Podcast Interview—EGGS—The Podcast
Episode 276: How to survive and thrive under any economic conditions with Alejandro Szita
In this episode of Eggs, the podcast, Alejandro Szita, a mortgage broker in California & Florida, and president of a firm that specializes in servicing self-employed borrowers such as artists and small business owners, shares whether or not it's a good idea to own property right now, what can you do to survive and thrive under any economic conditions, the difference between investment and speculation, and a whole lot more.
Podcast Transcription:
Ryan Roghaar: Hey everybody, and welcome back to the show. In this episode of Eggs! The Podcast, we're pleased to introduce you to Alejandro Szita. Alejandro is a California and Florida mortgage broker and the President of Prosperity Lending, a firm that specializes in servicing self-employed borrowers such as artists and small business owners. A real estate and mortgage professional since 2005, Alejandro has seen the world of real estate from all sides. Commercial, residential, and capital raising. Not only does he have a significant background in real estate and finance, but also as an entrepreneur, he created a million-dollar retail enterprise through the Home Shopping Network. A lifelong student of economics, Alejandro provides his clients with practical financial advice on a routine basis. And in fact, in his upcoming book, "Money: What it is, how it works, and how you can use it to create wealth and prosperity for yourself and your community," Alejandro teaches the fundamentals of wealth building and answers questions such as “what is money” and “what is value.” Joining us today for a conversation about whether or not it's a good idea to own property right now, what you can do to survive and thrive under any economic conditions, the difference between investment and speculation, and a whole lot more. Please join us in welcoming to the show, Alejandro Szita. Hey, Alejandro, how are you?
Alejandro Szita: Hi. Hi, Ryan. Thank you so much for having me on your show.
Ryan Roghaar: Of course. Yeah, no, we're thrilled to death to have you. This is an exciting topic and you know, we, both Mike and I have an interest in real estate and Mike actually worked in the industry for some time. So we both have an interest. But we honestly don't get that many real estate guys. This is awesome. I'm really looking forward to having this conversation with you.
Alejandro Szita: Thank you.
Ryan Roghaar: So cool. I guess let's just kind of get started maybe at the beginning. Let's talk a little about sort of where you come from and what you're doing presently, and let's just sort of talk a little bit about that timeline.
Alejandro Szita: Yeah, I was born in the country of Chile. I lived in Chile into my early twenties. And then after that I started to travel abroad, and I lived in different countries. Eventually in the nineties, I settled in the US, in Los Angeles, in Southern California. And I have been in Southern California ever since. I travel a lot, you know; before the lockdowns I used to go to other countries too. Now, thanks to Zoom, you know, I'm having this interview and I'm seeing most of my customers over Zoom. A year ago, I didn't even know what Zoom was until a customer said, let's do Zoom. And I go, "What is that?" I've always been in business for myself most of my life, and I have been attracted to the subject of money simply because every single question that I've asked about money since the age of six or seven, I remember that I never received a clear answer. And it seemed to me that the money, work, you know, having a business, economics, it's been a subject that to me, since the very beginning, I could never find anyone that could give me a coherent, rational response.
You know, like if you go to engineering and you study engineering, and you study how to build a bridge, any university you go to, you are gonna find the same thing. The professor is gonna tell you about the materials, about equations, and about physics. And when you build a bridge, it's very, it's pretty obvious because if you don't do a good job, cars are just gonna fall through. If you did a good job, the bridge is gonna stand. But I've never seen a field like economics or money or business where you could have so many opinions, and some of them are completely the opposite of others, and they coexist at the same time. So that's what intrigued me, and that's what really drove me in like a black hole, you know, into it. So I chose, just to answer your question, I chose the subject of lending because the same thing happened in lending. I thought, well, it's pretty obvious, you know, I want a loan. In the subject of lending, even though it's supposed to be a clear cut, dry, boring, you know, follow the rule, do this, do that, you'll find the same black hole of conflicting information in that field. So that's why I got sucked into it.
Ryan Roghaar: How long have you been doing lending? When did you start and how did you get started in that field specifically?
Alejandro Szita: I got started in that field when I was a boy, when my brother came up to ask me for some money. And then I thought, if I give him the money, I'm never gonna see it back. So I borrowed from my grandmother an old typewriter, and I wrote a full contract, you know, okay, I'm gonna give you this money, but you have to do this and this and this. And then I started to do this when I was a kid. I used to have all these big contracts, and then one day my mom found one of them, read it, and she goes, "You cannot do that." "Are you serious?" "You are like ripping off your brothers, you're ripping off your friends." "This is bad." "This is immoral." Blah, blah, blah. So after a while, it sort of killed it.
