Epic Real Estate Investing - Debt Pays - A Step by Step Guide | 851

Episode Date: November 29, 2019

Have you ever wondered how to use debt to build wealth? It sounds counterintuitive but today, Matt will show you not just how you can make it happen but also how to do it 10 times faster than the majority of people, step by step! 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 REI.

iAse.com. Here's Matt. Hey, rock star, Matt Terrio here from Epic Real Estate. Have you ever wondered how to use debt to build wealth? I mean, how does they do that? I mean, it almost sounds counterintuitive, right? Well, debt certainly can be used to build wealth, but not how you might think. And this is important if you want to get wealthy, because if you get this part wrong, the richer, they're just going to continue to get richer. You're going to scratch your head endlessly wondering, in spite of your best vested efforts, you're going to be wondering, you're going to be wondering. why it's not happening for you. But if you get it right, you'll establish confidence and certainty

around building your own wealth. Like you'll have no doubts about it happening for you. And you're likely going to be pleasantly surprised by how fast it does happen. All right. And that's if you get it right. And speaking of getting it right, you may find this interesting. This is among all of the Fortune 500 companies. Of all those companies, only 10 of them carry zero. debt. The rest have significant debt on their books. But even those 10 that don't, they didn't start that way. And there lies a clue. All righty. So let's look deeper to see if we can bring the relationship between, you know, debt and wealth. We'll bring that to the surface so that anyone can duplicate these get wealthy results, especially you. All righty. And to help you with this,

what I've got, I've got five points for you with regard to how to use debt to create wealth. The first one is good debt versus bad debt. What's the difference? And really, just no conversation about debt would be complete if you didn't start with defining the difference between good debt and bad debt, because there's a big difference. For the most part, debt, I don't know, it's a four-letter word for the majority of people in our society. You know, live debt-free is normal, traditional advice. I mean, especially if you're among the millions of Dave Ramsey or Susie Ormond fans, as they are in almost perfect agreement that all debt is bad. And the reason that they subscribe to that idea is not necessarily because they believe it,

but the reason they subscribe to it is the average person is just, the average person is terrible with money. And that's their core audience, the average person. And they assume that if you give the average person debt to use, they're going to be reckless with it. It's going to get used on stuff like cars and vacations and restaurants and clothes and stuff. Generally speaking, debt gets accumulated by buying things that make people look good and feel good in the short term.

yet these things they depreciate and value, and often very quickly. So if that's the kind of debt we're talking about, then, hey, I agree with Dave and Susie. This type of debt is bad. But in that context only, in the context of the Fortune 500 companies we just talked about, debt is an essential resource to grow massive wealth, to look good and feel good in the long term, and appreciate in value, to produce income and provide tax advantages. And since debt does all that, then in my book, debt is good and even great under certain conditions. So with that said, let's just keep the distinction simple.

Debt is bad when paid back by the salary or the job of the person that used it. Debt is good when it's paid back by the growth of the business or the investment that uses it. Bad debt costs you. Good debt pays you. That's the difference. All righty. So let's focus from this point forward. We're just going to focus on good debt.

All right? So number two, why do the wealthy, leverage this type of debt? Well, leveraging debt basically enables you to take a small portion of your own resources to acquire a large portion of someone else's. The common and popular belief of leveraging debt is to multiply returns. That's what people think it's all it does, which is true because it does do that. But it's purpose and benefits that go much further. You see, the use of debt empowers the borrower to gain full control of an asset, which gives the borrower the full benefits of the asset without fully owning it. And those benefits, they can be revenue, it can be appreciation, depreciation, and use of the asset. As well, long-term debt puts you on the same side of the economy, you know, with regard to

transferring wealth, with regard to transferring ownership from the lender to the borrower. And we do that through amortization. And we're done right, it's the asset itself that does the work to pay down the debt for the borrower, not the borrower. Further, due to inflation, the money used 10 years, 20 years, 30 years from now to pay off today's debt, it's going to have less value. So the asset typically hedges against that loss, especially when it comes to using leverage with real estate, which is one of my favorite ways to leverage debt. And although I do have two more ways that I'll share with you, well, let's do that now. I guess no time is better than the present. And so that brings us to where should the leveraging of debt be used to

create wealth. So where to use debt. Because there's a lot of options. There's many options for where we can use it. And I recommend to most people to try and limit their use of debt to a certain type of asset, specifically controllable assets, meaning assets that you have control over. And I really wish someone would have shared this with me much earlier in life as I've learned this painful lesson more than once. And I mean, I can be a slow learner sometimes. But I do learn eventually. Here's what I mean. There's really nothing more frustrating than when you've deployed the use of leverage

and that deployment fails to meet your expectations due to someone else's doing. I mean, it wasn't your fault, their fault. But it is still your responsibility. So when leveraging debt participate, stay in control as much as you can. At the very least, just stay involved. And here are my three favorite controllable assets that I would recommend using debt on. and I prioritize them like this. One, yourself.

