Kim D.H. Butler, Jimmy Vreeland (2019)
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Location 69: The idea of retirement is ludicrous, actually. Incomes have stagnated, but expenses have risen. By "saving" money in conventional "retirement" plans, you are speculating on something you have no control over. Typical retirement savings are mathematically impossible.
Location 73: The uncertainty and volatility of the Wall Street casino makes it hard to know which way is up. Your 401(k) investments become 201(k) investments—nearly cut in half based on a stock market crash or extraneous fees. Everything that Wall Street offers is a high-risk, volatile environment. It's an exhausting way to live your life, and this type of retirement plan puts all the risk on the investor for a very small reward.
If your balance sheet shows $100,000 in a retirement account, cut that value in half. After fees and taxes, that's all you'll be left with.
Location 114: The education system changed to create managers to manage the industrial system. Unfortunately, education has not updated itself in order to produce sovereign individuals capable of creating and adapting to change inside the Information Age.
Location 118: The idea of retirement is a monster created during the Industrial Age by bureaucrats. They needed citizens with no assets or land to go to state schools, become a manger, worker, or soldier, and then work until they were no longer needed or productive. At that point, the bureaucrat needed the ability to push the older worker somewhere to make sure there was a job for a younger worker. Young, unemployed workers create civil unrest; older ones do not.
Location 122: The bureaucrats also needed to garner votes from the older population and the easiest way to do so was to promise the golden ticket of "Retirement." The American bureaucrats created "Social Security." As most of us know, Social Security was started at a time when the average life expectancy was much shorter and also assumes population growth would continue at the same pace. Neither of these things turned out to be true and the promises the government made can no longer be met.
Location 128: What we currently call the middle class is a historical anomaly. It's been around for maybe eighty years. It was clearly built for the Industrial Age, not the Information Age.
Location 141: Wealth was built inside this country by homesteading and developing property. A piece of property was either homesteaded or purchased, that land was then made productive through farming the soil, extracting resources, or adding a building.
Location 150: The College of Financial Planning in Denver created what we know today as a financial plan by using averages and assumptions to calculate projections for someone's financial life.
Location 157: Why? Advisors told us to, and they also told us Wall Street could get us rich fast. It is human nature to want something for nothing. Humans want to put a little money in and get a lot out. Humans are also impatient and don't want to dig deep to find strategic solutions, so they delegate their finances to a planner.
Location 159: Most people also don't understand inflation. Taking the dollar off the gold standard was a subsidy to Wall Street. The government could print money at will, so the Cantillon effect took place. All commodities and stocks rose in value, but they weren't getting more buying power. It created a rush because people saw that the security was higher. The nominal value of the stock price went up, giving the appearance that the returns were higher than they actually were. If you broke it down and removed the inflation, the rise wasn't nearly as substantial. Financial planners took advantage of this, saying, "Securities will go up 8 percent. Invest all your money there!" At one point, returns were an easy 20 percent. Everyone thought this would continue forever.
Looking at the Dow over 100 Years In the year 1900, the Dow Jones Industrial Average was 65.29. One hundred years later, it was 11,600. Using a Rate Calculator, we can see that 65 growing to 11,600 over 100 years results in an Annual Interest Rate of 5.32%. So the Dow has averaged 5.32% over those 100 years.
Location 185: The first step in our system is save/store liquidity. You can never save yourself to financial independence, but it is a first step. Storing liquidity inside a whole life policy and using the liquidity to begin to invest in real estate is a consistent path to financial freedom.
Location 193: Consider this for a moment: a bank won't lend you money to purchase stocks or mutual funds, but they will loan you money to purchase real estate. They will also loan you money against your whole life insurance, which is a clue to why these two assets work so well together. Banks will not lend money against a qualified plan, because they know they are inherently too risky and if there is a crash, the bank loses all of its collateral. Banks understand and will lend against the cash value of life insurance and a piece of property because both have acceptable collateral. If the owner of a piece of property defaults, the bank can take an asset back (the house). If the owner of a life insurance policy defaults, the bank can take the actual cash of the life insurance policy as collateral.
