The Power of Leverage in Real Estate Investing | Tips from Mortgage Expert Aaron Chapman

Aaron Chapman (00:00)

For me, what I scream to the whole world is set up your team first before anything.

know who you can trust because I realize that it’s being sold as a passive real estate investment opportunity. In reality, it’s a business. You are the CEO of a real estate investment business. And for a person to shop around and find the cheapest of everything, it’s like the CEO of a big corporation trying to find a COO, a CFO and a CIO that’s willing to take minimum wage. That company will not be successful if all you are is trying to find the cheapest of everything.

Dylan Silver (02:03)

Hey folks, welcome back to the show. Today’s guest, Aaron Chapman, is out of the Phoenix, Arizona area, and what’s time between there and the Ozarks of Missouri. Mortgage broker, he’s also a coach for investors and really passionate about helping folks set up businesses the right way to be bankable on so many other things. Aaron, welcome to the show.

Aaron Chapman (02:26)

Thanks Dylan, good to be part of the show man, always, always. Any show that people are to let my redneck ass on, I’m all about it.

Dylan Silver (02:32)

It’s great to have you on here. I do want to ask you a lot of granular questions about how to make properties cash flow and how to hold onto them and have it make sense as a long-term hold. I know something that we were talking about before hopping on here. Before we get into that though, I do want to start at the top and ask you how you got into real estate.

Aaron Chapman (02:52)

I know that being a short form is going to be really tough to get deep into that. Ultimately, I left the mines of northern New Mexico, could not find a job to save my life. I found myself in a situation.

where I needed to go get diapers for my infant son. had a coupon for free diapers, but I was also out of gas. So I found myself walking a parking lot of a grocery store to pick up enough change to get some gas to get home. And then I exchanged to went inside with that coupon. As I’m walking out, I heard the worst thing I could have ever heard in the worst day of my life, which was my own name. Somebody recognized me in that worst time. He invited me to dinner and then is when he introduced me to that industry in 1997. I started as a telemarketer in December of 1997. I had shaved

cut a foot off of my hair, my mom bought me business-like clothes to try and blend in, and I learned a lot through the process of telemarketing and everything else to the point at one point in my career in the last 10 years being the number one guy in the United States in real estate investment lending in the top seven in the US for transactions closed period and we’ve experienced a lot of great success with real estate investors.

Dylan Silver (03:53)

I want to ask you, I’m a realtor myself. I think the more that I know about real estate, the more that I really feel like lending is, I hate to say this as a realtor, the most important part of any deal. What was it about the lending side that drove you to it versus what I did and what so many other people do is, hey, let me go get a real estate license.

Aaron Chapman (04:13)

I didn’t know enough about real estate at the time. We bounced a lot. I moved over 40 times in my life.

And so being settled into one spot and not really understanding the real estate transaction, I understood cattle. I understood going to the bank and deal with the cattle thing. We cattle ranched when I was in my high school years, but I didn’t understand real estate. And so when I was introduced to this opportunity, I was willing to take whatever. And so it was just me being being provided with a shot at some sort of revenue because nobody else was hiring. It kept telling me I was overqualified for everything I applied for at that time. So it was really just because there was nothing, no other option.

And as I started to understand the real estate investor throughout my career, I started to to determine the exact same thing. If you don’t have the leverage, you don’t have the capability to really build a strong, massive real estate business. Sure, you can save up a ton of money and pay cash for things, but that will only return in cash flow and appreciation. You miss out on the amortization. You miss out on a lot of the tax benefits, and you miss out on the ability to compound what what a person could take cash for, but actually compound it

Dylan Silver (05:06)

you

Thank

Aaron Chapman (05:17)

it five times over and then you add in the the amortization and the additional taxes you add another 20 to 30 percent on your money.

Dylan Silver (05:20)

That is three.

I want to ask you specifically about some of the strategies that people can use to be bankable. Before I get into that though, I do want to ask you on on the mortgage side, were you when you were starting out, were you primarily working with first time buyers? Were you working with investors and buyers? Was it a mix? What was the day to day like when you were just starting out?

Aaron Chapman (06:33)

Initially, it was refinances on people’s primary homes.

