Today, we are talking about the benefits of leverage and why it is an outstanding strategy for scaling up your real estate business. Learn what leveraging means, why it is the biggest wealth creator, and how it empowers you to help other people.
What You Will Learn About the Benefits of Leverage | HTH 021:
- What leveraging means
- How it helps you to create wealth
- Leveraging vs. buying notes
- How tenants pay off your loan
- Why you should not regard other investors as your competition
- The entrepreneurial power to create opportunities for people
- What the American dream was and how it looks like today
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Speaker 1: This is Theriault Media. Don’t wait for appreciation to buy real estate, buy for cash flow and wait. In other words, “Hold that house,” your host Matt Andrews and Matt Theriault.
Matt Theriault: Hey, flipping houses can make you rich. Holding them will make you wealthy. This is The Hold That House Show. I am Matt Theriault and over there is Mr. Matt Andrews.
Matt Andrews: Use the force, Luke.
Matt Theriault: And before we begin, we’ve got a free gift for you. Go to holdthathouse.com and download the four-hour work [inaudible 00:00:36], the 10 commandments to managing property managers. It’s really the key ingredient to financial independence through real estate that nobody’s telling you about. They’re not going to tell you about it because it’s kind of boring but it’s actually what works, it’s what gets you there, and you can get that for free at holdthathouse.com, holdthathouse.com. All righty, coming to you today live from Tampa Bay, Florida.
Matt Andrews: And it’s not raining.
Matt Theriault: And it’s not raining, no, it’s not raining.
Matt Andrews: It’s been raining every day for the last four weeks, so this is good.
Matt Theriault: Right. I don’t know if you can tell or not, we’re not going to know until after we’re done recording how this sounds. We are using a different setup. We’re in a board room and we’re going to have to do some post-production magic. So, Mr. Producer, if we’re a little heavy on the bass, cut that out. If we’re a little high on the hiss, cut that out and make us sound good like you have been up to this point.
Matt Andrews: Cool, cool.
Matt Theriault: Cool, so Matty, today we’re going to talk about the benefits of leverage.
Matt Andrews: Leverage.
Matt Theriault: It’s probably the single biggest ingredient or reason that real estate is such a wealth creator.
Matt Andrews: If you don’t have leverage on people, how can you blackmail them? I mean, you’ve got to have leverage … Oh wait, wait. That’s not what you’re talking about, I’m sorry.
Matt Theriault: That’s not that kind of leverage.
Matt Andrews: Different podcast.
Matt Theriault: Different podcast, yes.
Matt Andrews: All right, no, leverage in your business, obviously, guys leverage is what helps you scale up in a way that nothing else could in your real estate business. Leverage is the difference between doing one deal here and there and doing 10 deals here and there like Matt Theriault does and like I do. Leverage is such an important piece of your business but you know what, Matt? It’s really misunderstood in so many ways and people … There’s bank loans for first-time homeowners and then there’s actual loans for investors and some people equate one with the other and just get confused and think loans are loans. It’s a whole different ball game when we’re talking about real estate and business ownership, and scaling up a business. Those are different loans and it’s confusing for a lot of investors.
Matt Theriault: Right, right.
Matt Andrews: Absolutely.
Matt Theriault: Well let’s talk about leveraging of money real quick, and it’s very basic sense to why it is the wealth creator. If you have a $100,000 property and you borrow 20%, so you’ve put 20% down. You’ve put $20,000 down, right? And if that property should increase 10% in value you get the benefit, that appreciation, on the whole $100,000, not just the $20,000 you put in. That’s one of the biggies. That’s why it’s, I don’t know, I can’t think of another investment out there that’s available to the average person where you can put money to work with that type of power. And that’s just the appreciation we’re talking about. That’s just the appreciation.
Matt Andrews: And certainly, there are business and businesses that are structured in a way that you can get some kind of returns like that but certainly for the average investor or for the elite investors nothing provides what real estate does here. Just that simple example right there, think about how much your power grew exponentially there, what you opened yourself up to that you wouldn’t have if you didn’t have leverage.
Matt Theriault: Exactly, exactly.
Matt Andrews: Got to have it.
Matt Theriault: You get the benefit of leverage through the appreciation but you also get the benefit through the acquisition because you got a $100,000 property without having to use $100,000 of your money.
