Podcast Interview—The Financial Survival Network with Kerry Lutz
Episode: Real Estate Is Still a Good Bet
June 17, 2022
Episode summary:
How do we survive the carnage in the markets? Alejandro Szita urges us to turn to real estate, which behaves differently than many other investments and has potentially promising outcomes in our tumultuous economy. Commodity prices going up allude to future home values going up, which makes real estate a sector worth exploring and investing in. Tune in for more expert insight.
Podcast Transcription:
Kerry Lutz: Welcome, you are listening to, watching the Financial Survival Network. I'm Kerry Lutz. Well, it's the day after carnage again in Wall Street. It's June 14th, 2022. And well, the question is, how do you survive this? So we got massive inflation. Inflation. They say peak inflation is here. No, peak inflation is down the road, perhaps six months to a year, perhaps several years down the road. Inflation's not going away. What's that doing to real estate? Is real estate a hedge against inflation or is it just like any other investment? Well, we've got Alejandro Szita with us now. Alejandro, it's great to have you on the show. You're an established mortgage broker. You've been doing this for going on 20 years. Your website, prosperity-lending.com gives a lot of info about it. What are you seeing right now in the real estate market?
Alejandro Szita: Thank you, Kerry. Let me say that, thank you for having me on your show. The real estate market has confusing signals because as you know, it's driven by demand and interest rate. Basically, when you buy a house, you are leveraging your income into a purchase. With the rates going, having gone up about 2% in about two months in the last two to three months, that has put a cooling effect. You know, here when we are in Southern California it's pretty much put a dumping effect on it. But it's one thing for another. I'll give you an example. I have a client that is looking to buy a home. His home is on the high end. He's looking to buy a two and a half million dollar home. So when he started to look at this home, let's say March of this year, March of 2022. He will be looking at a rate in his case, you know, because he's going through a, with a bank statement program because he, because of the particular job that he has, you know, he was looking at probably a 5% rate. Now the same, the same loan, it's for him in the high six to seven, which is good quote-unquote compared to what's around. So for him, that means that, you know, on a $2 million loan, the 2% difference is quite a bit. So basically he's now stopping a little bit and he's waiting it out because he believes that prices should come down a little bit and they will. But it's one thing for another. Either you have a very low rate and you pay a high price, which translates into a certain mortgage payment, or you pay a lesser price, but a higher rate and you end up with pretty much the same mortgage payment. So it's one thing for another.
Kerry Lutz: So what about inventory? Are you starting to see more houses become available because we've had a real housing shortage here, haven't we?
Alejandro Szita: Right. But it is, it is by design more than because of market forces. That inventory is because of the restrictive laws. I don't know about other parts of the country, but in this state, in Southern California, in northern California, it's pretty much the government, it's the local governments, and it's the state governments that for decades, they have been restricting basically the supply of homes. and made it very expensive, made it incredibly complicated and risky for developers to build anything. Now it's like the left hand doesn't know what the right hand is doing. So I'm not trying to blame all of the government officials. Some of them are trying to right the situation, but it's not, you know, like when you're in a private company, you have a sort of agreement or a sort of working together. In the government, it doesn't work that way. Some people try to do some things, others try to do the opposite. So you get a mishmash of intentions and in the end you get a confused, confused signals to the developers. They don't really know what to do. And to make a long story short, this supply is the same with the water, you know, in California there is enough water for everyone, as you know, but half of it is dumped into the ocean. So with building is something similar.
Kerry Lutz: Okay. So we got this housing shortage, it's not going away. But as housing becomes less affordable then people are got to be renting more, right?
Alejandro Szita: Yes. Now it depends on the location. Now here in Orange County, you have a lot of new developments, you know, and new communities and new housing is just coming, you know, like crazy. You have like hundreds and hundreds of houses that are becoming online. So it doesn't behave the same way in every county.
Kerry Lutz: So every real estate market is local effectively is what you're saying. And in Florida here, we've got tons of building, but we've got tons of people moving in. And we still have, I've noticed recently, anecdotally, that I think there's more or supply coming online. But you know, it's, it's still very tight.
