Leveraging the 30-Year Fixed Loan to Create Generational Wealth Through Rentals

0:00So, in one of my lectures in San Francisco, unbeknownst to me, was a reporter for the San Francisco paper. In the Sunday paper, there's a big article about what we do, me, the whole thing. That led to a morning news interview on the local, you know, NBC station. I just started loving the whole thing and feeling like not only was I making my future so much stronger again as you like to say living off the rentals.

0:32— Mhm. — But I was helping many of my friends. So I decided to drop my high-tech life which is a very big step because you know I had invested many years in my degrees and yeah but and formed our company and for the past 40 years this is year 41. — Wow. — We've been helping investors do the same thing as we were doing in Vegas. So in the 40 years, my investors bought more than 10,000 rental homes in about 30 markets.

1:06After a few years, I came to the conclusion that I only want to deal with brand new homes. A variety of reasons. We may not even have to get into it now because I'll be happy to share materials with your viewers, listeners, and some of them are magazine articles I wrote by Invitation for Investment Magazine. One of them explains why brand new homes. So the only thing that changes we buy brand new homes but the principle remains the same. We go to markets where we feel it's a good place to buy where the numbers work.

1:40We establish a local infrastructure of local property management companies who are eager to get this kind of business, local brokers who are eager to get this kind of business. And we bring investors. We have markets where we bought more than 2,000 homes, — more than a thousand homes. We even have one metropolitan area where we bought over 21 years more than 3,000 homes. — Wow. — But the principle remains the same except again if an investor joins me today and they go into a market where we bought 2,000 homes, they carry the clout of 2,000 homes.

2:19The property manager knows they don't want them to complain to me and my company because they may lose a lot by not so you know it's the same thing I have been striving to make it simple easy and not many people in Silicon Valley and I don't just work in Silicon Valley in fact I enjoy more working with nurses and truck drivers because there the life changes are even bigger you know if you have somebody working — at Google, they already make a lot of but you know these homes change the lives of people in a significant way and so we enjoy doing this and I want to you know intro I want to simplify it.

3:05Many people especially from Silicon Valley love to complicate. Oh life is an Excel spreadsheet. Some of them are even should I go to the bathroom? Let's see the Excel say no I'm not going you know stuff like — everything is complicated every so I even though I come from the same background I strive to simplify and simplify and simplify I'll give you one example where I simplified we used to charge every investor a fee for my involvement for building the infrastructure for lending them our cloud for everything together we used to charge about 20 years ago I said you know what let's simply ify it even further.

3:48Let's not charge anything. So, how is the company going to sustain itself? I don't want to subsidize it for my own my own wealth. So, because we are licensed broker in the state of California, we started to split the realtor's commissions that they get in the field. It's not a lot of money, but it's enough without charging anything. Simplify as much as possible. Buying brand new homes under warranty simplified simplified and so the criteria that I have of where we buy the rental homes has not really changed in decades.

4:28So number one I've been a student of the demographics in this country for decades. To me, even if you just look at the US census, you can see the flow of demographics goes to the sunb belt states, states in the s in the southern part of the country such as Nevada, Arizona, Texas, Oklahoma, Louisiana, Alabama, Georgia, Florida. We don't invest in the Midwest. We don't invest in the north, those states. So, that's number one criteria. Number two, we like to buy in large metropolitan areas because of job diversity and economic diversity.

5:05Number three, we like to buy in the suburbs of the large metropolitan areas. Suburbs usually means families with kids. The kid goes to school. It's like a root in the ground, stable, nice. Number four, it needs to be affordable enough to make sense. — And that's it. So I think on my TED talk I say the steps are very simple. You buy a brand new home in the Sunbilt in a large metropolitan area in the suburbs.

5:41You put a down payment and you get a 30-year fixed rate loan. We'll talk about the 30-year fixed rate loan in a second. — Yeah, I remember you mentioned that. — Then you let the local property manager lease the home for you. And then once the home is leased, you proceed to do the hardest action for a human being to do. Nothing. Nothing. This is not a get-rich quick in one year type scheme because of the loan that I'll talk about right now.

6:13The the passage of time and inflation erode your fixed loan and build your wealth and you know equity and typically you don't have to wait for to wait for 30 years. Typically the sweet spot is between 12 and 14 years and you can retire. So let me go back to the loan. You can probably hear if you strain very very hard that I speak with an accent. — A slight accent.

6:45— Yeah. So that means I came here from another place. One thing that completely blew my mind when I began investing was what? They give you a loan called 30 years fixed. How is that possible? So to illustrate why that is so crazy, here's what happens when I speak in Europe, I tell the Europeans, my investors in the US can get a loan called 30 years fixed.

7:17They say, what does that mean? I say, well, like the name implies, it is fixed. Never changes. The monthly payment, principle and interest, never ever changes. Not with inflation, not with the cost of living, not with the holidays, not with the desert or the sun or the never. It is fixed. And in addition, the loan balance, how much you actually owe, even though it goes down every month because of the principal payment that you make also doesn't track the cost of living.

