How would you like to be completely mortgage free in less than a decade?
There’s a new way to manage your mortgage and monthly cash flow so that you, and not some banker, get to squeeze the most use out of every dollar that comes in, and every dollar that goes out. The strategy is called Equity Acceleration. It’s not such a big secret in Australia and the United Kingdom, where as many as 1-in-4 homeowners are accelerating the mortgages.
Join me on this exciting episode to discover how you can be mortgage free in 5 to 7 years on your principal residence or investment properties.
And, if you missed last week’s episode, be sure to listen to From Broke to $10,000 per Month at Age 24 – Sean Gray.
Enjoy the show!
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How to be Mortgage Free in Five to Seven Years – Jordan Goodman
Today, we have a very exciting episode because we’re going to tell you how you can cut your mortgage down and have it paid off in about one third of the time. Typically, that’s going to be five to seven years but it could be seven to nine. In either case, it’s going to be about one-third of the time. Our goal here is to share the knowledge and methods of actually owning your properties and your home mortgage-free much sooner than you imagined.
Think about this interesting statistic, in 1929, only 2% of Americans had a mortgage on their home. In 1962, 98% of Americans had a mortgage on their home. That’s a huge difference. Take a look at the history of mortgages in America and you’ll start to understand why this has changed so radically. Do you know where the idea of the amortization concept came from? It was actually developed after the great depression as a way to stimulate home ownership and of course banks’ profitability. That is still true today. Until that time, most loans were five years in interest only and they had a balloon payment at the end of the five-year term. Bankers didn’t determine that payments were a problem. They thought that those monthly payments were actually the biggest hindrance to someone owning a home. What they did is they dragged out the mortgage for as long as they possibly could to generate these low monthly payments. That made home ownership and affordability much, much easier.
Initially, they stretched it out to ten-year loans. That’s what was common and then twenty and then 30-year loans. That seems to be the norm nowadays. For some of you, if you remember back in the mid-2000s, we saw 40 and even 50-year loan amortizations, which is just absolutely crazy. If you think about it, the longer that term, the more interest you’re paying to the bank over the course of the life of that loan. Really, at the end of the day, who’s winning there? Is it you or is it the bank? Your lower monthly payment is given up in lieu of much, much larger interest payments. Today, would you buy a $250,000 home and pay $500,000 for it? Of course, you’d say no but that’s exactly what you’re doing when you finance a property.
Don’t get me wrong, 30-year fixed rate mortgages are great because it’s good debt. It allows you to acquire a larger portfolio of rental properties than you could if you were buying all cash. Leverage is a wonderful thing if it’s used properly. Real estate is a great vehicle to allow you to do that. You have to understand that there’s a cost involved and of course, your tenant is actually paying the mortgage off for you, not you. Your tenant is buying the property for you and that’s okay. You just build a portfolio and you use as much leverage as you can with the capital that you have to invest. Build the portfolios as large as you can, have your tenants pay it off, accelerate the payments if you want, but you’ll build up a portfolio and a large cashflow overtime. That’s the theme of the show.
There’s an unknown author that was quoted to say, “There are two kinds of people in the world: those who understand interest and those who don’t. Those who understand it, receive it. Those who don’t, pay it.” If you stop and ponder that for a minute, you’ll really start to think about ways that you could turn this around and to your advantage. The fact is, on average, 42% of Americans’ income goes towards paying interests. That’s a lot. Why are we surprised that Americans today are retiring broke? Did you know that 95% of the people today in the country that are aged 65 and older do not have enough discretionary income to write a check for $600? That’s an unbelievable statistic.
The average worker earns between $1,000,000 and $2,000,000 in the course of their lifetime. Yet, despite all that income, most Americans retire dependent on the government or in Social Security or on someone else. Where do you fit in that scale or that pyramid? Will you be the 1% that hits it at the top and you retire wealthy? Do you really think that Social Security will even offer significant income, any piece of mind? It’s hard to fathom. Social Security is effectively broke by their own admission. You could go online and look at their forecast for years projected forward and see how solvent they are.They’re insolvent. That’s probably another big bank bailout or federal bailout waiting to happen.
