CW 974 - Rate Hikes & Financing Your Investments In Changing Times

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 multimillionaire who's actually been there and done it. He, 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 investors.

Welcome to episode number 974. 974. This is your host, Jason Hartman. Thank you so much for joining me today. As we talk about financing, let's talk with one of our lenders. He's a returning guest on the show and we're going to dive into some of the details on financing. And you know what, we want to dive into this topic even more deeply than we are today. On future episodes, I think we're going to do a little series for you where we're going to go in depth and take a deep dive into appraisals, how they all work, into underwriting, how it works, and really dive into some of these financing topics in depth over time on the show. We had a big talk about that after recording this episode. And just think that knowledge would be very valuable to you, our investor clients and listeners and event attendees. So a couple things before we get this interview going. The first one is you must, must, you must, you must always, always, always. Unless maybe you're buying a brand new home from a big builder or something like that. You must, you must have a home inspection. Please promise me you will not buy property without an inspection. Okay? Deal? Are we making a deal? Yes, I am coming through your earbuds, through your AirPods, through your car stereo, through your Amazon Echo Alexa device, because yes, you can listen to my show on there. Did you know that? Just say play Jason Hartman's podcast or play the Creating wealth show. I will come right up there and you'll hear some of my other shows on your Amazon Echo device as well. So yes, I'm there. I'm everywhere. You can't get away from me. Sorry, no escaping. Anyway, I am coming through shaking your hand virtually because we are making a deal that you always get a home inspection. It is worth the money. So do that. Okay. Some events. We got some great stuff coming up. We're going to have our first event in the northeastern United States. Of course, this is coming up very soon. We're just about to ink our venue and it's going to either be in Philadelphia or Washington D.C. probably. So look for details on that. We just had another person join us for the ice hotel trip in Sweden. That is Carmen. Carmen, welcome. Glad you're joining us on that. That event is now full sold out. So no more ice hotel people on this trip. At least. Maybe in a few years we'll do another one. So that is something to think about. What else? What else? What else? Oh, yes, A. A tropical event. Yes, we are working on doing our event on the other side of the world from our northeastern event. Probably sometime in October, November. We are planning to do an event in Hawaii. Yes, beautiful Hawaii. So what a great way to take a tax deductible. Well, scratch that. I don't want to say that I am not a tax advisor. I have to tell you that that's my disclaimer. And by the way, if you start asking me about asset protection and legal issues, you know I'm not a lawyer, E. Okay, Not a lawyer, not a tax professional. And I'm a hack economist. In either case, you can probably deduct at least some of these great trips to come to our events. And hey, if it's in a beautiful tropical location like Hawaii, or a history rich or entertainment rich location in the northeastern United States, then why not come to those events, get some education, get some hours toward your real estate professional status, get a tax deduction for at least part of the event and part of your trip. So that's that. I guess that kind of covers it for now. I am in Austin, Texas. Yes, I am house hunting because it's time for me to move to another city. Now I've done a lot of house hunting here over the years and let me tell you, it is difficult to house hunt. It's a lot of work. It's a lot harder than buying an investment property. And that's a bit of work too nowadays with inventory being so scarce.

But.

But that's what we're here to do, is make it easier for you and help enable your success as a real estate investor. That should do it. For now. Get your home inspections for sure. And do not buy a house without a home inspection. Okay. And let's talk about financing today. And we are going to take a deeper dive into this subject we have over the years. But we're really going to do kind of a series for you, so look for that coming up in the future. But let's go to our guest today and talk about financing your income properties. Here we go.

Hey, it's my pleasure to welcome a returning guest back to the show. We're going to talk about financing with Aaron today. I recently saw him at our JHU Jason Hartman University event where he spoke and shared some of his wisdom on the financial markets and what it's like to get financing. It's certainly challenging. It's not as hard as it was post great recession. Rates are still very good. However, they have come up a little bit. They are slated to go up quite a bit more. So there is some definite urgency in terms of locking in that fantastic asset, that 30 year fixed rate, incredibly low rate mortgage. Also, we're going to talk a little bit about closing costs and it looks like we have to make some adjustments there as well. Aaron, welcome. How are you?

