Transcription
There's actually 14 reasons in this episode why I keep my real estate equity separated from the property, into property structured maxf funded IL. In a nutshell, to increase the liquidity, safety, and the rate of return. I'm going to show you how I earn, uh, two to three times what the net cost of a mortgage is. I make money even if it's vacant. Okay? And it's all tax-free. So get ready. I think you're going to be blown away.
So, I'm Doug Andrew. I've been a financial strategist and retirement planning specialist now, uh, for north of five decades, helping thousands of Americans optimize their assets and minimize taxes and empower what I call their authentic wealth. So, here we go. Uh, let's, uh, give you these 14 reasons.
So, reason number one, uh, is to maintain the utmost liquidity. Liquidity is the ability to access your money when you need it. In case you have a major setback or emergency of any type. I'm usually talking about, um, being laid off, losing your job, getting disabled, or whatever. The number one cause of home foreclosure in America is physical disability. Uh, but the chance of, uh, you getting financially disabled or losing your job is even greater than that. Okay? And so, uh, when I talk about separating your real estate equity, it's, uh, taking it from the property and putting it over into a liquid cash position. And the reason why I choose maxf funded ILS is because it passes the liquidity test with flying colors. Uh, safety test. There's nothing else safer than the multi-trillion dollar insurance industry to park your money. As far as rates of return, I've always earned rates of return greater than the cost of the mortgage, as you'll learn here.
And so when I do this, uh, yeah, I'm going to incur a loan. Many times I borrow with interest-only, uh, loans or mortgages. Sometimes it's an amortized loan, but I refinance most of my real estate about every 5 to 7 years on the average. Uh, many of my multi-millionaire and billionaire clients do the same thing. They keep their properties mortgaged to the hilt. They don't take extra, uh, positive cash flow, uh, and and send it to the mortgage company to pay down the mortgage. You'll learn why in this episode because if you keep it separated over here, you're going to earn compound interest. This is simple interest, simple interest tax-deductible if you do it right, especially on rental properties or if you do it right on your house, uh, it's not contingent upon tax-deductibility, but you can borrow, uh, the cash out of your house, uh, for business purposes and tax-deducted. And so, uh, a lot of times people will say, "Well, uh, this doesn't work anymore. Uh, the standard deduction is better than itemizing." No. Uh, most most of my clients, uh, they always itemize because if you're paying 10% tithing to your church or a charity, uh, if you do that, you add the deductible mortgages interest on top and you will come out ahead itemizing your deductions. Okay? And so this is compound interest over here tax-free if you use IL. This is simple interest tax-deductible. When you do the difference here, if I'm earning 9% tax-free and the mortgage is 6% tax-deductible, it's a net cost of four in a 33% bracket. You're making more than 100% greater than the cost of the funds. Okay? And I'll prove it to you here in just a moment.
The key elements of a prudent investment are liquidity, the, uh, ability to access your money when you need it, safety, safety so that if the asset goes down in value, which real estate will go down in value usually once every seven years due to the soft real estate market, you don't want to lose. If you leave the equity in the property, you will lose. And to earn a rate of return, real estate equity fails, uh, the liquidity, safety, and rate of return test. Maxf funded IL, uh, passes it with flying colors. Okay, I learned this lesson the hard way. Uh, clear back in 1978, I built my first home, uh, and, uh, I was able to build that home for $150,000. I've never paid a down payment for any piece of real estate I've acquired or home that I built. I've satisfied down payments, but not with my money. And so I built that home for 150 grand. And, uh, we moved in and it appraised for $35,000. I I thought we had the world by the tail. Now, uh, that equity didn't happen because I put in a bunch of cash. It it just was worth twice as much as we built it for.
Well, what happened, um, a couple of years later in 1980, uh, in in the country, we had a major energy crisis, uh, and in Houston, Texas, uh, 16,000 homes got foreclosed on. Not because 16,000 people all of a sudden became bad people. They just couldn't make their mortgage payments. Those who had been making extra mortgage payments maybe for five years. Uh, they they probably said, "Hey, uh, Mr. Mortgage Banker, I've been sending you an extra hundred bucks a month against my mortgage. I calculate I'm nine months ahead. I'm just going to I'm just going to coast for nine months until I get back on my feet here and, uh, and so just just, uh, uh, let me coast for nine months." No, it doesn't matter how much you pay. I knew a a person back then that just had paid an extra $100,000 against the mortgage. They lost their job. They got foreclosed on in 90 days. Okay, your next mortgage payment is due. And so I learned that lesson.
