- Keep your real estate working capital
liquid, safe, and earning tax-free returns.
In this educational episode, I'm going to talk
about where should a real estate landlord
deposit positive cash flow from rental income properties?
Get ready.
I'm gonna share with you what I have done
and what many savvy real estate investors have also done
with their rental income properties
when they have positive cash flow.
(upbeat music)
So my name's Doug Andrew, I've been a Financial Strategist,
Retirement Planning Specialist now for north of 48 years,
helping many, many successful people optimize their assets,
minimize taxes, empower what I call their authentic wealth.
And I've helped many, many professionals who are successful
in their various professions,
whether they are medical doctors or dentists,
many of them are very proficient as contractors
but there's a lot of real estate investors,
no matter what they do, they own rental properties
or maybe that's their full-time profession,
and they come to educational sessions
and I begin to teach them
where they can keep their real estate working capital
liquid, safe, earning tax-free returns,
instead of doing what most landlords do when they come,
they say, "Well, I have these rental properties
and I've just always thought
that I would take the positive cash flow
on the rental income 'cause I don't need it yet,
and I'm gonna plow it against the mortgage debt
on the property to hurry as fast as I can
to get the mortgage paid off in 15 or 20 years."
Thinking that's the best way to go,
that maybe in retirement,
they will have these paid off rental properties
that will then be giving them a rental income
and they think, "Oh, you know, it'll be paid off
so I'll be okay in case of a soft real estate market."
Well, that sounds pretty good on the surface
but I could tell you horror stories
about real estate landlords who have lost it all,
I'm talking about hundreds of thousands,
even millions of dollars when they lacked liquidity
during downturns in the market.
Now, when we talk about owning real estate,
most people who are landlords understand the term leverage.
If you don't, it simply means this is where you own
and control assets like a rental property
or a home or apartment complex
or a commercial property, whatever, you own it,
and you're borrowing against it,
so that very little of your own cash,
maybe a 20% down payment or whatever,
very little of your money is tied up in the property,
and you borrow the rest, that's called leverage.
So maybe you borrowed 75% loan-to-value,
you coughed up a down payment of 25%.
Sometimes people will continue to turn properties,
sell them, do 1031 exchanges.
And I've often seen where they make mistakes,
they think that when you do a 1031 exchange
for another piece of property that that means
not only do you have to buy a like property
to continue to defer paying a capital gain tax
but they think they have to keep the equity
out of the sell of their former property
and put it into a huge down payment into the new property
that they're doing a 1031 exchange into,
and that's not true.
Some people say, "Well, why wouldn't you do that?
Why wouldn't you just pay all of it in there?"
Well, I like to maintain liquidity.
See, if you leverage without liquidity,
I call that stupidity.
And this is where most people get into trouble
is they think they're so clever
taking all of their positive cash flow
and then putting it back into the real estate,
paying down the mortgage
or they leverage and they have no liquidity,
they don't have any cash,
and then what happens?
You all of a sudden have a downturn in the market,
and it can happen within 60, 90 days,
and then they get stuck, like I've said,
I could tell you horror stories
of different periods of times
where the real estate market has crashed
and people all of a sudden are way over-leveraged
and they go,
"Well, I've got a whole bunch of equity in here.
I've been sending extra principal payments
against the mortgage on this thing now
for the last 5, 6, 7, 10 years,
and this piece of real estate's worth 2 million.
And I only owe 700, 800,000 on it."
Well, guess what?
If you have still a mortgage payment on that,
it doesn't matter
if you just plowed a whole bunch of extra principal,
you can't tell the mortgage company,
"Oh, I calculate I'm now about 48 months ahead,
I've been sending extra payments."
The next mortgage payment is due.
And if you don't pay it within 90 days, they can foreclose.
And you try, when you don't have enough tenants,
you have vacancy, or when you are hurting
and you don't have enough income,
and you're in any kind of a situation,
maybe you're disabled, try to go borrow.
See, because lenders loan you money
based on your ability to repay.
It doesn't matter how much the property's worth.
And if you don't have the ability to repay the loan
because you're not renting it out,
they're gonna say, "Fat chance.
I'm not gonna give you the money."
And so I've seen many, many people get foreclosed on,
because they will foreclose on you within, (snaps fingers)
you know, 90 days, they'll start that process
if you're behind,
and I've seen people lose millions of dollars of equity,
they built up by being illiquid
and putting all of their positive cash flow
into paying down the mortgage
or paying huge down payments or what have you.
I would recommend you have a very good liquid cushion
to where that cushion could generate
or pay the mortgage payments
for a year or two, maybe even five years.
So people say, "Well, that sounds good, Doug,
but I'm not gonna put that money in a bank.
Banks are paying, you know, a measly 1% or less."
I'm going, "No, I didn't say a bank.
I'm recommending you put your real estate positive cash flow
into your own quote bank,
where banks put your money
when you deposit money into a bank or a credit union."
And they go, "Well, where's that?
I thought they loaned it out to people."
I said, "Well, they do
but they have to keep a certain amount of money
liquid and safe in case of a run on their bank."
