The Hell of the 40-Year Mortgage.

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 course on building your wealth the

zero to millionaire well I do there's a

coupon code linked down below you can

now use buy now pay later 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 real estate

zero to millionaire course linked down

below 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 their balance sheet and

Commercial mortgage-backed Securities

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