Epic Real Estate Investing - Are You, Like 200,000,000 People, Investing in the Worst Performing Investment in America? | 954

Episode Date: March 11, 2020

In this episode, Matt reveals the worst-performing investment in America and tragically one of the most popular! Tune in, learn the facts that will help you to avoid this huge investing mistake, and save your financial future! Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terrio Media. Success in real estate has nothing to do with shiny objects. It has everything to do with mastering the basics. The three pillars of real estate investing. Attract, convert, exit. Matt Terrio has been helping real estate investors do just that for more than a decade now. If you want to make money in real estate, keep listening. If you want it faster, visit R-E-I-Ase.com.

Here's Matt. Hey, Matt here. Welcome to another episode of the Epic Real Estate Investing Show. It is way back Wednesday. This is the day where we reach back into the archives and pull out old classic episodes. And we've been reaching back into the archives of the Do-Over podcast, the podcast that started it all. And I got another great one for you today. Enjoy.

During an era where countless people, businesses, and organizations are feeling the pinch running out of time, running out of money, losing confidence, feeling as if life is unfair, praying for another chance, and unless something is done, life is going to pass them by. Fortunately, in the nick of time, there is now a place where the ignored, underestimated, and unknown steps to producing results, and making life work are revealed. Save your career. Save your business. Save your health.

Save your relationships. Save your life. Get from where you are to where you want to be, faster, and with greater ease than you ever thought possible. Say hello to your do-over. Welcome. This is episode 58 of the Your Do-Over podcast, and this is the place where I show people who want more out of life, people dissatisfied with their current situation, people who are sick and tired of being sick and tired. You all know who you are. Or this is for people that even are cool with life, but they just want a little bit more out of it.

It's working but not working as well as what they'd like. I mean, this is the place where I show them all how to start over and begin a new life, setting goals and objectives so that they can create wealth, create financial freedom, create the lives of their dreams, and live that life to the fullest. You can get your do-over started fast by laying a solid foundation when you download the three pillars of creating the ultimate do-over, and you can get that for free at free doover.com. It's a 55-minute MP3 audio program that I made just for you with three specific steps

on how to get success as you start over. And it's yours for free at free do-over.com. All righty. So today's episode is a follow-up, essentially, of episode 56, how to retire early. I received a ton of emails from that episode on how it all. opened up your eyes to how to make money work for you, as opposed to you working so hard for it. And there was a question that came up frequently. And I'll reveal that question later on in the show, but it came up frequently, and I responded to all of those emails individually.

But I ran across an article by Kevin Clayson in Real Estate Investor magazine. And his article went into great detail on a topic that's really, it's near and dearly it to my heart. And I'm in 100% agreement with this article, but I'm bringing it up because Kevin pointed out some things that have bolstered my opinion about it even more. I mean, it's now stronger inside of me than it's ever been. It's just that's really strengthened my belief. It's, um, you know, just, I guess perspective and evidence has a way of doing that. And he pointed out some things that, you know, I never thought of, but it's certainly applicable. And That's absolutely true.

And so what I'm going to do is I'm going to loosely read from his article and I'm going to comment in between. And by the way, today's episode, this is not about real estate, okay? I have a separate podcast for that. This is not a real estate episode. This is an episode about your financial future. I guess there is a small gray area where your do-over and real estate from my opinion would overlap.

But I try to keep them separate. And today's episode is about just investing overall and shedding some more light on what we all think and accept to be truths about money. And when it's broken down, I mean, we subscribe to myths. We subscribe to broken ideas that we don't even know we're broken. And in some cases, the downright lies. I mean, whether those are intentional lies or not, that's really of no concern to me. I mean, I'm not a big conspiracy type person. But there are many falsities, I guess, out there about money that we accept as truths,

or we just accept because we never even thought to question them. So this article by Kevin Clayson, it's titled Purchasing Failure Every Month, the worst performing investment in America. And some of you that have been, you know, listening to this show for a while, you might have an idea as to what that investment is, but I think most of you might be really surprised. So let's begin, all right? The worst performing investment in America.