And then I used to be in sales and I used to be in marketing. Well I'm still in sales and marketing, but I was, you know, that thing that you played on the intro, that is on Home Shopping Network, that was a product that I created with a business partner that we sold. So I was always in business and then that's what I call my other life in the nineties. And then one of my clients, you know, one of my, I used to be in the infomercial business, you know, making these long television commercials, selling things. And then one of my good friend infomercial clients said, "Hey, why don't you come to a financial seminar?" This is, was somewhere in, at the late nineties. And then is when I made the switch. And then I became a financial guy. And then that, pretty much very soon I went into lending after that.
Ryan Roghaar: Oh, interesting. Yeah, that's an interesting transition from infomercials into finance.
Alejandro Szita: Yes.
Ryan Roghaar: Sort of a weird left turn, I guess. So, but I guess I can see how there's sort of, I guess, some parallel traits, right? Some things that you have to be good at in one that support you in the other, you know. Whether it's an ability to deliver a message or tell a story, or to be able to, you know, offer a sales pitch. I think those characteristics are all sort of the same. So even though they feel very, you know, apart or the two different lines of work seem very apart, they're actually very close.
Alejandro Szita: Yeah. And I'll tell you what helped me and why I decided to do the mortgage business. Because in most professions, you have to sell. However, in mortgages, I don't sell. What I've noticed in mortgages, people don't explain. You go to a mortgage broker, you go to a lender, they fill your head full of acronyms and nobody explains what it is. All I do, believe it or not, I don't sell anything. All I do is I take the loan program and I explain it to the customer. And then he goes, "Well, what if we do this?" "What if we do that?" And I spend the time. And I explained it. So it's, I'm lucky that nobody does it, and that's why I was able to build a business with it.
Mike Smith: So you've tended to focus on artist types and the self-employed, and people that have alternate sources of income, not a nine to five per se. Can you maybe break down why you went that route and why that's your focus? And then also maybe talk about the importance, like why working with an artist or a self-employed person is different in getting loans than someone who is a regular nine to five person? Nine to five job?
Ryan Roghaar: I'll just add too, before you get started, Alejandro, that this is my situation and I wish I knew you before I bought our house, because I will tell you as a self-employed person, scraping together the documentation and then just like the extra money I had to come up with and all that stuff—to do this as a self-employed person was really a challenge. So I'm excited to hear about this.
Alejandro Szita: Thank you. It's emotionally draining. So let me ask, let me answer the first part of your question, Mike. I became this because I suffered this myself. I remember in the nineties. I was a foreign guy, you know, I just wanted to buy a van, you know, I was in the business of selling, so I just wanted to buy a van. And I had the money to buy it. And a friend said to me, "Hey, don't use cash. Get credit because you need credit." I didn't know what credit was. You know, where I came from, credit did not exist. What existed was a blacklist. So if you didn't pay or if you defaulted, you would be on this blacklist. So whenever you went to the bank or you went to get a loan, they would check that you were not on the blacklist.
That was a good sign. And that's it. That was not the actual positive side of it, that now you did pay, you did comply with the terms of your loan. That side was not present. So that came to me as a surprise that it was better to have a credit record than to have the cash. So I experienced time after time, not just with the van, but pretty much everything I've done since my first credit card to this, to that. I experienced such a, it was so problematic. For me, for seemingly stupid reasons, you know, or reasons, let me not use that word, because then they're gonna ban me from, if you ever put this on, for reasons that to me did not make any sense or for reasons that to me were completely immaterial. And that perplexed me, you know?
So that, again, like black hole, it tended to suck me in. You know, I am very curious. So these things that don't make sense suck me in. And then I saw, you know, when I entered into the field of real estate, I thought, I saw that it was a really exciting field. You know, I'm a mortgage broker, but I'm also a real estate broker. I also worked as a realtor. I also worked in commercial real estate. I was mentored. I was very lucky to be mentored by, in my opinion, one of the best brokers on the West Side of Los Angeles. When I met him, he already had like, he had been in business for like 30 to 40 years. So I got, I was very privileged to have, to be mentored by him. So I've been around the real estate business in all these aspects, from the listing side, from the buyer side, from raising capital for real estate projects, syndication, you know, and lending.