And so three things happened to us that I never dreamed would happen simultaneously. A a supervisor above above us in the company I was with embezzled money. And so they stopped all of our incomes while they were trying to find out who it was. And it was him. But, uh, me and two others are we got behind on our mortgage payments because we didn't have any income. Now fortunately I had some liquid assets. I had a a time share at a ski resort that I sold and brought my delinquent mortgage current. I had a duplex that had equity in. I sold it and brought my delinquent mortgage current, but then I didn't have any other liquid assets. So, I put my house up for sale. It I had a bonafide appraisal for $35,000. I listed that house for sale for $295,000. Now, when there's more supply than demand, uh, no takers. So, I quickly lowered the price of the house down to 285, 275, 265, 225. I'll never forget the day when my wife and I walked into the county courthouse in Provo, Utah, and we watched that beautiful dream home get foreclosed on.
Now, I learned the lesson. Uh, and so I went out and bought another home within seven days with no money down and no credit. Uh, my acquisition of real estate has really had nothing to do with having cash or credit. That's another topic. But the point is, I learned that, uh, equity meant nothing but a number on a sheet of paper if I couldn't access it. It was not liquid, safe, nor did it earn a rate of return. Uh, I learned that it's a lot better to have and not need than need and not have. Okay? It was a lot better to have access to that $150,000 of equity in my house and not need it than need it and not be able to get it. Because if you go to a bank and you try to borrow on a property, they only loan you money based on your ability to repay. If you lack the ability to repay because I didn't have an income, what are they going to tell you? Fat chance. Okay? It's that simple.
Now, the second reason why I keep my real estate equity separated is for peace of mind. I sleep way better at night with my house mortgaged to the hilt and the equity separated from the property, uh, in the event of any financial situation that's out of my control. Uh, some people say, "Well, I I want to sleep better by having my house paid off." I said, "You don't know what you don't know." And then they begin to realize what happens because they send extra principal payments against their mortgages and they have no liquidity and then all of a sudden they get laid off or the house goes down in value and everything they sent in extra principal payments, uh, is gone, uh, just with what one drop in real estate value like 2008. So I do it for peace of mind. Okay. Uh, it could be physical disability, unemployment, financial setbacks, recessions, liability exposure, uh, the need to liquidate. Okay? That's why I keep it separated into maxf funded IL cuz I can access that money with an electronic funds transfer or a phone call if push comes to shove.
So let's go to reason number three because houses were made to house families, not to store cash. And so once you understand this, u your your house or your real estate isn't a good repository for cash. It houses people, not money. And once you begin to understand that that, uh, real estate does not pass liquidity, safety, rate of return test at all. And I'll prove it to you in, uh, these, uh, future, uh, reasons. Okay.
Reason number four, I keep it separate, is to protect my equity from liability lawsuits. Unfortunately, in the sue-happy society we have become, uh, there's a lot of people that will try to sue you, uh, for your real estate equity. And, uh, most of these people, if they if somebody slips and falls on your front porch or their child gets hurt on a trampoline in your backyard, uh, they will sue you, uh, for all of your net worth. Now, if you have a bunch of rental properties and you own them in joint tenancy, good luck, because they will sue you for everything you own. Let's say you think you're pretty smart and you put all of your rental properties in an LLC, limited liability company. Well, anybody that's going to sue you, they're going to go, "Oh, uh, how much equity is in that rental, uh, where that mishap occurred?" Oh, and, uh, look, there's another, uh, nine rental properties in that LLC. They'll go after all of that. And if you were paying down the mortgages on all of those with your positive cash flow, they go hot diggity dog. They can sue you for way more than your insurance limits. It happens all the time. So, what do you do? You want you want to know what I do? I have all my real estate mortgaged to the hilt. First mortgage, uh, 80s% loan to value. The last 20%, because I have good credit, I separate it. 100% is out there. There is no equity in there. And I have a separate LLC for every single rental property. So, if something happened and they wanted to sue me, uh, they they look and they go, "Oh, uh, uh, there there there's this rental, but that's the only thing in this in this LLC." Oh, uh, and it's mortgaged to the hilt. Who's going to sue you for your real estate equity if it's not there? Some of the most savvy asset protection attorneys in America said, "Doug, you you solve a problem we've been trying to solve for years. Who's going to sue you for your real estate equity or your home equity if it's not there?" I could give you dozens of stories of how people have thanked me for that. But see, so many people have all of their real estate in their in their own personal name or joint tenancy or in one LLC and it's all game. If you keep the equity separated into IL and, uh, you put that in an Alaska trust, there's not an attorney in the country that would waste their time trying to access your real estate equity. Okay? And by the way, this is why you shouldn't add your children's names to real estate deeds. You can't believe how many people I say, "How many of you, uh, think you're avoiding probate on your real estate by adding your kids' names to your house or your real estate?" And they sheepishly raised their hand and I go, "Uh, you just created far more problems than you solved." Yeah, you you avoided probate on that. But guess what joint tenancy means? It means, uh, everybody on that deed owns it all. It's like a joint checking account. Okay? If you have a joint checking account with your spouse, you can write out a check for 100% of what's in that checking account. Your spouse can write out a check for 100% of what's in that checking account. Does that mean you have twice as much in there? No. Well, when somebody's suing you, if your house is in joint tenancy, they can sue any one of you for 100% of the value of that house. You add your child's name to that and your child is texting on the freeway, okay, and gets in an accident, it takes about five minutes to do an asset search and they go, "Oh, uh, this this young person, uh, owns 100% of of this house." And and the parents may say, "Oh, no, no, no. That's our house. Uh, we just added their name to avoid probate." Doesn't matter. They own 100% of it, too. You don't do it that way. You set up a trust. You don't add their names thinking you're solving a problem. You're creating far more problems than there's even another problem. You start throwing your kids' names on there. That means you gifted money to them. And if you exceeded the gift tax, uh, exclusion, uh, they're going to you're going to owe a whole bunch of gift tax because you added their names. Don't do that. Okay.