On the flip side, bureaucrats and politicians created retirement plans based off regulation and legislation to fulfill the political need to replace the pension system.
Location 215: The traditional whole life insurance contract or policy is held inside a mutual company owned by the policyholders. There are no shares, it's not public, and you can't buy a piece of it unless you buy a policy. That mutual structure gives contract law even more emphasis, because the people controlling the company are the owners of the policy that also own the company.
Location 228: According to Pirates of Manhattan by Barry Dyke, every large bank uses whole life insurance as their primary vehicle to store liquidity. If most large banks are using it, why aren't they passing this idea down to people on Main Street? Because they want you to buy their products, and then they want to put their profits from you buying their products into a system that actually works. Think about it: banks take your deposits, loan them to real estate investors, and earn the high rates of return themselves. They arbitrage your money for their own benefit. This is why we say to cut out the middleman and do it yourself—keeping all the upside to yourself. All that's required is a little bit of know-how, which you will have by the time you finish reading this book.
Location 237: The antifragile investor loves randomness and uncertainty. By not following the crowd, you can use randomness and uncertainty to your advantage.
The myth of the middle class is a load of shit and there is no way that the wealthiest and most productive people in all of human history should spend their lives shackled to jobs that they hate and rob their families of their time, only to give 40 percent of the money to the government and another 10 percent of their money to the financial planning industry that puts their money at a high level of risk for a minimal return. Only a sucker would take all of the risk in any investment and that is what you are doing in a qualified retirement plan. Tax-deferred is not tax-free, and only a sucker would pay ordinary income rates on investments.
Location 293: What Are the Lies? Most of what you believe regarding real estate investing is wrong: It takes too much money. No. You don't have to buy the houses. Leverage the banking system and put down the minimal down payment. Leverage, used correctly, is one of the most powerful tools for any investor. It takes too much time. No. You will not be spending time looking at houses, evaluating properties, putting together estimates on repairs, managing contractors, placing tenants, or managing tenants. It's too complicated. No. We have simple metrics to show you that it's about cash flow, not appreciation. When you remove a lot of irrelevant information from the equation, it can be very quick and easy to identify good investments. It's too risky. No. We will remove the intimidation factor out of trying to identify a good real estate investment. We will systematically show you that it is not as risky as what you're currently doing on Wall Street. When you invest for cash flow, it removes most of the outside factors, like market volatility. It's about flipping. No. The HGTV lineup on flipping houses is a lie. We'll teach you why it's important to hold onto and rent out your properties for the long term.
Whole life insurance also has lies that need to be busted: It's an investment. No. It's actually a place to store cash. And you don't have to borrow against the insurance for it to be effective. It's multi-level marketing. No. Whole life insurance companies were typically created by a church or community that came together to put money in a pot if a family had a death, so it didn't destroy the family. The idea of mutual ownership was built on that concept. Everyone contributes and everyone benefits. Private individuals and organizations saw this need and fulfilled it with companies like GoFundMe—where two-thirds of the campaigns are due to a death in the family where the breadwinner was not insured. It's too expensive. No. Term insurance is certainly cheaper than whole life insurance, but the benefits are drastically different. It's federally regulated. No. It's state regulated and doesn't have a lot of the issues that come with the banks and large corporate investments that require federal regulation.
1. Set Your Strike Number
We are on strike, we, the men of the mind. We are on strike against self-immolation. We are on strike against the creed of unearned rewards and unrewarded duties. We are on strike against the dogma that the pursuit of one's happiness is evil. We are on strike against the doctrine that life is guilt. —Ayn Rand, Atlas Shrugged
Location 333: The first step in finding financial freedom is for you to determine your end goal. We call this a strike number, and it refers to the cash flow you need to cover your monthly expenses.
Location 350: When you set your brain on a number, it focuses on a concrete dollar amount and the why of what you're doing. If you don't have that specific number, your brain wanders aimlessly without focus. There's no accountability or measuring stick. You don't know if you've made it. Once you have the goal written down, your subconscious mind will automatically go to work for you, and as long as you don't lose sight of it, you'll soon achieve it.
