Podcast Interview—The Business Creators Radio Show with Adam Hommey
Episode: Prosperity Lending: A Mortgage Solution for the Self-Employed, With Alejandro Szita
Episode notes:
Business owners, artists and entrepreneurs tend to have unique financial flows and income and expense patterns. Additionally, because they have many deductible expenses, their tax returns do not always reflect their full financial picture.
Podcast Transcription:
Intro: Welcome once again to another fantastic episode of the Business Creators Radio Show. We help business creators like you win at the game of business and marketing, so you can thrive from your intersection of your brilliance and your passion, and make a difference for your community, market, and audience. Please take a moment and visit our website, www.businesscreatorsradioshow.com. We'll find hundreds of episodes covering a breadth and depth of topics relevant to you as a business creator, and links to subscribe via your favorite network so you get fresh episodes delivered straight to you. And now here's today's episode. Let's get started.
Adam Hommey: My name is Adam Hommey. I am your host. And I am once again honored by your wise decision to tune in and invest in yourself today. The Business Creator's Radio Show goes where you go to have those aha moments, to have those mastermind moments that bring you that much closer to your intersection of your brilliance and your passion. They give you that slight edge that moves you further down the path of success. Sometimes you may hear a little bit of ambient noise in the background, a bird chirping, laughter from a conversation from an adjoining table, a vehicle going by, all the things that happen in the background when we go into the real world and have these real conversations. Now, today, we're here in sumptuous Las Vegas. Known to some, at least me, as the hottest city in America. And I'm sitting in my living room in my high tech studio consisting of my laptop and my headset, and I'm here with my office supervisor, Princess Alessandra Francesca. And we are going to have a conversation about money. What it is, how it works, and how you can use it to create wealth and prosperity for yourself and your community. We're going to speak a bit about real estate. We're going to speak about, a bit about that type of investing, and we're also going to go a little bit further and we're going to look into how entrepreneurs can access credit, can access money, can access opportunities to invest. Which is sometimes a big deal, particularly in a world that still thinks that people get paper pay stubs. Anyway, we have with us today Alejandro Szita. He is a real estate mortgage professional since 2005. He's seen the world of real estate from all angles, commercial, residential, and capital raising. He has a background not only in real estate and finance, but also in infomercials in creating a million dollar retail enterprise through the home shopping network. He's the co-owner of a boutique mortgage brokerage that specializes in self-employed borrowers, including your artists, your business owners, your creative entrepreneurs. As a lifetime student of economics, he also provides practical information about money and finance. His upcoming book matches the title of this episode. Money, what it Is, how it works, and how you can use it to create wealth and prosperity for yourself and your community. And he teaches the fundamentals of money and wealth. This is a timeless topic. Our listeners can never get enough of it, never get enough perspectives, knowledge, and slight edge to move them closer to being able to tap into the power of money. Alejandro Szita, come on in. The weather's fine.
Alejandro Szita: Thank you, Adam. Thank you for having me on your show. Giving me your voice to connect with your audience, and I hope I'll be able to live to that wonderful introduction.
Adam Hommey: Well, you know, I just read off your official bio, and candidly, I'm not sure I'm worthy to be in your presence and this is my show, so very impressive. But what, let's do something a little bit, a little bit different than what you sometimes see on some of the other shows. Before we get into our points for today, you gave me up to seven different points. We may cover all them, we may cover some depending on how this goes. Let's start by just having you take a step back. Tell us a bit in your own words about your journey and what's brought you to where you are today, serving business creators from your intersection of your brilliance and your passion. I can tell you're a listener because you started to answer the question before I finished asking it.
Alejandro Szita: You know, I would say that you get into a path and sometimes you don't know why. You are just like, like very curious. I was very curious since the age of seven, I was curious because I could see that this money thing, this interest thing was on the newspapers every day. You know, I come from Chile. At the time when I was growing up in the seventies, the inflation index was published pretty much twice a week on all major newspapers in my country. And I thought that was normal. You know when I came to the US many, many years ago, like 24 years ago, I saw, this is in the nineties, in the 1990s. I saw that very few people even know what the word inflation was. I was flabbergasted to see that the newspapers did not have the inflation index. And actually that was a very arcane number that you had to really dig to find out. Not today, because today, you know, with inflation is in the news, you know, the gas and all that. But at that time it wasn't. And to answer your question is, it's a quest that's been since I was seven or even earlier than that. What is that interest rate? Why? You know, my dad, I remember when, when he was watching the news on TV and they were talking about the interest rate, I could see that he became really interested. He didn't, he didn't mind what the president or the different politicians talked about. One time I remember we were watching TV and somebody said a long speech and I didn't understand a word, and I asked my dad, dad, what did he say? He says, oh, you don't have to worry about, he's a politician and his expertise is to talk and don't say anything.
