Can you imagine, you bought a rental home 15 years ago, and now your 60 today.

 

Your hope was this rental would provide retirement income needed at age 65.

 

Sadly, it’s obvious there is no way this income is going to make enough of a difference for them.

 

15 years of dealing with the property, and now they are worried they may have made a mistake.

 

5 years away from retirement, they have to decide…..

 

Keep it, sell it, re-finance, or do something different, is it too late?

 

I hope you’re never put in this position, especially so close to retirement.

 

Let me tell you how it turns out….

 

But first, welcome, I’m Dan Thompson, I make sure that things like that don’t happen to you.

 

We have a proprietary process to protect your money, create tax-free growth and income, and at growth rates you’ve likely not seen before.

 

No use stressing and worrying about money, income, and retirement when you can create a predictable process to grow your wealth.

 

So, the other day I was in a casual conversation with this person in this situation with their rental.

 

My heart dropped. I mean, this was their dream, to be owners of rental real estate and make their millions, have all kinds of extra income at retirement, just like a lot of people think, right?

 

They thought that if they owned rentals at some point they spin off income that will provide a wonderful retirement.

 

Sadly, that’s not always the case…..let me explain…..

 

This couple bought a rental 15 years ago. At the time the home was 5 years old.

 

They originally paid 215,000 for the rental.

 

They put $40,000 down and carried a mortgage for the rest.

 

Over the years they put all the extra money into paying off the mortgage and it was recently paid off, 15 years later.

 

The rents have increased over the years, just a like they’d hope.

 

The current rental income is 2000 per month.

 

The home has appreciated in value to 300,000.

 

So, in the 15 years they increased their equity 85,000.

 

They put about 10,000 into repairs and maintenance over the years, like new carpet, some painting.

 

Their total investment with repairs is 225,000.

 

Now that the mortgage is paid, if we calculate their gross return on the amount invested it’s about 10.6%.

 

We get there by dividing 24000 (rents for the year) by 225,000.

 

After insurance and taxes their net income is about 8%.

 

There is a 50% rule of thumb that says over the life of rents, you’ll be able to keep and spend about 50% of your rental income.

 

This is after repairs, maintenance, insurance, and property taxes are paid through the years.

 

If that holds true, then the net return on investment is 5.3%.

 

If you divide 12000, (½ the rental income), by 225,000, amount invested we get 5.3%.

 

Now, they have 85,000 in equity appreciation too, that equates to about 3% per year growth over the past 15 years.

 

Finally, we want to know what the return is based on the current value of the home?

 

In other words, right now they have 300,000 tied up into the home when we include the equity appreciation. That is how much money they have in the home sitting in equity.

 

If we divide the annual rental income of 24,000 into 300,000 equity, we get 8%, gross, after taxes and insurance it falls to 6%.

 

And using the 50% rule of thumb when we divide 12,000 by 300,000, their net return on the entire home’s equity is 4%.

 

In other words, $300,000 is getting about a 4% net rate of return. Oh, this is before income taxes too.

 

Okay, so those are the parameters. They are essentially doing 4% on their money, plus some equity appreciation.

 

First question is this. Is all the works, management, dealing with renters, maintenance, repairs, late calls at night or on weekends with the hassle of a 4% return?

 

You might say, well they could turn it over to a management company, but that takes about 10% of their rental income. Now their real return drops even more.

 

The question they had what should they do at this point?

 

Should they sell?

 

Should they sell and buy another rental?

 

Should they refinance and pull some cash out?

 

Should they get the cash out and buy more properties?

 

Their overall goal is to create income so they can retire in the next 5 years and have the income they need or want.

 

So, we kind of worked backwards.

 

If they kept the rental and just lived off the income, lets again assume they can spend half, that means they have 300,000, the properties home value sending off 12,000 in income.

 

Or about 1000 per month.

 

Over the years it’s possible that the rents will go up, so maybe they’ll get more income incrementally over the years.

 

300,000 working for you and only providing 1,000 per month may not be adequate.

