Epic Real Estate Investing - How Rich People Use Debt to Build Wealth | 1243

Episode Date: November 17, 2022

We all know that debt is bad and risky. Is it? Of course not! But the people using it can be. If you get this wrong you’ll struggle to get wealthy while you’re still young enough to enjoy it. But when you get it right you can compound assets, and that traditional 40-year plan your parents, and grandparents, followed can be collapsed into 4 or 5 years. No foolin’! When you leverage debt, you get to take a small portion of your own resources to acquire a large portion of someone else’s. Listen to this episode, and you’ll be the smartest person at the table the next time the subject comes up. Are you ready? Let’s go! Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terio Media. Want to get wealthy the way rich people do it? Watch this. Welcome to the all-new, epic real estate investing show. The longest running real estate investing podcast on the interwebs. Your source for housing market updates, creative investing strategies, and everything else you need to retire early. Some audio may be pulled from our weekly videos and may require visual support.

To get the full premium experience, check out Epic Realist's States YouTube channel, epic rei.tv. If you want to make money in real estate, sit tight and stay tuned. If you want to go far, share this with a friend. If you want to go fast, go to r-ei-aise.com. Here's Matt. 70% of the American economy is based on consumer spending, the true lasting American value. People are spending money they don't have on things they don't need to impress people. They don't like. They max out their credit card. and spend the rest of their lives paying 22% interest on something that cost $14.75.

And they didn't care too much for it when they got a home in the first place. That's not a good use of debt. That will not make you wealthy, but that's how most people use it. So debt gets a bad rap. But like the brilliant yet diabolical Amy Dunn, debt has some very redeeming qualities

when executed correctly. Like you can get richer and wealthier using debt than you can if you don't. But isn't that risky? No, debt isn't risky, but the people using it can be, because if you mess it up, you'll struggle to get wealthy while you're still young enough to enjoy it. I mean, sure, you can always use the whole compound interest thing to work its miracle, but 75% of your life will be behind you by the time that that magic trick pays off.

But when you use debt the right way, you can compound assets, and that traditional 40-year plan your parents and grandparents followed can be collapsed into four or five years. No fooling. I see financial freedom created here all the time at Epic. There's Parker and Corey and Ryan and McKenzie and Josh and Brad and Tony, Cindy, and Rieke, to name just a few. And they all use debt to make it happen. And I'm going to show you how you can do it too.

So here's the deal. When you leverage debt, you get to take a small portion of your own resources to acquire a large portion of someone else's. It's not just about multiplying returns, of which it does, but the purpose and benefits think, go much deeper. Here, watch this. The use of debt empowers the borrower to gain full control of an asset, of which gives the borrower

the full benefits of the asset without fully owning it. And those benefits, they can be the revenue, depreciation, depreciation, and use of the asset. As well, long-term debt positions you on the right side of the economy with regard to transferring ownership

from the lender to the borrower through amortization. And when done right, it's the asset it's still. self that does the work to pay down the debt for you, the borrower. And then there's this. The 40-year high inflation that we're experiencing is paying down the debt for you too. You see, the increased revenues, salaries, commissions, and bonuses that you receive in the future

due to inflation is going to make the debt you take on today easier and easier to manage. You see, your income's going to grow, but your debt payments will not. Governments around the world, they understand this. And then there's Apple and Microsoft. As of the recording of this, 490 of the 490 of the 4. Fortune 500 companies are leveraging debt to grow their fortunes because they understand this. Rich people understand this. And if you want to be rich, you deserve to understand it too. Watch this. Our currency. Because of inflation is a depreciating asset. So the rich borrow this

depreciating asset to purchase appreciating assets, specifically assets that they can control. And here are three controllable assets to consider using debt for first. Number one, invest in yourself. like through self-education, training, mentors, and or associations, in the interest of becoming competent in the acquisition, management, and disposition of which asset class you plan to use the debt for. Make yourself better, make your network better. You, you can control you. Number two, invest in your business.

