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so recently there's been a lot of trending talk on and other than a Twitter about the 40-year mortgage and basically people are starting to circulate this conversation over oh my gosh people are going to get 10-year car loans and then they're going to get 40-year mortgages what's next 100 year mortgages 20-year car loans heck you know what let's take the logical fallacy of the slippery slope argument and say we're going to have a 30-year fixed rate mortgage on a car and that car which is a Toyota Camry is now going to cost you two hundred thousand dollars well folks generally I despise Twitter that it has nothing to do with Elon Musk obviously you know I'm an Elon Musk fan it has to do with the fact that generally generally the highest quality information on social media folds to the bottom whereas the most invigorating and emotionally creative byline is what gets everybody's attention it's it's the same thing on YouTube I mean you should know this by now the headlines have to be Jazzy and snazzy otherwise people aren't interested if you don't have a snazzy headline nobody clicks and then nobody can get the perspective that actually matters for example yesterday and then we're going to talk about this 40-year mortgage for example yesterday I suited up and I went on mainstream television I hopped on none other than everyone's favorite channel on the left and everyone's hated channel on the right Newsmax okay obviously I purposefully flipped that but yeah I went on newsbanks I talked to Sean Spicer he's talking to me about the following of the dollar because that's more clickbait that's going on right now and I'm like dude if you're buying assets it doesn't matter and they're like wait we didn't even think about that you're saying we could just buy real estate to stocks bonds or gold or whatever some kind of asset and then not even have to worry about what our asset is denominated in yes but you don't generally find that headline or that body line because it's not sexy so anyway as much drama as there is going on around this 40-year mortgage the 40-year mortgage for a real estate perspective would actually be a godsend for Real Estate Investors specifically not for big corporate landlords because big corporate landlords are not going to get access to these 40-year mortgages specifically for you so let's take a piece out of the Playbook of the uh you know zero to millionaire uh course on building your wealth right why do I have a cours well I do there's a for because I truly believe that every one of you can become a millionaire through real estate you have to buy property and hold property now generally what people do is they go to a mortgage calculator and they say well but Kevin if I take a 40-year mortgage I'm going to pay a lot more interest over time and that is true let's go ahead and do a little calculation and uh see how much more interest you would be paying and then let's talk about maybe why this just isn't what it seems so let's uh grab the uh a share screen here specifically on uh this uh this mortgage calculator and what we're going to do is we're going to calculate first the difference in payment uh between what we would expect for a 30-year mortgage but then also what we would expect for a 40-year mortgage and we're going to compare total interest paid and then what we're going to do is uh we're going to ask okay well why would we ever want to pay more why would we do that we would want to pay less right isn't the goal to minimize the amount of interest that we're paying and the answer to that is not necessarily it depends on what we are doing with our currency otherwise with our cash so let's go through some of the numbers here so first some of the numbers let's look at a 350 000 purchase price you know what let's bump that to 450 000 let's get with a more normalized uh house here let's go with a more normal interest rate today obviously we're probably looking at about a six and a half percent interest rate I generally don't advise buying right now and I don't think anybody actually expects we're going to see a six and a half percent interest rate for the long term so let's go ahead with what I dealt with a lot in 2000 or so a lot in 2009 and 10.
when I started in the real estate business bottom of the market basically and the market was still falling when I got in as we were trending towards the bottom four and a half percent let's assume that you're not going to buy until rates are four and a half percent or your average is going to be four and a half percent if you buy now and refinance later and let's do a typical 15-year mortgage to go extreme here your payment in this scenario with 10 percent down on a 450 000 house four and a half percent rate is about three thousand one hundred dollars now that is not your total payment for this property because remember your total payment is actually going to be made up of something known as p i t i so that is going to be principal interest taxes insurance and then you have you have the pleasure of also having HOA dues you can uh you could throw those down so let's just put PI right here and usually we I separate p and I but just to make things a little easier right now we'll just grab the total right here and then we're going to go get our taxes and unless you live in the state of Texas you're probably going to be sitting somewhere around 1.2 percent on an annualized basis so we're going to divide that figure by 12.
