TBT: Why Mortgage Interest Rates Don’t Matter

Hello my friends. Welcome back to Passive Real Estate Investing where we dive into the world of real estate investing among other related topics. To help you with your real estate investing journey, today we’re doing something a little different. We’re going to take a trip down memory lane and showcase an important episode from the past on what we call our throwback Thursday episode. Now, whether you’ve been with us since the beginning, which goes back to 2015, or you’re tuning in for the first time, this episode is a must listen, we are revisiting one of our more popular episodes from the past, and believe me, what we discussed back then, whether it’s six months ago or six years ago, is just as relevant today. So sit back, relax, and let’s rewind the clock for this great episode. Enjoy.

Today it’s gonna be something a little bit more interesting because we’re gonna talk about why mortgage interest rates don’t really matter. And you might be scratching your head saying, well, how’s that possible? If rates go up, that means my mortgage payment goes up, my cashflow goes down, and that is a big deal. Well, that may be true, but maybe you’re being myopic or shortsighted, and we’re gonna talk about that. So I brought my friend and trusted mortgage loan originator, Aaron Chapman, back to the show. Aaron has been a veteran in the finance industry since 1997. This, this guy’s been around for a very long time, and he’s been focused on real estate investors specifically. So he’s not your typical mortgage broker or loan originator that does loans for homeowners. No. He does mortgage loans for real estate investors, and he has a big team. He’s got 22 staff on his team that help him. And our clients obviously invest in real estate with mortgage loans specifically for building your portfolio.

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Throwback Thursday Episode (The episode originally took place in the year 2023)

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So with that, Aaron, welcome back to the show.

Oh, it’s good to be back, man. Like you said, it’s been a while. I think we got five in the can right now, so it’ll be number six for us.

It’s probably the sixth episode with you. Yeah, you’re you’re definitely the top repeat podcast guest <laugh>.

Well, you know, membership has its privileges. Once you get to know Marco well enough, he’ll let you come on a couple times.

Yeah, there you go. All right. Love it. Well, you’re looking good and I love the beard.

You too, brother. And I say you keep working on that one.

Yeah, I will. I’m trying to copy you. I haven’t caught up to you yet, but we’ll get there. <Laugh>.

Yeah, it’s gonna, yeah, well, the thing about this, you can, you can catch up. I’ll never be so to the point where I can always stay ahead. ’cause If I do it, I’m stepping on this some and I gotta trim it up, man, it, it got to a point down to my waist. At one point that was miserable and I finally had to cut it because of, but there was a reason why I had to have it that long. There was, there’s a story there.

Yeah. Before we jump into the meat of everything you had made a comment before that I don’t think I’ve ever heard from you, and that’s just your standing, if you will, in the y pool of mortgage lenders, mortgage brokers, loan originators in the country. It’s kind of like a ranking, if you will. Can you repeat that for everybody?

Yeah, there’s a place you can go. It’s called the S Scottsman Guide. There’s a couple places, Modex and the Scottsman guide that track us as loan originators, how much we’re doing in the marketplace. And I’ve been reached out to by them because I don’t really pay attention, I’m just kind of focused on getting my job done every day. There’s over a million people in the United States that do the job that I do. And last year I was ranked number seven in the United States for transactions closed. And when you start looking at the group of people that they’re ranking, most of the people in the top 20 have teams of loan originators working underneath them. I’m the only loan originator on my team. The rest of ’em are all operation staff. So every deal is truly comes through my sources of business. I do have licensed operation staff so they can do certain tasks that you have to be licensed for, but I’m the only loan originator driving the business. So I thought that was pretty cool to be ranked number seven for transactions closed. Now, I think if we went to just individual loan originators and what you, what you bring through, who knows where I’d be. I don’t want to sit here and speculate, but it may be a lot, a little bit closer to the front.

Yeah. Congratulations. That’s an amazing feat.

Thank you. We’ve done averaging over a thousand transactions a year through my team, and I got a phenomenal team. If it wasn’t for them, I wouldn’t be in that spot of rank number seven. And we do loans for anybody buying residential real estate. Right. And we’re doing a lot of your DSCR stuff now. We’re doing your, your portfolio and blanket loans for investors. We’re doing some construction loans. A lot of, a lot of more than just your basic Fannie Freddie stuff, which is our bread and butter. But we help people with their houses, their family’s houses, investment properties and your, your vacation properties do it all. But we focus on the investor. ’cause That’s the toughest one to do. Yeah,

That’s great. Well, and we’ve been working with you for what seems like 15 years, something like that. Long time. Yeah.

That’s been, it’s been a while. It’s been a while. It’s for, I mean, since you expanded your team and started adding people to your team. Yeah, I’ve been working with you since then.

Yeah. Yeah. Good stuff. Well, let’s let’s jump right into the meat of things here. So we’re, you know, we’re, we’re talking about real estate investment specifically and how mortgage rates affect your return on investment and the financing of it. Let’s start with the big picture here. Everybody’s always asking, you know, where do you think mortgage rates are headed? And the reason they, you know, are concerned about that is because they’re constantly in changing. They, you know, they fluctuate not Dr dramatically from day to day. But people are concerned because a small change in the mortgage rate can make a significant change in your monthly mortgage payment, especially on larger mortgage loans. And people are concerned about, you know, the cashflow. So don’t jump into the cashflow piece of it just yet, but let’s start with where do you think mortgage rates are headed and why? Maybe?