But I happen to like lending the most. But to answer your question, I'm one of those people, I'm one of those self-employed people, entrepreneur people that find it very difficult to get a loan. So that's why. Then to answer the second part of your question, is that lenders, if we were in 1970, or if we were in pre 1990, it would've been very easy. We would've gone to the bank, we would've talked to a person that already knows us, which we might have opened the account with him or her. This is what I experienced in Chile. So that, to me, that was not ever a problem over there. I had an account executive that knew me for already many, many years. He knew my bank balance. He knew how much I did for a living. He could just, with a couple of keystrokes, see my recent account activity, he knew my family.
So whenever I needed money, I just made an appointment, went to talk to him and said, "Hey, I need this money for this, and that." He would say, "When can you pay it back?" "This is what we can do." "You like it?" "Yes, I like it.” “Sign here." Done. The money is in your account. That service used to also exist in the United States, but it was completely dropped. It was abandoned. Banks realized that they could save more money if they created automatic processes where you didn't have to have a loan officer, because if you have a loan officer or a bank executive, he can only see so many people per day. He can only have a relationship with so many people per day. So banks made the decision that they were only gonna do that for the really affluent. And when I'm talking about the affluent, I'm talking $10 million plus. I know a lot of business owners that are wealthy, you know, they have a couple of million dollars here.
Their business sales, maybe $20 million a year, they make almost a million dollars a year income. But believe it or not, that is not enough to get the kind of service that everyone was getting in the 1970s or even the 1980s, or even to some degree in the 1990s. Lenders found out that if they automated the process, they could serve 95% or 96% of the people automatically at a much reduced cost. And then they went for that. So everybody else, the other 6% just fell over, you know, by the wayside. But nobody cares because they make so much money with the other 94% that that's the way they decided to go. Also, part of the problem is that after World War II, is when the secondary market became very active with the creation of Fannie Mae and Freddie Mac. So those institutions started to impose ever more regulations on the type of loans that they wanted to buy.
And that goes against the entrepreneur or the self-employed person. Because we as entrepreneurs, not only do we have an unusual way of making our living, also our cash flow is variable. You know, we get peaks where we get a lot of cash, and then we get throws when we don't get a lot of cash. And then that goes against the rules of Fannie Mae and Freddie Mac in order to be able to buy a mortgage. So right there, just by that factor alone, we are not there. Then also an entrepreneur and a business owner tries to reduce his or her bills in order to maximize his profit. A tax return is just a bill. So any business owner will make it his business to find out about how it works, you know, and to find out about how he can minimize his tax bill.
An employee doesn't think that way. An employee thinks that the tax form is a document. They don't spend too much money, you know, much time finding out about it. They believe that the accountant should know, and that's why they're paying them, and they're okay with that. So the tax return of an employee tends to reflect more accurately the type of money they earn, not because the self-employed is a quote-unquote a cheater or a bad guy. It's simply because the self-employed or the net worth or high net worth individual spend time and money finding out what are the existing regulations that allow him to pay less and use those regulations. So I don't know, I don't know if I went into a bit of a tangent, but that's the reason why I decided to become what I am, and this is the reason why I specialized, and this is why it's so hard for people to be able to find a loan if they don't belong to the 94%.
Mike Smith: Yeah. You covered a lot in that little bit. Ryan and I have both been down similar paths trying to… Ryan's bought a house. I haven't yet, but I'm in the process of saving for one right now. But in the past when I would file my taxes, I would file my taxes with a thought of, get the most write-offs as I can, the most things I can do, everything I could think of to get the write-offs. And in the last few years I've kind of changed my mindset. I don't know if this is correct or not, but I want to show that I have more income so that I can qualify for a loan and show that the money's coming in, instead of just writing it off, writing it off, writing it off. Buy a new speaker here, do this, do that. So is that, I mean, back in the day, back pre 2008, you could go in and get a stated income loan and you could get, you know, anything. Just say, "Hey, I make $400,000 a year." They take it and go with it. And then since the crash, things have changed, you can't really do that anymore. What options are available for self-employed individuals now that aren't necessarily stated income loans that qualify for people like Ryan and I?
