Exploring The Mortgage Industry’s Interest Rates And Inflation With Aaron Chapman

In this episode, Derek Dombeck sits down with Aaron Chapman to delve into the complexities of long-term interest rates and inflation in the mortgage industry. Aaron, with decades of experience, offers a unique perspective on what drives these financial elements, challenging common misconceptions. Tune in to discover the factors influencing today’s interest rates and why understanding these dynamics is crucial for real estate investors. Whether you’re a seasoned investor or just starting out, this discussion provides valuable insights into the future of mortgage lending.

—

Listen to the episode here

Exploring The Mortgage Industry’s Interest Rates And Inflation With Aaron Chapman

For this episode, we’re talking with Aaron Chapman. He has been in the mortgage industry for decades and has an awesome take on what’s going to happen with interest rates and what drives them. It’s not what most people think. He’s going to share an actual chart that he put together, tracking all the way back 20 or 30 years, to show why we are where we are and what’s going to happen. On top of that, we talk a lot about inflation and the importance of getting long-term interest rates, 30-year fixed, and buying and holding your real estate. 

Before I bring Aaron on, I just want to mention that if you’ve missed any of the shows we’ve released or you’re interested in our No Means Not Yet negotiations training, the Circle of Trust Mastermind, or the Generations of Wealth Voyage, our Conference at Sea, you can find all of this at TheGenerationsOfWealth.com. You can also get my two books, Next Level of Your Life and The Transformational Journey. It’s a one-stop shop at TheGenerationsOfWealth.com. Let’s bring on Aaron Chapman.

—

We’ve got Aaron Chapman with us, and from the conversation we’ve had prior to recording, I have no doubt this is going to be not only informational but a hell of a lot of fun. He’s got a TikTok handle called The Redneck Mortgage Broker. I knew we were going to get along really well right away. Aaron, can you tell the audience a little bit about yourself? Let’s just jump right in.

Thanks, Derek. I appreciate you letting me on, and I’m hoping that the TikTok handle is what swayed your decision. Honestly, what’s funny about that is I didn’t know what my handle was until you brought it up. I’ve got staff members who put it all together. Apparently, that’s what they think I am. I do have a book coming out titled Redneck Economics, and there’s a lot of wisdom in the experience of people who go through a simpler life.

Aaron’s Background And Entry Into Real Estate

I grew up doing the cattle ranching thing in the early ’90s. As we talked about, you spend some time dealing with the bucking bulls. There’s a simple formula found in the agricultural world that we can easily apply to the complicated business world, but people love to make it more complicated than it needs to be. I do loans for real estate investors and for everyone out there. I got into the industry in 1997 through a wild way of getting in because I couldn’t find a job doing anything else. I was desperate and broke, and I had to go through a massive scenario to get there.

Once I started understanding real estate investors and what their target was, I began seeing the value in helping them be successful from the finance side. What I found is that the banking industry has really sucked at helping them out from the time I got into it until now. In my opinion, the people who jump in wanting to help real estate investors, and I’m not trying to be a prick here, are opportunists. They see it as the only real business that’s working right now, so they decide to help those guys.

I’ve been working with investors since 2003, finding ways to help them when the industry was actually trying to shut us down. I got practically fired from places, had pipelines shut down, and was denied because they didn’t want to help real estate investors. To me, the real estate investor buying single families and then into duplexes, triplexes, fourplexes, and multi-units is what’s going to keep our economy alive. The banks only need them when they’re in pain. I think we need them all the time, and we need to back them up better than we ever have.

Aaron, how did you fare during the 2006 through 2009 era?

It was another interesting time in my existence. I was working for Countrywide at that time. I’d been with Countrywide since 2002. I was writing a ton of business, and life was really good. 2008 came around. 2007 and 2008 were getting harder and harder. I still had a good amount of business where I had a decent six-figure income coming in, even in 2008. August 8th of 2008 came along. I was working with these guys, basically taking an English double-decker bus and turning it into a mobile strip club. I have a background in fabrication, working in the oil fields of Wyoming right after high school. I was literally sleeping four hours a night for like a month.

Eight’s my lucky number, so I’m jumping on the bike, heading out of town for three days. I’m going to take August 8th, which was a Friday, and I’m going to take that Saturday and Sunday. I was planning to ride through Reserve, New Mexico, and come back into the Phoenix Valley to return to work. I wasn’t fifteen minutes into that ride when a seventeen-year-old in his dad’s truck took me out at 80-plus miles an hour. This was on the Arizona Freeway at 12:24 in the afternoon.

