Hacking Finance With George Antone
Episode 340: Hacking Finance With George Antone
The Wealthy Code, The Banker’s Code and The Debt Millionaire are three of George Antone’s books on finance, and they’re all bestsellers! A leader in the finance and investment space, George has founded one of the largest networks of private lenders. Having found shortcuts in the financial system, he has hacked the game of finance to help impact people’s lives. In this episode, George talks about the ways to use the system to work for you and reveals the different shortcuts that people can implement immediately in their investments and in their lives.
Watch the episode here:
I have George Antone as my guest and he’s going to talk to us about hacking finance and I know everyone’s going, “What is that?” I’ve got news for you. I’m asking the same thing. He is considered to be a leader in the finance and investment space. He has three bestselling books on finance and he has founded one of the largest networks of private lenders. He’s a regular guest speaker around the nation. This guy knows his stuff. We’re going to get to know him.
George, how are you doing?
I’m great, Mitch. Thanks for having me on the show here. I appreciate it. I’ve heard great things about the show. I’m super excited about being on it.
We’re lucky that we have a great group of followers. They stay engaged and they helped me. They introduce me to people like you and all the different interesting people. We keep finding great people to talk to and you’re one of them. You caught my eye here because I’ve written three books but none of them are bestselling books. What are the three books that you have? Can you describe them to us?
I’ll tell you what they’re about but let me just say the names, The Wealthy Code, The Banker’s Code and The Debt Millionaire. Many years ago, I read Rich Dad Poor Dad, which was an incredible book. One of the things about Rich Dad, Poor Dad is it’s about mindset. It’s not the manual on how to go out and invest but it’s about mindset. What I decided to do was after owning many properties and buying apartment buildings and doing some pretty big deals, I realized I should share this with the world. I continued where Rich Dad Poor Dad left off with The Wealthy Code. I go into numbers and specifics. I’m a numbers person myself. That’s what The Wealthy Code does and then The Banker’s Code, I talk about lending and being the bank. In The Debt Millionaire, I talked about how to use the financial system to work for you. In other words, it’s about a lot of investors who are stuck in the wrong place. The whole system; financial system, inflation and interest, all of that is working against them. The question is how do they move to the other side to where the financial system is pushing them forward? That’s what the third book is about. I’ve always hated writing in English in college but for some reason I enjoy writing books. That’s how this came about.
The reason that happens is that you’re a real giver and you like to help people get ahead. That’s what you’ll enjoy because I know when I’m writing it, I practically failed English. I was the least likely to even get out of English class. There are some English teachers rolling over in their graves right now. I wrote three books and it’s because you want to let people know that you don’t have to live the way you’ve been living. People were telling you things wrong and you’re being indoctrinated by a propaganda advertising machine. It’s all about separating you from your money and not helping you get rich. I’m hats off to you for writing the books. I didn’t know these were the titles when you said them but I have heard of the first two for sure, The Wealthy Code and The Banker’s Code. I hadn’t heard of the third one, The Debt Millionaire, but it has a great interesting title. I had someone say to me one time and I bet your books along these lines, they said, “Whenever you owe $10 million is when you’ll start making $1 million a year.” Lo and behold, if it wasn’t true, about the time I started owning a bunch of money, I started reaching that debt pinnacle. It’s all about good debt and bad debt like Kiyosaki talks about.
You’re going to introduce us to some concepts that are maybe a little bit foreign. I got to be honest with the audience right now. He started to go into this description of hacking finance and how it’s not just to do with real estate and everything. He started explaining it to me and I say, “Don’t explain it to me. Let’s all learn about it together.” This will be a neat experiment. I don’t know what this hacking finance is about myself but where do we start with hacking finance?
The title sounds weird, but let me explain how the whole thing came about. I was in Palm Springs, I was invited there to be a keynote speaker. I finished speaking in front of a few hundred people. This lady walked up to me and asked me an interesting question. She said, “Is there a way to build financial security without investing in stocks, bonds, real estate or even sell anything or start a business?” My first reaction was I chuckled, thinking she was joking. She wasn’t and I felt extremely terrible. I decided, let me figure out if there’s such a thing to do all of this stuff that she’s talking about without doing any of this other stuff. As I started researching more and more and admittedly, I’m the biggest financial nerd. I’m always looking for ways to use the system to work for us. All of us are like that in a way. I started discovering these interesting strategies that you implement one time that would help you leap forward financially. I wanted to touch and give it a name because it’s not investing. You have to invest in stocks or real estate or whatever it is. You’re not trading currencies or even stocks or anything like that. You’re not having to save way below your means and save money.Start thinking about how you can turn things around in financing so you don't have to work as hard. Click To Tweet
These are the three traditional ways of building wealth. This is a completely different way. I struggled to give it a name because there is no name for it. I call it hacking finance. How can you make the financial system work for you by simply making a few tweaks? I know that sounds crazy because we’re not used to thinking like that but here’s what I mean by that. We know inflation, interest, taxes, opportunity costs, fees and all these different things are working against us. If you start thinking about how do you turn these around so I don’t have to work as hard? Every year, we’re working against those forces. It turns out with a few financial tweaks and I can give you some examples here. You can turn things around and inflation starts working for you. Interest and all these things start to work for you so that you know financially you’re moving forward and not backwards without having to necessarily invest. If you invest, it’s even better because that increases or enhances your returns but you don’t have to invest. Everyone out there could use this. I know that it sounded so big.
I’m on the edge of my seat because how do you do this stuff without having to save or invest? George, I’m going to get out of your way and I let you keep rolling.