Well, the easiest way, and I’m gonna have to do a share screen. We’re gonna, we’re gonna describe the screen for those people that are listening to this in in audio. Audio and not, you know, thing, but it, to know where they’re going, you gotta know where they’ve been. And so the thing here is if, if I can, hopefully it’s allowed me to pull up the actual screens that I’m looking at here, but I’m looking backwards on the mortgage backed securities over history. And when you start looking at the, where they were at one point, it tells you where we’re at today and where we’re going. So I have the ability to look at the, the actual security that’s being exchanged on a day-to-day basis from minute by minute basis that drives interest rates. Many people, I tell ’em to go watch the big short, that tells you how it was started.

And so since the that kind of describes where it came from, you know, what money driving into a market will drive the rates down or up depending upon the supply and demand of money. So what this is a, a picture of shows the chart going all the way back to the end of 2008, about August of 2008. And so it shows the history of the, this particular security, which is where all the money flows in that then we get to lend out and depending upon how much is there, dictates what the interest rate is. And we’re, what I’m evidencing here with, there’s a yellow line that I have drawn in here, and I set that line based upon the day the Fed announced quantitative easing. Now, if you go back to November 25th, 2008 is when Ben Bernanke comes out and says, we’re gonna start quantitative easing, which is we as the Federal Reserve will start injecting capital into the markets to, to stimulate the economy.

Well, they dumped in over $8.9 trillion into the markets. And when they announced a quantitative easing saying We’re gonna start doing or buying mortgage backed securities, which used to be pension funds and used to be hedge funds used to be, you know, mutual funds, whoever was buying into that could be other countries throwing money into this big pool of money. And as it got lent out, they got paid the interest or a portion of the interest and it was secured by the real estate and a person’s promise to repay. Well, when the, the Fed put that in there, it was right here where I have my cursor shows it was at a a certain price point. If you go and you zoom in on the day, you had a massive update, meaning a lot of money flowed in just on the announcement. The Fed had not actually put any capital in there.

And when you’re looking at this chart, everything has been above that line, or capital has been well above that specific price point all since that time. And then it started to, to taper off back in 2017 when the Fed announced what they were gonna do is quantitative tightening, meaning they were gonna stop investing into it. And then of course the market freaked out. A lot of people sold off interest rates jumped up from 2017 to 2018. They reintroduced in early 2019, more quantitative easing than you had the, the pandemic. And then the Fed finally announced at the end of October, 2021, we’re going to definitively start the quantitative tightening. The interest rates had more than tripled since then. Now what I did then is I zoomed in, I took that line, I left that line in place to see, okay, how has that affected us and that line.

Now we crossed over that line probably the first time back. I’m gonna try to give a little more mo movement here on the chart. First time we crossed over that line was back in September of 2022. And there’s been some trading to try and get us above that as far as traders buying into it. But they, every time they hit what’s called the 200 day moving average, it would bounce off it and come down, bounce off of it, come down, bounce off it, come down. That became a ceiling for traders to stay below that ’cause it’s an overbought security at that point. And we definitively crossed that point in May, 2020 fifth of 2023, we definitively crossed that point where the 200 day moving average crossed that line established or that price point established back in 2008 before the Fed started quantitative easing. So because of that, it is my belief that we’re going to, that is going to be our hard ceiling, that specific price point on the security.

And then you have the 200 day moving average continued to decline any growth. Another thing I found interesting recently was Charlie Munger was had an interview, I believe it was Aaron Burnett and CNBC, and I believe that’s who the interview was with. It was cut up and distributed a bunch of different ways in that interview. He said, we have had 40 years of declining interest rates. It is the opinion of himself and those other management at Berkshire Hathaway, including Warren Buffett, his partner, that we’re going to be having 40 years of increasing interest rates. Now you get into you know what people believe is gonna happen, right? You have all these people saying, well, we’re gonna get back to a normal market. Well, what is a normal market? That’s the other thing that I, I definitely want people to try and try and wrap their head around what a normal market is.

So I’m gonna share another quick screen here. And that one has to is a, is a screen that breaks down the historical weekly data of the interest rates since 1971. So what this one’s going to show us, and I don’t know if you can see it quite yet, Marco, not yet, but it’ll come up, it’ll come up here in a second. So what this does is I’m only gonna show you what the very bottom of it as I’ve broken it all down. There’s 2,700 and basically 2,720 some lines here of data. The weekly interest rate, oh yeah, that was as it was published on a 30 year fixed from, from Freddie Mac. Now what I’ve done here is if you look at the average interest rate since 19 71, 19 71, 2, 2 last month of two thou August, excuse me, June of 22nd of 2023, taking in the pandemic, all the quantitative easing everything into account, the average interest rate for the average homeowner people buying a house to live in was 7.74%.