I don’t recommend lying on that for any length of time. I had to lay there for a while because they sent emergency services to get me two exits up due to how much the accident blocked the freeway. It took them 10 to 15 minutes to get to me. They had to rush me to the hospital, thinking I wasn’t going to make it. I came out of that situation. I went into that scenario at 190 pounds. I was running marathons and rock climbing.

I was doing all kinds of cool stuff, really physical. I was worth about $3 million to $4 million. I wheeled out of the hospital weeks later in a wheelchair at 156 pounds with a negative net worth of $1.5 million and a memory that would recycle every 3 to 4 minutes. I had to come back into an obliterated industry, a skeleton of who I was before, in a wheelchair, learning how to walk again. I had to train my brain again. As I’m getting back into this, everything’s obliterated.

There were two people still doing business with me from before. One happened to be my mother, who was doing a lot of short sales at the time. She pivoted her real estate business. The other was a gal named CJ with Coldwell Banker at the time. She kept her business alive. By their grace and the grace of God, I was able to step forward and take those phone calls when they would send them to me, saying, “You need to write this person down and call them.” They’d call me back five minutes later, “Did you write that down?” “Write what down?”

They’d help me get my pad, get my paper. They’d help me write things down and remind me. I’d call the borrower and talk them through the process. I’d hand the notes off to somebody within my branch or my team for the next step to keep things moving along. Sometimes, I would not cross out what I had written down on the notepad. I’d think, “I need to call this person,” and I’d call them up, saying, “I’m Aaron Chapman with such and such mortgage company.” They’d say, “We already talked.” I’m like, “We did?” “Yeah, ten minutes ago.” I had to explain to them how they were going to trust the largest transaction of their life to a guy who couldn’t remember three minutes. It was an interesting crawl back.

That exercise got me to where I could reconnect my brain. I don’t have that problem as much anymore, but I still have a very forgetful memory. It got to a point where I was able to build myself back up and get to where I am in the industry now. In the last two years, I’ve been ranked in the top 50 in the United States out of over 300,000 people who do my job. I’ve been number one in the real estate investment lending space for conventional lending for the last several years.

There’s so much to talk about. Going back, when you said your mom was in the short sale space, did you get into your own real estate investments, or was it just staying in the mortgage industry?

I was already in my own real estate investments prior to that. I started buying real estate in 2001 and investing around the Phoenix Valley. When the crash happened, it obliterated everybody. I couldn’t hold on to anything. As I was sitting there in my wheelchair, taking phone calls from creditors who wanted to foreclose or do short sales with what I had, it was an easier conversation than the average person at that time. They would call me and say, “What’s going on here? Why aren’t you making your payments?” I’d ask, “Do you have a fax number?” They’d give me the fax number.

I faxed them my first week’s medical bills. That was $1.7 million for my first week in the hospital. They literally calmed down and said, “OK, how can we help you?” It went from, “You owe us money, and we’re going to send somebody after you to break your legs,” to, “What can we do to help you out?” My leg was already broken, so they then helped guide me through it.

I was able to get a lot of these short sales done, but still, there were foreclosures. My credit score went from the high 700s to 460. I got out of it really quickly. I settled a lot of those debts with the few bucks I had in the bank. I was able to negotiate with all my creditors. I came out of it debt-free when I left that scenario in 2009. I entered 2009 and 2010 debt-free. I was able to retain my house and a car or two. I didn’t have to file for bankruptcy. I started over at that point. We have real estate in six states. 

My family utilizes the infinite banking strategy with whole life policies for every member of my family. Two policies on me, one on each member of my family. When they get married, they get their own policies. We use the family trust to buy real estate. Every person within the family, including myself, rents from the trust for the houses we live in. I have control of the trust. It’s all my capital that built it. We meet monthly as a family to understand what we have, what we’re doing, and how we’re going to continue to maintain it. If something happens to me, you’re going to get a windfall of capital. 

What do you do with it? It’s about continuing to perpetuate what we’re constructing and setting the right mindset now with their infinite banking strategies, how they’re living, paying, and holding each other accountable so that there will be generations of wealth going forward. It’s not going to be obliterated by the next generation.

The Infinite Banking Strategy For Generational Wealth

I love the fact that you’re doing that with your children. I have a very similar story from 2007 to 2009, very similar to yours, except I ultimately was forced into bankruptcy at the end of it. The generations of wealth portion I’ve always been very open with my children about is anything financial. We don’t have to go into the little finite details with them, but they need to understand when things are going well, when things are not going well, and what happens when mom and dad aren’t here anymore. I love that you took your family in that direction.

