Debt Management

How do I get the ultimate return on my investment?

 

“We’re going to show you why it’s not what you buy, but it’s how you pay for it and how using leverage can actually get you a higher rate of return on your money.”

 

 

Have you ever wondered how you can get the most out of your real estate investment? Today we will be using an example about how to leverage your money for real estate investing but know that this concept can be applied to any type of investment. So, keep that in mind as we go through todays example.

We’re going to show you how using the cash value in your life insurance can maximize the rate of return on your real estate investment. We have clients who invest in real estate who ask us, “ Why should we put money in a life insurance policy and earn a measly 4% when we can put money in a real estate deal and earn an infinite rate of return?”

We’re going to look at a real estate example, and we’re going to show you three different ways of acquiring the property; paying cash, financing with a traditional mortgage, and leveraging your life insurance cash value. We’re also going to show you how leveraging can actually get you the ultimate rate of return on your investment.

Here we have a $250,000 property and we are choosing to pay cash. After closing costs, we have $255,000 of our own money in the deal. We have no costs for financing and after taxes, insurance, and maintenance, we ended up with a gross rental income of $2,500 per month. We’re going to sell the property in 60 months and we’re going to assume that the value of the property appreciates at 2% per year over that ownership period. When we sell the property, five years later, the value of the property is $276,270. After we calculate everything that we received, we ended up with 13.08% as a rate of return on the real estate investment.

Now you may be wondering if the property is only appreciating at 2%, how did we get a 13.08% rate of return? Again, we have to evaluate the fact that we received $2,500 per month for 60 months. When you calculate that income versus the money we had in the deal, that’s how we can calculate a 13.08% rate of return. That’s a pretty good rate of return, but it can be so much better if we apply the laws of leverage to the purchase of the property.

Now, most people think that because we’re saving so much of interest by not financing, by not using a traditional mortgage, that this rate of return is as good as it gets. We’re going to show you why it’s not what you buy, but it’s how you pay for it and how using leverage can actually get you a higher rate of return on your money.

Next, let’s look at the classic 80/20 finance. We’re going to finance 80% of the purchase price, put 20% down and pay closing costs out of pocket. It’s the same deal. It’s the same building, same purchase price, and the same closing costs. The only thing we’re changing is the fact that we’re using other people’s money.We’re going to borrow 80%, $200,000 at 5% for 20 years. That means we have a mortgage that we didn’t have by paying cash and the mortgage is $1,320 per month. So how are we going to pay for that mortgage? We’re going to pay for it from the rental income, the $2,500 per month.

We’re going to evaluate this over the same 60-month period. We’re going to sell the property again in five years at 2% annual appreciation. We only have $55,000 of our own money in the deal. We’re also going to get the tax deduction because a portion of the mortgage is interest. So now we have less monthly income, $1180 versus $2,500, but we also have less of our money in the deal. When we sell the property, the fact that we have a mortgage doesn’t change the selling price of the building, it’s still $276,270. The only thing that changes is, when we sell the building, we have to pay off the mortgage. Our net cash out is lower. It’s $109,380.

Now you may be thinking with a lower cash out and a lower monthly income, it’s really surprising that the rate of return is actually higher when you finance, right? But you need to consider that we only have $55,000 in this deal. Our real estate investing clients, they understand leverage, and they would never pay cash for a building. If they have $255,000, they can buy five buildings instead of one by not paying cash. They understand leverage and that is the beauty of using other people’s money. Would you rather earn 34.37% on one property or on five?

Let’s take a look at the final scenario where we finance 80%, but we borrow against our life insurance policy for that 20% down payment. The only expense we have out of pocket is the closing cost of $5,000. We have the same property, $250,000 with the same closing costs of $5,000. But this time we’re going to mortgage the $200,000, just like in the last example. We have a 5% loan for 20 years and we have the same mortgage payment. The difference is we’re going to take $50,000 against our life insurance policy. We’re also going to finance that at 5% for 20 years. Our total mortgage payment is actually going to be a little higher and our monthly cashflow is going to be a little lower.

When we sell the property for $276,270, after five years, our net cash out is $67,633 because we have to pay off the bank mortgage and the loan we took against our life insurance. But remember, we only had $5,000 of our own money in the deal. Looking at it, this is the ultimate leverage. When we calculate all the income that we received, plus the appreciation of the property, we end up with a rate of return of 245.87%. Now, you might be thinking that that’s a great rate of return and it surely is. But actually, this scenario is so much better because what we didn’t tell you is the fact that when we borrowed against our life insurance, our money was still continuing to earn uninterrupted compounding of interest at the rate of 4%. Additionally, we have a death benefit. So, we have so much more than we’re actually showing here, that we couldn’t and didn’t calculate into the rate of return.