Let me give you a simple example. I’ll give one that people have heard of. This is what I call the Master Sweep Account. The way it works is simply when you get paid on the first of the month and then you put your money in your checking account. You pay your bills on the 10th or 15th of the month or whatever it is two weeks later. For that month, your money was sitting there doing nothing for two weeks. The same thing happens the following month. That money is sitting there doing nothing. Meanwhile, the bank is making money off of that, what’s called the float. If you simply know what to do with that money, if you extrapolate that for 40 years, you realize that your money is sitting there for twenty years out of 40 years waiting to pay your bills.
Many of us have heard of this and what we do is we simply use a home equity line of credit, as an example, where you park your money there. While it’s sitting there, it’s lowering what’s called your effective interest rate and then you pay your bills from there. That by itself might seem insignificant but that’s one tweak which you do one time and you set it on autopilot will allow you to pay off your mortgage in 1/3 of the time. Many people out there have heard of this and have tried it. I was extremely skeptical of it until I got into the math of it and it works well. That’s one example. Another example is if people look at their mortgage or just having their mortgage on their property.
When you look at Dave Ramsey and Suze Orman, they talked about paying off your mortgage or get a fifteen-year mortgage as opposed to a 30-year mortgage so you can be debt-free in fifteen years. That is the worst advice. If you look at your down payment compared to what the mortgage is doing for you, you are getting incredible returns because when you account for inflation, essentially “paying down the mortgage” which is making your dollars cheaper over time. Your return on that part, on inflation work on your mortgage, is double digits. At first, I was very skeptical of that too but when you do the math, you start realizing that by having a fixed mortgage for 30 years, your mortgage now is a huge wealth builder and you turned inflation to work for you.
The idea of getting a fifteen-year mortgage as opposed to a 30-year mortgage is in many ways hurting you. That’s what I’m talking about. There are many small tweaks like this that you can look at and start using to your advantage. You realize you’re building wealth faster than the traditional way of investing in stocks or mutual funds. These are the things I’m talking about and it gets into fascinating different strategies like this that you can implement one time and it might take them no more than a few hours and they’re done. If they’re set on autopilot every month, it’s working for them.
I want to go back to the first one you were talking about. Did you call it Master Sweep? Is that what you call it?
It’s Master Sweep Accounts. What happens is you sweep all your money that you get paid every month. Instead of a checking account, you sweep it into your home equity line of credit or if people don’t have a HELOC, they can get a traditional line of credit at the local bank and simply move the money from the checking account into the line of credit and pay the bills from there. That one simple tweak might seem like it’s insignificant but it ends up having a huge impact financially because the money that the bank would have made off of the two weeks that your money’s sitting there, what’s called the float every month, now it’s working for you in lowering your effective interest rate. It’s a fascinating idea. I heard about it years ago and I didn’t believe it at first. It took me 2 to 3 days of Excel to realize it works wonders.
Help me because maybe I’m a little slow here. I get the idea of the float because that’s what American Express and a lot of these credit cards do too. They’re living off the float. Millions and millions of dollars that they’re holding, that they’re going to pay 30 days later or something. Am I right about that?
Let’s say I have a house payment and I got a 30-year mortgage or does this has to be on a house that’s paid off that you go get a home equity line of credit? Help me start from the beginning of something.
Let’s say you have the first mortgage and you have some equity that you can put a home equity line of credit on it.
Let’s put real numbers on it, just make them up. Give me a case study.
Let’s say it’s a $200,000 property and you’ve got $120,000 first mortgage on it and then you’ve got $80,000 equity but you have $40,000 in the HELOC in second. The first would be a $120,000 mortgage.The numbers are one thing, but peace of mind is so much more important. If paying off the mortgage gives you peace of mind, go for it. Click To Tweet
You will get home equity on the $80,000 equity for $40,000. Now your debt looks like this, $120,000 and then the $40,000 home equity. You still have $40,000 pure equity in the house.
Let’s say you get paid on the first of the month and it’s $6,000 or $5,000. Typically, you would put that at your checking account and then you would wait to pay your bill. What we now do is we’re going to change that so that the money sits on the HELOC. The first step is we’re going to transfer and I’m using the word transfer there on purpose. We’re not paying down anything. We’re simply transferring. We’ve got to transfer some debt from the mortgage into the HELOC. We have this HELOC for $40,000. We’re going to write a check for $10,000. We’re going to take a check from the HELOC, write $10,000 towards the principal on the mortgage. What we essentially do is transfer $10,000 from the mortgage into the HELOC. We have $110,000 first and $10,000 in the HELOC and all we’ve done was transfer it. When we get paid, we simply park that $5,000 or $6,000 or whatever we got paid into the HELOC. The HELOC, what’s owed on it, drops from $10,000 down to $4,000 or $5,000 depending on how much we got paid.
While it’s sitting there, the interest that’s being charged on that money drops because we’re only being charged on the $4,000 and then we pay our bills from there. Let’s say we paid all our bills within two weeks and the money we deposited, we have 95% or 90% went out to bills, then the balance goes back up. The following month, the same exact thing happens. You deposit it to the HELOC and then you wait until you pay your bills when they’re due. That one simple tweak of using the HELOC is essentially your checking account or what we call it a sweep account now ends up paying off your underlying mortgage super fast because of that one.
Is that because the HELOC has a daily interest rate or floating interest rate? You’re eliminating those days of having to pay interest on that amount of money, which was the amount of your paycheck. You’re eliminating that interest bill or that interest fee because that’s $5,000 less that you were borrowing on that day and on the next day until you pay your bills. I get it. It’s the theory of making weekly mortgage payments instead of monthly. You make 1/4 every week instead of one whole payment every month and it works in your favor over a long period of time. As a habit, it becomes worth tens of thousands of dollars. That’s the point, right?
