Leverage with liquidity and safety. In this episode, we're going to
address the question "How can i get greater returns
on my rental properties?" So, hang on. You're going to be blown away with
opportunities that you didn't know existed and why
most people that own rental properties are
missing out on a fortune.
So, I'm Doug Andrew. And what do I know? Well, I wouldn't say that i'm a huge
real estate investor. But having said that, I probably own
more real estate than most Americans do. And
the reason I don't own a lot of rental properties is i just don't like the
headaches of being a landlord taking out the trash evicting tenants and fixing
toilets and so forth. And yes, I know I could hire property managers
and so forth. But let me tell you what i do with mine and I have a lot of clients
who are multi-millionaires and billionaires
who will agree with these 3 strategies on how you can optimize
your rates of return on your real estate properties if you have some that are
non-owner occupied rental income real estate properties.
Maybe rental homes, duplexes or whatever. So, get ready
here is number 1: You need to increase the liquidity, safety and rate
of return on the real estate equity. How do you do
that? The rental property is going to go up
or down in value regardless of how much equity is in the
property. If it's mortgage to the hilt or free and clear, it has nothing to do. See,
the rate of return on real estate equity is always the same.
Zero. We have this misconception that because
the property appreciates or the debt reduces
that equity has a rate of return. NO. Equity doesn't have a rate of return.
The house or the the property will go up in value or down
in value whether it's got a ton of equity or very
little equity. Has nothing to do with the amount
of equity in it. When you separate the equity to give it a
a better liquidity and safety, now you can increase the rate of return. So,
this is why on all of my rental properties, I keep
the equity separated. I will borrow 80, 90 even 100% on a first
second third mortgage. I keep as much equity separated from my
properties as possible. I refinance them every 2, 3, 4, 5 years as
is feasible. And where do i put the equity? I put it
over here in this pocket, so to speak. Now, my favorite
vehicle that passes the liquidity, safety and
rate of return test with flying colors that the property does not is what i
call The Laser Fund. It's a maximum-funded insurance contract and it's way
safer than in the property. So, i'll give you an example here.
When I separate the equity and i have it over here,
let's let's say a million bucks. If I have a million dollars over here,
it is protected from the market downturn. So,
if my properties go down in value, for example my house
in 2008 went down in value from a million five to a million one.
I didn't lose 400,000. My house
went down in value. But if i had had the equity in my house,
I would have lost 400,000 for several years until it came back up
to a million and a half. No. I actually had
my house mortgage to the hill with a first
second and third mortgage. And I had that money over here earning a rate of return
of at least double the cost of the mortgage. It was safe. I
did not lose. And a lot of people go, "Oh, you're
underwater, Mr. Andrew. You owe more on your house
than it's worth. And I go, "I'm in control." So, my money over here has been earning
let's say 8%. It was actually earning 10. At 8%
compounding tax-free. So, let's say it's a
million bucks. I have a million bucks over here earning
8%, that's 80 grand. If I have a million dollar mortgage on the
property and i'm borrowing at 4.5% tax deductible interest which you can do
on schedule E or your LLC whatever you own the property in, if you do it right.
If i borrow at 4 ½ and i'm in a 33-
tax bracket, it's only costing me a net of 3. So, every million I'm paying 30
grand a year of interest. But interest is my friend not my foe.
This is why banks pay interest to make more interest. So, they borrow our
money at 1% and they make 5%.
I'm borrowing money at a net cost of 3
when I borrow for mortgages at 3%
tax deductible it's a net cost of 2. So, if my net cost is 2 or 3 percent
on a million bucks that's 20 or 30 grand, over here, I'm earning 80,
90, 100 thousand. How much more is 90,000 than 30,000?
Don't say 60,000. It's 300% more.
See on top of whatever my house or my rental property is doing,
I'm making 300% on the equity
regardless of whatever happens to the property.
Because it will go up or down in value has nothing to do
with what my money is doing over here. This money
here is compounding tax-free. The money in the property, okay>
I'm paying simple interest tax deductible compared to compound interest
tax-free. So this is how you become your own
banker. You ready for the second and third reason
why and how you can protect yourself and multiply the rate of return on your
rental properties? Watch. So, in order to increase my return
dramatically on my real estate, I not only have the
properties rent them out. And if you don't like
to be a landlord like I don't, you can get a good property management firm.
But there's a lot more to take into consideration than just the cash flow
from a piece of real estate. So, let me make sure you're clear that I
keep my real estate equity separated from the actual property. Because it's
going to go up or down in value regardless of whether it has equity or
it's free and clear or whether it's mortgage to the hilt
if i have the money over here. Now, that's called leverage.
