How To Integrate Income Properties Into A Financial PlanJul 09, 2021
If there was a better, smarter, and safer way to...
- Financially evaluate an income property
- Know how real estate works in a financial plan
- Learn how to find, acquire, and manage real estate from afar
...would you want to know how? That's exactly what we're going to talk about here today.
Intro to Randy Luebke:
My name is Randy Luebke. I am actually the co-author of Mark Kohler's most recent book called "the Entrepreneurs Guide to Financial Freedom", which is available on Amazon, and Audible. Mark and I have been working together for about six years. Every year for the last five years we do all-day real estate, and financial planning training sessions around the country. We do one in Seattle, Chicago, two in Orange County, where I live, and then we do one in Honolulu.
I'm a registered financial consultant, investment representative, certified wealth protection planner, and certified Medicaid, the planner. I'm a real estate broker, mortgage broker (32 years), and I'm also a life insurance agent.
Basically, I do everything that there is financial, except for taxes and I'm not an attorney--that's why I partner with Mark Kohler because he is a CPA and attorney.
Between the two of us, we can really cover the waterfront. I think what really sets me aside as a financial adviser is it's not all about stocks, bonds, and mutual funds. Stocks, bonds, and mutual funds are viable tools. We like them, they have their purpose. But with a background in real estate and being a real estate investor, I realized that real estate is really a wonderful financial investment.
If you don't believe that watch the first session, because we went really deep on why Real Estate's a great investment back, we're gonna cover that a little bit here in a minute.
This is our disclosure: Investments are subject to risks, including market interest rate fluctuations, investors can do lose money, and unless otherwise noted, they're not guaranteed.
Any investment, whether it's real estate or anything that you're getting involved with...It's important to make a knowledgeable and informed decision.
In all seriousness is, you know, these are investments, we got it, we got to be smart, we got to know we got to understand the investment, make good choices and decisions about the investment or don't do it, you better stay on the sidelines. So we talked about in the previous workshop, the three states of money, going back to high school, the three states of matter, everything could be solid, liquid or gas, it has to be one of the three at the same time. There's no choice. Everything in the universe works that way.
Money is the same thing. There's no choice here, money is going to be spent lent loaned out, or invested. Spending has a cost called what anybody you spend when you spend your money. What happens is God right, when you pay taxes, you spent your money, that money's gone, and the opportunity to make money from that money's gone, and it's gone forever. Right? So there's a class associated with spending thing when you buy a home and owner free and clear, you financed it. And you find this to 100% with your own money, right.
Whether you put 20% of your money and 80% of somebody else's, or you put 100% of your money 100% of that purchase is always finance. That's important. Spending lending. We talk about banks and bonds. And again, thanks for really good about making us feel really good about doing a really dumb thing, right, which is we give them our money for free. Right. we lend them our money, we deposit money into our checking account. We think it's a good thing to do and to make us feel happy when we make savings, right. And we buy CDs from the bank all forms of lending to the bank as little or no interest as well, right?
By the way, if you look in your wallet, you find greenbacks in their little dollar bills was the same as a little about Dollar Bill. Bill, Treasury note is another is a short term loan, like a bond is just made to the federal government. What rate of interest Do you get paid on those greenbacks in your wallet? Zero, right. So the point is up, investing means only right. So we buy real estate we invest in we own it, stocks, we own things you can all okay. So the point of this is that money has to do something it never can be one of the can never can be anything else. But one of these three, it always has to be one of these three, at one time, does that make sense?
Three snakes of money, it's in the book, isn't the book in the corner of the book, go deeper, and fly through this park. And there's not a lot of people here. So we probably won't get off as many cats as I did last night. But last night, like five minutes after the end, I finally got to the point of my whole presentation. So I'm going to get through this recovery recap here. Why do we like real estate, great rates of return, right? That's the biggest attraction, you can get great rates of return on real estate investment, great tax benefits.
I'm a financial consultant, I spend a lot of time constantly with my clients and how to minimize their tax expenses. I really don't know of another investment that provides as many tax benefits and as good tax benefits is only in real estate. Right? It's just a really great tax tool. You know, we talked a little bit about 1031 exchanges, everybody familiar with 1031 exchanges, right? The right theory of a 1031 exchange is why we sell the property that we have profit, now we get to kick the can down the road on paying those taxes. And we'll kick the can and we kick the can and what happens eventually.
