit on is that so market timing is only really meaningful if you’re buying for all cash. So you know, if you’re an All cash all the time, it

Jason Hartman 20:09
is more meaningful,

Doug 20:10
better than that, then maybe try to really study up and figure out how to attend the market. But if you’re not buying with cash, and if you’re employing the multi dimensional aspects, then as long as you’re buying things that are sensible, you don’t really need to worry about where in the cycle you’re at, because it’s actually not going to make as much of a difference as you might think.

Jason Hartman 20:31
Yeah, I agree with you,

Doug 20:32
because time will actually make far more of a difference than your acquisition price.

Jason Hartman 20:36
And that leads me to one of my sayings, I’ve repeated often, Time heals all wounds, Time heals all wounds. And so if you buy the sensible properties, you have sustainable investments, you can stay in the game, right? Then you can make it to the next cycle, no matter what happens. So good stuff. Doug, thanks for joining me on this and listeners happy investing to all check out Jason hartman.com. For more that video on the front page of our website really an excellent thing you should review it every six months or so, if you’re a regular listener, it’s wouldn’t be bad to listen to that video again. Check out the property section to look at detailed performers with all the good specs on these properties. Until next time, happy investing.

Doug 21:27
Happy investing.

Jason Hartman 21:30
Thank you so much for listening. Please be sure to subscribe so that you don’t miss any episodes. Be sure to check out the show’s specific website and our general website heart and Mediacom for appropriate disclaimers and Terms of Service. Remember that guest opinions are their own. And if you require specific legal or tax advice, or advice and any other specialized area, please consult an appropriate professional and we also very much appreciate you reviewing the show. Please go to iTunes or Stitcher Radio or whatever platform you’re using and write a review for the show we would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.