You need to take control because out of 100 Americans at aged 65, only 1% retire wealthy, 4% will be well-off, 5% still have to work, 54% will still need family or government assistance, and of course unfortunately the other 36% are passed away. Here’s a big eye opener for you. This is actually directly from the US Social Security Administration. “Social Security’s current annual cash surpluses will soon begin to decline and then turn into rapidly growing cash deficits toward the end of the next decade as the baby boomer generation retires. Their growing annual cash deficits in both programs will lead to exhaustion in trust fund reserves for medical hospital insurance in 2019,” that’s only three years away, “and for Social Security in 2042.” They are openly admitting that they will be completely broke on or before 2042, not very encouraging. Even if you could live off social security, it may not actually even be there by the time you get to retirement age.
The good news is, you can take control of your financial future. One of the great vehicles, in fact probably the best vehicles to do that is through income-producing real estate rental properties. Build yourself a portfolio of real estate that pays for itself, that generates cashflow. You can do it. If you want to take that well-proven formula for wealth creation and cashflow and put it on steroids, one way to do that is to accelerate “the mortgage payments.” In other words, eliminate the mortgage payments in a short period of time. What we’re going to talk about is in one-third of the time.
It’s my pleasure to welcome Jordan Goodman to the show. Jordan is known as America’s Money Answers Man. He is a nationally recognized expert on personal finance. He is also the author and co-author of thirteen bestselling books on personal finance including Master Your Debt. He is a regular guest on numerous radio and television call-in shows, answering questions on personal financial topics. He appears frequently on The View, Fox News network, Fox Business Network, CNN, CNBC, and the CBS Evening News. Jordan, welcome to the show.
Great to be with you, Marco.
It’s a pleasure having you here. I’m pretty excited about today’s topic because this is something that is going to draw a lot of people’s attention. Everybody wants to be debt-free. When it comes to their principal residence, when it comes to their rental properties, it’s pretty enticing to think that you could be mortgage-free in five to seven years. That’s what we’re going to talk about today. Before we go there, tell us about yourself and your background.
I’ve been a financial journalist for over 35 years. I was at Money Magazine for eighteen years, NBC News for nine years, and a regular on Marketplace on Public Radio for six years. I’ve just had done thirteen books on different financial topics including what we’re going to talk about, Master Your Debt. My website is MoneyAnswers.com. I have all kinds of links and videos. I take emails from people, I’m on radio shows, I’m on TV shows, I give speeches, I’m a personal finance Pied Piper, I guess you might say. I just love to help people expose them to ideas they might not have heard about before. This whole concept we’re going to talk about today, which I like to call Mortgage Equity Optimization, is really life transforming; be able to take control of your financial situation and pay your mortgage off literally 25 years faster than you ever thought possible on your existing level of income.
By now, you’ve gotten everybody’s ears perked. They’re wondering how in the heck can you do this? Before we get into the how it works details, let’s lead up to this a little bit. I’ve seen this program. I was actually originally exposed to this back in 2005-ish. Back then, these people referred to it as a mortgage accelerator. They didn’t call it equity optimization. I can understand why you call it equity optimization. The idea of being mortgage-free is very enticing. It’s been around for a long, long time. In fact, as far as I know, this originated in Australia.
Correct, in the late ’90s.
It’s actually pretty popular in Australia and the UK. In fact, I read a statistic that one in four people who have mortgages in those countries are actually doing some form of equity optimization.
If you’re in Australia, this is the normal way you do things and what we do is very abnormal. Maybe one in four now have it but as far as new mortgages, 50% to 60% of all new mortgages use this optimization strategy in Australia, Hong Kong, Canada, Britain, all kinds of place. United States, it’s not as widely known because the banks have no interest in telling you about. They like the situation just the way it is right now, which is you take out a 30-year mortgage and all the interest is pretty much upfront. The first ten to fifteen years, you’re making very, very little progress in the principal. Even better from the bank’s point of view is then you refinance and you start another 30-year clock all over again. Even though your rate and payment are down a little bit, you’ve just thrown away all that interest you paid for how many years and start another 30-year clock all over again. The banks have no interest of actually helping the customer pay their mortgage off faster. They like the system just the way it is.
