Part Five of Five: “L” = Leverage
Then comes the icing on the cake. Not only can you serve people, receive income, write off more than you make, and let the tenants pay down the mortgage as the property increases in value, but you get a huge bonus.
Leverage. Bankers allow the public to borrow 80-90 even 100 percent of the real estate value. Why is that? Because they understand that real estate is safe collateral to lend money against. It has traditionally held its value and is very forgiving in that if it were to drop in value, it is a very slow drift that usually comes back in line quickly.
Contrast that with the stock market. Do you know what the brokerage houses will lend on a stock? Usually 50% of value. That’s 50% leverage in stocks vs. up to 100% in real estate. What do the stockbrokers know? Stocks are risky. Stocks (and bitcoin) can lose huge value quickly and are slow to forgive. Leverage allows you to invest little to none of your own money and control an income-producing asset with excess tax benefits as it grows in value while the user (your tenant) pays off the debt. There … now go find me something better.
A lot of long-time investors will tell you that the best you can expect from your rental investment portfolio over time is about a 10% return. Well for most of us 10% compounded over many years will do just fine. I’m sure a lot of you wish you could say that about your investments in the stock market. But what they don’t know is — you can add a system to make it better than average!
Timestamps:
0:01 – Introduction – “ Real estate the I.D.E.A.L. investment, the final chapter Leverage”
0:38 – Lou’s wins of the week
4:15 – Today’s give away – Lou’s book: “ Doing Good, While Doing Well”
5:10 – A foundation helps a new member to put up money for his down payment on buying his property.
6:42 – L for Leverage – Real Estate is the I.D.E.A.L. Investment
15:02 – Aug 27th, 28th & 29th – https://www.MillionaireJumpStart.com/Lou
19:16 – Ask Lou anything about the real estate business Questions for Lou
20:30 – With the Eviction/Foreclosure Moratorium being extended to Oct 3, how do you handle your Lease Purchase tenant buyers and your owner-financed buyers who cannot pay?
23:31 – Are we required to record the Affidavit of Trust in the County records?
24:51 – Maximum Asset Shield if I miss Thursday, will there be a chance to get it or not?
25:37 – How is the moratorium affecting this?
28:23 – Would you tell me a little more about the UWE?
30:40 – https://www.EZfixcredit.com
31:24 – Can House Joint Resolution 192 plays a part in my property purchases?
35:00 – Let say House Joint Resolution 192 can help me in my property how can I invoke it?
35:49 – Next week’s show: Mortgage Defaults Rates
If you are JUST getting started in real estate investing, you NEED to attend my ONE-DAY virtual training. I teach it LIVE over ZOOM, and it’s only $1 (yes, one dollar) for SIX HOURS of solid how-to training! https://www.wealthbuilderworkshop.online
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Listen to our Podcast:
https://streetsmart.mypodcastworld.com/11234/why-real-estate-is-ideal-l-leverage-part-5
Why Real Estate Is I.D.E.A.L. – “L” = Leverage
Lou Brown:
I’m going to be talking about Real Estate as the IDEAL Investment, and we’re going to have the final chapter, “L” is for Leverage.
Yeah, baby. I hope you have had a fantastic week last week, and this week has already started off big for us, and I’ve got some really cool stuff for you. I like to start off with the wins of the week and we’ve definitely had a great win this week. We had a gentleman, Eric, join us and he was a real player. And it’s just a great example of who we are and what we do on the Path To Home Ownership, right? So, as a Certified Affordable Housing Provider, you offer a program in your local community and anywhere else, you want to call it the Path To Home Ownership. And we had Eric, he showed up, he said, “Listen, I want that house.” And we explained to him about it, and how that particular property needed about $6,600 as the option fee.
And so he says, “I want that house.” And we explained to him that it’s the option fee plus the first month’s rent when you’re at the silver level. Well, he was very interested in that. He says, “Well, my company is transferring me and they’re going to be paying everything.” And we said, “Yeah, baby, that sounds like a plan.” Well, that plan ended up not being the plan that ultimately happened because the company did pay, but they only paid about $3,200. So whatever they told him they were going to do is not what they did. And so, as a result, he had to continue to build up his money. Well, house number one came and went. He was not able to get that house. So then he says, “Well, I’m putting it on the next house that you have available.” Sure enough, another house did come available.