It was really, really, really hard to develop a relationship in the real estate space, get somebody to send you their client. Because again, you know how tough it is to get a name in the real estate space that’s going to actually close. So the amount of energy and time you put into sourcing a name that will literally close on a home and trust you to do that, you need to find somebody you can trust on the money side that’s going to uphold your name. So it took me a long time to develop enough understanding of the process to get

somebody else willing to put my name next to theirs and trust me with that transaction, which is, like you said, the most important part of the transaction. Otherwise, nope it’s anything. If I screwed it up, nobody wins. But if I do do well, I can I’m earning the next shot. That’s all I’m doing. And so with respect to that whole situation there, really wasn’t… wasn’t I just took whatever I could get. So it started off as refinances.

Dylan Silver (07:12)

Yeah.

Yeah.

Let me now pivot to to this idea of being bankable, but also without giving away all the gold, Aaron, but maybe some of it. When folks are thinking about, I want passive real estate or I want to get into real estate investing, I’m not sure where to start. Is there a couple of foundational pieces of advice that you generally give folks?

Aaron Chapman (07:52)

For me, what I scream to the whole world is set up your team first before anything.

know who you can trust because I realize that it’s being sold as a passive real estate investment opportunity. In reality, it’s a business. You are the CEO of a real estate investment business. And for a person to shop around and find the cheapest of everything, it’s like the CEO of a big corporation trying to find a COO, a CFO and a CIO that’s willing to take minimum wage. That company will not be successful if all you are is trying to find the cheapest of everything.

You can find success, but you can also limit your success.

significantly to what your understanding of it is. Like I said, I have nearly 30 years in this industry working with thousands of people. I’ve seen where thousands of people have been successful, thousands of people have failed. That particular amount of experience is so valuable that when a person says, I found a guy has an 80 % lower interest rate, would you pay that extra eight on $100,000? That’s that’s an extra $6 a month to hire somebody that’s always available to you to talk you through a scenario could possibly be destructible.

Dylan Silver (08:47)

Thank you.

Aaron Chapman (08:58)

to your business, would you rather go with the other guys and say, hey, I just got a really cheap rate and I work for a bank, but knows nothing about real estate.

Dylan Silver (09:06)

Yeah, it’s a huge difference. I mean, I would think most people when they take a step back and realize what they’re getting themselves into would say, I want someone who’s going to be able to consult with me on some level. I I do want to ask you about asset classes or niches that people may be looking at. If someone is new, let’s say they’re a teacher, firefighter, you pick the job, right? W2 job. And they’re looking at

you know, single family, they’re maybe thinking Airbnb, they may be thinking, what about midterm housing, you know, nurses or transient people, but also looking at other asset classes like self storage. Is there a a an asset class that you’re particularly bullish on or that you guide people towards?

Aaron Chapman (10:23)

I am unbelievably bullish on the single family up to the four unit. The reason I am is because how easy it is to get in and how easy it is to exit. And when you’re also talking about those exits are not, the risks are not as big as a commercial exit.

Right? Um and the losses that you take are isolated a lot more than any losses you might take on a commercial exit. The other thing of it is understanding it takes time when you’re talking about a commercial asset versus a single family. Everybody understands a single family. And duplex, triplex, fourplex is easy to understand as well. So for me, it’s helping people to, to one, be able to evaluate a deal. And you’ve got to walk before you run.

And you’ll also find there’s a reason why the hedge funds are buying up so much of the single family housing out there. An opinion of mine is it can be and may actually be the most valuable per square foot real estate that exists. But one thing we’re also finding is they’re not buying out, they’re not building a lot more of it. COVID, that whole window of time when it limited at the… the um

Dylan Silver (11:12)

Yeah. ⁓

Aaron Chapman (11:26)

all the ⁓ materials that we needed and of course it impacted jobs. That really, really had a big dent the what we had as far as ⁓

the available housing that was out there. Now they’re going vertical. There’s a lot more apartments being built than actual family homes. So when you consider that, you have a very, very, very desirable asset.

Dylan Silver (11:40)

Yeah?

Aaron Chapman (11:46)

And it’s a desirable business. Every single one of those is its own separate business. You need to treat it as its own separate business. So I believe that a person learns how to run that business, which you could divest to somebody who needs to buy a house to live in, then you can learn a lot faster on how to operate in the real estate space. And you’re very, very, very bankable in that space.