If you take out quantitative easing altogether, just go from the day they started the 30 year fixed up until 2009 before they started quantitative easing, the average interest rate for your average homeowner is 9.12%. Hmm. Now to factor is to see how much that influenced it. ’cause You got down to 7.74 for this whole however many years that is 40 whatever years. Yeah. You’re can see actually it’s 50 years now, the average since 2009 to 2022, all that quantitative easing is 4.03% for your average homeowner from the pandemic, you know, from when the pandemic hit March of 2022 excuse me, 2020 till the end of 22. 3.34%. So that’s how the pandemic influenced that itself. Now, what I decided to look at since I was pulling up the charts back to 2008 and seeing how things were influenced by the Fed after 2008, well the window I think we’re sitting in right now is between 2000 and 2008.

could be wrong, but that’s what I’m looking at. Just as for data, the average interest rate from 2000 to 2008 before that quantitative easing is 6.48% for your average homeowner. If you look@bankrate.com published last week, you go just bankrate.com, scroll down till you see where it says a better rate is waiting and you click on, on the mortgage side. The average rate right now for a person buying a house to live in is 7.25. So I think we’re gonna be working our way somewhere between six point, you know, the low sixes to the, to the sevens. That’s what I see for the average homeowner. So what does that translate to for a real estate investor? So real estate investors typically are one to 1.5% higher in rate than the regular homeowner. Right now we’re not seeing that your average homeowner’s getting seven and a quarter.

Your average investor right now is about 7.6 to 7.7, but they’re paying a ton of points. That’s never been a thing in history. We’ve seen over a year now, year, year and a half, where points is the norm. Two points. Well, why is that? Some people ask me, why am I paying points? Why is there no zero point options? Right? Well, if we were to go zero point options if you about 8.5%, but then if the rates dip at all, people are already programmed to refinance. We’ve been programming to do that for years. So if that happens, then the markets who have securitized those loans will just get crushed. So what they’re doing is they’re only offering, this is my estimation. I’m not saying this is how it is, this is just my educated guess from doing this since 97, that they’re only offering a rate that forced a person to put money in upfront that when the rates do drop, all it’s gonna do is get the same rate, what they already got with less points, but they already paid the points.

So why would they go and refinance? ’cause Once you securitize a loan, yeah, you’re being charged fees up front, but that’s not going to anybody securitizing the deal. That’s not going to anybody on the, on the, the end side of it that’s setting up the servicing and all that kind of stuff. It costs them probably a couple, two or three points to do that. So their four or five grand in, if you free finance within the first couple years, they lose money. They need to at least break even. The easiest way to do that charge you money up front before you even get started, keeps you locked in long enough that that, that that particular side of the of the economy doesn’t take a header into the concrete.

On that note, this is kind of a side question ’cause it’s outside of the whole question of you know, where we’re headed, but you keep mentioning points. Is it a wise thing to do to pay points upfront to lower your rate? Especially if you’re considering keeping the loan for a long period of time.

Right now you can’t get away without paying points. It’s just the way it is. But what I would say is some people will look and see how many points could I pay to get down into the sixes or whatever that might be. Myself and Scotty, Scotty on my team is one who analyzes what’s going on in the market, analyzes what’s going on with the rates and talks through every person before they lock and shows them the different options. Sometimes it is wise, I’ve seen a scenario, you know, I’m big to say put 20% down, don’t put 25. But if the points today for a specific rate are like, say two points less, you could put 25% down. Well you’re really not putting 25% down. You’re actually putting 23% down because an extra two would’ve been paid to points anyway. So that’s gonna go towards your equity.

So you’re really saving money by doing that. But we’ll do an analysis with you. Each person gets an analysis with us to look at if you paid X amount of points, what’s that payback? If it’s within the first 8, 15, 18 months, it may be worthwhile because in reality what I tell everybody, when you buy an investment property and you lock that rate, you set it and you forget about it. This is some emeral live kind of stuff, right? Don’t think about it, don’t look behind you, what’s going on. Because with the time value of money inflation being what it is, and we know this inflation’s been well above 8% since the eighties. If you look at the charts that really track inflation, there’s been very small shorts, short windows of time is less than that. Not the metric that the C P I is that dollars eroding so fast that you’re never paying back what you borrowed any, okay? So set it, forget about it, let somebody else pay it off. Do your research differently for your property. Not the rate, not the cost. Those are factors you want to factor in, but that’s not the real value. Somebody else paying off that mortgage for you and then you writing off that interest on your taxes if you paid it still benefits you even when the rate’s higher, right?

Yeah, that’s a great point. I did go off on a tangent by the way, but I think a lot of people don’t think about or consider the points situation you’re saying it’s not an option today. Okay, that’s good. But you know, having a conversation with someone like yourself or your team to determine whether 25% is a better option than putting 20% down and then, you know, considering or including those points within that extra down payment is really a discount and a benefit to you. So, you know, you have to just run the numbers. This is all math. You have to run the numbers and figure out what is the ideal down payment. And if paying points to lower your rate is an option, consider that to see, you know, what loan and what it rate would benefit you. When I get a mortgage loan, if, if it’s a 30 year loan, I’m looking at keeping that sucker for 30 years unless rates drop significantly where it makes sense to refinance that, reset the clock on the 30 years, but have a lower mortgage payment. But again, to me it’s a math problem. You know, to you maybe you look at it slightly differently. I’m not sure.

