- Borrow to conserve, not to consume.
In this educational episode,
I'm going to address the question
when is it wise to borrow money?
Get ready.
I think you're gonna be blown away.
(upbeat music)
So I'm Doug Andrew
and I have been helping people optimize assets
and minimize taxes now for nearly five decades.
I am normally viewed as a financial strategist
and retirement planning specialist
but I've helped many, many people as they like to invest
in real estate
or maybe just their own home or other assets,
not real estate but even machinery and equipment
and I teach them when it's wise to borrow and use OPM.
What's that? Other people's money.
So that you can become your own banker.
And they sometimes don't understand it.
Many times people quip, oh there's
three kinds of people in the world.
Those who pay interest and those who earn interest.
Yeah but the third is those that
learn when it's wise to pay interest to make more interest.
So let's talk about how to borrow to conserve your assets
and increase them rather than consume.
Now, I've often said you can see equity lines of credit
darting all over the lakes in the summertime
in the form of boats and jet skis.
In the wintertime where I live, in the form of snowmobiles
where people borrowed on their home equity
to buy depreciating assets.
They're consuming. That's dumb.
Whenever you borrow, you should borrow to conserve
and make money,
not to consume by borrowing to buy depreciating assets.
So what am I talking about?
Again, strivers learn when it's wise to pay interest.
Arrivers who learn when you earn interest
but the mega wealthy thrivers understand
no you should probably pay interest sometimes
to make additional interest like banks do.
So whenever you go to a bank to borrow money,
if you happen to lack the ability to repay,
they're gonna tell you fat chance.
Because most lenders do not loan you money
if you have a bunch of equity in the property, that helps
but they really loan you money on the ability to repay.
If you've got positive cash flow or income.
if you lack the ability to repay,
they're gonna tell you a fat chance.
So let's make sure we understand the difference between
non-preferred and preferred interest expense
we'll call it.
Let's say we have two individuals here.
They both make $72,000 a year
and one is paying 12,000 a year in non-preferred interest,
meaning non-deductible interest on credit cards
or automobile loans cuz they're not deducting the automobile
in their business or something.
So you subtract where they're paying in interest
and they have 60,000 available before taxes.
We have another couple that is paying 12,000 of interest
secured by a piece of real estate or maybe their house
and that is deductible
or some equipment or machinery that is deductible
in their business.
So both of 'em still have 60,000 before tax
but there's a huge difference on what they pay tax on.
See with non-preferred interest,
this person has to pay tax on 72,000.
This person only has to pay tax on 60,000.
Are you getting it?
That's a $12,000 difference
that you don't have to pay tax on in preferred interest.
12,000 of money that you don't have to pay tax on
in a 33% bracket is saving you a third of that
4,000 in tax savings.
So do you understand this?
That's not necessarily bad.
See, paying interest can be your friend,
not just your foe.
So let's make sure everybody's on the same page
before I proceed any further.
If we talk about real estate or home equity 101,
if you have a property worth 350,000
and you owe 200,000 on it
between maybe first and second mortgages or whatever,
the remaining 150,000 is your equity.
Okay and that sounds elementary
but I wanted to make sure that everybody understands
from this point forward the difference
between the fair market value on your properties
and all loans against that property is your equity, okay?
So many times, we look at our
let's say a 30 year amortized mortgage,
it's 9% interest and we go golly,
I borrowed a hundred grand
but if I pay it off over 30 years,
I'm gonna end up paying back nearly triple what I borrowed.
So they have a tendency to look at that as a negative
or I borrowed 150,000 at 7%
and I'm gonna pay back more than double.
In fact I'm gonna pay back more than double
even at 6% on a 30 year mortgage.
They focus on that instead of this and what this can be
and how you can come out ahead by becoming your own banker.
So a lot of times people don't understand
there are two costs.
You're gonna incur one or the other.
Which cost are you incurring?
See, if you have all of your money tied up in a property,
you are giving up the opportunity to earn a rate of return
on that money
because that property is going to appreciate
or depreciate regardless of how much cash or equity
you have in there.
