Epic Real Estate Investing - Refinancing to Freedom…. | 1037

Episode Date: June 2, 2020

This Tuesday, Mercedes, the Turnkey Girl, shares her answer to a letter that she received from a long time listener of the podcast asking whether they should pay off the mortgage on their personal home or refinance it. More specifically, Mercedes gives a couple of practical options to consider in this situation so they can get clarity on how to move forward! Tune in and find out more!   Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terio Media. So you want to be a real estate investor, but you don't want to do the work. If there were only a way where someone else could do it for you, now there is. Tune in here each and every Tuesday on the Epic Real Estate Investing show for Turnkey Tuesdays with your host, Mercedes-Torres. Hello and welcome, welcome to Turnkey Tuesdays brought to you by Epic Real Estate Investing. My name is Mercedes-Torres, the Turnkey Girl. and I am lucky enough to be partners in crime with Mr. Matt Terrio, the guy who created the epic real estate empire.

I help busy professionals create passive income through real estate investing so they can retire even sooner. And on this show, I share tips and real life real estate experiences so that perhaps you can create passive income in your world. So to our listeners that tune in every single week, welcome back. On today's show, I am going to share a letter from a self-proclaimed longtime listener and first-time caller on a common question about sitting on equity on their personal home and then having conflicting emotions about paying it off or refinancing, you know, stripping it from the equity that it has and reinvesting it. and I'm sharing this because it is a very common feeling. I get this question often, but I know that many

years ago before I started investing, I had the same feelings about, you know, do I own my property free and clear so that I never have to make another mortgage payment again? Or do I create debt and buy another investment property that possibly cash flows? So I'm going to read his letter and I'm going to share a few things to consider if you're faced with this situation so that hopefully it provides clarity to help you make a better decision on how to move forward. And I'm going to do that right after these words from our sponsor, Ridge Lending Group. Have you been searching for a lender that is knowledgeable experience and will actually talk with you about your financial situation? Well, we found them for you.

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If you want it done right, use Ridge Lending Group. Go to Rich Lending Group.com. Click on the Get Started tab and tell them I sent you, will you? You will get individualized financial and lending education with Epic Love. So here is the letter that was written to me. It goes, Dear Mercedes, I've been a fan and listener of your show for a very long time and I've learned so much from you and Matt. Thank you for selflessly sharing your wisdom with so many. And thank you for allowing us a platform to ask a question about our own situation. My wife and I own our primary residence that we bought about eight years ago right after we were married. And we purchased our first investment property about two and a half years ago. We're trying to save up for our next investment property, and I recently learned that our home has about $80,000 of equity, and our investment property has almost $20,000 in equity.

My primary residence interest rate is 3.75%, while our investment property's interest rate is 4.5%. percent, my investment property cash flows about $212 per month. Does it make sense to refinance one or both of our properties to cash out the equity and invested in more real estate? I have two school-age daughters and college tuition is on the horizon, but I also love the idea of paying off my home and never having to make a mortgage payment again. My interest is. rates are super low, so I worry that I won't be able to get that low interest rate if I refinance. Signed, conflicted, Ray and Nelly. Wow. Great letter. So Ray and Nellie, thank you so much for your kind words. I truly appreciate them. I mean, after all, Matt and I do this show to help just

preach financial freedom to the world. So I absolutely love that. You. You know, you're benefiting from our show, but more so that you're taking action and creating your financial freedom. So your questions are great ones. And I decided to share this with the world. So I hope that you don't mind. But I often get this question. And my answer is often so different because it's based on so many aspects of just finances. First and foremost, and I hate to start off with this, but I'm going to because it's really, really important, but it's really important that you understand why you're investing in real estate.

And I mean, it's such a cliche when you say, you know, what's your why? But it's really important to understand why are you investing in real estate. estate. I mean, some people invest because they need the cash flow. Other people need tax deduction. And other people invest for the same reason that you're thinking of is, you know, how am I going to pay for my children's college education? So they buy investment properties knowing that this property is going to pay for their children's education. So understanding the definition of, you know, financial freedom and what that means to you is really important. Some people want to, you know, not ever make a mortgage payment on their personal resident. And that is financial freedom to some.