Alejandro Szita: You know, the stated income loan does exist. But it's very hard to find. It's called Community Lending. There is a standard, it's not community lending, but it's something like that. You can get, some banks have this, some banks have a classification by the Treasury Department that they are community lenders and they are allowed to lend to the, what they call the unbanked. Unbanked is the person that technically is not in the banking system, but that is a very inaccurate word because this is when you need to get a community lending loan, you only need to have a credit score of around 700 or more, and you need to have about 25% to 30% of the down payment. If you have those two things, and if you go to a community lending bank, then you can get a loan, which is pretty much stated.
But very few banks have this classification. I knew one in New York that had it. And now I know another one in Southern California that has it, but pretty much this is a very obscure niche that very few people know about. So you can do that. In addition to that, you have about seven other ways in addition to the tax return to get a loan. I'm just gonna tell you a few of them. You can use bank statements, but when I say bank statements, this is the interesting thing. You can use business or personal or both, you can commingle them and you can use them to prove your income. You can use it, it happened to me last year. I had an artist actually that wanted to buy a condo. He had about twice the money in his checking account, all ready to buy it.
He said, "You know, Alejandro, I could buy it with cash. But I don't wanna do that. I wanna spend half of my money doing that. Can you get me a loan?" There is a loan program that if you are in his position, if you have about one or two times the price, let's say the thing costs a hundred, you have two hundred in your bank. If you have two times the amount of what you're buying, we can use your bank balance to qualify you. That's another way. Another way, if you have income that is coming from assets, you know, you have, you don't have to go to work every day, but it's not that you don't work, it's that your income, instead of coming from, earn income from a job, comes from managing your assets, we can get you a loan based on that, based only on your assets.
Now, if you have a company and the company is healthy and the company really makes money, but let's say it's not on the tax returns of the company, it doesn't even matter. We can get you a loan based on the profit and loss of the company. So we can use bank statements either commingled or not. We can use the profit and loss, we can use the assets that are generating an income for you, or we can use the existing cash that you have in your bank. Say that you come to me and say, "Alejandro, I have no job because I haven't worked in a year or two or three or four, I have no job. I wanna buy this million dollar place and I have 2 million dollars in my bank account. Can we do it?" As long as your credit score is not shot, the answer is yes, we can.
Ryan Roghaar: Oh, that's really interesting. Yeah, I mean, that's a lot more channels than were offered to me when I was going through our loan.
Alejandro Szita: And there is something else. All of these things have flavors, and have variants. So when I'm talking about bank statements, just the bank statement world alone has like seven or eight ways of combining them in different ways. The assets that I'm talking to you about have another three or four variants. You know, having money in your checking account has another variant. So usually what ends up happening is that when we get somebody for a loan, I want them to tell me the whole story. Because it could be that there is a particular variant of a particular way that when you massage it, when I mean massage, it's like, and if I go too astray just stop me, okay? Or if I go too much on a tangent, but this is what is happening. Most of the advertising we see today, most of the ideas that we have about loans today, and most of the regulations that we have about loans today are based on, on the standard of the W-2 employee loan.
The standard of the W-2 employee loan and how to make that loan so Fannie Mae or Freddie Mac can buy it on the secondary market has become the yardstick which everything is compared to. Like when you read in the newspaper. Oh you know, 30-year rate is blah or this is blah. They're only talking about that, that classification of loans. And believe it or not, that is a classification that, although a lot of people use it, it's just a fringe type of loan. It's like me saying, you know, we are going to classify all food and we are going to use as a yardstick how donuts taste. And you say, "Well, I'm never gonna buy a donut. I don't even like donuts." It doesn't matter. Everything is gonna be measured against the donut. This is the same thing.
They're taking a specific type of very specialized type of loan that many people can use and they're using that as the yardstick. So now when I get you another loan that deviates from that, people automatically tend to compare one with the other, but they're not comparable. That is only a fringe way of doing a loan. So when I get you a bank statement loan and you go, "Well, but you know what, I can get a loan at 5%." Well, it's not that you can get a loan at 5%. There is a loan that complies with this specific rigid guideline advertised at 5%. That doesn't mean that you can get it. I don't know if I answered your question.
Ryan Roghaar: Yeah, no, I think that that's super interesting. And I think that the, I mean I wish I knew more about the terms of my loan. Unfortunately, it was so much like us just sort of thrashing to make it work, right? But I know that we had to, you know, produce business documents, personal documents. They were looking at balances, but you know, I ended up having to pay a little extra down to get the interest rate we wanted and all that kind of stuff, you know. And thank goodness we bought it just before, you know, the time period we're in now. But that sort of leads me to my next question. I wanted to talk to you, I mean, we've spent a lot of time covering mortgages, but I mean, is it even a good time to own property right now?