If I remember my numbers correctly, I believe it’s nineteen years into a 30-year mortgage where you actually reach that midpoint of your equity pay down or the principal pay down.
It depends on the numbers, but something like that. You’re paying mostly interest for at least ten years, something like that. Towards the end, you start paying off the principal. What a lot of people do though, the average person keeps their mortgage for about seven years either because they refinance or they move to another house. They never get to the tipping point. They just keep paying interest their whole life. Even worse, people who are older, say you’re 55 and he’s like, “Wait until it drops, let me refinance it.” You just got a lower rate in payment and now you’re going to pay it off when you’re 85. The idea is to pay your mortgage off well before retirement and certainly by retirement. A lot of people, because they refinance in later years, are going into retirement with huge mortgages; not a good idea.
You’re just resetting the interest clock because when you do that, you’re frontloading all the interest on that all over again.
The banks don’t want to tell you that. It’s in the writing when you sign a mortgage document, there’s an amortization table right there, which nobody looks at, which shows you exactly how slow you’re paying off the mortgage principal. You’re so excited about getting a lower rate in payment that you overlooked that you’ve just thrown away tens of thousands of interest and you’re about to start a new clock all over again, correct.
This begs the question, why haven’t more people heard about this? I know you mentioned the banks. Of course the banks don’t want you to know about this, but the banks are not the first group of people that I would think that would be wanting to tell you or not tell you about this. I would think that financial advisors or maybe even the media would want to talk about this. Why don’t we hear about it?
Financial advisors do not know about this. This is not taught in schools. I talked to a guy who’s doing mortgage finance teaching at Wharton, he’d not heard about this. You’d be surprised at how many highfalutin people don’t know about these things at all. Financial advisors, for the most part, have no clue about this whatsoever. I’ve been talking about this for at least ten years. I did a book about it in 2010 called Master Your Debt. That’s really the first time that it had ever been written up in the media. I’m a financial journalist, I’m dealing with these media people all the time. Most of them have never heard about this before. When you describe it to them, it’s like, “Why haven’t I heard about that before?” You’re just talking to banks all day. It’s a new idea to them as well. It’s quite amazing. As you say, it’s around the world but in the United States it’s still relatively not well-known. Your listeners are going to be in a tremendously advantageous situation because they’re going to find out about it for themselves.
Some people are probably thinking this sounds too good to be true. When I looked at this initially, I thought the same thing. I thought, “How’s that possible?” When you really lift the hood and look under and dissect it, it really makes a lot of sense, but it’s all math.
It’s what I call math, not magic.
When people think about accelerating their mortgage payment, paying down the principal quicker so they can eliminate that mortgage, the common methods that come to mind are making extra principal payments. If you’ve got a $500 monthly payment, you pay $550 or $600. That really makes an effect.
It will help some, but it would cut two or three years off your mortgage, not 25 years.
There are really three methods that I know of outside of equity optimization. There are the extra principal payments. There are the two payments per year extra.
Bi-weekly, you pay every other week.
That’s the third one. There’s the bi-weekly and that’s what I think most people are familiar with. They make 26 payments per year. They’re paying bi-weekly.
What that means is you’re making thirteen mortgage payments a year instead of twelve in effect. It’s nice. That’ll cut two or three years off your mortgage maybe but again, nothing close to 25.
Before we talk about how it works, I want to compare and contrast this to making the extra monthly payment. I actually went and pulled out a mortgage calculator. I took a $100,000 loan and I said, “What happens if I make $100 per month extra towards the principal? What does it do to the loan?” What it does is it shaves $30,400 off the interest and it reduces it to 8.7 years, which is still pretty amazing.