Alejandro Szita: Yes. I read a survey that says that, if it's by day or by week, you have 1300 people on average moving into Florida.
Kerry Lutz: Yeah. I guess they're all coming from California, huh?
Alejandro Szita: Yes. I don't blame them. Florida's doing really great. It's doing pretty much the opposite of what most states are doing, but it is what most states should be doing.
Kerry Lutz: Yeah. Well, you know, there's a whole bunch of reasons for it. I don't want to like go into this because it is politics and stupidity and governmental stupidity, everything else. But when even your wealthiest person in the state moves out to go to Texas for greener pastures and no state income tax, you got a problem there. But nonetheless, California for the time being is still the most populous state as people move out, more people move in. All these things. So the question is like how do you navigate this? You know, we are the Financial Survival Network. How do you survive the turmoil that's going on now and what part of your plan, your survival plan should real estate be or take part in?
Alejandro Szita: Well, you know, that's a very good question. I would say that one thing is the theory. One thing is the macro and one thing is what you control. And one thing is what you can do. I would say you have to have an eye on what is happening internationally, what is happening in your state. But that should not be your main driving factor because those are things that you cannot control. What you can control is what you do with your money, what you do with your income, how you actually leverage it. I had these discussions many times with financial planners and financial, like people in the financial world. And I always contrast the theory with the practice. It's like life insurance, you know. In life insurance you have this saying, buy the term invest the difference. That's a theoretical concept. In practice, it doesn't work. Same thing with real estate. For the average person, even for the average, well to do person or wealthy person, real estate in my opinion, is still a way to leverage your income and is still a way to acquire an asset that you're going to use and that is going to provide you with a certain degree of appreciation and a certain degree of wealth. I say a certain degree because in California you could rent something for $3000 and the same property to buy it, you'll be spending $4,500. So it's a little bit upside down. Like in Florida, you could buy a house, you could pay a mortgage for $2,500 and the mortgage will be more or less equivalent with a little bit of difference to the rental amount. You know, so it makes sense, you know, it makes sense. Instead of paying $2,500 for renting, why don't you pay $2,500 for a mortgage?
But here in California, even though the equation is like a little bit upside down, in my opinion, you still are better off. And let me tell you why very simply, I will never forget this. I was in my twenties, I went to a seminary in England in the nineties, and this guy was a financial consultant from Germany. And he said this, he said, in order to make a saving, you have to make the saving a necessary expense. You have to make it a bill because if you don't, you won't do it. And that brings me back to the example of buy term and invest the difference. It's like, yeah, it theoretically works, but you're not got to do it. Why? Because if you have to send $300 away for savings, you're not got to do it. But if you have a bill that says you have to pay $3,000 or else, you are going to do it. It becomes automatic. And one thing that I noticed that is missing on real estate blogs, on real estate discussions is the payment of principle. The payment of principle is the number one reason why you should have real estate. Not so much the appreciation. Before all of this propaganda and before all of these TV shows. You know, that was what people concentrated on for hundreds of years. What happens is this, when you send in the mortgage payment, a part of that payment is building wealth, not because of appreciation, not because you bought the right house, not because the economy is doing well, it's because the bank is forcing you to save. And that's something that is not mentioned.
Kerry Lutz: That's called forced savings. And that's the same thing. You can set it up on your pay. If you're an employee, it's easier than if you're self-employed, but you can still do it where every month your account, your bank account gets debited and the money gets put into savings of some sort, whether you're buying cryptos, stocks, bonds, whatever. You automate the process, you take the conscious decision out of it. I think that's what you're saying and that is what real estate does when you build up principal over time. Granted it takes a long time, but you know, do you tell people, do you get a 15 year or a 30 year mortgage? What's your take there?