Alejandro Szita: You know, this is a very interesting question, and this is a question that I pose myself over and over over the years and I'm just gonna tell you a little story. I remember back when I started doing these loans. Back in 2005, back in 2006, I read an article in the paper. There was a couple seeking to buy a $350,000 home, and I remember this since then. And they were basically asking, "Should we buy it?" Because this home was at $320K you know. There was a time between 2005 and 2007, I don't know if you remember where homes were like going exponentially higher and higher every month, every two, three months, the home would be $20,000, $30,000 more. So this couple was in that period, the beginning of that period in 2005 when the home that was $350K just months ago was a $320K. And homes were going like that. And they were afraid that they were going to overpay for something that was not really worth it. That home today is worth over $1.5 million.
So is there a good time to get a mortgage or not? When I started doing mortgages, I remember my first mortgage, I got this girl a deal. That was the deal of a lifetime. That was seven and a half percent. So I always tell my customers, don't focus on the rate. Focus on your goal. What is the goal that you want and what is the best way to achieve your goal? Because the rate could be immaterial and usually is. I'll tell you another story. A month ago we closed on a loan, single family residence for business purposes. Rate: eight and a half percent. You go, wow, eight and half percent. How come? Well, this lady's an entrepreneur. She runs homes for the elderly. She makes very good money. To her, she could never buy this home before, because there was no loan program that would buy it.
And she didn't wanna pay hard money rates. Hard money rates are 12% or more. She wanted a fixed loan that she could count on and that would allow her to achieve her goal. We found her a loan program, a fixed eight and a half percent, fixed for 30 years. Which she didn't have to worry about. Because of her business model, that is absolutely nothing to her. And it was the only way that she could buy the home, and she did it and she's super happy. I always say, don't worry about the rate. There is always a way to massage the rate, like you were saying right now, you know, there was a way that you could pay a little bit more and reduce it. And like that, there are many rules and that's why I call it massaging. Because when you're gonna get a loan, usually your mortgage broker says, "This is your rate, but this is false."
Usually anyone and everyone qualifies for 50 or more rates. Of the 50 rates or 60 sometimes. Once in a customer's case, he had like 150 rates you could choose from. Of those massive amounts of rates, about five or six make any sense. So you get a range. Nobody tells you that. You qualify for a range of rates. Let's say you qualify for, I'm just making this up now from 4 to 4.5, but the mortgage broker says it's 4.3, but it's not 4.3, it's between four and 4.5. And each one of them has slightly different documentation, slightly different costs. Wouldn't it be nice to know the range and to know what it would be to go down to 4 and what are the advantages on going to 4.5? Because we're conditioned by the press and advertising to believe that 4 will be better.
But you know what? Four and a half could be better. Why is that? Because at four and a half, the bank will kick in enough money to pay for all your closing costs. And if you go, "You know, Alejandro, I just wanna buy this house for three years." Then, it will be better if the bank pays for your closing costs. But if you say, "Alejandro, this is my dream house and I don't foresee moving in over 30 years." I will say, "You know what? Pay the closing costs and get 4." But this is just a small sample of the kind of conversations you can have in order to decide what portion of the range you're gonna go for. So don't focus on the rate, focus on the goal and then let’s—there are hundreds and hundreds of loan programs to address every shade of a goal. So this is what I say, focus on the goal, communicate the goal clearly, or my job as the mortgage broker is to get from you what your goal is. Because sometimes we don't know. I'll help you get to the goal. And then once we have the goal, let's find the most efficient program, not necessarily the cheapest or the most expensive, the most efficient one that will get you to the goal faster.
Ryan Roghaar: Yeah, no, it's funny that you say that because I'm totally, you know, a victim of this, you know, idea that the best rate is the lowest rate, right? Or the best deal is the lowest rate. And I'm sure that, you know, and it's funny you mentioned sort of in the old days, I mean the first house that we ever owned you know, it was only a $96,000 house. It was our starter house, but it was 6.5%. And so now, you know, interest rates are somewhere around the, you know, the mid fives or whatever they're at now. And you know, I still look at that and go, oh God, we were paying 6%, you know. It's like, you know, that's still not a bad deal for me. Of course, you know, we have a better rate on this house, thank goodness we got out ahead of this and we did get a deal on the rate. But it's interesting to hear you say that and also just interesting to call out that idea that maybe the lowest rate isn't the right one.