He joined us about 3 months ago and another house came available and we said, “Eric, maybe this is the house for you.” He went and looked at it. He says, “Yeah, I want that house.” We said, “You got to get your money in. Otherwise it’s on the open market for other Path To Home Ownership clients and someone else might get it ahead of you.” Well, sure enough, that’s exactly what happened. Someone else got the home. So he says, “I’m sticking with you.” And we said, “Well, get the rest of the money.” And so sure enough, he kept bringing us in 500, 1,000, 500, 1,000, he built himself up and I’m proud to say last Monday, he closed on the home, last Friday, he moved into the house. It was the third house that we were able to get him on, turned out great. Of course, when we know who’s going to move in, we know how much downpayment they have.
We know how much they can afford on a monthly basis. So that means we can actually go custom-buy a property. In this particular case, this property came as a result of one of our clients who was on the Path To Home Ownership, who actually got good enough credit and good enough downpayment to go buy somebody else’s house, which was just fine with us because that’s exactly what the program is built to do. It’s built to help people build up their credit, build up their downpayment, and they might buy the house that they’re in. They might buy a different house and sure enough, that’s exactly what happened. But now Eric has the amazing opportunity to own this home. And we did this on our silver level rent-to-own plan. So certainly, guys, you have great opportunities out there to serve your people, serve your clients that are members of the program and be able to help them get amazing home ownership.
Now, today we are going to be giving away at the end, I’m going to be giving away my book, it’s called, “Doing Good While Doing Well.” I’m going to give you a digital version or you’ll have the opportunity to actually have one shipped to you. And this is an amazing book because it does give you some great insight into people all across the country that are Certified Affordable Housing Providers. And it’s their story in their local community about what they’re doing and how they’re doing it and how they’ve been able to help people to obtain home ownership. So it’s very inspirational as well. And I’m going to give you an opportunity to have your own copy of that at no charge. How about no charge? Do you like that program? I think it’s also known as “free.” Yes, I’m doing it for free for you.
Oh one thing to say also about Eric’s situation, I just wanted to mention that it was a foundation that put up the money for his initial down payment. So the company that he works for, well, let’s just say it’s the “Colonel,” if you know what I mean, in the food service business that’s a franchise operation. So certain franchises happen to work for a bigger franchisee and they have their own foundation. So they actually gave him downpayment assistance. And that’s one thing you want to introduce to local foundations. And you also want to look for foundations that will help their employees to obtain home ownership. Now you can introduce the concept to local foundations. And in fact, in my House Monster system, there is a letter to foundations in there. So take that as a reminder that foundations many times will give downpayment assistance, especially to employees that allowed the foundation to occur in the first place or the company and business that allowed the foundation to occur in the first place. What a great thing that you are helping that person with and also that the foundation can do to help the community. So I thought I’d mentioned that to you as well. All right, now we are now headed into our topic of the day and the topic of the day is “L” for Leverage when Real Estate is the IDEAL investment.
Well, I started this series about five weeks ago, and I mentioned a story that I was in a book called, “Walking With The Wise In Real Estate,” which was written some years ago. In fact, one of the authors in the book was actually Donald Trump back when he was a real estate investor. And there’s some really great stories in this book. And my chapter in the book was on “Real Estate Is The IDEAL Investment.” “I” for Income. “D” for Depreciation, tax write-offs. “E” for Equity, equity buildup. “A” for Appreciation, the benefits that you get from owning real estate. And today I’m going to be talking about the final letter, “L” for leverage. Well, real estate provides an amazing opportunity to do things that you really cannot do in other industries. And for people like you and me, for average people that are just purchasing property, holding property, long-term maybe selling it in the future.