With regard to anything that will improve directly or indirectly the revenue and value of your business, and most specifically the profit of your business, You can control your business far more easily than someone else's. And then number three, invest in real estate. It's the final frontier where the average person has a legitimate shot at creating epic wealth, and that's mostly because of the average person's ability to leverage debt in real estate in a way that they can't in other mainstream investment options. And now I'm going to show you how this works, and I'm going to use real estate as the model,

but these principles can be applied to other assets as well. So I'm going to use some simple numbers to keep the math easy and do your best to not get bogged down into the numbers. But place your focus more on the concept of how the leveraging of debt builds wealth and builds it much faster than you could without it. As long as you understand the concept, you can then later plug in your own numbers to correlate with your own resources, your own asset class, your own market, and your own financial goal. So here, we have a house valued at $100,000. and you were able to find a motivated seller and acquire the property for $80,000. That's what we show people how to do here at Epic, by the way. And it's not terribly important right now, but if you feel that this is impossible or really

difficult to do to buy out a discount like this one, it's not. All righty. So we're purchasing this $100,000 property for $80,000. We're going to place 20% down, $16,000 and leverage the rest from a bank, $64,000. It's a $5% for a traditional 30-year loan giving us a monthly payment of $1,000,000. $344. We now control this property without fully owning it, but the control 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, the interest, and business deductions, the benefit of

the amortization, that's the paying down of the debt, as well as the preservation of our money's value through real estate's hedge against inflation. We get all of that. We leverage debt here to take a small portion of our own resources to acquire a large portion of someone else's. The next, we go find a tenant that will pay us, say, $1,200 per month to live in the property, and each month we'll collect that rent payment to make our mortgage payment of $344, paying down the debt. That's the amortization at work. So to this point, we have used debt to create income. We use that income to pay off the debt, and we also get to use the tax advantages of real estate to further offset those debt payments.

I mean, those tax advantages include the deductions of the cost of borrowing the money, the management costs, the depreciation, and other allowable business costs. I mean, those tax advantages, they add up pretty darn quickly, often to the point where you can show to the government a loss on paper, yet a profit in the bank. And Uncle Sam's going to give you a big thumbs up for that too. So now, we'll sit on this property for, say, three years. Here's what happens after those three years.

The national average housing appreciation since 1968, per the National Association of Realtors is 5.4%. Now I know we've experienced much greater appreciation in these last couple years, but I'm going to keep it really conservative just to show you that the appreciation isn't what real estate is all about. Therefore, timing the market isn't as important as most people think. So let's cut the appreciation down to just 3% of which would cause the property's value to jump $110,000 after three years. And when we add in the three years of debt paydown, that gives us a principal paydown of $3,000. And when you fact, after the original equity with the appreciation and with the principal paydown altogether,

that gives us a new equity position of $49,000. Through leveraging debt, we have turned $16,000 into $49,000, a 300% return in three years. That's sick, right? You can now leverage that $49,000 of equity into new debt to acquire three more of these properties and repeat the process. And in three years, do it again into nine more properties, of which would give you 13 total properties in less than 10 years. So keeping the math simple, you've turned $16,000 into a small million-dollar real estate empire with somewhere in the ballpark of $500,000 of equity, the type of

returns that would give your financial planner an inferiority complex. And I didn't even factor in the positive cash flow from the rent yet. Now, when you leverage debt is really important, and I'll get to that. Plus, I'm going to give you five different ways to protect yourself from the risks of using debt in just a second. But I can hear your wheels turning. And And you're thinking of the countless hypothetical scenarios as to 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. Because it has worked for more people's wealth creation than anything else. I mean, if you're happy with what you're doing, keep doing it.

But this is how rich people use debt to build wealth. We understand 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, but it snowballs really quickly. 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 use it? Well, as long as you're borrowing a depreciating asset to acquire an income-producing, appreciating one, I can't think of too many scenarios of when you shouldn't use it. Ultimately, debt creates speed.

The more you use it, the faster your wealth and financial independence will grow. Conversely, the same is true, because I'd be remiss if I didn't mention your losses can be accelerated and magnified as well. Countless people have been ruined by debt because of greed and negligence. It can go both ways. However, understand 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 isn't really risky either. The reality is people are risky. Contractors are risky. Property managers are risky. Investors are risky. Debt and real estate? Not so much. People like Dave Ramsey and Susie Ormond advise their audience to avoid debt altogether in the interest of protecting themselves.

But their advice will significantly limit the amount of wealth you will build and greatly extend the amount of time to when you build it if you do. So you'll be safe with their advice, but you'll struggle most of your life too. So if you've decided you want to get wealthy in a safe way, here are five things that you can do. One, invest in your own financial education. Two, become competent in the operations and management of your asset class. Three, stay involved. 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. And that wraps up the epic show. If you found this episode valuable, who else do you know that might too? There's a really good chance you know someone else who would. And when their name comes to mind, please share it with them. And ask them to click the subscribe button when they get here and I'll take great care of them. God loves you and so do I. Health, peace, blessings and success to you.

I'm Matt Terrio. Living the dream. Yeah, yeah, we got the cash flow. You didn't know home world. We got the cash low. This podcast is a part of the C-suite Radio Network. For more top business podcasts, visit c-sweetradio. com.