Welcome to the Get Real podcast. Your high octane boosted in the trenches, tell it like it is reality therapy for personal business and real estate investing success with your host entrepreneurs, Angela Thomas and Ron Phillips. It’s time to get real.
Ron: Hey everybody. Welcome to another episode of the get real podcast where we’re going to get real about actually real estate today, but we do real estate, we do business, we do life and we speak real about it. You can find this at getrealestatesuccess.com make sure you subscribe, make sure you share us with all of your friends, all that good stuff. With me today is Heather Marchant. Welcome Heather. She’s been on the team for, we just figured that the numbers out. It’s 13 years, 13 years. Unbelievable. She knows so much and she is so she’s a powerhouse as far as the team is. Anybody who’s listening to this has done any business with our company, knows you knows Heather and so we’re going to talk about real estate today. Heather, are you super pumped about this?
Heather: I am super pumped because I you’ve like helped me be passionate about this over the last 13 years pretty quick. So,
Ron: So, we’re going to talk about something every, every now and again. I used to do this thing called Ron rants and Heather, well, I think a lot of people are – occasionally I get pissed off. You guys who are, who are listening already know this, because I probably did that last week, but we’re going to do it again today. No, I’m not, I’m not so fired up today, Heather. But this is really important what we’re gonna talk about today because this is like a, I mean people are passionate one way or the other on this topic. You know. And what fueled this was a discussion on a friend of mines Facebook page, crazy enough, where they were talking about mortgages and whether you should get a 15-year mortgage, a 20-year mortgage, a 30-year mortgage. And there’s, well there’s no way we could talk about all the different kinds of mortgages cause Heather, there’s like, yeah, I mean…
Heather: Just more mainstream, yeah.
Ron: Yeah. Yeah. So, let’s, so because of that Facebook posts and there were some, you know, there were some really pointed discussion on this, on his Facebook post about this. Let’s talk about, let’s just try and talk through the difference in these and interrupt me if I miss some stuff Heather. But you know, you spend a lot of time talking to and coaching our clients about this stuff and they ask about it. You know, people tell me I should get a 20-year mortgage or they told me I should get a 15-year mortgage cause I want to pay this thing off really fast. And
Heather: Yeah, I have clients tell me I don’t, I don’t like debt. Like it makes me feel nervous or anxious that I have, I’m taking on more debt in purchasing rental property. So…
Ron: Yeah, interestingly enough, one of the people on there said, “No, no loan. What are you talking about? Pay cash.” There’s nothing wrong with that. Absolutely nothing wrong with paying cash, but a lot of people can’t do that right now. And some people like me just don’t want to do that because I can buy more properties if I leverage them. Right? And, and it works better for return on investment. Everything else. Okay. So, we’ve kind of flogged that horse before. Let’s talk about the difference between these the loans. And I know you’ve got some examples and I’ve, I’ve just, I just want to share something cause it’s super simple so that everybody can understand this and I’m just gonna – this is going to be a little harder for people to follow. So, if I go too fast, Heather, just interrupt me and say, yeah, but you forgot about this piece, whatever.
Ron: So, we’re going to keep this exactly the same. $100,000 property, putting 20% down. So, it’s a single-family home. Super simple, right? Not going to go into all the cash flow numbers or anything like that. We’re just going to talk about loans, period. Okay. So, if I get a 20 year mortgage on a on an $80,000 now if you put, if you do a 20 year mortgage, you’re going to get a better interest rate and I didn’t check with our lender today, but Heather, you’re really involved in, in our rates because you’re constantly doing this all the time. I chose four and a quarter. Is that a pretty accurate rate for a 20 year?
Heather: Pretty accurate.
Ron: And right now, at 30 years running what?
Heather: Closer to five.
Ron: Yeah, so like 4.75 to five somewhere in there. Now, obviously this stuff depends on the day guys, but what are the other things, Heather? I mean we, between a 20 year and a 30-year mortgage, the down payment doesn’t change, right? It’s still 20%.