That's why you didn't understand anything. And I thought it was hilarious. So he didn't listen to the news when politicians were talking, but whenever an economic news came up, I could see that he was keenly interested, interested. And to me that was weird because he didn't owe any money. So why was he interested on, on the interest rate if he didn't owe any money? So that, that's how I began. And along the journey I encountered different events that sort of marked me. You know, my dad was a very wealthy man, so he, one day I went to one of the banks that he dealt with, and the manager said, the bank manager says, hey, you know, any day you want to come, you know, come to my office, make an appointment and you can come to my office. I was maybe 14, 15, I took him up on his word and I said, I called his secretary, made an appointment, showed up. By the way, I didn't know anything about anything. And because I didn't know anything about anything, my first question was, where does money come from? So he gave me a lecture for about half an hour, and through the lecture I realized that he didn't know. So I thought, wow, this guy's, the bank manager. He, he doesn't know where money comes from. How is this possible? So along the way, you know, to answer your questions, through the years, this topic of money, this topic of investing, you know, this topic of net worth has been hitting at me from different sectors, you know, in different areas. You know, when I came to the United States, I wanted to buy a vehicle and they said, we will not give you money to buy the vehicle and say, why not? I have the money already on my checking account. Yeah, but you know, you don't have any credit.
What is credit? Oh, credit is when you, you pay your bills and then we know that, that you can pay. And I said, okay, so how do I get this quote unquote credit? So I, basically, what I'm doing today is things that I quote, unquote suffer myself. It's things that I have to go through myself in order to get to the end of the line. And this is, I feel passionate about. Because I feel that we take a lot of things for granted that are not, that should not be taken for granted.
Adam Hommey: Right.
Alejandro Szita: I don't know if all of that makes any sense.
Adam Hommey: Oh, it makes a lot of sense. And yeah, I went through economic classes three times before I finally understood what inflation was. The way economics is frequently taught is, they show you these curves, one's called supply and one's called demand. So the first time, or the first two times I suffered through econ classes, I didn't understand a thing about it. I never knew what those curves meant. Now, the third time I took an economics class is when I was in my MBA program. Our instructor was an adjunct who was an executive at one of the regional banks in Pittsburgh, who, whose work was basically helping entrepreneurs get funding for their ventures. And at the first class of the semester, he, he told us two things. The first thing he said is that he was mandated by the university to assign a textbook and to give assigned reading. And he cautioned that there would be times when the people who wrote stuff in the books would say one thing and he would say another. In any case that that came up, he was right and they were wrong because he actually did it for a reason and they just studied it. That was number one. Number two is he promised us that he would not put us within a hundred feet of any curve. We would not be looking at any graphs. We would not be drawing any lines, we would not be moving any points on a grid until we could explain in layman's terms how to create a recession, how to create inflation, and how to revalue a currency.
Alejandro Szita: Oh my God, you were so lucky to have him. That's a teacher that I would've loved to have.
Adam Hommey: And thanks to him I know how to do those three things.
Alejandro Szita: Wow.
Adam Hommey: See, the thing is, I had to go through econ class three times, and I know this is an oversimplification, but it took three classes to find out that if you print too much money, it causes inflation because the backing that goes behind the currency gets diffused further reducing the value of each, each individual units.
Alejandro Szita: Adam, you're so lucky. So lucky to have encountered that person.
Adam Hommey: Yes, absolutely. So what is also a lucky thing is I've had a few folks over the years who have actually attempted to understand the lifestyle of an entrepreneur. And however it is challenging for us when it comes to buying houses or real property or even renting apartments. Because and I mentioned this in the intro, the first thing they say is, well, we need to see your pay stub. When's the last freaking time anybody got a pay stub? It's been direct deposit for 20 years now. I mean, I mean, when in my last corporate job, which ended 18 years ago, we didn't even get paper receipts.
Alejandro Szita: Okay.
Adam Hommey: Yeah. So come on. So that is like the most micro example, but there's so much more to it. So I want you to give the answer to this based on your experience, is why does it seem like the majority of the mortgage industry is just simply not geared toward the self-employed borrower, whether they be business owners or entrepreneurs knowing that those two terms mean different things.