Uh, let's go on to reason number five. To keep my equity safe from real estate market downturns. The real estate market, uh, it doesn't fluctuate sometimes in 30 days dropping 30% like during COVID-19, but like 2008, uh, real estate went down in value, uh, 30% or more. My own personal residence in in 2008 went down in value from a million five down to a million one. I could see the writing on the wall because I knew there was going to be a mortgage meltdown in December of 2007 and I refinanced my house, uh, uh, totally 80% loan to value on the first mortgage and the last, uh, 20% of my equity I pulled out with a second and third mortgage. It was mortgaged 100% and I put it out into IL. So let me let me show you what happened. Okay.
Now back in 2008, this relates to another reason why I keep my real estate equity separated. Uh, back in 2008, interest rates were low and so banks, um, if you understand how money works, banks were borrowing OPM, other people's money. Uh, people deposit money in a bank and what were they paying? Less than 1%. Let's say they were paying 1%. So banks, uh, their greatest asset is their liabilities. Uh, they were paying 1%, let's say every year on a million bucks. So they pay 10 grand. Why why are they doing that? Are they just a benevolent institution? No. Uh, if they stopped paying interest, they would wither up and die. They don't view paying interest as their foe. That's their friend. Okay. And so, uh, the banks, 400 went under in 2008. 900 more were on the watch list on the brink of going under. And the ma and the federal government asked the five major banks in America to disclose where they had their tier one assets for liquidity and safety. Guess where they had it? In bolle bank on life insurance. Exactly where I keep my real estate equity. So, uh, they were earning, uh, 4 or 5%. So, they turned around and they were paying 10,000 on every million and they were putting that money into insurance companies increasing the safety by six notches. Okay? Most of those banks were rated triple B. Uh, these insurance companies, they turned around and put your money into a rate of AAA. That's six notches higher. And they were earning four. How much more is four than one? Don't don't don't say three. 400%. Okay, that's a 300% profit. That's 400%. You know what I was doing in 2008? I was borrowing on my real estate. It was low interest, 3 and 3/4%. So on every million, I paid $37,500 a year. That was not a cost. That was an investment. Because of my tax bracket, the net cost of that mortgage, deducting that off of my tax returns was 2.5%. Okay? In a 33% bracket. So, the net cost of every million dollars I had separated, uh, was 25,000 a year. Piece of cake. Why? Because I was earning 10% on my IL in 2008. How much more is 10 than two and a half? 400%. Hello. Uh, the banks were making 400%. I was making 400% cuz I'm my own banker. Uh, did you miss out? Don't miss out again. So, let me show you what happened with my house. My house was worth a million five in December of 2007. I refinanced the first mortgage at 4 and a .5% tax-deductible interest, a net cost of three. Okay? And so, I was paying $67,500. I deduct that. Okay? And the net cost was 45,000. Okay? Now, uh, the 45,000 was actually an investment because, uh, on the very first year on that million, uh, on a million two which is the first mortgage but on a million five, 8% I'm making 120 grand. How much more is 120 grand than 45,000? 75 grand. I'm making 75,000 bucks on, uh, the equity on my house even after it went down in value. I kept making money even though it went down in value to a million one in 2008. The last, uh, uh, 20%, uh, 400 grand. I had the critics that go that went, uh, neener. Mr. Andrew, you're underwater. You owe more than your house is worth. Did I care? Did the mortgage company care? No. They were thrilled. They were foreclosing on everybody else that had been sending extra principal payments against their mortgage. They had no liquidity. Uh, I, uh, on that 400,000, uh, if I borrowed at 6%. Because usually second and third mortgages are a little bit higher, tax-deductibles and net cost of four. For 400,000, it I serviced that debt at 16,000 a year out of my pocket. What was I earning on that 400,000? I was actually earning 10. Let's just say eight. How much more was eight than four? 100%. I could peel off half of the interest I was earning on that 400,000 and make the payment on the 400,000 and have a bunch of money left over. Are you getting it? Okay, let's go to reason number six.