Heather: Your interest rates are a little different, but so is the, the term is going to be a little different. So, you have the, the fixed portion on a 30-year loan is going to be fixed for 30 years and sometimes you can have loans that have a shorter term fix. If we’re talking about a 20-year fixed, then you’re paying off the loan over 20 years versus 30.
Ron: Yeah. So, in the example on the, on the, on my buddy’s Facebook post, it was a 10-year term, right? So, in 10 years you’re going to have a balloon and some people were asking about that. We’ll get into that a little bit later about what, what happens after 10 years, you know, does this rate adjust? You know, and there’s three, five, seven, 10-year terms. That’s pretty generally what banks will do. Right? So, we’re not completely apples to apples here because the 20-year mortgage that we’re talking about legitimately probably isn’t a 20-year term. It’s probably max a 10-year term, you know, where the other one is legitimately it’s fixed for 30 years. So, just in the payment amount, there’s not a ton of difference. Okay. So, the payment on the 20 year would be like 495 and the payment on the 30 year would be 422. Okay. So, we’re roughly just a little over 70 bucks’ difference on these two loans. So, it’s not really a, it’s not a crazy amount, but in our return on investment, that can be several percentage points, right?
Heather: Oh, definitely on a single family. Yeah.
Ron: Yeah. Depending on what you’re getting in rent. So, there’s a bunch of different things that we need to talk through and I don’t want to get this completely jumbled up and really confuse everybody, but to maximize return on investment on a monthly basis or on an annual basis, you would, you would go for the 30 year loan. So, and you read through this post, I mean, there was people on there like, yeah, but you’re paying way more interest. Yeah. And that’s true. If you actually carry this thing out 30 years, you’re going to pay a ton more interest than you would on a 20-year loan.
Ron: That’s absolutely true. Then somebody else chimes in and says, yeah, but you’re not really paying it. Your tenants paying it and well, that’s a fair point too. Right? But your tenants paying it on the 20 year. So, I don’t know that that’s a – I don’t know that that’s a fair – I don’t think that’s fair because the tenant is paying it on both. Right? So, you’re either going to pay more interest or you’re gonna pay less interest. Period. Yeah. Now we, we preach we preach cashflow and there’s a few reasons for that Heather. But what are some of the really important reasons why we want to maximize cashflow on a, on a monthly and an on an annual basis?
Heather: Well, I have a lot to say about that. So, well, you have number one, you want to have cushion in case you have maintenance or unexpected issues with the property, right? Vacancies you’re reducing your cashflow means that you’re not going to have as much in reserve to cover those expenses you’re dumping out into the equity in house basically and not able to recoup that directly. That would be my first answer.
Ron: And that’s a really important one. I think people overlook, right? And you know, they’re like, well, the properties, the property is gonna cashflow anyway, you know, if you know, a few bucks on the 20 years. So, what difference does it make? Well, it makes a big difference if your HVAC goes out.
Ron: You know, and then somebody’s going to say, well yeah, but if you’re buying a rehab property then that stuff’s not going to go wrong. And if you get a home warranty then you probably, okay, well yeah, on most everything you are, but you know, if you have a vacancy last couple of months you’re done. Like there’s no more cashflow for that year.
Heather: Yes. And you’re dipping into your own pockets and you have the money tied up in, you know, the balance on the mortgage basically that you, you can’t really access in case of an emergency, but you, that’s just one of the more conservative approaches too. You also have money that is not invested in anything. It’s not really giving you much yield. And so, if you are putting more money into the mortgage every month, then you can’t invest that and get that to give you a rate of return as well.
Ron: It’s certainly a lot harder to get it back out of there. We talk about that, right? When we talk about return on equity, because if you’ve got a ton of equity sitting in the property and it’s not doing anything, and your largest asset is sitting in these properties, then you’re not effectively utilizing that money to make you more money.