Alejandro Szita: Because the money that comes to fund mortgages comes from bond holders, comes from people who put out their money and they want, they want a certain number of dollars to come in every month like clockwork. They want a consistent return on investment, or they want what they call an investment grade investment. Meaning they put a thousand dollars, they want to get $10 a month for 20 years or what, however long it is. That's all they want. Now that flies in direct opposition to how life is, and that flies in direct opposition to the behavior of an entrepreneur. An entrepreneur operates on cash flow and profit. An entrepreneur gets a windfall. He knows that that windfall is only temporary in the sense that let's say you get $10,000, you know, you owe those $10,000, maybe you have to pay them in taxes, maybe you have to pay them later, but you are going to have them for three or four days or 30 days. And you know, as an entrepreneur that you could turn them around one or two times. Maybe you can buy some inventory and sell it. Maybe you can use it to provide a service and finish it before 30 days. Or maybe you can do something with that money that you can turn it one or two times before you have to disperse it.
Adam Hommey: Right.
Alejandro Szita: Thereby generating profit and thereby generating more cash flow. That is something that bond holders don't want to know about. Because what happens if you're already late? What happens if you do buy the inventory, but you don't sell it in 30 days? You sell it by 40. A regular entrepreneur will go, well, you know, I was a couple of days late, they're going to charge me a hundred bucks, you know, extra, extra or late fee. I'll pay it. I don't care. I'm making $500. So if the cost to make $500 is to pay a hundred in late fees, so be it. And he moves on. Now that late fee becomes quote unquote a bad mark. And now that late fee becomes proof to the bond holder that you're not reliable. You know, another example entrepreneur gets a $10,000 or $5,000 credit card, you go, great with this $5,000, now I can do this and this and this, and I can make more money. You go and you use it. That's your point of view as an entrepreneur. Bond holder, my God, he took $5,000 and he used them, he should have only used $500. And that would've showed me that he's a financially responsible individual. But what did he do? He used it all, therefore he's not reliable. So the lifestyle, the behavior, the economic behavior of the entrepreneur clashes with the expectation of the bond holder. And that's where the great divide happens. Statistically speaking, in the United States, most people have been W2 employees.
I would say. I read an article the other day, I don't know if it's true, that it says that about 95 or 96% of the workforce in the United States is employed. If that is true, it means that that is the bond holders' paradise because the employee gets a set amount of money in a set amount of time. All he has to do, all he, he or she has to do is manage that somewhat okay, and he or she will be fine. That's the target of the bond holder. That's the target of the mortgage capital. That's who they want. They don't have to think about it too much. They only have to answer. I mean, the bond holders don't have to think about much. That's what I mean. You know, they're easy to classify, they're easy to put on a system, they're easy to lend money to. They don't have to spend a lot of money, and they get a, they get a huge profit. So that's why, in my opinion, there is a divide.
Adam Hommey: Yeah. Let me, let me tell you, I remember when I first started, I was an entrepreneur about 16, 17 years ago, it was pretty easy to get business loans. I would have, and I want you to bear in mind, I had a home office. I would have lending representatives show up at my office, meaning my home uninvited, unexpected with pre-filled out paperwork. All I had to do was give them a number and I'd call it in. So at some point I thought, well, you know what? I'll get a debt consolidation loan. Five years, paid it off perfectly. Never missed a payment. Actually somehow managed to pay it off like two months early. So during that intervening time, we went through what is now known as the Great Recession. I thought, okay, so I have a little bit of a debt that I racked up in other areas. This previous debt consolidation loan was fun. Let's do another one. Boy, you would've thought, let me just tell one story and I, and I share this with folks and they don't believe this actually happened until I start telling it to the right people. And then they start having their own similar examples. Now, bear in mind this was a business debt consolidation loan and they were just actually seeking ways to poke holes in the corporate veil. And it got to the point where I looked at the numbers myself and I caught them trying to count my personal student loan against me. Not once, not twice, but three times, three times, finding three different ways to put it in the debit column against me in my attempt to get another loan identical to the one I had just successfully paid off without incidents.
Adam Hommey: And when I called them on it, they actually asked me, why do you have a student loan, anyway? Okay. I was 36 years old at the time and I had been out of MBA school for 12 years. Why do you think I had a student loan? So I told, I told them the reason, it's because I had had to partially finance my undergrad education through borrowing. And I financed my entire graduate education through borrowing except for some minor tuition reimbursement from my employer at the time. And so that's expensive. Tuition's expensive, books are expensive. So what I did is I took out the student loan and used it to finance a meth lab so that I could sell drugs to raise the money, to pay the tuition and the books. Now, at this point, I was just being sarcastic, but they actually asked me very seriously if I had ever seen a jail cell from the inside looking out and how I would feel about that being the next 15 years of my life. And they were actually serious about turning me in.
Alejandro Szita: But what were they trying to achieve? That doesn't make any sense.
Adam Hommey: I didn't say exactly what they were trying to achieve. They were, they were building up their statistics by getting people to apply for loans knowing they attended to decline most of them.
Alejandro Szita: But how does that benefit them or did it benefit them at the time?