Well it’s, it’s still a, it’s still a math problem. There’s no two ways about that. But also we gotta get back into who benefits when interest rate is the most, the most focused on thing. And it’s not the real estate investors, it’s actually the banking industry that, in that, that benefits more from people be so being so focused on interest rates. You know, I’ve had more than one situation where people come to refinance and they just wanna refin get the rate down when they’re like, you know, already 5, 6, 7 years into the deal. I have seen consistently that we have been programmed to refinance every four to five years. Well, in a 30 year fix, the first four to five years is almost all interest. And when you look at the, the numbers here, people will pay a significant amount of capital in principle and interest payments in that first four years or five years.

But very, very little bit went to principle and then they go refinance. And the amount that they had paid down in principle was nullified by the cost being added back to the mortgage. They’re starting out where they started again and they’re back in an interest heavy period. And if they keep doing that for 20, 30 years, you never pay down the loan. But if you see a person who’s been in this for a while and you start looking at wait a minute, you got this way back 20 years ago and your payment is this, we start figuring, well, but what the dollar was worth back 20 years ago versus what it’s worth today. You’re not paying anything on this mortgage and yet whoever you’re paying back is getting screwed. So it’s that programming of refinance, refinance, refinance. When the rates go down, it’s programmed by the banking industry to not keep you in that loan.

They’re gonna give you a third of year loan to make you feel like you have a big blanket around you to keep you protected. But they’re not gonna let you keep it if they can psychologically get you to think differently. And if you are gonna refinance, if the rates are better, you better get cash out. Take that cash, reinvest it to generate more capital. Don’t ever just refi a refi. This doesn’t, doesn’t make any sense. I’m telling you from my perspective, I have, I have pushed away thousands and I’m saying thousands of deals where people want me to refi just to refinance. I couldn’t consciously do that for them and sleep at night and say, that was a good move for you.

Right? And that kind of plays into the whole thing of why mortgage rates don’t really matter. Because when you factor in the inflation rate and that your mortgage loan, that balance is being eroded away and you’re paying it off and cheaper with cheaper and cheaper dollars, you have a built-in automatic rate of return just from the devaluation of the dollar. Meaning that your, your mortgage debt is being, you know, eroded away. For some people, they just don’t wrap their mind around that. They don’t get it. They just heard what I said, but they don’t realize that yeah, there’s a rate of return by the fact that that mortgage loan is being devalued, inflated away each and every year. It’s worth less, but you’re paying for it, you know, with the same amount of dollars you want to take a stab at explaining that in different words. <Laugh>

Yes. I have a couple of explanations I can give to help you do, help you kind of wrap your head around what, what’s really happening here. So I’ve heard this explained to me that back, I think it was, it had to be like the fifties or sixties that you that for $20, which was also equivalent. And I don’t have the exact date, so don’t go call me an idiot ’cause I didn’t go look up the date for $20. You could buy an ounce of gold. Well that $20 or that ounce of gold could get you a a newly tailored suit to yourself, right? Yep. A, a shirt, a tie, a belt, pair of shoes, and a pair of socks pronounce gold today if you walk into a men’s store that had, you know, fairly tailored suits and all that kind of stuff. I’ve had to get a couple, ’cause you know, Marco and I went, Marco and I went to DC together to speak to some senators and the members of Congress about what you guys need for as real estate investors.

I had to get the suit, get the suit, the shirt, the belt, the shoes, all the stuff for about 2000 bucks. What is it? What is an ounce of gold, right? So in reality, gold has not, doesn’t move that much in value. It’s a very stable thing. What moves is the value of what you have to buy it with. Same thing as, you know, back in my early twenties, I remember going to Taco Bell to get two bean burritos, two tacos, a drink on their value menu for a dollar 99. I drove back through there with a couple of months ago with my daughter’s. She’s 15. She was 15, recently 16. She ordered the exact same thing. It was 15 bucks. The value of the instrument we’re buying it with ha is declining. So one other way of looking at this is you know, with inflation we know that the dollar spends less, right?

You can’t buy, it’s the, the inflation’s really not. The products are inflating a price. It’s the value of whatever you’re buying it with is declining in value, right? I use an average of 8%. So everybody, while you’re here, you can pause this right now, but don’t pause yet. Wait, I’m tell you what to pause for. Go to your app store and download the Q J O investment tool. It’s on the Android and it’s on the, on the Apple store. Now, the reason I had, I, I had this created, you know the professor of accounting at Kennesaw State University called me, heard me on a podcast, may have been this one actually theorizing about the time value of money. And he brought me over to speak to all the students and then he helped me create this, this tool, which I turned into an app.

And that app will help you to show how much you’re gonna pay in your mortgage over 30 years. And then when you factor in the value of the dollar, you’re actually paying less than what you borrow. That time value of money is very, very, very valuable to have. And know that what you borrowed 30 years before the value of that dollar to buy that asset, that business, that real estate, that’s gonna create cashflow for you and then have somebody pay off, off else, pay off the note, then the property’s gonna appreciate, get the tax benefits. All these things. You’re paying it back slowly every time you make a payment. The dollar’s worth a little bit less at 8%. It’s 0.666 per month. So every time you make a payment, it’s 0.66, 6% less every single month. So you can see how it goes from, let’s say you borrowed 160,000 ’cause you bought a $200,000 house, you put 20% down.