Dylan Silver (11:48)

Yes.

Okay.

I want to get a little granular on this idea of being bankable, and also cash flow too, if we can hit on both of these ideas. For our audience who may not be aware, when you say bankable, can you break that down for us?

Aaron Chapman (12:18)

So when you’re trying to get leverage and buy properties and invest in real estate, you need to be able to show a certain amount of strength financially and credit and assets to be able to purchase that and have somebody willing to invest capital into it. And think of the real estate, the banks who lend on real estate, think of them as a business partner. You are attempting to go before a business partner says, listen, I could put up 20 % of the capital to purchase this business. I need you to put up 80 % of the capital.

Traditionally, if you have a partner, that 80 % would mean they have 80 % ownership in the business. But in this scenario with the banking world, they’ve arranged it where they don’t get 80%. They don’t get any ownership. They get to put a lien against the property and say, hey, we need to get paid back. And we’re going to demand, 7 % of that 80 % in monthly installments over the next 360 months. But we don’t get to own the business. You get the cash flow from the business. You get the appreciation of the business. You get the fact that the

that people who is that you’re selling to are paying us off and getting us out. And then you get the tax benefits associated with it. So all the way around, being bankable means that you get to use somebody else’s capital to acquire a business. A third party is going to pay back the partner, but then also pay you on top of that. And then you get all the you get to retain the asset and the ownership and all the benefits of ownership that it comes. So and then when you talk about the bankable side of it,

qualifying for this, being able to get that partner to come in with that capital, how do you do that? There is a lot of great strategies out there, but sometimes those strategies put you in a position where you can’t get that, where a lender say, I’m sorry, we can’t qualify you.

Dylan Silver (13:48)

Okay.

Yeah.

Aaron Chapman (14:00)

Being able to understand how you qualify in advance of going into a deal is absolutely paramount. Working with somebody that understands what your objectives are and how you want to become qualified and what you want to build and how you want to build it is an absolute necessity because if those people don’t understand that, they can’t get you approved to get that leverage. And if you can’t get that leverage, you’re going to be subject to only what you can personally invest in.

Dylan Silver (15:05)

Now, when we’re talking about you know the the single-family space in particular, it’s interesting this conversation because a lot of the folks that have been on the show, quite frankly, have used hard money loans. They may be working with partners and they may have a syndication, but it it’s less common that I hear people talking about this idea of using traditional financing to purchase lots of single-family properties.

Which is ironic because that’s probably the most common way, right? Do you do you find that most people that you’re coming across, whether they’re newer investors or established, are not thinking immediately, hey, I need to be bankable? Is this an afterthought to a lot of people?

Aaron Chapman (15:48)

It has become.

much an afterthought because people have found different ways to scale quickly, utilization of other other forms of acquisition such as like the harder money or syndications or partnerships, those kind of things. They don’t realize there’s actually structures built right now in the banking world for all of those who are doing that to get into the single family duplex, triplex, fourplex, and some they’re actually a little bit larger if they want to go down that path with 30 or fixed money. We can finance your LLC.

have to have a history with that LLC. doesn’t have to have a tax return. We just go off the property’s ability to generate revenue. We have figured out in the banking industry how to qualify those properties and help you to get into deals. So a lot of your wholesalers, a lot of your flippers, these guys will look back on their history and you may have the same. They’re like, man, I should have kept that deal. I should have kept that deal. I’d have a huge, huge portfolio if I kept these these five, right? Well, we’re helping people identify how do you do that? And then when you’re ready,

to do that. Let’s say you own that property and currently in an LLC, but you want to be able to hold that for 30 years and pay that that little minimal interest. In that’s case when you get down to it, you’re not even paying that interest because the dollar is losing so much value is losing so much value. You got somebody set up and we can get into a deeper conversation later. I’m actually have props to do that if we want to talk about it. I don’t think we have the time. So when you look at that, there’s a way to be able to sell it to yourself and get bankable with 30 year fixed money.

Dylan Silver (16:55)

Yeah.

It’s true.