Adam Hommey: From my understanding, and I've seen this with credit cards and things like that as well, is they get bonuses somehow and it positively impacts some statistic they report to the government if they get certain amounts of applications for things like loans, credit cards and things like that. Particularly if it fills certain diversity type requirements. But the idea is, is they don't actually get measured the same way on whether they give any loans or approve any credit cards.
Alejandro Szita: Oh I see what you mean. I see what you mean.
Adam Hommey: So what they were doing is they were jerking me off waiting to see how much longer I'd wait them out.
Alejandro Szita: Wow, okay.
Adam Hommey: Yeah. They did that. They've done that to me and other people with credit cards as well.
Alejandro Szita: Yeah. Well, this is what we try to avoid, you know? This is what we try to avoid. And this is, actually before you, before this interview, I had a phone call from a salesperson trying to sell me an AI system so I can talk to more people faster. And I said, you know, man, we are trying to do the opposite. We're having, we're trying to have real conversations. We're trying to find really what is going on and we're trying to help people. I don't want a machine to talk to more people. So if you will fall through the cracks and, and we'll do business with them, that's not what we are about.
Adam Hommey: Right. Precisely. And I've seen over the past, particularly in the past five years, when it comes to business networking, actually moves away from automation and more toward the personal connection.
Alejandro Szita: Yes. That's what we have a lack of.
Adam Hommey: Yeah.
Alejandro Szita: Yeah. So I agree with you. I agree. We will never do such a thing. You know, if we, if we had to take loan applications just to comply with some government statistics, we would not do the loan program at all.
Adam Hommey: Right? Now, at least that's how it was explained to me by some people in the know. Whether that's exactly the case, I don't know. But just when I look at how my experience went and some of the stories I've heard when I've shared this, I don't put it outside the realm of possibility. So alright, so with all this stuff about bond markets and everything else, I'm starting to get a sense of why it might be more difficult if we want to stick with mortgages for a bit. To get a mortgage. But how can business owners and entrepreneurs qualify?
Alejandro Szita: They can qualify going away from the traditional standard. There are like seven, seven additional standards in addition to tax returns that you can qualify. There are certain things that because of the structure and because the way things are built, we can't escape. For example, one of those things is the credit score. Even though the credit score for an entrepreneur is sort of meaningless in the sense that a high credit score doesn't measure his success, nor does a lower one. We have to help the entrepreneur increase the score because we won't be able to get anywhere without that. And, but that's the part that we have to sort of like, get the round hole into the square. I mean the round peg into the square hole and try to fit it somehow. But on the income side, this is the good news, a loan is, 90% is your income. You are leveraging your income into a payment. So 90% of the loan is how much money you make and the way to document that, that income now has expanded tremendously. You can use bank statements, you can use personal, you can use business bank statements, you can commingle both, you know? You can use one year, you can use two years. You can use your assets, you can use the balance in your checking account. If you work with the CPA, and the CPA is willing to, they don't have to be, they don't have to be extensively like check or audited. But if your CPA is good and he's willing to write a letter saying that he audited your financial statements and there so on, so we can also use that. So all of the different variants that we can use in addition to tax returns are like other seven avenues, I would say between seven to eight avenues that we can use to document the income the entrepreneur is making.
And that is 90% of the loan. Then we work on credit. And then the last part is the, is the actual collateral. The collateral, believe it or not, it's not what lenders are looking at. You know, I've had a lot of people say, hey, my house has so much equity, my house is worth a million dollars. How come I cannot get a loan? And I always say it's because it's not on the strengths of your house that they're lending you the money, it's on the strength of your income stream. We have to look at your income stream, you know, and then it has happened. You know that sometimes I've had clients that want to purchase, would like to purchase a piece of real estate and the purchase price is completely on the checking account. Let's say the house is worth a million. They have $3 million on the checking account. We can leverage that. We can use that to qualify them. So that's how an entrepreneur can get a loan. If the entrepreneur is relatively successful, and when I say relatively successful, I'm not talking about a millionaire. I'm not talking about a person that has hundreds of employees. I'm talking about a professional, he maybe has an office, he, maybe he's a CPA or lawyer or an accountant. He probably is another type of an entrepreneur. Maybe it's like himself or has a, has an employee. He's been in business for about five years and he can pay his bills and has a little bit of extra money. Anyone in that category can get a loan, in my opinion, even if they have been denied. We get a lot of people calling, hey, Alejandro, I was referred to you by so and so, but I don't know if you can help me because I've been rejected. Or I went to another mortgage broker and they say that I can only qualify for so-and-so and I need to double or triple that amount. But if the basic ingredients are there, like I said, you've been in the activity for a while, you are somewhat successful, you can. This is what I've seen over and over, over the years.