It's because your money needs a home safer than your house. Now, uh, until you understand this, uh, you might sleep okay, but after you really get this, you will no longer sleep soundly if your house is, uh, free and clear of a mortgage. Okay. So the way I like to explain is like the story of the three little pigs. Uh, real estate is moderate risk. Okay. It's like the house of sticks in the story of the three little pigs. Uh, we have the stock market which is, um, like, um, the high-risk, uh, stocks, mutual funds and what have you. The big bad wolf can blow down this one, uh, in 30 days like COVID-19. But real estate like 2008 can drop, uh, 30% over a year. Not as volatile as the stock market. Uh, what I'm talking about is I keep my serious cash, my real estate equity separated from here over here. Okay, in a house of bricks. And so money market accounts, CDs, annuities, those are low yielding. Uh, I put mine in, uh, property structured maxf funded IL where the banks put your money in insurance contracts where I am earning 8 and 10% tax-free compound interest and I pay simple interest tax-deductible on my real estate. Now the big bad wolf, who's that? It's not the IRS. It's it's the pandemics. Uh, it's it's the fires, the hurricanes. Is it's the things that blow down the stock market and the real estate. So if you understand what I'm saying is, uh, when we look at this scenario here, uh, what I want is to participate when the market goes up with index universal life. I benefit when the market goes up, but when the big bad wolf blows down the stock market, I may not make anything that year, but I don't lose I don't lose one dime. When my real estate goes up in value, I refinance it. Separate the equity. I benefit. But when the real estate value goes down or if it's vacant, it doesn't matter because my money is not in there. It's over here earning a rate of return greater than the net cost of the funds. I keep making money even if my real estate rentals are vacant. Okay.
Reason number seven, I keep it separated, to be treated more favorably by financial institutions during market downturns and be able to sell my house quicker and for a higher price. People have a hard time understanding this. Okay, let me, uh, say it this way. If, uh, a mortgage company had had a bunch of homes in their portfolio and so they they have a home, a million-dollar house and, uh, the people have been paying extra principal payments against it and so the mortgage on that house is only $200,000 now. Okay, but it's worth a million. Okay. Uh, and then they look at my house and, uh, it's worth a million and and
And I owe 800,000 or a million on it. Okay. Now, both both properties are worth a million. Okay. And so, uh, all of a sudden, um, if, uh, we get in a little bit of trouble and I get tight, I've already told you I have money. I I won't be in trouble, but let's say I missed a payment or two, uh, and this person missed a payment or two. Uh, what's the mortgage lender going to do? They're gonna work with me because if my million-dollar house went down in value to 800,000 or 700,000, okay, and I owe a million, they'll work all day long with me. They always do. Mr. Andrew, what can we do? Uh, can we uh can we just tack the uh we'll let you go for six months without making a mortgage payment. We'll we'll put it on the the end of your loan and and they work with me. Okay.
Uh uh and uh what do they do to the person that only owes $200,000 on a million-dollar house and that house goes down in value to 800 or 700,000? They they got a lot of cushion. They foreclose. 90 days. They start foreclosure. That's what I'm talking about. A mortgage lender will treat me far more favorably uh because uh I owe uh as much or more than the house is worth. The people who have have a bunch of equity in it because they've been paying extra principal payments. Uh they're foreclosed on faster. Now, who's going to sell their home? What if both of us decide to sell our home? Guess who's going to sell their home for a higher price and quicker? I am. Why? Because uh uh I can I can come in and and I can show people, hey, you just come in and you don't even have to qualify. I'll sell you my home on contract and uh I'll sell you the house for for $800, 900,000 or a million dollars. You just start making the mortgage payment or whatever. But the person who only owes 200,000 on that house that was worth a million and now it's down to 800,000 uh they have to find somebody who can qualify for a mortgage or has to sell their house first before they'll buy it.
Now folks, these are real stories. Uh you will sell your house for a higher price and quicker if you have a high mortgage balance, okay, and uh your money separated than if you have a low mortgage balance and all your equity is trapped in the property and you have to wait around to find the right buyer who who will cash you out. Okay, if you don't understand that, you better watch this again. Okay. Reason number eight, I keep my real estate equity separated because you're going to incur uh opportunity cost or employment cost on your real estate. One or the other. But if you have to incur one or the other, I would rather incur deductible uh employment cost rather than non-deductible opportunity costs. So, if you don't know what I'm talking about, whenever you borrow money, you should borrow to conserve, not to consume. Okay? Uh you can see home equity lines of credit darting all over the lakes in the summertime in the form of boats and jet skis. People borrowing their home uh from their home equity to buy depreciating assets. That's dumb. When you borrow, you borrow to uh conserve as I'm going to show you here in the next uh a few reasons. Uh but there are four things you can do with money. Okay? You can spend it, lend with it, own with it, or give it away. I double dip. I own and loan on the same asset. And I'm way ahead. I'm in control. So let me help you understand uh opportunity versus employment cost.
