Returns on real estate can be infinite if you pay no money down.
In this episode, I'm going to enlighten you by answering the question
"How to calculate return on real estate investments?"
Now, I've been doing this for more than 46 years so get ready. I'm going to share
some things with you that you probably never
heard before.
So, my name is Doug Andrew. I've been a financial strategist
for more than 46 years. I happen to be here in my radio studio.
I record a new radio show every single week. I've been doing it for 12 years.
It's broadcast on several stations in America. Prior to
that, I started writing books at the turn of the century. I've written 11. I'm
going to write a book every year the rest of my life is my goal.
But as you continue with this education on this episode, if you want to learn
more in depth about what I'm talking about, make sure you click on the link
below and seize your free copy of my most
recent best-selling book that retails for 20 bucks.
You contribute $5.95 towards the shipping and handling which is usually a little
bit higher than that. And I'll send out a book to you
absolutely free. So, make sure you claim your free copy.
So, let's talk about how to calculate rate of return
on real estate. Now, first of all, real estate,
when you put money into a property, if you
pay cash which I have never done. I've never paid even a down payment for
any piece of real estate that I've acquired. And you're going to understand
why here. But if you pay cash let's say for a
duplex, a rental property. And let's say you paid 300,000 cash.
And then you sell it 10 years... Let's say 10 years later
for 600,000. So, you paid 300,000 cash and you sell it 10 years later for
600,000 and you go, "I doubled my money."
Now, first of all, when people say "I doubled my money", that doesn't impress me
until I know what? How long did you hold on to the
asset? And did you pay cash or did you leverage?
Using OPM, other people's money, borrowed money. Okay?
Now, if they say cash, I go, "Oh, that's easy. So, you held on to it for 10 years and
you doubled your money?" 10 years into the rule of 72, 72
means that you earned an average appreciation on that of 7.2%. I've
done that many, many times. That's ho-hum.
That's not anything to brag about. If you pay cash and you sell it for
double, you divide the number of years, it took for
you to double your money into 72 and that will give you the
compounded interest equivalent. 7% is not
anything to brag about. Now, if I say, "If you leveraged, if you used some
or all of OPM, other people's money, the bank's money,
now we're talking." So, what does that mean? If you paid 20% down,
(let's say) on a 300,000-dollar property, 20% would be
$60,000 down. And you went out and borrowed the
remaining 240,000. Now, it depends upon "Well, what did you
pay in interest?"
"Well, I borrowed at 6%." Well, did you deduct the interest on schedule
E or on the LLC or whatever?" "Yes, I deducted the interest."
So, between federal and state income tax, what is your
marginal tax bracket? Because you get to deduct the interest you're
paying off at the top off of the the last dollars you earn. So,
you use your marginal tax rate. Let's say between federal and
state it's 33% that or a third. So, if you borrow money on real estate
that is tax deductible because you did it right,
it's not costing you 6%, it's costing you 4%.
See, it costs you two thirds of that. Because you're able to.. Let's say on a
on a million dollar property, 6% would be 60,000. You can
deduct 60,000 of interest that year.
But you are saving in a 33% bracket
one third of 60,000 or 20 grand. You actually paid 20,000
less in tax because you deducted 60,000 of
interest expense off of your tax return. Does that make sense?
So, the net cost of borrowing money on real estate is based upon your
marginal tax bracket. But if you're in a 33 marginal bracket,
if you borrow at 6, it's really only a net cost
of 4. If you borrow at 4.5%, it's a net cost of 3.
If you borrow at 9%, it's a net cost of 6.
Well, for years, if I borrowed at 6 a net cost of 4 in my indexed
universal life insurance policies where i keep my real estate equity,
I've been earning 8 to 10. Let's just say 8.
I've been making 8%. So, on money
that would otherwise go into an unnecessary down payment
on the real estate acquisition, I keep it over in my Laser Fund. This is where my
my money is growing tax free. You can learn about it in a book that I'll gift
you at the end here. I've been earning 8 percent, 8.2 percent
for the last 46 years. The last 25 years more like 10.07%
Let's just say 8. Okay. Now, let's do
the math. So, let's say on a million dollar
mortgage I am earning 80,000 tax-free
by not paying the mortgage off or paying a huge down payment. I don't care. Let's
just say on a million dollars of real estate equity,
If it's in the property, it's only going to do what it does. If the real estate
goes down in value, I will lose. I guarantee you'll lose
money when the real estate goes down. If the money is over in my insurance
contract and and the real estate market goes down, I
don't lose a dime. I keep earning 8%. I earn
80,000 the first year. The next year, I earn compound interest on a
million eighty thousand. But I'm making 8%. What's the
cost of the mortgage? A net of 4%, 40,000. Hmm,
wait a minute. By having a mortgage, it cost me 40,
but i'm making 80 or a net of 40,000. How much more is 80 than 40? 100%
more. Let me put it this way. Would you hire an employee for 40,000
if that employee made you an extra 80,000?
Oh, I'll do that all day long. Because
they're making me 100% more than they're costing me.
Would you buy a widget machine for 40,000 if that widget machine made you
an extra 80,000? How many widget machines would you buy?
As many as I can get. That's called 100% return on employment
cost or equipment cost. So, by not putting a down payment into
the property, I keep earning 8, 10 percent rates
of return and I pay a net cost of 4%.