Not too bad. How things are you, Jason?

Good. It's good to have you on the show again. So first of all, I want to address this closing cost issue. Our world has changed quite a bit. You know, years ago we used to have a lot of brand new properties, brand new construction properties. They were at higher prices, you know, A class type properties. And now our clients ask for a broader range of properties. Some of them like the C class stuff. I don't really recommend it because it's usually never quite as good as it looks on paper. But hey, if you're used to it and you know, you can make money in anything, you just gotta be attentive to it and you gotta know that market, right? But the A and the B class properties are the more expensive ones. The closing cost, when it comes to closing cost on financing a property, a lot of those fees are flat. So when someone purchases a less expensive property, maybe it's a, you know, a 60 or a $70,000 C class type place, right? Or you know, B minus, maybe even a B, you'll get up there. Sometimes the closing costs are actually higher as a percentage. You really need to calculate about 5%, not 4% on those. But if the property's what, 130, $140,000 more likely to be an A class type property. Of course, this varies by market always. And a, B and C class is sort of a subjective thing anyway, then you know, somewhere in the neighborhood of that 4% will work because there are some fixed flat fees. Right? Can you talk to us about that a bit?

You are correct. If you go backwards a decade plus and you start looking at what we were charging as an industry, it was very common to see a bank with flat fees of like 400 and $500. I remember when we were like 398 bucks for total lender fees. And people will complain about that. And then you saw it started to increase in our expense because our overhead jumped significantly. Once you start instituting a Dodd Frank and you have a CFPB and you have an increased regulation, it's not just the two or three on the transaction anymore. You have now a lot more people involved that you don't see. Like, we'll see audits happening two, three and four times on a transaction before it's closing and after. So because of that, all that overhead's got to be covered. So you start seeing flat fees out there that are fairly significant. You know, you see lenders charging anywhere from 1500 up to 2000 plus. I have seen in various places, depending upon what their costs are to maintain the manufacturing engine, if you will. So when you start looking at that cost go up. And also there's an increase in appraisal fees because of the nature of how the things have to be appraised today. And there's an increase in title fees and taxes are going up across the board. So when you stack that all up, it's an increased percentage from what it used to be. And it's definitely an increase when you start talking about loan sizes going below 100,000 because the lower the loan goes or lower the price goes, the higher the percentage goes up because it's all more flat. People have got to pay the overhead that that same amount of work is going to cost the exact same, whether it's a $50,000 transaction or an $800,000 transaction. It's the same amount of work.

Sure, sure. You know, one of the things that's such a paradox in life, and my friends on the left of the political aisle will never. They just never seem to grasp this, that the government, when they get involved and they start regulating stuff, there are always unintended consequences, or maybe they're actually intended, if you want to think worse of them.

But, you know, and that's easy to do is think worse of them.

Yeah, yeah. At least they unintended for sure. Right. The result of a lot of these government regulations that are supposedly to protect the consumer and to, you know, make the consumers costs lower. They actually raise cost. They do the reverse of what they say they're doing. Right.

It's Significant the difference. Because every time they get involved and they put something else out there that we need to adhere to, we have to hire somebody then to be sure everybody's adhering to it.

Yeah, right, A compliance person.

Exactly. And we have stacks of compliance people involved and from different angles. Because it's not just complying with the one loan, it's complying with all the different facets of the loan. You know, so the loan breaks up to multiple different facets within just the paperwork that we do and the checks and balances that we have internally, then you have to adhere to those different facets and they ought to adhere to different regulation. You know, there was a point there during the releases of the Dodd Frank act because it was being released out in stages, that some of it was conflicting with the other parts of it. Especially when you involve the Consumer Financial Protection Bureau had their regulations and you stack it all up, there was conflicts. And so you need to have other legal forms of protection in place to deal with those potential conflicts. It's so beyond what anybody can articulate or understand.