You die. Yes, we die. And it's okay. Well, not okay. But you did, because it's gonna happen. The way that does all that profit you kicked down the road gets a step up and basis. And now that real estate passes to your kids, your heir's tax-free, right? 1031 is a beautiful thing. We have another tool called the deferred sales trust, which works similarly. And I like the 1031 exchange, which is limited to real estate, a deferred sales trust can be used for any appreciated asset. So if you have a company that you've grown in value, stocks, that's grown value, artwork, whatever it is, it allows you to let that appreciate asset be sold. And then to defer the gains.
The taxes I should say on that, as both games at some point in the future is called a deferred sales process. Another good thing we like about real estate is this multi-generational, right? You buy this piece of property. And if hopefully, your kids become interested in real estate, and you teach them how it works, you can pass that property on to your kids, and their grandkids and your great-grandkids, and how wonderful it to continue to build wealth that you can pass on from generation to generation, right, growing that wealth along the way.
And again, when you die, you need to pass along tax-free to them generation after generation. And then finally, I think the number one reason that you're here. And the number one reason I find real estate investors across the country are interested in owning real estate is because of control. Right? You're in charge. Wall Street, you have no control. Right? You go along for the ride. You hope you got on the right bus, you hope it's gonna take you to the right place. And if it does, you make money. And if it doesn't, you got off in the right place and get killed.
That's the way it works. Okay. But with real estate, you have more control. It's up to your, your smarts, right, you're cutting this your strength, your willingness to do whatever it takes to make it work. So control is a big thing for real estate investors. They love that. What do we not like about real estate? It's complicated. It's messy. It's expensive. And the biggest thing as a financial advisor, it's illiquid, right? You can't just cash up that piece of real estate tomorrow, like a cash flow from it. You had to sell it, you might not be able to sell it because it's a bad market. And there's no financing, right? Well, there might be something wrong with the property. So real estate is an illiquid investment.
All I can say to that is each one of these four things that make it that are not good things about real estate are in for more good reasons to own it, right? Because if you can deal with a complication and the mess, if you can deal with the amount of money it takes to get into real estate, if you can deal with those things and deal with the liquidity, then you get to take advantage of those great rates of return and all the stuff on the left side, Real Estate's a good investment. Okay. We talked about the stock market, Dow Jones industrials, s&p 500 and now we're going to talk about financial planning. Okay, I'm a financial planner versus your financial consultant.
Most people when they walk into my office, at least the first time, this is what I see. They have money in their 401k IRAs, they have money locked up in the market, right? It's in typical securities types investments, and it's trapped. They go to the stockbroker and they go, you know, I went to this seminar. in Provo, and it was often this, they said we should invest in real estate.
The guy that Edward Jones says, I can help you with that. We got these greets. Right? It was. So what's that? Well, it's a real estate investment trust, all they do is own real estate. And you know, what is real, it's a stock, right? It's another security, right? factories might even only own mortgages, there is a mix of both right? Doesn't make reach back doesn't make any of this stuff back just because of it. It's just not owning real estate directly.
That's different. That's what you're here for. That's what you're here to do. The money is their company plans, of course, is unless you leave the company is trapped there, right? You can't get it out to turn 59 and a half years old, right? Unless you have something called an in-service, non hardship, withdrawal privilege, that's a lot to remember. But you can ask your employer, especially if you have a small company, a small company 401k plan, you can have a clause to the plan documents called in service, nonhardship, withdrawal privilege, that allows you to transfer money out before you're 59 and a half years old. Frankly, as a business owner, myself, you know, the business owner is the sponsor of the 401k plan.
Okay, that's important, because the sponsor, the 401k plan is responsible for all that money inside the plane, you have literally if the plan loses money, or they have bad investments, big debt employer owner could be sued by the employee, pretty bad situation. So frankly, if you really think about it, every employer should have an in-service, nonhardship withdrawal privilege in their 401k document, because they should get that money out of there. Right. But the pert, let the employee take the deduction, that's what they want. But then let them put it into their own IRA, where they can self-direct it and do what they want other penalties to use The good question is other penalties to do that? The answer is absolute no. Right?