Maybe keeping it as an income stream for retirement. Certainly the opportunity is big when you deal with residential real estate. And I love residential real estate. And there’s a big reason that I do it because people need houses. They need a place to lay their head. They need a safe place to live. And so, as a result, everyone needs a home now, and in our world, real estate allows something that other investments don’t allow. And that is to leverage that asset. Now, let’s say for example, that you buy a piece of real estate, well, the bank will automatically give you 80% of value. Now that means that if you buy a property for $100,000, the bank will give you $80,000. You can take that $80,000 and invest in other real estate. Or you can buy that $100,000 property and the bank will give you an 80% loan, but they will even, with insurance, go up to 97% of the value of the property.
So all you have to put in, it’s like 3% of the value of the property to own it. Now, that, my friends, is what we call leverage because you’ve got that 97% being financed by the bank, literally, by your signature, you have now got up to 97% of the value of the property. And that can be a very big thing when it comes to being able to expand your portfolio, buy more properties, and leverage. So let’s think about this. Now, with the stock market, for example, the stock market allows leverage too, but only 50% of value. So if you bought $100,000 worth of stock, the stock market says, “Look, you’re good. We’re going to give you a loan of $50,000 against that $100,000 worth of stock. And if that stock drops in value by a certain amount over a length of time, we’re going to do what’s called a “margin call” because we are concerned that we’re not safe in this transaction.
So you’re going to have to come in with a chunk of money to cover this loan that we’ve given you. Well, that just doesn’t happen in real estate. When you own real estate, it keeps its value. It holds its value typically for an extended period of time. Now I’m not saying that markets don’t go up and markets don’t go down. In fact, I talked about that last week but we have some great opportunities coming our way. And I’m going to be having a whole conversation about that next week. And so in our world, we love the fact that leverage is a big part of the real estate game because you get so much more leverage than you can in other types of investments. So definitely take advantage of the leverage. Now, one thing to say about how we do leverage is we love to start with the seller as the bank.
In fact, in my Volume 1 – Buying and also my 4-day training, Millionaire Deal-Maker, where I teach you how to structure transactions, one of the places that we raise our money from is the seller themselves because the seller already has a thing called ‘equity.’ One of the things in the ideal investment is equity, and that seller already has equity. Now they can lend you that equity in the form of a purchase money note. So what a great way to leverage yourself when the seller actually will carry back financing. So we love that one. And in some cases, the seller already has an existing loan on the property. While there are ways to take over that existing loan, again, leverage for yourself, you get to save your credit report. You get to save any open-to-buy that you might have as an investor because you can take over the existing financing of the seller.
So that’s another way you can leverage. The third way you can leverage is to actually borrow from the bank. And like I already said, pretty much if they like the asset and they like your ability to pay, they’re going to give you an 80% loan off the bat. And with insurance, like I said, you could take up to 97% of that. So you’ve got another way you can leverage using your own credit if you want it to do that. Now, to me, that’s not the Street Smart way of investing. So I have been in this business for over 40 years. I’ve never been to the bank. I’ve never qualified for a loan on a single-family or a small multi-family property. And the reason is I don’t have to. I’ve figured out that there’s other ways that I can purchase that property without having to use bank finance.
Another way that we fund our deals is private money financing. Now I love private money. Lenders have been doing that since almost day one that I got into this business. Now over 40 years, some of my lenders have been with me, literally, for decades, and they love what we do. They love how we do it, and they love their return on investment as well. So we love private money lenders. And another type of lender is what’s called hard money lenders. And again, they’ll lend up to 65% usually off the bat, some all the way up to 75% on hard money loans. And that’s typically more of an investment type loan where they’re taking a risk with you. Maybe you haven’t fixed up the property yet, and so they’re taking a risk, but they’re not going to give you as much as a bank would give. Now, the bank wants to see fixed-up property. So there’s your opportunity costs when you, when you work with a hard money lender. But there’s many ways we can finance our transactions and that produces that wonderful “L” called ‘Leverage,’ baby.
By the way, everyone, here’s your opportunity to ask me questions while we’re live and in person together. So any questions you have about real estate that means buying, buying right, buying cheap, holding property long-term, residents in your property, the Path To Home Ownership, renovations, negotiations, land trusts, personal property trusts, everything that may come up in your world, any kind of property management issues, lease options, owner financing, that’s what we do in our business and I welcome you to ask me any questions you might have on those things. And also leverage, if you have any questions about leverage as well, I’m happy to answer those questions.