Alejandro Szita: Yeah. And even you, and let's say that you were unfortunate enough to have a high rate. The other thing that nobody tells you is this, the rate is not important. What's important is the volume of interest. The volume. I'll give you an example. You can buy a car at 1% and after five years you can pay, let's say $5,000 worth of interest. So you go, "Well, my rate was 1%. “Okay, what if I sell, what if you can buy a car and let's say you classify a 6%, but then you end up paying $500 as a volume of interest and you go, "What?" Yeah, you can buy your car, 6% and you can make it, you can control your payments in such a way that your volume of interest is a 10th of what it would've been if you got a rate that is two or three times lower. "What are you talking about?" I'm talking about not the rate, the amount of money that you end up paying for the purchase. And that is called the volume of interest. So I always try to make my customers focus on the volume, because that is the real cost, not the rate. It's the volume of interest. I don't know if that makes sense.
Mike Smith: I think so. Let me try and, so you're saying I buy a $10,000 car or just a random number, right? And you know, it's a 6% loan, 7% loan, fairly high for financing a car. I know there's options out there that you can get 0% if you finance through the lender kind of thing. But if you make principal only payments on it, over a shorter amount of time and you're not going the full length of the loan, your total amount of interest that you're gonna be paying over the lifetime of the loan is isn't, is negligible just because you financed it and paid it off early. So what if it's a higher interest rate, you were only doing it to get the positive credit report kind of thing. Is that kinda what you're getting at?
Alejandro Szita: Yes. I'll tell you why. Okay. Business people think in terms of cash flow. They don't think in terms of rate. Business people think, "Okay, I'm gonna do this cash, I'm gonna invest and I'm gonna get so much then I'm gonna do this." So let's say you're a business person. Let's say your credit score is not that high. Usually business people don't tend to have a high credit score. And if we have the time, I can tell you why that is. So you go to a car company, that is the car that you want, you could buy cash again, but you don't wanna do it because you have the cash for other things. Maybe you want to buy inventory, maybe you want to do a business deal. So you don't wanna use the cash. You go in and say, "I wanna buy this car." And because your credit is not that great, they quote you a 7% rate, which seems outrageous for a car because like you said, with a good credit score you could get 2% or maybe nothing.
And you said, "Okay, I'll pay the 7%." But because you work on cash flow, because you are a self-employed individual or a business person and you understand cash flow, now you pay that car in one year, which you could have done anyhow. You're just using the credit to facilitate the purchase. Instead of having to wait a year. After a year, you add up all the volume of interest you paid and probably you pay less interest than the guy that got a 3% for the same car from the same dealership because you manage your cash flow differently.
Ryan Roghaar: Okay? So like putting this back into house terms for example, is the idea that basically we, you know, would finance at whatever rate we finance at, but maybe we just pay a little extra on our payments, right? You always hear about people you know paying, you know, an extra 500 bucks or an extra 100 bucks or something on top of their loan just to try and chip away at that principal. So in that case, is that how we would reduce interest?
Alejandro Szita: Yes. Because when you, a mortgage is really a financial instrument. Most people view the mortgage as a bill, but it's not a bill at all. It's a financial instrument. It's a financial instrument that builds equity for you and generates amazing tax write-offs. If you look at it from that perspective, it completely changes the mindset. Instead of getting the bill and go, wow, $3,000 mortgage, okay, here you are robbers, you know, you think, okay, it's $3,000 of which I'm getting a thousand dollars back right away because it's going into my pocket, you know, into my principal and the other $2000, I'm getting a write-off of 750. Okay? If you think that way, then you go, "Okay, how can I optimize the diminishings of my, how can I diminish my volume of interest?" And I'll give you a quick example. Back when I started doing loans and in the nineties, usually the proportion was one to three.