Alejandro Szita: My take is this, bills are your enemy. I try to make bills as little as I can. So if the person can qualify for a 15 year mortgage, I tell them, get a 40 year mortgage or a 30 year mortgage and pay it as if you were paying a 15 year mortgage. Because this is what happens. And this is another thing that in my opinion is not discussed enough. If your coupon, meaning your mortgage bill at the end of the month is $3000, that means that's the minimum the bank expects from you. You can give them any other amount that you wish. So get a 30 or 40 year mortgage and pay them a pay, send them a 15 year mortgage payment. Now something happens, your cash flow goes down. You know, because we service, you know, the entrepreneur, we service the small business owners. And small business owners or independent professionals have a varying cash flow. So when cash flow is going down, guess what? Because you have a 30 or four year mortgage, your bill is going to be small and you're got to be able to make the payment because only when you are not able to make the payments when you run into trouble. So don't set yourself up to lose. If you have a 15 year payment, that payment is got to be high no matter what for 15 years. If something happens during those 15 years, you'll be screwed. You won't have control. So that's what I tell them. The rate is really immaterial when you control the volume of interest. There is a difference between rate and volume of interest. I'm going to give you a very quick example. Years ago I bought a car for my wife from a credit union. The rate was 6%. All my friends said, oh, your deal's so bad. You know, you could have had a 2% interest. You don't know what you're doing. You're supposed to be in the financial world. But guess what, that was a five year loan. I paid it in a year and a half. Once I added up the volume, remember the volume, meaning the quantity of interest that I paid, I paid about one and a half percent, even though the rate on the note was six. You can do the same thing with real estate. So that's a little bit long-winded explanation to answer your question.
Kerry Lutz: That's not really that long-winded. So but on the other hand, we got this inflation. So the slower you pay back your mortgage, the cheaper the dollars you get to pay back on. So do you really want to be debt free in an inflationary time or is debt your best friend?
Alejandro Szita: Let me tell you the story that I will never forget when I was starting my career. My broker says, you speak Spanish, right? And I said, yes I do. And he said, go and help this couple. They don't understand what is going on. They don't have a real estate agent because at the time in California with a real estate license, you could do the real estate part and you could do the loan at the same time. He says, you can get double commission. So I went to help them. And this man told me the story. He bought in Mexico, a property that cost at the time in the eighties, 50,000 pesos. Those 50,000 pesos was really hard for him. That represented an enormous amount of money. The payment, even though it was just a couple of hundred pesos a month, was really, really hard. Then in Mexico, there was a huge inflation, a devaluation of the currency. And then what happened is the 50,000 pesos became so little that later with three months of work, he just paid it off. Now, that has never happened in America, in the United States, but I have seen it in Chile. I'm from Chile and I remember between 1971 to 1974 that happened there. Not, because it's never happened here. It means that it won't happen. And the world is so crazy right now that many people are predicting this is going to happen in America.
Kerry Lutz: It doesn't have to happen like that. I mean, that's similar to pre-war or post-war World War I, Germany, the Weimar Republic, where a guy supposedly was a bellhop, bellman at a hotel and he received a $20 gold piece from as a tip. And three years later he used that $20 gold piece to buy that hotel. And you have stories of, of creditors running from their debtors who are paying off their debt. But if your dollars become worth 10% less every year, so that means in 7.2 years, basically you're going to owe, in real terms, half of what you owed when you took out the mortgage. That's a pretty good deal. And if inflation, if the value of the property keeps up with inflation, your property will be worth what it was then. But your actual debt on the property will be in real terms, 50% of what it was. So if you bought a piece of property for half a million dollars and just assume you got a hundred percent financing, you owe $500,000. 10 years later, the value of the currency has more than declined by 50%. At that point, you still owe the $500,000 less your principal payments, but the property is now worth a million. You know, you kind of made out like a bandit there, right?
Alejandro Szita: Exactly. And when you look at the behavior of the appreciation of property in general, over time, you'll see exactly what you said. There are periods where appreciation goes really crazy, periods where it goes under, but in the main home, you know, historically will continue to, you know, parallel inflation. So like you said, you know, the dollars become cheaper and cheaper. I always tell my clients, make sure you can make this payment for five years. And they go, well, why five years? This is a 30 year mortgage. I say, yes, the first five years are got to be tough. During the year number six, amount is not going to change, but inflation will make the payment seem lower, seem easier. And then you will be in a better. So make sure that for five years you can really do this.
