Epic Real Estate Investing - Debt Free or Financially Free? | 3rd Degree Thursday

Episode Date: October 2, 2014

It’s time to get clear: do you want to be debt free or financially free?  Because they require completely different game plans.  Today Matt addresses the differences in strategy and more while tackling a listener response to last week’s episode, Should I Buy My Primary Residence?    I agree that your house is a liability, however rent is even more of a liability!  There are two sides to the balance sheet: increasing assets and decreasing liabilities (rent).  Both will increase your cash flow.  I bought my house for $80,000 cash 3 years ago and now it can rent for $1,200 per year.  I'm open to increasing my ROI.   -         Brian P. ------------ If you have a question, comment or concern that you’d like Matt to address live on the show, send it to him at [e-mail] and type "3rd Degree" in the subject line… or leave him a voicemail on the Epic Hotline at 1-888-891-7203.   See you tomorrow for a new episode of Financial Freedom Friday!       Learn more about your ad choices. Visit megaphone.fm/adchoices

Hello and welcome to third-degree Thursdays, the show where I subject myself to you, giving me the third degree. All righty, so I got a question via email from Brian P. And Brian is challenging last week's episode of Third Degree Thursday, the episode titled, should I buy my primary residence? And for the most part, the answer to that question, I said no. And I ran down a long laundry list of reasons why. but as usual, as we know in real estate, the answer comes with a big fat quote-unquote, it depends. So if you missed it, check out last Thursday's episode as it generated more feedback probably

than any other episode that I can remember. And Brian took me up on my offer to challenge me. So he sent in an email all about it. And Brian writes, love your podcast, but I want to give a counter example of paying off your home. Agree that your house is a liability. However, rent is even more of a liability. Exclamation point.

There are two sides to the balance sheet. Increasing assets and decrease liabilities, in parentheses like rent, both will increase your cash flow. So if you increase your assets and decrease your liabilities, both will increase your cash flow. Absolutely. So I bought my home and paid cash for $80,000. Three years later, the same house in the area would rent for $1,200 per month, now due to inflation. That's $14,000 per year. year in rent over 30 years, not counting further rent inflation. So do the math. I would like to know

if you still feel the investment of purchasing a home is as terrible as you make it out to be. I'm always interested in maximizing my return, so I would love to hear any alternative ideas, Brian P. Well, fantastic, Brian. Fantastic. As you've already said, wrote one thing here. I would like to know if you still feel the investment of purchasing a home is as terrible as you make it out to be. There's a big depends on there. There was a big depends. It's terrible in some instances and it's perfectly acceptable in other instances. But we'll get to that.

All right. So a great point, though, about the rent. And per your request, we will do the math. Okay, so let's do the math. You paid $80,000 cash for your home. Oh, and by the way, there's nothing right or wrong about what Brian has done here. but I am going to sway maybe a little bit. You'll kind of decide which way I'm swaying.

But considering Brian's final sentence in his email, it states, I'm always interested in maximizing my return. That's what Brian says he's interested in. So let's look at it from that angle specifically then. You paid $80,000 for your home, Brian. What's your return? How much money is your home putting in your pocket each month? You know, unless you're renting out space,

in your home, nothing, right? In fact, even though you pay it all cash and have no monthly mortgage payments, it's still taking money out of your pocket each month. It's not putting money in your pocket. You still have property taxes, you still have insurance, and you still have maintenance. You sound like a smart guy though, and I think you get that. You already know that. Although that you own your home free and clear, it's still a liability. You got that. That's part one of the quick and dirty analysis. Okay. So there is no return on this. investment. There's no return at all. And if you're thinking, what about appreciation? Well, listen to last week's episode. I covered that in great detail. Okay, I don't want to

repeat everything here. So what Brian is really focused in on here, though, is the $14,000 a year he's saving by not having to rent his house, the one that he's living in. So great observation. Brian lives in a part of the country where it's significantly less expensive to buy than it is to rent. Meaning if Brian were to buy his house over again, let's say traditionally with say a 20% down, his monthly payment would be, I don't know, about $350 a month, $350 to own. It's $1,200 a month to rent. See the difference there?

So indeed, this is the big exception to the rule that I mentioned in last episode. If it's cheaper to own than it is to rent, then own. Buy the house. And Brian feels he's done even better because he doesn't even have. the $350 a month mortgage because he paid cash. And right there, you know, that's where I'd want you to ask yourself, Brian, is your goal here to be debt-free or financially free? Because they're not the same.