And others want, you know, $10,000 in passive income because perhaps that's, you know, somebody else's definition of financial freedom. For example, for me, freedom meant that I was going to be able to take my kid to school every single day and pick him up and never miss a baseball practice. I mean, my little guy is only eight, so he's still in Little League, but I take him to every single baseball practice, and I'm at every single game. So financial freedom to me, outside of our vacations and outside of all the extra things that I wanted to do, first and foremost, I wanted to be able to take my kid to school every single day and not miss a practice or a game ever. And that was my definition. So once I reached enough passive income to be able to fire

my boss and work for myself and do the things that I wanted to do, that was financial freedom for me. So it's really important that you define what financial freedom is for you. And here you. And here, something that is important to analyze when you're having this thought process with yourself and your spouse and your family. So let's just assume, and I'm going to take exactly Ray and Nellie's situation. You have $80,000 in your home. What is that equity doing for you? Is it doing anything for you. What is it doing for you while you're making your mortgage payment every month and you're receiving rent from your tenant every single month where you're paying off that loan and you're also benefiting from cash flow, not to mention tax benefits? So really think about it.

What is that $80,000 in your property doing for you? What if you took that $80,000 and you invested it in properties that perhaps paid you $200 a month like your other property. So imagine if you did that times four. I mean, do the math. It's super, super simple. So we're going to take Ray and Nellie's $80,000 and we're going to do a cash out refinance and we are going to use that $80,000 to reinvested in other properties. Now, I know in California, there are not properties for $100,000 don't exist. I mean, rarely exist, I should say that. So most properties in Southern California, you know, run in the starting at $250,000. But there are markets in Middle America where you can buy properties for $100,000. And I'm going to give you an example just so that you can

grasp your mind around what that can do for you. So let's just assume you found a property for $80,000. Now, if you finance the property and use a conventional loan, you only need a 20% down payment. So for a $100,000 property, the bank will cover you $80,000 and all you need to do is come up with a down payment of $20,000. Well, if you have a $1,000, you have a $100,000, the bank will cover you. have $80,000 in your home in equity and you did a refinance and took that money out, you now have $80,000 available to invest, which means if you found a $100,000 property, you can use $20,000 of that, still have $60,000 left, and you're able to buy one investment property with your 20% down payment of $20,000 that will allow you a cash.

flow of $200 a month. Now, I'm doing quick and dirty math, but you get the concept. You take your money, you use it as a down payment, and you reinvest it. Well, in this case, because you have $80,000, you're able to buy four properties with $80,000, $20,000 each property that will cash flow you $200 a month. Now, that's a total of $800 a month. month, if you decided to take that $80,000 out of the equity of your home and reinvest it and park it in four properties, each property valued at $100,000 with a 20% down payment, you're getting $800 a month. Now, I'm not even touching the other property that Ray and Nelly had that has about $20,000 in equity that's currently cash flowing $212 a month.

Now, what can you do with an extra $1,000 a month that you're getting from the equity that you just took from your investment property? Now, I know your wheels are spainting. Let's talk about two things that really come to the surface when we're talking about refinancing your property. And by the way, when I mean refinancing the property, I don't necessarily, mean doing a refinance. You can also do a he lock, a home equity line of credit. Most banks will offer that, and they tend to be lower rates than if you're doing a flat-out cash-out refinance. But the reality

is that you are able to either do a he-lock or a refinance. Whatever is going to give you more money for the cheapest rate is probably the way that you should consider what route to go. But going back to Ray and Nellie, there are two things that we have to talk about. Number one is the interest rate. Ray is very concerned that his interest rate is going to go up. And then the other thing was the children's college tuition. So entrance rates, let's do the math. The interest rate that Ray has on his primary residence was 3.75.

there is no doubt that that rate has gone up today. No secret about that. He likely got a first-time homebuyers rate where he was able to come in with a super low rate. I saw those rates at 2.99 that low. And right now, for first-time homebuyers, they're about 4.5%. But regardless, that's probably not going to be happening in today's world

because the rate has gone up. So right now I'm seeing, rates at a 4.875, 5%, maybe even 5 in an 8th. But even if the rate does go up to 5% and between 5 and 5 and a quarter, the mortgage payment will also go up because naturally the loan amount has gone up. So the loan amount because you took the equity from your home and the interest rate, they went up. So yes, that is going to go up, no doubt. But the amount that will go up can be offset by the cash flow that you're making with the money that you took from the equity that you are reinvesting it. And by just holding a home for 10 years, I mean, look at what Ray and Nelly were able to do.

