Don’t Invest in Real Estate Until You…
The Amplified Impact Podcast
August 11th, 2023
Curious if now’s the time to dive into real estate?
First off, let’s clear the air.
While interest rates soaring may sound daunting, I’m not sweating it.
Instead, I’m tuning into a trio of bank term powerhouses that wield serious influence over your real estate journey.
But let’s rewind a bit. Should you leap into real estate now?
Are you after casual investment gains or aiming to build a real estate empire?
Both paths have perks, but clarifying your intent is key.
Remember, it’s not about market timing, but time IN the market.
Embrace it.
So, dive in, invest smartly, and let time work its wonders.
TWEETABLE QUOTE:
“It’s not about timing the market, it’s about time in the market.”- Anthony Vicino
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Episode Transcript:
Anthony Vicino:
So interest rates are flying up through the roof and I’ve been getting a lot of questions about whether or not you should invest in real estate. Like, is now a good time? And here’s the interesting thing is I actually don’t get too hung up on interest rates. In fact, I I care very little about that. Now, interest rates are important in that they reduce your cash flow and that’s an important, you know, metric within side of your business for how healthy it is. But there’s, there’s something else that I think far, far more frequently about when it comes to my bank terms and getting into debt. Those are the things that are going to control my optionality or the things that are going to affect my ability to profitably exit the deal. I’m going to talk about what those are in just a second. But before, let’s just put a pin in that and cycle back to something a little bit more foundational, which is a lot of people come to me and they’re like, hey, should I invest in real estate? I’ve been thinking about doing this, maybe doing that thing over there.
Anthony Vicino:
And I want to share with you two concepts that I think are helpful for walking through this decision, regardless of where you are. First is understand that real estate is one of the best ways to build wealth. However, there’s two ways to participate in real estate. You can either invest in real estate or you can build a real estate investing company. Now, most people, they get into real estate wanting that first thing. They want to invest in real estate, but they unknowingly get themselves into a real estate investing business and now it becomes like a full time job with systems and processes and teams and a headache, right? And that’s fine. That’s really where the majority of wealth is to be made is by building a real estate investing business. However, for most people who have a w two job, they like the idea of real estate, but they don’t necessarily want it to take up their full time energy and be like the thing that they dedicate their life to.
Anthony Vicino:
Investing in real estate is the better solution. So it’s important that we go into this with eyes wide open so that we don’t try to get that first one, which is investing in real estate and then find ourselves by happenstance, having a business. And this is important because a lot of people, when they think about real estate investing, the first thing they think about is the fix and flips of HDTV. And this was my first experience with real estate when I was in college. My roommate and his dad were doing fix and flips on single family homes and I would live with them for decreased rent, help with the construction. Not that I was really much of a help because I can swing the hammer, but I can’t hit the nail. So I wasn’t super useful. And I came away from that experience thinking, if this is real estate, I’m not interested in real estate.
Anthony Vicino:
And I think a lot of people think that’s what real estate is, or you have to go buy a single family home and then you rent it out. That’s one way. But that tends to be a very high maintenance, very hands on business approach to the real estate. And there’s other ways, whether that’s passively investing in syndicates or REITs or whatever, there’s passive ways to invest in real estate. But that’s the first thing is for people who are wondering, should I get into real estate right now? Pump the brakes and ask this question like, which one are you trying to do? Are you trying to invest in real estate or build a real estate investing business? Because depending on which one you choose, it’s going to affect how you move forward. The second thing I want you to think about when it comes to real estate and investing in general, is that it’s not about timing the market, it’s about time in the market. And so what I mean by that is my core investment philosophy is that we let time do the heavy lifting. So we buy things and we hold them for extremely long periods of time.
Anthony Vicino:
We let time add the value and do all the heavy lifting for the investment. The longer you hold something, typically the better it’s going to do. Time is an investor’s best friend, and so we want to have as much of it as possible. And so we want to judge the success of our investments on long time frames rather than short. Because as I’ve said before, often the only difference between a good and a bad investment is the timeline upon which you measure it. So if we measure investment in the first six months, it might be very volatile, might have dropped, it might not be on business plan. We would say that’s a bad investment. But if we fast forward, I’m sorry, to twelve years from now, we look back on it, we’re like might be a very, very good investment at that point.
Anthony Vicino:
So the timeline upon which you measure it affects whether or not it’s a good or a bad investment. And so if that’s the case, then it’s not about getting in at the right moment. It’s not about timing the market. That doesn’t matter. It doesn’t matter if we’re at all time highs or at all time lows. It doesn’t really matter. What matters is that you get in and you stay in for as long as possible. Because one of the things we know about real estate and just investment markets in general, is that they tend to move up and to the right on a long enough time frame.
Anthony Vicino:
And so the key is to let time do the heavy lifting, get in and stay in. Okay? So those are the two things I wanted to share there. Let’s go back and talk about bank terms and the three things that affect optionality or the ability to get in and out of your asset. Not just only three, but these are three things to think about. So interest rates, yes, very important, but more important to me are the interest only period, the prepayment penalty and the term. So the interest only period is on commercial assets, the time in which you only have to pay the interest portion of your loan. Usually you can get a year, two years, maybe three years. And then after that you have to start making principal paydowns.
Anthony Vicino:
What this means is that your debt service suddenly jumps and becomes very expensive in those years, once the interest only period runs out, I like the I O period to be as long as possible because that decreases my debt service. I might have a high interest rate, but if I have five years of interest only period, I’m only paying the interest. And so that asset is probably going to cash flow pretty well in that. Meantime, number two is that prepayment penalty. This is a penalty that the banks enforce on you because they don’t want to go through all the rigmarole of originating and underwriting a loan for you to turn around and sell that asset the next year. Right? They’re thinking, I’m going to get my interest payments for the next ten years. And if you’re turning around and just selling the next year, they’re going to lose out of money. So they enforce a prepayment penalty, which is to say, if you sell early, before years two, three or four, we’re going to hit you with this big fee.
Anthony Vicino:
And so you want to negotiate that because maybe years two or three or four, you get this crazy offer that you can’t refuse and you want to take advantage of it. You don’t want to be locked in by the prepayment penalty and saying you have to stay inside this. You have to hold this deal for another three years before this drops off, before it becomes financially feasible for you to exit. And then the third thing is bank term. Like, how long is this loan before the balloon payment comes due? Like, how long do I have to pay this thing off? The longer the better. If it’s two years, three years, that’s a very short period of time. If it’s five years, ten years, that’s a little bit better, right? So we want more time to be able to pick the right moment in the market cycle to profitably exit the deal. The shorter timeline that we have to work with our bank loan like a bridge loan, two years, three years, then a lot has to go right in that very short period of time.
Anthony Vicino:
And again, time is an investor’s best friend. We want more of it. So we let time do the heavy lifting by making sure that we have long runways on our bank loans. So wanted to share that. Try to answer the question, should you invest in real estate right now? Should you wait, what should I do with rising interest rates? Should I sit on the sidelines? Answer no. Get in the game. Stay in the game. And hopefully this brings you a lot of value, guys and gals, let me know in the comments.
Anthony Vicino:
Shoot me a DM. I love chatting with all of you guys. Seriously. It means the world to me that you take a little bit of time to join me each day. I’ll catch you back around these parts tomorrow, but until then, stay hyper focused, my friend.
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