And the irony here is, 200 million Americans are participating in this investment. So that's why I'm drawing your attention to it. So let's see if it's you or not, okay? I mean, ask yourself the following questions. How long have you been a failure? Hey, let's just get right down to it. How long have you been buying into a broken, financial paradigm or paradigms.

How many times have you fallen prey to 12 months same as cash? Or 0% interest for six months? Or max out your 401K contributions because the company is going to do a dollar-for-dollar matchup to up to 6%. I meet a lot of people that, but my 401k is great because my company matches it. Let's look at this. Here's a fun little batch of numbers for you to look at. You see, if you began a 30-year working career,

and it's something to think about as you get ready to, and you're due over, maybe it is not going to be as an entrepreneur. Maybe it will be getting another job, and that's okay. But let's look at this real quick. If you began a 30-year working career making $65,000 a year with a guaranteed 1.5% salary increase every year, that's guaranteed for 30 years. And that's going to compound over your 30-year career.

and if you contributed 6% of your annual income to your 401k, and the company matched your contribution dollar for dollar for the entire 30 years. That's a hot job right now, by the way. That would be a gift. And then the market earned a guaranteed 7% rate of return. You're given a guaranteed rate of return by the market every year for the entire 30 years. Okay? Sounds pretty good.

Well, guess what your retirement will look like at age 65. What will it look like at age 65? Well, after you account for inflation and after you take into account taxes, you will only have $35,000 a year to live on. Basically, half of what you were living on while you're working. You've got to cut your life in half with that amazing dream job of today. But this is when it gets really scary. If you end up living 15 years past retirement age,

you will only have $25,000 per year to live on. $25,000 a year. What does a retirement look like with only $25,000 a year? I mean, most of us were probably going to have to change zip codes at the very least. Might even have to get a roommate or two. That's not my ideal of a grand retirement. So let me ask you again, how long have you been buying into broken financial paradigms? You know, recent discussions in the media, especially among financial experts.

I did that little air quote thing again, experts, have focused on identifying the best investments in the current market. Okay, a lot of people are looking for what's the holy grail right now in our market. You know, generally speaking, Americans want an answer to the following question. where is the safest place to invest my money? Where is the safest place to invest my money? Now, if you've ever asked that question, consider the information you are really seeking, right? Consider it.

I mean, you want an investment that will perform beautifully, regardless of market conditions, right? You want your investment to provide a predictable and consistent rate of return. We all want consistency. And you want to be able to have access to the funds if you should need them, right? and maybe access when you just want them.

In other words, you want some degree of liquidity. And most importantly, you want to keep the money that you invest. Sounds simple enough, right? I mean, all you really want boils down to three simple things. Safety, liquidity, and a high rate of return. All right. So here's the big question. Do you purchase failure, little by little,

like 67% of Americans do every single month? Are you among that 67%? I mean, over 200 million of us throw money at the kind of investment vehicle that is the antithesis, the opposite of what we want for our money. And we do it every month. So let me list the features of this very popular investment. And as I go on to explain the features, I mean, ask yourself if you are throwing money every month at an investment vehicle with the, following features, okay?

So one, you, the investor, are required to make an initial contribution to the investment in order just to set it up, just to get it in place. And that initial contribution required is typically between 2 to 9% of the total long-term investment amount. That's the, you have to put 2 to 9% up front just to set it up. 2. You, the investor, have a very limited number of contribution options, okay, very limited. but you ultimately retain the ability to choose the amount you would like to contribute on a monthly basis.

However, once you have elected your monthly contribution amount, you are locked in for the life of the investment. You're locked in. Number three, you, the investor, have the freedom to contribute more than that elected monthly minimum investment, but you are never allowed to contribute less than the monthly minimum you elected upon. I mean, even in the case of job loss or medical issues or any other hardship, you can never contribute less than what you elected to set up right at the beginning. 4. If you, the investor, elect to pay less than the minimum contribution amount in any given month,

you risk losing the entire contribution amount to date. You lose it all. Okay? So you can't do it. Number five, in most cases, approximately 95 cents of every dollar contributed to during the first five years, funds the investment company directly. The company that manages the investment,

it funds them directly, 95 cents of every dollar for the first five years, leaving only five cents of every dollar to benefit you. And over a 30-year period, only 46% of the total investment contribution will be owned by you and be claimed by you. 46% of all the money you put in investment. you only get to keep 46% by the time it's all said and done.