See if I keep my real estate equity trapped in the property. I have given up the opportunity to earn a rate of return because the real estate's going to go up or down in value whether it's mortgage to the hill or free and clear. Do you understand that? But if I separate the equity, I give it the ability to earn a rate of return on top of whatever it will do. So if I leave it in there, I've given up opportunity. It's an opportunity cost. I could be earning 6, 7, 8% on that. It's a real cost. Okay. Uh now, if I separate it, I'm going to have to have a cost on a mortgage. Okay. And so sometimes people say, "Well, yeah, if you pull it out, uh then then you're incur a mortgage cost." Well, yeah, but I can get a mortgage for 6% with my credit. So, I incur a 6% uh mortgage cost. I call that employment cost because I'm not going to just put it in the vault. I'm going to employ the money. But see, it's not really 6%. It's deductible cuz I can show you how to deduct the interest on your home mortgage uh and itemize your deductions. Okay? If I pull it out at 6%, it's a net cost of 4% in a 33% bracket. So, if I have to incur one cost or the other, the opportunity cost is 8%. The employment cost is only 4%. If I have to incur one or the other, you will incur one or the other. I'd rather incur, okay, the much cheaper tax-deductible employment cost of 4% than to incur an 8% cost. Does that make sense? If it doesn't, then bless your heart, you're missing out.
Banks, they'll easily borrow a million dollars, like I said, in 2008, and they'll gladly pay 10,000 in interest. Why? They turn around, they put it in insurance companies and make five 500%. That's 400% profit, but it's 500%. You know, uh, for the last 40 years, um, on a million dollars, I have paid as high as 21% interest, as low as 3 and 3/4, uh, but probably an average of six. So, if I borrow at 6%, I get to write off 60,000 off of my tax return. In a 33% bracket, I am saving a third of that, 20,000. That's real money. It's not paper money. I get $20,000 back, okay? Of otherwise payable tax. So the net cost of that is four. You need to understand this. That's my net cost. If on that million all I do is earn eight, how much more is eight than four? Don't say four. It's 100% more. Would you hire an employee for 40 grand that made you an extra 80 grand? Would you buy a widget machine for 40 grand that made you an extra 80 grand? That's that's a 100% return on employment cost or equipment cost. Okay.
Now, here is a low interest environment like 2008. I borrowed at three, a net cost of two in a 33% bracket. I was earning 10. How much more is 10 than two? 500%. The banks were making 500. I was making 500. Folks, uh you need to understand how money works. Now, let's go to the ninth reason to get out of debt much faster and smarter. So, watch. You can get out of debt about two and a half years sooner than any method of sending extra principal payments against the mortgage. But you got to be disciplined. Okay? When we talk about out of debt, there's smart and quick ways. Smarter and quicker ways, but the smartest and quickest way is not any way, shape, or form sending extra principal payments to the mortgage company. And I can prove it to you. Okay? Every time you send extra principal payment to the mortgage company's like, "Here, Mr. Mortgage Bank, is an extra hundred bucks or $1,000. Don't pay me any interest on that. If I want it back, I'll borrow it back on your terms and prove there's a need why I should have it. Yeah. See, years ago, there was a company that had this fancy software. They charged like 800 bucks for it that would show you, get ready, uh which credit card you ought to pay off first, the 12% interest one or the 18% interest one. Yeah, that's not rocket science. So, what they did is they had the software. And so with any discretionary income you had, they'd say, "Quit spending. Uh, pay off the 18% card and then take that money and then pay off the 12% interest and then pay off this automobile loan and then pay all this against your mortgage and bam, in 12 1/2 years, you'll have this 30-year mortgage." And the mortgage they assumed at the time was was a $210,000 mortgage. You'll have it paid off in 12 1/2 years. That's good. And then they said, "Now sock away that money that you were sending in extra principal payments and put it into a tax deferred IRA or 401k and you'll end up with 8% returns with a $987,000. Well, that's good. Okay, that that's a good way. Far cry from the best way.