Location 374: When most people buy for appreciation, they are putting their financial life into the hands of outside forces. Greater macroeconomic forces come into play: interest rates, how loose/tight bank lending is at any given time, how much money the federal reserve decides to print, and the general feeling people have towards the real estate market at the time. You are also subject to a wide variety of more local geographic forces: how many people are moving in and out of the area, job growth or lack thereof, and the amount of new construction being built every year. You have no control over any of these things. You can do your best to anticipate market cycles, but nobody has a crystal ball, and dealing with the ups and downs isn't worth the hassle quite frankly. Hoping and praying the market goes up is no way to build a solid financial picture.
Location 393: We encourage you to rethink the concept of retirement and create options for the present moment instead of putting them off for several decades. You never know what will happen in life. Don't push goals and opportunities into some obscure future date; build a solid plan that sets you up for success today, and tomorrow will take care of itself as a by-product.
2. Establish Your Emergency/Opportunity Fund
Location 465: It's important to not confuse whole life insurance with universal life insurance. Beginning around the mid-twentieth century, universal life insurance began to be sold as if it had all the guarantees of whole life insurance, but in reality, it was term insurance with a savings account, like a money market account that is subject to interest rate fluctuations. These universal life insurance policies do not have a guaranteed premium, guaranteed cash value, or guaranteed death benefit, which is constantly increasing like whole life does.
Location 478: To invest in real estate the right way, you need to have a source of liquidity and to make your first real estate deal, you'll need a lump sum. However, contrary to common perception, you actually don't need a lot of capital to invest in real estate. At a minimum, you need only $15,000. That's the absolute bare minimum to have as a down payment on cash-flowing property in the Midwest United States, including closing costs. We really recommend that you have $25,000, and we prefer to work with clients who have closer to $50,000. Why do we recommend having more? Well, if everything goes perfectly, $15,000 would be fine, but things rarely go perfectly in life. You need to have an extra $10,000 cushion, on top of your personal emergency fund, for when problems inevitably crop up. Otherwise, if you put all your money into deals, when one little thing goes wrong—say a furnace goes out on one of your properties—you won't have any liquid capital available to fix it. Or if a property goes vacant, you might need to cover two months of expenses. There are ups and downs that will occasionally happen, and you don't ever want to find yourself suddenly in the position of being the motivated seller, needing to liquidate fast. That is the quickest way to have your real estate dreams go up in smoke.
Be wary of anyone who encourages you to tie up all your capital. You should never put your last dime into real estate. It's much better to wait until you have an adequate cushion. Remember, a key component of this strategy is removing the stress of the ups and downs of market cycles. If you tie up all your liquid savings, you'll be right back into the stress trap.
Location 502: But with whole life insurance, you pay the monthly bill, and if you want to use the money or borrow against it, you have to request it. You can still get it quickly, perhaps within twenty-four to seventy-two hours, depending on the company. But, this one little step forces you to stop and think, What am I using this money for? Am I using it for the right reasons? That moment of conscious awareness ensures you are living by the principle of paying yourself first, one of the lessons from the great book, The Richest Man in Babylon, written by George Samuel Clason.
Location 509: Safe from frivolous spending, the money will build up, and you'll hit your emergency fund baseline. From there, you keep saving, and you'll hit your opportunity fund threshold. Then, your strike number will begin to come into view, because your dollars are working more efficiently. You'll be covered in case of an emergency and now have the peace of mind to confidently buy your first house.
When you're just starting out, you can do this with as little as $200 to $300 a month. Start wherever you can and work up from there. Once you start to see your money grow, you'll get addicted to the process and start finding ways to put even more money into your emergency/opportunity fund every month.
Location 520: When you put your money into a qualified retirement plan, you're telling yourself you're saving, but you're really not. At best, you're investing, and at worst, you're speculating.
Location 522: A qualified retirement plan is not savings at all, as all of that money is locked up for decades. You can't use the money to repair the car, cover unexpected expenses, or pursue opportunities. You could technically be foreclosed on and kicked out of your home, and yet still have money in a qualified retirement plan. Your net worth would look just fine, but that wouldn't really help you, would it? You could be homeless, unable to get to work due to a broken-down car, but at least you have your 401(k) still, right? It's backwards. You certainly aren't free to invest in real estate when your money is tied up in a 401(k).