That’s correct. This is slightly different in that you’re using the same timeframe that the bank is making money off of you while it’s sitting on a checking account. You might as well put it in the HELOC. The bank makes a lot less money off of you and the money that they would have made off of you, you’re using it to pay down your mortgage. That’s how it works. That’s just one of many different financial shortcuts. There are many of them out there. The more I researched them, the more I realized why isn’t everyone doing these things? They don’t cost anything. It’s just that we have to approach things in a completely different way of what we’re told by the financial institutions because they’re telling us things that work in their favor. Why don’t we change it? We replicate what they do for us. That’s what hacking finance is all about. It’s these simple tweaks that you can implement to help you move forward financially.
The bank certainly is not going to tell you. They want you to pay every minute of that 30-year mortgage. That’s where they make their money. We went on to the second hack which was don’t pay off your house. I’ve always been conflicted about that. If there’s one thing that I thought maybe you should pay off is at least your home. My wife feels that way because I paid off my home a long time ago and I keep thinking, “I can get some 2.75% money out of this. Let’s refinance the house.” It’s a war to try to get that done and I’m not winning. I still haven’t got my 2.75%, but besides the personal or emotional things of it, financially, what you’re saying is when you put $10,000 down on a $100,000 house and you get a 4.5% interest rate. The 4.5% interest rate that you’re paying, it pales in comparison. You use the word inflation but is the word appreciation the same or is it different and in addition to? It’s going to be in addition to because inflation means the cost of bread went up. Appreciation means that your house is going up and appreciation on real estate can be dramatically more or less than what inflation is. It’s all cyclical but inflation and appreciation you’re saying are two different things and they’re in addition to each other.
I’ll give you some numbers but let me touch on something you said that’s important, which is the emotional part. I completely agree with you and your wife about the following. The numbers are one thing but peace of mind is so much more important. If paying off the mortgage gives you peace of mind, go for it. Ultimately, we do what we do for peace of mind and for having a less financially stressed life. However, if you want to look for people that want to leap forward financially while they’re in the accumulation phase, having the right type of mortgage was so critical. Having talked about the peace of mind, that’s more important, but let me talk about the numbers. Let me give you some numbers so we can dive into numbers again. Let’s say that you bought property all cash. It’s $200,000 and ten years later, assuming inflation was 4%. Your $200,000 property, ten years later will be worth approximately $300,000. At this point, everyone thinks I made $100,000. Let’s go back ten years when you first bought the property. Let’s say that coffee at that time was $1. Ten years later, the coffee is going to be $1.50. It turns out you can still buy the same number of coffees if you sold your property. In other words, your purchasing power hasn’t changed.
Ten years, you were able to buy however many billions of cups of coffee for $200,000. Ten years later, you’re still buying the exact amount of coffee with the money that you thought you made $100,000. You broke even in this scenario because with the extra $100,000, it still buys you the same amount of crap.
On the other hand, if you were to get a mortgage and you’ve got a $160,000 mortgage. You put $40,000 down and the coffee was $1. Ten years later, going back to the coffee, it went up to $1.50 for example. However, the property still appreciated. You still made the $100,000, but here’s where it gets interesting. Inflation worked against the mortgage. You made money two ways. One is the appreciation but in terms of inflation, it kept up but you didn’t improve your purchasing power. What improved your purchasing power by 2 or 3 times is the mortgage itself. You have two things going on here. You have appreciation but you have inflation making your dollars cheaper. That’s why when you buy a property 30 years ago and you’re still making $200 payments on it. Back then, $200 was a lot and now, it’s nothing. People say you’re so lucky. The reason is because inflation worked against your mortgage. It was the inflation against your fixed mortgage that improved your purchasing power, not the appreciation. I know that sounds crazy.
I have an example too that I want to use in real life. I do want to back up. One of the reasons that will make it easy for the audience is scenario number two, where you bought the same $200,000 house but you didn’t pay cash. You put $40,000 down and you had a $160,000 mortgage. In ten years, the house is worth $300,000. You only had $40,000 out of your pocket to get the same $100,000 increase over the same amount of time. The only thing that offsets it is you’re making some payment on that $160,000 so you’d have to deduct that too because when you paid cash, you weren’t making that payment. I’m not exactly sure how to look at it. Am I on the right track here? That’s what they call the power of leverage, right? $40,000 made the same $800 because we used money minus some payment.
I want to take what you said, because you’re absolutely dead on taking a step further by saying this. Savvy investors that understand how the financial system works, they don’t buy the whole assets, they buy spreads. For you to have a spread, you have to have the upside, meaning the appreciation in your example and the mortgage in this example. When you buy spreads, this is where you can improve your purchasing power significantly more than people that buy the asset all cash. The more you understand how inflation works, how interest works, how opportunity cost works, the more you realize you’re always looking for spreads, not the actual asset. That’s why we call this inflation arbitrage is because you’re making money off of inflation. For you to do that, you have to buy the spread, not the actual. You don’t care about the real estate per se, you care about the difference between appreciation and the inflation paying down your mortgage essentially.
This shows up a lot in an argument that I have a lot of times with realtors. I’m going to take a little sidestep here but I’m going to try to make a parallel. I hope I’m relevant. I have realtors because I owner finance houses, I buy something at $50,000 and I owner finance it for $100,000 with $10,000 down. Sometimes, I can sell over the market because of I back into my market. I back into the rental price for that house. What does it rent for? What does that person pay him for rent? What is the price if I give them exactly the same payment, principal interest, taxes and insurance as they’re paying for rent? If I get to that number, can I make money on this? I sell my houses based on an owner finance value, which is based on rents, which is an income from approach. I’m finding out what the rents are and I’m backing into a sales price. A lot of times that sales price is 10% or 15% higher than what the comps show, the comparables in the area.