What's your ultimate goal? Is it to be debt-free or is it to be financially free? You know, being free of debt does not equate to freedom. Nobody has ever retired off of no debt alone. Nobody has ever traveled the world just because they have no debt. Nobody has ever got to do what they want to do every day with the people that they want to do it because they have no debt. Now, eliminating debt can be a part of your personal freedom formula, but it's not the fastest route to achieving financial freedom. I mean, you've heard me say here several times on the show, stop focusing on making piles of money and start focusing on making streams of money.

As it's the streams of money that will set you free. a focus on eliminating debt, that falls into that making piles of money mindset. There's nothing wrong with doing that. Just understand it's a substantially longer road to freedom by doing it that way. So here's an alternative, Brian. You ask for an alternative. A faster path to not only being financially free, this alternative, but creating your overall wealth as well of maximizing your return on investment, of which is what you said you are always interested in doing in your email.

So here's the alternative. Rather than using all of your cash to buy your house outright, okay, because you don't want that payment, right? Rather than doing that, go ahead and just put 20% down. Take $16,000 and take on that mortgage of $350 a month. You now have your home for cheaper than you could rent it. Okay, you're paying $350 a month for mortgage, not the $1,200 a month in rent. but you have you also have $64,000 left over.

What if you took $16,000 of that $64,000 that you have left over and bought another house just like the one you bought to live in and rented that second one out for the $1,200 a month? You know, after, let's be very, very conservative about this. After deducting, say, 40% of the gross rent. And that's pretty much what the number we use around here. 40% of that gross rent will cover your taxes, your insurance, your maintenance, your property, management, and vacancy. You don't have to manage the property. That's counted.

That's included. After that's deducted, that 40%, you're left with $720 a month. So you pay the $350 a mortgage on the rental, okay? And you're still left with $370 a month. It's $370 of cash flow on that second property. Then take that $370 and use that to pay the $350 mortgage on your primary residence's mortgage. And you're still left with $20 a month of residual income. Now, you've just improved your current situation, haven't you?

You've improved your current situation from a 0% ROI to some ROI. Granted, it's just $20 a month. But your situation has improved. You are better off now than you were before. You're putting money in your pocket. You have increased your ROI. Why? Your expenses are covered by your residual income. True.

It's not much. And that right there, that's exactly why most people never achieve financial freedom is because they won't take that first step to getting not much. It's because they don't want to go through all that work for a measly $20 a month. But you have to take that small step at some point. And then you have to continue to take those small steps for that $20 a month to amount to something. you know, you're never going to get to $10,000 a month of residual income unless you get the $20 a month first. So you're going to have to keep taking those small steps for it to actually make a difference in your life.

But that first step might not make the biggest difference. But you've got to take that first step so you can keep taking those additional steps that will make the difference. But wait, there's more. There's more, Brian. You still have $48,000 left over, don't you? Well, let's do it again. Let's purchase another house just like the other two. that you purchased, your primary residence and one rental property. So let's purchase another one

just like it. We'll take $16,000 from your $48,000 and boom, assuming the previous numbers, you've added another $370 a month to your existing $20 a month now. Now you're cash flowing $390 a month. And you still have $32,000 left over, don't you? Well, let's do it again. And you add another $370 to your $390 giving you $760 of cash flow per month. You still have $16,000 left over, right? But I'm not going to say, let's do it again. Let's leave that there in reserve. Let's leave that as a sleep well at night amount. Okay. Let's leave it there so you can conservatively and comfortably protect your primary residence and your, what would that be, three rental properties and your four rental properties. So you've got your primary residence, four rental properties,

and that's putting $760 a month into your pocket after all of your expenses are paid for your primary residence and those four rental properties. Now, this isn't necessarily better. It's not right. It's not wrong. And what Brian did wasn't right or wrong either. It just depends on what your goals are. That's what I'm saying.

It depends on what your goals are. Would you rather be debt-free? If so, I would do what Brian did. If that was your goal. if you'd rather be financially free, I would do what I just explained as the alternative. That's what I would do if being financially free was my goal. You see, what Brian did is what so many people do, is what I like to call prematurely retiring their money.