Scott Paton:
All right, Lou, we’ve got quite a few questions to go through. Gerald has a couple of questions. And the first is, “Hi, Lou, with the eviction/foreclosure moratorium being extended now to October 3rd, how do you handle your lease purchase tenant buyers and your owner-financed buyers who cannot pay?”
Lou Brown:
Gerald, what I would encourage you to do, unfortunately we’ve got this challenge of an additional extension and some jurisdictions are ignoring it. And the reason they’re ignoring it is because it’s unconstitutional. There’s a contract between the resident in the property and the owner of the property or the manager of the property. And that is the basic foundation of our business is contract law. It’s a basic foundation of all business, frankly, not only in this country, but worldwide. And so what’s happening is a quasi-governmental agency, an advisory agency has come out with a mandate that they don’t have the right to do and the Supreme Court already told them that. And they went ahead and did it anyway. So, I don’t think that this has got legs to stand on. However, we are here now. So what do we do? Well, first of all, like I was saying, some courts are not paying attention to that.
They’re moving forward and some sheriffs, and remember this, the sheriff is the constitutional law officer of the county in which the property is located. So, sheriffs may choose to go forward with evictions. So those are two different anomalies that may exist, meaning that those opportunities exist in your area to go ahead and retrieve your property from a non-payer. But the third thing is to go ahead and file the eviction. Anyway, go ahead and file the dispossessory action or whatever they call it in your area. And the reason you want to do that is to cause behavior. So sometimes people have a wake-up call when there’s the knock, knock on the door and it’s the sheriff and they’re trying to serve papers. So always be aware that that can cause the resident to do something. We certainly do use that as a tool whenever someone gets behind and they’re not working with us on a payment plan and they’re kind of sticking their head in the sand and ignoring us. The only other option is to go ahead and file that dispossessory action. And when that occurs, surprising things occur. They will bring in their money. They’ll bring in all their money or some of the money, they’ll do a workout with you. So definitely take action, Gerald, would be my advice on that.
Scott Paton:
Great answer, Lou. And he had a follow-up question. “Are we required to record the affidavit of trust in the county records? It seems it provides more privacy if we do not report it unless required by the county.”
Lou Brown:
Well, the affidavit of trust is, first of all, if you are deeding a property out of your name into the trust name, I do advise you to record that on public record. And there’s many reasons why. First of all, you want your name off the public record. If someone were looking to sue and you don’t own anything, well, that might be one of those lawsuits that disappears and never shows up. If it does get recorded, then they’re going to sue the trust and not you personally. So I advise you, what I would do is record each property in its own trust. Now, beyond that if you don’t have the property in trust yet, then that would be something to do ASAP. Getting your name off public records is one of the goals of learning how to protect your assets.
Scott Paton:
Great. So you brought up trust and I’m going to jump ahead to Leonardo. He asked, “Maximum Asset Shield, if I miss it on Thursday, will there be a chance to get it or not?”
Lou Brown:
Yes, Leonardo, we will be recording that. So for attendees of the event, we’ll be able to get a recording of that event.
Scott Paton:
So then we’ll move on to Patty and you might’ve answered that when you were answering Gerald’s questions, but she’s asking, “How is the moratorium affecting this?”
Lou Brown:
Patty, let me expand on the answer that I gave. And one of the solutions that we do and have done in our business is we took rentals off the table. We are no longer doing any rentals. Obviously for apartments, we’re doing rentals, but for single-family homes, we’re only doing our rent-to-own or owner-finance Path To Home Ownership Plans. So this is what we focus on. And just as I started out today talking about Eric’s situation and how he was able to get a property from us, is a rent-to-own level because he’s on our Path To Home Ownership. And that’s unfortunately how we have to do business in these COVID times is we took rent off the table and that’s the answer because if you’re getting 3.7% or more from your client that’s moving in, well, you’re covered pretty significantly.
