In this Creating Wealth episode, Naresh joins Jason Hartman on the show. Jason explains what a convertible ARM is and the type of property that uses this type of mortgage. Then, they talk about the Cost of Funds Index (COFI) and the formula for calculating adjustable-rate loans. Jason also discusses bridge loans and how to become a hard money lender.
Announcer 0:00
This show is produced by the Hartman media company. For more information and links to all our great podcasts, visit Hartman media.com.
Announcer 0:12
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in 1000s of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 1:03
Welcome to the creating wealth show. This is your host Jason Hartman episode number 589 589. Thank you so much for joining me today as we approach Episode 600. Well, before 600 it’s gonna be 590. Right? And you know what that means? It’s a 10th episode show, where we’re gonna go do a topic of general interest and life success. So today, our guest will be the raving capitalist. Yes, the raving capitalist. His name is Paul and I cannot remember how to pronounce his last name. But when you hear the recording, you’ll hear it pronounced correctly. So there we go. But I’ve gotten Naresh here with me today to help with the intro portion of the show. Welcome, Naresh. How are you?
Naresh 1:48
Great to be back on, Jason. Looking forward to learning more about real estate
Jason Hartman 1:53
And the raven capitalist.
Naresh 1:54
Oh, yeah.
Jason Hartman 1:55
So Naresh, last time you were on the show, we were doing some definitions. We were talking, we did sort of a deep explanation of understanding adjustable-rate mortgages, not that I’m recommending them to anybody. But we’re gonna talk about taking the top down today, going topless, right? Because that’s convertible ARMs or adjustable rate mortgages, and some other terms, and then we’ll get to our guest. So tell us what’s going on? What questions do you have? What terms do you want to discuss whatever, take it away.
Naresh 2:26
Last time we spoke, we discuss adjustable rate mortgages, and you did a great job of explaining to me kind of how they work when people should get these types of mortgages. Now there’s something called convertible, I was doing some research after that episode. And there are what are called convertible arms rmws. And my guess is they are what I think they are. They’re essentially a hybrid, a hybrid between fixed-rate and adjustable-rate mortgages. But tell me a little bit more. I’m sure there’s way more to the idiosyncrasies of how these vehicles work?
Jason Hartman 3:03
Well, you know, this one’s probably going to be as much as I like to ramble on about things. You know, I do. This will probably be a pretty short one, actually, because it’s just what you said, it’s basically a mortgage that either starts out and remember, technically, it could start either way, it could start as a fixed rate mortgage, and then convert to an adjustable rate. Or it could start as an adjustable rate and convert to a fixed rate. Usually, it’s the former, it starts as a fixed rate for a certain period of time and then becomes adjustable. This is very common in the world of commercial real estate mortgages, where you’ll you’ll be buying a commercial property or, and we have some special connections with neurons. By the way, this is one thing that’s unique to us. We have some special connections with commercial lenders, who will finance residential investment, real estate. And as you know, I think residential investment real estate is really the best opportunity out there for most people. Of course, you can make money in commercial real estate, but the returns are generally lower. For many reasons we’ve discussed on many episodes before that we will refrain from diving into that today. So on this type of convertible adjustable rate mortgage, typically on a commercial property, very common there. It will be fixed rate for five, seven, or maybe 10 years. And then it will become an adjustable rate mortgage after that. Now, of course, the reason the lender wants to do this is because they don’t know what the heck the interest rate climate will be in six, eight or 11 years. I’m just putting one year on to five, seven or 10. They don’t know what the interest rates will be. Then It might be a 20 or a 30 year loan term as a, usually a commercial mortgage. But this could be done in residential too. So they just want to protect their yield, right? And that mortgage will most very likely be sold off into some sort of a pool of mortgages where a bunch of Wall Street fraud will take place, as it always does. As it almost always does, I guess I shouldn’t say always, that’s not fair. But 99.99% of the time, in my humble opinion, there’s some sort of trickery going on. And it may be legal, Lay’s crockery remind you, you know, just because it’s legal, doesn’t mean it shouldn’t be called a crime. And there’s the Hartman definition. You know, there’s a lot of stuff that’s legal, that really should be criminal, because it’s, frankly, just immoral or unethical. So Naresh, we have the risk of going off into a tangent there. Probably sensed it, didn’t you? Yeah. So anyway, it will just convert after that after that initial term. That’s all it means. It’s really simple. So they’ll give you a sort of a this teaser period where you can feel more secure for the first five, seven or 10 years. And then and then it’ll become adjustable after that.