Yeah, it's truly mind boggling. It really is. Okay, so of course this is all subject to change, listeners, but right now investors can now do 10 properties per spouse. If both spouses are working and can qualify. Everything subject to change. Everything subject to qualifying. But if they can, they can now do 10 properties with just 20% down, whereas before it was the first four properties with 20% down and the next six with 25% down. These are the conventional or Fannie Mae Freddie Mac known as agency loans. Okay, these are the most desirable. They're really subsidized by the government and that's a great deal if you can get in on these for your first 10 properties. And after that there are some other options that are a little more creative and nuanced. But with 20% down, what are the rates today?

Also depending upon loan size, but you could anticipate rates today in the high fives where before the turn of 2017 they were in the high fours.

Right, right, right.

So we saw some adjustment.

Yeah, we saw some adjustment, but I was just quoted today 5.25 with 20% down. And now these are non owner occupied loans. Any of you listening and you're looking online or you're going to bankrate.com or you know, wherever you're seeing lower rates because those are for owner occupied loans. These are non owner occupied investment property loans. So just this morning I was quoted 5.25 at 20% down. And if you do 25% down, which I would prefer more leverage to less leverage. But with 25% down, the rate actually goes down quite a bit. It goes to 4.875 was the quote I got. Now, this was not from you. So your shop may be different, but what are your rates? You're saying high fives really for 20% down?

Depends upon the individual and what we're looking at. I mean, we structured some today. I actually did some box today at five and a half. For many of them, 5.25 is not one that we able to acquire without spending more money in our shop right now. I tell others that I have seen, on an average, some bumping up. And I also look at the 5.75 as a potential coming around the pike, some seeing what's happening in the market after what has occurred with the new tariffs that are being thrown out. So with that going out there, it's sending a ripple through the markets. I'm one who tries to be a little bit more conservative when I'm throwing out there what one can potentially expect. But if you're talking about what am I stitching things up today? 5 and a half is fairly common.

Yeah. Okay, and what kind of credit score is that? Is that 720 and above, or is that 750? 740 and above on a FICO score?

740 and above.

Okay. So this is a tier one best credit. Another thing I want to say to people, listening is like everything in life, it's complicated. Okay. A lot of people think, and I used to think that a FICO score was a FICO score was a FICO score. Not true. There are different FICO scoring models. If you go to buy a new car, the car dealership uses one model. And if you go to get a mortgage, the mortgage lender uses a different FICO scoring motto. There's, you know, FICO 8, FICO 4, you know, different things. The other thing is there are multiple credit bureaus, and a mortgage lender will use a Tri Merge report. Right. Do you still call it Tri Merge?

We still call it that.

Okay. Okay.

I think mainly because we've all been so used to it and it's been industry standard so long.

Okay. So that's where you look at three credit bureaus. You look at the scores on each, and maybe you blend them together. Is that what you do? And which FICO scoring model is it?

We take the middle score. The blended thing was pretty rare to find. And then we're going to look at the three different ones Equifax, Experian and TransUnion. And take the middle score from those three.

All right. Now, are adjustable rate loans at all in the market nowadays or they. Does anybody take an adjustable loan anymore nowadays for an investment property? I know they're still doing it on.

I see them doing it when this gets past the 10 because that's what's available out there. They're either balloon loans or the the adjustables. But when it comes to your regular agency style loans, your Fannie and Freddie backed loans, most people stick with the 30 year fixed because the adjustables don't seem to be that much better. And I think because when you look back at what happened during the crash and so many properties that went into foreclosure, I believe a large percentage of those were in the adjustables. So since there was that big old mess and many of them had to do with adjustables, they don't have as much money available to lend in those adjustable pools as they used to. So because of that there's not a big differential in those interest rates. Right.