My goal here is to help people pay their mortgages off faster. The one thing about that is a traditional mortgage is what I like to call a one-way mousetrap. You can put money in it but you can’t take money out. You can’t write a check on your mortgage. You have no liquidity. When you give them $100 extra a month, that’s it. You can’t get it back out to spend on bills or anything else. It helps you ten years, twenty years, fifteen years in the future, but right now, it cuts your monthly cashflow. That’s $100 you do not have now to spend or invest.
I just want to correct something I misspoke on. The 8.7 years is the savings in time, not the length of the time.
It makes sense to me. That means your 30 more years is 22 years or 23 years compared to 30. That’s good but I think five to seven is even better.
Let’s talk about how it works. Explain to us how equity optimization works.
I’m going to contrast equity optimization to the traditional model. The traditional model is you keep the money you’ve got sitting on a checking account like your paycheck and dividends or whatever interest you’re getting in the checking account, sitting there earning nothing. You make the same payment for 30 years or 15 years depending on the mortgage you’ve got; as we said, with all the interest front-end loaded. That’s the traditional system. Notice how that’s working for the bank on both sides. You give them your money for free. They’re going to check which they’re taking and lending out and they’re earning money on it. The interest is all front-end loaded so they make plenty of interest for many, many years before you start making much progress on principal. That’s the traditional system. Equity optimization completely reverses the table. Now you, the consumer, are in control.
Here’s how it works. You use a home equity line of credit, HELOC, which is a liquid line against your house as a second mortgage. You’re not going to touch your first. It’s going to pay your first out faster but you have a HELOC on the equity you’ve got on the house. You use that HELOC in effect as a checking account. That becomes your central account. Instead of having your money sitting on a checking account earning nothing, you keep your money, your paycheck and other things in that HELOC and every day that goes by, you push the principal down a little bit. HELOCs are based on what’s called average daily balance. How much do you owe today? If you put money which will only be sitting in the checking account not earning interest because you’re at zero today, you have the same money in the HELOC not paying interest because every day they look at how much you owe. You’re going to owe less because the money’s sitting there. Literally, every day that goes by, your principal is going down on that mortgage at an accelerating rate as you pay your mortgage off faster. It’s hard for people to imagine but that’s the way it works.
That’s the basic principal is you’re using out HELOC, you’re paying off your first in big chunks. You pay off the HELOC in six months, nine months, however long it takes, and then you do it again. You pay off your first in chunks and depending on the numbers work out, five, six, seven years, your first is completely paid off, you pay off the HELOC and you are now mortgage-free. That’s an overview of how the whole thing works. Does that make sense?
The part that I’m missing here is the bridge between starting off with just a mortgage, no HELOC and getting that HELOC. Once you get that HELOC that home equity line of credit, let’s just say you get it for $100,000, it’s a revolving line of credit. You haven’t used it yet. It’s basically setup but there’s nothing owed because you’ve got a zero balance on that $100,000 line. Are you saying that when you get that $100,000 HELOC, that you’re maxing it out and applying that $100,000 towards the mortgage?
Correct. What is the size of your first? You tell me a number you like.
I’m here in Southern California. Let’s just say someone has a $500,000 mortgage and they go out and get a $100,000 HELOC.
They’re owing $600,000 and the house is worth $800,000, whatever it may be. Let’s say you’ve got $500,000 first and you took out a $100,000 second. Your $500,000 first is really good, 3.5% very, very low interest rate. Here’s how you’re going to do it. I’m actually going to take you step by step how this whole thing would work. You’ve got your first $500,000, 3.5% rate mortgage. You take out the HELOC for $100,000 and then it’s now, as you said, free and clear. You just open the thing up. You write a check on the $100,000 HELOC towards your first. You haven’t added any debt, you just shifted part of it from the first to the second. You still owe $500,000 total. You just owe $400,000 in the first and $100,000 in the HELOC.
