Transcript: Diversifying Outside of These Crazy Markets w/ Jason Hartman, Founder of Platinum Properties Investor Network, Inc.

Announcer:  It’s time for Marc Lichtenfeld’s Oxford Club Radio, the hardest-hitting half hour about you and your money. Now here’s Marc Lichtenfeld.

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Marc Lichtenfeld:  Welcome to Marc Lichtenfeld’s Oxford Club Radio. I am Marc Lichtenfeld. I am glad you are with us this week. It has been a crazy week on Wall Street. We’ll talk about that in just a moment, but we’ve got a fantastic show for you today.

We are going to talk real estate with Jason Hartman. He’s the founder of Platinum Properties Investor Network and the CEO of Hartman Media. He’s an expert on investment real estate, which is something I’m personally interested in.

I think it’s a great way to diversify your investments, your assets and your income streams. I’m a big believer in investment real estate. I’m really looking forward to getting some of Jason’s insights.

We also have a special treat later on in the show. We’re going to talk with Leonard Marshall. You might remember Leonard from the New York Giants. He was a defensive lineman.

He started and won two Super Bowls with the Giants. We’re going to talk with him. He’s a real interesting guy.

He, unfortunately, is suffering from CTE, which is the brain injury affecting many former NFL players. He can shed some light on CTE – including what it is like to live with it – and what can be done about it. And talking with him seems very appropriate considering the Super Bowl is this Sunday.

If you want to get in touch with me go to oxfordclubradio.com and click on “Contact.” That’s how you can email me. Give me your thoughts, your questions and your feedback. You can also tweet at me – I’m @stocksnboxing – or follow me on Twitter. I hope you’ll follow us on Twitter as well.

I mentioned it was a crazy week. I was having drinks with somebody in the industry on Thursday. He had missed the end of the day in the market and asked, “What happened today?” And I think the answer to his question is the same answer for the whole week.

My answer would be, “Everything. Absolutely everything happened in the market this week.”  You had gold skyrocketing. You had oil moving higher. All the metals were surging. You had some stocks getting cut in half on earnings. You had the markets surging and then dropping. Having 300 point swings in a day. It was all over the place.

The people who saw oil move higher definitely felt some hope. (They saw oil finally getting a bit although it sold off a little bit on Friday.) My caution to you is market bottoms typically don’t behave this way. Typically, the market bottoms just chug along at the bottom and not a whole lot happens. People who have been beaten up for the last several weeks, months or years just give up and nothing really happens. Then slowly the market starts to go higher, and, eventually you wake up and realize that the market has moved.

That’s not what we’re seeing right now. We’re seeing a lot of volatility, which typically indicates – though no guarantees in the market – that we’re not done yet. So be cautious out there.

You can still make money in the market. No doubt about it. You can still pick the right stocks. There are stocks performing well, but it’s tough out there. I think it’s going to be tough for a little while longer.

The economy certainly isn’t helping. We had the jobs numbers come out on Friday. They were a little disappointing. A good thing was that unemployment ticked below 5%. But, overall, the jobs numbers were disappointing.

One bright spot was that average income ticked up a little bit, and that is something I’m watching closely. To me, that is a sign of a healthy economy. And it is a signifier that eventually it will be time to raise rates.

We’ve raised rates once before. And I’ve said many times that raising rates was the wrong thing to do. If wage inflation continues to rise at a meaningful clip – not just a little clip like it was on this last report –  then that’s the time we know that the economy is doing all right, and it could be okay to raise rates.

Now speaking of rates, I don’t know if you saw what happened in Japan this week. The Bank of Japan committed to negative interest rates and that caught the attention of Jose Canseco. Yes, that Jose Canseco. Jose Canseco, the baseball player, started tweeting about how wrong the Bank of Japan is.

Now before you start dismissing Jose Canseco – granted he is not one of the great economic minds of our time – know that he does follow the markets. He used to be a trader. I don’t know if he still trades. I just found it interesting that if Jose Canseco can see quite clearly how bad negative rates are for an economy, why can’t economists around the world? You’ve got Japan in negative rates. You’ve got several countries in Europe in negative rates. It’s unbelievable.