Leverage though without liquidity is stupidity. People get into trouble
when they buy multiple properties. And they're leveraged to the hilt and they
don't have any liquidity. This is where a lot of people like Dave
Ramsey admits that he got way over leveraged because he didn't have any
liquidity. So, when the real estate went down in value,
everything imploded because he didn't have the cash.
Because he kept tying it up in equity in additional properties. No.
I use OPM. I always mortgage the properties.
If i have to pay a down payment, i'll pay the least amount down but
i have actually never paid a down payment for any property I've acquired.
I've satisfied down payments but not with my money. I keep my money
over here liquid and safe in case i need the money,
I can access it with an electronic funds transfer or a phone call.
I don't have to have to borrow it back out again because i learned.
When you need the money the worst is the hardest to get. They're not going to loan
you money if you don't have the ability to repay.
So, the equity in the property is useless to
me if i can't get to it. If it's over in my
Laser Fund, I can access it anytime i want.
So, liquidity and then safety. If the house or property goes down in value,
if my money's over here and it's protected from the market volatility,
which my Laser Fund is, I am safe. I do not lose.
Now, here's the third consideration: There's many
people that I've helped dramatically increase
their rate of return on their rental properties by repositioning
those properties or borrowing on them and acquiring additional properties
for the reason i just told you. But here's an example. There was a couple i
met down in palo alto california. And they had purchased this home for
like 230 thousand a five-bedroom home years ago and raised their 6 kids in
it. So, we fast forward to 35-40 years.
And that house is worth 4.8 million. Now, only in the bay area do you see a
five-bedroom home worth 4.8 million. Well, they were renting the
home for 10 000 a month and then they
increased it to 12,000 a month. And they're like, "Oh, look at us. We're
getting 12,000 a month rent." Now, let me just tell
you that's pretty pathetic. If you do the math, they were only
getting about a 2% annual rate of return on that 4.8
million dollar asset. I said, "Hey, why don't you either
sell this house and do a 1031 exchange into other properties in far
better rent-multiplier cities. Or else
i'll show you how you can just sell the house pay the capital gain.
put that equity into a portfolio of Laser Funds
and you'll generate about 250,000 a year of tax-free income
out of lazy, idol equity that was trapped in that house earning you a pathetic 2%?"
They went, "Wow!" So, let's use the 1031
example. This couple was able to take the equity
by selling the home and doing a tax-free exchange into over
20 homes in Memphis, Tennessee. Now, they have
newer properties. The homes in Memphis have a one percent
per month rent multiplier. What does that mean? A
5-bedroom home in memphis is worth about 300,000. Not 4.8 million.
But it rents for 1% of that a month or 3
grand a month. In other words, the house in Palo Alto, if
it's really worth 4.8 million should have been renting for 48,000 a month.
Hello? If it's not, it's not really worth 4.8 million. Something's wrong there.
So, they were able to diversify into over actually 20 homes. And then rent rented
out at 1% a month. After the property management, they don't
have to be a landlord. They were netting 10%. They 5
times their cash flow on those 20 homes. They went from
getting a 10 or 12 thousand a month up to
60,000 a month in rental income. Now, other
people like that we have actually had them just pay the capital gain.
In that example, we could have taken the capital gain tax and still
netted 2.8 million out of selling 4.8 million.
Take the 2.8 million. That was after buying another home for
600,000 which was twice the size of the one they sold. They
retired and moved to Utah. Well, the 2.8 million
in a portfolio of laser funds is generating
over 200,000 a year of tax free retirement income it's now up to
250,000. This is out of lazy idle equity that was
earning zippo in the property. It was giving them
rental income but only at 2%. Now, we're up to 10% tax-free.
We do this all the time. So, what are the great takeaways here?
If you want to increase the return on your rental properties,
don't just rely on the property to appreciate in value and have
rental income cash flow. I would recommend you keep your equity separated
in a position of liquidity, safety earning predictable rates of
return that are generally 2 to 3 hundred percent
greater than the actual net cost of the interest on the mortgage. You're
able to protect yourself so when the property value goes down, you don't lose.
And the third consideration is to look at maybe increasing the rent
multiplier from a measly 1 or 2 or 3
percent up to maybe 10 to 12 percent. Where you can be
getting up to one percent of the value of the
property in rental cash flow. Even after property management fees. Many
people are netting 8 to 0 percent. We have
done this for hundreds of clients and referred
them to specialists in this area. If this is
intriguing you, click on this episode. Watch it. Get a
copy of my book Laser Fund, thelaserfun.com. I'll send it
out to you. I'll pay for the book, you pay $5.95 shipping and handling.
And you'll see why The Laser Fund is used by many, many real estate investors
to increase the liquidity, safety and rate of return on their rental properties.