there we go and let's make sure we have our parentheses in the correct places there we go now here's the magic of this little Fun hack your property taxes on a monthly basis are usually just the purchase price minus three digits yeah mind-blowing hack there eh uh I I love little hacks in real estate I teach endless hacks in the okay then Insurance let's go with about 75 now obviously this is going to get adjusted if you're and let's say you have no HOA because everybody hates HOAs let's say you are um not you know in a flood zone where your insurance could be 275 dollars and let's say you're not in Texas where your property taxes could be doubled if this is your payment for this property is now 3623 now this is actually a little bit problematic because if we want your front end ratio don't worry you don't have to know what that means if we want your front end ratio for this property to be 30 uh you know what I'll be generous I'll go with 35 well then your monthly income before we even consider any of your other debts in your debt to income your your monthly income is going to have to be somewhere around ten thousand three hundred dollars to afford this property or one hundred twenty four thousand dollars uh and this also assumes that you have saved up about forty five thousand dollars plus closing costs so you're probably gonna be sitting somewhere around fifty thousand dollars now okay well uh that's going to be a little bit of an oof eh because not a lot of people make a hundred twenty four thousand dollars uh but your total uh interest paid over the life of the loan in this scenario would be uh let's go over here 180 that's your 15 year your total interest paid would be 152.6 and your total principal payment would be 405.
so let's add a 405 plus one five two point six your total paid for this home would be sitting at 557.6 if you held it uh to the to the 15 in 15 years right so that is how much you've actually paid for the property if you held this loan to maturity fine okay now let's change these numbers a little bit let's go with a 30-year fixed rate mortgage and now we're going to leave most of the other numbers the same uh however look at your ability your the necessity of qualifying how that just changed let's actually write it down and you need let's write down need 124 000 of income 4K income to qualify all right now let's change this again to your typical 30-year fixed rate mortgage at four and a half percent and in this case you need 88.3 or 88.3 thousand dollars to qualify for this 450 000 home now if you keep this to maturity you're going to be paying somewhere around 738 000 for this house 738 000 in 30 years is how much you're going to be paying for this house over that lifetime okay now let's go with a 40-year mortgage so 40-year mortgage oh and your payment dropped too what was it your payment was two thousand fifty two dollars so in this case you had a 25.57 payment so you'd have a payment would be here the payment would be 33.6 K here the payment would be about a 2.6 K payment and then now your payment would be about 20 52.
oh no it would be a little higher hold on the 2.6 is with the yeah that's with the 30 year okay let's drop this to 40. there we go 1821 brings you to about 2.3 okay 2.3 K payment you would only need 80.4 K to qualify so about 10 percent less income to qualify and your total over that period of time paid for the property would actually be 800 and about seventy four thousand dollars eight hundred and seventy four thousand dollars so now we look at this and when we first see when we look at this the first thing we do is we say oh my gosh in order to qualify with lower income uh needing just 80 000 of income so basically a third less from 124 over here oh what we're doing is we're making housing more affordable this is true you're making housing more affordable but in order to make that housing more affordable you're actually raising how much money people are paying over time right not necessarily and so from a real estate investor point of view the real estate investor is almost always going to choose the 40-year mortgage if they have that option wait a minute Kevin why would an investor pay more money that doesn't make sense investors usually want less money out all right well not necessarily uh not necessarily because what you're doing over here to an investor is you're changing the cash flow and the leveraged appreciation factor for the property right and so take a look at this if this property rents for three thousand dollars a month that's the rent well then and then we add in Property Management expenses well over here you would be sitting at a negative cash flow on the 15-year mortgage you'd be having a negative cash flow of somewhere around uh three four six hundred dollars so you'd be negative six hundred dollars per month on the 30 year you'd be positive 200 a month and on the 40-year mortgage your cash flow uh would end up factoring in about this 200 in Property Management expenses would be around 450 so you'd have higher cash flow which actually because this is a fixed rate loan means you would have more risk with the 15-year loan but on top of that you have leveraged appreciation right so consider now that you're paying this uh this property down uh with less of an outlay every single year on an annual basis you're putting into the property with the 40-year mortgage you're putting in 23.45 times 12.