Matt Andrews: Exactly.
Matt Theriault: So now you can start building faster than you can in other … There’s a couple other podcasts out there, and you’ll see the gurus come around where they’re talking about notes and how great it is because there’s no management, and if you do it on your IRA there’s no tax issues and you have no maintenance calls, you don’t have property taxes. There’s great passive income, right?
Matt Andrews: Yeah, there’s some good benefits to notes.
Matt Theriault: Absolutely.
Matt Andrews: No doubt, yeah.
Matt Theriault: But one thing they never point out is you don’t have the benefit of leverage.
Matt Andrews: Right.
Matt Theriault: If you want a $100,000 note you have to buy $100,000 note. You have to take $100,000 out of your pocket, and there’s places for both of those strategies in your portfolio but really, buying notes is a much better strategy to sustain your wealth. If you’re looking to build it, you’re not going to build it that way. It’s going to move really, really slowly, so you need the leverage. So that’s another acquisition [crosstalk 00:04:44].
Matt Andrews: Yeah, exactly, and just to come off that point, you’re not going into any bank saying, “Hey, I’d like to borrow some money to buy some notes.”
Matt Theriault: Right.
Matt Andrews: You know? Like that’s not happening, right? First of all, the person you’re talking to is going to look at you with a blank stare because somebody at a bank counter is not going to even understand that probably but secondly, you can’t leverage like Matt said. That’s just not going to work. Now notes, we will have a show on that probably in the future, and it’s a great strategy for growing wealth.
Matt Theriault: Sustaining wealth.
Matt Andrews: For sustaining wealth but not for, yeah, not for what we would call inception of wealth I guess, right? [inaudible 00:05:15] perfect.
Matt Theriault: Right, and even then, sustaining … When you start looking at the devaluation of the dollar and you’re holding notes, if that dollar drops so does the value of your note.
Matt Andrews: Absolutely.
Matt Theriault: People try to get the best of both worlds and you really can’t.
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Matt Theriault: The other thing that I like about leverage is leveraging other people, and specifically I’m speaking of tenants that need a place to live. They’re going to live somewhere until housing goes out of fashion, until roofing, when that trend blows over.
Matt Andrews: Right, I think we’re in a pretty safe market, yeah. People still like shelter.
Matt Theriault: Absolutely, and it’s also their most important bill of the month for most people. I have tenants where it’s not, actually.
Matt Andrews: I was about to say, our hope is that it’s their most important bill of the month.
Matt Theriault: Exactly.
Matt Andrews: If it’s not it won’t be a bill for them much longer, right? That’s how it works.
Matt Theriault: So, when you have the tenant in there renting your property, their rent goes to pay off that gap. So you’ve taken $20,000 to acquire the property, you’re getting all of the appreciation, you’re getting all the tax benefits, you have the ability to keep acquiring but it’s your tenants who are actually paying off that $80,000 that the bank gave you or somebody else gave you. It just gets better and better.
Matt Andrews: It does. I read, and I know you and I have talked about this a lot. I read Rich Dad Poor Dad when I was pretty young and one thing I got out of it was how you can leverage and start to use the money to leverage. And so when I got out of college I didn’t have a lot of money but I put together enough for 20% down to buy a house, and then I got two roommates, college buddy roommates that actually paid rent, actually did pay me which was nice, and I leveraged them for five or six years. They paid off a good chunk of that house for me and that’s a house now that I rent out. I own it free and clear. I’ve owned it for over a decade now, but I really was able to hold on to that because I leveraged people and I leveraged money. I leveraged with a loan and with two good roommates that actually paid. I learned that lesson early and then I thought, hey, I could do this over and over again. I could do this with tenants like you said, and then leverage them.
That’s how it works, guys. It allows you to leverage people. It allows you to leverage money. It creates what you have and lets you have the benefits of more than you actually put into it.
Matt Theriault: Absolutely. Those are some of the biggest ways that I can think of, the benefits of leverage in real estate. Now there’s other ways that you can put leverage to work for you but it’s probably available in other opportunities or other ventures is leveraging other people’s experience. Fellow investors, creating a network of fell investors. Unfortunately, a lot of people, especially the newer investors come into investing and they think that everyone’s competition. And we belong to a pretty high-level mastermind group of 80 of probably the most prolific investors in the country, at least when it comes to single-family investing I think, and how many deals have we done because we’re part of this group because we know other investors.