Thank you. It’s been an interesting venture. Our youngest was nine when we got into this, and she’s now seventeen. She would actually reach out to the person who wrote my life insurance policies and have conversations with him via text, asking, “How do you do this and this?” He’d say, “If we could get nine-year-olds across the country to ask questions like this, it would change our country’s future trajectory.”

I’m hoping to do that by sharing little comments, data, or even the book, just helping people open up and talk about it. It’s funny how often people don’t want to talk about their finances. They definitely don’t want to share them with their kids. People often struggle and would rather buy knockoff items to look like they have money. The majority of people on this planet, 98%, are working hard day to day to stay afloat. Maybe that’s a high percentage. I could be off a little. Maybe it’s 90% or 80%. I don’t know. It’s a large percentage. They’re trying to pretend like they have more than they do.

There’s no shame in not having it right now. The shame is in being foolish with it and putting yourself in a position where you’re always going to be struggling, with nothing left when you’re out. There’s the mindset where people say, “I’m trying to save $200, $300, $500, $1,000 a month and set it aside for my kids.” Why? Use that capital, build things, live a life. That’s where I get the whole life policy. I have life insurance, so I can live a life. I’m not hoarding the capital. I’m using every cent I have available. I hope I will have used every resource I had when I go out, maybe on a bear hunt with a pistol. If my bank accounts are zero when I die, the death benefit that comes in will make them wealthier than I ever was based on what I set up for them.

They’re getting the financial education now, which is the important part.

We have our trust set up so that my kids, who vary in age due to adoption, will be in different situations depending on when I pass. For example, my soon-to-be 18-year-old versus my 6-year-old, if they get this huge windfall of money, we’ve set up parameters. They’ve got to be contributing members of society, gainfully employed, or running a business. I’m not an advocate for just handing an uneducated youth a big load of money and saying, “Have fun, go blow it on whatever.”

Exactly. You end up with supercars that won’t run anymore because they can’t maintain them after blowing all their money. I can’t have that. When I first shared our financial picture with my kids, showing them my income, assets, and capital, they all, almost in unison, looked at me and asked, “Then why do we live here?” I said, “You are not going to have a better childhood than I had in terms of where we’re living. You’re going to understand what it is to live in this environment.” I don’t care about a big house. At the time, we had a 3-bedroom, 2-bathroom home with 4 kids. Big deal. I bought the house next door and rehabbed it for more space.

Now, my daughter, her husband, and my grandchildren live right next door where they grew up. It’s a really cool existence. If I ever have a castle on a hill, which I doubt I ever will, and my kids come to visit, they’re going to meet me at Circle K, where I’ll put a hood on them and take them up so they won’t know where I live. I don’t want them to see that they don’t have access to that once I’m gone.

The Reality Of Long-Term Interest Rates

I’m curious. With your background in lending, what’s your take on what drives long-term interest rates? Everyone’s always an expert, especially in an election year, claiming they’ll drop right before the election. All these rumors and crap flying around. What’s your take?

Rumors and crap are 100% correct when it comes to that. I spend a lot of time on stages and often ask, “What drives interest rates?” People say it’s the Fed, the ten-year, inflation, or other factors. Some of those are partially correct. They’re all pieces of it. In reality, I tell everyone to watch the movie The Big Short. It explains the history of mortgage-backed securities. What all lending ever was, but especially when it comes to mortgages, was a local bank offering interest return on a checking account, savings account, and CDs.

Originally, lending was a local bank offering interest returns on checking accounts, savings accounts, and CDs. Locals would deposit their money with the bank and receive interest, which could be 3% to 4% on checking, 5% to 6% on savings, and 8%+ on CDs. The bank would then lend that money back to the community at 12%, 14%, or 18%. There was a huge margin.

Solomon Brothers said, “Why are we keeping this local? Why can’t this be national or even global?” They created the bond market’s mortgage-backed security, where pension and hedge funds could invest and expect a certain return. In The Big Short, they show a conference room where someone asks, “Who the hell doesn’t pay their mortgage?” They invested $25 million and went for drinks.

The problem was that people borrowed but repaid slowly. Generations used to live in the same house until they died. My grandmother, for example, died in the same house she lived in before I was born. That generation didn’t move much. By the ’90s, they had to get creative, inventing instruments where you could borrow with no money down, no income qualifying, or no asset qualifying. This eventually created the crash. When the crash happened, we had quantitative easing.

Let me see if I can do a screen share here because I want to show you something about the whole quantitative easing process so people understand what drove our interest rates to where they are. People think there’s a cycle going on here, that it’s going to come back around, and we’ll get low interest rates again. That’s not going to happen. This is not a cycle we’re in. We’re in the average interest rates we should be.