Uh the problem is uh that's tax deferred. Uh you're only going to net about 600 650,000 because a third of that will belong to the government. Okay? So the net of that is about 650,000. Now uh what I would recommend is you don't send it to the mortgage company because you're going to be killing your partner that tax-deductible interest. So, I use interest-only mortgages and I put it over into the IL compounding tax-free while I pay simple interest over here. And I have enough money in my IL policy to pay off that mortgage in 10.2 years, 2.3 years faster than the same amount of money it takes to pay it off in 12 years. Same money. I'm out of debt 2 and 1/2 years sooner. And then I sock away the difference and I end up with a 245 grand tax-free in an IL. Twice as much money. Hello. That's not what I do. See, uh, when I have enough money in, uh, 10.2 years that I can take out the money out of the IL and pay off the mortgage. I don't do it because I would be firing an employee, so to speak, that's making more than double what they're costing me. Why would you do that? That's not smart business sense. And so I keep it separated and uh I I I just let it continue to go and it goes to 800,000. Um I don't even do that. What do I do? I refinance my property every five, six, seven years. And by repeating the process, that turns into over 4 million bucks. Math doesn't lie, folks. Okay? Now, if that went over your head, I get it. But um you're you're you're missing out on millions of dollars. So, here's the good way. You're a half a million ahead. Here's the better way. Here's the best way. The difference between the employee cost and how much the employee made you in profit over and above the cost. Don't fire the employee. Don't pay off the mortgage is what I'm saying. Okay.
The Federal Reserve Bank of Chicago issued a report in 2008 uh six when my second book came out. And uh this was a 38-page report which was the trade-off between mortgage prepayments and tax deferred retirement savings. Okay. Uh in this report uh these gurus, three gurus came up with this conclusion. Uh Americans are making the wrong choice if they're sending extra principal payments to the mortgage company. They said mortgage overpayments would be a misallocation of funds. In their opinion, they said if you changed your allocation, instead of sending it to the mortgage company, you put it in over into an investment compound. Just tax deferred. I will is tax-free. You would uh you would reap a substantial gain. Yeah, I just showed you that gain. And they called this strategy a rather conservative approach to optimizing wealth. This is the Federal Reserve Bank of Chicago. Okay. The 10th reason is to leverage with full liquidity. Okay. Now, what's leverage? It's the ability to own and control assets with very little or none of your money tied up or at risk in that asset. Okay. So, uh, leverage is this banks, uh, use it to make millions and billions of dollars. They borrow OPM, other people's money, uh, and and pay you, let's say, 4 and a half% interest on a on a savings certificate, and then they turn around, they put a lot of that back into banks making more, or else they'll loan you this money back to you at 7 12%. And that's a difference of 3%. They have overhead costs and everything. They they may only make a net of 1% and they make millions. Now I have critics out there. They go, "Oh, whoa, you'll do all that for 3%." Yeah. Hello. That's how banks are wealthy. Okay. That's not 3% difference. That's almost 100% more than they're paying for that. Okay. And so when we talk about leverage, you want to maintain liquidity. So, let's say you have $500,000 of cash. You could go buy one rental property and pay cash for it if it was selling for 500 grand. Okay? Now, it's all tied up in the property. I would never do that. If you leverage like most people do, you go, "Oh, I'm going to take a 100,000 of that 500,000 and pay it as a 20% down payment on five rentals." Now, you have five rental properties, but you have no liquidity. So, if you get into trouble and they're vacant, you don't have any positive cash, especially if you're sending extra principal payments against those mortgages. That's stupid. Now, what I do is I keep the $500,000 of cash liquid over into an IL, and I mortgage those five rental properties, 100% loan to value. If you have good credit, you can do that. Now, I have leverage with full liquidity. So, if you understand what I'm talking about, uh you don't want to get into trouble by overleveraging with no liquidity.
Now, the 11th reason I keep my real estate equity separate is to earn a return because the rate of return on real estate equity is always zero. Zip, nada. Now, a lot of people have a hard time understanding this. Let me let me say it this way. If I had a tin can and uh you put a $100 bill uh in that tin can and buried it in your backyard. Is that $100 bill buried in the tin can in the backyard liquid? Yeah. As long as you can remember where you buried it. Your spouse uh doesn't know where you buried it. Is it safe? Yeah. Again, as long as maybe your spouse doesn't know where you buried it. But let me ask you this. Is it earning a rate of return? No. In fact, it's doing what? It's probably losing value. Okay. uh because of inflation. What's the difference between this $100 bill buried in a tin can in my backyard and the hundreds of thousands of dollars we tie up in the bricks, mortar, wood, and foundations of our real estate? Nothing. In fact, I would submit that this is more liquid and safe and uh than the money we put into the property. Now, imagine this. If I had an actual pitcher and goblet here, I would do this right in front of you, but use your imagination. Let's say I have a picture and I have a goblet. Okay? And this goblet represents your house, a piece of real estate, and you have not put your first dollar of liquid cash into it. And you have a you have a a picture over here with $100,000 of liquid cash. Okay. Now, I have $100,000 of liquid cash in in the bank, or better yet, an IL. And I have a $100,000 house. I have a $100,000 asset here and a $100,000 asset. What do I have in total assets? 200,000. Now, it may be true that you have $200,000 of assets and $100,000 liability for a net worth of $100,000 day one, but day two forward is much greater if you keep them separated. Here's why. If I start pouring all this extra principal payments and cash into the goblet here into the house and I pour all of that cash into there and I pay it off, what did I just do to my assets? I just took one $100,000 asset, my cash, and another $100,000 asset, the house, and I combined them together into one $100,000 asset. I just cut my assets in half. Do you get it? Okay. 200 went down to 100. Okay.
