In this episode, The Real Estate Guys™ answer your question with our questionable answers. 😉
And at the end of the broadcast, a living legend in the real estate business answers the question we get asked more than any other. So tune in and listen up for another exhilarating and informative edition of Ask The Guys! To put your question in our email grab bag for the next Ask The Guys show, click here to visit our cleverly named Ask The Guys page.
From the Rich Dad Radio Show studios in chilly Scottsdale, Arizona (thanks to our good friend Robert Kiyosaki and his amazing team!):
- A man who asks nothing and knows everything, your host Robert Helms
- A man knows nothing and answers everything, co-host Russell Gray
- A living legend in real estate who shall remain anonymous until revealed at the end of the episode, Mr. X
Okay! We’ve got another great bunch of questions…thanks to YOU and our email room manager, Walter. If you know Walter, it’s amazing he can even carry the email bag, much less pull anything out of it. But he’s a resourceful little pecker…
So right out of the gate we get a question about LEVERAGE. This is SUCH a great tool in every investor’s toolbox…and we love to talk about it.
The question is simple enough, but the answer, like a fine cut diamond, is multifaceted.
Should you pay cash or get a loan?
Mmmmmm….there’s a lot there. And to blog on this topic is to write a chapter in a book, so we won’t do that.
Instead, we’ll give you some things to think about, then encourage you to listen to the show. And if you can, get your hands on a used copy of our temporarily-out-of-print-while-we-look-for-time-to-update-it book, Equity Happens. We spend a lot of time on the topic of leverage in the book. It’s also covered in our Real Equity Home Study Course. available here.
Here some of the FEATURES and BENEFITS (that’s sales speak) of leverage:
- Leverage allows you to own more real estate for less of your own money. Instead of 100% down on just one property, you can put 20% down on 5 properties. It’s not complicated…more is better.
- Leverage allows you to enjoy 100% of the appreciation of a property with only a fraction of your own money in the deal. So if you put 20% down, you pay for 1/5 a property. The loan pays for the other 4/5. But when the property goes up, you get 5/5 of the gain. Nice!
- Leverage allows you to SHORT THE DOLLAR. If you believe that the dollar will continue to fall in value against things that are real (like food, energy, real estate, cars, clothes, labor, etc…), then you don’t want to save dollars, you want to convert them into things that are real. Ideally into things that produce income. Even better to go to go into the future and bring dollars into the present and buy more real assets today. This is called “shorting the dollar”. Confused? Click here to get a copy of our special report on Real Asset Investing and see if it helps.
- Leverage allow you to arbitrage your cash flow. Arbitrage is just a fancy word for making money on the spread, like a bank does when they pay you a paltry 1% on your savings and then buy Treasuries at 2.5%. You can do the same thing when you borrow at 5% and then use the proceeds to buy 8% cash flow (like a rental property), you make 3% profit on the spread. Fun!
We could go on and on (can you tell?), but hopefully you get the gist of it. Real estate is a financial tool and leverage is an important financial concept that every investor needs to understand. So study it.
And when you get good at understanding leverage, you’ll want to enjoy Multiple Mortgasms.
Sorry. It’s a little crude, but after all, we are The Real Estate Guys, not The Real Estate Gentlemen. Besides the line was too good to pass up.
So what are we talking about?
In residential real estate, the mortgage market is subsidized by the Federal government. It’s kind of like what’s happening with healthcare under Obamacare. The government wants to “help” by make housing more available to the little guy, so Uncle Sam created agencies to “help” the private sector make mortgages cheaper.
How? By providing more liquidity through a guaranteed buyer of mortgages in the secondary market. That’s where mortgage originators go to sell the mortgages they make. Remember that while we, as investors, think of mortgages as liabilities…paper investors think of them as assets. When you OWE the money, it’s your liability. When you are OWED the money, it’s your asset.
The street names for these agencies who buy (or guarantee) the mortgages are Fannie and Freddie. Since their introduction to the market (among MANY unintended consequences), most residential lending conforms (a “conforming” loan) to their lending guidelines. Even when the originator doesn’t plan to sell the loan to Fannie or Freddie. It’s just nice to have a backup exit strategy.
One of the Fannie / Freddie “conforming” guidelines is they won’t lend to anyone who has more than 10 Fannie or Freddie loans already. So when you get to 10, you’re “Fannie’d out”.
The point is that if you want to maximize your investing by taking advantage of these cheaper loans, you need to manage your loan portfolio carefully. So when our listener told us they had just two properties with four loans on them, we knew he didn’t get this concept. So we talk about it to be sure that everyone learns.
Of course, the segues into the next topic…
With so many properties, vendors and tenants, what software can be used to keep track of it all? Great question!
Sadly, there isn’t a one-size-fits-all great answer. And keeping track of all the moving parts is the bane of any business person, real estate or otherwise. Unfortunately, complexity is the price we pay for prosperity. Sometimes you just can’t remember all the properties you own or where they are.
Our short answer is to know that most property management platforms are PROPERTY centric. Most CRM (Customer Relationship Management) platforms are CONTACT centric. Of course, brilliant developers are constantly creating new and innovative products. And each year, the products become more specialized as developers target specific niches. That’s the good news.
The bad news is that there are still so many demographics bigger than the real estate investing community, so no product has come across our desks that we feel we can call, “Neo”…(from the Matrix…”the One”)…
The biggest problem we see with software is that it tries to be smarter than you. In our case, that’s not too hard. But when the software locks you into a process, it’s hard to adjust to changing conditions.
So our general advice is to go with something inexpensive, highly supported (lots of gurus who know how to tweak it), and very customizable. This way, you can adjust it on the fly as you figure out how to use it to best manage your unique situation. So if you start out with single-family homes, then get into self-storage or Christmas tree farms, your software can be made to fit your needs.
When you buy a program tightly designed for one niche, it may not fit the other. But you can customize, you can add fields and functions to suit your investing fancy. You don’t want the technology tail to wag the investing dog. Investing is the main thing. Technology is a support function. Duh.
Lastly, we get a question from someone who just drank the real estate Kool-Aid and wants to make real estate a profession. We get this one ALL the time.
So rather than recycle answers we’ve provided several times in the past…and because we happen to be in Scottsdale, Arizona…we give a shout to our friend, hero and 2014 Summit at Sea faculty member, the legendary Tom Hopkins. Tom is gracious enough to drop everything and come into the studio to share a small portion of his immense wisdom.
But we won’t do you the disservice of trying to transcribe Tom’s sage advice, except this Yoda-like notion: when you decide to do something, don’t try. Commit. And when you do, you’ll be successful. Too many people “try” real estate sales or investing. Too few “commit”. “Do. Or do not. There is no try.”
So commit to listen to this episode, and then take the next steps to enhance your education, grow your network, and build your support team. We’re committed to providing all kinds of opportunities to help you, including events, resources and episodes full of great ideas and information. Thanks for listening to The Real Estate Guys™ radio show! Tell a friend!
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