 

So, the next question is, should they sell?

 

When you apply the Buffet rules to investments – you never sell unless the story changes.

 

In other words, is the property doing what they want it to do or thught it would do.

 

Interesting, they seem to be happy with having the home. I don’t know how deep they get into their numbers and know their real return, but they seem to be happy with the outcome.

 

Buffet would simply ask, is the home doing what we expected it or wanted it to do?

 

I’d ask is the home keeping up with market conditions?

 

Is the investment is still producing the expected results?

 

Is the home in a good area for rentals and equity appreciation?

If those things are still true – then you don’t sell. The story and the reason the bought it seem to hold true still.

 

They were happy with the home, the rents, the appreciation, so then, there would be no reason to sell.

 

The only thing that’s wrong is it’s simply not going to produce adequate income that they need.

 

They didn’t do a lot of research to see if there was something better. They simply assumed since RE is a good investment overall, and other people wanted rentals, that it was the best thing for them to do as well.

 

The next question you have to ask if they did sell, what would they do with the money?

 

In other words, you don’t want to sell if the story hasn’t changed, and you never sell unless you have a better place for your money.

 

Sitting idly in cash won’t improve their situation.

 

The next thing they thought of was to sell this property and buy a more expensive piece of property that would produce a higher income.

 

In other words, maybe sell and put the 300k into a million-dollar property? Most likely commercial.

 

The mortgage would be 4300 per month. So, they’d have to have rents more than 4300 plus taxes, insurance, maintenance and repairs.

 

Then a couple of decades from now, when rents go up, and mortgage goes down, they might be able to have a greater income. They might be able to double their income.

 

The next idea is to leveraging their equity into buying other properties.

 

Let’s suppose they could get 225,000 out of the home by refinancing (about 80%).

 

They may not have adequate income or rents to assume this new mortgage by refinancing, but let’s say they do.

 

With the 225,000 they could use it to put 20% down on several homes.

 

If each home they bought was 300,000, they would need put 60,000 down for each home.

 

Let’s say they can get 4 homes – I know that’s not quite accurate, but maybe one of the homes was 250,000 or less.

 

Now, if they were getting the same rents, all at 2000 per month.

 

That’s 8000 per month.

 

However, we’ve got mortgages.

 

The cost of the mortgage will be about 1500, plus insurance, plus taxes for each home.

 

They may be lucky to break even – let’s say they do.

 

So, there is no additional income coming from these rentals for several years.

 

Then down the road maybe they clear 100 per home or 400 per month in 6 or 7 years.

 

Then maybe they get that to 300 per month 10 or 12 years.

 

Now they are into their retirement 10 or 12 years and finally have 1500 dollars more per month.

 

I think you know where this is going. It may be a good strategy long term, but right now they have more cash flow than that with the one home.

 

There is no way even 4 new homes are going to produce the income they need to enjoy their retirement. Particularly because they want to retire in 5 or less years.

 

So that does not seem to be a good option.

 

What’s left?

 

Not much –

 

What they finally came to the realization is that rentals may not have turned out to be the income producing asset that they thought it would be.

 

So, what should he do?

 

What I did was assume they sold the rental, after his capital gains tax, ends up with 285,000.

 

What would it look like if over the next 5 years he put that into a compounding and leverage program, using life insurance as his base to keep the money safe and guaranteed?

 

Using current economics, this could potentially produce ______ in annual income, all tax-free.

 

Now, here’s an interesting contrast.

 

15 years ago, this couple put 40,000 into this rental to purchase it.

 

What if instead he did the wealth squared method, again by compounding and leverage instead?

 

Let’s project out at the current economics and see what it could be.

 

His income would produce 50,000 annually, tax free.

 

If they wait until age 65, it would produce 60,000, tax-free, and a few short years later 70,000.

 

Oh, and when they pass on, at age 90, over 2 million would go to their heirs.

 

Wonder what the house will be worth in 30 more years?