Now, what happens uh if I have all of my equity in a in this property? Uh what if it gets destroyed in a fire? What if what if uh uh you lose your job or whatever? It's trapped in there. I've already told you that. So, uh what if this uh house goes up in value uh 5%? What's it worth? 105. Okay. So, if I pour all of my cash into that house and it goes up 5%. Now, what is it worth? 105. Why the same answer? Because this equity in the property has a 0% rate of return. Your your house goes up in value. Your real estate goes up in value regardless of whether it's full of cash or empty of cash. Mortgage to the hill or free and clear. Do you see that equity has no rate of return? The property appreciates as a function of inflation and appreciation or that the mortgage reduces uh be but equity has no rate of return. The only way your equity has a rate of return is if you separate it. So if you separate it from the house and put it back over into a cash position into a max-funded IL, now you've doubled your assets. Okay, so far so good. So now that house goes up in value 5%. Okay, you made 5,000 there, but now your cash grows 10%. How much did you make over here? 10,000. Oh, because they were separated. I made 10 grand here and five grand here for a total of 15,000. 15,000 is how much more than 5,000 when the house was paid off? Three times more money. But but but there's a mortgage there. Is that good or bad? Let's say that mortgage is 6% interest, tax deductible and net cost of four. So, uh, you have 4,000 in interest you're paying on that $100,000 uh, mortgage. Okay. So, I made 15,000. 5,000 here, 10,000 here in my IL. I have 15,000 minus the $4,000 mortgage is a net of what? 11,000. More than double what I would have had had I had all my cash tied up in the house. Do you get it? See, equity has no rate of return. When equity is kept separated, you have twice as many assets. You have the assets here in the IL and you still have your real estate.
Okay, let's go to reason number 12 is to become your own banker. Uh put money to work for you. Okay, make double to triple the cost of a mortgage. Hopefully, you've already seen that. If you separated a 100,000 of equity out of a property and you borrow that at 6.5% interest, even if you couldn't tax deduct it, it's worth it because you're making a huge spread here. Okay? You're making about uh 33% more than the cost of the mortgage. But if you can tax deduct that and you earn 8 and a half%. I've had critics go, "Borrow at six and a half and only earn eight and a half." you'll do all that for 2%. And I'll go, "Yep." Why? If I did this as a oneoff and never refinance this property, the first year I'm I'm ahead 4,100 bucks. By the 15th year, I'm I'm ahead 174,000. Year 30, a million dollars, folks. A million bucks. Math doesn't lie. Now, that's one a oneoff on a h 100,000. If you're watching this video and you have 400,000 of lazy idle equity trapped in a property, I'm talking about 4 million bucks. If you repeat the process, if I refinanced every 5 years and my real estate only appreciated 5%. Meaning it takes 14.4 years to double in value, this would be 4.3 million instead of 1 million by repeating the process. Hopefully, you're beginning to see how to become your own banker. Uh, I've helped many of my savvy real estate clients who are landlords uh refinance uh their properties. A million-dollar mortgage at 4 and a.5% interest because they have good credit. Tax deductible is a net cost of three. And on their max-funded IL where we put the million they pulled out of the property, it's earning nine. How much more is nine than three? 300%. What does this mean? If this rental property is destroyed, they are in control. If this rental property is vacant, no renters, they're still making 300% more than uh more. Okay, they're making 300% or 200% profit. They still have $60,000 of cash every year, more than they need to make the mortgage payment. That is how to become your own banker. Okay. Now what people don't understand is in a max-funded IL laser fund the same thing when you access money out of an IL you can withdraw it but that's dumb. Okay now it's no longer in there earning interest. So the same concept applies with IL. Uh if you have a million dollars in there uh you can uh borrow it out at 2% interest and uh the insurance company will uh uh charge you two excuse me will credit you 2% on that million. Technically speaking, the insurance company is loaning you a million using the million of cash value in your policy as collateral. So that's called a a zero-cost loan. They charge you 2%, they credit you 2%. So uh it's tax-free and you don't have to uh it doesn't cost you anything. But most of my savvy clients, they understand what I'm teaching on this video. They borrow out at 5%. And they keep earning the index rate, which they average 10%. How much
More is 10 than five? 100%. They keep making 100% more than the cost of the mortgage by becoming their own banker with laser banking.