Okay, so we are not in an adjustable rate market now. I love the 30 year fixed rate loan. I will tell you folks, there may come a time when I actually think an adjustable is not a bad deal. If rates go up enough and the delta between the fixed and the adjustable rate rate loan is high enough and the choice is get a low teaser rate for the first five years and go adjustable after that, or for the first seven years and go adjustable after that, I might actually start recommending adjustable rate loans. So you know, again, I don't know, it all depends. But it's always something to consider and keep in mind. I never want to be so attached to dogma that, but I just never look at anything else. I always want to keep a somewhat open mind to changes. So certainly we're still in a good fixed rate market and that three decade long fixed rate loan is a phenomenal deal.

And to that point, Jason, we weren't always ones that Even explore the 25% down very much in the last couple of years because there really wasn't a big differential. Now we have seen a bigger gap, as you pointed out earlier, between the 20 and 25%. So it's worth exploring with each transaction and looking at each opportunity, whether it be 20 or 25% down. See how that varies from deal to deal and whether or not one would choose that over the 20% down. I used to advocate almost exclusively do the 20. It doesn't improve you very much. To do 25 now with that gap, it may be worth looking at a little bit closer. So I also just like you're saying, it's not like you're trying to hold to the dogma of one thing. We need to look at each individual differently on each transaction. We can't just be blankets and tell them to do one certain thing.

Right, Right. In other words, the rate might be low enough by putting that extra 5% down that it might actually be worth considering. I mean, even though you have to give up some leverage, could be worthwhile in considering that. What do you want people to know about financing, qualifying, anything?

Well, when it comes to a lot of this, I think a person needs to get their mindset right. That's the one thing I really drive more than anything. You're no longer a consumer spending money and going into debt. You are now a startup business owner or a business owner that you're looking to expand as far as your ownership of your cash flowing assets. And you need to consider what you're looking at. It's not always strictly about the cash flow, it's about the asset and that you're getting somebody else to pay down the note or cover the expense of it. And in a way, you have this cash flowing asset for free. So the ability to expand that and get your mind correct about what you're doing rather than just living like a consumer spending money and going to debt, it does change how you look at things. Now when we're talking about an interest rate that has gone up over the last few months because of what's going on in the market, I'd run some numbers just as a way to understand what we're dealing with here. And I had seen if we had a 1% differential on, let's just say $100,000 investment, and if things spiked up to the point where the average rate was 5.75 versus 4.75 just about 40 days ago, we could see, or at least the turn of the year we could see that there would be a difference in their cash flow. About $594 per year can be pretty significant depending upon how you look at that. 594 change in cash flow is something that might deter one from purchasing it. But if they look deeper into it, that 1% differential in rate actually changes the interest that they write off by $800 per year. So your cash flow did drop, but that's less cash flow that you're paying taxes on and your write off increased on something that you're not Paying the tenants, paying the interest on that in reality, and your write off increase.

Let me just say that in the way I always say it. One of my components of what I call the ultimate investing equation is that we outsource the obligation to pay our debts to other people called tenants. And so the tenant is paying that debt, but it's actually increasing your write off. Yeah, because part of my refi till you die teaching and my strategy there of, you know, the most tax efficient way to extract wealth from your real estate portfolio, part of that is in essence saying that, you know, take the money out, don't have a lot of cash flow because the cash flow is taxable, have a lot of income on the overall portfolio, but lever it with as much debt as you can because then your overall return is higher, you have more leverage, you have more inflation induced debt destruction. You know, you can outsource that debt obligation to the tenant. I mean, I would think debt is terrible if I had to actually pay it, but when someone else pays it, it's great.

And it is terrible when you actually have to pay it. And I believe that so many have been tied up in debt over the years that they do still think of it as something that's terrible. And trying to get past that mindset is tough, you know. And we know right now that the debt going through the roof, personal spending, consumer debt.

Yeah, right.