Ron: There’s nothing wrong with having 10 or 20 or 30 paid off houses. That’s not what we’re saying. But if you’re in growth mode and you’re trying to grow as much as you can, you’ve got to all of your money needs to be working. It can’t be just sitting there dead. And that’s exactly what it’s doing when you’re putting it into the property. But I think one of the other really fair points here on this maybe kind of got glossed over in what both of us just said, is that if you put the money, if it’s a 20-year mortgage, your payments locked in. It’s not like you can just say, ah, well this month I don’t want to pay the extra 70. You know, I just need to reduce that down. So, let’s say we go through another downturn in our economy and your job goes away all of a sudden, and then your tenant moves out and you have to do a tenant. You have to do a turn your property and you no longer have the, the extra money to make that happen. That is, it’s really cool when the, when the market is good and when the economy’s good and everything’s great. It sounds like such a great plan to go with a 20-year mortgage until it isn’t a great plan anymore. Right. And we’re not maximizing the cash flow. It can turn into a really sticky situation.
Heather: Well, and then the other thing too is if you have a downturn in the economy and you want to pull the cash out of the property. Last time in the last economic downturn, lending was really tough. You couldn’t get loan. You couldn’t maybe even refinance the property as well. So, in dire straits maybe you’d say, “Oh, I’ll just take the equity”, but that may not be accessible at that point. In the last downturn, my husband was in grad school and we couldn’t qualify. We had the cash to buy a house and we wanted to buy a house and we couldn’t, we couldn’t qualify. So, even though…
Ron: There were a lot of people, there were a lot of people with home equity lines of credits, they got shut down. I mean, just overnight money’s gone. Can’t have access to it anymore. I mean that’s a really good point. Because when, when you’re in crisis, the last thing you want is to have to go begging to the bank to, to, you know, readjust your mortgage because you made a really stupid decision upfront because you thought everything was going to be Rosie on your property forever. And in the economies. Let’s keep in mind that even if you’ve got a decent cashflow on a 20-year mortgage, there may be a time in your life where you kind of need that thing to take care of itself and maybe even provide a little bit. Right. So, and here’s the other thing that I was thinking about. Like what stops me if I have a 30-year mortgage from just making extra payments? And what’s the net difference between me getting a 30-year mortgage making extra payments?
Heather: Yeah, I use it. I go online and use mortgage calculator.org all the time to look at that. Right. How fast can you…
Ron: Funny you say that. Cause I actually did do this, right? Feeling a little prepared for the conversation today. I went and did this. So, we have these two payments, right? We were about 70 bucks off. So, I thought, well, let’s just see what the net difference is and let’s see what the downside is to getting a 30- year loan. Because most investors, I know Heather, they don’t actually keep the properties for 30 years.
Heather: Nope, I don’t know any.
Ron: Yeah. I mean almost everybody is selling or cash out refinancing or doing something that alters their loan. Right? But I kind of agree with Warren Buffet when he said, you know, this is an effective way to short the dollar. When you can lock in money at, you know, somewhere between four and a half and 5%. I mean, when the rates go up, because they inevitably they will, somebody on the post was like, yeah, rates are going to be fine. You know, historically rates aren’t really that high and we’re really don’t have a problem with an inflation. Well, everybody thought that too until the 80s and then interest rates went up to the, at their peak they were at 18%. So, you know, the person who has their property locked in for 10 years, I hope you’ve paid a ton down. Reality is, according to the amateurization schedule, you’ve paid roughly $30,000 down. You still owe 50 grand on that property, and so you’ve got to refinance or sell or do something. And you know, you don’t know what the market’s going to be. You don’t know what the interest rates are going to be. No one has any idea. 10 years from now, what things are going to be, so if you can lock it in for 30 years and during the last downturn to Heather, what happened to rental rates?
Heather: Rental rates went up.
Ron: They went up.
Heather: Yeah, cause people like me couldn’t buy. Right?
Ron: It’s alright. So, we take this exact same property, we put it on a 30-year mortgage. The interest rate is higher, right? So, to me this is counterintuitive, but you’re going to pay more interest. You’re going to pay it for longer, which means you’re going to pay more interest. But if I just pop in there, that extra 70 bucks difference between the 20 year and the 30 year, I get this – thing’s paid off completely in 22 years.
Heather: Yeah. It’s a no brainer.
Ron: There’s literally almost no difference here. And interestingly enough in the, in the 22nd year, I’m only paying off $621 so really it gets paid off in 21 years, just over 21 years.