Location 530: Another lie we're told about qualified retirement plans is that they're good for creating wealth. Surprise: they're not! Whole life insurance policies were created by entrepreneurs, but qualified retirement plans were created by the government and bureaucrats, and they were created for people who have jobs.
Location 534: The idea of retirement is a huge lie. Retirement doesn't work, and it never should have existed in the first place. Working yourself ragged until some arbitrary age is not good for you socially, physically, emotionally, psychologically, or financially.
Location 536: Various studies are starting to show the downsides of the retirement construct, and even the AARP has begun to shift the conversation, because people now realize you can't save money for thirty years and then try to live on it for another forty years. Except for a few very wealthy families, it's literally financially impossible. You would have to get a crazy rate of return to achieve the amount financial planners recommend saving for retirement.
Our human lives are not mathematically designed.
Location 548: The goal isn't not working but finding work that you can spend the rest of your life doing, because work and service to humanity is what gives people energy.
Location 559: This process is slow and steady, but it's also exciting and inspiring, because you can see your money working for you and see yourself getting closer to your strike number. In contrast, having your money sitting in a checking account somewhere gathering dust can create anxiety, making you feel as if you have to play catch-up. When your money is in a whole life insurance policy, you know you're earning a certain rate of return on it, and that eliminates the anxiety.
Location 562: Remember: this is all about liquidity. You want cash-flowing money, not dead money. Whole life insurance gives you the liquidity and real estate gives you the cash flow. The two together enable you to invest in more real estate and anything else you'd like.
3. Embrace a Cash-Flow Mindset
Location 570: Instead of thinking about accumulating numbers on a balance sheet, you need to think about accumulating assets that kick off cash flow. Bankers care about your net worth, but you should not. You should care about how much cash your assets are kicking off every month.
Instead of focusing on storing money, you should be thinking about cash flow.
Location 576: Accumulating $1 million is a daunting task, but accumulating $1 million in cash-flowing assets is not that difficult.
Location 589: Speculation can be a valuable tool in your tool belt, but if it's your primary strategy, you'll be completely dependent on market cycles. That's simply too volatile, and it's not the strategy we are talking about. We want to eliminate as many variables as possible.
Location 604: I think what something is actually worth is what someone can buy it from you for in thirty days. The true value of my portfolio is how much cash value it kicks to me every month.
When you're focused on cash flow, it doesn't matter if the underlying value of the real estate goes up or down.
Location 634: In reality, wealthy people are those whose assets kick off cash flow that equal or exceed their expenses.
Location 646: Relying solely on appreciation is not a sound business model. The people who are skilled at this have in-depth market experience and need to make sure they don't get too overextended at any given time. You can make money in a rising tide, but as soon as the market shifts, you'll go from champagne showers to the poorhouse. The consistency of monthly cash flow is much more valuable than one-off appreciation. Plus, making money off of speculation in this way requires real market expertise, whereas anyone can establish a cash flow system.
Location 651: Economists only talk about gross domestic product and increase or decrease of asset values, completely ignoring the cash flow that comes in and out of all assets and businesses.
Location 653: There's no way to calculate the aggregate amount of cash flow in the entire economy. The closest equivalent to cash flow on Wall Street would probably be dividends, but so few stocks actually pay dividends nowadays. Instead, everyone is chasing appreciation and completely ignoring what makes economies and markets work.
4. Use Leverage to Buy
Location 671: One of the unique traits of real estate is the ability to borrow money against it. No bank will even consider lending you money to buy stocks, nor will they give you a loan against your qualified retirement plan. That should be a red flag alerting you to the fact that qualified retirement plans can't truly be a great—much less secure—idea. Banks are in the business of loaning money to make money, and if they won't lend on something, it should tell you how they view those investment vehicles.
When you leverage your whole life insurance policy to buy real estate, you're not actually pulling money out of it; you're simply borrowing against it, just like when you take a loan on a house, you're borrowing against the value of the house. The life insurance company loans you their money, using your policy as collateral for the loan. Instead of using your own cash for the down payment, you are using the life insurance company's money. You pay interest to the life insurance company on the money you borrow, and all your money continues to accrue value inside of your policy, unaffected by the loan against it. This method is essentially a private loan that does not appear on your credit. The borrowed money is essentially cash that's placed in your account, so when you then use that money for a down payment, the bank has no concerns.