 

So, they didn’t start 15 years ago, is it too late?

 

Well assuming they could sell the home and we could put to work their 300,000 ASAP.

 

Projections show about 45,000 in income about the time he wants to retires. Again, that’s tax-free income. 

 

More than double their current rental income and no way they could produce that kind of return from 300,000 in any other investment.

 

See the problem isn’t that they weren’t savers and they weren’t motivated to prepare for retirement.

 

It’s that they didn’t have many options in front of them.

 

Buy rentals, put it in the stock market, or stick in a savings account.

 

That is why we’ve got to give you this other alternative.

 

A way to save money safely, achieve above average returns, keep your money and your income tax-free, and create a substantially greater income than otherwise could be achieved with traditional financial planning methods.

 

So, don’t hesitate, take advantage of our free strategy session and see if it can help you too….

 

Remember you never get back yesterday – you don’t want to miss a day growing and compounding your money – that is the way to safely build your wealth

 

That’s about it….

 

 

 

The Financial World Has Changed

 

I was reminded today of the massive changes that the financial systems have gone through in the past 35 years.

 

It’s been good for the do it yourself consumers, for the most part, and it’s been really good for Wall Street, but not right away.

 

When I first started in ’85, we had one quote machine in the office. We didn’t have computers on our desks and everything we did was by hand.

 

If one of my clients wanted to buy stock, they would call me, I would call the trade desk or go to the quote machine and get the bid and the ask of the stock.

 

If my client liked the price I would take out my order pad, write down the ticker symbol, how many shares, and if was a market or limit order.

 

Then I’d call in to the order desk, place the order, and hope it was filled quickly.

 

When the order was filled, I would get a call, write down the fill information on the order sheet, and call back my client.

 

Then I’d put all the orders for the day on a ledger and file it away for 3 years.

 

The cost to buy was generally 3% and the cost to sell was 3%. As you can imagine at those rates there weren’t a lot of trades in an account.

 

Think about it, if you bought a stock it would have to basically go up 6% before you even started making money. 3% on the front end and 3% on the back.

 

That could take a good part of the year or even longer depending on how well the market and that stock was doing that year.

 

A $10,000 trade order would cost 300 bucks to buy and another 300 bucks to sell, assuming you sold it for the same price, it would cost you more if the stock had gone up.

 

Very costly, right? Or so we thought…..

 

About 1987, computers began to be more affordable. I remember getting my first one, with a dot matrix printer, I thought I was in the big leagues now.

 

A year or two later we could subscribe to stock market quotes.

 

It was really expensive for live real time quotes and you could save some money if they were delayed 20 minutes.

 

Think about how that is today.

 

You can get an instant quote from 20 different website all day long for free.

 

Some brokerage firms will even display a constant stream of the market right to your desktop or device.

 

Then something interesting happened. The internet came along.

 

Information was being disseminated quickly and to about anyone who wanted it.

 

I’m not sure who was first, but the next thing to happen was discount brokerage firms popped up.

 

The first ones had flat fee trades of 97.00.

 

I know, that’s crazy to think about now days, but back in the late 80’s that was a bargain.

 

From that point on it’s gotten cheaper and cheaper.

 

I remember 10.00 trades, then 7.00, then 5.00 and now with M1 and Robin Hood you can trade for free.

 

The bid and the asked have narrowed as well.

 

What does that mean?

 

When you buy a stock, you pay the asked price and when you sell it you pay the bid.

 

As an example, suppose you want to buy 100 shares of a stock who’s asked price is 10.00.

 

Back in the day the bid might be 8.50, meaning if you bought the stock at 10, if you wanted to sell it you’d get 8.50.

 

Buy at the ask price, sell at the bid.

 

Another way to remember it is you always buy it at the highest price listed and sell at the lowest price.

 

The brokerage firm makes the spread.

 

So, before you made any money, the bid had to go up 1.50, to 10, and then you had to make up for your commission of 3% too.