This is a very complicated-looking chart. This is the universal mortgage-backed security. It’s what they call a 5.5 coupon. Anyone who puts their money into this will make about 5.5% on their money. We’re going to go right, I’m going to have to try and zoom in here. Actually, I’m going to get out of this one. The problem I’ve got is that my ability to zoom in on this makes it a little complicated. I don’t know if you can see much in this.

All the way back in November 2008, the Federal Reserve announced they were going to do what they call quantitative easing. They announced it in November 2008, but they didn’t actually start doing it until January 2009, which is illustrated right here, this orange line. The yellow line is the announcement date back in 2008. January 2009 is when they started putting money in. Look at the difference here. That gap shows that a whole bunch of money flooded in and started going into those bonds, filling them with money. As the bonds go up, more money goes in, and interest rates go down.

Why did it get full of money at that time? It was because mortgage-backed securities were driving it. Let’s put it this way, it’s like you and I going out to dinner, sitting next to a couple of guys in three-piece suits who start ordering. As they’re talking, we hear that they’re going to invest $100 million in some stock. What are we going to do when we hear that?

We’re going to look at that stock. 

We’re literally calling our Schwab guy and saying, “Get all that stock. Sell everything else. Buy that stock.” That’s exactly what they did.

I’ve got a better zoom-in now, so I can show you this. They all jumped in. This is what happened, all this capital went flowing into it. The Fed started putting money in. This is the US Treasury under Hank Paulson printing money, filtering it through Ben Bernanke at the Fed, and then dumping it into the market. This represents $8.9 trillion up until this point.

With the assassination attempt on Trump, people were saying it was going to kill the markets and cause all kinds of inflation if Trump got in. We see what happened after the assassination attempt, a record jump in the Dow. This right here is actually election day in 2016. We see mortgage-backed securities dropped. They continued to drop because they tried quantitative easing after Trump’s election. There was speculation that the stock market would fall if Trump got into office in 2016. It didn’t, it spiked. It jumped up and actually started the biggest bull run we’d had in a long time.

When money goes into stocks, it’s got to come from somewhere, and it came from bonds, as we saw the bonds fall. When these fall, rates go up, and we saw a big rate jump from 2016 until the end of 2018. They started quantitative tightening. They had to figure out a different approach than just quantitative tightening, we’re going to reinvest. Then COVID hit, and it jumped even more.

This is when we got into the 2% range. We started actual quantitative tightening, where the Federal Reserve said, “We’re going to stop putting money into it, period.” That was at the end of October 2021. It fell off a cliff, and because of that fall, we saw interest rates rising at an enormous level over this period until we passed through these lines. Remember those lines where the Fed started investing in quantitative easing? We passed through that one and the line where they announced they were going to do quantitative easing. We bottomed out in October.

Why Interest Rates Are Unlikely To Drop Significantly

I’ve got to think when everybody’s saying, “Aaron, when are the interest rates going to go down again, back into the fives?” I don’t believe they ever will because they only went down due to quantitative easing. I drew this out way back in early 2023. I thought that was our level. It’s going to break through that, and I don’t think it’ll reasonably get above it. It broke it, came back down, and was stuck between the two before coming back down. It hit its worst level since 1996 at the end of October 2023 and started to rocket up because they started reporting the jobs a little more accurately than they had been. They’ve been inflating our jobs report up to this point to make our current administration look good.

That’s why money was flowing out of bonds and going to stocks, with people thinking our economy is going to do awesome because of all this job creation. It wasn’t job creation, it was post-COVID. It’s not job creation, it’s post-COVID, with people going back to work. It wasn’t the creation of jobs. They started actually looking at real job reports, and it rocketed up, meaning money flowed into mortgage-backed securities. The economy is really weak, so we want to put money into a safe place.

Where did it stop? It stopped right on that freaking line, the announcement of quantitative easing. Why did it stop there? There’s not enough capital to go beyond what the market’s willing to give. It stopped there, and I’m going to zoom in a bit more so you guys can see it. It stopped at that level, kept hitting that level, and started in a downward channel. I follow these channels because I drew them out early on and watched them just bounce around that channel. That’s where your investors are. When it reaches certain points, some might buy, and when it reaches others, some might sell. They’re trying to stay ahead of it to make money.

We’ve had what’s happened with Donald Trump, and we’ve had a lot of negative economic data coming out, pushing us up into these levels. I think this is where we’re going to be. This is going to be our peak. I don’t see interest rates getting any better than maybe 0.5% lower than where we’re at right now. If you’re looking at the rates today and say, “I’m going to wait until they get to 2%,” I don’t think it’s going to happen again. It could. I’m not saying they won’t. They’ve already done foolish things that are destructive to our economy. Why would they not do more foolish things? If there’s anything our government has proven, it’s that they will do foolish things.