Adam Hommey: Right. Another thing that entrepreneurs run into are considerations when it comes to credit score. And I know that there's a bifurcation between business credit and personal credit. And this is really a very broad question. So I'm just going to start very broad and allow you to take it wherever you want us to go. What do we need to understand about credit, credit scores, business versus personal? How do we improve those? How do we build those?
Alejandro Szita: That is a very good question, and I'm glad that you're, bless you. I'm glad that you're asking me that question because we have started to do some some business loans. When I say business loan, I don't mean to the business. I mean commercial property. So they're commercial loans. And then when you don't know, you usually go to a website and they say, well, if it's commercial property, if it's multi-family property, you don't have to worry about you. We're going to look at the property. It's the income of the property. It's not you that matters. But I can tell you categorically that that is absolutely and completely false. Even when you go to a hard money lender, a hard money lender is a person that lends on the collateral. Remember when I was saying that the loan is 90% your stream of income, then credit and then the actual collateral? The hard money lender is the reverse. The most important thing for them is the collateral. Even in that scenario, they want to know who you are. They want to know how much money you make. They want to know how much net worth do you have.
They want to see what is your credit score. So even when you are in the commercial scenario, even when you are a businessman, an entrepreneur, you're going to buy a commercial property. Meaning a property that is not residential, meaning a property that you're either going to rent to someone or you're going to use it for some business purpose. And let's say you have a business, the business is healthy, it makes the money. It's not you who is going to buy it, it's the LLC or it's the corporation, even then they're going to look at you because at the end of the day, they want what they call a warm body. That's how they call it. This is not me, this is them. They want a warm body to be responsible. They want to make sure that you are of good character. By the way, this good character is a very loose term. What they mean by that, they want to see that you've been paying the bills. They want to see that you don't have any lawsuits. They want to see that you haven't been arrested. And you could go, well, you know, obviously I haven't, but you know, I'm doing a loan now for a few young people that are doing a fix and flip. And when they were 16, you know, one of them was in the car, he wasn't even drinking. Somebody had opened a container and then he got cited, and now he has a criminal background, even though he wasn't even drinking because the friend next to him happened to have an open alcoholic container. So these things can, and and it's not them, it's their LLC, you know, and it's not a house for them, it's just for business. But these things affect you.
So to answer your question is yes, as you move into the commercial arena and as you move into a commercial loan, they are going to look more and more at the property and less and less at you. But you still have to have your dogs in a row. You still have to have a decent credit score. That means 680 or more. You still have to make sure that you make an amount of income that is commensurate to what you're going to buy. If you're going to buy a $5 million building and it only shows that you make $20,000 a year, that's not going to go well because it doesn't make sense. You know.
Adam Hommey: I mean, regardless of anything that's, and I don't, I can't think of any real world scenario. Even when you take out some of the ridiculousness where that would be considered viable, a $5 million building on $20,000 a year. I don't, I just don't see that, man, I'm sorry.
Alejandro Szita: I'm exaggerating, just to make the point. I'm exaggerating. So anything and everything has to make sense. Now, when you go to the residential side, meaning this is house you're going to live in, or maybe this is up to a fourplex that means four units in a building or less, then yes, they look, they look more at you. Okay. And then it's not that important.
Adam Hommey: There we go. All right.
Alejandro Szita: So this is, this is what I would recommend. I will recommend work on your credit. Keep it always in the best possible shape, even if you're not going to need it. Work on your cash flow. Work on, you know, for most entrepreneurs, a tax return is a bill. And as a bill, we try to minimize it. Do it, but do it within reason, what do I mean within reason? I'm doing another loan for a very successful, very successful lawyer. He's very successful. He makes in the millions, however, his tax return shows, he makes, you know, a fraction. So that places immediately, it raises questions. When you go to a lender, that raises questions. So be an entrepreneur, maximize your return, minimize your bills. But always bear in mind that if you are going to go to a lender, if you're going to go to an investor, bless you. If you're going to go to somebody to ask for actual capital. I was hearing one of your podcasts that people sometimes when they're at a certain point in their career or business, they need an injection of capital, maybe from a venture capitalist or from a source of an investment. Just bear in mind that whenever you need money from someone else, be either bank, be either a hard money lender, be either a business loan or, or a partner. They're always going to look at you and they're always going to look at your, at your financial performance. Just bear that in mind always. And then try to try to find a balance between your financial performance and what you're paying in taxes and so on.
Adam Hommey: Absolutely. So we have a few other points you requested we cover, and these may be in no particular order, but the next thing is, and this is another thing that comes up a lot at least in my experience, is, is it better to buy or rent? And how do you know the difference?