You use the HELOC on which you owe $100,000 as your checking account. I’m just going to do an oversimplified example. Say you had $1,000 that you just got in the paycheck, normally you’d be keeping it in the checking account. You get paid. It goes in your checking account. You electronically transfer it to your HELOC. Instead of owing $100,000, you now owe $99,000. You just pay it down by $1,000 for that day. The HELOC company takes a look and says, “Yesterday, we charged him interest on $100,000. Today, we’re going to charge him interest on $99,000.” Your interest goes down a little bit because you owe less principal. That’s happening during the month. All the income you’ve got is going to that HELOC, pushing the principal down at a regular basis. Then you pay your bills out of the HELOC. Your balance is going down, down, down, down. One day a month it goes up when you pay your bills. The best way to do this is actually have all your bills charged on one credit card; your utility bills, your food bills, all the bills on one credit card. Basically, you pay one bill a month is where it comes down to. Every day during the month, you’re making progress in your principal and the one day a month when that credit card bill is due, you pay the credit card electronically and your balance is going to go up by the amount of the credit card. Your money is working for you every day pushing that principal down.
The next month is the same thing. You keep adding $1,000, you keep adding whatever income’s coming in, get all that money pushing down that principal every day. In six months, nine months, however the numbers work out, you will have paid off that $100,000 HELOC down to zero. You still owe $400,000 or maybe even less than $400,000 on your first. Remember, you haven’t made hardly any progress at all on that. You do it again. You write another check on the HELOC for $100,000 towards the first. Instead of owing $400,000, you owe $300,000. You do the same thing, you pay the HELOC off of your six months, nine months, however long it takes. Do it again, you’re down to $200,000. Do it again, $100,000. Do it again, your first is now paid off. You pay off the HELOC. Depending on how the numbers work, five, six, seven years, you’re completely debt-free.
You see how your money is working for you instead of the bank? Your checking account is pretty much zero. Your mortgage balance is going down at an accelerating rate and your HELOC is going down at an accelerating rate because all your money is working for you every day pushing down that principal. The way I like to put it, instead of having your money in a checking account not earning interest, your money is in the HELOC not paying interest. Does that make sense?
Yeah, that makes a lot of sense. I can see how that works now. Your HELOC becomes essentially your central checking account.
Correct, which is completely liquid. You can put money in, you can take it out whenever you like. The main thing is your money sitting there is pushing down your principal every day because it’s based on average daily balance. What people end up doing is they find other money that’s sticking around doing nothing normally sitting in the checking account or in the savings account is also zero. It’s like, “If I put that towards the HELOC, it’ll pay off that much faster.” It really motivates people to find, “I had this old 401(k) I forgot about or I’ve got the savings bonds stuffed in the mattress,” wherever it may be. That money is sitting there doing nothing for you, but now, you’re actively making it work for you by pushing down your principal balance literally every day.
Does this increase your net monthly payments, your bill payments?
No, your bills are going to be the same. You’re paying the same bills but you’re saving money because you are now paying less and less interest every month. Your balance is going down faster and faster. After the first nine months say, you paid off the $100,000 HELOC the first time. You now owe $400,000 in debt instead of $500,000 after nine months. If you just did the traditional system, you wouldn’t get to $400,000 for twelve years or something.
What I’m thinking of is your aggregate monthly payments. You still have that principal interest payment on the first, on the mortgage but now you also have a monthly payment on the HELOC.
It’s the same total amount of debt; a little debt that’s going down faster. That was correct. Notice what happened on your first payment. I’m making up a number. Say your payment on $500,000 is $3,000 a month, doesn’t matter what it is. You’re doing $3,000 a month on $500,000, it’s almost all interest. You paid it down to $400,000 instead of $500,000 with that first $100,000 HELOC. You’re still making the same $3,000 payment but you’re paying it on a $400,000 loan instead of a $500,000. A lot more of that is going to principal.
I agree that you’re paying down your principal faster. The mortgage payment on the first doesn’t change but now you’ve added an additional payment that you need to pay against that HELOC is now your actually using the HELOC. Does that not increase your monthly aggregate output?