Location 681: The interest owed on the money borrowed against your life insurance policy will be a small expense, but you can easily use the cash flow from your purchased property to pay back the life insurance loan. When the policy is fully paid back, you can borrow against it again for a down payment on another property.
Location 685: The most significant benefit is the ability to buy your first house much quicker than if you saved up to buy the house entirely in cash. The faster you buy your first house, the sooner your money begins to work for you, and the sooner you can take advantage of the benefits of owning real estate.
Location 688: For one, you get tax benefits, as you get to deduct the interest you're paying on the property as an expense.
Location 699: Spreading your capital across properties thus provides greater tax savings as well. A video from Truth Concepts at www.youtube.com/watch?v=cgK\_dOIesZo explains further the value of putting a second mortgage on homes using the cash value of your whole life insurance policy.
Location 703: The dollars you have in your pocket today are much more valuable than the dollars thirty years from now because of inflation.
Location 711: FHA loans exist only because the us government, wanting to promote home ownership, subsidizes the loans. They remove the risk from the lenders and put it on the government, which means us, the taxpayers. Because these loans are subsidized, they're like welfare payments, but they're intended for middle class individuals with w-2s and good credit.
Members of the middle class are currently eligible for ten FHA loans, and married couples where both partners work are eligible for twenty.
Location 725: Some of you may be wondering at this point, Is this a moral dilemma? Am I perpetuating the welfare system if I use these loans? In a perfect world, a libertarian utopia, we would not have the Federal Reserve or FHA financing. We would be backed by the gold standard, and our currency would be sound. But until that environment exists, there's no point in taking the woe-is-me victim mentality, lamenting over how the big bad government takes your money and there's nothing you can do about it. Taking advantage of FHA loans is what you can do about it. The government is ruining the value of the dollar, causing you to lose money to inflation; when you use FHA loans, you are using the government's very tool of inflation against them.
Location 732: At the end of the day, it's all about personal economic liberty, personal autonomy. If you want to achieve that, FHA loans are the most efficient way to do it. All you can worry about is yourself. You can't control the greater scheme, so you should work to create your own personal financial freedom, bringing the sphere of control back into your own world as much as possible.
Banks want you to get a fifteen-year mortgage because you're increasing their cash flow. They get a higher monthly payment while holding the same value as collateral.
Location 792: When you choose a thirty-year mortgage, you can invest the liquidity into other opportunities. You can put the money you're saving into your whole life insurance policy, and once your emergency/opportunity fund builds back up, you can put a down payment on another house. Rinse and repeat. Instead of focusing on paying off only one house, you're focused on how to build your portfolio, adding more cash-flowing assets.
5. Partner with Operators
Unique Ability®, by definition, is the essence of what you love to do and do best. It's your own set of natural talents and the passion that fuels you to contribute in the ways that most motivate you. When articulated, it describes the "you" that makes you who you are. —Dan Sullivan.
Location 886: When you begin investing in real estate, you're going to pay in one capacity or another. Either you pay a management fee to gain another's experience, or you pay through the school of hard knocks.
Location 937: Many real estate DIYers make the mistake of over improving their rental properties. They put in granite countertops and nice mosaic tile. These improvements look nice, but they provide only marginal increase in extra rent compared to the cost of the house. For each incremental dollar you're paying in repairs, you're not necessarily going to make that money back in actual income on the property. It's similar to the fact that you don't want the more expensive house in a better neighborhood.
Location 961: Professional tenants—people who know the ins and outs of the eviction process and who know how to game the system—typically look for single operators and newbies. They look for people who are easy to take advantage of, people who are inexperienced and don't have the systems in place to handle evictions quickly. A professional tenant will scrape together enough money for the security deposit and first month's rent, and then the next month, when rent is due, they don't pay.
