The medical expense comes up, you want to send your kids to college, you lose your job or you want to buy that car you have always wanted. It’s from the optional to the necessary. The only way that you can get that cash back out of your house is to borrow money. You are back in debt again when you spent the last fifteen years trying to pay it off. You have to borrow money or sell your home. Those are the only two options that you’ve got.

To walk through a real-life example, my stepfather and mother paid off my childhood home. I talked to my father and he’s like, “It’s paid off.” I said, “You should go get a line of credit in case you ever need that money.” What he did was he did a line of credit on the house. I forget what it was up to. For instance, he could have done that and bought a car or used it for education. Your point is it’s paid off now he’s back in debt to the bank.

In other words, it’s great that you paid it off. The other thing that happens is you lose the advantage of leverage. Your appreciation rates and real return on investment decays as you reduce your leverage. What happens is if the house price appreciation in your area is 4% a year and you pay off your mortgage, then you are only ever going to make 4% a year appreciation on your asset. However, your next-door neighbor who’s got a 50% mortgage is making 8%. The guy down the road who’s got a 25% mortgage is making even more.

That concept is so important because I tell people the return on your equity is 0%. That’s the point you are making. A lot of people lose that when they say, “I have this investment property. I’m going to pay it off.” Why would you want to do that? If you are making 30% with 20% down, you might only make 5% or 10% when you get that property paid off in profit.

This is why these types of home equity agreements are so important because it enables you to unlock or access big chunks of that $23 trillion worth of equity without having to go back into debt. The way our programs work is because people think, “If it’s not debt, what is it?” It’s an investment where in exchange for a cash lump sum that our investors give the homeowner, the homeowner says, “I will share some of the appreciation. If I sell my house in a few years and it has gone up in value since the day we signed the agreement, I will give you your money back, which was your original investment, and a share of some of the increase in value that the house benefited from.”

If my house goes up, I’m going to have some of that equity increases as the homeowner. As the investor, you are going to have some as well. The other good thing is the investor does not go on title as an owner, “I don’t have to share my spare room with anybody.” No one else has got rights on the property. It is protected by a lien on the title but it sits in a junior position. It doesn’t trigger due-on-sale clauses with mortgage and property tax reevaluations. The best part is because it’s an investment, there are no monthly payments.

I don’t get paid as an investor until you sell your house or you may decide to buy me out at some point. In that period, there was no monthly payment. It’s not a debt product. Since it’s not a loan, you can use that money to pay off other loans. You can use it to reduce your mortgage and invest in something else that provides a much better cashflow and liquidity, and potentially, a much better return than your home equity does.

We have a lot of investors and they have the same thing. They have a bunch of equity tied up in their homes. They say, “I’m going to take money out of my house at 2% to 3% on a line of credit. I’m going to reinvest it at 15%.” People use that. If you don’t mind, let’s walk through a real-life example. You mentioned that homeowner that has a $500,000 house. We can make it simple or a little more complex.

Maybe they own it outright or they owe $100,000. You could walk through how that would look. The homeowner wants to use the money for either an investment or pull some money out for college. What would it look like? They reach out to you and say, “I want to walk through this process and see if this is a good option for me.”

I will give you an example of a ten-year agreement. The agreements come in different durations from 10 years to 30 years. You can have these agreements out to 30 years but a 10-year agreement would be a straightforward discount. If you want to access $50,000, which is 10% of the current value of your home, you will give us 16% of the value of your home at the time you sell it. It’s a straightforward trade. We give you 10% of the current value but when you sell the property, you give us the equivalent of 16%.

Another component to take into account is if you sell your property in the early years, then we have a maximum return on investment, which depends on the property. It’s subject to underwriting but it’s normally 16% to 18%. That means the maximum return that we can make is around 18% a year on our money. If you were to sell your home after six months, then it would cost you less than 10% of that capital for that period. It’s not a loan. There are no monthly payments.

Everything is determined by the value of your home when you sell it. If your home goes down in value, we potentially could get back less than we invested. There is a risk on both sides. If it goes up, that’s great because you are making more money as well. We cannot eat into your existing equity. It’s not like a loan where if you want a house goes down considerably, you can’t be underwater because we could end up taking a loss as well.

You have to have some skin in the game. I did some math on my favorite thing that sits on my desk, which is my TI BA II Plus calculator. This is called a home equity contract or home equity agreement. If I have $50,000, I want to help my son out with his college expenses or maybe I have a midlife crisis and want to buy a new sports car.

I’m giving up 16% of my value at ten years. If the home appreciates 3% annually, it ends up being about $108,000, which is less than 8% interest over that time. One way to look at that would be if I could also say, “If I want to invest this, I can get 10%, 15% or 20%,” that’s a good arbitrage but I don’t have to make those payments along the way, which is a big difference.

We should go back to your point earlier when the banks decided that they wanted their money back with a day’s notice. The thing with home equity is it is an equity risk. Since it’s equity, it means that if your house price is greater or if the world changes, we can’t suddenly say, “We want our money back.” That’s the risk that we take. You benefit from that because you have then got a clear run for 10 years or even up to 30 years to make your investments knowing that you are not going to get that call or you don’t have that corresponding monthly payment.