It shouldn’t work out that way. There are three things you need to make this work. First thing, you’ve got to have equity in your house. If you’re underwater on your house, there’s nothing to borrow, you couldn’t get a HELOC. You have to have positive equity on your house. Second thing you need is a decent credit score, maybe 60, 80, or higher to be able to qualify for the HELOC. The third and most important thing you need is positive cashflow. The more money coming in, the faster it’s going to go down. You have to have more money coming in than going out during the month. You’re not adding bills, you’re just moving your money in a much, much more efficient way to make progress in your principal much, much faster than you ever thought possible. You’re using your cashflow, which normally is sitting there doing nothing for you, for your benefit. Makes sense?
Yeah, it makes sense.
Then you want to link your HELOC with your checking account so it’s free. You move back and forth as you need it. You typically are not going to get your paycheck to be able to direct deposit in your HELOC. Your paycheck is directly deposited into your checking account and then electronically you move it right into the HELOC. If you need it, you can move it back out, you can write checks in the HELOC as you will.
The operative principal is that you’re paying this down based on your terms, not because of the rate or the payment.
Correct. Banks have you looking the wrong way. Banks have you say, “What’s the rate and what’s the payment?” That’s how they trick you into refinancing because you get a lower rate and lower payment and you are so-called saving money. In fact, it’s costing you a huge amount of money because you just started another 30-year clock all over again. The question I do not want you to ask is the real question that you should ask is, “How fast do I pay off my principal?” The answer is very, very slowly on traditional 30-year, 50-year mortgage, whereas here, you can see it. This website that I’d want to recommend people actually implement this is called TruthInEquity.com. It’s a free website. At that website, you put in your numbers in what’s called a personal profile and you put in your income, your expenses, the value of your house, your first mortgage, all different elements. Based on what you’re doing today, it’s going to take you 28.5 years to pay off your 30-year mortgage, whatever it may be.
Using numbers you just gave us, using optimization, you’re going to pay your mortgage off in 5.3 years, whatever it comes out to be. Then they show you step by step how to do it. It’s not something in your mind. As you said, it’s math. Depending on what numbers you put into the system and the more positive cashflow you’ve got going in there, the faster it gets paid off because that positive cashflow is what’s pushing down that principal on a regular basis.
The key to making this work is someone has to have good discipline and they need to know how to execute because you can’t miss a monthly payment. You have to be disciplined.
A lot of it can be automated. I agree with you, you have to pay attention but a lot of the things can be automated. It really can. You can have that once a month credit card bill paid automatically, for example. You can have your monthly first mortgage payment paid automatically. You’re paying it where? Out of the HELOC, you’re keeping your checking account minimal. It does take some attention but what a payoff to save literally 25 years off your mortgage. I sent you a copy of my book called Master Your Debt. If you have it there, I’m just going to show you on page 76 and 77, I actually have some tables showing you exactly how this would work. Do you have the book with you there?
Yeah.
On page 76, this shows a typical example of a $225,000, fifteen-year mortgage. You’ll notice this shows the income, the expenses, everything. It shows you your payment, in this case, is $1,808 a month for fifteen years, and goes all the way through. In the middle, it shows the accumulated interest over fifteen years on that mortgage is $100,578, $100,000 basically. In the next page, page 77, apples to apples, same people, same interest, same mortgage, same house, same everything. Using this technique, you’ll notice the payment is going down every month, starts at $643, ends up at $157 and in five years, it’s zero. The accumulated interest over the five years is $22,459. Instead of paying $100,000 interest, you pay $22,000 interest over five years. You save yourself $78,000 of interest and ten years off your mortgage with your existing level of income. That’s the proof right there. If you want even more, the next page actually shows you the same thing on a 30-year mortgage. Take a look at page 78. He has a $400,000 mortgage. In this case, the payment is $2,462 for 30 years all the way through. In this case, the accumulated interest over 30 years is $486,000 on a $400,000 loan. In fact, you bought the house twice basically; $400,000 for the house, $486,000 for the interest. Apples to apples, the page right next to it, everything else is the same and so on. Here on this page, your accumulated interest, this is about 8.5 years, is $102,000. You paid off the mortgage and $102,000 in about 8.5 years versus $486,000 over 30 years. That’s the math right in front of you there.
As far as interest rates go, obviously the HELOC will be plus something and it never fluctuates.