And it gives you an opportunity to confirm their income before they move in and make sure that they have a significant amount of income over and above what your rent is. So we look at take-home pay and we look if it’s 3x the rent. So as an example, if their rent is $1,500 a month, they have to have $4,500 a month in take-home pay in order to qualify in the first place. So that money comes in, first of all, that protection of the income and verifying their income. The third thing that we’re doing is we’re requiring the resident who’s moving in with us to go on payroll deduction. Now, what that means is a direct deposit from their check directly into our bank account. So none of this check payment, etc. They have to directly deposit from their employer into our bank account. So the employers are already deducting for other things off of their check. Well, every pay period, they can just deduct off half of our rent and send it as a monthly payment, as what we call it, the monthly payment and send it in directly to our account. So that’s another way you can usher and ensure your future resident relationship. And we do have a special document for that, that we do provide to our clients as well.
Scott Paton:
Awesome. Leonardo has a follow-up question. “Could you tell me a little bit more about UWE please?”
Lou Brown:
Okay. So UWE is the new name for FES, or Financial Education Services, which we’ve been a part of for over 5 years. And we’ve had great success with that, meaning that our clients that are joining us typically have less than perfect credit. So United Credit Education Services, UCES is a nonprofit organization that does credit restoration. And they’ve done a super job for about 17, 18 years now. And so as a result of offering that to our clients, not only does that help them establish a better foundation to build towards home ownership, but you get paid for it as well. So when they sign up, you’re making $100 and while they’re staying in the program, you’re making $12 a month residual income. One of the greatest things is that it’s very inexpensive for the clients, only $89 a month.
And not only are they getting those credit restoration services, they’re getting a whole battery of other things that come with it such as a will, trust, power of attorney that comes with the package as well. They get a lot of really good things. They get a dashboard where they can input their information and be able to track their credit score. They get budgeting, they get a bunch of things. So it really is worthwhile not only to help them restore their credit, but they typically stay on after that. And you continue to get residual income because of all the other services that they’re getting with it as well. So it’s something you can definitely open up to your clients and you can find out more about that by going to EZfixcredit.com and that’ll give you all the information you need. And if you need more information beyond that, call us at +1-800-578-8580. We’ll be more than happy to follow up with anyone who wants to know more about that
Scott Paton:
All right. So one more question. It’s from Rodolfo. “Can House Joint Resolution 192 play a part in my property purchases?”
Lou Brown:
There’s a lot of things that have been proposed. A lot of things that we don’t know, what we don’t know about what they’re going to do. And when I look at proposals, I also look at the way our government is structured. And so there’s a lot of obfuscation. There’s a lot of hurdles to climb, to be able to pole vault over before we can do anything with it. So if you like it, you should tell your congressperson. If you don’t like it, you should tell your Congressperson because that’s the most important thing. Each one of those Congresspeople represents about 750,000 people. And that’s it, just their district, that’s all they represent. So if you want to talk to a member of the House of Representatives and you’re from California and they’re from Georgia, they don’t want to hear from you because you can’t do a thing for them.
They don’t want to talk to you, but someone who is a constituent who lives in their district, they absolutely will talk to them. That’s who they’re there for. They are their representative in Congress and in the Senate, each state has 2 senators. It’s kind of funny up in the Northeast where we’ve got these sliver states, each one of those little sliver states, some of them are like 800,000 people have 2 senators. Isn’t that funny? But then you’ve got California, you’ve got 35 million people and they got 2 senators. So it was kind of interesting how they structured that. But each state has 2 senators and you can communicate with each of those senators and give them your opinion because each of those senators has a vote. So if it’s coming over from the House to the Senate, or if it originated over in the Senate to go to the House, whatever might be happening there, it could benefit you.
Now, one of the things that they did pass in the last administration is they passed the enterprise zones. So those enterprise zones are another tax benefit that you can have investing in enterprise zones. About 8,800 enterprise zones. So there’s quite a few that you might be investing in that you could actually get some additional tax benefits. I won’t go into all of that, but there are tax benefits to certain types of investments in certain areas, very important to find out what is available in your area that may have filtered down from the federal government, but also there’s state programs, there’s city programs, there’s county programs, there’s many different other types of programs that could incentivize you to invest in real estate. So I wouldn’t be so concerned about just what’s being done at the federal level, but there’s also benefits at the state, county, and city level as well.
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