HI 83 - Real Estate Relativity & Reverse Mortgage Facts

Welcome to the Heroic Investing Show. As first responders, we risk our lives every day. Our financial security is under attack. Our pensions are in a state of emergency. A single on duty incident can alter or erase our earning potential instantly and forever. We are the heroes of society. We are self reliant and we need to take care of our own financial future. The Heroic Investing show is our toolkit of business and investing tactics on our mission to financial freedom.

Hello and welcome to episode 83 of the Heroic Investing show where we focus on challenges that are unique to veterans, members of the armed services and first responders. But we also focus on those common to all investors, like getting back time, replacing W2 income with passive income from real estate and other investments that helps people get back their future, their free time and their families. I'm extremely proud to be co hosting this with Jason Hartman and thank you so much for joining us today. In episode 83, Jason talks near the end with Aaron. I call him Aaron the Closer, my nickname for him. I've done 15 loans with Aaron and have three going on with him right now. I've thrown all kinds of curve balls at Aaron and his team, like changing jobs in the middle of escrow or completely changing the property that we are in escrow on. And they handled all of them like champs. Absolutely professional, efficient. Can't say enough of Aaron and his team. And if you'd like Aaron's contact information, please talk with your investment counselor at Platinum Properties or send me an email. You can send that directly to GaryaryPinkerton.com that's GaryaryPinkerton.com I tried to make that one as simple as I could. So this is a pretty long episode, but at the beginning, Jason has a great summary discussion, a nice little review of rent to value ratios and the impact of owning properties and highly appreciating cyclical markets. And he kind of beats up on his mom like he always does when that conversation comes up. But he does a nice job of going through some of the numbers about different markets, linear versus cyclical. And I think if you haven't been to a Jason Hartman University recently or, or some of the discussions we had at Meet the Masters, this is a great review.

A great review.

And then as I said, he follows that up with a discussion about reverse mortgages with Aaron. Now, maybe reverse mortgage is not appropriate for everyone in the audience, but I think one day it will be. And all of us have aging parents if we're fortunate. So it's a great tool for somebody who's older and that has a lot of equity in their property. And like I said, long episode. But here's a teaser of a government backed version of the home equity reverse mortgage. Excuse me. And it's called the Home Equity Conversion Mortgage hecm. You'll hear it referred to as the hecm. And that's an FHA backed loan and it has some enormous benefits. Now, reverse mortgages, they've gotten a horrible name throughout the last couple of decades and the main reason is because mainly more lender based rather than these conventional government backed reverse mortgages. But it was because the fees, the closing costs were pretty substantial and the perception at least was that people had been taken advantage of. And maybe that's true, but I can tell you that this FHA version, the hecm, is much more widely used by reputable banks. And you know, with the Internet today, it's not too hard to shop and make sure that you're getting a, an appropriate deal. But here's why. The HECM is something that anyone who's 62 or older and has equity in their property should seriously consider. So just a couple of the aspects of it. So first, there really are two ways in which you can have one of these mortgages. You can have a fixed loan rate or variable, right? And most people would just say, well that's easy, I'm going fixed. Well, the issue is I actually wouldn't recommend fixed in this case because the fixed one has only one option and that is to take a lump sum distribution. Essentially what you're doing is a refinance of your property. It's just a reverse mortgage, meaning that your account balance goes up instead of going down like we normally would be paying off a mortgage. Then there's the variable 1. And the variable of course could have rising interest rates, in which case you would just end up not using that. But the variable one allows you to take basically open a line of credit. And once you've opened that line of credit, you can decide at any point how much you want to borrow. You can continue borrowing. But here's the key thing about the variable one, it's a line of credit, unlike a HELOC where this line of credit is non cancelable. So if we have the next economic 2008 crash where all of the lines of credits were closed, shut down, they cannot happen with a home equity conversion mortgage. And so you've got this line of credit that will remain open even throughout the next cris. Why is that guaranteed? Well, it's guaranteed by the good faith of the US Government. So assuming that our government has not defaulted, then it's backed by that and you actually pay a mortgage insurance to ensure that that's the case. So it's contracted into the thing. So line of credit can't be canceled, but you also lock in home value. And what I mean by that is when you're using this HECM line of credit, your available account balance starts off at the current home value. Let's say it's 400,000. And generally you can get access to about 50% of that. But what happens each year is that the home value goes up based on the interest rate that you received. And if your interest rate goes up because it's variable, then the amount that your home value is going up does the same thing. So let's say you start at 4%, then each year your assessed home value will go up by 4%, which means the available money you can borrow will go up also. So it starts at 200,000 and it creeps up from there. Well, what happens? Let's say that your available home value gets to 500,000 and then the actual home value plummets to 250,000 like it did, you know, in Florida and Vegas and many other places, California coast. So the actual home value, what you could sell it for, is at 250, but this calculated value continues to rise. So hopefully you can see the power of that. And I will dig more into that in an upcoming podcast. I'll dedicate it directly to that discussion. But I talk about that with my clients all the time. It's an absolutely essential way to lock in the value because the last thing that we want is for our parents or those of us out there that are in our 60s and 70s, to have a lot, you know, a paid off home or have a lot of equity in our property and, and then lose half of it because a market correction and you may not be around for the 10 years or 20 years that it takes to get that value back. So I think it's essential when you're in your 70s and 80s to not be in a position where you could lose some of that equity or a substantial amount of it. Okay, so enough doom and gloom and obviously that only applies to a certain part of our audience, but I think you will truly enjoy this. And like I said, a fairly long discussion here. Started off with Jason and then he talks for a while with Aaron, the closer. Thanks so much and I will see you next episode.