When I borrow money at 3% in a 33% bracket
it only cost me 2%.
Every million, I only shell out 20,000 a year in interest
but I've been actually making 10%. How much more
is ten than 2? Don't say 8. It's 500% more. I make
100 grand, it only cost me 20,000. That's like
hiring an employee for 20 grand that makes me an extra 100 grand.
So, how does this all come together? When we talk about safe positive
leverage which by the way is the third marvel or miracle of wealth accumulation
that I talk about in this book that I want to gift you, the
first miracle is compound interest. I am earning compound interest tax free
over here in my laser side fund. And I'm paying
simple interest tax deductible at 2, 3 or 4 percent
net cost over here on my real estate mortgage.
Why would I ever want to send extra principal payments because I would be
giving up 100 to 500 percent rates of return. And so, I
actually get out of debt faster by not giving it
to the mortgage company by keeping it earning way more than it's costing.
But this is what banks, credit unions.. They borrow our money
and they pay us 1% and they turn around and put it into the same
place I'm telling you to into insurance companies. And they earn
5, 6, 7 percent. They're making 500% when you put
money in a savings account. I'm making 500% by doing what I'm telling
you. We're both happy. You wouldn't believe
how many people don't understand what I just said. This is how money works.
And so, the function of leverage, okay? Compound interest is the first miracle.
Compound interest tax free is the second. But the third miracle is safe positive
leverage. The ability to own and control assets like a real estate
property with very little or none of your
money tied up or at risk in the property. Because if the property goes down in
value, you will lose. If the money is over protected in the
insurance contract and it goes down in value,
you don't lose. I've been doing this for 46
years. And so, when we talk about it, this is what makes the world go round.
And when you do that you have 100% liquidity.
If I get into trouble, if I get laid off, if i get disabled and
my money is trapped in a property that I've been trying to pay off,
there's only one way to get that money out of there. That's to borrow it back
or sell it and prove there's a need why I need the money.
I don't have to worry about that at all when it's over here in my liquid Laser
Fund, I just make a phone call. I make an
electronic funds transfer and I can have the money. Let me give you
an actual example of this that happened to me in 2009. So,
back in 2007, December, I could see the writing on the wall that we were headed
for sort of a mortgage meltdown and sure enough it happened.
So, I borrowed 100% of the equity out of my house because I
have good enough credit to do that. Back then, the home I'm talking about was
worth a million and a half. So, I had a million and a half dollars of my equity
out earning compound interest tax free. Guess what happened in 2008? Bam! In 2009,
my house that was worth a million and a
half, just over a year earlier was now only worth a
million one. It dropped in value 400,000.
If i had left my equity in the house, I would have for sure lost 400,000
for about 7 to 8 years before it came back.
I didn't lose a dime of that. Because it wasn't trapped in my house. It
was over here in my Laser Fund. And it was earning 8%.
8% on 400,000 is $32,000
a year tax free in the very first year.
The mortgage at 6% tax deductible interest was a net cost of
4. On 400,000, that was
16,000. So, on the equity that was not
in the property was over here safe, I was earning
100% more than the mortgage was costing. It was costing me 16, I
was making 32. I just peeled off 16,000
out of the 32. And I was making 100% more than the cost of
the mortgage. And yet, people said, "Oh, neener, neener,
neener, Mr. Andrew. You're under water. You owe more than your house is
worth." Did I care? I'm in control. People were
losing their homes in foreclosure. I'm like, "No. The mortgage company loved
me. I never missed a payment." I took a
portion of the interest I was earning and it made my entire mortgage payment
and I still had 100% more than that.
You will actually get out of debt faster by accumulating your money over an aside
fund. I can prove to you. You'll pay off your
house 2 ½ years faster. But if you want to calculate rate of
return on real estate, If you pay cash, it's a simple pathetic
return. It's a rule of 72 calculation. But if you
leverage, you finance 80% loan to value, now
we're talking. But if you do like I do, I don't put one
dime. I've never paid a down payment for any piece of
real estate that I've acquired. I've satisfied down payments but never
with my money. I leverage. You leverage with full
liquidity. If you do not have liquid money, leverage
without liquidity is stupidity. I had the money. I just didn't tie it up
in the property. I put it over here compounding at a higher rate of return
than the net cost of the mortgage. And I was making 100 to 500 percent rates of
return. If this is beginning to arouse curiosity,
you have no idea how huge this is over the long term, how this creates
millions of extra dollars that most people just pour
down the drain by sending extra principal payments against their real
estate. So, you can have infinite rates of return
on your real estate when you do this. When
you become your own banker and do what banks and credit
unions do. I want you to learn about this. In this book or any of my previous
books, if you go to laser fund, laser means
liquid asset safely earning returns. Laserfund.com. In fact, all you have to do
is contribute $5.95 towards the shipping and handling. It's usually a little bit
more than that. I'll pay for the the book. It retails for
20 bucks. It's 300 pages of charts graphs and
explanations and 62 actual client stories. There is a
chapter on the orange portion of the book that
actually talks about real estate management which is what I've been
addressing in this video. So, this is the left brain side, charts
and graphs. This is the right brain side. There's a chapter here
that talks about how to use the laser fund
to manage your real estate and increase your rates of return to
infinite rates of return.