Deflation is a serious condition in an economy. It’s not something you want. It sounds great to a consumer. Consumers think, “Oh good, prices will go down.” But that is not a good thing for an economy. It signifies poor demand. The companies who have borrowed money often can’t service that debt. That becomes a problem. If people get laid off, they can’t service their personal debt. Deflation can spiral very quickly. It’s not a good thing.

So you really – in my opinion and Jose Canseco’s – don’t want to see rates go negative. That’s a bad thing. Jose Canseco and I are of the same mind. And I never thought I would say that.

When we come back, we are going to talk real estate with the founder of Platinum Properties Investor Network, Jason Hartman.

This is Oxford Club Radio. I’m Marc Lichtenfeld. Stay with us.

Announcer:  And now back to Marc Lichtenfeld’s Oxford Club Radio.

Marc Lichtenfeld:  Welcome back to Marc Lichtenfeld’s Oxford Club Radio. I am Marc Lichtenfeld. I am excited for my next guest. As I mentioned in the first segment, I’m a big believer in investment real estate.

I have been investing in real estate for about 10 years. It’s worked out pretty well. Not all of them have been home runs. But for the most part, it’s done pretty well. So I’m really excited to talk with Jason Hartman. He’s the founder of Platinum Properties Investor Network. You can get more information at www.jasonhartman.com.

Jason, thanks so much for joining us. As I mentioned, I’m really excited to speak to you. I know you’re one of the premier experts in this field.

The first question I want to ask is about the broad market right now. I’m very familiar with the most expensive real estate markets: South Florida, California and New York. Is that representative of what’s going on throughout the United States as far as valuations for investment properties?

Jason Hartman:  Marc, it’s a great question. I’m glad to say it is not at all representative. A country as large and diverse as the United States doesn’t have a national real estate market. It has about 400 local markets. The old saying in real estate is that all real estate is local.

So when we look around this hugely diverse country, we’ve got these 400 markets. Those can be divided up into three major categories; the cyclical markets, the linear markets and the hybrid markets. Hybrid markets  are, as the name would imply, a hybrid between the linear market and cyclical market.

So these high-valued markets – the markets that make the news and the ones in any expensive area in the northeast or all the expensive areas in the West, whether it be virtually all of California or Seattle or Oregon or Washington or Oregon – are the more cyclical markets. And, as the name implies, they have more of a roller-coaster type pattern when you look at the price trends. They have glorious highs and really ugly lows.

So we can compare and contrast how these three different markets perform over time. And learning about how each market performs can make us better investors.

Marc Lichtenfeld:  Are you seeing any areas – especially for investment real estate where the cash flows will be meaningful-  that are particularly good values?

Jason Hartman:  Absolutely. Cash flow is key. It is really quite reliable. But financial gurus’ abilities to predict appreciation and depreciation are unreliable.

In fact, in all my many years in this business, I’ve never met anyone who can reliably predict appreciation or depreciation cycles. That applies to all the gurus are out there. For a time, they’re right and they seem brilliant. But eventually they’re wrong and a lot of agony ensues.

So let’s look at the linear markets. I like linear markets best. These markets generally have very low land values as a ratio to the overall price of the investment. This is something that I call the LTI ratio. Most of your listeners are probably familiar with the LTV ratio. That’s the loan-to-value ratio, and you may receive one when financing for a property. But I invented a new ratio. I call it the LTI ratio. What that stands for is the land-to-improvement ratio.

When we buy a property, we’re not buying one single thing. We’re buying two components. One component is the land. The other component is the improvement. The improvement would be the house or the apartment complex sitting on that land. So no matter what type of property you own – it might be an office building – the land-to-improvement ratio is still critical in knowing how to be a good investor. The areas with favorable LT ratios – those would be markets like Atlanta, Memphis, Indianapolis, or many of the cities in Texas – may be better when it comes to turning a profit.