Meaning if you bought a hundred thousand dollar home, you will end up paying $300,000 in total. So your volume of interest was $200,000. That was 200% more than the price of the house and that was normal. Today in all the loans that we do, that percentage is about 98%. But for the sake of the discussion I'll make it simpler, let's say it was a hundred, okay? That means you buy a hundred thousand dollar home and if you keep it all the way to 30 years, you're gonna end up paying $200,000. So you're paying a hundred percent more of the value of the home. So the volume of interest now is a hundred thousand dollars. And that, by the way, is at a very good rate of four and a half or 5%. That's not considering a really high rate. Now by paying some extra payments, and that can be mathematically and accurately calculated, and you can change it every month, you can decide, "Okay, of this hundred thousand, how much do I really want to pay? Do I want to pay 50? Do I want to pay 20?" And you have total control over that. Total control over that. You don't have control over the rate, but you have control over the volume of interest that you will be paying. Isn't that amazing?
Ryan Roghaar: Yeah. Okay. That makes sense. And I imagine for a lot of people it's a real challenge, you know, or I mean, I think there's a lot of people who tend to buy as much house as they can possibly get, right? So they're already sort of at the end of what they can afford. And so I think for maybe those people, you know, hearing this might be a good reason for buying something that's slightly less, just to give you a little higher, you know, amount of money or a little bit more money left over that you could then apply to that. So I think that that's a really good idea, but also maybe great advice for, you know, backing off a little bit.
Mike Smith: Well it's also a principal-only payment that goes so much further than just your regular normal payment. Just an extra hundred bucks a month or 200 bucks a month after the amortization schedule comes to fruition. I mean, just that extra principal-only payment wouldn't be applied until the end of the loan normally, until the interest has already been paid. Am I explaining that correctly?
Alejandro Szita: Almost. The amortization schedule is the minimum payment they expect from you, but that's not the payment that has to be done. If you are making a hundred or $200 more of principal [payments], as long as you are currently on your mortgage, that amount of principal will be applied the next month to your balance. So you don't have to wait until the end of the loan. Every excess amount of principal that you make goes back to you the next month. Now there are a lot of theories, there are a lot of financial advisors and you're gonna read everywhere that you don't have to pay your home down for A, B or C. But this is the reality that I see. The reality I see is that we don't save any money.
It's very hard for people to save any money at all. When you have a house, you are forced to save because you're forced, even if you make the minimum payment, which is the payment that appears on the mortgage bill, you'll be surprised to know that that payment that you see there is just a minimum payment. But if you only do that, you automatically are saving about a third at the beginning and then very soon it builds to half and very soon it's more than half to, from a third to half to more is coming back to you, and you are building equity. And there is no other saving strategy that I have ever seen so far that compares to that. You say, "Well, but it's inefficient." "I’m not making a return on investment." "If I put it on Wall Street, I would make so much." "If I bought the stock, blah blah." Yes, if, if you did all of those things, but 90% of people will never do any of those things because if you have your, if you see yourself at the end of the month with a few extra dollars, it takes an enormous amount of willpower to once put it in savings, let alone do this on a consistent basis over the years. So saving on your house, I've never seen any other strategy—the only other strategy that I've seen is life insurance on a mutual company, but that's a different subject altogether.
Mike Smith: Yeah, we've actually had a few of those guests on in the past to discuss that. Can you maybe talk about lending options for investment purposes instead of your primary home that you live in? Are there, because that's kind of more what I'm interested in, at the moment. I'm looking at land deals, I'm looking at something that maybe I could just, you know, put a yurt on or something like that. Nothing too expensive, just land only. But I'm also looking for passive income. As a self-employed person, if I were to buy a home just for the rental opportunity or the passive income, are there different programs available that take that into consideration that, you know, your debt to income ratio is a little different based on the fact that the property's gonna be generating income?
Alejandro Szita: Yes. What you mentioned at the beginning is called land banking, by the way, and that's a different subject, but that's a very good strategy. The only problem with land banking is that you don't get any income and you have to pay taxes for the land. Yeah. Until one day it is gonna be bought. But that's a very good strategy by the way. But I'm going to answer your question. In the universe of investing, there are really three tiers, and the three tiers are very different. The first tier is what they call four to one, meaning a property that has four units or four dwellings to one new dwelling. That has a certain set of rules. Then when the property has five doors or more, it has another set of rules. And that is divided in a small balanced commercial, which are loans from $300,000 to $5 million and then $5 million and up.
I'm not gonna address the $5 million and up, but just so you know, in the $5 million and up commercial, meaning the property has five units or more, the key factor is net worth. If you wanna buy a $2 million building, the bank wants to see you have a $2 million net worth. And there are no ifs, buts about that. If you don't have the $2 million net worth and you wanna buy the $2 million building, it's gonna be an uphill battle. It can be done, but it's gonna be an uphill battle. Now, once you go down from $5 million to $300,000 and we're still in the commercial space, but now we are in the small balanced commercial space, your net worth doesn't have to be the same as what you're buying. It could be less, but the property has to be producing money, has to be rented and has to be producing income because if not, now you have to be able to show that you can afford to carry the property.