Aaron Chapman (17:16)

There’s a process. You need to have the right entities in place. You need to be structured well in advance with the right attorneys, the right right CPAs, and the right lender. Often people find an attorney that can help them do one thing in one state, the CPA to help them do some other things, but doesn’t understand real estate investing. They all have different ideas that nobody talks to each other and puts you as the investor in the middle. And then the lender has it all says, this is all screwed up. We can’t do anything with this.

My the CPAs I work with their national CPAs the attorneys I work with that are in all 50 states and myself we all communicate together for you. We can help you set it up to ensure you have the entities you need. You have the the backing you need from the tax strategy perspective and we all communicate as far as the lending is concerned to ensure that you’re bankable, it’s scalable and you can hand it off to the next generation without those tax liabilities that you’d be so scared of.

Dylan Silver (18:07)

I want to ask you a little bit about

this idea of hard money and then these alternative resources that people are using. I mean, it’s not it’s not exactly a walk in the park to get those set up either. I mean, when you talk about hard money, I come from this space, right? If you’re brand new in flipping, you’re gonna have to partner with somebody, they’re gonna have to know you, you have to kind of get someone to sign for you effectively. So it is interesting that people have have been using maybe more of that than than traditional.

Is is this information, the traditional side, readily out there? Are banks, you know, kind of keeping this behind a cloak and dagger? Or or is there just kind of the the social media phase as people moving away from traditional and more to these other alternative financing methods?

Aaron Chapman (18:56)

I think that the reason there’s a lot of the alternative financing methods, because those are the guys who they make, let’s put it this way, they make a lot of money per transaction. We all know that, right? So their voice is very broad, very loud. they’re the ones you walk into a trade show, there’s a ton of them. When it comes to the the lending industry, as far as the banks are concerned, there’s only a few of us that understand this. There’s a very small few. There’s a bunch of jumping into it wanting to be part of it, but they don’t have the history.

Dylan Silver (19:19)

Yeah.

Aaron Chapman (19:22)

When you’ve been doing this since 1997, as long as I have, you’ve seen a lot of the cycles, a lot of things that hit real estate investors. You understand it differently. And we understand how to properly use hard money to help that person springboard into a transaction that you can flip into a long-term deal. And ultimately, in many cases, I’ve had many clients have less than 10 % left in the deal of their own capital.

So if you’re buying a property and you have less than 10 % left in the deal, consider what the return on investment is on that. It becomes significant. You’re talking 50 % returns per year on your capital invested. Now there’s there there’s a way through it and we coach them through that because I do it myself. I have property in six states. I start with myself that has a family trust. The trust has holding companies. The holding companies start LLCs that buy houses. Every single member of my family that’s an adult and I have three grandkids, we all live in houses.

that are owned by the trust we pay rent to our trust. I lease my house from my trust. I lease my vehicles from my trust. I own nothing. We are here to help people do exactly the same and then pass it on to the next generation because one of some guys they will not have a shot at it at all if we don’t change it now. You have to change today.

Dylan Silver (20:28)

Okay.

Yeah.

Aaron Chapman (20:34)

for your children and your grandchildren and bring them part of it. And that’s what I do with my partners in in the legal side. My partners in the accounting side. And then of course all of us in the banking side and my entire team.

Dylan Silver (20:45)

No, you’re exactly right. mean, I I feel like in a lot of ways, it’s people may feel like they don’t have a shot right now with where I mean, I’m from northern New Jersey, we were talking about this before hopping on. There’s a lot of people who are I mean, a lot of people who are priced out over there. ⁓ We are coming up on on time here though, Aaron, where can folks go to reach out to you directly? Maybe they have deals they’re looking at, or maybe they are interested in becoming an investor starting a real estate business, but not sure where to start.

Aaron Chapman (21:13)

So just go to aaronchapman.com.

That’s the website you’ll always find me at. Always find me at. And then you’ve got info @ aaronchapman.com is where you can email me. My assistant, re-watches that email. She’ll get us set up on a call. And then that way, can sit there and figure out what is the way we can best set you up to springboard you into investment real estate and be able to keep as much capital for yourself. All those things we talked about before, they have place, but they need to be in the right place. If they put in the wrong place, it can cripple you as a real estate investor or as really just a business builder.

Dylan Silver (21:42)

Right. Aaron, thank you so much for coming on the show here today.

Aaron Chapman (21:47)

Right on buddy, thank you.