Alejandro Szita: That's a very good question, but the answer is a little unconventional. You, I can see that you have a strong financial background, but what I'm going to tell you is a little unconventional. One thing is theory, like your, your teacher was saying, and another thing is practice. You know? There was a very interesting philosopher who said this, this not from me. This is what he said. In order to save any money or in order to have any wealth, you have to convert the saving or the savings into a necessary expense. That's the only way that you're going to accumulate or save any money. If you say to yourself, well, at the end of the month, if I have any left, I'm going to take this money and I'm going to put it there. It's going to be the hit and miss. You're going to do it. Sometimes you're not going to do it, at other times. If you take the savings and you turn them into a bill that you cannot but pay, you are going for sure save. When you get a mortgage, and I'm going to go with the extreme case here in Southern California, and in Northern California, it's even worse.
But in Southern California, if you want to buy a house, let's call it house A, okay, house that costs $800,000, which is, which is down here, you know what you would be expecting to pay for. Nothing fancy, just a regular okay home. Okay. And you compare to how much you can rent it for, I would say the difference could be $1500, sometimes $2,000. So you, you could pay $1,500 less to $2,000 less to rent a home in Southern California, as opposed to buying one. So from a financial point of view, from an accounting point of view, it would seem a no-brainer, right? But this is, this is what I tell my customers. When you pay rent, all you do is you're paying on the 1st, the right to occupy the space until the 30th, and that's it. After that, there's nothing. When you are paying for a mortgage, a portion of that money at the beginning is coming back to you. If the mortgage is $4,000 at the beginning, about $1,000, 800 to 900 are coming back to you. What do I mean coming back to you? It means that when you pay that $4,000 check, you have increased your net worth on another $800 to $900 at the beginning. And as the years go by, every time you pay that $4,000 check, there is more and more than comes to you by year 10, between year 10 and year 15, depending on the rate, depending on the mortgage, about half of that money is coming to you. And after that, more and more, and it comes to a point that you're just paying yourself. So two things happen. Number one, all of the money is not wasted because now you're saving about a fourth to begin with. Another fourth comes in the form of a tax deduction that you don't get when you rent.
So once you, once you take into consideration the tax deduction, and once you take into consideration the equity that you are building, even on the first year, that $4,000 thing is really costing you about $2000. So now we are, it's comparable to a rental. Now we are in a similar, it's not the same, of course, in a similar food as a rental. But then you inadvertently have stepped into the rich class. What do I mean by the rich class? And then again, this is not me. You can find it in books like by Robert Kiyosaki and others. He says that the wealthy don't make their money the same way that we do it. You know, we make it by working. We make it by providing a service. The rich people or the people that are well to do buy assets, those assets increase in value over time. And yes, you could argue that we're going down, that the housing market is unstable, that is volatile. But by owning a property, you open the door to getting extra money in the form of appreciation. It may, it may be a lot, it may be little, it may be a lot of one year, it may be less the other. But without doing that, the chances of you getting any appreciation are zero. There is no appreciation. Now, not only you get money coming back to you, not only you're forcing yourself to save, but now you have opened the door to get money out of thin air, which is what appreciation is.
So once you take all of that into consideration, even in Southern California, if you have the down payment, because it's usually a question of having the down payment and having atra k record of an income stream that allows you to afford the payment, if you have those two things that, that a bunch of people do have, then in my opinion, you're better off getting a good realtor and finding a deal for you and getting it. Regardless of the economy, regardless if it's going up, if it's going down. Because real estate is very local. If you really look, if you really have a good realtor, and if you really put some effort into this, even in a quote unquote bad market, you're going to find a good deal for you.
Adam Hommey: Wow. That's really something to consider.
Alejandro Szita: Yes.
Adam Hommey: Yeah. Okay. So if we're going to be doing this buying thing what should we look out for? So we don't end up with a bad mortgage. We've seen enough volatility in housing just within our own lifespans.
Alejandro Szita: Yes. One thing I will tell you is this. A mortgage is not a bill. A mortgage is a financial instrument. And believe it or not, it can be massaged and it can be adapted to your circumstances. Usually most brokers don't do this. You know, you go to a broker, you say, hey, I want to buy this house, you know, and they say, okay, this is your rate, this is your payment. But when the broker does that, he actually made a lot of decisions for you. Because when you apply for a mortgage, you qualify for between a 100 to 50 rates. Out of the 100 to 50 rates, about five or four make any sense. Now, I've never seen a mortgage broker that tells you that. I've never seen a mortgage broker that explains which one of those four are and what are the advantages or disadvantages. And so the mortgage broker picks one, you know, and says, oh, Adam, this is your rate. And you go, oh, well this is my rate. Maybe, maybe I can get it cheaper somewhere else. But that is a missing proposition because there are another four rates he didn't tell you. That's one thing. Another thing is, when you go to pay for the mortgage, when you are signing the mortgage paperwork, very few mortgage brokers tell people that you can divorce taxes and insurance from the payment itself. I'll give you an example. If your payment is $5,000 a month, but what you give the bank is $4,000 and the other thousands are four taxes and insurance, it doesn't occur to mortgage brokers to tell people, hey, you know what, just pay the bank $4,000. That's what it's going to show in your credit report, that is going to make your debt to income ratio lower.