 

And then you had to factor in the 3% commission to sell. All told you may lose 10% just between costs and the spread between the bid and ask.

 

This is why people bought stock and rarely sold it. They held on to it for years if not decades. A lot of investors took delivery of the stock certificates and then put them in a safe.

 

Costs were so high, and no one day-traded.

 

Day trading become most popular during the dot com boom when you could trade for pennies.

 

By the mid 90’s discount brokerage firms were taking over Wall Street, and access to instant information was at your fingertips.

 

Then brokerage firms offered cheap margin accounts so you could leverage your money and trade all you wanted for a fraction of the cost.

 

Did it help the investor in the end? Nope.

 

Few day-traders make money long term.

 

They get confident in up markets, and then suddenly during a crash their trading system doesn’t seem to work so well.

 

The long-term investors like Buffett bought a stock in the 1960’s and never sold. They’ve done so much better than day traders.

 

In fact, that philosophy has made him one of the richest men in the world.

 

Now Buffet didn’t do it because he couldn’t afford the commissions, he simply realized that if he were to buy great companies, when they are at a bargain price, he could hold onto them forever and do very well.

 

Most investors don’t have the kind of patience and certainly not the confidence that they picked the right stock.

 

Brokers don’t get it either, they think in order to be worth their salt, they need to constantly be moving client’s money.

 

I’d say a good majority of the investors and brokers out there are actually speculators, not investors.

 

I’d bet most people don’t know what they own or why they own it and what’s a good buy price and what would have to change in order to sell.

 

Brokers don’t do these kinds of analysis, they ride with the tide and what’s popular, and because of that they rarely, if ever will beat the market or protect your money in a crash.

 

Most people I see out there hand their money over to mutual funds or advisors and hope the advisors knows what they are doing.

 

Now that we have instant trading, quote machine on every phone, you can trade all day long for pennies, and never make any money….and often times lose it.

 

The other thing that has changed is brokerage costs to buy and sell have been essentially eliminated, and now the word on the street is to charge fees.

 

It’s called “AUM” and it stands for assets under management.

 

I was listening to an advisor talk about getting as much AUM as possible, that’s how he assures an annual income for himself.

 

Look, Wall Street wasn’t being generous and charitable to eliminate commissions for stock trades.

 

It is tremendously more profitable for them to charge fees. Let me show you.

 

Think about a guy who has 100,000 and back in the 80s buys 5 stocks for 20,000 each.

 

He pays $3000 to buy those stocks. Then most likely doesn’t sell them for 20 or 30 years.

 

Using a very crude 9% growth rate, and no dividends so all his equity is stored in the stock price and when he sells, he’ll pay capital gains tax rather than ordinary income tax.

 

Anyway in 20 years his stocks at 9% grow to $506,400.

 

If he sold the old fashion way where he pays a whopping commission, he’d get a bit of discount for the size of the trade, but let’s say it’s still 2%.

 

Cost to sell, $10,128. Total cost to buy and sell $13,128.

 

He then has a taxable gain of $396,272 (does not include his original 100k investment) and at 15% (plus state taxes) he’d pay roughly 59,440 in taxes and have 336,832 plus his 100,000 for total of 436,832.

 

The broker makes his commission and all is well.

 

However, now that brokers charge fees instead of commission, and we think, great we’re finally sticking it to those commissioned brokers. Let’s see how it turns out.

 

Suppose the broker says, we don’t charge commission, trade all you want, we simply charge a 2% management fee and we’ll trade, watch over, and protect your stocks for you.

 

Now because there is no commission to trade, chances are the broker will have you trading more often than not.

 

Rather than doing the research and holding on to one company for 20 years, they have you moving in and out of stocks with the tides, usually over diversifying you money because they don’t know how to buy stocks, they simply oversee the process.

 

This will often times cause short term gains which are taxed like ordinary income.

 

So how does this same person fare?

 

Remember commissioned broker took a total of 5% for both the buy and sell and the buyer held on to the same company for 20 years. It cost just over 10,000 for those trades the old-fashioned way.