you're putting in about 28 000 or going into this property on the 30-year mortgage uh rough math here you're putting in about thirty one thousand two hundred dollars in the property and on the 15-year mortgage you're putting in about forty three thousand two hundred dollars okay but now if you had appreciation long run appreciation of let's say three percent you could even do the math with two percent if you want but if you had depreciation of three percent let's just say given that this is leveraged appreciation as well it's quite fantastic but anyway we'll talk about that leverage in a moment well anyway um four hundred fifty thousand dollars 450 000 times appreciation of three percent gives you about thirteen thousand five hundred dollars right so you've got about thirteen thousand five hundred dollars of of uh appreciation here but now consider what you've actually put into the property the total you've put into the property where you put in about 50 to buy it right so you put 50 in to buy it uh let's boost this to here you put in 50 to buy it your actual cost of the property since your your cash flow offsets how much you're really putting into it right here right uh your your cash flow here so how much are you actually putting in 600 times 12 net net your net into this property 7 200 offset by your appreciation 13 500 plus 7200 not even considering principal pay down right not even considering principal pay down here your net worth is up 6 300 bucks on the property just considering cash flow leveraged appreciation uh and that folks is on fifty thousand dollars so if we divide this number here by fifty thousand dollars we're looking at a 12.6 irr okay but let's do that over here well now we have 200 of cash flow plus the appreciation so 200 a monthly cash flow that gives us twenty four hundred dollars a year plus thirteen five hundred of appreciation on the property fifteen nine now we've actually gained our net worth by fifteen nine we're trying to leverage depreciation point of view is actually now 31.8 percent on ten percent down it gets ridiculous when you only put 10 down but it shows you how remarkable that leverage appreciation can be and it does get that ridiculous this is why buying your home is so phenomenal uh and leveraging for as long as possible with a fixed rate loan is so incredible but now let's go ridiculous here and let's take a 450 and this assumes you live there for the first year and rent it out there after right five thousand four hundred dollars plus leverage depreciation of Thirteen thousand five hundred dollars eighteen thousand nine hundred dollars into fifty thousand dollars is a 37.8 rate of return uh that's your irr for the first few years right now that irr goes down as you then reapply that to your next year of the net worth that you're into the property right because for the second year that you're into the property now you're into the property fifty thousand dollars plus that eighteen thousand nine hundred dollars of wealth that you've created but you can also be ridiculous here and you could offset this by principal pay down every month you're paying down another 300 bucks in principle on the 40-year mortgage so you could be even more ridiculous over here the point is what if when you're leveraging real estate you tend to have a much higher internal rate of return than your interest rate and so when we look at the time value of money and this is where I'm going to sort of summarize this uh and make this a little bit more clear because I know sometimes it could be a little confusing well we look at the time value of money if your internal rate of return exceeds the interest rate that you're paying you should always make that choice because your Net Present Value which is just a finance way of saying uh it is a good decision your net present value is positive when your net present value is positive you win and you want to do more of that think about that if you're paying a fixed interest rate of four percent but you're actually earning five percent on your money well that generally gives you a net positive of half a percent that might not be worth it right but if you have an internal rate of return of 12 because you continue reinvesting into real estate you continue buying rental property which you can do an internal rate of return of 12 is pretty realistic in real estate no company can guarantee that to you but it's pretty realistic because what you do over time to repeat the process is you continue to refinance as you have sort of longer term leverage appreciation you refinance you buy another rental property how can you add fuel to this fire and potentially look at a 15 16 17 or more rate of return you buy wedge deals you buy a wedge deal you finance properties for the long term you get leveraged appreciation and a wedge deal over the long term your interests your your net present value is substantially higher than the interest you're paying on the loan so anybody who simplistically tells you that oh well you're actually paying more for the property Kevin why are you paying more for the property well it's because the government is trying to screw you they're trying to get you to pay more to the banks first of all that's a lie you don't pay this interest to the banks like people need to wake up and realize this money doesn't go to the banks this interest you're paying goes to mortgage-backed security