What I wanted to talk to you about today, before we get to our guest who is Aaron, who will be talking about reverse mortgages. And this isn't applicable to everybody, of course, because reverse mortgages require you to be of a certain age. However, I think you'll find it interesting because it has broader implications on the real estate market and the economy as a whole. I think this is destined to become a lot more popular over the years. And anyway, I just think it'll be an interesting discussion, even if it doesn't apply directly to you in terms of you being able to get a reverse mortgage. But before we get to that, a couple of things here. First of all, I heard a great quote today that I wanted to share with you. It was in a book that I was reading, and it is. I looked it up to just get the exact quote from, from the Internet, and I found it on a website that says it's falsely attributed to Buddha. And so it's not a Buddha quote, or it is, I'm not sure. But this is what I really want to constantly stress to investors, to my listeners, to my followers, is think for thyself, right? And that's really commandment number one, thou shalt become educated. Thou shalt become educated. So you can become your own best advisor, right in my 10 commandments and now 20, because we added 10 more as an addendum and just recently played that episode where we did that and think for ourselves. We've got to think, does this make sense? And so this quote is great. It says, believe nothing, no matter where you read it or who said it, no matter if I have said it, unless it agrees with your own reason and your own common sense. So believe nothing unless it agrees with your own sense of reason and your own common sense. So here's one of those things I want to talk about today, and this is the concept of Einstein's theory of relativity. No, I'm just kidding. We're not going to talk about Einstein's theory of relativity. We're going to talk about Jason Hartman's theory of relativity as it applies to rental income in real estate investments. You know, occasionally we have a client who is having a challenge in renting one of their properties. And sometimes we hear about this where they bought a property from somebody else and they come to us and they say, help me, help me, please. And, you know, we'll try and help them out if we can, but sometimes they buy property from us and they have challenges. This is hardly perfect. I will be the first to disclose that. I think it's like that great quote about, about capitalism or democracy. It's been used both way. I've heard it both ways. And one of those quotes says, capitalism is a terrible economic system, but it's better than everything else. And that's really how I view income property. It's hardly perfect, it's just better than everything else. At least everything else I can find out there for investment. And my second favorite, as you know, is hard money lending or private lending, which is pretty darn good too. But in terms of my theory of real estate relativity, it applies to many aspects. But the one I want to talk about today, today with you before we get to our guest is rents. And so if you're having a problem renting one of your properties, I just want you to consider this concept that I'm about to say. And to do this, I looked up one of my mother's properties because she was on the show last week and I thought, heck, what could be more applicable than to just look up one of the properties she purchased several decades ago. This is a property that as a kid I used to live in, actually, or not a kid, but a young adult, probably between the ages of, oh, about 18 and 19 right in there, 17 to 19 maybe years old. I lived in this property and it's in Santa Ana. Santa Ana is a city in Southern California and it's not a very nice city. It's pretty bad actually, most of it. But this is sort of a little bit better area of Santa Ana and it's called Washington Square. It's in the northern end of the city still. You know, again, not a great city by any means, but this is a slightly nicer area. Now there was a really, really nice area of Santa Ana north of this property that my mother actually still owns. And I'm sure your experience is pretty similar to mine when it comes to close friends and family. They would sooner listen to a stranger than listen to us. Right? And so for the last several years I've been working on my mom and I've been trying to bring her around. But mom is a very focused, which is a great quality, kind of one track minded sort of person. And she only likes to kind of do one thing at a time. And so her thing now and for the past several years is building that house you heard about on the last episode, that southern mansion that looks like Tara from the movie Gone with the Wind. Or I think there was a another house that's actually nicer that looks more like hers called Twelve Oaks or something like that. I don't pretend to be any expert on Gone with the Wind, but very old movie anyway, so that's been her focus. But slowly, as she has purchased new properties, she has purchased them around the country in markets that make a lot more sense than where she started, which was investing in Southern California properties. Just like me. Remember my story, when I was 20 years old, I bought my first rental property from a client, and it was on Coventry Lane in Huntington Beach, a little, little crappy one bedroom condo there. And California, New York City or New York City metro area, it's much bigger than actually New York City itself. South Florida areas like Miami, Fort Lauderdale, Chicago, kind of, you know, some of the more expensive areas of Chicago or more expensive areas anywhere. Seattle, the Pacific Northwest, Portland. We haven't been able to make any of these markets work. And believe me, it's not for lack of trying. It's just that the prices are too high. And when the prices are high, of course, you have run into this problem, which we've talked about extensively, of rent elasticity, where the rents don't really go up enough to cover and give you good cash flow on your income property. So these properties basically just don't make sense. And how this applies to having trouble renting possibly one of your properties, if you're having that problem now, or if you've ever had it in the past or, you know, you're bound to face it in the future. The theory, Jason Hartman's theory of real estate relativity applies very much here, and here it is as it applies to rents. So what I did is I looked up one of my mom's properties in Santa Ana and I looked it up on Zillow and I found that the Zestimate. Now listen, Zillow, the big disclaimer here is Zillow is notoriously inaccurate, and so is Trulia. And all of these sites that, you know, use algorithms to give you real estate data, but not always. Sometimes it's pretty close, and this time I think it's pretty darn close. And so Zillow said that this Property was worth $455,000. And the reason I wanted to use this one is because it's a good, like just middle class, maybe, you know, a little bit lower than middle class or, I don't know, middle class in Southern California property, you know, if you can believe, 455,000 is middle class. Right? You know, this is an old house. It's not that nice really. I mean, I used to live there and it's kind of a crummy little house. It has three little crummy bedrooms and one and a quarter, or, I'm sorry, one and three quarter baths. Okay. Anyway, so 455,000 is what Zillow said it's worth. And Zillow estimated the rent at $2,400 and change. You know, we'll call it $2,500 for round numbers. And so I called my mom up and she's at a Mardi Gras parade for some funny politician who passed away. And the reason this guy is a funny politician, forgive me, I can't remember his name, is he had. He had a whole bunch of wives and they have a parade just for this guy