Okay, let me show you something here. I had a client in 2017. He's he's a major real estate investor. He buys strip malls and big, uh, multi-unit apartment complexes, fixes them up and flips them. He doesn't like to be the landlord because he has a a pool of of sellers and buyers. Uh, but the buyers want a fixed-up property. He called me in 2017 and said, "Doug, I got a strip mall and uh I need a million dollars to uh for an earnest money agreement to tie it up." Uh, send over that that that form. It's one sheet. Uh, he puts his name and his policy number for his IL policy. And uh, it asks, "Do you want to withdraw a million?" No. Uh, do you want to borrow a million from us using your cash value as collateral? Yes. Do you want to borrow at two and and be credited to? No. Do you want to borrow uh with an index loan? Yes. He borrowed a million in 2017. Uh, 5% interest. He doesn't have to make out a check for that. That's 50 grand. They deducted it. Guess what he earned on that million that was sitting there as collateral? 25% that year. He made 250 grand tax-free on a million that was collateralizing the loan from the insurance company. And they charged him five, 50 from 250, he netted 20% tax-free, or 200 grand on his million while he was using that million to make 2 and a half to three million buying, fixing up, and flipping a strip mall. Are you getting it? Okay.
Now, here are the last two reasons. Reason 13 why I keep my real estate equity separated is to prevent someone from stealing the title to my house. You hear these ads, oh, you need to get title theft protection because people in the world go and they go to the county courthouse and they look up your house and then they put their name on your title and then they go borrow on your house and all of a sudden they stole your title and now you owe a new mortgage. I don't have to worry about that. Why? Who's going to go steal my title if the house is mortgaged to the hill? That would be dumb. They would inherit my mortgage. I don't need title theft protection. Nobody's going to steal the title if I have it mortgaged and all my equity is separated. Hello.
The 14th reason is really why you probably pulled up this video. You throw anything at me, anything at me, any disaster. If my house were to slide down in a mudslide, get burned in a fire, uh get flooded, uh be destroyed in an earthquake, I'm in control. I have all the options. uh I can um go ahead and uh take my time, let the homeowners insurance sit there and argue with me and uh they're going to rebuild and everything like that. I have the money to go out and I can stay in hotels. I could I can build another house. I could buy another house for cash if I wanted to or mortgage it, which is what I would do. But see, I have all the options. Uh, some people when their home gets destroyed, all of a sudden they realize, "Oh golly, my homeowners only uh covered my house uh for 800,000 and it was worth a million, too." And so now they're only going to pay you 800,000 and to replace it's going to cost you 4 or 500 grand. And uh all that money is down the drain. It got destroyed in the disaster. Do you see what I'm talking about? I have way more options because my money did not go up in smoke or go down the mudslide with the house. My money was separated and protected. So, I have all kinds of options on where to go live and how I'm going to afford it. I'm making uh double or triple the cost of the mortgage. I can I can do all kinds of things because I sleep at night better because my equity is separated in a position of liquidity, safety, earning a rate of return double or triple the net cost of the mortgage and it's tax-free. I'm in control. I would implore you to stay in control.
So, if this is resonating with you and you want to learn more about what an IL laser fund is, claim a copy of this book. Uh, this has been flying off of our warehouse shelves. U, it retails for 20 bucks to 60 bucks on Amazon. If you buy it on Amazon, thank you. It's 300 pages, jam-packed with information. 200 of those pages are charts and graphs and explanations. But if you're a right-brain learner, you flip it over to this book. It's actually two books in one. This one is about 100 pages with uh 12 chapters of 62 actual client stories. And uh how property structured max funned IL is the dream solution for many goals. Okay. And why it passes liquidity, safety, ready return, and tax advantage test with flying colors over any other place you could put money. Okay.
Now, uh I I can gift you a copy of this if you simply go to laserfund.com or click on the link below. Uh you'll uh contribute a nominal amount towards the shipping and handling. I require a little skin in the game, but I'll pay for the book. I will fire out a hard copy to you via priority mail. And while you're in there claiming your free copy, if you'd like to listen and learn or watch and learn, there's audio and video formats available for your investment. But, uh, when you're in that website, um, if you want to register for a free educational webinar that we teach every week, you can do so. You can even schedule an appointment online to talk to an IL specialist that I oversee and they'll create illustrations on how this may work for you in your particular set of circumstances with no cost, no obligation because it's imperative that the IL is structured correctly and funded properly to maintain liquidity, safety, ready return, and tax benefits I've been talking about on this video. So folks, other than that, uh I I have uh no other strong feelings on this subject. That's why I keep my real estate equity separated. I like options. I suggest you maintain options. [Music]