holders not the banks now yes a lot of banks hold mortgage-backed Securities but guess who holds most mortgage-backed securities individuals Pension funds other individuals big Banks right now the biggest banks Chase JP Morgan Chase Bank of America they hold like seven percent of it's nominal most mortgage-backed Securities are held uh not by large institutions but the interest you're paying is in the bank it's the mortgage-backed security holder that's important to remember but beyond that it doesn't really matter whom you're trying to stick it to by paying lower interest this is the flawed number to look at looking at your total interest paid is the wrong Financial metric for evaluating whether what you're doing is a good decision or a bad decision uh and unfortunately that's because in America and widely around the world most people have not been taught true financial analysis and uh anybody who and I want you to think about this web anybody who says oh my gosh you're going to be paying X dollars over the life of that loan for an appreciating asset like real estate is missing the point of how wonderful real estate is they don't understand real estate investing so when I see that drama on Twitter I just laugh and it helps me realize we are going to be able to create a multi-billion dollar company because people just don't realize uh we have simple and easy real estate is now that's different for a car of course should cars have a 10-year mortgage no you should buy a used car and pay it off in cash it's totally different very very very different now some people are like deeps here in the chat is questioning uh appreciation versus uh inflation generally real estate appreciates at a higher rate than the rate of inflation but at bare minimum you're protected uh from inflation with owning real estate generally not this hyperinflation that we've seen in this last cycle but generally long-term average inflation we tend to be protected by owning assets uh and uh and then of course you know when people say oh what about the maintenance of a property well I just that's purposefully why I built in an additional 200 uh per month for uh maintenance and management uh especially if you manage the properties yourself I mean think about it twenty four hundred dollars buys you a new furnace every year at twenty four hundred dollars for four years buys you a new roof twenty four hundred dollars buys you five new stoves for just one year it buys you two new water heaters you see what I'm saying like you can maintain a property on a twenty four hundred dollar budget per month so that's not terribly unrealistic I already built that in so the beautiful thing now uh what you can do is you could use buy now pay later to join the programs on building your wealth a link down below use that coupon code before April 12th when the coupon code will be expiring so one positive dude says a 20 a 40-year mortgage will take you 25 years to pay more principal and interest who cares that does not matter in fact most sophisticated investment investors don't pay any principal on their real estate they actually take an interest-only Loan in other words by taking an interest-only loan you're not actually doing a 30-year mortgage or 15-year mortgage or a 40-year mortgage guess what you're signing up for you're signing up for an infinite mortgage why do you think investors do interest-only loans because they don't want to pay off the debt paying off principal is not the best use of capital it increases your safety net the paying off principle is not the best use of capital if you're putting your hat on actually telling yourself that you're going to hold a loan for more than three to five years you're somebody who's either facing retirement or not financially literate in real estate and that's okay that's not designed to be offensive it's just designed to be be realistic most people refinance after three to five years and they reset the amortization schedule anyway somebody who says they're going to hold a 30-year mortgage for 15 years so they can finally start paying off more principal and interest actually I think that flip point is somewhere around year 11.
they're lying to themselves they're not they're going to refinance now hopefully they don't refinance and buy garbage like a boxable or an RV which is basically the same thing or or spend money on a vacation uh which I'm a big fan of spending money on vacations just don't think you should refinance your house to do that uh you know that's that's financially illiterate so nobody ever holds a loan to the full term that's stupid it's stupid to do that unless you're retired if you were going into retirement you are a different you're in a different situation if you're growing your wealth you don't hold your loan to term if you are going into retirement you should pay off your debts you should pay off everything get a 15-year mortgage make an extra payment make an extra two payments a year pay that sucker off as much as possible because you want to go into retirement you want dividend stocks and pay off your loans but if you're trying to build your wealth you don't build your wealth with a 15-year loan and making extra payments that's nonsense so rant over thank you so very much for being here I appreciate you all I will be leaving now goodbye and enjoy your Good Friday good
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