and all the wives are in the parade and they're all, you know, wearing black, mourn his passing. And there were a bunch of undertakers on a float. And I'm like, this is just kind of weird morbid humor. Anyway, my mom was telling me about it, but I said, hey, mom, how much does this property rent for? And she said, well, I just re rented in September for $2,500. My mom knows off the top of her head what every one of her properties rents for. Granted, she doesn't have that many. She's got like what, 15 or something like that, I think maybe 16. So she said, I just rented it in September to a family of six people. There are six people living in that little house. So that means two per bedroom. And the house is not very big. I would guess it's probably 11, maybe 1200 square feet. And she rented it for $2500. And I thought, wow, this time. And then I said, well, what do you think it's worth? And she said, I don't know, it's probably worth 400. Now, she doesn't keep very close track of her value of her properties. And that's really one of the lessons that I talk about is, you know, don't be too concerned once you own it about the value of the property. I mean, heck, we don't invest for appreciation. If it happens, great. It's icing on the cake. It's wonderful. But that's not really the core of our philosophy. The core of our philosophy is cash flow investing. And so I said, well, do you think Maybe it's worth 450, 455? And she said, yeah, I guess it's probably worth that much. So it seems like Zillow is pretty accurate. Well, what does this tell us? It tells us that if the Property is worth 455 and the rent for six people occupying the property, probably putting some pretty significant wear and tear on that property. And by the way, until last September, it was rented for $2,300. She had the same tenant there for eight years. And the last rent eight years tenant stayed and the last rent was 2,300. So this property, if you do the math and divide it, your rent is.00549 of the value. Now, you probably know what I'm going to say here, right, listeners? I'm going to say I want you to get at least 1% or at least close to 1%. Maybe you'll get more, maybe a little less, but right around that 1% target. So in my eyes, I think this property should be rented for $4,550 per month. Well, it's actually rented for 2,500 and that represents a loss, in my opinion, of $2,050 per month. She's really losing 20, $50 per month income that she otherwise should have. Because, I mean, just look at it this way. If you bought $100,000 houses in diversified markets around the country, you could buy four and a half houses, right? And if they each rented for 1% of the value, you would get $4,550 per month. Right. And you'd be diversified and you'd be far better off, in my opinion. Now, you might be saying, well, Jason, you know, I know you're all about cash flow and you know, you'd be right. That is what I'm about. But Southern California, I mean, doesn't that market appreciate better? Well, not really. And here's why. You know, as you know, that's a cyclical market versus the markets that we recommend are very linear markets, or at least hybrid linear cyclical markets. And in a market like Southern California, you're going to have big ups and you're going to have big ugly downs, big really bad ones that hurt. And so the values fluctuate and there's a lot more volatility than you have in these more stable markets, which also, you know, they have volatility, too. I'm just saying that the volatility is less because you have more inexpensive properties where the prices are much closer to the cost of construction. Yes, they can still go down and they have gone down, but overall less volatile than the more expensive properties. And you know, I had a great example of that. I've got to find this old PowerPoint slide. I used to use it as an example in my seminars and I in the Creating wealth boot camp, but I haven't been presenting it a long time and I'm not sure why. Just to shorten my very long winded day. You know, that takes about, it's about a nine hour day when you come to that boot camp. Okay. And what it basically did is it compared Orange County, California, the OC to I think maybe Kansas City, Missouri, a market that we've done business in, in and out over the years. And it compared the two of them over, I think it was an 18 year period. And I kind of trick the audience into guessing which market they think appreciated better in this 18 year cycle. And invariably the audience always says, you know, Orange County, California, of course, the high flying market with wealthier people and expensive homes and higher number of college degrees and higher number of master's degrees and higher number of PhDs and you know, all of this great stuff. Right. Well, the reality was, and you know, I may not be remembering this exactly, but the reality went something like this. Kansas City actually, and I believe that was the example appreciated on average over that 18 year period at I think it was 5.8%. And Orange county, the much more famous place with seven television shows about that dumbtown where I lived for a couple of decades, you know, and before that in Los Angeles area as I was a kid, that place, it only did about 5.3%. So Kansas City, boring. Kansas City beat Orange County. I mean, can you believe it? Yeah. You know, when you average things when you're a buy and hold investor, you did better appreciation wise. But so what? Appreciation really isn't the game. The game is cash flow. The game is all about income. That's why it's called income property. It's not called appreciation property, it's not called speculation property, it's not called gambling property, it's called income property. And that's exactly what we're looking for. So let's take and compare my mom's house, that is an old house occupied by six people that rents for 2,500amonth. And it's got a 0.5 RV ratio, rent to value ratio. And let's compare that to a little property on my website@jasonhartman.com Properties in the Birmingham section. And I'm going to compare one more market and it's going to be Atlanta next just to see how these stack up. And so here we go. Here's a little house in Birmingham that you can buy for $51,900. And again, you can see the entire pro forma with all the details@jasonhartman.com Properties in the Properties section there. And so this property is we're going to round it off. We're going to call it $52,000. And it has a projected rental income of $700 per month. Well, let's see, this $52,000 house, how many of those could you buy? For the price of my mom's one house in Santa Ana, California? Well, according to my calculator, my trusty HP12C, it says you can buy 8.75 of them. So if you take $700 a month in rental income, as we're looking at this Performa, you Multiply it times 8.5, the rental income of 8.75 of these houses would be $6,125 per month. That's $6,125 per month versus the paltry $2,500 per month my mom is getting. Now. See, my mom doesn't believe this anymore, but after many hours debating this with her and trying to get it through her head, because, of course, I'm her son and she'd sooner listen to some stranger than she'd listen to me, right? That's just the way human nature is. And it's pretty true with all of us. We know that. But I finally have convinced her that this doesn't make any sense. And she'll say, jason, well, I paid that house off. I own it free and clear. Which, you know, I believe that's a pretty terrible idea, right? To pay your houses off, I like to keep them leveraged. And do the refi till you die plan. Right? And we've talked about that on prior episodes. If you want to understand that, go to jasonhartman.com, look at the little Google search bar in the upper right hand corner of the website and type in refi till you die. And you'll find the podcast on that and some documentation