Six, you have absolutely no liquidity. The money is tied up and unavailable. Now, with the exception of certain loan provisions that allow access to a small portion of the investment, and the investment must meet rigorous standards for the investment company to even consider allowing the investor you access to the liquid portion of the investment. Seven, the money sitting in the investment is completely at the mercy of the market. And those dollars are not guaranteed or insured. In other words, they could go, poof, at any given moment, could just disappear.

Number eight, every time you add principal to the investment, you put the entire principle at greater risk. Yet at the same time, as your principal gets less safe, it further secures the investment company's position with your money. You put more money into it, and it's actually turn, it's riskier for you. and it increases the security for the investment company. Nine, the money in the account or the principal will earn somewhere between zero and negative 3.8%. You got that? It's going to earn somewhere between zero and negative 3.8% rate of return over the lifetime of the investment. There's a 75-year track record of those investments earning negative.

3.8%. So what that means is the zero is being generous and optimistic. 10. Once you have fully funded the investment, you are no longer allowed to contribute any additional dollars to the investment. But I mean, at this point, why would you want to, right? Okay, number 11, the fully funded investment pays no dividend or income of any kind at any point unless the investor sells off his or her interest in the investment. You got to sell it just to benefit from it. 12. The investor will be required to pay taxes on the fully funded investment

as long as they hold on to it, even though the investment provides no income or dividend. So, who wants in? Come on, put your hand up. Raise your hand high if you want that investment, if that's where you want to put your money. I mean, doesn't this sound exciting? Any takers at all?

I mean, your skin should be crawling with the absurdity that over 200 million Americans invest in this very thing every single month. Now, most of you are likely thinking, I'm knocking the 401K, right? Or I'm knocking IRA accounts. The fact of the matter is, while 401K and IRA accounts have many of the same rigid features and absurd features and absurd restrictions that I've mentioned,

like no principal protection feature, being dependent on the mercy of the market, and zero tax benefits, I'm not talking about 401ks or IRAs. The investment that hundreds of millions of Americans are unwisely investing in on a monthly basis is quite simply put their mortgage, their own personal residence.

And that's the question that comes up. That's the question that I got most frequently out of how to retire early two episodes ago, what we're on 58, so 56. Should I buy my own house? Or when should I buy my own house? Listen, your home isn't an investment. The only reason that you'd want to buy your own house is just to be able to say that you're a homeowner.

That's all that you get out of it. No, what you get are the 12 dynamics that I just went over. You get that also. That great investment. I mean, millions of Americans are willing to mortgage their lives away for a sense of security. They're believing that the equity building in their homes will somehow provide the level of retirement and security that they seek after their entire lives. I mean, people work a lifetime to own a home free and clear, only to realize that they cannot retire once they reach retirement age.

They're free and clear home no longer really feels like an asset. It doesn't feel like that at retirement. It feels more like a consolation prize, right? So to bring this point home, let's take a look at those 12 investment features that I described. And let's discuss them in terms of the mortgage on your primary residence now. Let's put them actually into context. So number one, the investor is required to make an initial contribution to the investment in the amount of 2 to 9% of the total long-term investment amount.

Your initial down payment of 3.5% to 20% of the total purchase price of the home will, at the end of a 30-year note, equate to approximately 2 to 9% of the total purchase price over the lifetime of the loan. Not great. number two the investor has a very limited number of investment options but ultimately retains the ability to choose the monthly investment amount so once you have elected your contribution amount

you are locked in for the life of the investment you have the ability to shop around for the best interest rate you know you can shop around from mortgage brokers to lenders to banks and you can go ahead and you get to choose the loan that you accept but you have very limited options 3. The investor has the freedom to contribute more than the elected monthly minimum investment, but the investor is never allowed to contribute less than the monthly minimum. Even in the case of job loss, medical issues, or other hardships, you are always welcome to pay more than your monthly

payment, but if you ever pay less or don't pay at all, you may be considered in default, and the foreclosure process will begin ultimately resulting in a lower credit rating and in the potential loss of your home. four, if the investor elects to pay less than the minimum contribution amount in any given month, the investor risks losing the entire contribution amount to date. All the money that they've put in, gone. I mean, if your home slips into foreclosure, you will lose all of your principal payments, as well as all of the interest that you've paid up to that point.