The real estate agents were chastising, “You’re ripping this guy off.” I go, “I’m not ripping this guy off. The landlord is ripping this guy off. Let me show you why, because in ten years from now, this guy’s payment is still going to be $850. What were the rents be in ten years from now, Mr. Real Estate Agent?” They’ll mumble around and I’ll make them give me an answer, “No, you have to give me a number. Give or take a few, what are the rents going to be in ten years from now? There were $850 when they started, ten years from now, what would they be?” They’ll say, “They’re going to be $1,200.” I say, “You’re right, they’re going to be $1,200. What will they be twenty years from now? Using the same formula that you used for the last ten years, it’s going to be up around $2,200 now. What will the rent be in 30 years from now?” I make them give me an answer. He says, “It’s going to be at least $3,000, $3,500.” I said, “In 30 years from now, my buyer, his payment is going to be zero. The landlord is ripping this guy off, not me.” I don’t argue with them too long, but that’s what you’re talking about. You can see inflation right in the rents because when rents go up, it’s inflation just like a loaf of bread or a cup of coffee. Is that a great argument, do you think?
That’s perfect. In fact, the challenge with most people when I talk about some of these strategies, what’s brilliant about them is that they’re so simple to implement. The hard part is understanding and because we’re so used to thinking that if something goes up in value. We were thinking, buy stocks and hope and pray it goes up in value. However, when you understand how this system works, it’s a completely different approach where you’re using the time value of money to make you rich, which is inflation. How can I make inflation work for me? That’s exactly what we’re talking about here. How can I make opportunity to all these things to work for me because we know over time inflation is going to keep going up and we know that using debt strategically can improve your purchasing power? It’s a completely different approach to building wealth. There are less volatility and less uncertainty with the stock market and different things like this than doing this approach.Using debt strategically can improve your purchasing power. Click To Tweet
Because for sure, things are going to go up. They might temporarily hit a low or stall out, but over the period of time at which we’re talking about a lifetime or half the lifetime that you have left which could be 15, 20, 25, 30 years. I call it getting on the other side of the clock. You’re on the other side of the clock. I originally used that phrase when I was talking about in my previous life, I was on the wrong side of the clock and that was the side of the clock that I woke up on the first of the month and said, “I owe these people this money. I hope I made enough. I’ve got to write all these checks to these people.” When I got on the other side of the clock, where I am now, I wake up and go, “Is it the first already? Isn’t that amazing?’ This is great. A whole bunch of people owes me a bunch of money.” I got on other side of the clock and I think this is similar to what you’re saying. You’re trying to encourage people to get on the other side of these clocks on these little bitty matters that we’ve been blown off for our whole life and that no one’s taught us about. You’re going to show us these little niches in your free report. I’ll talk to you about how to get to that and on your webinar, how to shift over so that you’re on the other side of this clock? Am I doing a good job analogizing this or am I not?
I’m so glad we’re going back and forth on this because you’re helping put a lot of clarity.
Feel free to correct me. This is your story but I see what you’re saying and I’m finding it interesting. I’m going to go get the report myself because I wonder what I could be doing. I owe millions of dollars in different places, private people and banks. What could I do to shift and how much would that be worth if I created a sweep account or was able to take ahold of some of these theories that you’re talking about? It takes a little bit of time to set up and it takes a little bit of a mind adjustment. Once you’re there, you rinse and repeat every month. You do the same routine every month once you’ve got it down.
I tell people it typically takes no more than six hours in small increments and 30-minute increments to learn and implement. Some of them are within two hours of learning. You can learn and implement within 2 to 3 hours. You don’t have to do it all consecutively. It can be different 30 minutes segments. We have people doing two or three financial shortcuts a month. Others are doing one a month and they implement them. They start seeing things moving or changing. For example, this one lady works for a well-known bank, one of the big banks. She’s a numbers person but she’s like, “George, I don’t get the numbers on this but I’m going to follow it.”
Less than two years later, she called me up and she said, “George, I wasn’t sure about the numbers because I give people the spreadsheets. I’m a very skeptical person when people make claims. I have to prove on the spreadsheet that it works. I share spreadsheets with all my members and students.” She tried to understand the spreadsheet. She said, “I’m going to do it.” Less than two years later, she had $50,000 more money in her pocket because of one of the strategies and we have so many of them. That’s what I’m talking about here is that let’s change the way we think and let’s understand how bankers think about finance. That’s what this whole thing is about finance. It’s not about any specific assets. Notice here, we’re talking about tweaking finance from here to here and it’s all legal. It’s all things you do at your bank to tweak things and the fascinating stuff.
In fact, the more you owe, the better it can be for you.
As long as it’s the right type of debt. There’s something that I talk about, it’s called the loan constant. Most people talking about interest rates and interest rates are extremely deceiving. If you only use the interest rate as a metric for debt, what you have to look at is something called the loan constant. The loan constant is your annual payment. You can take your monthly mortgage payment multiplied by twelve and that gives you your annual payment, then you divide by the loan amount and that gives you something called the loan constant. A loan constant is a metric that banks use to shift the risk to the borrower. The key for the readers is to lower your loan constant as much as possible. When you look at a 30-year loan constant versus a fifteen-year loan constant, you realize that the 30-year loan constant is significantly lower than the fifteen-year loan constant. The reason is because you can always get a 30-year loan and you can always pay it off in fifteen years if you choose. You just have to make more payments.
However, if you get a fifteen-year mortgage, you realize that your loan constant is so much higher, which means you are taking on more risk from the lender. They’re shifting more risk to you for fifteen straight years. That’s what I tell people is get a 30-year loan if you choose to pay off sooner, make the payments as if they’re fifteen-year payments. If you have a bad month or bad year, you can always go back to a 30-year loan payment but with a fifteen-year payment, you’re stuck with higher payments. This loan constant metric is a metric that every real estate investor that does buy and hold needs to know. It’s not for flipping or rehabbing but it’s more for anyone that wants to keep a property for five years or more. It’s such an important metric and you want to lower that as much as possible because it is a measure of risk.