about it and so on and so forth. So here, this property, $6,125 per month. You could own almost nine of them. So you've got a loss there that's very significant every month. Now, what if you take a nicer property and you look at Atlanta, Georgia, okay? Now, Atlanta is a great market. Done business there for many years. Lots of good client feedback from Atlanta, some problems here and there, and I'm going to tell you how to overcome your rental problem here in a moment. If you have one, and if you don't have one, and if you haven't had one, you're going to have one. So that's why we're talking about the theory of relativity here. We'll get to that in a moment. So this one is on the website@jasonhartman.com if you want all the details, but I'll just give you an overview. This house is $124,900. And you know, this same thing applies to multifamily apartment complexes too, in high price versus lower price markets. I'm just using good old single family homes as an example so we can keep the comparison as apples to apples as possible. So here we go. We've got this property for $124,900, let's call it 125. We'll round it off. And the projected rent here is $1200 per month on this fully renovated property. And by the way, almost every single one of our properties is fully renovated. Occasionally there's an exception, but the vast majority are completely rehabbed or renovated. Now this property, if you wanted to spend $455,000, the value of mom's home in Santa Ana, you could buy 3.64 of these houses and you could take that $1,200 a month in rent and you could Multiply it times 3.64 and your rental income would be $4,368 per month. 4,368 per month. So compare that end the fact that you're diversified, not all your eggs are in one basket. They don't necessarily all have to be in one city, which I think is a great idea to spread it around a little bit. So if one city goes down the tubes, you've got another one there that won't. So you can diversify, spread your risk a bit. And here, even if they are all in the same city, you know, if one goes vacant, you've still got 2.64 that are hopefully occupied. In the Birmingham, Alabama example, if one goes vacant, you've still got 7.75 that are hopefully occupied, right? So you, you spread your risk through diversification in that way in terms of vacancy, in terms of market risk, geographically you can spread it as well. So here you see how the RV ratios are much better when you are in the lower priced side of the market. Now I don't like really, really inexpensive properties. And the reason I don't like those is because the tenant quality gets pretty, pretty rough. Now there have been many landlords, AKA we'll call them slum lords, who have made a lot of money in these really rough neighborhoods. And you know, you can do that, but just understand it's a specialty. You're probably not going to get the properties from my company because we try to go toward like the lower middle of that market. So, for example, if the median price in a given market is $100,000 for your typical single family home, we're going to want to be around $80,000 if possible. We want to be under the median. So we're not on the middle, we're a little bit below the middle. Okay. But we're not in the low, low end. So there you go. That's your cash flow number. Now, the theory of relativity. Let's circle back here. Why did I tell you all of that stuff? Well, I told you all of that because I wanted to explain how to handle a rental problem. Occasionally we're all going to run into rental problems where we have long vacancies and we think, why the heck won't this property rent? Well, here's what you can do. Lower the rent. Oh, Jason, that's just too simplistic. Well, no, not really. It's actually, there's a little more to it than that. And here's why. If you took the exact same rent to value ratio that mom is getting in her property and this, she owns several properties. This is just one of them that I'm using as an example. But that Birmingham property that is on the performance says $700 per month rent. If you apply the same ratio to that one, you could rent that for only $260 per month and you would have people lining up around the block. I mean, folks, look at this is a three bedroom, one bath home. And it's a really cute house by the way. I'm looking at a picture of it right now. You can't rent a room for $260 per month. Right here you get a whole house with three bedrooms, 260 per month, same ratio. Well, what about the Atlanta property? Well, that one, the Performance has twelve hundred dollars per month. Okay, what if you applied the same ratio that mom is getting in this example and you wanted to rent this property really, really fast and end any worries of vacancy? Well, you would price that property at only $625 per month. Wow. Now, I just want you to know this property is 2,460 square feet. 2,460 square feet, two story house. I do not have the bedroom count on that house. Sometimes it's in the remarks section. It's not here. I'm going to guess that that's four or five bedrooms. Many markets just renting a room alone would be five or six hundred dollars per month here, you'd rent the whole house for only 625. Now, you don't even need to be this extreme. But if you, if you're thinking, gosh, and you know, you might be asking yourself, jason, well, why are you talking about California? What does this have to do with me? I don't live in California. I'm not silly enough to consider investing in California. It's just an example. The same story is true in Miami or Fort Lauderdale or the Northeast, in any of the expensive areas, whether they be the Boston metropolitan area, many areas of Connecticut, many areas of certainly New York, any area where you're not looking at houses that are below $150,000 in total price, your rent ratios just simply don't work. And I'd say that if you look at history in a lot of these linear markets, because you don't give anything back, or at least you don't give as much back when the downturn comes. It's crazy to say you don't give anything back. You do give something back. Now, this last financial crisis, this was, to be fair, it was certainly an anomaly, right? We haven't had that bad of a real estate market seven decades. This is the, the worst the economy has ever been since the Great Depression seven decades earlier. Seventy some odd years, right? So that's. Maybe it'll happen again. You know, it could, but the likelihood is the downturns will be a little less pronounced and significant than that in the future. We can blame the Wall street crooks for that. We can blame the banks and the lenders as well, but to a lesser degree. As I've told you many times before, I saw the foreclosure crisis coming. I predicted that. I talked about it, you know, at live events and published that numerous times. I knew that was coming and I knew it was going to hit in late 2005. That was the mortgage crisis. But I did not know. And there's no way I could have known because I'm not an insider. I don't work for Goldman Sachs. I don't work in government or Wall street firms that were basically destroying the world with toxic financial assets. Their financial innovation, right? Anytime you hear financial innovation, run for the hills, because that usually means the money is going to move from your bank account to their bank account. So, you know, I didn't know that they were polluting the world with toxic debt and credit default swaps and all this kind of stuff that we all learned about post financial cris, but I certainly knew that the lending was way too aggressive and they were giving loans to people who could fog a mirror. I mean, it was ridiculous. They just weren't qualifying people and the banks were being just completely stupid. I knew that was coming. But the second part of the crisis, no, I didn't know that one was coming. So what do we have