Matt Andrews: Cooperation is way better than competition just about every time, especially in real estate. People that know how to leverage real estate investing clubs and there are local clubs that know how to find the people and really do partnerships, those are the ones who do deals quicker. I will always pay somebody or partner with somebody who knows something I don’t to help me get something done that I wouldn’t have gotten done anyway.
I teach students … You and I both teach students how to flip houses too and how to start those businesses. I always teach my students that, hey, when you’re going into a market, if you’re trying to flip houses or wholesale properties, other people that flip houses and wholesale properties, they’re not your competition, those are your best partners. Those are the people you want to find and say, “Hey, let’s do deals together. Let’s make this happen together and co-wholesale, let me refer you buyers.” I’ve always thought that cooperation is better than the competition so that’s a really big one. You said something very wise there on that one, for sure.
Matt Theriault: Every once in a while.
Matt Andrews: That’s right.
Matt Theriault: Probably have to wait for four more episodes, five more episodes before that happens again.
Matt Andrews: No, no, you drop at least one nugget on each one, you know, come on.
Matt Theriault: And then, other people’s efforts, leveraging other people’s … You can do that in traditional business as well but it’s where you really start to create a business out of your real estate is when you create a business where you provide an opportunity for someone else, you provide a job for someone else, and in return that creates a business that can run with or without you.
Matt Andrews: Absolutely.
Matt Theriault: And that’s when it really starts to get fun.
Matt Andrews: Absolutely, and that’s part of being an entrepreneur, part of being a real entrepreneur. You have the power to create opportunities for people, and I always say, “It’s not the government that’s going to solve your problem, it’s not people, it’s not politicians in Washington. It’s going to be entrepreneurs helping people and giving opportunities.” So that’s that in action, so I love it.
Matt Theriault: It’s so clear to me. That’s how this country was built. When our country was first forming, it was like three out of four people that came over here were entrepreneurs and now it’s like one out of 40 is an entrepreneur. I don’t know what the number is but it’s way off balance and then the results of our country kind of indicate that it is off balance.
Matt Andrews: And it’s interesting you say that too because when I think about the history of it, I’ve been told the American dream was to own your own home. And then that was replaced at one point by the desire … They still wanted to own their own home but that was replaced with the desire to own your own business. That became the American dream. Now, I don’t know what the American dream is right now. I know what it should be. I know what it is for me, it’s to be an entrepreneur, to own businesses, and to help people, but at large we’re losing that and I feel like, like you said, one in four now. So what is the American dream? That’s a question that-
Matt Theriault: One in 40.
Matt Andrews: One in 40?
Matt Theriault: One in 40, yeah.
Matt Andrews: Oh, one in 40? I was about to say, one in four. I thought you meant one in four even [crosstalk 00:11:38].
Matt Theriault: When we started, I think we were closer to that when the country-
Matt Andrews: One in 40.
Matt Theriault: Yeah, and I don’t know what the numbers are. 37% of all statistics are made up on the spot.
Matt Andrews: Right, exactly, exactly, I’m good at that. But no, that’s huge and we have the ability to affect that change. We’re entrepreneurs. We have the power to help people and that’s really what good entrepreneurs do and that’s getting lost somewhere along the line in the messages the media is telling us and the messages politicians are telling us. That’s getting lost, and that’s what’s going to change the world, not politicians, not the government. Allow me to get off my soapbox now.
Matt Theriault: All right, step down, watch your step, okay there you go.
Matt Andrews: Oh yeah, I was like-
Matt Theriault: All right, so that sounds good today. The benefits of leverage. We’re going to talk about … Next episode we’ll talk about some other opportunities that you might not have as many benefits of leverage or the ability or different opportunities to use the leverage but definitely other places and ways to get wealthy in addition to real estate. Diversification is not a bad thing, depending on who you talk to I guess but I don’t think it’s a bad thing.
Matt Andrews: Always good to have some backups and some safety, so yeah, I look forward to that one, yeah.
Matt Theriault: Absolutely, all righty, so that’s it for today. Flipping houses can make you rich, holding them will make you wealthy. We’ll be back next week and until then, remember, don’t wait to buy real estate, buy real estate and wait.
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