There is no contractual provision in place to allow you to receive any of that money back if the bank forecloses. Number five, in most cases, approximately 95% of every dollar contributed during the first five years of the investment funds the investment company directly. It goes to the lender directly, leaving you only 5% of every dollar to benefit as the investor. Only 5 cents. Over a 30-year period, only 46% of all the money you put into that investment, you get to claim.

When researching a typical 30-year amortization schedule, you're going to find that on average only 5% of your monthly payment pays down your principal balance, while the rest is devoted to interest. As your amortization schedule matures, you'll begin to contribute more and more to principal and less to interest. However, all the interest is paid up front. You know, with a $225,000 loan with a 6% interest rate, your fully amortized payment would be around $1,350 a month, not including taxes and insurance and all that stuff.

So if you make that payment for 360 months or 30 years, the total amount you'll have paid over the life of the loan is $486,000, more than double the price of the property. Hence, only 46% of the total amount of investment went towards paying down principle. And this is one of the biggies because a lot of people will look at someone that's renting and might look down on them like they've made a bad financial decision, like they're throwing their money away every month. Well, you're essentially doing that with your home mortgage for, I don't know, in my opinion, you know, in this magazine article, it says the first five years, I really think the first 15 years you are throwing that money away.

And, you know, most people don't spend, you know, that long in their properties anymore, in their houses anymore. So you're throwing the money away anyway. And in most places, you're throwing away more of it because it costs more to buy the home than it does to rent it in most places. There's certainly exceptions. Number six, the investor has no liquidity. The money is tied up and unavailable, with the exception of certain investment provisions that allow access to a small portion of the investment,

like a refinance. The investor must meet rigorous standards for the investment, especially today, more today than probably ever than most of us can remember. They've got to meet rigorous standards for the investment company to even consider allowing the investor access to the liquid portion of their investment. Home equity, or the debt.

difference between the value of the home and the remaining principal balance is tied up and it's not accessible. You have zero liquidity. And the loan provisions referred to, they equate to a refinance or a home equity line of credit, but those require you to pass multiple rigorous qualifications before the bank will give you your money. The lending industry is an ever-changing monster that is, I don't know, it's literally caused multiple casualties over the years, especially in recent memory.

I mean, it's those weird loans, those things that they use to suck you in and they take it away from you that's created these casualties. I mean, an unforeseen change in the lending industry, it may in fact mean that the mortgage you once qualified for when you purchased the home may be the only home loan you ever qualify for. You know, if lending guidelines shift, you may not even be able to qualify for a refinance on your primary residence. leaving those dollars eternally unavailable unless you sell your home. Number seven, the money sitting in the investment is

completely at the mercy of the market and the investment principle is not guaranteed or insured. Homeowners have unlimited downside potential in their investment. This means that you could owe significantly more on your home

than what it is actually worth. Right now, in Southern California. I think there's a lot of places. I don't have a list of them, but it's the majority of the country. 67%, 68%, the last numbers I heard, people owe more on their property than what is worth. I mean, this is a problem that has helped drive the U.S. housing industry and U.S. economy in general into the ground. That's what has people saying real estate is a bad investment. I'm going to talk about that in just a second. Number eight, you see, every contribution made puts the principle at greater risk, yet it further secures the investment company's

position. As you pay your mortgage loan down, the loan to value on the home decreases, which means that the bank's investment in you is even more secure than it was when you first started making payments. Mortgages with a low loan to value amount are the easiest and quickest to foreclose on if you ever miss a payment which puts your principle at greater risk. See how that works? You pay more and it actually increases your risk.

because it's more likely to be foreclosed on because it's more likely going to be a moneymaker for the bank if they do foreclose on it. I mean, think about this. You are a bank and you have 10 homes you can potentially foreclose on. In deciding which homes to foreclose on first, you notice that one home is worth $225,000 but has a loan balance of $50,000 versus the other nine that are worth less than what is owed.