This is why it’s not what you buy, but it’s how you pay for it that really matters. Leveraging can really increase your rate of return. We really illustrated that with these examples today, you know, conventional wisdom would have you believe that the less you pay the banks and finance companies and fees and interest charges, the greater rate of return you can earn. Today’s example really underscores the importance of having as little of your cash tied up in the deal as possible and how leveraging other people’s money can maximize the rate of return that you could earn on your money. Not to mention you still have control over all that money that isn’t tied up in the deal.

 

Which is better- A 15yr or 30yr mortgage?

 

 

 

How often do we think about what will happen if we get sick, hurt, disabled, or lose our job?
These are just some of the factors that we need to consider when investing in real estate. Buying a house is an exciting but stressful time. With so many options out there, how do you know which one is right for you? In this week’s video, we dive in to explore the pros and cons of a 15-year mortgage vs. a 30-year mortgage. We also explain the difference between a bank’s equity and your own, and other factors to consider. Remember, if you need approval to access your equity, is it really yours?

“It’s important to choose the option that gives you the most liquidity, use, and control of your money.”

 

Which is better a 15- or 30-year mortgage? When shopping for a mortgage, it can be so confusing because there are so many options. Buying a home is one of the largest purchases you’re going to make, and many people get hung up on interest rates. Well, interest rates are important. It’s not the only factor you should consider when choosing the right mortgage for you.

One thing to consider that’s often overlooked is inflation. When you buy a house today, you get a mortgage, the dollars have more purchasing power today than the dollars that you’re going to use to repay the bank. So the longer you can take to pay back the bank, the less purchasing power the dollars are going to have at the time of repayment.

Let me give you an example. When I was younger, my parents would send me down to the bank to pay the mortgage. The mortgage was $52.80 and at the same time, they would send me over to the local hardware store to pay the utility bills. Our electric bill at the time was about $45 or $50 and I remember asking my parents, “how much was the electric bill was when we bought the house? ” And they said it was about $4 or $5 per month.

Think about what happened over 15 years. The electric bill increased by about five times, but the mortgage stayed the same. So my parents were negatively affected by inflation on the electric bill, but they were positively affected on the mortgage because the mortgage stayed the same and they were paying that mortgage back with dollars that had less and less value over time.

Conventional wisdom tells us debt is bad, so Americans want to get their house paid off as soon as possible. You think you’re making your position safer, but the fact of the matter is you’re actually making the bank’s position stronger. Let me give you an example. If you have a $250,000 house with a $200,000 mortgage balance, if the bank had to foreclose, it might be difficult for them to break even if they had to sell that house. But if you have a $250,000 house with a $125,000 mortgage balance, it’d be very easy for the bank to break even if they had to foreclose.

Don’t get us wrong, both you and the bank are building equity, but the nature of those equities are quite different. The bank has full liquidity use and control of their equity. Whereas you would need to qualify to access the equity in your real estate. The bank’s equity is cash and your equity is real estate equity, which requires bank approval in order for you to access your equity. So, basically if you need approval to access your equity, is it really yours? The next thing to consider when choosing a mortgage is control. Think about it. If your goal is to regain control of your money, then you should not be giving up your discretionary income to the bank. That’s money that you could be using for your lifestyle or savings.

You’re taking money that you have complete liquidity, use and control over and giving it to the bank and now they own and control that money. Which brings us to our third point. What happens if you become sick, hurt, disabled, or lose your job? You may have a lot of money in real estate equity, but now you have to apply to the bank in order to access that money and make no mistake. Banks are not loaning you money because you have equity in your real estate. They’re loaning you money on the premise that you’re going to be able to repay them. Anytime you want to tap into your real estate equity, you need to go to the bank, apply and prove that you could repay the bank.

It doesn’t matter if you had a great payment history on your previous mortgages. They don’t care if you actually paid extra on your previous mortgages. They have to consider whether or not you can pay back this new wealth. Let me give you an example. We have clients who had a $175,000 house with a $50,000 mortgage balance. The husband got sick and couldn’t work. They figured they could tap into their equity when they applied to do a refinance, even though the monthly payment was going to be lower, the bank declined them because they couldn’t prove that they could pay back the new loan.