That’s important because many investments don’t pan out the way we think they are going to. You might make an investment based on debt with the expectation that it’s going to be paid off at a certain date. If that doesn’t happen and you can’t service that debt, then your problems start compounding. From an investor’s perspective, it’s a much safer option to invest with equity because you’ve got that additional timeline and flexibility.

For example, we are buying and syndicating apartments. I tell investors 3 to 7 years is a reasonable assumption. That’s a big difference. That’s over 100% difference on the long versus the short end. To your point, we talk about, “Put long-term debt in place and low loan-to-value cash reserves.” That’s the big thing. If you invest, you have to serve as debt. On the other side of that investment, you have money sitting in the bank that’s not earning a return and has to go to that.

As I’m listening to this, I’m like, “That’s a big advantage.” Also, what comes to mind is I think about my stepfather. My mother passed away. He’s sitting in this $500,000 house and it’s paid off. If he wanted to have equity but still wanted to live in that house, he could do something like the 30-year option and have access to a chunk of that capital to use for retirement.

He wouldn’t have to pay that back. I would admit to you, I’m pretty ignorant when it comes to reverse mortgages but you brought that up. Talk about the difference between a mortgage or a line of credit. Can you talk a little bit more about what a reverse mortgage is and how that’s different? I’m not exactly familiar with that concept.

A reverse mortgage is a reverse amortization mortgage. Rather than you making monthly payments and reducing the capital balance, you don’t make any payments. What happens is those interest payments stack up and are added to the principal. Effectively, over some time, your overall loan continues to grow. There are points where ultimately, it will eat up potentially all of the equity in the home, depending on how long you have the reverse mortgage for. There are other restrictions.

For example, you have to be over 62 to be able to qualify. The problem is you can’t move out. If you decide that you want to rent your house out, you have to be an owner-occupier. Once the last surviving qualifying borrower dies, then the reverse mortgage comes to an end. If you own a home and you want your kids to stay in there when you die, then you can’t. With the home equity agreement, you can transfer that agreement across.

There are a lot of costs involved. If you have an existing mortgage and you want to take out a reverse mortgage, then you can only have a reverse mortgage. You can’t have two mortgages. The reverse mortgage will have to subsume the existing debt. You might have a loan at 3% but the reverse mortgage comes in at 6.5% so you have to buy out your existing loan at a higher rate. It’s also quite expensive to set up.

Generally, the biggest difference is that one is debt and one is equity. One has a payment and one has all of the issues associated with debt. The equity structure is a completely different animal. It’s based on a different risk profile. We are paid very differently and there are a lot more flexibility. You don’t have any of the credit score issues that you get with loans. We can work with people with credit scores at 550 or sometimes even below that.

That comes back to my original point where you’ve got millions of homeowners that may not be able to borrow money. Let’s say life changes and your credit score may have decayed to the point where no one wants to lend you money at acceptable rates, yet you’ve got $500,000 worth of equity. There are a lot more flexibility.

You have to sell your house.

That’s the downward spiral.

This is a great option. Let’s get a little more technical. You have these home equity agreements that are out there. Are you all securitizing these? How are you working at a grander scale?

One of the companies that we work with securitized $143 million to $146 million worth of home equity contracts or home equity agreements, which was the first major securitization of purely these assets. They also announced $1 billion worth of capital commitments into this space. What we have seen despite COVID is this increased interest from institutional investors in this space because of the return profile that has been proven.

We are beginning to see a pretty strong track record developing into how these types of assets perform from an investor’s perspective. They are very scalable. Remember, there’s no ownership, so you can grow the number of assets that you have but you don’t own any real estate. That’s good because you don’t have the cost of maintenance associated with that and all of the issues associated with being a landlord. You can still, however, benefit from the asset price appreciation. There has been an enormous amount of interest and growing interest in this space.

We can see the momentum beginning to build, particularly because house prices have appreciated significantly and the economic climate is more challenged. It’s even more challenging particularly because of the pandemic. People are finding it harder to borrow money yet their house is now at the highest rate it has ever been. There’s this real tension between those two positions.

The downside would be if we went through another period like 2008. You are looking at ten-year periods and over ten years, there’s a pretty consistent appreciation in these asset classes.

Remember that we are working with homeowners who already have lots of equity. When the contracts are finished or when we sign the agreements, they still have a minimum of 20% or 25% equity depending on the agreement. The homeowners we work with are not the homeowners who were highly leveraged and had no incentive to keep their homes. These are homeowners who have relatively low leverage. Even though they have a home equity agreement with us, we don’t increase their leverage. We reduce it. We are putting homeowners in a stronger position.

All we want them to do is to keep their homes and keep paying the mortgage because we know, historically, in any ten years, real estate will outperform inflation. Even though you take a ten-year period, which includes the ‘07 and ‘08 crisis, at the end of those ten years, house prices will have appreciated faster than inflation. The assets that we are investing in are in a sector, which is pretty well insulated from the exposure that we would have seen in the highly leveraged times of the financial crisis.

Where are you getting your capital to place this?

It’s all institutional. We have family offices and institutional investors. They are the capital sources. What we do is originate agreements for those investors and other companies in this space as well so that we can provide a broad spectrum of offerings to our customers.

I told everybody at the beginning here, if people want to learn more and if they want to get a copy of your book, what’s the best way to get ahold of you? I would like you to share more information about your own podcast here.