Invest in yourself, meaning education, training, mentors, and our associations, in the interest of becoming competent in the acquisition management and disposition of what it is that you plan to use the debt for. Basically, make yourself better. Make your network better. Because you, you can control you. That's a good investment. Two, use debt to invest in your business.

With regard to anything that will improve, directly or indirectly improve, the revenue and the value, and most specifically, the profit. that the business produces. Because you can control your business far more easily than someone else's. So get your business straight before looking at others to use debt to invest in. Three, invest in real estate. Because it really is the final frontier where the average person has a legitimate shot at creating significant wealth.

And much of the reasoning of that is due to the average person's ability to leverage debt in real estate in a way that's unavailable in other mainstream investment options. And that brings us to my fourth point. the how, right? How is it used to build wealth? And I'm going to use real estate. I'm just going to stick with this as the model. But these principles, they can be applied to other assets as well. So I'm going to use some really simple numbers, too, just to keep the math simple. And do your very best to not get bogged down in the numbers. Place your focus on the concept of how the leveraging of debt builds wealth and builds it much faster than you could without it. Because as long as you

understand the concept, you can then later go back and you can just plug in your own numbers, right? Plug in your own numbers that correlate with your own resources and your own asset class, your own market and your own financial goals. All right? So just focus on the concept. And so for an example, here, we have a house valued at $100,000. And you just say you were able to find a motivated seller and acquire that property at $80,000. Now that's what we show people how to do at the Epic Pro Academy, by the way. And it's not terribly important right now, but if you feel this is or really difficult to buy at a discount like this one, it's not. So the Epic Parole Academy was, it was worth mentioning just for that in case that's what you were thinking.

Because, I mean, we do it here in my office on a daily basis, and I've showed thousands over the last decade how to do the same. Anyway, we're purchasing this $100,000 property for $80,000. We're going to place 20% down, $16,000, and then we're going to leverage the rest from a bank, $64,000. We're going to do that at 5% for a traditional 30-year loan, giving us a monthly payment. of $344. So we now control this property without fully owning it. But the control that gives us the right to any revenue the property can produce, the right to any appreciation of property experiences, the right to all of the tax advantages through depreciation and business deductions, and the benefits of the amortization, the paying down of the debt, the transferring of ownership, as well as

the preservation of our money's value through real estate's hedge against inflation. We leverage debt here to take a small portion of our own resources to acquire a large, portion of someone else's. See how that worked? Next. We then find a tenant that will pay us, let's say, $1,200 per month to live in this property. And then each month, we're going to collect that rent payment to make our mortgage payment of the $34, paying down the debt. That's the amortization at work. I love the amortization. So at this point, we have used debt to create income, and we use that income to pay off the debt. And then we also get to use the tax advantages of real estate to further offset those debt payments. It gets really exciting when you start looking at that.

The tax advantages include the deductions of the cost of borrowing the money, the deductions from the management costs, the depreciation deductions, and all the other allowable business costs, you get to deduct all of that. And those tax advantages, they add up pretty quickly, often to the point where you can show to the government, look, Mr. Government, Mrs. Government, I lost here on paper. At the bank, you actually made a profit. There's more money in your bank account. And you can do this legally, honestly, ethically, and even with Uncle Sam's blessing. So what we'll do now is we're going to sit on this property. We're going to repeat this process every month for, let's say, three years as an example.

And here's what happens during those three years. So let's look at appreciation. The national average housing appreciation since 1968 per the National Association of Realtors is 5.4%. I'm going to be more conservative than the average just to demonstrate that you don't need massive appreciation to get wealthy like so many people think. All right? So we're just going to cut that appreciation down to 3% of which would cause the property's value to jump to $110,000. So then when we add into three years of debt paydown, that gives us that principal paydown of $3,000. And then when you factor, so now just factor in the original equity with the appreciation and the principal paydown altogether.