Which home are you likely to foreclose on first? In hopes of minimizing the negative impact that asset will have on your books. that's another conversation. But, you know, if one represents, you know, just you go to work every day and the boss hands you ten jobs and they're all the same job, but one pays more than the other nine, which one are you going to choose to do first? Yeah, you're going to do the one that pays more. Yeah, banks or businesses also. They make the same types of decisions. Now, number nine, the money in the account or the principal is going to earn somewhere between a zero,

and negative 3.8% rate of return over the lifetime of the investment. I know you all want an explanation of this one, right? That doesn't even make sense. That doesn't even sound right. Well, you see, equity in your home earns you nothing. That money never produces more money for you. It's not working for you, okay? Equity is a fully theoretical concept.

It's all theory until you actually access it with the home equity line of credit or a refinance or sale and when you actually sell it. And the equity converts then to real, physical dollars in your personal bank account. Now, not accessing the equity in your home is like having tens of thousands of dollars sitting in a bank account doing absolutely nothing. Putting money in a similarly structured non-interest-bearing savings or checking account would be like stashing money in a locked safe that you can't open.

Right? They'd be like put it under the mattress. Money sitting like that is subject to inflation. and the 75-year average on inflation, according to the United States government, is 3.816%. 75-year average, 3.816%. That means your money is losing value at 3.816%.

I mean, your home may increase in value, but the real estate market is not growing your money for you. The theoretical value of the home is growing, but that growth is wholly dependent on market conditions that you have absolutely no control over. So whatever you invest your money in, it's got to get almost 4% just to break even, just to stay with the times, just to make sure you're not losing anything. Think about your savings accounts right now. I mean, I only think there's a savings account in America that pays 1%.

By it's sitting there, it's losing 3% every year. And it's just, you think it's safe and it helps you sleep better night because you have this balance there. So you've got to find a vehicle that's going to generate more than 4% just to break even. You've got to find a vehicle that generates 5% for you to get that 1%. Now, number 10, once the investment is fully funded, the investor is no longer allowed to contribute to the investment, right? I mean, like I said, who would want to? I mean, when your home is paid off, you are no longer allowed to put any more money into your mortgage. I don't know why you would, but you're not allowed to.

I mean, most long-term investments, however, don't cap the amount you are allowed to contribute. I mean, maybe this was a good plan for you, but now you've got to go buy another personal residence for that to work. And I don't know why you'd want to do that either. Most of us would never choose an investment that caps principal contribution. We would never choose that. We would see to it as too restrictive, right? yet most of us view our home as an investment and get excited that we don't have to put any more money than necessary into it. Doesn't make sense when you separate it from something that you would actually invest in,

and then when you actually look at your home, somehow it flips it around and it makes it all, everything's okay. And it's not. 11. The fully funded investment pays no dividend or income of any kind at any point unless the investor sells off their interest in the investment. investment. Once your home is paid off, it creates no residual income or dividend. I mean, the best way to put it is this. A free and clear home will never deposit a check in your bank account. Plain and simply, I mean, if you put money into an investment vehicle that does not cut you a check every month, you are not properly investing. You're not investing. Investments are supposed to pay you,

you know, not take money from you. Even if you were to take the amount of of money you paid every month towards your mortgage and began allocating it to another investment account once you have your home paid off, it would take you years before that money would begin providing any level of retirement income for you. Years. And at age 65, a lot of us don't have a whole lot of years left. Number 12, the investor will be required to pay taxes on the investment as long as they hold on to it, even though the investment provides no income or dividend. So not only is it not paying you, you still have to pay it. And what you're paying it is not going towards the principal either.

You're not building anything. Once you own your home free and clear, you are only clear of the mortgage payment. The home does not become yours. And in no way, is it free? You are required to continue paying property taxes on the home as long as you own that property. And in most states, you may not know what your tax bill will be from year to year. Now, don't misunderstand. I do not advocate any of the following, using your home as an ATM machine.