Let me run this from a different angle. I’m a simple man, George, and I’m trying to keep it as simple as I can for the readers. What you’re saying is you’ve got a 30-year mortgage and then there’s a fifteen-year mortgage. The difference between the two is $300. On the 30-year mortgage is $300 cheaper than the fifteen-year mortgage. Your mortgage is at 4.5%. The question is, if you took the $300 a month and put it into something that made 10% or 8%, aren’t you much better off than paying an extra $300 a month on a 4.5% debt? Am I on the right track? I’d have to keep asking for confirmation.
Let me give you a slightly different example so that people get this. Imagine, you have three people and imagine that you and I are going to borrow money from these three people. We have to pick one of them. They’re all offering us a $100,000 loan at 10%. Lender A says $100,000 a 10%, lender B says the $100,000 at 10%, lender C says $100,000 at 10%. We have the same loan amount and interest rates. However, lender A says, “Pay me $10,000 a year.” That’s 10% of 100,000. The second lender says, “Pay me $24,000 a year because I want you to pay me some interest in some principals so you can pay off the loan fast.” We agreed to get the $24,000 a year, even though the interest rate is still 10%. With lender C, they say, “Pay me $1,000 a year. Anything that’s unpaid interest gets added to the loan amount.” When you hear that, most people think, “Let’s go with lender B so we can pay off our loan fast.” However, let’s look at lender A. Lender A says $10,000 a year. We have the choice of paying more. We can pay them $10,000, $12,000, $15,000 but if we have a bad year or bad month or whatever, we can always go back to the $10,000. With lender B, we have a very high obligation and we don’t have any flexibility whatsoever.
You look at lender C, we can always be a lender C $1,000, $2,000, $10,000 a year, we can pay them $12,000 a year. We have so much flexibility. If we have a bad month or bad year, we can always go back to the $1,000. All three lenders are exact same loan amounts and exact same interest rates. Clearly, the $24,000 is the highest risk because it doesn’t have any flexibility. What we want is a metric that gives us flexibility. If you go back to these three payments, to the three lenders, what metric tells us about the payment and the flexibility? That’s the loan constant. In the first case, it’s $10,000 divided by $100,000 that’s 10% loan constant. The second lender, it’s $24,000 per year divided by the $100,000, it’s 24% loan constant. That shows you the high risk there, even though they’re all the same interest rates. The third one is a $1,000 divided by $100,000 and that’s 1% loan constant. The loan constant is a measure of flexibility and/or risk. The higher the number, the more risk. With interest rates, even though all three are same interest rates, it doesn’t tell us about the flexibility of the payment. You have to look at both the interest rates and more importantly the loan constant. Does that make sense?
Yes, it does. In your example, you said you always want your loan constant to be as low as possible. You pick the lowest one and then if you want to accelerate, it’s your choice but what if you found something with your extra money that you could make 25% on in the next ten days? If you’d given up all your money in number B, you wouldn’t have any money left over to go take advantage of that 25% rate of return in two weeks, which by the way, ends up being something astronomical if you annualize it. I get it. All of these three loans don’t have an early pay off penalty.
You said something very interesting also, Mitch, which is the second lender. The borrower would be in a high-stress situation because they cannot afford to lose their job. They cannot afford to have an emergency because they’re going to lose their properties. They cannot make that high payment. Imagine there are people out there that have high stress for fifteen years. This loan constant is a metric that banks use to shift the risk. They want the highest loan constant into the borrower because it’s making the lender in a safer position.
People can learn about this. I want everyone to go to 1000houses.com/HackingFinance. I want you to get a free report call hacking finance, which we’ll go to talk about these different shortcuts. While you’re there, you’ll have an opportunity to take a look at our free webinar or get a link to a free webinar on hacking finance. My understanding of this, George, is that you’re going to show us how to get time on our side, how to take a look at different things in figuring out which one has the lowest loan constant because that’s what we want, the lowest loan constant, which is the annual payment divided by the original loan amount.The problem with debt is that has so many benefits, but if you don't have the monthly payments ready, it's going to hurt you financially. Click To Tweet
There are many different shortcuts that we’ve talked about that people can implement immediately in their lives. This is the best analogy that someone gave me. He said, “It’s like eating sushi. You start with one bite and you’re like, ‘This is so good,’ you can’t stop.” Every single one of those financial shortcuts is like one bite of sushi that you implement and you started seeing the results and you want to implement the second one, the third one, the fourth one. This is not something that’s going to take you years to figure out. It’s learning and implement within a few hours. It’s like eating sushi or chips.
Of all the guests I have, there are not a lot of things that you can implement within an hour of the time that you read it. Usually, they are more involved a couple of hours and there are that many hacks.
There are a lot. In fact, I want to share an analogy that we’ll be talking about in this training. Here’s what it is, most people think of investing as the asset. They think real estate investing or stocks or mutual funds and they’re so focused on the assets. However, it turns out that there’s an underlying formula that people have to realize. The best analogy is this. Imagine you’re going to start running in this race and you start running and all your focus on is to get to the finish line. What most people are focusing on is, “Let me keep running at a good pace and I’m going to get to the finish line.” You look up and then you realize that the finish line is moving away from you and it’s moving away from you at a faster rate than you are moving towards it. That finish line is the financial system. It turns out that most people are going to run out of time or energy before they find out that the finish line is moving away from them.