Kerry Lutz: Alejandro, I really appreciate your coming on and talking about this, especially having experienced it in Latin America. It's what my good friend Jason Hartman calls inflation induced debt destruction. And also as he explains houses besides the land cost, the land value, what determines the value of your house is it's a bunch of commodities. Literally under one roof. You got you know, copper, you've got you know, concrete, you got doors, windows, all this stuff, and it's all commodities. And I mean, I guess in the end everything's just sand. But the fact is that as the price of all the commodities that make up your home go up, the value, or not necessarily the value, but the price of your home after inflation goes up. So, so real estate, are you going to, what about cash flowing real estate? What if you're newly married, just out of college, both got jobs so you buy a duplex or a quad? Does that make sense?
Alejandro Szita: It makes sense, but I would say one caveat of things to worry about or or not to worry about, to taking into consideration is this. When you buy a duplex or any kind of investment property, you have to take your percentage out and put it on a repairs fund. Almost no one does that. Realtors don't advise you to do that. You see all of these spreadsheets and financial analysis, no one takes that into consideration. If you're got to buy that kind of property. And if you can take five to ten percent depending on the volume, out, and still the pencils out, then buy it. Another thing that people don't take into account is when you are buying an investment property and you are calculating your rate of return, don't calculate only the cash flow you get on your down payment, which is basically your rate of return. Add the equity that your tenants are building in for you and add a little bit of a tax write off that you are getting for the property to get a real vision or a real view of what your rate of return is. And I'm going to give you a quick example. I was doing that the other day for a client. If you only take the cash flow and you measure it against the down payment, his rate of return was like 2% and it seemed really low, better than the bank, but really low. Once you added the equity that the tenant was paying for him and building for him and you added a little bit of the taxes, not everything, not just everything, just a third of his savings in taxes, he jumped from 2 to 12% return. So this is how much we're missing out. We're not taking into account the whole picture. And that's even considering a little deduction to keep aside for repairs.
Kerry Lutz: Yeah, 5 to 10%, totally reasonable, because at some point you're going to need to do work. Whether it's on furnace, hot water heater, roof, all these things got to be done. And yeah, definitely, you know, I like an income property to buying this thing that's going to, basically you're borrowing money to buy this piece of real estate and then you're sticking somebody else with the bill and they pay it. So that's a good deal. Anytime you could get anyone else, someone else to pay your debts, then you're doing the right thing.
Alejandro Szita: It's not just your debts, it's your equity. They're building equity for you.
Kerry Lutz: Exactly. Exactly. They're building equity and they're paying your debt. So paying your interest, they're paying your principal. Alejandro, it's really been great speaking with you. We're definitely going to have you on again. Just tell people out there, how do you get in contact with Alejandro? What states do you work in and how you can help them?
Alejandro Szita: Yes, we work in California and Florida. You can contact me by sending me an email on info@prosperitylending.us. That's info@prosperitylending.us. The website is the same, it's the one that you saw or www.prosperitylending.us. And then we specialize on the small business owner, professional and artists. Those are the people that usually fall through the cracks of the lending machine because they don't fit a particular box. You know, we see this all the time. People are being rejected. People don't qualify for the mortgage even though they have the money, even though they have the income. So that's our specialty.
Kerry Lutz: All right. We'd like to hear that. Because I've been telling you out there for years, at least the last three years, seeing this inflation thing about to take off, buy a home. It is your best way to protect yourself against inflation. You know,. Financial Survival Network recently just did a thing. You know, electric rates are going to double throughout the country in the next 18 months. So what are the ways you can hedge your bets, is in real estate, also through contracts. We won’t get into that now. In any event, if you got a question for Alejandro, you can always send me an email at kl@kerrylutz.com.