What that does is it gives us a brand new equity position of $49,000. So through leveraging debt, we have turned $16,000 into $49,000. That's like a 300% return in three years. Pretty slick, right? Yeah, it is. But it gets better. It gets way better. So it gets better when your wealth starts to multiply

because you can now leverage that $49,000 of equity into new debt to acquire three more of these properties. And then you just repeat the process all over again. And in three years, do it again, into nine more properties, which will give you 13 total properties in less than 10 years. So just keeping the math simple. You've turned $16,000 into a small million. dollar real estate empire with somewhere in the ballpark of, I don't know, $400,000, $500,000 of

equity. The type of returns that would cause Wall Street to blush. And I haven't even factored in the positive cash flow from the rent along the way. That's typically what we talk about here is cash flow, cash flow, cash flow. I didn't count that yet. Now, I can feel it right here through the screen. I can feel the vibes. You're trying to do the math. I can hear your wheels turning, and you're thinking of countless hypothetical scenarios as to what you just saw, how this would not work. Well, if that's the case, instead consider focusing on the countless hypothetical scenarios as to why it would work. Obviously, it does work. The concept I just showed you is responsible for more wealth, for more people than anything else that you can think of. So my only

intent here is for you to understand the concept of how debt is used to create wealth. The more debt you have, the more money you can make. The more money you make, the more debt you can get. And it may seem like it starts a little slow in the beginning, but it snowballs pretty quickly as you just saw. All right? So we know what good debt is, why we should use it if we want to become wealthy, where to leverage debt first, and how it works once you begin. So the last point is when, when do you begin? When should you leverage debt? That's number five. Well, as long as you heed the ideas that I've shared with you up to this point, I can't think of too many scenarios of when you shouldn't use it. Yeah, use it as often as you can. If you want to build your wealth faster,

that is, you want to go slow, don't use it. Also, when using debt, it frees up the cash you do have to use elsewhere. Another great benefit of debt. I mean, even if the asset breaks even, you've done a really good thing because you've hedged your balance sheet against inflation and you've kept your liquidity outside and available. Because when debt is used properly, it's just a tool. It's a tool that has a high likelihood of increasing your wealth and a low likelihood of decreasing your wealth. I mean, unless we move into a deflationary environment, which is, I don't know, it's very unlikely unless the mortality rate changes with those that are expecting to withdraw benefits from the government zone. Debt users like us are going to benefit from an inflationary environment with long-term debt.

In fact, I would say the cost of not leveraging debt, you're losing. Yeah, the absence of debt, it slows down your wealth creation. It slows you down through opportunity costs. You know, because opportunities, those are missed by insufficient liquidity. And if you're using your cash just because you can, I mean, you're going to be less prepared and able to jump on the next opportunity that comes your way. All right, so here's my basic rule of thumb.

When it comes to using debt, my basic rule is use as much debt as you possibly can to build your wealth. And when you feel you have enough, eliminate the debt to, preserve your wealth. Got it? Debt to build, eliminate debt to preserve. I mean, ultimately, debt, it creates speed. It creates speed because it can create cash flow. And the faster you create cash flow, the faster your wealth and your financial independence is going to grow. Conversely, though, the same is true. I mean, I'd be remiss if I didn't mention your losses can be magnified as well. However, it's not the debt that is risky. And I'm a big proponent of the idea that

A basic real estate education will eliminate most real estate risks. So the real estate, that's not really that risky either. The reality is the people are risky. And if you disagree with that, it's because your real world experience with debt and real estate, it's either limited or speculative in nature. You know, Dave and Susie, they continue to caution their audience to avoid debt and real estate altogether, just in the interest of protecting their audience. But that advice will significantly limit the amount of wealth their own.

audience is going to build and greatly extend the amount of time to build it if they do. Sure, I mean, you'll be safe with their advice, but you're going to be poor for most of your life, too. If you want to build wealth and avoid the risks that seemingly accompanied debt in real estate, I've got five things that you can do, five things that you can do to protect yourself from all the stuff that destroys all of those people that give debt in real estate a bad name. It just destroys all the naysayers. This is how you can protect yourself from being one of them. One, invest in your own financial education. Don't leave that to somebody else. Two, become competent in the operations and management of your asset class.

Three, participate. Stay involved. And four, buy with equity in place. And before taking ownership, number five, confirm that the asset will pay you more than the debt will cost you. Yeah, yeah, we got the cash flow. Yeah, yeah, we got the cash flow. Yeah, yeah, we got the cash flow. You didn't know home world, we got to dash low. This podcast is a part of the C-suite Radio Network.

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