going on? What's going to happen in the future? Nobody knows. But I think we can all pretty much feel fairly secure in the knowledge that government's solution to everything and central bank's solution to everything is inflate, inflate, inflate, inflate your way out of the mess. It is the most painless, it is the best business plan. It really works pretty well. I mean, philosophically, I hate it. I think it's completely stupid. But given, you know, the fact that our government and many governments around the world are irresponsible and they just spend too much money. I love the Ronald Reagan quote. He said to say that government spends like a drunken sailor is an insult to drunken sailors. And that is certainly true. So if we're going to have this happen, it's not going to stop as long as you have politicians that want to buy votes. Right? So the likely response will be inflate your way out of the problem. So with that, we already are planning for that. We're already investing for it. We know how to, how to, how to game the system. We're doing the exact same things that some of the most powerful people and entities on planet earth are doing to hedge against that risk. We're investing in commodities that have intrinsic long term global value, that are needed by every single person on the planet, that are traded in every single currency on the planet. And we are buying them with long term fixed rate debt that we are outsourcing to another party called a tenant. And at the same time we're getting the most favorable treatment, the most favorable shield against life's, life's single largest expense taxes. Because we're investing in the most tax favored asset in America and the most debt favored asset in America. I mean, try getting the kind of wonderful positive Dave Ramsey be damned. Okay, you know my thoughts about Dave Ramsey, okay. I mean, he's okay for people just starting out in life regardless of age. That doesn't mean that has nothing to do with age, by the way. It has, it means starting out on the path to financial freedom. But his deal is not about investing. We're talking about investing, okay? We're not talking about consumer debt, we're talking about good debt, debt that we can use to our benefit debt. That helps us game the system against irresponsible government spending and central banks and the welfare state. That's what we're doing anyway. I hope you like that example. So look it, everything will happen at a certain price. I remember years ago I was sitting at a small roundtable that was sponsored by the Young Entrepreneurs Association, YEO at the time now called EO or just the Entrepreneurs Organization. And that's like a sister organization of YPO or Young Presidents Organization. And I remember listening to this guy who was talking and he was, he was very successful. I don't remember what business, but he said something that, you know, it made a lot of sense to me. He said, how many problems do you have today that you could solve instantly by just writing a check? And I thought, you know, I've got a few of those and I've got the money to write the check. Maybe I should just get rid of a few of these problems and solve them by buying my way out of them. That is a wonderful privilege when we control assets, whether they be money or things like commodities, like rental properties. So how does that apply to you? Well, if you have a problem and you're thinking, gosh, I can't get this damn house rented, what is the problem? Renting this house. Try renting it at a California rent to value ratio of 0.5% and I guarantee you will have people lining up around the block. I mean, of course, you know, assuming you have proper marketing, you know, if you don't tell anybody it's that cheap, you're not going to have anybody line up. You'll probably have a bidding war for tenants where you'll actually end up renting the property above what you listed it for. So that $1,200 a month rental property, if you list it for $625, I bet with the right marketing, you'd end up getting 750 for it. You know, you'd be, you'd have tenants bidding against each other. You'd literally have a bidding war. It would be my guess. Okay, so rental problems are not problems. They're just, do you want to buy your way out of it? Do you want to lower the rent and get it solved? Now listen, I don't want you to lower the rent. I want you to raise your rents every year. I want you to try and raise your rents 4% every single year if you can. Now, granted, that depends on the interest rates. Why? Well, because the tenants have choices, right? They may want to go and buy something. If rates are really low and qualifying is easy, they're going to be sucked into the buying market. Now we have an interesting thing because we have very low interest rates, but qualifying is very difficult. So it's kind of a quandary. If you can qualify, the world is your oyster, so to speak. And a lot of tenants can't qualify. A lot of them have foreclosures and that'll keep them out of the buying market for a few, a few more years. Well, good for you. Strike a win win deal with them, serve them, give them the housing they need until they can get back in the buying market and get their credit repaired, or just wait for their credit to improve automatically because this stuff comes off eventually and it's a great win win deal. So there you have it. My theory of real estate relativity across multiple geographies. You can write your check, if you will, by making the rent such a bargain that the property rents. You know, you can make it a special where you, you, you do it the first year and then you raise it back to the market rent the next year. And you might lose the tenant, but maybe your situation will have changed, maybe the market situation will have changed by them. If you lower the rent $200 a month times 12 months, that's $2400. Right? But you've got $1000 a month rather than 1200amonth. But you've got something. Again, this is my fallback strategy. It's not my ideal strategy. I'm just saying it's something to consider, to understand that every single day less informed investors, people that don't get it, people who think they get it for various reasons, are buying, quote, investment, unquote, properties. You certainly couldn't call them income properties, but we'll call them investment properties or speculation or gambling properties in markets like Southern California or Northern California. Anywhere in California. Nothing works in California or South Florida or, you know, the Northeast, any of these expensive markets, they just don't work. It doesn't work. And a lot of them, because, you know, you don't have to give back the money when the market goes down or give back very much of it when there's a downturn. Really, overall, over time, your average appreciation rate is better. So it's, it's something to consider. All right, I've rambled on long enough. Check out those properties@jason hartman.com, click on the properties link and you'll see them. There you can see the full performas and also check out the blog and the member section and everything else while you're there as well. Without further ado, let's get to our guest. Let's talk about reverse mortgages. Hey, it's my pleasure to welcome one of our lenders. You heard him speak at different Meet the Masters events over the years and also on a recent podcast that we did where we played our mortgage lender panel from our last Meet the Masters event. And I wanted to have him on today to talk about a new product offering that he has. It's not new in general to the industry, although it's not talked about very much. And I've been fascinated with it for, oh, I don't know, maybe 10 years now. I've been kind of fascinated with this whole idea, but you don't hear too much about it. And that is the subject of reverse mortgages. So, Aaron, welcome. How are you today?