They were able to pay off the mortgage over time. Now they were living in the property, but they built equity. I'm sure they got great tax benefits, and over time, you can pull that money out and have that money pay for college tuition or whatever you want. But all you have to do is make the mortgage payment. And guess what? You can do this over and over again and again and again because there is no limit on the amount of property. you can buy on earth during your lifetime. So the strategy, the strategy that Ray and Nellie used with their primary residents by just making

their mortgage payment every single month can be also used with investment properties. Now, on investment properties, you can build equity, create cash flow, and also have the tax deductions. So why wouldn't you pull that equity out of your home to build more of what you just did with your primary residence? But this time, you build it with cash flow. So you can double-dip. You're not only building the equity over time. And by the way, nobody has a crystal ball. equity happens because history repeats itself. There is no doubt that your property is going to increase, the property value is going to increase over time.

And the beauty of this whole situation is when you buy a property and you lock in a loan for 30 years, now I always say that, lock your loan with an interest rate that is fixed for 30 years. So when you lock it for 30 years, you not only fix the amount of the loan that you're locking, you're also fixing the rate. So if you lock your property at a rate of 3.75 or 4.99 on a 30-year fix, that interest rate is never going to change and neither is your loan amount. So even if you don't do anything but make your mortgage payment for 30 years, inevitably you are going to build equity.

Now, nobody can tell you at what rate and how much, but everybody can tell you that that interest rate, so long as it's not adjustable, as long as you locked it at a 30-year fix, that rate and that payment is never going to go up. Now, your taxes might increase a bit because the land value does go up. Your insurance might increase a little bit,

but your mortgage payment is never going to change if you lock it on a 30-year fix. And that's how you build equity. Okay, so you've built the equity. And now that we're talking about an investment property, if you buy it right, you're building the equity and you're creating cash flow. Now, with Ray and Nellie having two daughters in college, the equity of your house, of your investment property, let me clarify that, the equity on your investment property can now pay for one daughter's education and the cash flow can pay for your second daughter's education. Now, I don't know how old your kids are. I'm assuming that they might, you said school age,

so I'm assuming that they're still in elementary school. But if they were even in middle school and you still had five or six years, it would still make financial sense. because over time, your tenant is paying for your property while you're cash flowing and again, while you're benefiting from tax deductions. So, remember we talked about that $80,000 and you're buying four properties that are valued at $100,000 each property only using a 20% down payment. well, two of the properties can go for the cash flow for your children's education, and the other two properties that you have can go for anything else. You can put it back into a fund to reinvest it.

You can create a vacation fund, and that'll be your vacation money for you and your family to enjoy while you're on vacation. I mean, you can continue to do this over and over again, because there is no limit on the amount of investment properties that you can buy. Numbers just don't lie. Now, analyze all of the numbers, your taxes, your insurance, the management fee. Do the math and determine what's going to give you your financial freedom. Leaving $80,000 in equity in your primary residence or putting it to work, that's a personal decision. And just think, the definition of insanity is doing the same thing over and over again and expecting a different result. So if what you're doing now isn't working for you, why don't you try something different? And by the way, I didn't even

discuss the investment property that Ray and Nellie shared in their letter. But I didn't have to because, as I said, what you can do with your investment property or what you can do with your primary residence are very similar to one another. Now, there are some exception to the rules. There are like 1031 exchanges and there are different tax benefits. But the reality is it's not so different that this strategy wouldn't work. Same things apply to an investment property when it starts to build equity. Because over time, if you're the owner of that property or if it's owned by an entity, you are still able to take the equity, do a cash out refinance, and reinvest it. That's it for today. I hope this episode got your wheels to turn, as I say, every single week. And if it did,

it would be awesome if you wrote us a review. If you took the time to say something, about us on iTunes or Spotify or wherever it is that you're listening to me speak as I talk. Or if you find that this episode may help somebody in your world, please do not hesitate to share it with them or share it on social media. Heck, if it made a difference for you, it may make a difference for somebody else in your world. Once again, my name is Mercedes Torres, the turnkey girl, where cash flow is clean. Make it an epic day. Your portfolio has seen better days.

But this two shall pass. And the best for you is yet to come. Together, we'll get you there faster. We're cash flow savvy. And we'd like to share some information with you that will show you how you can take control of your financial future and accelerate its arrival. Go to cashflow savvy.com.

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