One of the first things you have to think about is, “How can I run at a faster rate to catch up to the finish line?” Because you have to know at what speed the finish line is moving. That’s exactly how the financial system is set up. What happens is, and this is what’s called the breakeven, it’s how fast the financial systems are moving away from you. It turns out for most people, they have to generate somewhere between 8% to 10% recurrent every year just to maintain their wealth without the use of debt. They’re not becoming wealthier, they’re maintaining their wealth without the use of debt.
Once you understand that, you’re like, “How can I beat that?” That’s exactly what’s happening. Unfortunately, many people are going to get through retirement age, they’re going to look back and they’re going to realize, “I made money all these years” and that’s equivalent to running. “I made money but I cannot afford to buy the same stuff I used to buy 10, 20, 30 years ago.” The reason is that they’re running at a slower pace than the financial system. That’s the biggest problem I see right now in the US and the world. People think they’re making money, they see money coming into their pocket. They don’t realize that there’s a problem or they’re only going to realize there’s a problem when it’s too late. It’s better for them to know now that there’s a problem so they can fix it now. That’s one of the things we talked about on this webinar is open your eyes. There’s a formula that the financial system that you have to beat every single year to improve or maintain your purchasing power. It’s not about dollars that come in. It’s about being able to buy more. That’s the big thing here.
It’s certainly been an eye-opening conversation. We could talk about this for days and days. If you’re interested in these ways to get ahead and these hacks as he called them, go to 1000houses.com/HackingFinance and learn more how you can get on the other side of that clock and you can get the things that have been working against you working for you. I’m going to follow it myself, George. Anything else that I haven’t been smart enough to ask that we might need to delve into or we’ve done a good job so far?
Mitch, I’m enjoying this conversation especially because of your background. You can appreciate a lot of what people end up realizing how much more powerful real estate is. A lot of people think of the physical property, they think of the pain, they think of the root, they think of all the stuff that comes with the real estate. The underlying pinning of real estate, the financial aspect of it is what is so intriguing because there are built-in wealth-building strategies in it that are fascinating and somewhat unrealistic. You would even appreciate it even more once you understand how the financial system works. When you talk about the underpinnings of real estate, you start realizing how fascinating real estate is. What I want to do is give all your readers the three levers or dials that affect all of real estate that you have to think about when you’re putting together deals, specifically buy and hold deals. Number one is how I’m going to start with the reserves? Most investors out there don’t believe in having any reserves in the bank because they think the money’s sitting there doing nothing. That is so not true.
It’s so important that every investor out there and I’m speaking specific to real estate investors, most investors have to have reserves and reserves are two things. One is your debt service, your mortgage payments, meaning your monthly mortgage payments and the second is your operating expenses. What you want to do is add these up and have at least three months, preferably six months. Most people think the money sitting there doing nothing. That is not true. When the money is sitting there, it improves your borrowing capacity, it improves your peace of mind. The problem with debt is that has so many benefits, but if you don’t have the monthly payments ready, it’s going to hurt you financially. If you have no money in the bank, no lender is going to lend you money. Having some reserves in the bank is so critical because it improves your borrowing capacity but also it helps you know that in case something happens, you have that money there. Reserves are one thing.
The second thing is the percentage of your LTVs. You want to look at all your debt divided by all your assets. That’s what’s called your debt-to-asset ratio. It is so critical that you maintain that. You want your mortgages to be no more than 80% off your property values. The reason is that the risk starts going up exponentially as you go up from 80%. There’s a number for every different asset and there’s no time to discuss it right now but keep it at 80% or less. I know people are doing 100% debt financing on real estate, on buy and hold. This is buy and hold. We’re not talking flip and fixing or rehabbing. It’s so critical that you don’t have 100% debt financing. It is asking for trouble. If you’re going to use OPM, the top 20%, that down payments should be structured as equity financing. That means you might tell someone, “I’ll give you X percent of the profits and then the rest would be debt.”
It’s so important that you understand exponentially your risk is going up as you go over 80% and especially from 90% and above for supposed covered reserves. Your percentage of debt asset or LTV should be no more than 80% and the top is equity financing. Finally, the spread between what money’s coming in and what money’s going towards the debt. Specifically, I’m talking about the loan constant. You want the loan constant to be as low as possible. These three things help you structure safer deals with real estate. Ultimately, it’s not about real estate. It’s about being able to build wealth. The last thing you want to do is put yourself in a position of losing everything. I know some people have lost everything they had. One gentleman I know had over 1,000 apartment units and had a lot of single-family homes and end up losing everything because he had to wait too much debt. When the market turned, on the day he retired, he lost everything. He was a millionaire on paper, end up losing everything because of these things. That’s how I learned these things. This was in the late ’80s. He lost everything. It’s important that people understand that real estate is a bigger game than just real estate. It’s a game of finance and you have to understand these three levers we talked about or three dials. It’s very important.
Let me chime in here because you started making me think right now. I do houses but houses are just the vehicle that allows me to get into the finance game. A typical deal from me is I’m buying a house for $50,000 and I’m owner financing it. I borrowed money at 8% interest only and I paid $50,000 for a house. That was a discounted price. Based on the rent, I knew that I could sell it for $110,000 and try to get about 10% down. In this formula, we’ll say $10,000 down, a little less than 10%. I immediately turned around and owner finance it for $110,000 with $10,000 down and I carried the $100,000 at 10% for 30 years. I’m making 2% on my borrowed money. The $50,000 that I borrowed. I bought it at 8% and I’m loaning it out. I’m charging my buyer 10%. I’m making 2% on my borrowed money. That means the more I borrow, the bigger my 2% CD gets. I’m making the full 10% on the $50,000 spread. As a side note, I got paid $10,000 in my pocket to make that happen in the form of a down payment. I’m not in the house business. I’m in the finance business. Is that what you’re saying?