These are markets that don’t make a lot of headlines. They’re not sexy, but they have great fundamentals. They have great cash flow. Cash flow is a very reliable part of an income property investment, and should ideally be somewhere in the neighborhood of 1% of the value of the property in gross income per month. So if it’s a $100,000 property, I want you to get $1,000 per month from that investment.

Now cyclical markets generally get somewhere in the neighborhood of a .4 percent rent-to-value ratio. This is another ratio I call the RV ratio, or the rent-to-value ratio.

So ideally you want to get somewhere in the neighborhood of 1% per month, but these sexy, cyclical markets – and when I say sexy I’m saying that in a bad way – are like a siren song. You got to be be careful to avoid them in many ways because these markets generally will get .4 percent per month. So you might have a million property in Miami, for example, or Newport Beach, California or Los Angeles or San Francisco – it’s even worse in San Francisco, by the way – that gets $4,000.00 per month when you should be getting $10,000 per month from a million dollars invested.

Marc Lichtenfeld:  So when you work with your customers, how does the relationship work?  What are you showing them?  How are you working together?

Jason Hartman:  Well our clients usually start by listening to my podcast, the Creating Wealth Show. We’ve been podcasting for about 10 years now. They usually come in that way. They learn about the fundamentals of smart, prudent investing.

Then they start talking to one of our investment counselors about how to deploy capital in a diversified strategy when it comes to building a portfolio.

You know I started this conversation by saying that all real estate is local and it is. We look at investing from a global perspective. We just never liked any international deals we’ve looked at. The U.S. is a special real estate market.

So our clients talk with one of our investment counselors. They work out a plan the way a financial advisor selling a Wall Street investment would work out a plan, but here we’re working with the most historically proven asset class in the world, income property.

Then we help our clients invest in three to five different markets. That way, they are diversified geographically while still working with income property.

Marc Lichtenfeld:  Interesting. We only have about 30 seconds left. But one last question. Do you manage the properties for your clients or do they manage it themselves or find a local manager?

Jason Hartman:  So we vet and recommend property managers. We also teach people how to self-manage from a distance. I’m in favor of self-management. When you do it right, it works pretty well. But you can use a property manager.

But we help them manage it. We provide software and ongoing support. We refer managers and exert a lot of leverage over those managers because we give them a lot of business.

Marc Lichtenfeld:  That is great stuff. I can’t wait to have you back. Like I said, I have been doing this for 10 years, but I have so much to learn. So I’m looking forward to speaking with you again.

Jason Hartman:  Well Marc, happy investing to you and your listeners.

Marc Lichtenfeld:  Thank you very much. That’s Jason Hartman. And again, you can find more information at www.jasonhartman.com.

When we come back, we will be speaking with two-time Super Bowl winner Leonard Marshall from the New York Giants. This is Oxford Club Radio. Stay with us.

Marc Lichtenfeld:  Welcome back to Marc Lichtenfeld’s Oxford Club Radio. I’m Marc Lichtenfeld. We have some bad news. We have not been able to get a hold of Leonard Marshall. We were really looking forward to speaking with him about his thoughts on the Super Bowl, as well as what it’s like to live with CTE, which is the brain injury affecting many football players.

If he calls in, we will get him on the line. He’s out in California right now for the Super Bowl. Perhaps he got the times mixed up with the Pacific Time/Eastern Time. That’s what his PR representative was suggesting. Perhaps he’s still sleeping because it’s still early in the morning in San Francisco.

But we’re going to move on and talk about a pretty big story in the news: Martin Shkreli, also known as the bad boy of pharma. The “Pharma Bro” just went in front of Congress. They wanted information on why he raised prices on an HIV/AIDS drug from $13.50 a pill to $750 a pill.

Smartly he pleaded the Fifth. And he really didn’t give them any information. He’s been charged with securities fraud. He certainly doesn’t want to give up any information with a criminal case that is pending.