Naresh 6:14
So you said this is usually used more in commercial real estate and less than residential?
Jason Hartman 6:19
Yes, because one of the beauties of residential real estate and why I favorite so much is not just because housing is a universal need of all human beings, you know, they say their free three, universal needs food, clothing, and shelter, let them rent that shelter from you. The commercial real estate market really has a much lower level of subsidy from our government. And, of course, residential real estate has been subsidized in the United States, since the Great Depression, through these sort of NGO quasi governmental entities, I don’t know if they fit the technical definition of an NGO, a non governmental organization, but I’m just calling them that for sort of casual reference. And those are Fannie Mae and Freddie Mac, you know. And so that’s why the residential properties just have such a desirable financing. Not only is that the universal need, not only is it simple, not only is it fragmented, where the big institutional investors haven’t really come into the market in any real way. And you may say, Well, Jason, haven’t you heard of Blackstone, you idiot? Well, sure, of course, I’ve heard of Blackstone, and I know there are hedge funds and private equity groups that own you know, many, many 1000s and 1000s and 1000s of homes. But by and large in comparison to the size of the overall market, it’s a small, you know, it’s really a drop in the bucket, the residential, real estate investment market is controlled, typically by mom and pop investors. And that creates the opportunity because of the fragmentation. So as I always say, embrace the fragmentation, take advantage of all these little idiosyncrasies in that market. And you will be better off you can you can become very wealthy that way. So that’s, that’s the scoop on that. You want to go to the next one.
Naresh 8:12
All right. The next one is the costs of fund index. Cost of funds index?
Jason Hartman 8:18
Yes. So the cost of funds index is otherwise known as the COFI, the C O F I. I not spelled like the drink you probably have every morning. The most widely used drug on earth is caffeine. And, and I must admit, I’m a drug user. I use caffeine a few times a day. So yeah, the cost of funds index. Most commonly, you’ll hear the 11th District cost of funds index, which was introduced way back in like the early 1980s. Oh, actually, I got it right here. I’m looking at Wikipedia 1982 before George Orwell’s 1984, which was a prescient book he wrote decades before 1984 he was boy, George Orwell is probably rolling over in his grave when he looks at the NSA and Edward Snowden and Bradley Manning are Chelsea Manning nowadays, he’s probably thinking, wow, I was right. I told us. Oh, it’s too bad.
Naresh 9:21
Do you have any idea of George Orwell was one of those authors who died poor and homeless and depressed or I’m just curious cuz I’m
Jason Hartman 9:32
Good. Good question. Well, well, that’s like Tesla, right. You know, it was so unfair. If you ever study or watch any documentaries or read any books on Nicola, Nicola Nikolai, or Nikola Tesla, Tesla, Nikola Tesla. I mean, you just think that is so unfair, what happened to him? He was a genius. And Edison sort of stole his inventions and, you know, Edison was kind of a rude evil businessman. And Tesla was really the inventor and it was so unfair what happened to Tesla? It seems like the way history just didn’t give him nearly enough credit. But, you know, Elan Musk is bringing him back. Right? And
Naresh 10:14
Yes.
Jason Hartman 10:15
Never overestimate the intelligence of the general public. You know, just because the Tesla car is becoming hugely popular and gets a lot of PR, will anybody ever bothered to research and ask themselves the question who is Tesla, right? Maybe they will a few people will. I mean, I did. I didn’t really know. So you know, never overestimate my intelligence either. I’m right there with you, folks. And by the way, present, listeners excluded. No, I’m talking about the the people who like people like Barack Obama. Oh my god, I just lost half the audience there. But whatever. You know, I just bought a Tesla. Well, I actually bought two Tesla’s. How do you like that?
Naresh 10:54
Oh, wow. I didn’t. I didn’t know that
Jason Hartman 10:56
About two of them, I know. You know/
Naresh 10:57
How are they?
Jason Hartman 10:58
Well, I don’t have them yet. Okay, I ordered them and they’re coming in and just just gotta have one as a backup, right? a backup Tesla, because they might run out of batteries.
Naresh 11:07
Yeah, okay. Well, yeah, I asked about Orwell because so many of these great innovators they died poor and with no friends, no, nothing. And yeah, and now, Tesla’s, he’s, he’s a household name. But anyway, back to the COFI as we were talking about.