That’s exactly correct. You brought up a good point. I want to clarify. When I talked about the LTVs and stuff, I was talking about retail. The deal you mentioned is brilliant because you’re buying under market and then you’re selling at retail and/or above retail and you’re selling on terms. That’s brilliant because when you’re getting paid 10% and your underlying loan is 8%, that arbitrage, that spread is so critical because this is the part that people don’t realize, inflation does not impact spreads. Inflation only affects people that use their own money. In other words, if I was to put up the money and if I was to put money into a deal that makes me 8%, that’s all my money and you’re getting 2% or 3% spread, you’re better off than I am. Even though it might seem that I’m making more money, but inflation is working against my 8%. When you make a spread, inflation does not work against you. It is a fascinating thing and there is no time to go into a lot of detail now, but it is brilliant and that’s what banks do. You’re playing an incredibly, very sophisticated and smart game, Mitch. That’s great.
I did some numbers so people would know. 2% doesn’t sound like very much, but when you have private money and you can borrow, the sky is the limit on private money. There’s no cap on how much private money you can go out and get. There are caps on how much banks will loan you in different assets, classes and stuff, but with private money, there’s no ceiling. I pulled some numbers out. If I have $6 million out that I’ve borrowed to buy all these houses and I’m making 2% on the borrowed money, that’s $120,000 a year. Just for borrowing money to buy a house, I’m making that much because of the way that you have it set up. Then you’re making the whole 10% on the other $6 million, which is $600,000 a year. On a $12 million worth of debt, you’re making $720,000 roughly. I’m trying to extrapolate out so people can see that even small spreads can add up if it’s something that you are doing over and over again. Borrowing money and having a house payment to someone runs out of the exhaust system of my strategy. It’s nice that I could turn it around so I could make some money off of those payments that I have to make. I think that’s what you’re saying.
It is such a pleasure to talk to someone who is very successful, who knows what they’re doing. The thing that bothers both of us is that these strategies are out there for people to use and they choose to go the traditional route of working extremely hard, having financial stress in their lives and not moving forward. They’re moving backwards financially without realizing it. The sad part is you and I know that these people will get to retirement age. They’re going to look back and they’re going to say, “I could have done this or I should have done this. I’m having the opportunity.” The thing that’s so sad is that these things are out there and people can tap into them and start using them in their lives and yet, they choose not to.Improving or maintaining your purchasing power is not about the dollars that come in, it's about being able to buy more. Click To Tweet
The big reason that it happens is it’s just like I went to my banker. The banker says, “We’re not sure we want to get mess around with these little junky houses that you have.” I don’t do warzone houses. I do Walmart houses for Walmart people. They’re run of the mill, three-bedroom two-bath, three-bedroom one-bath, two-bedroom two-bath, little 1,200 square-foot houses. They’re not in warzones or in ghettos. They’re average houses for average people and it’s not very romantic. They start doing my spreadsheets and they say, “What’s going to happen when a recession happens?” I said, “That’s the greatest part, my sales price.” In the recession, what happens George, the banks clam up. It’s either the cause of the recession or the results of the recession but either way, banks stop loaning money in every recession. They just stop.
That means no one can buy houses or the number of people that can buy houses dramatically decreases. What happens to house prices when there’s a recession? The banks clam up, people can’t borrow money to buy houses and house prices drop. This is not rocket science. This is common sense supply and demand. There’s not a lot of money out there being lent, not a lot of houses being sold so prices dropped. I have private money, so I’m buying houses when the banks stop loaning. What happens to rents when fewer people are buying houses? There’s a lot of pressure put on the rents? The rents go up.
What did I tell you my sales price of my owner finance houses was based on? My sales price is based on rent and I’m backing into that payment to find out what I can charge using 10% interest in 30-year amortization. What does that rent payment make? I have to take into consideration that they’re not all going to have to pay me principal and interest, but they’re going to have to pay me taxes and insurance. I’m subtracting the taxes from the insurance off the rent. I’m figuring out what they got left over for principal interest and I’m coming to like this is the payment for how much money if I use the terms 10% in 30 years. If you multiply that rent minus taxes, minus insurance equals a number that they have for principal interest. If you multiply that by 115 in the price range that I’m dealing in, you’ll come very close to what they can afford to finance. I add 12% on top as a nice down payment for me. That’s my owner finance value. That’s the formula. Rents minus the taxes and insurance times 115 plus 12% equals the OFV, the Owner Finance Value.
During the middle of the recession and the bankers looked at me like I was crazy, I said, “My houses appreciate in the middle of the recession. I’m the only appreciating real estate in the world because I’m owner financing. It’s going up in value because my price is based on rents.” They had a hard time saying, “That can’t be true. Why is everyone else’s house going down?” I say, “Because I’m basing my price on what they have to pay to live someplace.” They couldn’t get it. It was hard for them to make the shift. They looked at me square in the eyes and said, “You’re telling us that you have an inflation proof business?” I said, “I’m telling you in the last recession, I sold my houses for more than I ever sold them for before because the rents went up and I don’t know how to explain it to you any clearer.”
They did not want to believe me. It’s an absolute fact and it’s because they’ve been ingrained to a certain ideology or the learning system around, they’ve been brainwashed in the way that it all works like this. It doesn’t work like this because it’s exactly what you’re pointing out. When you get on the other side of some clocks and you stop listening to traditional mumbo jumbo and start looking at what moves the needle on this stuff, what moves the needle? If I change this number, what happens? If that number changes, what happens to my number? You start saying, “That’s weird.”