In some cases you’re going to get prime minus or prime. It’s going to be roughly the prime. Prime today is 3.5. It’s going to be in the 3% or 4% range, something like that.
Does that interest rate even matter or is there a breaking point where that interest rate on the HELOC could get up to a point?
It doesn’t matter very much. One of the things that’s interesting is that when you do that Truth In Equity process, they will do an absolute total impossible worst case scenario. Rate today is 3.5% on the HELOC. We’ll take the rate to 10% tomorrow, which is beyond impossible but just for fun. You’re going to see, “Instead of paying it off in 5.6 years, I’ll pay it off in 6.1 years.” The reason is, the interest rate is being applied to less and less principal every day. Remember your principal is dropping at an exhilarating rate. Even if the interest rate goes up, it’s being applied to less and less principal so even though the rate is higher, it has hardly any impact because the principal is melting away so fast. The interest rate is nice, not the most important. The most important thing is how fast you pay off your principal.
Here’s a scenario. I have a principal residence here in California with a large mortgage. I’ve got rental properties located in other states that have smaller mortgages. They might average out to be $80,000 to $100,000. For someone listening to this show right now and they’re in a similar situation where they have a principal residence and they’ve got a portfolio of rental properties, how do they decide which mortgage to accelerate and pay off first, second, third?
See how powerful this is for a rental property. In effect, what happens is you do a HELOC on your rental property. Your tenants are paying off your mortgage much faster. You become free and clear on those rental properties, years faster than you’re doing right now. You’ve got a commercial mortgage on those things maybe fifteen, twenty years, something like that. Depending on your rents and how the numbers work, you could have that rental property paid off whenever, two, three, four years depending on how the numbers work out. You become free and clear on those. Now you have extra equity, you can go and buy more rental properties. You can be building up a whole portfolio of rental properties that you’re paying off faster and faster. What’s wonderful about that is your tenants are paying it off faster and they don’t even know they’re doing it. It’s because you are moving the money in an efficient way. Right now, you keep your rents in a checking account earning nothing and you have a traditional 20, 30-year mortgage. You’re using the same techniques so you do both. Pay off your personal mortgage for the house you live in and pay off your rental properties using equity optimization.
Let me ask you the same question but with a little more specific. Let’s just say you can only get one HELOC. Let’s say you’ve got it on your principal residence and you’ve got a small portfolio of rental properties that doesn’t have enough equity to get a second HELOC on. You’re only working with one line of credit. In a scenario like that, how do you determine whether you should pay off your principal residence first or one of your rental properties? Is there a formula to determine?
The Truth in Equity people would go through this in much more detail. I see in your particular case it would be best. I would pay off the one with the highest interest rate and with the shortest amount of period to go, so you could pay it off faster. If your rental properties have a smaller mortgage, I just get them paid off first, have those things be free and clear as fast as possible and then apply it towards your first mortgage where you live. That’s the way I would do it. I want those investment properties to be free and clear and be able to keep all the rent. The only expenses I have are property taxes and insurance and upkeep. What a difference it will make to have all those rental properties which you’re right, it can be leveraged to the HELOC, have that big positive cashflow much, much quicker.
If people want more information, what would be better? Picking up your book?
They can go to my website, MoneyAnswers.com. I’ve got a little video about that. Basically, I link them to the ultimate experts on those areas on how it works and how you personalize it for your own are these people at TruthInEquity.com, who I have referred something over 50,000 people seeking to help with us. It’s always exactly the same arc that you’ve gone through; never heard about this before, sounds too good to be true, interested, involved, implemented, evangelist. That’s basically the way it works. It’s like, “What have I been doing with my whole life? I’ve been paying interest in the bank that was totally unnecessary.”
The power putting this in place is phenomenal. To cut down a 30-year mortgage to five, six, seven years is unbelievable.
You can see why the banks don’t want people to know about this.
It cuts into their profit.
The interest that you’re not paying is interest that they’re not receiving.