 

In addition, the broker had to wait 20 years to make half of his money.

 

If the fees were only 2% a year, over the next 20 years instead of his stock portfolio being worth $506,000, it would only be values at 386,000.

 

A difference of $120,000.

 

It cost you $120,000 in fees because Wall Street convinced you that fees were better to pay than commissions.

 

That is $110,000 more than the supposed high commission way, if you paid 10,000 in commissions.

 

Can you imagine if a broker asked you to choose -

 

Would you like to pay us 10,000 over the next 20 in commissions?

 

or over 110,000 in fees?

 

Duh….

 

What was interesting is listening to this financial advisor on the radio on Saturday, he was talking like this was a good change for the industry.

 

He was saying that you can even find advisors who will work for 1%.

 

Using our same numbers that means instead of paying 10,000 in commission you would pay $94,000 in fees.

 

Over 900% more in fees and again likely less than average return because they move money around too much.

 

Oh it was a change a big change since 1985 alright, a big change for the good for wall street, not so good for you.

 

It reminds me of the story of the couple who went to this very ritzy yacht club and saw all these beautiful yachts. 

 

They asked one of the deck hands, who owns all these yachts. The boy said, oh, these are mostly owned by Wall Street advisors and Walk Street execs.

 

The man then asked, where are the yachts of their clients?

 

The boy walked away perplexed….

 

It seems the clients paid for Wall Street to live pretty well.

 

Now let me say this, there are advisors who are worth their fee.

 

They do something unique or better, they protect your money from large downside losses or get you better returns than the market average because they understand investing.

 

They don’t simply put your money in a “diversified” portfolio and pretend they know what they are doing.

 

They actually earn the fee because you do better in the long run.

 

If you are paying an advisor to buy mutual funds or index funds, time to move on and save boatloads of dough!

 

And don’t get me started on 401k fees, this is pretty much the scam of the century!

 

Want to hear a real crime in pension funds? The fees can be as much as 6% on portfolios earning 4%.

 

This is why we have underfunded pensions – Wall Street is charging fees, it’s death by a thousand cuts!

 

They go upside down every year and no one really cares because at some point they think the govt will bail them out.

 

If you have a pension, you might want to see if it’s on the list of underfunded pensions. You may not like the long-term results.

 

Now if there was something good come from all this is that you can do a lot of this yourself.

 

You can open account learn to invest for nearly nothing. But you have to understand HOW to invest.

 

You can’t listen to the barber or your co-worker, you’ve got to put in the time!

 

If all you’re going to do is buy mutual funds or the index, you can get very low-cost funds and do it yourself.  

 

You can easily do that without an advisor. Quit paying fees for nothing….and I can about guess 99% accurately that you’re overpaying for what you’re getting.

 

There are very few advisors who are worth their fees….

 

Again, if an advisor can give you better than average returns on the upside or protect losses on the downside, that might be worth paying for.

 

That means even after fees, you’re going to pocket more than you would have on your own or with other advisers who simply roll the dice and buy you 5 different mutual funds and cross their fingers the market will go up.

 

Let me end by this.

 

One of the reasons we do what we do, where we invest into safe, guaranteed investments, and then let the magic of compounding and leverage do the heavy lifting is because we can typically get better than average returns, safely,  and so that you can set it and forget it.

 

The plans we put together have often outperformed Wall Street, with less to no risk, and tax-free, freed up liquidity, better than average income, and you can leave a legacy too.

 

You don’t need to cause ulcers and anxiety over your money. Keep it safe!

 

I mean c’mon in this day of technology and easy access to financial markets, banks, and insurance companies, it’s time you put that technology into a plan that will produce for you.

 

Without fees!

 

Check it out….

 

You are welcome to have a strategy session with me, see if it’s a good fit. If not, no worries…

 

Best part is you won’t pay annual fees, and you likely beat the market too. It’s kind of a win/win.

 

Well that’s it for this video….

 

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Take care….