So 160,000 over 30 years, you’re gonna pay back about 400, 2000 in principal and interest at today’s rates. But the value of those dollars, when you recalculate it every time it leaves your hands to make that payment, the sum of all that over 30 years is equivalent to $152,000 in value compared to the day that, that you bought the property. So that 152,000 that you paid back the bank lost eight grand on you. That’s why they trade the paper so much. That’s why they sell the servicing so much. That’s why your, your mortgage gets changed to a different person, different person, different person. They’re trading the servicing. So if one person held it too long, it would be worth so much less. So it becomes a just literally a trading scheme in the background.

So that segues into a question I want to ask you about. How should a real estate investor look at returns when mortgage rates are increasing? Because I asked you right from the very beginning, where do you think mortgage rates are headed? I don’t know if you specifically answered the question, but I got the sense that mortgage rates will be going up going forward.

They are going up from everything I can see. And if just coding back to Charlie and Margaret, he said 40 years of increasing interest rates. Now he didn’t say they’re going to to 1890 8% like they did back in the eighties, right? But they could be going up. Everybody keeps claiming a year or two they’re gonna go down but go down from where, right? If they go up to a certain point, they could come back down, but they might settle in at 8%. Still higher than where we’re today. So how I would say to evaluate this, if you’re gonna spend your time evaluating what property to get involved in, look at who you’re working with, right? You got ra real estate, you got people that are gonna go out there and help you vet areas that’s got a ton of experience. You literally get an operations division as part of your business for free.

‘Cause They don’t get, they they get paid by real estate same way a realtor would. If you went there and found a house on your, on your own, you wouldn’t have that experience to help you. So that’s free. So you’ve got the experience you need to have, right? The people that are on your, my team. If you’re working with a different lender than us, I’ll just be blunt. You’re taking, you’re, you’re literally putting yourself at risk. There’s some good people out there, but they don’t get, they don’t get it from the perspective that we do. They don’t have the experience that we do. Then there’s the, the, the area that you’re purchasing in. Now here’s the thing I think a person really should be focused on is the property can keep reasonably rented for the entire time you own it. And can you raise rents? That’s it. That’s where your main focus is. We talked about a $200,000 purchase. We talked about 160,000 loan. Well I’m gonna ask you Marco, if you did your job as the c e O of your investment business and you found a property you kept reasonably rented the entire time you owned it, you raised rents on it. Who pays off the 160,000 mortgage?

Your tenant.

Your tenant. So if you take 160,000, divide it by 30, which is how many years it’s gonna take ’em to pay it off. ’cause You’re not gonna be dumb. You’re not gonna pay off your mortgage fast, you pay it off slow, right? You’re gonna find when you take 160,000 divided by 30, 30 years that they are averaging over the 30 years, $5,333 and 34 cents per year being paid in your behalf by paying off that mortgage. Now divide that into your investment, which was 40,000 down, let’s say 10,000 in cost. So 50 grand, that’s a 10.6% increase on your investment every year averaged over 30 years. 10.6. That’s just by keeping the place occupied. That’s it. That doesn’t factor in any cash flow. That’s not cash on cash return. That’s not tax benefits, that’s not appreciation. Now let’s get to appreciation. We’re living in an inflationary environment.

I don’t care where you look. Everything you read right now, properties are still appreciating, they’re still going up in price. The top 100 markets, only one had a decline. It was a small decline. Is Austin, Texas, nobody’s going to Austin right now. It’s overpriced as all hell. So it’s not a great place to invest. So everywhere you’re investing, they’re going up. Now the case Shiller index says we got 6% average increase last year. They’re anticipating a five to six this year. Take that five and cut it in half. Two and a half percent. So we bought a 200,000 house Marco and it went up by two and a half percent was two and a half percent of 200,000.

What was the math? 200? Say it again.

You got a 200,000 house went up by two and half percent. So you’ve got a hundred thousand house that’s 2,500 bucks. You double it, you’re at five grand, right?

Yeah.

5,000. So 5,000 is what percentage of the 50,000 invested.

You want me to grab a calculator? <Laugh>.

<Laugh>. So a person invested 50,000, put 20% down, which is 40 grand plus 10% on this 200,000. I mean 10,000 in costs on this 200,000 house they invested 50,000 property value went up 2.5%, which is now five grand. Yeah. Which is 10% increase on your investment. What we just said by paying off the mortgage, your tenant paying off the mortgage that’s averaging 10.6 by buying in a place that at least has a 2.5% increase in value year over year. That’s another 10. That’s 20.6 before a single dollar goes back into your pocket 20.6%. This is the long game guys. Everybody got so wrapped up in cash, on cash return and cap rates and all this metrics, which are good metrics to look at. But those come down the road. It’s always come down the road. We had this quantitative easing for the last 12, 13 years that taught people that real estate investing was different. It’s not I, this is what it always was. Nobody ever started a business because it was profitable the first month they started a business with reserves for three to five years to be profitable down the path, right? That’s what this is. Now, if you already know, just by buying in the right place, getting the right team to keep it rented and, and you can raise rent or just have an appreciating property already making 20.6. Now let’s talk about the rents. $1,800 a month on a 200,000 house is not an unreasonable rent. Correct?