You’ve got the current chairman of the Fed, Jerome Powell, who recently, in the past six to eight months, has said, “The one thing we do know about inflation is that we don’t know enough about inflation.” With all these things, I can’t say what they’re going to do. I personally don’t anticipate them lowering the rates more than maybe one time this year. Maybe.

If it were me and someone said, “Aaron Chapman, you’re now the chairman of the Fed for two days. What are you going to do?” I’d say, “I’m raising freaking rates. We’ve got to get this more under control. We’ve got to slow this down.” People are not stopping their buying. We built a consumer-based economy that needs that push to hit the buy button. How many people do you know have freaking Amazon showing up every day at their door, with boxes unopened in their house?

Absolutely.

It’s not about what they bought, it’s the feeling they got by buying it. That’s the problem we have today, and until we get that under control, we’re going to have inflation. When we’re talking about inflation and what’s coming, there are readings out there. We just had the Producer Price Index come out, and it was way hotter than anticipated. People are thinking the CPI is going to go down, which will bring down interest rates.

The Producer Price Index is where it all starts. If the production of goods and services is going up in cost, don’t we think that actual consumption is going to go up in cost? In reality, inflation is not about goods and services becoming more expensive. It’s the fact that the dollar is losing value. The dollar is losing value so much that people need to understand how that affects them as investors.

Looking at these interest rates, I don’t believe they’re going to go down more than half a percent below where they are now. A couple of key points. Let’s say they did. Let’s say you sit there and think, “I’m not going to invest in real estate until the rates go down to 4%.” Let’s say they did. How many people are sitting on the sidelines, waiting to get on the field when the rates go down to four? An enormous amount of people. What do you think the pricing of housing is going to do?

It’ll skyrocket. 

It’s going to go through the freaking roof. We already saw that. We should not see house prices right now at the level that they are. A $400,000 house in Arizona is like 1,300 square feet. That’s freaking foolish. That’s a $100,000 house or a $150,000 house. It’s because of the amount of supply of capital we have. Let’s illustrate this a little bit better.

In 1994, I walked into my very first Taco Bell. Never walked into one before that. I looked at their value menu. I could buy two bean burritos, two crunchy tacos, and a drink for $1.99. Fast forward to 2023, I drove through Taco Bell in November 2023 with my seventeen-year-old, getting ready to take her back to school for whatever crap she was doing after school. She said she wanted two crunchy tacos, two bean burritos, and a drink. What do you think I paid for that?

That’s $14.

$14.90-some odd cents, almost $15. That’s a 750% increase in cost over 30 years. What does that mean? Did burrito construction become that much more expensive over that period of time? No. The value of the US dollar dropped that much. Here’s another example if you don’t believe me. In the 1920s and before, they minted a one-ounce gold piece. I have a couple of them. If I had been thinking, I would have brought it out here. A one-ounce gold piece. You could go into a department store with a $20 gold piece and buy a hat, a shirt, a tie, a belt, a pair of shoes, a pair of socks, and a suit for that $20.

Right now, I can’t buy the socks I’m wearing for $20, but I could go into a department store and buy all that stuff with an ounce of gold. Why? It’s because the value of an ounce of gold is equal to the cost of all those things. The value of the gold has not gone up. The cost of those goods has not gone up. The instrument that we exchange for has gone down that much.

When you recalculate the value of your dollar over a 30-year period when you’re getting a mortgage on a house, you need to rethink how you’re paying back your mortgage. It doesn’t matter the interest rate. What you’re thinking about is your cost structure and how you can offload that cost to somebody else. We’re going to do a little bit of math real quick, Derek.

We’re going to pretend you’re a brand new real estate investor, and we’re going to pretend you’re buying a $200,000 investment property and putting 20% down. Let’s say you’re going to make $1,800 a month rent on this $200,000 house. You’ve got a 30-year fixed mortgage of about 7.6%, and you’re only making $100 monthly in cashflow. Does that sound like a good deal to you?

On the surface, no, not from a cashflow perspective. However, spread out over the fixed rate of 30 years, that’s where it becomes appealing to me.

It starts to become a lot more appealing. Let’s grab your phone. Let’s do a quick calculation here so we can show what people should really be looking at. From the cashflow perspective, when you’re talking about investing in single-family homes, people are like, “My cash-on-cash returns and my cap rates,” and that’s what they’re focused on. Rates have to go down, so I get my cash-on-cash return back up. I tell them, “Can you keep that property reasonably rented for the entire time you own it? Can you get at least 2.5% appreciation, and can you raise rents?” then let’s do those calculations. We’ve got that $200,000 house. You’re putting 20% down. How much is that?