Location 1005: Lease-option tenants have more skin in the game and pride in taking care of the property. Their security deposits are typically more than a standard rental, and they aren't willing to walk away from it, so they pay the rent on time and abide by the contracts. They take better care of the property because long term they want to be a homeowner and buy the home. Fewer issues come up with the property, and there is less wear and tear. Many times people actually improve the house by installing tile flooring or painting the rooms. They know they're going to buy it someday, so they want to take care of it.
6. Rinse and Repeat and Expand
Location 1053: You want your money to move and work for you. When you build velocity of money, your money moves through assets.
Location 1058: Once you get your first property, you can use the cash flow from that house to pay back your whole life insurance policy loan. Then you can use the cash value that keeps building up in that policy for a down payment on a second property. Now you have even more cash flow, which becomes new premiums and "Paid-Up Addition" contributions, and new savings for additional properties. As you repeat the process, your money and your cash flow will compound quickly.
Paid-Up Addition contributions are simply additional cash added to a policy, which then create cash value for about 95 percent of the dollar and an increased death benefit for about 5 percent of the dollar. This enables the cash value to create additional dividends, and the death benefit to protect that cash value and dividend payment from tax. Paid-Up Additions can be paid monthly or annually, but lump sum Paid-Up Additions must be carefully reviewed in order to not create a Modified Endowment Contract. That would cause the whole life insurance policy to have less effective tax law.
Location 1100: When you buy real estate, you're amassing good debt, because the debt is helping you to put money into a house and into your pocket. Paying extra on your principal is risky because you're putting that money into the banker's hands, not your own. When you prepay your mortgage, you lose control of your dollars and get nothing in return except some saved interest. If you believe saving the interest is worth it, you're assuming that you can't beat the interest rate. However, if you put your money through a whole life insurance policy instead of paying down your principal early, you can then put that money back to work in another property, and you can easily earn more than the interest rate.
Location 1108: People tend to think they'll be able to access the money they've put into a house if needed, but you won't always be able to refinance or sell a house in order to pull money out. Money that is tied up in a house is dead capital.
Instead of paying down your principal early, you should pay back your whole life insurance policy loan. Then, once you have the capital freed up within your whole life insurance policy, you buy another house.
Location 1113: When You Should Not Rinse and Repeat There are a few strategic exceptions when it doesn't make sense to keep accumulating more cash-flow assets in this rinse-and-repeat approach. The first such situation is when you experience rapid appreciation on a property. Sometimes certain markets appreciate faster than others, and you can accumulate a lot of extra equity in a house through appreciation. In that case, the extra equity is dead capital. If you sell or refinance the house to pull money out, you can potentially double down and put that money into two separate properties, rebalancing your portfolio to support more cash flow. The other situation is once you hit your strike number. At that point, the rinse-and-repeat model doesn't matter as much. You may decide to liquidate certain properties to get cash to spend on any variety of things. Remember, though, that you should never sell off so much of your portfolio that you drop below your strike number.
Location 1134: You could get halfway toward paying off your house, having prepaid the mortgage by an extra $50,000, but if something happens and you're unable to make a monthly payment, you will still go into foreclosure. If you tell a banker to use the money you've prepaid to count toward that month's payment, they'll tell you tough luck. When the money is in your whole life insurance policy, you remain in control of it.
If you pay the principal early, you're lowering the bank's risk while increasing your own. You also lower your cash-on-cash return. All the bank does with the extra principal is re-lend it to another real estate investor. Banks are one of the greatest practitioners of velocity of money. They don't want money sitting around doing nothing. They get it moving by lending it out and earning interest on it.
Location 1149: When it comes to how you handle your money, you should do as the banks do, not as they say. We find this odd that the banks practice one thing and preach another. There's a huge hypocrisy in the fact that banks tell you to invest your money in qualified plans while they do the opposite. Banks essentially invest in the same thing we've been talking about this entire book: whole life insurance and real estate. While they are telling you to invest in qualified plans, they are doing the exact opposite.
Location 1153: Another reason to put extra money into your whole life insurance policy instead of toward your mortgage is to reap the tax benefits. The tax deduction for interest on your primary and secondary home mortgages is one of the few remaining legitimate tax deductions for individuals today. Why would you want to reduce your tax deduction by putting extra money toward your mortgage? Furthermore, the growth of life insurance is tax-deferred. Compare that to where most people store their liquidity: savings accounts and money market funds, both of which are taxed.