Right? True.

Well let’s say I’m gonna beat this up ’cause no every investor’s gonna hear this like nope, I went buy that house. Let’s say you’re only making a hundred dollars a month cashflow on this $1,800 a month rent. Most people say I’m not buying that house and I’m gonna tell you you’re stupid. Why? Because we get to raise rents. How much are rents going up by year over year? Right now in the United States, Marco

Depends on the area, but anywhere from four to 8%

Four to 8% is pretty common and eight then the four percent’s in some of your areas that you probably won’t wanna be in. Right? So let’s cut that down to 3%. Well, if you’re renting for 1800 bucks, 3% of 1800 bucks is like $54. That’s not a lot. Not a lot of tenant are gonna move out for 54 bucks. I’ve got kids in apartments that are getting $200 rent increases year over year in little one and two bedroom apartments, $54. Not push your client away but you made a hundred dollars a month the year before. Now you’re making 154. That’s a 54% increase in your cashflow. That’s a massive increase in your cashflow. You do that again the next year. It’s 3% of the 1,854. You can see how this compounds, right? In five years, where are you at? You’re at a significant growth over where you started.

But where’s the lender at? We talked about the lender gets to take the exact same dollar amount every single year, year after year, month after month. And they don’t get to change it. And as we prove you go to, you quit jerking off investment tool there and you go down the amortization table, you click on that one, you can type it all in in your upper right hand corner. After you type in the 20% down 200,000 purchase price, let’s say 7.5 interest rate, you hit calculate, you go up to the upper right hand corner, you click on the calendar icon, scroll all the way to 2035. No 2030 2053, sorry, 2053. You get that 30 year fixed. Figure out what happened in 30 years. Scroll the bottom you’ll see is over $400,000 in principle and interest. But 152,000 in actual dollars paid. They’re losing while you’re making money and it compounds at hundreds of percent.

That’s where a person needs to be looking at real estate. Where are you buying? Who are you working with? Not what’s my cash on cash. People are gonna get screwed sideways on cash. On cash right now because they’re gonna get suckered into the wrong house and into the wrong loan. The wrong loan I’m seeing people take right now is adjustable rate mortgages. They’re taking sometimes these yeah, they’re taking these zero down loans. It’s like, well but you know, it’s for the savvy investor. If you’re a savvy fricking investor, you wouldn’t do that loan, right? So I have seen the cycles and the people get screwed. You are not savvy if you take either of those. ’cause What Warren Buffet said, he said the 30 year fixed is the greatest financial instrument in history. ’cause It’s a one-way bet. If the rates go down, you can always just refinance. But if they go up, you are protect yourself. Being forced into a refinance. There was more foreclosures on arms than near anything else out there when the, when the crash hit in 2008. So stay away from those things and if somebody, anybody on the real estate side or on the lending side tries to push that, that your direction, yeah, walk away, gimme a call aaron chapman.com. It’s the best place for you to go.

Aaron, I always used to call adjustable rate loans as ticking time bombs. ’cause It wasn’t a question of if it was a question of when you’re gonna get, you know, caught with your shorts down on that thing.

Hundred percent by the grace of God that we had this window of time where people that were able to weather the crash to hang out long enough to get better set rates than ever in history. But I think that this, the rates that we got, albeit phenomenal, right? It’s gonna do more damage than good. I don’t know what the ramifications are gonna be of 13 years of quantitative easing. That’s never happened in history. Right? we also have an enormous amount of inventory out there that are not gonna hit the market. ’cause Nobody’s gonna sell their houses. There’s no reason to. The 30 are fixed. They have at two point a half or 3% is so valuable to ’em. That is a massive, massive tool of value to them. And so some people are saying, well I don’t know if I should buy real estate ’cause they’re selling less than half the houses they used to. Well they have less than half the inventory. I mean, we have less than half the inventory had in 2019 pre pandemic. That’s why you don’t have all this, have all that.

Yeah. Even if interest rates go up, in my opinion, it really doesn’t matter as long as the property carries itself. Because we have very, very strong housing fundamentals in this country. We have a deficit in the, in the amount of housing that we need. And we’re probably gonna be in that situation until at least 2030. We’re not gonna catch up. So, you know, the you know, the saying is that you have a lot of tailwind, you don’t have a lot of headwind. That’s basically where we sit today. So, you know, just to kind of pick up where we left off and then, you know, start landing the plane here. Is it wrong to look at a real estate investment as a cash flow investment in the short term? It sounds like it is, even though you do want to maintain some level of positive cash flow. But, but if you look at real estate as a short term, is it wrong to look at it as a cashflow investment?