So, all along the way, while this family was building their home equity, making their mortgage payments, they believed that they were making their financial position stronger and safer. But at the end of the day, it ended up hindering them. If you need to get approval from somebody else to get your money, is it really your money?

The fourth thing to consider when choosing a mortgage is what happens if the economic climate changes. For example, interest rates can go up or down. If interest rates go down and you’re locked in for 30 years, you could always refinance if it makes sense for you. But what happens if interest rates rise? Well, this happened actually in the early 1980s people who had money outside of real estate equity were able to take advantage of interest rates on CDs and money market accounts that were 15% or 16%. If you have money tied up in real estate equity and the CD rates go to 15% or 16% you can’t tap into your equity because the bank is going to charge you more than the 15% or 16% if you’re borrowing.

It’s really going to put you in a situation where you can’t take advantage of opportunities if those opportunities arise. This brings us to our fifth point when choosing a mortgage tax deduction. Not everyone will qualify for the mortgage interest deduction, but if you do, do you want all of it, none of it or some of it.
Most people want as much as they can get. With the 15-year mortgage, there’s less opportunity for tax deductions.

In conclusion, we’ve been trained to shop for mortgages using one criterion only, interest rates. While interest rates are an important factor, they’re not the only factor you should consider when choosing a mortgage. Let’s face it, if the banks made the same amount on all the mortgages, there would only be one option. It’s important to choose the option that gives you the most liquidity, use, and control of your money. Again, if the point is to regain control of your money, does it make sense to give that money to the bank and then still have to get approval to access your money?

 

 

How to repay your debt using the IBC policy

How to repay your debt using the IBC policy! Many of us put off saving because we want to repay our debts first. We end up in a debt cycle, Income -> Repay debt ->Borrow money ->Income. When you delay compounding to pay debt, your completely out of control and have no safety net. In this video we go over why taking the IBC policy approach, will help you to repay debt faster and start saving now!

By implementing the infinite banking concept as a financial strategy, you’re able to repay your debt faster and start saving.”

 

Do you have a debt you’re thinking about repaying before you start saving? Most people hate debt, so they put all of their disposable income towards repaying that debt, whether it’s their cars, student loans, mortgages, or credit card bills. The point is that they focus so heavily on repaying the debt that they forget to focus on the saving aspect of their financial situation.

So, let’s focus on how that affects compound interest. The key variables for compounding interest are time and money. The more time you have, the less money you need to set aside in order to put that money to work for you. The less time you have, the more money you’re going to need to put aside in order to make that money work for you. But really when you delay compounding in order to pay off debt, you’re completely out of control and you have no safety net. So you go from a situation where you have cashflow that’s going towards debt and therefore no savings to a situation where you have more cashflow once your debt is paid off, but you don’t have any savings at that point, you have to start saving. Our focus is in helping our clients to be more in control of their money.

The problem with repaying your debt before you start to save is that it takes you from one weak financial position to another weak financial position. You go from having no cash flow and no savings to having cash flow, but still no savings. All because you don’t have access to capital and because you don’t have access to capital, you’re forced into what we refer to as the debt cycle. Income, repay debt, borrow, because you don’t have access to capital income, repay debt, borrow. It’s the proverbial hamster wheel and it doesn’t have to be this way. We have to show you how to save while you’re paying off your debt and that will put you in control of your cashflow.

By implementing the infinite banking concept as a financial strategy, you’re able to repay your debt faster and start saving. Now it’s really quite simple. Instead of taking your extra cashflow which you were using to pay off your debt, take your extra cashflow and begin an IBC policy. Then when the cash builds up, borrow against the policy and use a policy loan to pay off your credit loan. Now you can redirect the credit payment back to the policy to replenish your access to capital.

The benefit of using this process to repay your debt is that it puts you in control of your money and you’ll have less dependence on banks and credit companies going forward. You end up with more savings sooner, paying off your debt faster and setting yourself up for the future where you’ll have less dependency on banks. All three of those issues translate into control for you. And remember, any other way or method of getting out of debt takes you out of control of your money.

In conclusion, in order to put the system to work for you, the only thing that needs to change is how you use your money. In its most basic form, we’re taking liability, cashflow payments and converting them into creating assets. And by doing so you’re in control of your money and you’re securing your future and making your future that much brighter.

Middle Class Family

Meet George and Beth: A Middle Class Family With No Way to Pay for Their Children’s College

Meet George and Beth: A Middle Class Family With No Way to Pay for Their Children’s College

George and Beth purchased a lovely home in a safe and quiet neighborhood shortly after they wed.  As a two family income, both worked 9 to 5 jobs and made a decent living.  This afforded them the opportunity to live within their means and save to start a family.  Their bills were covered, they were able to pay down their debts, and they were even able to put away money for retirement.