Consumer debt, I mean, government debt, financial debt, corporate debt, consumer debt, all through the roof. We're looking at 2017 as a whole. We started seeing people trading personal savings for debt. So debt has gone up significantly. That's why we had end of the year economic data saying that the personal consumption expenditures were going up, people were spending more money on goods. But when they looked at their percentage of savings versus their income, that was dropping significantly from a peak of 5.5% of their income was getting saved by end of quarter two, 2017 to now. @ the end of the year, it was balancing out to 2.4% of their, their income was getting saved. So were there trading savings per debt? Right, which was really.

Interesting. Yeah, no. Household debt is definitely increasing, which is a little worrisome. Aaron, let's kind of wrap it all up with a little bit of thought on the economy in general. What do you think is going on out there.

There? Yeah, that's a solid question. There's so many different metrics that are being thrown around that it's confusing. The economy is getting confusing. But I do know that we have real risk and inflation risk on the rise with what's being put together by our government, but what's going on with our consumption and with that inflation and with the.

Trade. Don't forget the trade war. The trade war is hugely inflationary. So hey, this is great for us real estate investors. We love this kind of thing, right? We love this it. Inflation is the home run for us. Philosophically I hate it. But as a self centered investor, I love it.

And I guess I'll say I love it for my clients that are following my plan too.

So. Yeah, exactly, you love it from what your philosophy is on the inflation induced debt destruction that you have there. On top of that though, we do need to keep in mind that as things inflate, interest rates do suffer as a result. That, I mean inflation and the bonds are definitely enemies. So as an inflation comes about, we can see those interest rates increasing. But if you're looking at from the right angle and the fact that you're not necessarily going to see the cash flow every month go in your pocket, but because of what you get to do with your taxes, you get to see it come in a different, different form. Just got to keep your mindset correct and keep following the right people. Have the right people on, on staff you as the CEO of your real estate investment firm, meaning the listener definitely needs to have Jason, you and your team as the operations division and myself, I always apply as that CFO job. So we can look at the different angles and see how we can help continue to evolve with the economy and how we can adjust their business to continue to thrive in those economic.

Situations. Yeah, absolutely. So understand that the bond market and the interest rates are opposite it. Right. When bonds go up, you know, it usually means rates are going down. When bonds are down, that means rates are up.

Right? Aaron, you are correct. They swing opposite directions because the rates go up, because the bonds are going down, because they're shrinking. That means there's less money to lend. It's a supply and demand.

Thing. Yeah, that's a supply and demand thing. And also, you know, if bond investors are thinking, well, I've got some significant inflation risk in these bond investments, the capital flees and it goes to other assets that can be, you know, offer more inflation protection for them. Interesting stuff. Let's keep it all in mind. But it certainly looks like we are in an increasing interest rate environment. You know, the Fed is tightening, things are changing. So stock up on those incredibly low interest rate loans. I mean now, you know, look, interest rates are still historically very, very low right now. So stock up on Those assets, those mortgages are assets. You want to get as many as you can at the low rate. Because what happens, and if you've learned about my three dimensions of real estate concept, hopefully you have. You understand that housing affordability and interest rates, when those get worse for people, what most people consider worse, right? When affordability goes down, rates go up, tends to soften the market and the prices and cool the market for sure, for the for sale market. But remember, as an investor, you're not in the for sale market necessarily, right? You're only doing that when you're doing a transaction, getting in or out of a property. Mostly you're in the yield market, you're in the rental market. And so that's when you see rental prices come up more, you see more upward pressure on those rentals as this happens. So the best strategy ever is to lock in as many of those cheap 30 year fixed rate mortgages as you possibly can and get good quality properties attached to them, get those properties rented and then wait. And as you see rates go up in the future, other investors will be kept out of the market. They won't enter because the cost for their deal doesn't make as much sense as the cost did for your deal. The cost of that debt service and also a lot of those renters that are in the renter pool will be priced out of the market due to declining affordability. So they'll be forced to stay in the renter pool. And that again puts upward pressure on your rents. It just goes back, Aaron, to don't wait to buy real estate. Buy real estate and then wait. You know the old saying. The old saying. Yeah. Good stuff. Well, hey, thank you so much for joining us and happy investing to.

You. Thank you.

Sir.

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