I think if that is your primary viewpoint, then it’s wrong. But to find it as a cash flow investment is fine. You stumble into one or find, you know, I’m gonna say stumble, but sometimes you can find markets that’ll give you that. If it’ll give you that, why not? Right? But you also still have to go back to all the other things I just said. Can you keep it reasonably rented for the entire time you own it? Can you raise rents, cash flow that looks awesome on a proforma Could be amazing. But what if nobody wants to rent that piece of crap, right? Get your inspections, send people out there, get pictures, go see it, understand it. There’s been a lot of people that have made a lot of money and a lot of people sitting in jail right now that offered guaranteed rents. And then when the guarantee was up, like, man, we can’t get this place rented at all.

It save lives. And it turns out it was never rehabbed. The pictures that they got were wrong because they paid cash for it. And guys, lemme just tell you, you never pay cash for a house that you don’t have any sort of appraisal in or put some more, just don’t pay cash for a property unless you call me. Period. I will give you all the reasons why paying cash is so dang risky. And if you do pay cash, you wanna do a amp, get your cash back out after a re rehab after a rehab or something, you better talk to me before you do that. ’cause You can back yourself into a corner. Very, very, very bad. I’ve seen this thousands of times do not step into this without professionals backing you up, period. So if you’re going strictly after cash flow, you could get, you know, get those sirens, those cash flow sirens calling you in through this amazing opportunity to end up being just a hardcore screwing that was coming. You gotta look at it from all those basic fundamentals. If you get cash flow on top of it, then great. Yeah. But if that’s what you’re looking for first and foremost, you’re, you’re gonna set yourself up for problems.

So it’s, it’s your opinion that mortgage rates are going up. How should investors look at returns then with rates going up in the foreseeable future?

Really looking at the areas to see how much those, those rents can go up by. And then what is the, what is the driver for rents in the area? Is there it’s, I think you really get with your real estate professional and understand what’s gonna happen in that particular market. Rents have not gone down. I mean, there’s places where they have declined. You know, if you want to go into probably the worst performing market I saw any fund, any, any information on over the last five years, and I know it was less than five years ago, but you know, Minneapolis, Minnesota, the people who had real estate there that was close to the inside there when things started getting burnt down and all the upheaval in Minneapolis, people having to drop their rent significantly clearly to keep tenants. So you gotta be careful where you’re, where you’re at and what things could happen. And be aware of the of the market. ’cause Anymore man, the, the economy and some of these markets can be affected by just how people act within it. So I would spend a lot more time understanding the communities and understanding what’s driving them and what would bring tenants to that community over another one.

So you’re, you’re hyper-focused it sounds like to me on the ran in the area, but more so the ability to raise those rents in time because really what I asked you is, you know, how investors should look at their rates of return. You’ve driven it back yet, you know, once again to the possibility of raising rents in a particular area or the opportunity going forward. The potential opportunity, yes.

‘Cause We’re locking it in a rate for 30 or fixed, right? I have to look at it from that perspective. For locking in for 30 or fixed and we’re anticipating them not to go down anytime soon, right? Right. Then you’ve gotta look at what else is going to create you cashflow or create the opportunity for cashflow if that’s one of the things that you really, really seek. Or if you can just at least keep the thing rented out and have, you know, minimal capital expenditures because you buy a newer home or you have a really, really good inspection, make sure all those things are done the way they should. That’s, to me that’s really the only way. If you’re looking for any sort of form of cash flow down the path, you’ve gotta understand how to take what’s already a fixed cost and increase the revenue on that cost.

That’s really it. There’s no way to cheapen it up anymore. You can’t cut anything out of it. You’re gonna have that mortgage payment unless you pay it off. And I will strongly caution against anybody paying off mortgages. Strongly caution against anybody thinking I’m gonna take my cash, my 200,000 pay cash for a 200,000 house and just get more cash flow. That when you start doing that, you’re literally killing wealth because that 200,000 spread over, say four properties that you can raise rents on four properties that you’re gonna get compounding growth on four properties, compounding appreciation. You’ll just see within about three years, you’re just destroying your original thought process. That isn’t, it shouldn’t even be a thought process, right? If you got cash locked up in a house right now and you could have three, four, 5% interest rates. I’m sorry, but you were foolish. Extremely foolish.

Yeah. Okay, so in just wrapping it up here, two questions. What’s the maximum today? Is it still 80% and how much is too much? ’cause I know a lot of people are opting to go with 25% down to get a better rate and slightly better cash flow.

We can still do 85% if you want to put, if you want to get a a higher rate and more points and have mortgage insurance and sometimes it’s a necessity. And so we still do those. But 20 and 25% is the most common. Still the most common is 20. Interestingly enough. And we will run the numbers, it’s, it’s actually getting kind of a, it’s, it’s really being a close second is that 25? It’s, there’s a lot of people choosing to do 25 just because of where that cost might be. If one and a half to two points of your 5% would’ve gone towards costs and you can apply it towards equity sometimes it just makes sense. So we take the time, you can’t say on a blanket deal, always put 25 or always put 20. We take it case by case. I have a specialist analyze that with you to be sure you’re not making that decision alone.