7:51The Europeans treat me with great contempt. They say, "You clearly don't know what you're talking about. I can't believe I drove a 100 kilometers to hear you speak. You don't know anything. It's not possible. And we are going to prove to you that it's not possible using logic. You have inflation in the US. Right. Right. Sometimes it's higher, sometimes it's lower, but it's always there. Right. Right. 40 years ago you bought a postage stem for 4 cents.

8:23Now it's 72 cents. 40 years ago, you went to the movies in San Francisco for two bucks. Now it's 15 bucks. If you go to Whole Foods now and buy an organic avocado, it's $3. You know, we know, everybody knows in 10 years it's likely to cost $6, right? You have inflation. — Inflation erodess the value of the dollar. You need more and more dollars for the avocado, for the tomatoes, for the shoes, for the t-shirts, for the glasses, for rent, for housing.

8:57I'm not, we are not saying it's all going to go in a straight line. It could be up and down. But inflation, you know, I mean, houses in Silicon Valley used to cost $100,000. Now they cost millions. You know, like this. You want to tell us that in this kind of an environment, somebody is going to be insane enough to lend you money for 30 years that would be the only thing in the US economy never to budge while everything else is going up all the time with inflation.

9:29If that were true, and it can't be true because it's insane, inflation would become your very best friend. It will erode the real value of your loan every day, every month, every year. It will build you wealth. Not possible. Therefore, you don't know what you're talking about. We're done. We made our case. Then I say, "How about you do a little search on your little phones?" They say, "Oh my god, they really have this insanity in the United States." The next question is always the same.

10:04If the Americans can get this thing which we consider to be the biggest financial gift in the world, a loan that never changes with inflation while everything else does. Why don't the Americans run out every day and buy as many of these homes as possible and get as many of these loan gifts as they can? My answer is always the same. I don't know, but I sure did. — Yeah. Yeah. See, I didn't stop at the, you know, the 22 homes.

10:37I still lead all of my investors. And I have investors who bought 100 homes and I have investors who bought 90 homes and I have investors who bought three homes or one home and it changed their future. But let me run with a typical example. So I get a call from one of my investors in Silicon Valley and he says, "Remember me? I started investing with you guys in my early 40s. I started really small because I was very busy in my job and it was important for me to see that the property managers really do the work because I didn't have time to fix toilets.

11:14Yeah. — Right. — I bought just one home. I understood what you said about the 30-year fixed rate loan. So, I put a small down payment also to stretch my money — and bought one home. Once the home rented and became pretty even boring really because the managers took care of everything, then I started buying more and more and more, you know, I ended up buying 19 houses. That's his story. Now, again, not as impressive as it may sound. At the time he was buying the 19 homes in, you know, early 40s, he was buying brand new homes for about $150,000 each, putting a smaller down payment.

11:53Not hard to do for a person who works in a good job with a good salary. — Where where was he buying them? — He was buying them in the markets that we were, you know, active at the time. Got it. — Our biggest market at the time was the Phoenix metropolitan area, which now doesn't work because the prices have gone up way too fast. But he bought most of them in Phoenix, a couple of them in some other markets. But he said, "Last year I turned 55. I looked at my 19 homes and after 13 years, even though when I bought them, I put a small down payment and my loans were very high relative to the value of the home.

12:37After 13 years, in my case, all my loans were roughly a quarter of the value of the home. M — that's what inflation does to a loan that never keeps up with inflation while everything else does. So he said I was ecstatic because over 19 homes I had millions of dollars in equity. But then I took it one step further. I took four of my 19 homes and I sold them. I didn't do anything sophisticated.

13:09No 1031 exchanges, nothing. Just sold the homes, paid my tax, and I used the proceeds to pay off the 15 remaining small loans. And now with 15 free and clear homes, I retired from Silicon Valley. Thank you. Thank you. And then he adds the one sentence that every single one always says in the future. I should have bought more. — Yeah. That's how it changes your life.

13:43So in his case, he bought 19 homes. He could retire from a highpaying Silicon Valley job. Some people say the three homes I bought for a couple of hundred thousand each are now generating a few thousand dollar a month which adds to our family budget completely change our life. There's a lady who retired in another country from three homes. Some some people tell me I just bought one investment home and it brings in maybe a,000 or 1,200 a month which of course does keep up with inflation because rents do — long term.

14:20— So I mean it doesn't matter whether you buy 100, 200, 1, two, 16. Each such home is a building block. — Yeah. And you choose how many building blocks you I've worked with doctors, Silicon Valley people, as I said, teachers, nurses, truck drivers, and the life changes are amazing. Except you need to give it 12 to 14 years. — Yeah. — It doesn't happen in one day, — but then you wait 12 to 14 years, it completely changes your financial future.

14:55— Yeah.