7. Leverage the Tax System
Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands. —Judge Learned Hand, Helvering v. Gregory, 69 f.2
You can use whole life insurance policies to get a float on tax dollars. Whole life insurance provides tax-deferred growth, tax-free loans, and income-tax-free death benefits.
Location 1172: While there are caveats, both real estate and whole life insurance are essentially tax-free asset classes. Tax efficiency is crucial, because the highest lifetime expense we all have is taxes.
According to Dan Sullivan of Strategic Coach, everyone deals with a scarcity mindset. Even when you change your mindset to one of abundance, you aren't fixed for the rest of your life, you will find yourself falling into a scarcity mindset and panicking. Perhaps even daily. We all go through it. The goal is not staying out of it, it's getting out of it. Whatever you need to do, do it—go outside, run, pet the dogs, call your best friend, even scream if you need to. In a scarcity mindset, we make poor decisions, especially financial and leadership ones. We are not superhuman, constantly in abundance mindset, so sometimes the fear of being broke keeps us going. The key is recognizing a scarcity mindset and turning it into abundance.
Location 1204: Most people think they must replace their entire income in order to gain financial freedom through real estate investment. However, you don't need to replace what you make, only what you keep
Location 1223: When you're eighty-five or ninety and don't want to deal with real estate anymore, you can begin to divest yourself from your portfolio. You can do this by selling properties or using a Charitable Remainder Trust strategy. Before then, though, you should let real estate drive your income, whether it's through bridge loans, lease-to-owns, hard money, or owning turnkey properties. You should save the whole life insurance cash value for your later years and potentially even hold on to it for the death benefit. Doing this is substantially safer, as if you try to live off only your whole life insurance and don't time it right, you could implode your policy.
Location 1230: While death may be certain, taxes are not. Qualified retirement plans are only forty years old, and income tax has only been around since the late nineteenth century. Americans fought the Revolutionary War over a 6 percent consumption tax, the stamp tax. The income tax was declared unconstitutional twice, and the constitution had to be amended to get the tax passed.
There has always been an American aversion to paying income tax, and for 140 years, Americans did not pay income tax at all. Income tax was created by bureaucrats, and those same people came up with qualified retirement plans. They are both new developments of the Industrial Age. They are not certainties. They could be anomalies that go away.
Location 1239: This is an example of an accumulation mindset vs. a cash flow mindset. The flaw is in thinking you can accumulate fiat dollars somewhere and then draw it down over time. With a cash-flow mindset, you accumulate capital and then put it into assets that continue to kick off cash. You never draw on your seed capital; instead, you let it work over and over for you.
Location 1243: The appreciation model of real estate is a high-tax environment
Location 1245: When you instead focus on a cash-flow model, you get major tax benefits. You can deduct the interest and get depreciation. You can also do a 1031 exchange, which allows you to sell a property, reinvest the proceeds into a new property, or properties, and defer the capital gains taxes.
Nobody on Wall Street ever talks about their tax liability, their realized gains, or their take-home amount after taxes. They talk only about the top line. The top line sounds glamorous, but at the end of the day, it's the money you keep, not the money you make, that truly matters.
8. Mitigate Risks
Location 1259: Investment is something that provides a return with no loss of principal. Typical financial planners frequently talk about risk tolerance in relation to investments. They want to quantify it and offer questionnaires to determine possible investments. Many times they lead people to believe that higher risk means the opportunity for bigger returns when in actuality risk only means the likelihood of loss.
Location 1269: Whole life insurance and real estate are both low-risk and antifragile in comparison to other investments. With whole life insurance, you have a guaranteed increase in value every single year, and with real estate, a focus on positive cash flow instead of appreciation can shelter you from losses even if your property value decreases.
Location 1302: Everyone worries about another market crash, yet the value of a cash-flowing real estate portfolio could drop in half tomorrow, and it would not necessarily destroy the investment. As long as the majority of the rents are coming in each month, the cash-flow income will continue to be steady, and the investor will continue to win. This strategy works especially well when an investor purchases the property below market, rehabs the house, and finds a responsible tenant.