$40,000.

That’s your investment. You invest $40,000. This is your investment into your business. Let’s say it’s a crappy time in the market. You’re getting a 7.6% rate. That’s not what we’re talking about here, just letting you know. We’ve seen that. We might see it again. It’s lower than that now, 7.6%. Let’s say there are points and costs. You’re at $10,000 in costs. This is round numbers. You’ve got $10,000 in total costs and points and taxes and insurance plus $40,000. How much are you investing?

$50,000.

$50,000 invested. We said you found a property and keep it reasonably rented the entire time you owned it. You’d be able to raise rent. You’d get appreciation. Who’s paying back the $160,000?

The tenants.

Let’s take $160,000 and divide it by 30, and what do you get?

$5,333.

What that means is that you are, over 30 years, on average, because you have an amortization table, your tenants are giving you basically $5,333.33 per year to pay off your mortgage. You’ve invested $50,000, and you’re paying off this $160,000 partner of yours. How much is your investment going up percentage-wise? If you’ve got $50,000 invested and they’re giving you $5,300, what percentage is your $50,000 going up by every year?

Off my head, that’s 10%.

10.66%, to be exact, just by somebody paying off your mortgage. If you didn’t pull a single dollar out of your pocket to maintain the house, and you didn’t bring in a single dollar of cashflow, you’re making 10.6%. Let’s talk about appreciation. Do you know how much houses are appreciating right now in the United States?

Nationwide, I do not know what the average is currently.

Schiller, Black Knight, and CoreLogic said about 6.8% to 7% last year, somewhere in that range. Let’s say two and a half. To get a good stable tenant, your house, your market, your area is only doing two and a half percent. How many people get excited about two and a half percent?

On the surface, nobody.

Nobody. We’ve got a $200,000 house that just appreciated by 2.5% percent religiously. How much is 2.5% of $200,000?

$5,000.

What percentage of $50,000 is that?

10%.

You increased your investment of $50,000 by another 10% through appreciation in a crappy market or a stable market. It’s an extremely stable market, not a crappy market, just extremely stable. You are now at 20.6% growth on your investment. If you had a stock portfolio doing that, would you be bragging at dinner or would you not?

Absolutely.

You’d be freaking pounding your chest and dropping your pants to show how big your investment balls are. You’d show the whole world what you are getting done. For some reason, we’re not seeing that in real estate because we’re always looking at cashflow. In this scenario, we said you’re getting $100 a month cashflow on this $1,800 a month rent. Not sexy.

Nobody’s excited. You get to raise rents. Rents are going up by what? 6% per year? Cut that crap in half. Let’s say it’s 3%. What’s 3% of $1,800?

Good God. $600? Just hit me with the answer. I’m doing redneck math.

Yeah. You got to take 1,800 times .03. It’s even a little bit high. It’s $54. Now, are you excited about a $54 increase in your rent?

Not on the surface.

Not at all. Here’s what’s also interesting. Your tenants are excited. How many people are renting two-bedroom apartments with a $200 a month rent increase right now? Your tenants in a $200,000 house only saw a $54 increase. You’re literally getting your picture on their mantle. They love you. You’re not losing that tenant, especially if they’re a good tenant, which you don’t want to lose.

What percentage did your $100 a month cashflow go up by? This is a massive trick question.

Mathing is hard right now.

You have a double-digit increase in your cashflow. Every year you’re doing that, you’re getting a double-digit increase in your cashflow. What does five years look like? You’re in that $400 to $500 range in cashflow all of a sudden. Are you complaining about your cashflow, your cap rates, or your cash-on-cash returns? Not so much. You also need that 20.6%. We haven’t even gotten to the tax benefits. People need to rethink how they look at an investment property. It’s not about your cashflow anymore. When you get suckered into cashflow, you get suckered.

There are people out there right now screaming that you need to get that ten-year interest-only investment deal because this is an investment for the seasoned investor. It’s not. It’s for the people who are about to get screwed. The people preaching that right now, I know them. Some of them did their very first loans in 2015 to buy real estate investments. They’re not seasoned. They haven’t seen cycles. They saw the best interest rates in the history of man, so now they’re successful and call themselves gurus. Don’t listen to them. We all know the name Warren Buffett, correct?

I believe it’s been mentioned a few times around the world.