Heather: And you have the flexibility, you know, that flexibility you don’t have with the 20 year you have to make your mortgage payment. You can pay extra on a 30.
Ron: It’s so, so important. You know, and look, if you’re hell bent on paying your property off, but you want the flexibility of, of having access to the money as you’re paying it down, there are other creative loan options that you can use. I mean, there are these home equity line of credit. That’s a first, I don’t know if you’ve heard of these Heather, but it’s a first mortgage. It’s a home equity line of credit and you use it basically as a bank account right now, the interest rate on that you pay is even higher than the, than the one that I just quoted you. But the reality is that if you’re, if you’re using it as a bank and you’re dumping money into it and paying the principal down every single month, the numbers work out in your favor. Right? So, there’s, yeah, there’s several different options that you can do here. And if you really just want to pay your house off but you don’t want to completely isolate yourself from your money and your cashflow. Maybe I’m missing something Heather, but I can’t see why anyone would not do a 30-year loan.
Heather: Yeah. I think sometimes when people look at the 20, they’re not looking at the full picture of why the 30 makes more sense. All the reasons we talked about and the all in one mortgage is pretty cool. It’s expensive upfront. I actually just barely ran numbers on my own primary residence for it and just doing nothing different. Just keeping my income and expenses coming out of the mortgage instead of out of my checking account. My house will be paid off in I think it was two or three years.
Ron: That’s psychotic and maybe we should, maybe we should do, listen, if you guys are interested in hearing more about that loan pro program, maybe I can try and get somebody to come on and actually talk about it cause it, it is really powerful. They didn’t have to be on with that particular one. Not to completely jump the shark here, but in order to make that one work, you have to be like Heather, right? Not like wrong. You have to be like Heather in that you got to have your crap all dialed in and you have to work off of a budget and you have to have X amount leftover every month so that you’re paying down constantly, right? You can’t be like, oh hell, I’ve got $50,000 I paid down, let’s go to Europe. Like, like wrong. You can’t, you can’t do that. This is a bad, bad loan product for people who have a really hard time managing their funds. So, my wife and I don’t know that I’ve ever really ever said this on the show or not, but Heather knows this. My wife and I are both spenders. Now, she’s way better than me, but, we’re both spenders.
Heather: Do you mean a better spender? Like she’s better spending?
Ron: Yeah. Well, on certain things, there’s no question, but she’s actually better at not spending than I am, but we’re both spenders. So, we’re spender-spender where we’re supposed to be spender-saver. And that really is not a good combination unless you make a lot of money, which thank God I do. So, we do okay. But man, we, and I don’t know if you knew this or not, but spender- spender can talk each other into getting nearly anything.
Heather: I’ve seen that with you guys. It’s impressive.
Ron: It’s a sickness. It really is.
Heather: Well, we’re saver-savers. So, our problem is people telling us that we need to spend money. We’re like, Oh yeah, that’s true. We should.
Ron: It’s true. You should enjoy it. Enjoy some of the money. So, let’s talk through one more thing that was on that thread and that was fees. And I think the real problem, the reason that this came up was because the broker that had given the client this loan, I mean they really charged him a lot of money. I think that was the main problem. If you actually want to boil it all down, they were like, why would you pay all of these fees when a local bank will give you a loan and you don’t have hardly any fees. Let’s talk about the difference between a bank and a broker real quick, Heather, and kind of the difference in fees that we’ve seen over the years because it can be astronomical. The difference.
Heather: Yeah, for sure. I mean our, the lender we work with is a Fannie-Freddie lender. So, he’s going to sell the note after, but the rates and terms and stuff are pretty, pretty tight. I mean, you can’t really have a lot of leeway and he has a very low lender fee that he charges. And so very, very few times does it make sense for our clients to pay origination because his rates are already really competitive. So, in the end, closing costs on a single-family home are mostly, I would say 50% of the cost is usually your escrows, your taxes and your insurance. And maybe you know some of your title fees in there too. It’s not the lender fee. That’s most of it. So, I’m a single-family home.