Equity has no rate of return.
The property appreciates or depreciates
has nothing to do with how much equity's in there, okay?
And so if you leave it trapped in the property,
you are giving up the opportunity to earn
you know six, seven, eight, nine, 10% rates of return
like I have
for over 40 years on my favorite financial vehicle,
the tax-free laser fund.
Now what's the other cost?
Well, if you keep this equity separated like I do,
I have never paid a down payment for any property
that I've obtained.
I've satisfied down payments but not with my money.
With my credit, I'm able to get 80% loan to value
on a first mortgage and
and the other 20% on a second, okay?
So, I keep my equity separated
and by doing that, I am paying interest on a mortgage.
That's an employment cost
cuz I'm not gonna bury that money in my mattress.
I'm gonna do like banks do.
They don't bury it in the vault.
I'm gonna put it to work as if I was paying an employee.
So if this employee is costing me 4 1/2% interest
but is tax deductible,
in a 33% bracket it is only costing me three.
And over here, I am earning a rate of return
of nine or 10 tax free.
How much more is nine than three?
Don't say six. It's three times as much.
I'm making a 300% return by having an employment cost.
Why would I fire an employee that's costing me 30,000
when that employee is making me 90,000?
Why would you get rid of a widget machine
that's costing you 30 grand if it's making you 90 grand,
triple what it's costing you, okay?
So, you're going to incur one cost or another
but if the employment cost is tax deductible
and the opportunity cost is non-deductible,
which one would you rather incur?
I'd rather incur the deductible employment cost, okay?
So if people say "Well golly Doug,
"this is giving me all kinds of thoughts so
"tell me how money really works?"
Okay, well there are four things you can do with money.
You can spend it, lend it, own with it or give it away.
I double dip.
I sort of own and loan on the same asset
and I'm able to double dip.
So let me show you what I do here.
Banks, they borrow OPM, other people's money,
and they might pay you three, four, 4.5% interest on a CD
if you leave it there.
So they're borrowing or they're paying interest.
Interest is their friend, not their foe.
They would wither up and die if they didn't do that
because it's not a negative to them, it's a positive.
They turn around and loan you money at 7.5%
and that's a three point spread
and they make millions doing that.
All I'm saying is you can do the same thing.
You can become your own banker.
So for years, you know, during the
after the 911 terrorist attacks up until you know
2012, 2015,
banks were getting away with borrowing OPM at 1%.
They were paying 1% or less
with your money sitting in a bank.
Every million they borrowed, they only had to shell out
10 grand in interest a year.
They turned around and loaned it back at 5%
and you know that 30 to 40% of their tier one assets,
I'm talking about banks and credit unions,
are invested in insurance companies where I put my money.
Off times this is in the form of BOLI,
bank-owned life insurance,
and they earn 5%.
How much more is five than one?
Don't say four.
They're making 50,000 tax free.
Would you hire an employee for 10 grand
that made you an extra 50 grand?
That's 500% return on employment cost.
Are you getting it?
Would you buy a widget machine for 10 grand
that made you an extra 50 grand?
That's a 500% return on equipment cost.
So, many times throughout the years on my real estate
for example,
if I borrow at 6% tax deductible interest, 60,000,
I write off on my tax return,
the net is 4% or 40,000.
That's the true cost.
If I only earn 8% compound interest tax free on my assets
over here in the laser fund,
how much more is eight than four?
Don't say four. It's a 100% more.
Many times banks make at least double what
they pay you in interest
and they come out millions of dollars.
Well yeah, they're dealing with millions
but you can do this and become a multimillionaire
doing the same thing.
In a low interest environment,
I was able to borrow money sometimes at 3%
with my credit tax deductible interest
for my business, real estate or whatever.
In a 33% bracket, that's a net cost of two
and I was earning 10%, 10.07 to be exact.
How much more is 10 than two? 500%.
The banks were making 500%. I was making 500%.