No way. Do not advocate using the equity in your home for debt consolidation. No. I do not advocate restructuring your loan through a mortgage refinance. Those practices add to debt proliferation and will ultimately result in bankruptcy for many Americans. In fact, you know, paying off your home is a noble and could be, depending on your perspective, a wise thing to do. But only if you have organized your financial house adequately enough to allow you to save for

retirement by creating passive income. I mean, if you spend your entire adult life chasing that financial unicorn called retirement, please reflect long and hard on the actual, practical, and very real side of what many Americans call their biggest and best investment. Millions of Americans, they need a drastic financial. financial paradigm shift. Paying off your home first, like so many Americans do, that's their goal. Let's get the home paid off.

Let's get the mortgage out of the way. Paying off your home first is not the key to successful retirement. It does not lead to financial freedom. Now, I do, however, suggest implementing conservative financial principles that may include using your home equity and applying it to conservative and time-tested real estate investments. This is where the real estate conversation, the little gray area between, you know, your do-over and real estate investing comes into play.

Because it's one of the, I guess, the surefire way. That's probably, it's not sure-fire way, because there is some risk in real estate, but it's manageable risk. But it's probably the one method that most people can manage and produce a passive income, a residual income. You know, dumping money into a 401-k, or an IRA account or paying off a home doesn't work as a way to retire.

I mean, that last thought it might go against everything you have ever been taught as a responsible citizen, right? But ask yourself a very important question. Has practicing the traditional methods of saving, contributing to a 401k and an IRA account, and paying off the home first, has it put you on course for the exact retirement that you need or want to have? Or are you currently behind schedule? Are you worried about the future? Most people are. If you're not, congratulations.

You're a rare breed today. Very simply, is your current plan working or not? If you want something that you've never had or something that you know you're not getting, you've got to do something that you're not doing. It's the only way to make it happen. I mean, it's a widely known and well-documented fact that 97% of all Americans

are not financially independent by age 65, 97%, and you may currently count yourself as part of that group. And if so, fix it. It's up to you to do so. No one else is going to do it for you. Paying off your home certainly feels good and is indeed wise in many cases. But the key question remains,

is it the single best way to invest your hard-earned money? I'm not saying don't pay off your home. I'm just recommending that you do it in an alternative sequence. Don't pay it off first. Pay it off last. After you've got enough residual income to lead the type of life that you want to in retirement. Is that investment? Is it putting you on track to earn the exact amount of residual income you need for your retirement?

I mean, everyone should own real estate. It's the best shot at financial freedom that you've got. Everyone should own it. It's the best investment in America. It's the most manageable investment that there is. It's the best investment. But no one said you had to live in that investment. Hopefully that just clicked for you.

It's the best investment. Real estate is the best investment out there. But no one said that you had to live in it. You see, there are three reasons to own real estate. For equity appreciation, for the tax benefits, and for cash flow. Those are the three reasons to own real estate. But no one said that you had to live in the real estate. In fact, when you live in the real estate, you lose those three things, most of them.

So now that you have the facts, is paying off your home your greatest investment, or is it indeed the single worst performing investment in America? I'm not going to force my opinion on you. I'm not going to say you must do this. But now that you've got the facts, what do you think? It's your decision. You can either continue to purchase failure every month, or you can take control of your own financial destiny.

It's up to you. All right? So that's it for today. God loves you, and so do I. I am Matt, the do-over guy, and I will see you on the next episode, the next episode of your do-over, where we're going to get back on track to getting you where you want to be

and the time that you want to be there. Deal? All right. Take care. Thank you for tuning in to your do-over. where the ignored, underestimated, and unknown steps to producing results and making life work are revealed. And remember, knowledge is potential power.

Take action on what you learned today. This is not your learnover. It's your do-over. To view the resources referenced in today's show and to retrieve a complete show transcript, visit www. Thedover guy.com. Stay connected with Matt the Doover Guy Terrio on Twitter at The Doover Guy. on Facebook at www.com.

slash doover guru. This podcast is a part of the C-suite Radio Network. For more top business podcasts, visit c-sweetradio.com.