- Far too many real estate investors
learned this lesson the hard way.
In this video episode, I'm going to explain
why savvy real estate investors
hold their real estate properties
usually only one of two ways,
either mortgage to the hilt or free and clear.
Why? (upbeat ambient music)
So my name is Doug Andrew.
I've been a financial strategist
and retirement planning specialist
now for nearly five decades,
helping people optimize assets, minimize taxes
and empower what I call their authentic wealth.
I've been very blessed, honored in my career
to have authored thus far 12 bestselling books.
And in my very first two or three books,
the first one was titled "Missed Fortune"
because of the fortunes people miss out on
when they simply don't know what they don't know.
And then in my second book and then my third book,
which we were very blessed, it became a New York Times
and Wall Street Journal number one bestseller,
I talk about the concept that
smart savvy real estate investors
keep their real estate properties in one of two ways, okay.
Either mortgage to the hilt or free and clear
because anywhere in between, they get into trouble
and they don't understand it until it's too late.
So they learn this lesson the hard way
and then they come back and they go, "Oh my heavens."
Yeah, I wish I would've listened to you earlier.
So let me explain this to you
and I'm gonna share a few stories with you in the process.
Now my first lesson about this
happened with my first home that I built, okay.
I actually bought a home when we were first married,
my wife and I in 1974.
And I need to reveal to you
that I've never paid a down payment
for any home that I've purchased, any piece of real estate.
I've satisfied down payments,
but I've never coughed up any of my own money.
Okay.
Now that's another topic
and you can search on this YouTube channel for why and how
I have never paid a down payment for any piece of property.
And so this home that we built in 1978 was our third home
and it was a beautiful 6,400 square foot home
built on two acres on a canyon rim in central Utah.
It was our dream home.
And we were able to build that home for about $150,000.
Yep, 6,400 square foot home.
And when we moved in about a year later,
it appraised for 305,000.
Now I didn't pay $150,000 into the home in a down payment.
I didn't pay anything down.
I actually had the seller of the lot subordinate
and the lot satisfied the down payment
but I didn't even pay cash for the lot, okay.
And then after it was all done
and I took out a long-term mortgage,
then I was able to pay off the lot.
And that story is in the book.
So I didn't pay a down payment.
But here's the mistake I made.
See, I built the home for 150,000 and when I moved in,
it appraised for 305,000.
I thought I had the world by the tail,
it was worth twice as much as I paid for it.
But that equity didn't occur or happen
because I put 150,000 of cash into it.
The house just simply
was worth more than what I paid for it.
Okay, this is called appreciation.
So I thought I had the world by the tail
until a couple of years later, three things happened
that I never dreamed would happen simultaneously,
and it was right smack dab in the middle
of the 1980 recession, where in Houston, Texas, for example,
16,000 homeowners lost their homes in foreclosure.
Now they didn't all of a sudden become bad people,
they just couldn't make their mortgage payments.
And it didn't matter
how much they had been sending the mortgage company
an extra principal payments when they lost their job
in the energy crisis of 1980 or what have you.
They went to the mortgage banker and said,
"Hey, I've been paying you an extra 100 bucks a month
for the last five years.
I should be about nine months ahead."
Didn't make any difference.
The next mortgage payment is due
and if you're behind 90 days, they can foreclose on you.
In fact, they'll foreclose on you
if you have a lot of equity in your property.
So in 1980,
we had a supervisor that was dishonest and embezzled money.
Three of us didn't have our income for about nine months,
they froze our income
while they were investigating this guy.
And so all three of us lost our homes in foreclosure.
Now I learned that
even though the home had appraised for 300
and I only paid 150 for it,
that was just a number on a sheet of paper
if I couldn't access it.
When you go to borrow, okay, the lender will loan you money
based on your ability to repay.
I didn't have an income, so they're gonna say, "Fat chance."
And so I could not do that,
that's why I had only one alternative,
I actually sold a duplex and took the equity
and brought the delinquent mortgage current
and I sold a timeshare to ski resort
and brought the delinquent mortgage during a second time,
but I didn't have any other liquid assets,
and so I decided to sell the home.
We had another two acres we could rebuild.
And so I listed the home for, you know, 295,000
'cause I had a bonafide appraisal a year earlier of 305,000
when there's more supply than demand.
No.
So we had to quickly lower the price
of the house down to 275, 265, 225.
I'll never forget
the day we walked into the county courthouse
at the sheriff's auction
and we watched that beautiful dream home get foreclosed on.
Now I went out the next day
and bought another home with no money down and no credit.
Again, most of the homes that I've ever acquired
had nothing to do with me having cash or even credit.
But I learned a lesson.
See, the equity in my home
wasn't because I put money into the property,
I let the home appreciate,
and I thought that was a good deal,
but that real estate equity was not liquid.
It was not safe when the real estate market crashed
and it did not earn a rate of return.
So from that point forward,
I have always kept my real estate equity separated.
I don't pay a down payment
and any time my property goes up in value,
I refinance and keep that equity separated
into a liquid safe vehicle, which I call "The Laser Fund".