Ron: That doesn’t hold true for everybody in this particular case. So, one of the comments that I made on this thread was, but you’re just using the wrong or you’re just using the wrong person, period. End of story, right? If they’re charging you two, two and a half points on your, on your origination fee, plus a whole bunch of other junk fees to close a loan, you’re just getting bent over. And there’s no other way to put it. You’re, you’re just getting screwed. And that was the point of this. He’s, he’s going man, cause my local bank, they’ll give you a 20-year loan and the interest rate is going to be less and the fees are going to be less. But there’s a difference. The lender that we use, Heather, he is, he is at a bank, right? But he’s at a bank that also does business with Fannie Mae. Right. So, they can sell these loans, these 30-year loans off to Fannie Mae. But he gets to charge bank rates and he gets; they get better rates anyway because they do more volume. Just their par rates are better and then they don’t have to charge the same amount of money as a broker does.
Ron: So, it’s kind of the best of both worlds. So, I mean if, if you were, if you were going to tell your clients or anybody listening, well I mean what do we need to do? We just need to go through,
Heather: Yeah, go through a bank. You can use a local bank sometimes on depending on the deal, but we use one lender that’s nationwide so that you can purchase across the country and not get preapproved over and over again. Our focus with our clients is mostly growing a portfolio over time. So, working with one lender is super convenient where our clients are professionals and have a job and this isn’t their full-time gig. So, the 30-year fixed is perfect for rental properties. It’s like almost like it was made for it. It’s perfect. Yeah.
Ron: Main thrusts of this is a few things, right? You need to choose a bank, not a broker. And if you are choosing a broker, just make sure you’re not getting screwed on fees. Okay. You don’t shop it a little bit. When you do that though, if you don’t know, there’s a massive difference between a regular loan retail loan that you’re buying for yourself and investment property. They’re completely different animals. Right. So, you know, don’t go tell your mortgage broker that you can get a rate under four on an investment property cause you can’t, you cannot do that. So, don’t, don’t lie to him. Everybody already knows you can. Okay. Interest rates are pretty much what, right now what Heather and I said they were. So, go to a bank or go to a broker that charges reasonable fees and a reasonable fee is, is what? 1% or less.
Ron: Yeah. And then man, get a 30-year loan. Cause if you want to pay it off you can pay it off. But if life throws you a curve ball you can do, you know, then you get the choice of paying the extra 70.
Heather: Exactly. Choice is always better. And having the cash and flexibility. I was telling Ron, I have a client, it’s a husband and wife, Jerry and Sharon, they listen to this podcast religiously. So, I’ll get a text message from them when they listen to this. But I spoke with them yesterday. Elise came in lower than our pro forma and when that happens, we require the seller to make a concession of some kind. It’s not always the same every time. So, we negotiate. So, the lease was fairly low and so they, they said, look, we have wiggle room of $14,000 Heather, you tell us what, you know, what’s going to work for the client. So, when I initially talked with the client via email and presented the options, they said lower the price. So, I got on the phone yesterday and I said, look, if we, if we look at the math, we can lower the price a couple of thousand dollars and you can pocket $11,000 in different incentives.
Heather: So, with those conventional loans you are limited to 2% of the purchase price as incentives. So, I knew that. So, we kept that out at 2% and then I said, okay, let’s prepay property management for two years. The, in that situation they have, they know they’re part of the business is the property management company so that’s flexible for them. And then they also were willing to pay the difference in the lease for two years as well. So, all of those incentives combined were $11,000 and I said, let’s not lower the purchase price because you’re leveraging, this is only, you’re only saving 20% upfront of whatever price reduction we have. This way you have $11,000 in your pocket. And it’s kinda the same concept we’ve been talking about is having the money in your pocket and the flexibility that that offers versus taking it in the mortgage and that being your only your only savings. So, in the end she said, well yeah, that makes perfect sense. And so did her husband and we said, okay, well let’s get into some identities together. And so, they are only lowering the price 3000 instead of the $14,000.
Ron: Yeah. And all the rest of that money goes to them in the form of, in the form of cashflow or cash in your pocket or, or reduced amount of money that you have to bring to closing. Yeah, it’s fantastic. Congratulations. You too. For sure. That’s awesome.