Doing good, Jason. How you doing, buddy?

Good. Hey, it's great to have you on the show to talk about this because I think it's a good option for some people. It's a relatively small market. You have to meet certain age requirements and so forth, but it definitely fills a very particular need. It's pretty interesting. A way to engage in equity stripping. I believe that income property is the best investment, but it's a mediocre bank. It's not a great bank, so why keep equity in it? It just doesn't make much sense. And if you're new to the show and you're hearing me say that and you think I'm nuts, please go back and listen to the prior episodes. There's well over 300 episodes where we talk about this stuff in depth and the benefits of having your properties properly leveraged and the downfalls of having equity in them. And it really is a big downfall in so many ways. Mortgages at rates like we have today are an asset, not a liability, as long as they're used properly. So, Aaron, when it comes to these reverse mortgages, first of all, maybe talk a little bit about why should someone consider a reverse mortgage versus a refinance?

Well, first off, I can't agree with you more about it being really an untapped and very obscure way of tapping into an opportunity that people really don't discuss. When you're considering an individual that has a has equity sitting in their home and they meet those age requirements, many times they may have some sort of form of income that restricts them from their ability to go out and. Or they have their assets tied up in ways that restricts them to be able to use those to go out and buy more real estate and expand their assets and expand their income capability with your thought processes. Where if they've got that equity sitting their home, you can utilize that process, that reverse mortgage that gives them the ability to tap into extra funds, put that to work out in the market, and it not cost them any money on a monthly basis. It's designed to basically not tap into their resources on a monthly basis like any other type of loan would.