A couple of times. You can probably even picture in your mind what that son of a bitch looks like. He said the 30-year fixed mortgage is the greatest financial instrument in history because it’s a one-way bet. The reason he says that is because if the rates go down, you can refinance. If they go up, you’re protected against adjustment because a lot of people lost everything to adjustable-rate mortgages, especially in 2008. His partner, Charlie Munger, do you know that name?

I don’t.

He was Warren’s partner since the very beginning. He was almost 100 years old when he passed. He was in an interview with Christy Quick in early 2023. He said in that interview, “We saw 40 years of declining interest rates. We’re going to see 40 years of increasing interest rates.” Interestingly enough, I cannot find that clip anywhere any longer. I’ve been through eight hours of footage of that. Nobody has that clip. They’ve cut that out because they don’t want people to do the 30-year fixed. Why?

When you recalculate this mortgage on this deal, a $160,000 mortgage, I’ve got an app you can download on your iPhone right now. Go find it. It’s called the QJO Investment Tool. What does it stand for? The Quit Jerking Off Investment Tool. If that’s all you’re chasing is interest rates, then all you’re doing is spending your time jerking off. When you run the calculation on this, you’ll find that on a $160,000 loan at today’s rate, you’ll pay $402,000 in principal and interest. You will be tempted to listen to people who don’t understand finance, who say to pay it off early, do a fifteen-year payment, or pay an extra $100. Don’t do that.

I already told you what’s going on with the dollar’s value. When you recalculate every payment you make for the next 360 months, you’re paying a little less and a little less and a little less until, when it all gets said and done, you’re paying $154,000 actual dollar value with somebody else’s money as you’re raising rents and you’re getting the house for nothing. Think about that before you move forward on any type of loan.

Don’t ever talk to a lender who’s trying to push you in any direction. Just call me. I’m not trying to tell anybody. Call Aaron Chapman. I don’t need to do your deal, but I need you to understand that if you screw yourself, you’re going to screw the next few generations, and my grandchildren are part of those generations, and I don’t need you making their lives miserable. Let me help you set it up upfront so that doesn’t happen to them.

The Value Of A 30-Year Fixed Mortgage

Aaron, what 30-year products are available to investors?

All kinds. Your regular conventional deals, I’ve got DSCR, I’ve got blanket loans. If you want to buy five houses on the same street, I can do one loan for all of them. We have 30-year fixes coming out of our ass. It’s the best instrument out there, and it’s not about the rate. It’s about stretching out the payment term with somebody else’s money.

Absolutely. You’re touching on a subject that the people who know me well are aware of, but I owned a hard money lending company for ten years with my business partner, and we parted ways. He bought me out at the first of the year, and one of the reasons was because I was always the real estate guy. He always loved the lending space, and I wanted to buy and hold more real estate, but we were so buried in our lending company that we weren’t buying and holding as many assets as I wanted.

One of the things that I personally realized after going through the downturn of ’07 and getting my ass handed to me is that I don’t use banks. I haven’t used a bank for an investment property in 12 or 13 years. Everything I’ve done since then is privately structured, private money, or structured with the seller of the property. I say all that to say this. If I jump back into the institutional lending world as a client, as a borrower, the 30-year product would be the only thing that I would be interested in because I got my ass kicked in ’07 when everything I had was institutionally financed with crap loans.

Just foreign deals. Were they pay option arms, probably?

The majority of them.

I had those, too. I got my ass handed to me. I was suckered into thinking that one of those who wins with pay option arms is the banks. They win. It seems like they wouldn’t because you’ve got all this negative interest and they’re getting screwed. No, they’re winning in that environment because the bigger institutions putting the money into the mortgage-backed securities are winning, not the little bank that sold the crappy product.

What people need to wrap their heads around is that the banks win when the interest rate is the most important part of the deal. The average person is refinancing their primary residence every four to five years. What do the first five years of your 30-year fixed mortgage look like?

It’s primarily interest.

If you can convince people to keep doing that and then add the cost back on the loan, you’re increasing their balance in some cases but never paying off the mortgage. I had one guy with a $120,000 loan who paid $38,000 over 48 months and then refinanced his house to within $102 of his original balance because the rates went down. If he kept that practice up, he’d have been able to pay for his house twice and never reduce the mortgage amount. They have you by the nuts when you think the interest rate is the most important thing.

Get that out of your mindset. Stretch that puppy out. Pay them back as slowly as they want, but don’t let them influence you to do it the way they want it done.

A hundred percent. I love this because most people don’t want to hear what you’re saying because they want to believe that there is an opportunity that interest rates are going to go back down and they’re going to be able to spend money like it’s water and use their houses as piggy banks. I’ve been saying for the last few years, I was looking forward to interest rates going up again because it weeds out the weak. 