Jason Hartman 11:24
No, Naresh. Let’s stay on a tangent here. Just about everybody. You know, people say they like my tangents. So I’m, you’ve given me some latitude, dear listeners. If you don’t want me to go on tangents, just, you know, send me a note reviews at Jason hartman.com. And say, Jason, shut the EFF up and stick to the topic at hand. And then I will, I will do what you say I’m here for you. So you know, whatever feedback you give me, I will consider it. I don’t say I’ll totally listen, because other people give different feedback. But anyway, yeah. Orwell, I don’t know the answer. But you know, Animal Farm is a great book to talking about the dangers of socialism and communism, and you know, read George Orwell, he’s, he was brilliant, obviously. And I don’t know what happened to him. Man. That’s a good question. We should research it and talk about it on a future episode. But the cost of Oh, Tesla cost of funds, okay. Oh, just let me finish the Tesla thought. So I ordered the New Model X Tesla. And at first they told me, you know, you could expect delivery, maybe in early 2016, then they told me, maybe May of 2016. And then when I talked to him the other day, they told me well, probably by the end of the year in 2016, and I thought, you know, as much as I talk about the absolute massive game changer known as the autonomous vehicle, the self-driving car, and it, you know, please listeners tell me, am I wrong about this? Because I would really rather cancel my Tesla order, and buy a good old-fashioned internal combustion car right now. But I’m buying it for the autopilot. You know, that is, I think Tesla has the most advanced autopilot. The closest thing to the self driving car, of anybody so far. Now, Hyundai made some great progress in this field, but I haven’t heard much. I don’t, you know, I think it’s kind of unfair. I think Tesla Motors gets a lot of PR that really isn’t deserved. I think they’ve eclipsed it’s kind of like Donald Trump showing up at the debates, right? He just sucks all the oxygen out of the room and nobody gets to talk. You know? No, everybody’s looking at Trump. It’s kind of like that with Tesla. I think, I don’t know, I could be wrong. But um, anyways, I ordered the Model X,
Naresh 13:45
I’m just gonna I’m okay with Trump doing that. That’s the only reason why I watched those debates.
Jason Hartman 13:49
Okay, well, we’ll see how it brings more more people into the audience. And certainly Tesla Motors and Elon Musk have done that for the electric car, which I still think is kind of unproven to tell you the truth. But anyway, another topic. But anyway, so just to finish the story, because everyone will ask, well, Jason, why’d you buy two of them? Well, I’m only one driver. I only believe in having one car. I’ve had second cars at many times in my life, it’s a waste of money. Don’t buy a second home Don’t buy a second car. It’s a waste you can only be one place at once. You can only drive one car at once. So I ordered a Model S because I just cannot wait a year to have an autopilot car. I really want to take some long trips go to some of our markets. Jump in my Tesla and have it drive me there. Almost. It doesn’t quite do it yet. But it’s it’s getting close. And and you know, I’m hoping although I don’t know this that when the self driving car really comes it will just be a software update for the Tesla because supposedly it has all the necessary sensors built into it already. So that’s why I bought two. So I’ve got the Model X on order, the deposits down. I’m number like 19,000 and something. Then I’ve got the Model S coming. Probably I think Santa is going to bring it. I think Santa Claus will bring it to me. It’s gonna come right around Christmas. So anyway, that’s the story. Back to the COFI index, the cost of funds index. Wikipedia says it’s a regional average of interest expenses incurred by financial institutions, which is in turn used as a base for calculating variable rate loans. Same as adjustable-rate loans. And of course, on the prior episode, last time, you were on Naresh, we did a big episode, a detailed in-depth explanation of how adjustable-rate loans work. And even though I’m not recommending I love long term Fixed Rate Mortgages at today’s low interest rates, but there may well be a time listeners in the future where I actually will recommend adjustable rate loans. And when do you do that, when you think you can, you can take advantage of that teaser rate and then refinance later in a declining interest rate environment. But right now, fixed-rate loans. Wow, they are that that’s like a huge asset that you know, I love three decade long fixed-rate debt, it’s phenomenal. On to the definition here. Okay. So COFI is specified in particular loan documents. The COFIs in turn are usually calculated by a self-regulatory agency, like Federal Home Loan Banks. In California for example, many mortgage loans are indexed to the Federal Home Loan Bank of San Francisco. Interest rates on COFI loans and mortgages tend to fluctuate more slowly than variable rate loans linked to other indexes in index used to determine interest rate changes for some adjustable-rate mortgages. The 11th district Cost of Funds, like I said, was first introduced in the early 80s 1982 is a national monthly median cost of funds defined as interest, dividends paid, or accrued on deposits for Western American financial institutions. And it is calculated the last day of each month. So there you go, I would have hacked my way through that. But Wikipedia gave me a hand. Yay. Hey, I donate to Wikipedia every year. I love Wikipedia, it’s great. Send them a check, because, you know, they’re just donation-supported. And what a great tool they have. The crowdsourced encyclopedia. So what’s the other one, Naresh? I think you have one more before we get to our guests, right?
