He’s not just a loan broker. Aaron Chapman finances about 700 transactions per year for real estate investors and gets to see where they are successful and where they are failing. And, he uses that experience to coach others. It was my privilege to listen to him being interviewed by the very knowledgeable Kathy Fettke.
These are some of the financing tips for real estate investors that I gleaned from his discussion with Kathy Fettke on her, Real Wealth podcast.
Kathy Fettke is the Co-Founder and Co-CEO of Real Wealth Network. She is passionate about researching and then sharing the most important information about real estate, market cycles and the economy. Author of the #1 best-seller, Retire Rich with Rentals, Kathy is a frequent guest expert on such media as CNN, CNBC, Fox News, NPR and CBS MarketWatch.
Tip #1 – Get Away From the Consumer Mindset
Real estate investors need to stop looking at their investment in property with a consumer mindset. They should not and cannot view it as if they are spending money on a consumer product and going into debt. They should understand that what they are really doing is moving liquid capital from a liquid asset to a non-liquid asset and that this asset is now growing because somebody else is occupying it.
To oversimplify the point, real estate works basically like this, you purchase a property for $100,000 borrowing 80% of the money, you only have to spend $20,000 of your own money on the deal which somebody else will effectively pay off for you, probably after as little as 5 or 6 years. Everything else after that that you make is free money. That free money comes in the form of tax benefits, cash flow, equity appreciation, etc. That is the power of leverage.
Tip #2 – View Yourself as the CEO of a Real-Estate Investment Company
A successful CEO is one who makes sure that he is always the dumbest person in the boardroom. In other words, surround yourself with an excellent and experienced team and those team members effectively become part of your company. By doing this you will not need to gain experience by making mistakes which in real estate can just be too costly. Surround yourself with experts. These individuals have already gone through the painful learning curve.
Check out our blog, How to Build a Rock Star Team for Multifamily Investing.
Tip #3 –As Money Devalues Because of Inflation – Real Estate Investment Will Actually Increase the Value of Your Money
In economics, inflation is ‘a sustained increase in the price level of goods and services in an economy over a period of time’. In simple terms, it means prices are going up and the value of your money is going down.
The key to beat inflation, however, is to gain more money with the capital growth of assets over long-term periods, and earn more money from higher prices over short-term periods.
Depending on the market, the average real estate market growth can be higher than the inflation rate. By buying real estate and investing your money in property, you are actually beating inflation and covering your losses with long-term capital growth.
Tip #4 – Choose a 30 Year Fixed Rate for Flexibility and Predictability
Because you can predict where you are going to end up as far as the dollar value is concerned, let the market erode it for you and run that as far as you can. A 30 year will also give you more opportunity to let your portfolio decide which loans to pay off first.
Tip #5 – Don’t Live and Die by the Pro-forma
Only use the pro-forma as a reference, do not live and die by the pro-forma. Its sole purpose for you is to help you decide which property you would like to take on as your next project or “business” from that particular provider, not to compare it between providers. Build a relationship first with the provider and then look at the pro-formas. No matter how good they are at putting those together it is just a quick tool, you need to dig deeper.
A very interesting discussion with Aaron and Kathy, hope you enjoyed that ‘fly on the wall’ perspective.
No wonder many people love real estate as a strategy to build wealth.
Beyond the multitude of reassuring, emotional reasons, such as the fact that real estate investments are tangible, you can walk up and touch your investment, physically improve it, and even live in it if need be, there are the facts to back that strategy up.
But historical return averages also lend weight to real estate as the investment class of choice. Real estate returns have outperformed equities, bonds, and bills, when averaged over the last 145 years.
Unlike stocks and bonds traded frequently on a secondary market, real estate is a scarce resource and holds intrinsic value as a hard asset.
Most often, stocks are purchased for their selling potential rather than their capacity as a source of income, hence the “buy low, sell high” mantra of the stock market.
And as highlighted in this post, you don’t need to pay the entire upfront cost to buy a property yourself. You can use other people’s money for residential investment property financing.