And then if you have a bad month, it's easier to afford $4,000 than it needs to achieve five, than it needs to afford $5,000. And then the other thousand just manage it correctly. Now, if you are a W2 employee and you have a very tight budget, yes, I agree, incorporate the mortgage payment, the taxes and insurance into the payment. But if you are an entrepreneur that manages cash flow and you already know how to manage cash flow, because that's what entrepreneurs do, you are going to derive a lot more economic benefit managing the cash flow of taxes and insurance, which are only due once a year because property taxes, you pay them in December and you pay them on April of next year. So for all intents and purposes, you need to just be, remember to have enough money on December and on April. If you manage your cash flow, you can derive so much more benefits. So this is what we do. We explain to the person what programs there are. Within the programs, what are the different rates available, and within the forms of payment, how to structure the payment so it suits their lifestyle. So I'm not going to, I will not say that there is a bad mortgage. I would say that there is a mortgage that maybe you did not research or you didn't, were not made fully aware of what you could do with it.
Adam Hommey: Interesting.
Alejandro Szita: I don't know if that makes any sense.
Adam Hommey: Makes a lot of sense. Makes a lot of sense. Now one of the things that you suggested we cover here, and again, this may be for some of our more finance oriented listeners, which is fine, is you want to bring up the topics of broker fees and zero point loans. Which sound great as phrases, but now educate me. I'd like to remind our listeners that not only am I the host, I'm also in the front row looking for my slide edge.
Alejandro Szita: If we take the definition of zero point, if we take the definition of zero point loan to mean that you're not paying for the loan, that loan does not exist. The zero point phrase is a marketing phrase, and it's a legal phrase in a very strict sense, but it does not convey what a normal borrower would think. You will go to a mortgage broker and he goes, hey, I'm giving you 4%, zero points. What does that imply? It implies that you are getting 4% and you're not paying anything extra and you're getting the cheapest possible costs. But that is not true. It's not true. Not even when you go to a bank. When you go to a bank, a big bank, I'm not going to mention any names, but when you go to any of the big banks, the guy says, oh, don't worry here, we don't charge you any points. You know, I get a fixed salary and therefore you're saving money. That is not true either. Why? To make a loan, to originate a loan. And, and the term, and that term is a very specific term, that terms means finding someone who is able and willing to, to have a loan and make them sign on the dotted line, that is originate a loan. To originate a loan is very, very expensive because the loan officer or the institution has to go through a lot of people. They have to put a lot of time before they know whether or not the person is going to be approved. So having to go through a lot of people and having to put a lot of time, and you cannot charge, in the United States, you cannot charge a borrower to, to see whether or not he can qualify that, that that's could be a good thing.
But in my opinion, it's a bad thing because if you work to a bank, if you work to a mortgage company, and they said to you, you know what it's going to cost you like $300 to see if you can qualify or not for the loan, and you actually paid for that time, you will make loans a lot cheaper. Because in reality, what happens is the loan officer has to go through 10, 15, 20 people. In essence, he has to work for free to find the one person he can make the loan to. So there is no such a thing as the zero point loan. So most mortgage brokers and most financial institutions fear, fear telling the borrower how much a loan really costs. So they devised this thing called the zero points loan. And this is what it means. It means that the cost that the expensive cost of originating a loan comes in the form of a rebate from the investor that is providing the money to the lender. That means that a lender buys money like a grocer buys apples, you know, so the lender can buy the money at a certain rate.