After having their first child, the two remained steadfast in saving for retirement as well as beefing up their rainy day fund.   Once their second child was born the family still continued to put away savings and afford their lifestyle without compromise.

They dreamed of a cabin in the mountains after retirement.  A nice quiet place to relax after working hard for their whole lives.  Beth longed to sit in front of a big window to read with a warm cup of tea, while George was hoping for a lot of acreage and big porch to enjoy it from.  They were on track with their retirement savings to be able to start building their cabin – after their kids were grown up and moved away, in about 15 years.

 

By conventional standards, George and Beth were living the dream and doing everything right financially.

As they approached their late 30’s, the couple began to see that even though their salaries were continuing to increase, it wasn’t keeping up with the increasing costs of their family. Sitting at the dinner table, bills and statements scattered about, the two faced a big dilemma.  Their current financial situation wasn’t as bright as they had hoped.

With their first born turning 11, they had begun to think about the cost of a college education.  Luckily, the couple started to look at a way to save for their kid’s education before it was too late – but even with 7 years to put money away, at their current level of income, it wasn’t possible to save enough cash to cover the classes for their first child, let alone a degree for the second.

Tapping her fingers on a calculator, Beth hung her head.  “Even if we stop saving for our retirement, there won’t be enough to cover the college tuition for the kids,” she said.  George felt sadness seep into his strong and stoic expression.  He felt like he couldn’t provide for his family, even though he had a college education and a good paying job.  The two held each other’s hands, unsure where to go from there.

 

The following day, Beth began to find other ways to get out of debt and save for retirement.

After searching all day, Beth scheduled a few consult appointments with “experts” at how to get out of the situation her family was in.  The first 3 appointments didn’t prove to be worth the time or effort, but the fourth appointment left Beth and George much more hopeful than that night at the kitchen table.

As they sat in the office at Tier 1 Capital, the man behind the desk said, “If you could send your children to college, save for retirement, and begin building your retirement home several years sooner, would you do it?”  “Absolutely?” replied George, preparing for another plan that was obviously too good to be true.  “Good. Let’s get a plan together,” said the man.

 

 

The plan was about redirecting money the couple was losing unknowingly and unnecessarily into a cash pool they could access when they needed it.

After an evaluation the couple found they were giving money away in various places, including with interest on their debt.  They also were surprised to learn that they didn’t have to pay banks for the privilege of using their money and that taking control of their money could increase their cash flow and easily accomplish all of their goals.

 

Elated and a bit skeptical, the couple agreed to create and implement a plan that would:

  1. Enable them to pay for both kid’s college educations
  2. Continue to live at the lifestyle they were accustomed to
  3. Have enough saved for retirement so that they may live comfortably
  4. Build a cabin in the woods for their retirement NOW

 

The plan they enacted worked by redirecting their cash flow and gave them access to money they were willfully making inaccessible.  Traditional tactics keep money inaccessible in times when it’s needed – even when it’s your money.  Beth and George felt privileged to finally learn there was a better way.  A way that would keep their money at their fingertips for when they really needed it, without extra taxes and penalties.

Using a cash pool created with their own money, Beth and George were able accelerate the payments on their mortgage, while saving for retirement and having the comfort of knowing that college tuition also wouldn’t be a problem for them to afford.   As they used their funds to build up their cash pool and aggressively pay down their debts, the two did not sacrifice saving for retirement.  In fact, it was just the opposite.

2 years after implementing their plan, the couple began construction on their cabin in the woods.  Something they thought they wouldn’t have been able to afford for another 15 years.  A few years after the cabin was built, their first son went off to college.  When the $60,000 per year tuition bill arrived, George and Beth cut the check without a worry about dipping into savings or retirement.  Later, they overheard their friends, who had always had higher paying jobs than them, lament over taking away from their retirement accounts to pay for their kid’s college education.

 

Today – Beth and George are pleased they found a better way to handle their long term finances.

As George sits on the front porch of their cabin discussing college choices with their second child, he smiles and says, “Cost isn’t a concern, choose which education you feel like will best serve you.”  He looks down at the boards that his father helped him nail there under their feet and was filled with gratitude.  His father, who recently passed, was able to help him build this cabin because he was able to afford to build it sooner – and finally he could provide for his family without question.