This past week I attended our East Oahu Regional Group Meeting for the Honolulu Board of Realtors at Waialae Country Club. The guest speaker was Peter Savio, President & CEO of the Savio Group. He's been a successful real estate broker, investor and developer over the past 40+ years in Hawaii and shared with us some of his thoughts on why residential real estate can be such a great investment.
Peter Savio's Speech on the 7 Creators of Wealth in Residential Real Estate
He started the talk about his background in having a degree in real estate, however never had much success in selling real estate. He grew up in a home were real estate is practiced and shared how his mother was a Realtor and was a "million dollar producer" back in the days when homes were only selling for $10,000 - so she had to sell a lot of homes to reach that figure. Once she taught him it's more about educating people than trying to sell them something, his career took off.
To this day he said all of his siblings (he is one of 5 children) are multi-millionaires by owning their own real estate and by doing so were able to stay in Hawaii and not have to move to the mainland in order to seek a better lifestyle and better paying job. Without further ado, here's what he had to share based on the notes I took:
The 7 Creators of Wealth in Residential Real Estate
This is one of the more obvious ones. When most people think of investing in real estate, their idea or "hope" is that you buy it and it goes up in value. Over time, this has absolutely been the case in Hawaii (and most part of the country). However, there are definitely market cycles and if you're looking to buy for a "quick flip", you could get stuck. He had a classic quote when one of the Realtors asked him about losing money when buying too high and he said just "don't buy stupid".
This is another power of wealth creation by use of borrowing money. For example, if you buy a property for $250,000 cash and it goes up 10% in value, you make 10% off appreciation. However if you buy the same property for $250,000 with $50,000 down and borrow $200,000 and it goes up 10%, you'd then make a 50% return on your initial investment of $50,000 (which is 5 times as much as paying cash).
3. Mortgage = Forced Savings
For those that take out a mortgage on a property, every payment you make to the bank is like a forced savings account. This is in contrast to being a tenant. Every payment you make, you can never get back. Whereas during home ownership, every monthly payment builds your equity (in principal payments) by paying down the debt and you also have the tax benefits (see below).
4. Constant Monthly Payment = P & I is Fixed
Contrary to being a tenant where rates typically increase over time, having a mortgage allows you to have fixed (principal and interest) monthly payments. While home values increase over time, your monthly payments go unchanged. Granted property taxes and insurance rates will go up over time, however those increases are minimal when comparing to increases in rent.
5. Tax Advantages
Outside of the mortgage interest deduction, you also have your property taxes you can write off. In addition, he went on to say that on investment property you have other write offs and depreciation. I always advise clients to check with their CPA regarding tax advise.
6. Ability to Make Additional Payments to Mortgage (Savings Account)
You have the ability to make additional payments to principal to pay off your mortgage, thus increasing further leverage to your "forced savings account".
7. Interest You Earn on Additional Payments are Tax Free
For example, if you have a mortgage at say 4% and pay off $1,000 you'd thus be saving 4% that would have otherwise gone to the bank for interest and that savings is tax free.
3 Ways to Prevent Losing $ in Residential Real Estate
I'm not sure if you've heard of Warren Buffet's 2 rules of investing? They are:
1. Don't Lose Money
2. Don't Forget Rule #1.
Along those lines, Savio mentioned the 3 ways not to get burned in real estate:
1. "Buying Stupid" Ie. - if you're buying real estate with the idea of "selling to another sucker", he advises don't even bother buying in the first place.
2. Spending cash flow profits foolishly. Ie - on things that go down in value, Robert Kiyosaki (see below) refers to these as "do dads"
3. Moving Too Fast. Trying to build a portfolio too fast without managing your cash flow or trying to flip property is where you can get into trouble.
What is The Best Form of Wealth Creation?
According to Savio, THE BEST form of Wealth Creation is item #4 above, which is the constant monthly payment, This also follows along the lines of Robert Kiyosaki's philosophy of investing for cash flow. Similar to Savio's saying of "don't buy stuipid", Kiyosaki says "flippers are losers".
Want to Learn More About Investing in Real Estate?
Having been an avid real estate investor since first reading Robert Kiyosaki's book Rich Dad, Poor Dad 15 years ago, I practice what I preach. Unfortunately, there are a ton of Real Estate Brokers on Oahu that have no idea about investing in real estate, which is why Robert has the saying "they're called brokers, because more often than not, they are broker than you".
Here I am with Robert and Kim Kiyosaki at a Book Signing in Kahala
One of the first thing's I'd ask when interviewing a Realtor is asking them if they personally own any investment property. My guess is 90% of the agents on the island do not. It's also sad that I also know tons of Realtors that don't even own their own home... If you're interested in residential real estate investments, feel free to contact me for more information.