Now the lender is saying to the customer, hey, don't worry, we're not gonna charge you any points, but in order to pay for the cost of originating the loan, that cost now is being born by the investor. So the investor says, well, you know, if you want me to give you the money to originate the loan, I will do it, but I have to charge you more because now you're not just buying the money. You want me to put some money into it. And the lender says, yes, no problem. So that means to give you a practical example, if you go to the lender and you say, how much is to originate this loan? And he goes, it's 5,000, 10,000, or whatever the number is, and you go, no problem. I'll pay you the 10 Gs. Now you get the money at the wholesale price, now you get the money at the cheapest price, and let's call it for example, 4%. That will be a loan where you have to pay the points, meaning you have to pay the cost of origination, meaning you have to pay the loan officer, you have to pay for the office, you have to pay for the staff, you have to pay for the computer system, and you have to pay for everything that it takes for them to take your application and do everything they need to do. And comply with the law, the compliance is, there is a whole, back office worth of work that sometimes clients are not aware that needs to take place for their loan to occur. So if you go, don't worry, I'll pay for that. Here's the money. Then you get the money at the cheapest rate, let's call it 4%. Now if you go, hey, you know, I heard that I don't have to pay any of those fees. The loan officer is gonna say, the company's gooing to say, yeah, no problem. We can give you this great loan at 4.7 or 5% and you don't have to pay anything. So it's a deceiving practice because it's not that you don't have to pay anything. You are paying it in the form of a higher rate for 30 years. Now you might say, well, you know, I'm only going to be in the house for seven years. That is possibly true. So now for seven years, you're paying a higher rate in order for the mortgage company to get compensated on what you did not pay to begin with. Now it gets even weird because the law forces a mortgage broker like ourselves to disclose that. So if we are doing quote unquote zero point loans, we still have to produce a piece of paper and show the borrower how much he's really paying in the form of an increased rate. But if you are a big bank or a credit union, the law says you don't have to provide that piece of paper. So you can go to a big bank or a major bank or a major financial institution, they'll go, well, it's a zero point loan. You don't have to pay. You can look at the paperwork with the magnifying glass and you'll never see it because the law allows them not to disclose that. But because we are licensed by the Department of Real Estate in in Southern California, in the whole state, actually, we have to disclose how much money we're making regardless if it's zero point or not. So I don't know if I made it clear, you know, the difference. So what all I'm trying to say is, to originate loans, it costs and it costs a lot. And you either pay it upfront or you pay it in the backend.
Adam Hommey: Right. So basically it's, what I'm getting is it may cost very similar regardless. It's just a matter of how are you paying for it? Are you paying a bunch of fees upfront to handle all the processing or are you paying it in a form of more of interest payments?
Alejandro Szita: Exactly. And it also depends on your goal. If your goal is to be on the property for a short period of time, I would take the zero point loan because I'm not going to be in this property for a long time. Therefore, even though the rate is higher, I'm not going to make enough payments to paid what the origination fee would've been, and then that could be better for my goals. If my goal is to remain in the property for a long term, then I might consider putting, paying for the fees upfront because then I'm going to save long, I'm going to save more in the long run. So it's not an automatic decision, you have to take into consideration where your plans are.
Adam Hommey: Ah, I see. I follow now. Okay, great. Great, great, great. So, I guess, you know, as we wrap up here, because we are getting close to the top of the hour here. If you were speaking with somebody right now who wanted to get involved with this, let's say somebody visits your website at prosperitylending.us and they wanna discover more about how all this works and they want to, and before we go there, actually, do you deal primarily with folks looking for the place where they themselves live? Or does this also apply when it comes to acquiring properties for investment, whether rental properties, Airbnb properties, properties are gonna flip or any other ways of leveraging real estate as cash flow?
Alejandro Szita: We do both. We are a company that is integrated or is vertically integrated to, to feed the needs of these entrepreneurs. That means if the entrepreneur or the self-employed wants to buy a primary home, primary residents, we do that. If they want to buy a small investment property, we can do that. If they want a breach loan to do a fix and flip, we do that. If they're a little bit older in their life and they want to use a reverse mortgage to either cash out their equity or buy another home using a reverse mortgage, we could do that too. Basically, we provide all the products that we feel the business owner or entrepreneur is going to need through different stages of success in his life and through the different, periods of his life.
Adam Hommey: Right. Okay, great. So if somebody were coming to you and they wanted to find a way to get started and they're looking ahead and they're seeing just basically an abyss of data and not even knowing what the first step is, what would you suggest that they do?
Alejandro Szita: The first thing that I usually do is I listen to them because it all depends on what their goal is, if their goal is to buy a primary residence of their dream, it's one approach. If their goal is to start with the investment property, it's another goal. If the goal is to buy an office, like a commercial property for their business, that's different. So the first thing I do, the first thing I will suggest you do is just email me. Let's begin a conversation and, and by listening to you then I will be able to, to point you in the direction that you want to go.
Adam Hommey: Fantastic. All right. So I do encourage everybody to visit Alejandro's website, which is at prosperitylending.us. There are a lot of great resources there that will help you take this wherever you want to go with it, if you find yourself leaning in, wanting to discover more. With that Alejandro Szita, thank you so much for being with us today. It's been an honor.
Alejandro Szita: Thank you Adam. Thank you for giving me a voice through your show. It's a pleasure to be here.
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