So the reverse mortgage doesn't have payments, right?

Correct. It doesn't. It's designed a lot like an annuity where they are looking more or less at the, the average mortality table, just like an insurance company would. And they're setting it up that when an individual has is of an age of 62 or older, they will lend up to a specific loan to value based on that table. And they don't charge a monthly interest or a monthly principal to satisfy that lien because there's that equity sitting there to do that for them.

Right? Right. So here you can refinance and have zero payments. Pretty cool. Exactly.

A lot of people will try and refinance and pull equity out in a cash out type scenario. But then they have that payment that they are subject to. And because they pulled that cash out, now you have an increasing debt to income ratio and a diminishing capability to borrow more to buy additional real estate. This actually helps their debt to income ratio where it wouldn't otherwise.

Right, right. Okay, good. So how does it work? I mean, you need to be 62 years old, right? 62 or older.

Well, when you're thinking about, a lot of people say, well, I got to qualify for financing. This is probably the most simple qualifying process that exists. It's based strictly on age and value of the home and whether or not there's an existing balance on the loan against the home.

So if you have a loan, let's do maybe an example. Let's take a $625,000 value of the house. Now this has to be the principal residence probably, Right. Not an investment property.

Correct. It has to be something that they are occupying.

Okay, so your own owner occupied home. Say the value is $625,000. And is it free and clear in this example or is there a small loan against it already?

Let's take a look at a free clear example.

So $625,000 property, free and clear. You want to free up that equity so you can do something with it. You can do more investments and keep in mind 62 nowadays is young. I mean, the problem people are facing nowadays is too much life at the end of the money, not too much money at the end of the life.

No, Ed, this is definitely very true.

Yeah. So what do they do? They come to you and they say, okay, here's my $625,000 house. I'd like to pull some money out of it. How much can they get? What is the maximum? Is it almost $500,000?

Their maximum is actually approaching that $400,000 mark as we're looking at. And what we have is depending upon their age. You can go, in fact, the age table more or less sits at 62 to 68. They can go to 55% of that total value, 69 to 75, then go between 60 to 65% of that total value, 76 to 81. They go 65 to 70% of that total value. And then when they hit 81 on up, they can. They cap out at 75%. So they go between 71 and 75.

Yeah. So just so people understand the rationale, in other words, the older you are, the more qualified you are, in kind of an odd way, because they know from the actuarial table you have less life left. So they'll give you more money, they'll give you a higher loan to value ratio. Kind of counterintuitive in a way.

And like you pointed out when we're talking about there's more life in today's world because of multiple reasons, this particular table may or may not fit everybody. So since it's built like an annuity, even let's take a say the table is set up to where they're expecting the average individual to live to, say, age 92. I don't have that table in front of me to be able to say what their expectations are. But if a person lives to be 110, there's insurances involved in this that indemnifies that lender. So the individual who was receiving the loan doesn't have to. The loan continues on as if it was set up the very same day. So they continue to have no payments. They continue to be able to use that money as necessary.

Okay, so the lender will give you a lump sum here for what, $393,000?

393,000 and change. And the person can use to put that in their bank account to use that to invest. They can, they can do several ways. There's a really, really good. A really kind of a newer system that's used that AARP has stated that borrowers have recognized about 66% of the time as be the best choice for them. And that's referred to as a reverse mortgage credit line. So you get the money. Say that. Let's take that figure. 393,708. You've got those funds. It's available to you, but you're not borrowing it, you're not using it. It's just sitting in that account. Well, there's still that interest occurrence that comes as a result. That should be going against the equity. Well, since that's there and the individual's not really using the money the way that that's written, the bank will actually have to increase the credit line by the amount of the interest on a monthly basis. So let's just say that interest would have been $1,000. They have to increase that credit line by that thousand dollars, plus an additional, I believe is 1.25% of the balance. So you're seeing an increase in credit availability every month when you're not using it. So some of the clients I spoke with about this, let's just say they get a $200,000 credit line and they only use 100,000 of it, or they're having the interest accruence going onto the balance of that $100,000. Well, the other hundred thousand that is sitting in the account being unused is getting that interest increase in their balance, I mean, in their availability, plus an additional one and a quarter percent. It's offsetting what they're using. So what? The availability here is huge. And their ability to go out there and use that money to buy additional real estate, receive an income on it, all the while they're not making a payment on what they're using to buy the real estate. And also getting increased availability on a monthly basis.

Yeah, that. That's a pretty cool deal. So in other words, they can take it out as a lump sum or they can take it out as a credit line and access it whenever they want. Right, exactly.

And put it back as they sell real estate. So if they sell something, they put it back and let it continue to grow. An increase in availability. So if they see something else come to come down the pipe that they want to purchase into, they can pull it and do it again.

Yeah, yeah. Pretty interesting. Okay. What else should people know?

Well, some of the things that are fears that I have heard over the years that people looked into is, you know, are they signing over their home to somebody? Is it something that they're. They're getting Rid of their, they're giving their asset to somebody else to control. It's no different than any other loan. Whether they're refinancing or doing a cash out or just a regular rate into refinance or doing the reverse mortgage. It's the exact same style lien. Nobody can take any possession over that property any easier than they could in any other type of loan situation. Another concern that I've heard of is those that are saying, hey, if I do a reverse mortgage, what happens to my estate or my posterity with my home? Well, if you've got that reverse mortgage and there's this balance that had accrued and in the, you know, the demise of the individual and their estate takes over, the estate can refinance it, they can sell it and pay off the note the same as what would happen with any other type of mortgage situation. So those fears shouldn't really be anything different than the fear that they would have just to have a regular loan on the house. The big plus is they're not having to deal with the monthly payment that comes from covering or at least maintaining the home that they would in any other situation.

Yeah. So what they need to understand is if they have a normal loan against their house when they pass away, there will be, the property will probably be sold off by the heirs and then that lien will be paid off and the heirs will get the proceeds. The same is true of the reverse mortgage. It's just a lien against the property, nothing more.

Exactly. And the difference really is, is what they do with the reverse mortgage versus what they would have done with the other loan. With the reverse mortgage they're increasing their capability to go out there and build a bigger estate. They want to leave their home to posterity. Feel free to leave the home, but why not leave some, some investment properties and an operating business that was put together because that initial home existed. Another thing here is it is very pricey when a person steps into that transaction. There is a lot of fees up front and that's. And it's more fees than what would be on the standard refinance because of the nature of what it is.