It makes the professionals professional again. People who got into this business in the last, let’s say, five years ago, and they bought a couple of houses, got lucky. They thought that their crap didn’t stink, and a lot of them are out there pitching products and selling other people on mentoring and coaching, saying, “This is how great I am.” They haven’t seen the ups and downs and the cycles, just like a lot of the mortgage brokers haven’t. You get a couple of cycles under your belt in this business, as you and I have, and the end of the movie is pretty obvious.

Very much.

That’s a good thing for us, but a lot of people want to have their blinders on.

It’s very much the case that so many people who got into the industry since 2008, if they have not been in this industry before that, you really want to be cautious with them. There’s a guy out in Kansas City who’s pushing a local bank on the properties he was selling to his investors. They were doing ten-year fixed, twenty-year amortization back then. This was eight years ago. They were doing it like crazy. I’m screaming up and down, “Don’t do that crap, the market’s going to shift.” I was offering 3.6% to an investor. They were getting 3.125% from this guy. “The market’s going to stay here forever. It just has been. 

You guys are insane.” I couldn’t get people to listen. There’s such a big jump of them. They’ve been calling me. They’re like, “What do we do?” Suck it up and take the seven-point-whatever rate. You don’t have a choice. You’re on a twenty-year amortization. I don’t know what more I could have said that you guys would listen. Somehow, this guy made deals to make sure that they closed with his buddy, probably because his buddy was paying him under the table. It’s just sad that that’s the situation. You’ve got to listen to the people that have been there. These guys had not been there. None of them had been there.

Final Thoughts And Parting Advice

I want to be respectful of your time, Aaron. I can’t tell you how much I appreciate you coming on and sharing all of your knowledge. What’s one question I should have asked you that I didn’t? It can be about anything. It doesn’t have to be about interest rates or business or anything.

There’s a lot of questions out there. I know a lot of people ask me, “What’s created my success? What is my formula to get there?” I tell them, “Listen, I don’t know until I get there.” It’s one of these things I don’t ever believe success has ever achieved. You’ve got to keep shaking your ass like you’re late on rent every single day because it flips around on you in an instant. Never put your feet up. Never relax. Every freaking goal you achieve is the peak of Everest. You don’t sit on Everest and crack a beer. That thing will kill you if you sit there too long. Get your ass up and get your ass down and move on to the next one.

That is a great quote. I’m going to have to start using that. I appreciate it. I’d ask you your social media handles so people can follow you, but you don’t necessarily know.

I do know one, my Instagram, @SGOC_Aaron. You can find me there. I do know that one because that’s SilverbackGirlOnCoke.

That’s the way I believe you need to operate your life, like a coked-up silverback. You need to go with that ferocity with how you do everything. There’s also my website, AaronChapman.com. There’s a media section. There are the podcasts. I do videos twice a week to investors on what’s happening in the market and how it affects you as an investor. You can go to your App Store and download the QJO Investment Tool. There’s a question mark at the top corner. It goes right to my website. If you can’t find that, text me at 602-291-3357. Tell me you need the app and provide your email address. Bri will send it to you. That’s my assistant. She runs my life.

I have an assistant too named Tabitha, and she runs my life, but we spell run R-U-I-N. It’s fantastic.

I have to look at my calendar every second to see what she just added.

I can tell you right now that my phone has gone off nonstop since you and I have been doing this show, and I don’t even want to know what has been added. I appreciate you coming on. Anything that my community at Generations of Wealth can do for you in the future or for any of your people, don’t hesitate to reach out and ask.

Definitely do that. I’ll be coming back around. We’re getting ready to launch the book. You’ve got the foreword and the artwork for the foreword in your inbox.

We’d love to have you back.

Thanks.

We’ll wrap this one up. Everybody that’s a regular, thanks for reading. If it’s your first time, thanks for being here. You can always go back to TheGenerationsOfWealth.com for all of our previously released shows, and look for everything else that we have going on, including Circle of Trust Mastermind, the Generations of Wealth Voyage, which is the conference at sea, and my negotiations training, No Means Not Yet. Until the next show, go out there, live your vision, love your life. See you.

Important Links:

• Reicot.com
• Gowvoyage.com
• TheGenerationsOfWealth.com/fbgroups
• TheGenerationsOfWealth.com/YTChannel
• TheGenerationsOfWealth.com/Instagram

About Aaron Chapman

Aaron Chapman is a veteran in the finance industry with 25 years of experience helping clients better understand, source, and finance cash-flow positive investment properties.