Now that's what I do and I keep my money liquid and safe,
earning a rate of return
that's usually at least twice as much as the net cost
of the mortgage, which I explain on this channel.
This is how to become your own banker.
If I borrow money
at 4.5% tax deductible interest in a 33% bracket,
it only costs me 3%.
On a million dollar mortgage,
that's only 30,000 and I'm earning 9% net
after the cost of the insurance or more on my laser funds.
So how much more is nine than three?
Don't say six.
I'm making 90,000 the very first year tax free
and I'm only paying 30,000.
Would you hire an employee for 30,000
that made you an extra 90,000?
That's a 300% return on employment cost.
So I actually make money by using OPM
just like banks pay interest in order to make more interest.
Well, how did that play out in 2008?
In 2008, the market crashed, the stock market
and the real estate market shortly comes
because that was the mortgage meltdown.
And so I had financed my home at that time to the hilt.
And so I actually owed on my home
about a million and a half, and that's what it was worth.
And in one single year,
the house went down in value to about 1,000,001.
And I had critics that went,
"Oh, neener, neener, neener Mr. Andrew, you now owe more
on your house than your house is worth."
And I went, "So, I'm in control."
The mortgage company loves me because I have, okay,
I have the million and a half dollars of cash,
it's only worth 1,000,001,
that 400,000 had dropped in value,
I would have lost had I left it in the house.
Hello.
I still have that 400,000, it's over here
earning a compounding rate of return at 8%.
And the mortgage is only costing me at most 4%.
I'm making a 100%
more than the cost of funds on that 400,000.
Hello.
I am making money on 400,000 of equity
that is no longer in my house because I never let it accrue
in my house in the first place.
And then after 2009 when the house came back
and then finally came back up
to a million and a half and $2 million,
I refinanced it again, because I learned that lesson.
Because people who had their equity
or they were paying extra principle payments,
they lost all of that extra equity
that they had spent years building up
by sending extra principle.
This is why savvy investors
either keep their real estate mortgage to the hilt
and their equity, so to speak separated
safely where it's liquid
and safe earning a tax free rate of return
greater than the cost of the funds or else free and clear,
'cause anywhere in between they get into trouble.
Okay.
Well, most recently during the COVID-19 pandemic,
I had a commercial property,
and again, I actually had a first, second, third
and fourth mortgage on that commercial building.
Yep.
And that kept me safe because I was able to,
as I saw COVID-19 started to come,
I was able to sell that property
and it was able to pay off all the mortgages,
but I had the liquid cash already separated.
I have a very close acquaintance
who owns nearly $1 billion of commercial real estate.
And he has always said, "Doug, I love what you teach
because you understand how money works."
And he has always kept
all of his commercial buildings mortgage to the hilt.
He refinances them every three, four, five years
and he makes sure that he keeps his cash separated,
so he's in control.
And so during Covid-19
when everybody started working outta their homes
and then after Covid,
half of the people never came back to their offices
'cause they were as efficient
or more efficient working out of their houses.
So during that sort of dearth of having tenants,
he's been in control.
He has the money because he kept it separated
and he's been paying simple interest tax deductible
with just a portion of the compound interest
that he's earning tax free
on the money that he kept separated from his properties.
Is this making sense?
If you're going, "Golly, I've never thought of it this way."
You need to learn how money works.
So I want to gift you a copy
of one of my most recent bestselling books.
It's called "The Laser Fund", okay.
LASER is an acronym that stands for
liquid assets safely earning returns.
This teaches you how to diversify
and create the foundation for tax-free accumulation
and tax-free income during retirement.
And this is my favorite vehicle,
and when you understand how money works,
you can set up your own laser bank is what we call it.
But I've been teaching this ever since the mid 1970s
and I'm not the first one to originate this idea,
frankly, it's in the Bible, okay,
"The Parable of the Talents".
But if you want to read this book,
it's actually two books in one,
this side is 200 pages,
14 chapters with all the charts and graphs
if you're a left brain learner,
if you're a right brain learner,
you can flip it over and read this one.
This is about a 100 pages,
12 chapters with 62 actual stories of how this works.
Okay.
And so you simply go to laser fund,
l-a-s-e-r-f-u-n-d.com or click on the link below,
you contribute a nominal amount
towards the shipping and handling.
I'll cover the rest of that cost,
and I will pay for the book.
I'll fire out a hard copy to you.
But if you like to listen and learn or watch and learn,
there's options there for audio and video.
And you can check out some of the educational webinars
that we teach on a regular basis.
And they're free, they're at no charge.
You can even plug your name into an appointment
to talk to a specialist with no cost, no obligation
to see how these strategies may apply
in your particular set of circumstances.
But I hope you're beginning to understand
why savvy real estate investors in particular
either keep their properties mortgaged to the hilt
and their equity separated compounding
rates of return tax free, usually at least double
the rate of return of the net cost of the funds,
or they own them free and clear,
but they have the money over in this pocket,
they can pay off the property
in one fell swoop if they want to.
They are out of debt anytime they want to be out of debt.
Does that make sense?
(upbeat ambient music) You will learn why
as you study my book.