Yeah. Why, why is that? I mean, what, what's the, what's the nature of it? Why do they have to pay all the these fees?

Well, a lot of it has to do with insurances because when a, again, we're talking about a mortality table. That is as an average, across the board, we've got some people that will live shorter lifespans, others that live much longer. Lifespans. And so when the lenders putting the money up for this, this situation, they are taking a little bit of a. They're taking a calculated risk. And so one of the calculations that add into that risk is having insurances put in place to ensure that they don't lose money on it. Because if you've got somebody that lives for, you know, lives to be the age 98, 105, something like that, depending upon what market you're in and what's going on with real estate, there's a good chance that they could lose money. Let's look at people that may have had a reverse mortgage back in the mid-2000s that ended up hitting, you know, the 2008, 2009 area where they, their, their death had come. And the property values in some places have dropped 70%, 50%.

Yeah. Well, you know, the real risk, though, is that the person will live too long. That's the biggest risk, because then the lender has to keep waiting and waiting and waiting to get paid. This reminds me, Aaron, of what happened in the world of something called viaticals. And viaticals were basically when, in the early 80s when there was this big scare about AIDS and they thought everybody would be dying of AIDS, but they essentially learned how to treat it and people were able to live even if they, if they had the hiv. And so what, what happened there is a lot of people had life insurance policies and they figured, why not cash in this life insurance policy, sell it to an investor. So I'll have the money to either pay for my medical care or just, just live it up. I'm not going to live that long. You know, I got a year to live or whatever, and, you know, I'm just going to spend the money. That was kind of the attitude. And so investors would buy these policies, banking essentially on the, on the, on the person passing away, and then they would get the benefit of that life insurance policy. They would be the new beneficiary. Well, the problem was the people didn't die like they thought they would. And now here we are, what, 30 years later, and they still haven't cashed in those policies. So the investors really got burned on those viaticals. You know, that was kind of, it's.

A macabre thing to say that they got burned because people didn't die. But that's the reality of it. Investors are in it to make money.

But look, you know, there's nothing wrong with that really, because if you think about serves a need for the person, if they want to pay for their medical care or take a cruise around the world in their final days, they could cash in their policy early. I mean, it serves a huge need for them too. So, you know, the problem was though, in that situation, they didn't pass away.

Items served a purpose. And when we're talking about these insurances or what they have to do put in place, and that may be why these insurances exist and these higher costs that add to these insurances, because maybe the viaticals had some sort of window into what, what could happen with this, and that's why they put it in place. But regardless, the investor who owns the home, take advantage of the opportunity, put this to work. You can go out there and buy multiple pieces of real estate, receive an even greater income, increase your lifestyle at absolute what really no cost to you. Even though there's these expenses associated with the loan. If we're talking about 200 or $300,000 loan and the expenses are say 12 or $13,000, that's not an expense. You see, leave your pocket, you can still take the remaining amount and put it to work and make that money back in a matter of months. And it's money that never left your pocket. You don't ever feel that sting. So there's a mindset that one has to wrap their head around. And what really would take is, is for us to sit down to look at their situation, look at what they want to do and where they want to be, be with that, and pencil it all out to where it makes sense. This is not something a person goes into lightly. We do have an education process that they must complete up front before we even take the application. They have to go through all that, they have to understand it fully. And then we pencil out how does this work for them to get them to their ultimate goal? Does it get them closer or does it not? If it does, it's very much worth looking at.

Some of the pros are there's no qualifying to access the equity in the home. There's no credit check, no financials, no paperwork about how much assets you have, no monthly payments on the loan, no impact on the debt to income ratio. Normally when someone starts accumulating more and more mortgages, and we're going to have you back on to do a show on mortgage stacking or mortgage sequencing where we talk about how people can accumulate more properties. And there's no age requirement on that one. But on the reverse mortgage, if you qualify for it, and you know, we have investors that are well into their 80s who are buying properties from us. Certainly this, this can really be a nice benefit because it doesn't impact the debt to income ratio. So if they have income and they're using that income to qualify, whether it's investment income or even, you know, if they're still working and they use that income, this doesn't impact in a negative way their debt ratio. This reverse mortgage, they can use the funds for whatever they want. You get to pay off the existing loans so you have no more payments. If you have a loan now, that loan is paid off. Credit line can increase over time and you can, you can do more investing with it. So it's, it's a pretty cool thing.

Yeah, I see it as a big win win for somebody in the right position to use it.

Yeah, it's, it's just a small niche market. That's the, that's the difference, right?

That is correct. There's not a lot of lenders out there doing it because I don't know why. I honestly can't answer why a lot of lenders are doing. I know that we are and we're participating in it heavily and it seems to really work for a lot of people.

Yeah, well, I see a lot, you know, it's a small market, it's a small number of people that can qualify for it. But you know, I see a lot of commercials on television about it, about reverse mortgages. I know Robert Wagner had some commercial he was promoting a lot and I don't know, some other famous character does too. I can't remember who it is, but, but you know, I see those commercials on television about it. Is there anything else you want to say on reverse mortgages?

No, that pretty much sums it up. The other things that need to be discussed, we can discuss one on one with the individual based upon their specific scenario.

All right, good folks. So if you're interested in this, go to jasonhartman.com if you're already working with one of our investment counselors, just ask them. They will get you in touch with Aaron where you can find out all the details about it. Thanks for telling us about reverse mortgages today.

Thank you for having me on, Jason. I appreciate it.

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