We’re giving you all the data to make the decision with, but what I tell everybody is you hit the trigger to lock, you lock and walk away and keep moving forward looking over your shoulder, wondering if you locked at the wrong time. It’s never a good thing. It actually puts you in a really, really rough position. Especially now I think that that worry about interest rate is hurting a lot of people. ’cause They, what they do is they’ll just call and call and call all these different lenders looking for the rate, who’s gonna gimme the best rate and they do it for weeks. And what I showed you in that chart, guys, the market keeps going down. Meaning the rates keep going up. By the time you’re done, you satiated on all your calls, your rate’s gonna be higher than what you’re quoted by the first guy to begin with <laugh>, right? Just lock and quit.

Well, on that note, are there any tips or strategies for those people who still are focused on getting the best deal? Meaning the securing the lowest interest rate on a mortgage? Is there anything you can share with people to at least get that best rate? Even if it’s like shaving an eighth of a point or a quarter of a point.

Find the best lender you can work with. Find the people you can stand to work with and just communicate with them. Understand what’s going on in the market. We track the market minute by minute. I’ve got Scott, Scotty and myself staring at the bonds. Sometimes we can capture some movements. No lo no different than trading. If you can capture the movement on the upper end of the, of the, the trend before it drops back down, you can shave that eighth or a quarter off of your costs. Yeah, it’s not gonna be eighth and a quarter off rates anymore guys. It’s getting, unless they’re massive, massive days, but there’s so much volatility. Find somebody you trust zero in with them. Get that application in place, get that ready to lock. If this whole thing is I’m gonna wait and find a lender on work with ’em, then I’ll let ’em pull my credit and then I’ll let ’em lock.

You can lose your lock. Just get it set up the people you wanna work with and if you wanna work with people to get it done, to focus on it aaronchapman.com. That’s the only place I would recommend you go, go talk to everybody else. But honestly guys, you’re putting yourself at risk. I have a lot of people call me back after talking to another lender and it just went the way it shouldn’t have gone. They got a great weight locked but they never got the own closed. So since the loan never closed, we gave it down what their rate was.

Yeah, good point. Well I always end by asking, you know, my guests to tell listeners how they can follow you and get more information. You literally just answered that question with your website, but I’m gonna get you to repeat it, but you, you heard it here guys and gals. You know why mortgage interest rates don’t really matter when you’re investing in real estate. You know, Aaron just explained it to you today. But anyway, Aaron, tell our listeners once again, how can they…

Well one of the, one of the main points I think I do wanna, one thing I wanna touch on real quick, Marco, guys because your questioning this, just know that there’s a large, large, large number of people questioning the same things that are, don’t have the information you just got. So what that means is the competition you used to have out there driving prices up is not there there, right? So you are not gonna have that massive amazing how when rates are really low, you called your realtor and they would say, well you gotta have, you gotta come in with 30,000 over list just to get in the game. We don’t have that anymore. It’s funny how nobody questioned that, but everybody’s about the interest rate. You overpaid for the house. You pretty much ate up what interest rate benefit you had. So we don’t have that going on right now.

You are armed with knowledge that a lot of people don’t have or at least are paying attention to ’cause they’re wired. So screwed up. Go forward, contact us. Let us guide you through this again, like you said, I’ll just reiterate, it’s aaronchapman.com. You go to go to YouTube, look for Aaron Chapman, look for the bald, bearded redneck with a braid in his face, subscribe there. Twice a week. I give a rundown of the market how it affects you as a real estate investor. Get informed, stay informed, and be ready to move when the deals hit you.

Yeah, and I’m gonna add real quick to that, Aaron, just so you don’t get crushed, you and your team with a whole bunch of calls and emails, you know, rehashing the same type of information. Our investment counselors here talk about the exact same things that we just discussed here on today’s episode. So you’re gonna hear it again to a lesser more diluted degree when you’re talking to my team here. You’re gonna hear it again and again. And then ultimately you’ll be in touch with guys like Aaron Chapman to get your mortgage financing in place so you can buy your next investment property and build your portfolio here. So we work very tightly together. We share the same you know, knowledge and understanding and we see investing in real estate the same way, especially when it comes to using mortgage financing to get it done. Anyway, with that Aaron, hey, thanks for coming on the show again. I appreciate your time always a wealth of information. Of course. I’m sure I’ll have you back on here soon enough. So thanks for coming on.

Oh yeah, I got a book to promote so I gotta come back on here.

Alright, we’ll definitely get that done. All right, thanks Aaron.

Thanks buddy.

I hope you enjoyed this week’s throwback Thursday episode. If you haven’t already, remember to subscribe so you don’t miss out on a single episode. We’re releasing one every week, sometimes two, and I would not like it if you missed an episode. There’s just a lot of great nuggets and good content sprinkled throughout this show. If you have a question about real estate investing or finance, simply go to passiverealestateinvesting.com and click the Ask Marco button. I read all of them, I reply to many of them, and sometimes I cover them on the show, and I’m gonna try and do more of that. So, I am going to encourage you to go to passiverealestateinvesting.com and submit your question for Ask Marco. Lastly, help us share the show with other like-minded people that you know who can benefit from it as well. Just visit us on your platform. Most of you are on iTunes and leave us a rating and review. I would greatly appreciate it. I read them all and I will thank you in advance. And that is it for today. Thanks for listening. I will see you on our next episode.

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