Everybody's happy
except the people who don't understand this.
So hopefully, you're getting this
so let me just show you some examples here.
I keep my real estate equity
and I keep my real estate equity separated
to keep it liquid safe earning a predictable rate of return
because liquidity is number one
key element of a prudent investment.
Safety is number two, rate of return is number three.
Real estate equity fails all three of those, okay?
You can't get your money when you need it.
You, your money's not safe.
The property can go down in value like mine did in 2008
and went down in value 400 grand, okay?
And nearly 40%.
It's not earning the rate of return.
The property is gonna go up or down in value
regardless of how much equity is in there
so the rate of return on equity is always zero.
You can check me out on this channel
on me pouring water back and forth
between a pitcher and a goblet if you don't agree with me
and you'll be convinced.
So I keep it separated because this is an amortized loan.
Simple interest, declining balance tax deductible
and this is a compounding balance tax free.
This is my laser fund,
this right hand pocket or my assets compounding
at a rate of return usually double to triple
the net cost of the simple interest mortgage over here.
Compound interest tax free
versus simple interest tax deductible.
Does that make sense?
What does it mean mathematically?
If you separated or kept a 100,000 of equity
separated instead of paying it into a big down payment
or extra principal of payments into a property
and you were borrowing at 9% and only earning 7.5%.
but that 7 1/2 is compounding and the 9% is tax deductible,
that 9% is not costing you nine.
It's costing you six
over a 30 year period if you only did it one time.
775 grand.
You would've made a nearly $600,000 profit
by not having the money trapped in the property, okay?
What if you borrowed at 7.5 and only earned six?
Now 7.5 in a 33% bracket
only a net cost of five.
That's only one point spread but 150,000 of equity.
You come out ahead over a half a million bucks
over a 30 year period.
That's just a one-off, okay?
Well what I've really done most of my life,
every 100,000, of separated equity
if I borrowed it 6.5% tax deductible interest
and I only earned 8.5 on my laser fund.
Now I have critics out there that go
you'll do all that for 2%.
The difference between 8.5 that you're earning and 6.5,
I go bless their little heart.
They don't understand it.
Yeah, I'll do that all day long.
Banks do it all day long and they make millions.
So can you.
You wanna see how?
Because this is not really 2%
but this is actually as much as a 100%
more than the net cost of the funds
when you calculate the net after tax cost of that mortgage.
So on a 100,000 of separated equity,
you'll make 4,000 of property the first year.
After 15 years, 174
but you'll make nearly a million bucks
over a 30 year mortgage
by not sending extra principal payments to the mortgage
but putting it over here, compounding.
I'll end up with a million bucks over in this pocket. Yep.
Now that's only on a 100,000.
How do you extrapolate from this?
If you have 200,000, it's two million.
If you have 400,000 that you could separate from properties,
that's four million.
Just do the math, extrapolate.
But that's a one-off.
What I do is I keep my real estate properties,
my office equipment, my business equipment
and I refinance it usually every five years on the average.
As it goes up in value, as it appreciates,
I keep it separated by doing this
and repeating the process every five years
and only assuming my house is appreciated at 5%.
That means it's only doubling in value every 14.4 years.
This number turns into 10 million.
10 million, okay?
Other than that,
I don't have any strong feelings on this subject.
And so what I'm talking about it is wise to borrow money
when you're borrowing to conserve, not consume.
So if you wanna learn more about this laser fund
where I keep my serious cash compounding tax free,
I want to gift you a copy
of my most recent best-selling book.
It's my 11th book.
It's been flying off of the warehouse shelves.
You can go to Amazon and purchase this for 20 bucks
plus shipping and handling.
If you do that, thank you.
But I'll gift you a copy.
You simply go to laserfund.com or click on the link below
and you contribute a nominal amount
towards the shipping and handling.
I'll cover the rest of that cost.
I require some skin in the game.
And while you're in there claiming your free copy
cuz I'll send out a hard copy via priority mail.
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