Heather: Well, and the along with the mortgage part though, I guess I didn’t explain this piece. So, it saves them $46 a month to lower the purchase price by that $14,000 and if we did the math, it would take them almost just shy of 20 years to be able to save that $11,000 to get it back. So, it means that, you know, they got it all up front instead of over a period of 20 years.
Ron: And in addition to that, I think on this deal, you told me earlier that they just kind of screwed the lease up. It’s not even that the lease rates should be there. Right. So they’re, so they’re going to get a bump in rent on top of all of this stuff because they, they screwed the lease up. So I mean, really, really cool. Congratulations to you too. It’s a, you know, sometimes it’s really frustrating when things don’t go exactly like they should, which almost always happens in real estate for some reason. It’s a complicated business, but sometimes it can work out in your favor when things get a little bit messed up and a little bit messy. So, that’s really good. So, you guys are out there looking for loans, just make sure that you understand all the ramifications and don’t just take one person’s word for it, right?
Ron: That you should do something. Because I think this guy in his post, he was really frustrated mostly about all the fees these people were paying. Yeah. But it altered and said, Hey look, you should just use this local bank and we use that local bank. They’re really a really, really good bank to work with. But we usually use them for weird situations and crazy loan products and stuff like that normal people can’t get or that normal properties can’t get or something like that. Where you cannot beat a Fannie Mae loan. You just cannot beat that thing right now. And so why, why try? So, there’s my point man. And then be really careful about how much money you pay down, right? Just be careful about it because you never know when you need that money in your pocket.
Ron: Right. And I, and I hope this was helpful. So, this was helpful. And if you guys want to learn a little bit more about the all-in-one mortgage product, just, you know, shoot us a message, make a comment. Everybody should like this anyway. Right? Because that’s the nice thing to do. Yeah. And then share it with everybody. And it was Heather’s first time on the show. Right? Nice. So we’ll, we’ll bring her back. We’ll, we’ll do some more shows with her. She’s got a wealth of knowledge and especially about what just goes on in the day to day of helping all of these thousands of clients that we help to acquire rental properties all over the country and the management, all the things that goes along with it. The good, the bad, the ugly.
Heather: All day. Love it.
Ron: Heather can seriously help us get real on this show. So, we’re excited to have you here. Excited for all of you guys to listen. Go look us up, getrealestatesuccess.com, subscribe to the podcast. You can find our main company at RPCinvest.com. You can look that up as well. There’s some really cool over there as well, and we just, we’re really grateful that you guys are listening, so don’t keep us a secret. Thanks everybody. Until next time.
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If you’ve heard someone say, “I don’t like debt”, but they want to invest in real estate, how are those two ideas compatible? Paying down a 15 year mortgage is incredibly attractive to these folks, but they don’t realize they’re losing out on cash flow in their business. I talk with Heather Marchant about the apples to oranges comparison of 15 and 30 year mortgages, and why a 30 year mortgage continues to be a superior financial product.
There’s a reason we talk about cash flow as king, especially as you’re in the growth phase of a real estate business. Cash flow gives you a cushion to deal with vacancies or repairs. If you lose your job and a tenant at
the same time, that cushion from cash flow protects you from losing your rental entirely.
When the economy’s great, a 15 year mortgage sounds like a solid plan, but Heather’s experience in the last downturn drives home my point. If lending tightens up, you can’t always guarantee that you’ll be able to get
your equity out of a house. A 30 year mortgage gives you that flexibility you need in a tight financial spot.
We talk about why you might choose a nationwide lender versus a local lender, and when brokers are just a bad deal all around. Hint: it’s fees.
But either way you end up going, remember that there’s a massive difference between a retail loan and an investment loan.
There’s a lot of misinformation floating around about all of the different kinds of financial products available in real estate. Make sure you understand all of the ramifications of the different loans available, and don’t just take one person’s word for it!
- We discuss the differences between a bank and broker.
- Why you’d want to choose a 30 year mortgage.
- How a 20 year mortgage in a downturn can restrict your cash flow.
- Choosing flexible payoff methods can improve your investing ability.