When the rent number changes, my number changes and it doesn’t matter what economy there is. The reason why my strategy works is I don’t need a bank to buy my houses. I’m using private money and I don’t need a bank to sell my houses because I’m owner financing. I’m wrapping the underlying debt with my home buyer’s debt. It’s all legal. It’s called the wraparound mortgage and that’s the dynamic that I live in and trying to explain to people this, who are very sophisticated, they go back and think somehow I’ve out-slicked them. Somehow, I’ve gotten slick and they want to go back and review it over and over again. The outcome is always the same. I’m right.
They’re stuck in the box. That’s part of the problem is the box of the banks put out there and everyone is used to thinking inside that box and nobody is stepping out of the box and realizing, “There are many ways to work in the system that is outside of the banks and the financial institutions are telling us.” That’s precisely your genius there is saying. Step out of the box and it’s a win-win for everyone in your situation.
Don’t try to get too clever. Use your common sense. I tell people, I function off of 8% private money and I give them a lien. On that house that I told you I sold for $100,000 or $110,000, I give that guy who loaned me the $50,000 the first lien on that house. They either get paid 8% or they get my house, but it’s hard to go broke that way. The worst they’ll do is if I pay them on time because they’re only going to make 8%. They do a lot better if they get my house. I like to tell everybody, if everyone in Bernie Madoff’s scheme would have had $100,000 house as collateral, for every $50,000, $60,000, $70,000 they gave him, none of them would be broke, not one.
When I’m trying to explain this to my private lenders, I say, “Don’t pay the house off with the $50,000. Your house is like 4.5%. Give me the $50,000, I’ll pay you 8%. You can go pay 4.5% of it to them and you can still keep 3.5% to yourself.” They go and pay the mortgage off. I said, “Why did you do that? You’d be much better off if you’d given me the money and had enough mental discipline that when I paid your 8%, you went and gave up, let that payment make your house payment. It’s the same thing. You’re not making the payment anymore. I’m making your payment.”
That was maybe a little bit more emotional with houses. I did it once with my dad who wanted to pay off the car. That was a 4% interest rate at that time. My dad said, “I’m going to retire. I’m going to pay off the car.” I said, “How much you got owed on the car?” He said, “$22,000.” I said, “How many years are left on the payment book?” He said, “Four years.” I said, “How much is the payment?” I don’t remember exactly here but I’m going to pull a number out. He says, “It’s $400.” I said, “You want to give up, you want to part with $22,000 of your hard-earned money so that you don’t have to make a $400 a month payment. Is that what I’m hearing for four years? He said, “Yes.” I said, “Hand me the payment book and hand me the $22,000.” He says, “What?” I said, “Hand me the payment book. You no longer have a payment. That’s my payment and hand me the $22,000.” He says, “Why would I do that?” I said, “Dad, you wanted to give up $22,000 to get rid of the payment. Hand me the payment book and hand me the $22,000.” It was foreign to him. He said, “Why would you do that?” I said, “Because I will take $22,000 at 4.5% with four years left all day long. I’ll take as much of it as you have.”
That was my first nothing down deal. I went and bought a house with $40,000 that I owner finance for $550 a month. I made 150 spread boards for four years and then after four years, I didn’t even have the $400 payment anymore. For the remaining sixteen years or 25 years or how many years were left on that mortgage, I made the whole $550. It was like a deal that I wish I had a hundred of those, a thousand of those. It’s about listening with a different set of ears and looking with a different set of eyes. How many people are going to recognize that situation? “Dad, give me the payment book. You’ll get rid of the payment because those will be my payment now and give me the $22,000.” How many people see that? That’s what you’re teaching. You’re teaching people to see that, to hear that when it’s right there on their plate. You’re going to teach them how to see that.
People need to understand that everything you’re talking about there is what I call the game of finance. They need to stop thinking about the car. They need to stop thinking about the stuff. They have to understand the underlying finance because there are some brilliant things you can do. Once you see what sometimes I call the financial matrix and the way things are, you realize that the car and these things are nothing more than collateral for a bigger game. The only reason it’s there is for the bank to feel better about lending you the money. There are some brilliant things you can do to turn the system to work for you and not against you. That’s precisely what you’re talking about. That’s brilliant stuff, Mitch.
I want to thank you for being on. I want everyone to go to 1000houses.com/HackingFinance and learn what George Antone is talking about. There are many more hacks I’ve been informed that you can do. We’ve just touched on a couple. I’m not exactly sure how relevant all my analogies were, George, but I thank you for putting up with me. I try to give a different angle. You’re so sophisticated. You know so well what you’re doing. I was trying to point out to the readers maybe in a layman’s way to look at it sometimes. I don’t know if I did a good job or not but I tried.
It was great being on the show. Mitch, I’ll have to congratulate you. I’ve heard a lot of amazing things about the show from a lot of my students. Obviously, you’re doing something right and it was a pleasure talking to you finally after all this time. I want to thank you again for this and congratulations on your successes. It’s great to hear that.
I appreciate you too. I want to thank the audience for stopping by to get you some George Antone. One last time, it’s 1000houses.com/HackingFinance. Go there and you can get a free report on exactly all the different areas that you might get on the other side of the clock, to get time on your side. There’s also going to be a free webinar there on the same subject. It’s been amazing. I’m going to go there myself. Maybe we’ll meet up in the future somewhere at some seminar or something. George, I look forward to meeting you in person. You’re a great guy with a great mind and I appreciate it. Also check out George’s books, The Wealthy Code, The Banker’s Code and The Debt Millionaire. I want to thank you so much for stopping by to get you some George Antone. We are out of here.
About George Antone
George is considered a thought leader in the finance and investing space. He is the author of 3 best-selling books on finance, the founder of the world’s largest network of private lenders, and a regular guest speaker nationwide on the topic of finance and investing.