Location 1323: If you want monthly income, real estate is the way to do it. All other forms of monthly income are more volatile. Even bonds, which used to be the method to use for safe money, are no longer safe, because municipalities are now going out of business just like businesses do.
Location 1337: The first black swan is a tenant not paying rent. The first thing you want to do to reduce this risk is to have a strict rent-collection protocol in place. This way, if a tenant is not paying, you can get them out immediately. Another way to reduce the risk is to use lease options instead of traditional renting. With a lease option, the tenant puts down a nonrefundable option deposit—typically 5 percent of the purchase price—that will go toward their down payment when they purchase the home. Because it's nonrefundable, the tenant now has skin in the game. As a result, you get tenants who have ownership mindsets and who are more likely to pay the rent on time, so that they don't lose their deposit. If the tenant does default and you must evict them, the next person you find will have another option deposit. In that way, you cover some of your vacancy risk.
Location 1343: The next risk is the tenant destroying the property. Using lease options is a great way to mitigate this risk as well. If the tenant destroys the property, you can use the $4,000 nonrefundable deposit to help repair the property. You can also use the option deposit from the next tenant buyer to help offset the vacancy and repair costs.
Location 1346: Another black swan is natural disasters, but the solution to that is simple: buy insurance on everything. Insurance is using someone else's Unique Ability® to cover a risk.
Location 1347: The fourth potential risk is a situation in which you are not collecting rent and so cannot afford to pay the mortgage. This risk is why whole life insurance is so critical. You need a source of liquidity to cover your mortgage payment in case you can't collect rent for any reason. That store of liquidity is your hedge against vacancy. This is a great reason why you should not be paying extra toward your principal and should instead be putting any additional money into your whole life insurance policy for liquidity.
Location 1351: The final major risk is a balloon payment coming due on the property or interest rates skyrocketing. This potential risk is the reason turnkey buyers should always get thirty-year, fixed financing. With fixed financing, you don't have to worry about balloon payments or changing interest rates. A married couple with both partners working can purchase up to twenty houses on a fixed-financing model, and married couples or individuals with a single income can purchase ten. After those limits are reached, the best way to mitigate this risk is to keep a good store of liquidity inside your whole life insurance policy.
Location 1356: If your money is locked in a qualified retirement plan, inflation will hurt you. You can look at your 401(k) and think, Wow! I'm going to have a million dollars in thirty years! In today's dollars, a million dollars is great, but what will the purchasing power of a million dollars be in thirty years? You may only have the purchasing power of $300,000 in today's money. With a thirty-year mortgage, you use inflation on your side. Your mortgage payment will stay the same, but rents will increase approximately 3 percent a year due to inflation. You pay the bank back with inflated dollars thirty years from now that are worth a lot less than they were today.
There are only two things that are benefited by inflation: thirty-year mortgage payments and whole life premiums. This is because both those figures are fixed, and so, while inflation rises, the impact of the payments to the mortgage company and/or to the life insurance company lessens.
Location 1378: It's much better to spend the prime years of your life actually living rather than slaving away, waiting until you're sixty-five so you can go on a cruise and sit and stare at the water.
Summary of the 7 Principles of Prosperity™:
Think: Owning a Prosperity mindset eliminates Poverty; scarcity thinking keeps you stuck.
See: Increase your Prosperity by adopting a macro-economic point of view—a perspective in which you can see how each one of your economic decisions affects all the others. Avoid microeconomic "tunnel vision."
Measure: Awareness and measurement of opportunity costs enables you to recover them. Ignore this at your peril.
Flow: The true measure of Prosperity is cash flow. Don't focus on net worth alone.
Control: Those with the gold make the rules; stay in control of your money rather than relinquishing control to others.
Move: The velocity of money is the movement of dollars through assets. Movement accelerates Prosperity; accumulation slows it down. Avoid accumulation.
Multiply: Prosperity comes readily when your money "multiplies"—meaning that one dollar does many jobs. Your money is disabled when each dollar performs only one or two jobs.