And that's the problem for business people and entrepreneurs that are just starting in that area. Now once we go into the area of the four to one residential, it becomes a lot easier. So you don't have the rules of the commercial world anymore. In the commercial world you have to put 25% or 30% down. There are no ifs and buts about that. Once you get into the four to one [units[, and if you are an independent entrepreneur, and this is what I would recommend, if you're gonna buy in a property for investment purposes, buy one that is already rented and has a lease agreement. Because if you can do that, you can use 75% of the income of the property to qualify.
Mike Smith: Oh really?
Alejandro Szita: Yes. You, if the property is rented, I'm just gonna put a number to make it simple. If the property is rented for a thousand dollars a month, there is a tenant that is paying, is not in default, and there is a lease agreement properly executed, not an internet lease agreement that somebody downloaded, but like if we are in California, hopefully a California Association or Realtors form, or if you are in another state, whatever is the official lease form. You know, because people tend to quote-unquote “save money.” They go to the internet, they download a lease agreement. Many of those lease agreements, even though legal, they are not investment-grade, you know, they have many legal loopholes that will not make a bank or a lender wanna take a property that has that kind of agreement. So one thing is make sure that you lease with a proper bankable investment grade lease. Then let's say the lease is a thousand, the bank will credit you $750, you can use $750.
So now it's $750 from your income monthly that you don't have to use. So now you only need to do the down payment, which is gonna be about 20% to 25% and you need to, for the other 20% that the bank is not giving you, you have to supplement with your income, but that makes it easier. Then you buy the property, leave it rented; put a business plan together, what are you gonna do with the property? The business plan is gonna take you a few months. You keep it rented. Once you decide on the business plan, then you let the tenant go and then you execute your plan. If you wanna buy a home for investment purposes that is vacant, then your income is going to have to support the home completely. And that is gonna be harder, because your debt to income ratio now is gonna be very high.
Ryan Roghaar: Yeah. And in fact that leads me to sort of my next question I wanted to ask you against or ask you about. There's a lot of people who talk about, you know, buying investment properties, you know, for rental purposes or whatever. And I've heard people say that basically they borrow against their existing home or they're borrowing money against another property or whatever to cover the cost of the new one, right? There's sort of this, I guess strategy of rolling one into the next and so on so that you can sort of build up a big portfolio. I don't understand how that works at all, but like, I mean, if I'm interested in buying a rental home, for example, like if, if I wanted to be in this scenario—I have my primary residence, and then with my primary residence, can I then borrow against it to get other property?
Alejandro Szita: You could do so and you would be able to do it. That is a little bit risky. If I were in your position, this is what I would do. I will try to get partners. Instead of having, let's say you need a hundred thousand dollars to make the down payment, pay for the closing cost and have some budget for repairs. Instead of everything having to come from you, get with a couple of like-minded individuals and raise the money that way. If you still need to borrow against your home, do it but not the full brunt of it.
Ryan Roghaar: And is that really just for safety's sake? Like in the case that your rental property never rents or something happens, you know, at least that way you're not on the hook for it?
Alejandro Szita: For many reasons. I'll tell you the overall reason. Every time you get a loan, you actually become a slave because every month or at a set date, you have to make a certain payment. That's why lenders make so much money because no matter what happens in your life, by a certain date, you have to make the payment. But life doesn't behave that way. If you have a property, the person may not pay, you know, because they got late or maybe you have to, evict them or maybe, you know, the income stream is not gonna be stable. The income stream is not gonna be, even with the best tenant, you know, air conditioning goes out, he goes, "You need to fix it." For A B or C. What is gonna happen, is your loan is gonna have to, you are gonna have to make that loan no matter what. But on the other side of the transaction, that's the debit side. On the credit side of the transaction, you're not going to have the same kind of regular income. So that's why you don't wanna do it that way because you are entrapping yourself. You're putting yourself in a risky position. If you get a partner and everyone puts equity, equity doesn't generate a rate return, like has to be paid constantly at a certain point in time. Equity can wait. The tenant didn't pay; you have to evict him. You have to provide on the [recording cuts out].