You see, by paying $80,000 cash for Brian's home, he paid it outright, what Brian did is he prematurely retired his money. his money actually gets to retire and enjoy the good life without having to work while Brian still has to go to work. There's so much more work that Brian's money could be doing for him. And if Brian and his money are both working hard for Brian's financial freedom, Brian gets to retire before his money does. And much quicker. And then once Brian's retired and enjoying the good life,

he can then start paying down his debts and then retire his money. see it's not one way is right or wrong or the right or wrong it's the sequence of what you do it is what's going to determine the speed of what you get there you see there are two phases to achieving financial freedom there is the building phase and there is the preserving phase you use debt to build your freedom use the debt to build leverage that's what they call it leverage because it it moves faster It does heavier lifting. It allows your money to work harder for you.

That's what leverage does. So you use debt to build your freedom. You use leverage to build your freedom. Then once you've got your freedom, now start eliminating the debt to preserve it. There's nothing wrong with owning your house free and clear. There's nothing wrong with buying a house. I don't think that's terrible at all.

I'm just asking you to consider repositioning paying off or paying cash for your home on your priority list. Just maybe not be at the top of the list. Maybe it's down number four, five, or six. Further, I'm asking you to consider who actually is going to pay off your home once you're ready to pay it off. Will it be you that pays it off going to work every day and working really hard to pay off that house?

Or will it be your investments that pay it off for you? Put your money to work. It should be working for you as hard as you work for it. If you've got some money laying around, some assets laying around that are just sitting there chilling, not doing anything for you, it's time to put it to work. All of that stuff should be working for you as hard as you working for it, as hard as you worked for it. If it's not, you've got to stop and analyze what it is you're doing with your life financially. stop buying liabilities. Stop sitting on assets.

Stop buying liabilities and working to pay for them. Buy assets. Put them to work. Make sure those assets are producing and cause them to pay for your liabilities. That's the formula right there. Stop buying liabilities and going to work to pay for them. And buy assets and cause them to pay for your liabilities. Go to work to buy assets.

don't go to work to buy liabilities. Let your assets pay for your liabilities. Now, if you don't have access to the money or you don't have access to bank loans, then here's your next option. You need to educate yourself on how to create your financial freedom without those things. And that's exactly what I show you how to do inside of the Epic Pro Academy. Or, you know, you don't want to learn how, or you don't have the time to learn. how, or you don't have the time to do, or you just flat out don't want to do all that heavy lifting,

that's what we do for you over at cashflow savvy.com. That's why that business over there is so successful, because there's people that want real estate, they just don't want to go out and do what it takes to get it. Or that maybe they would do it if they had the time, but they've already got a career. They don't want to take on a second career. So that's what cashflowsavvy.com is for. Under the whole epic umbrella, we'll teach you how to do it so you can go do it yourself or we'll just flat out and do it for you.

And you know what? Recently, we just launched our acquisition assistance program. So you don't need the bank loan either. There's no excuses. You have options. And if you're not taking advantage of the abundance of options available to you, whether you work with my companies or not, because the options out there are abundant,

if you're not taking advantage of everything that's available to you in this day and age, you just don't want it bad enough. You say you do. but if you're not doing everything that you can to get it, you don't really want it. Not as bad as you say you do. For example, Brian, if I were you, I'd visit the bank on your lunch break or on your way home from work or stop by the bank on your way to work. And explore the options for you getting access to all that money that's locked up inside your house and see how you can put that back to work. You need access to it because you've got to put it back to work.

take it off the sidelines and put it back in the game. The game ain't over. Why do you have one of your MVP sitting on the bench mid-game? You haven't won yet. Get your full team out on the field playing for you, playing for you to win. That's how I see it. But then again, if being debt-free is more important to you than being financially free, leave it there. It all depends on what your ultimate goal is.

I hope that helps. And if any of that got any of you all fired up and you're like, Matt, what about this and what about that? Bring it on. Send it to me. I love sharing what I've been able to do in my own life. And also, I love learning. I'm always open to new perspectives. So if you see something I don't, I want to know about it.

I love new lessons. So send your questions, comments, concerns, or rants that you'd like me to address here live on the show. Send them to me at Matt at epic real estate.com. and type third degree in the subject line. Or leave me a voicemail on the epic hotline. I'll play your voice live on there. I'll make you famous. And that hotline is 1-888-891-7203.

And I'll see you tomorrow as Financial Freedom Friday Returns. This podcast is a part of the C-Suite Radio Network. For more top business podcasts, visit c-sweetradio.com.