And in 2008, when over 400 banks went under
and over 900 more were on the watch list,
the Federal Government asked the five major banks in America
to disclose where they had their tier one assets,
that's money, they have to have liquid on hand and safe
where they could access it if there was a run on the bank,
where did they have that?
And they disclosed that 30 to 40% of their tier one assets
were invested in insurance companies.
These insurance companies are usually rated
maybe five or six notches higher
by let's say a rating agency like S&P, Standard & Poor's,
where sometimes banks may be rated triple B,
these insurance companies are rated double A or triple A.
Not only that, but banks are paying you 1%
and the insurance companies are paying them four or 5%,
which is four or five times what they're paying you.
So they're coming out ahead, right?
Just bypass the middleman.
So my favorite repository for positive cash flow
on rental properties is to take the positive cash flow
and don't put it against the mortgage necessarily,
keep it liquid 'cause if you pay down the mortgage,
there's only one way to get that money back
and that's to borrow it back on their terms
and prove there's a need why you should have it.
And when you need it the worst, it's the hardest to get.
Or if it totally paid off,
there's only one other way to get it and that's to sell.
And sometimes when you need to sell it,
you have to drop down the price so low
that you give up hundreds of thousands of dollars of equity
'cause you're forced to sell it during a soft market.
So I like to keep the positive cash flow
very liquid and safe over an insurance company.
One of the last dominoes that would fall
if the American economy totally collapsed
and I can access money if I need to,
with an electronic funds transfer phone call,
and I can make up payments or shortfalls
if my property becomes vacant, I get into trouble,
I need to fix it up.
I don't have to qualify for a loan from anybody
because the insurance company will let me withdraw my money
or the insurance company will loan me the equivalent
of my money.
And they'll loan it to you at 2%, even four or 5%.
And they'll keep crediting you, maybe 7, 8, 10, 25%.
That's what savvy real estate investors do.
I have many clients who are very savvy landlords
and they will use their Laser Fund,
their IUL policies, as their working capital account.
They put their positive cash flow from rents into that
and they accumulate a million, 2 million,
it could be a 100,000, 200,000,
but anytime they need money,
they go, "Doug, I need $1 million
to tie up another piece of property with an earnest money."
They get that money within two days
and they're able to access that.
And I had a client do that in 2017,
borrowed a million out of his policy at 5%,
and he kept earning 25% that year.
So he made a quarter of a million of interest tax-free
on his million while he actually borrowed a million
from the insurance company using that money as collateral.
And they charged him five.
So he made 250,000.
They subtracted the 50,000 of interest outta that,
he netted 20% or 200,000 on his million
while he was using it where he made 3 million
buying, fixing up, and flipping an apartment complex.
Savvy real estate investors keep their money
liquid, safe, and earning predictable rates of return.
Most real estate investors, like me,
if you borrow, maybe you're borrowing at 6%
but it's deductible interest on Schedule E or the LLC,
6% deductible interest in a 33% bracket
is a net cost of four,
many Laser Funds, IUL policies earn eight.
How much more is eight than four?
Don't say four, it's 100% more.
So on every million dollars,
you may be paying a mortgage interest
out of your pocket of 40,000 a year in interest
but you're making 80,000,
100% more than that on your liquid account
so you're not losing ground by not paying down the mortgage,
you're actually gaining ground
by not giving it to the mortgage company.
Does that make sense?
So you wanna be smart
about your positive cash flow with real estate
so you don't get into trouble
when the real estate market gets soft.
Does that make sense?
So if you wanna learn more about the Laser Fund
and examples like this, I wanna gift you a copy
of our most recent bestselling book.
This is flying off of our warehouse shelves.
You do not have to pay $20 on Amazon for this,
I will gift you a copy for free.
Here's how you claim your free copy,
you go to Laser Fund, L-A-S-E-R fund.com
or just click on the link below,
you contribute a nominal amount
towards the shipping and handling,
I'll cover the rest of that,
and I will pay for the book.
It's 300 pages, 200 pages is this white side
which is 14 chapters with all the charts and graphs
and explanations of how the Laser Fund works.
If you learn more by stories,
you flip it over and read this one, which is 100 pages,
12 chapters with 62 actual client stories
of how the Laser Fund is a working capital account,
not only for real estate, business, retirement,
your college funding for your kids and grandkids,
on and on and on.
It allows you to accumulate access
and transfer your money totally tax-free.
And so claim your free copy,
there's options there to listen and learn,
watch and learn,
and also check out some of the online educational webinars
that we do,
and you can even talk to a specialist
that will help you understand how this may apply
to your particular set of circumstances.
And if you're a real estate landlord,
look seriously at setting up one of these Laser Funds,
at least one of them, to accommodate your positive cash flow
to maintain liquidity, safety, and earn rates of return
that are probably double the net cost of the mortgage
that you were sending that positive cash flow
to try to pay off.
You'll actually get out of debt two and a half years faster
by not giving it to the mortgage company
but by putting it in the Laser Fund,
you'll have enough money compounding tax-free
to actually pay off the mortgage on the real estate
probably two and a half years faster
than giving it to the mortgage company.
You will learn about that in this book.
So here is to your brighter future
and being able to optimize your real estate even better.
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