But what I’m finding fascinating- and also frustrating, to be honest – is this demonization of business these days. Granted what Shkreli did is abhorrent, but he’s not the only one. Drug companies do this all the time. Valeant is very well-known for doing this, but they’re a giant company. Martin Shkreli is an easy guy to pick on. He’s this young, brash executive.

Valeant is a major pharmaceuticals company, and that’s their business model. They don’t research and develop drugs. They buy them and then jack up the prices. So Hillary Clinton responded to Valeant – specifically Martin Shkreli – and has been tweeting about cost controls.

The Attorney General in Massachusetts said that they’re going to launch an investigation into Gilead Pharmaceuticals for their Hepatitis-C drug, which costs $80,000 a year. I find it amazing that you have a drug, especially Gilead’s drug, that cures Hepatitis-C. It doesn’t treat it. It doesn’t treat the symptoms. It cures it. They charge $80,000 a year, which, granted, is quite costly. But there are cancer drugs that extend life for a few months that cost the same amount. This drug cures Hepatitis-C.

There is something else to remember when you read about high sticker prices.  That figure is not what is actually being charged. In the case of the Hepatitis-C drug, there may be a handful of payers that are paying $80,000. Medicare’s not paying $80,000. Private insurance isn’t paying $80,000. If you’re an individual patient without insurance, you’re not paying $80,000. You’re getting some a break.

It is the sticker price. That price may get reduced from 80,000 to 60,000 for Medicare or for your insurance company. If you have a deductible or co-pay it can be expensive. I get that, but let’s keep things in the scope of reality. Barely anybody’s paying $80,000 for Gilead’s Hepatitis-C drug.

You have this demonization of the drug industry. President Obama said he wants to levy a $10 per barrel tax on oil to be paid for by oil companies. This is an attempt to fund green initiatives. Now oil companies can certainly pass that tax onto consumers at the pump.

Then you have Bernie Sanders. He wants to tax Wall Street. He wants to tax trades on Wall Street. He wants to use that money to pay for free college. I don’t understand when business became the bad guy. I understand that there is a lot of inequality in this country. I understand that the rich have gotten richer over the last decade and that the middle class has struggled. There are a lot of people on food stamps now. I understand that there is a big disparity.

We do need to do something to help the middle class because a healthy middle class is healthy for the country. There’s no doubt about that. But levying these anti-business taxes certainly isn’t going to help.

What’s going to help is healthy businesses. Businesses that profit can hire and invest in equipment, plants, factories and people. That’s what is going to help this country and help the economy.

I think that demonizing business is a bad trend. I think it’s wrong for America. I think it’s misguided and I don’t think it’s accurate. Are there bad players like a Martin Shkleri?  Absolutely. I think bad players should be reined in. If somebody’s breaking the law, they should throw the book at them. But since they are not breaking the law, I don’t see why we are pointing the finger at businesses. If they’re operating within the law, let them operate within the law.

If you don’t like the fact that there’s a drug that costs $80,000, come up with something better. Find a better drug and make it cheaper. There are companies doing that. There are companies who are seeing markets where there’s an $80,000 cancer drug and they have a similar drug and they’re charging $60,000. The next one’s going to come in at $50,000 and then $40,000.

There is competition in medicine. This is not always the case. Sometimes there’s a drug that’s clearly the best drug. And that is the one what patients have to get. But many times, there are competing drugs that have some similarities. And what should be prescribed should be determined by the patient, the doctor and what’s right for the individual. But in many cases, there are drugs that are very competitive with each other. And a major area of competition is price.

So I’m not an apologist for the drug companies. But I do think they are entitled to a profit when they invest in making these medicines. It typically costs a billion dollars and about 10 years of research to create a new drug. So I think just pointing the finger and saying business is bad is wrong.

My thanks to Jason Hartman, Alex Moschina, Curtis Daniels, Naresh Vissa, and all of you for listening. Sorry we couldn’t get Leonard Marshall on the phone.

We’ll be back. Same time, next week. Until then, hope your longs go up and your shorts go down. I’m Marc Lichtenfeld.