Rick Dryer: Gary, let’s start by emphasizing the central theme for all of our coming discussions. You and I strongly believe—and experience firmly proves—that well-selected real estate will outperform all other types of investments.

Gary Eldred: You’re so right, Rick. And to illustrate this point, we can refer to the phrase you use to begin the Right Place, Right Time™ educational seminars for which you are so well known and respected.

Rick Dryer: You must be referring to my discussion of how “real estate opens the bank vault.”

Gary Eldred: Yes I am. Can you explain how “opening the bank vault” helps support our belief that well-selected property will yield superior performance?


Rick Dryer: That answer falls into two categories—risk and return. First, Let’s talk about risk. Stated simply, the fact that lenders are willing to bring eighty or ninety thousand dollars to the closing table for every one hundred thousand dollars you pay for a property illustrates the low risk nature of property better than anything I could say.

At every turn, bankers have government regulators breathing down their necks. Yet, regulators not only approve those 80 to 90 percent loan-to-value ratio property loans, they actually readily encourage lenders to make them. That’s a prime purpose of FHA, VA, Fannie Mae, and Freddie Mac. Yet mortgage money is readily available even with the internal underwriting standards these bankers may choose to impose. Government guidelines and lenders internal risk factors both see a great reservoir of security in real estate.

Name any other type of investment where lenders will finance a first-time investor in similar fashion? Gary, as smart as you are, I’m willing to bet that you can’t find even one such alternative.

Gary Eldred: Well, Rick, I’m not sure that I’m as smart as you say. But one thing’s for sure, I am smart enough to refuse your bet. Stocks, bonds, gold, commodities, new businesses, antiques, coin collections - the list could go on. None of these investments opens the bank vault like real estate. In fact, most often, when someone wants to borrow money to start a new business, the bank will ask the entrepreneur to put his home (i.e., real estate) up as collateral.

Rick Dryer: Of course, “opening” the bank vault tells only part of the story of risk. Two other factors help prove our point that property offers relatively low risk: (1) Cost of the borrowed money and (2) terms of repayment.

Gary Eldred: You’ve just touched a sore point with me. You know the financial media—especially those lap dogs for Wall Street who consistently chant “stocks for the long run”—always talk about the high-risk nature of real estate. Yet, not only can a first-time, John or Jane Doe investor get a lender to put up 80 to 90 percent of a property’s purchase price, that lender will charge Mr. or Ms. Doe a rate of interest just perhaps one, at most two, percentage points higher than the rate of interest the U.S. government pays on its long-term bonds.  For example, (although the interest-rate spread fluctuates over time), today the Wall Street Journal reported that 30-year Treasury bonds were yielding 4.89 % and investors could originate 30-year mortgages at 6.25%.

Rick Dryer: You’re right, Gary. Investors can borrow against property at a very low cost. In fact, when they pledge property as collateral for their loans, Mr. or Ms. Doe can borrow at  interest rates just slightly higher than the most creditworthy Fortune 500 corporations. But guess what. If those creditworthy corporations raised their debt-to-value ratio to 70, 80, or 90 percent—an L-T-V that’s quite ordinary for real estate, the credit ratings of those companies would plummet and their borrowing costs would skyrocket. When corporations follow the high debt to equity ratios typical for real estate, their outstanding bonds fall to junk status. Why? Because real estate itself provides a much more stable reservoir of value than corporate operations.  The capital markets recognize and reward that fact.

...a bank will open its vault more liberally for John or Jane Doe real estate investor than it would for Microsoft or Proctor & Gamble.

Gary Eldred: I never thought about real estate risk from that perspective. Rick, I think you’re on to something that warrants far more attention. Accordingly, on an L-T-V basis, a bank will open its vault more freely for John or Jane Doe real estate investor than it would for Microsoft or Proctor & Gamble. Real estate serves as its own collateral; in that sense, it serves as the real estate owner’s capital partner. These and similar creditworthy companies can borrow cheaply only because they keep their debt ratios (i.e., LTVs) below 60 percent.

Rick Dryer: Don’t forget, too. Not only will lenders liberally open their vaults for property investors at low-risk rates of interest, they will allow them to pay it back over 25, 30, or even 40 years. I know of no other asset that qualifies for such favorable terms of repayment.