Naresh 17:32
Yep. The last one is a bridge loan. What is a bridge loan?
Jason Hartman 17:37
Well, a bridge loan is something that government uses, especially the Obama administration to build a bridge to nowhere. Oh, no, that’s not really what it is. Okay, now, Jason, get off your political soapbox here. Okay, so a bridge loan is simply a loan that is used for a short part of a real estate lifecycle, if you will. So, for example, I do and many of our clients do. And by the way, if you’re interested in doing this, just send me over a note. We’re gonna put a whole little interest expression of interest form on our website at Jason hartman.com soon. But if you’re interested in doing hard money lending or private money lending, you can do that through our network, I do it all the time, it’s not as good as actually owning the properties, just know that in advance, but it is easier. So if you want simplicity, and you’re willing to accept lower returns that are really still quite good, you know, I’m talking eight to 12% interest, usually. Every deal is different. But that’s sort of the range, you can do that through our network. And we can help place you in the position where you are the lender making a bridge loan to one of our local market specialists to basically fund their machine to fund their business. So for example, they’ll acquire a property. And they might pay cash for it and say, you know, they pay $50,000 for this property, but it needs a bunch of work, and they’ve got to put $20,000 work into it. And then their hope is to sell it for I’m just pulling numbers here $90,000. So you might make them a bridge loan for maybe $60,000. So they’ll get their 50,000 cash back, they’ll have 10,000 toward the improvement costs, they might put in 10,000 of their own. Now, you know, loan to value ratios. This is where you have to be careful as a lender, you don’t want to loan too much because then you put yourself in a riskier position, visa vis the collateral, and then they will rehab the house and then they will sell it to usually one of our investors. Now interestingly, we’ve had clients who not only make the bridge loan to the local market specialist but then become the actual buyer of the property. Isn’t that funny? That they literally participate in two parts of the supply chain, they loan the money for them to do the job, and rehab the property. And then they actually just buy it from them when it’s all rehabbed. So they were the lender making the bridge loan. And then they were the final buyer, who may have gotten the long-term financing after the bridge loan, that basically takes out the bridge loan, in other words, pays it off. And so that’s the way it works. That’s a bridge loan. It’s the it’s sort of that interim short term, maybe usually six months as part of the transaction, that is a short term loan, usually at a fairly high-interest rate, to enable someone to bridge the gap during that, that supply chain or that lifecycle of a real estate deal. That’s a bridge loan.
Naresh 20:55
Gotcha. Okay. Awesome. Well,
Jason Hartman 20:58
And by the way, I’ll just mention one more thing. It’s also used by traditional homebuyers who, you know, are fixing up a property that they’re buying, or maybe for one reason or another, they can’t get permanent financing, because they haven’t sold their other property yet. And so they’ll take a bridge loan to buy the new house, and then you know, sell the old one, and pay off the bridge loan, and then get permanent financing on the new house. So it’s used, it’s used in many ways. I just gave you one. Well, two examples there. But yeah. Let’s just talk about a couple quick upcoming events and get to our guest.
Okay, so upcoming events, Orlando property tour, by the time you hear this message, it may be sold out, because that one is really filling up. And we’re gonna have to call it full soon. The limitation being the size room we have for our seminar, and the size of the bus for the tour. So there’s there’s going to be a great tour, there’s going to be a lot of people. We’re going to do the creating wealth boot camp, and property tour, we’ll share several meals together, go to Jason hartman.com. Click on events to register for that. Meet the Masters coming up in early January, that one’s filling up to don’t miss out that’s in La Jolla, California, San Diego area, Southern California, great place to come in January if you’re in the Midwest or back East where it’s cold and snowing. And you can you know, enjoy San Diego go to SeaWorld Disneyland is not too far away in Orange County. So come and join us for meet the masters. We’ve got Garrett Sutton, multiple Rich Dad book, best selling author coming to talk about legal loopholes. He’ll be speaking on Saturday. He’s awesome. By the way, he’s been on the show a couple of times. Register for that at Jason hartman.com. And you can also buy tickets on Eventbrite. We just put it on Eventbrite. Yesterday, I haven’t confirmed that it’s there, but it should be. And then, of course, the venture Alliance is going to do by in February. Our newest members are Jeff and Shannon, welcome, Jeff and Shannon, we’re glad to have you aboard. And if you want to join the venture Alliance, and really take your investing career to the next level, hang out with very successful investors, we are going to Dubai, we’re probably going to do a side trip to Abu Dhabi. And that’s going to be really fun. That’ll be in February, probably over Presidents Day weekend. And you know, a few extra days it’s a faraway trip. So you know, we’re going to spend a lot we’re going to make that a longer trip than just a weekend. If you’re in Europe, or Asia or the Middle East or whatever. Of course, the Dubai trip is a great fit for you. We’ve got listeners in 164 countries. We’d love to have you for that. Naresh, you know what, I’m looking at the clock and we’ve gone really long today. As usual, we always think this is going to be a 10 minute intro. Why don’t we run the raven capitalist on the next non 10th episode show. So we’ll do that, folks. You all tell me you want these episodes around a half hour, so don’t blame me for getting your hopes up. The Raven capitalist. He’ll be on here in a couple of shows. And we’ll put him on when I don’t blab so much. So Naresh, you got any other questions since we were just we just ran long? Okay.