Changing gears here, Jordan. You had mentioned briefly you have a project going on CommercialRealEstateIncomeFunds.com. Talk about this.
For people who want completely passive ways of receiving secured real estate income, there are funds that do that. There’s a website for that, CommercialRealEstateIncomeFunds.com. What they do is they make loans, short-term loans, one year, eighteen months, something like that, to high quality commercial real estate developers who use it to either renovate existing properties or build new ones; all different kinds of commercial properties. They give them a slightly lower interest rate in return for a piece of the profits when the building is ultimately sold typically eighteen months later. You, as an investor, get 8% annualized rate paid monthly, you get monthly checks, which you could either take if you want to live off the income or reinvest compounding your money at 8%. Starting eighteen months later, you get a profit sharing distribution when these buildings are sold at a profit. That’s another maybe 2% or 3%, something like that. It could be a total of 10% or 11%. You can stay in the fund as long as you like. The minimum hold time is eighteen months. After that, you can get out whenever you like; no fees, commissions of any kinds, no management fees. The way the management of these funds make money is they’re earning a higher rate of return than 8%. They may be earning 12% or 13% or something like that only in the backend after they’ve performed. They make their fees after it’s already been profitable. You, the investor, get what’s called a preference. You get 8% first before the management gets anything.
In this environment, where you get zero on CD’s, money market funds, treasure bills, accounts, to be earning 8% in a very secure way is a good thing. There are very volatile markets we’ve had with all the craziness going on in the world lately. It’s completely passive. You don’t have to buy real estate. You just send them a check. The minimum investment by the way is $25,000. You send them a check and you start getting checks month one. You can do it inside an IRA, you can do it outside an IRA, both ways. 100% of the money you invest is getting the 8% plus the profit sharing. I’ve been putting money into something like that. That might be of interest to some of your listeners who want to invest in real estate but don’t want to actually go buy homes and collect rents, that’s what I would call active investing, this is completely passive. You write them a check, you get checks automatically.
Some people might be interested in that. We run a fund on first position private notes and we have a lot of people who express interest in that too. It’s about as passive as it can get with hard asset underlying it as collateral.
You are secured. The maximum they’re going to lend against the property or the loan-to-value is maximum 65%. It’s a mix geographically, about 30, 40 different projects all over the country. It’s a mix of property types. There will be some apartment buildings. There might be assisted living. There could be some office building, shopping centers, medical buildings, a mix of all different property types, half of which are being renovated and approved, half of which are new construction. They know in advance what the disposition is going to be. Because they’re adding value, they’ll be able to sell it higher.
I’ll just give you one example, Marco. I did one recently. There was a guy with a big house in a university town that he was renting out to two students. He went and took a bridge loan from his fund, renovated the house, so now he could have four apartments instead of two. He had to put in four kitchens and four bathrooms. It was a bit of a construction project. He went to a local bank, they rebuffed him. Banks don’t like these kinds of things at all. He went and got a bridge loan from this fund. Now, a year later, he’s got four apartments instead of two. He’s doubled his income for life. It’s worth it for him to pay an interest rate of 10%, 11% for a year. He knew in advance that once this is done, he was going to be able to rent it out to four students and he couldn’t get a loan from a local bank. That’s a typical example where adding value and knowing for sure in advance his income is going to be higher up because of the way he’s improved an existing building.
Jordan, you’re the author of Master Your Debt, great book. Thank you for the copy. Tell our listeners how they can find you and get more information.
My website is MoneyAnswers.com. I’ve got loads of links and videos and all kinds of things on there. I’m glad to take emails from your listeners as well. There’s a little Ask Jordan box and a button there. I’d love to help people in all these different ways. This is just a small sample of the resources I can offer people to help them in all aspects of their personal, it’s not only real estate but credit cards and insurance and investing and all kinds of different things. That’s why I’m the Money Answers Man, I love to help people answer their questions.
This has been powerful stuff today. I’m hoping that our listeners take advantage of it. Thanks for being on the show, Jordan. I’m sure we’ll have you back on down the road. We appreciate your time.
Thanks so much, Marco. I appreciate it.
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