Gary Eldred: I can just see some stock market buff bringing his $1,000,000 wish list portfolio to the bank with this request: “I’ll put down $200,000, but I would like to borrow $800,000 to buy this million dollars worth of stock,” he says. “and I want an interest rate no higher than 6.5%, fixed for 30 years. In addition, if the stocks fall in value, that’s the bank’s problem. I won’t agree to any loan terms that require a margin call.” (i.e., put up more collateral to compensate for the decline in value of the loan’s original collateral.)

No banker would even consider such a loan against stocks or bonds. Any investor who made such a request would get the boot, pronto. In stark contrast, open any newspaper or magazine, turn on the TV or radio, surf the internet, or open your junk mail, you will see that banks clamor to attract property investors on those same terms. It’s commonplace for real estate, but not for any other collateral.

Here’s more evidence to support the relative low-risk nature of property.

In those few...instances where property prices do turn down and borrowers fall behind in their payments, lenders do not immediately push defaulting borrowers into foreclosure.

Rick Dryer: I like to point out that real estate represents real, tangible property that provides functional utility. That’s where the etymology of the word comes from: real, meaning it’s concrete and palpable. Real estate represents substance, not merely a financial claim or symbolic asset. The functional, real tangible nature of property nearly always provides a floor of value based on use. We know that stocks or currency (paper money) can quickly evaporate in value almost overnight (remember Enron, remember the dot coms, remember the 1920s German inflation when people needed wheelbarrows of cash just to buy groceries). In contrast, lenders know with almost 99 percent probability that their real estate collateral will at least retain—and more than likely increase—its real value over longer periods of time. Both its value in use and its value in exchange.

Gary Eldred: Here’s more evidence to support the relative low-risk nature of property. In those few, even, historically, relatively rare, instances where property prices do turn down and borrowers fall behind in their payments, lenders do not immediately push defaulting borrowers into foreclosure. Instead, they do all they can to help borrowers recover from such distress. Depending on the specific situation, lenders might cut the borrower’s interest rate, extend the term of the loan to reduce the amount of the monthly payments, or perhaps forgive the missed payments and add them to the outstanding balance of the loan. With property loans, lenders might be willing to initiate any number of forbearance or restructuring agreements because they realize that over time property values, and therefore the safety of their collateral, will recover.

Rick Dryer: Good point, Gary. You certainly won’t see those types of loan workouts when borrowers put up stocks as collateral. If the borrower doesn’t pay or if the stocks fall in value, the lender forces an immediate sale, or additional collateral.

Gary Eldred: I would like to add a related point here. Sometimes people avoid investing in real estate because they do fear that tough times might send them into foreclosure. And that’s a risk they prefer to avoid.. Yet, because lenders prefer to work out problem situations, that risk of foreclosure hardly exists if—and this “if” stands very tall—the troubled borrowers will go in and talk with their lender as soon as they recognize that they may be facing some financial difficulties.

Rick Dryer: That is key. If hard times hit, don’t dodge or weave – contact your lender immediately. But looking at the statistics, in most areas of the country, fewer than one percent of all prime mortgage loans end up as auctioned properties on the courthouse steps. And my educated guess is that at least half of those loans could have been avoided had the borrowers not stuck their head in the sand, but instead called their lender, laid their cards on the table, and pursued a doable workout.

Gary Eldred: Last year financial institutions issued approximately $3 trillion of new mortgages—far more money than they invested in any other type of loan or investment asset. So Rick, when you say that “real estate opens the bank vault,” you really are making a powerful case for the low-risk nature of property.

Rick Dryer: Of course, risk accounts for only half of the investment equation. Although I don’t like to take big risks with my money, I do love big returns. And that’s the second major reason why I favor real estate investing over other asset classes. Property defies the supposed Wall Street wisdom that says to earn big returns you must bear large risks. Because banks gladly open their vaults to finance my properties, my out-of-pocket cash can earn outsized yields that most Wall Streeters can only dream about. Because in an appreciating market I can profit on the increasing value of 100% of the real estate. That is, not only the, say, 10% purchased with my own money, but on the 90% purchased with borrowed mortgage money, so my returns are magnified.

Gary Eldred: Again Rick, you're so right. An open bank vault not only signals relatively low risk for the real estate investor, it provides the opportunity for high rewards as a function of that same open bank vault – OPM, other peoples’ money. In a word, leverage.  We’ll do the math and prove this point in dialogues 2 and 3.