Naresh 24:04
Yeah, I think I think we’re good. I’ll save them for the next time.
Jason Hartman 24:08
Okay. Hey, I want to tell the listeners one thing. One of our first venture Alliance members who’s going to come on the podcast soon. You know, I’m on my second try with this but she really recommended Fitbit. And I gotta tell you, I got it. I got my second Fitbit. Now. I sent back my Apple Watch. I think the Apple Watch will be great. I just don’t think it’s quite there yet. But I love this Fitbit. And you know, if you can just do nothing else in terms of fitness, but walk over 10,000 steps per day. You’re doing great. You’re doing three times what the average American does. The Fitbit is awesome. Elizabeth helped me pick it out. And I got the Fitbit, ah, our charge are the charge HR that monitors your heart rate all the time, during your sleep, everything. It’s really quite interesting in terms of the quantified self aspects of it. So I love I have my little Fitbit. So check that out if you’re interested. We have nothing to do with Fitbit. I don’t own stock. I just wanted to recommend it to listeners, because I really thank Elizabeth for getting me back into Fitbit. I kind of dismissed it, but I’m loving this new one. So it’s it’s really great. And get your 10,000 steps in a day and you know, do a little walk and you’ll feel great for it. I guess that’s it. So the next episode will be a 10th show while the 10th show guests, we got some other great guests coming up on the show. And keep listening, folks, thank you for reviewing the show for telling your friends. Also, of course for listening and your continued support. We love having you attend our events, meeting our actual real clients that have been buying properties through us for years and investing with us. I think that’s hugely beneficial to you. And of course the content. Everybody says they love it. So attend our Orlando property tour, our meet the Masters event, or even our venture Alliance event in Dubai. Anyway, Naresh, thanks for joining me today. Appreciate it.
Naresh 26:05
It was great, as usual, Jason, full of information and knowledge.
Jason Hartman 26:08
Talk to you soon and happy investing to all our listeners around the world.
Announcer 26:13
I’ve never really thought of Jason as subversive, but I just found out that’s what Wall Street considers him to be.
Announcer 26:20
Really. Now how is that possible at all?
Announcer 26:22
Simple. Wall Street believes that real estate investors are dangerous to their schemes? Because the dirty truth about income property is that it actually works in real life.
Announcer 26:33
I know I mean, how many people do you know not including insiders who created wealth with stocks, bonds and mutual funds. those options are for people who only want to pretend they’re getting ahead.
Announcer 26:44
Stocks and other non direct traded assets are a losing game for most people. The typical scenario is you make a little you lose a little and spin your wheels for decades. That’s because
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the corporate crooks running the stock and bond investing game will always see to it that they win. This means unless you’re one of them, you will not win.
Announcer 27:05
And unluckily for Wall Street. Jason has a unique ability to make the everyday person understand investing the way it should be. He shows them a world where anything less than a 26% annual return is disappointing.
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Yep. And that’s why Jason offers a one book set on creating wealth that comes with 20 digital download audios. He shows us how we can be excited about these scary times and exploit the incredible opportunities this present economy has afforded us
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Announcer 27:53
And this set of advanced strategies for wealth creation is being offered for only $197.
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To get your creating wealth encyclopedia book one complete with over 20 hours of audio go to Jason hartman.com forward slash store.
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If you want to be able to sit back and collect checks every month, just like a banker. Jason’s creating wealth encyclopedia series is for you.
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