It's a rollover, just like a rollover, when you're 59 and a half, or when you have a hardship, like the fire leaves the company, you can fire. And there are a few other reasons that you could get your money out of the 401k. It's not a taxable event, as long as you roll the money from one trustee to the next. Don't touch it, if you do touch it. Yeah, get rid of it in 60 days, right? You only do that once a year. Kind of a dangerous, dangerous thing. But no, no in-service, non hardship, withdrawal of religion is, is not a taxable event. It's just a way out, right? It's just the way out. So, oh, this is another thing. If you guys are out there looking for money to do investments, you're fine.
People have money in their 401k ask them, if any of that money came from a previous employer, a lot of people will do that they'll roll the money from one employer 401k into their new employer 401k because all that money from their previous employer can be rolled out directly to the in-service, nonhardship, withdrawal to others as part of the 401k law doesn't have to be in the plan document. That's important, as well. Okay, so what can we do right now? That's the question to say, this is my problem with money stuck in my 401k? What can we do? Now? I want to know if the real estate I already own is worth keeping, right? A lot of people have purchased real estate along the way they have it or maybe they inherited it. But is it really still the right thing to have in their portfolio?
Right. So we're gonna help you with that? Should I purchase more real estate? And how do I create an ongoing lifetime income stream, which is what I call financial independence? This is what we talked about a bunch. So in Singapore, it's a new block. And it's a new book. So you know, really, I move off a little bit of a tangent here, but two, three generations ago, they didn't meet me. Didn't need a financial planner grew my great-grandma and great-grandpa did, because what do they do? went to work 2030 years from the same employer. 40 years.
They retired With what? pension, right? They had a pension, that assault Social Security check coming in every month, they probably own their home free clear, right? Because they live in the same home their whole life, right? So they're paid that mortgage job, and now they're retired. So it was a little bit of savings in a pension in a form of social security, a little bit of savings, no mortgage, they could live a nice, comfortable life for the rest of their life, which by the way, wasn't all that long.
Because that was the other thing that happened during retirement, Grandpa, unfortunately, we passed away about five or 10 years after he retired and he retired at 65. And by 73, he was dead. Right now, Grandma, of course, he's got a little bit of life insurance, right? That helps her improve her situation. And then you also got to remember this since 1945.
After World War Two, essentially, the stock market has gone up, up up up up in value, right. So the increasing debt in appreciation of that savings, they have savings rates, you know, I'm all I confess I'm both I'm 60 He's 66. And April. I'm bragging about that because I feel pretty good for 66. Okay. But back in 1980, when Jimmy Carter was president, anybody remembers that when Jimmy Carter was right, you got?
Yeah. Jimmy Carter, right. So you can go down to your local bank and put money in the checking account. And they were giving you 12% interest in your checking account, you can get a CD for 18%. Yeah. So what happened since then is interest rates have gone down, down, down, down, down? Well, bonds go up in value as interest rates go down, down, down, down, down.
So grandma had all these bonds that were increasing in value, right with it, and they got a pretty good coupon, the interest rate Anyway, she had her social security check going up every year with inflation, right? She had her guaranteed pension for life. She didn't need a financial planner. All right. And then when she died, she passed all this stuff on to you know, her kids, and they didn't even want either. Well, no, they did.
Because what happened just two generations ago, how many people have in this room even have parents that retired with a mortgage in place? Right now, there's not a lot of people there, but a lot of people do. And people are living a lot longer, much longer.
And because of that, as they live longer, the cost of health care gets more and more and more expensive, right? bonds are, you know, mortgage rates or type of bond, as the lowest in decades, decades, and decades and decades, right? So they don't have the bond prices going up. So they don't have the volatility in the stock market. Bonds aren't going up in value, right? The cost of living is going up, the cost of healthcare is going up. If they have a mortgage, they have to deal with that, too. It's way different.
Now, the tax situation is far more complicated as well. Right? So it's very different, right? So the point of all this is what we care about today is not retirement is not about getting that gold watch. And getting that pension check is most people unless they work for the government, their teacher, or Sheriff or they work for the state, we're going to get a pension, all the rest of us we don't think can happen, right? What we want is financial independence. Here's my definition.
When the assets you have to provide the income you need to live the life you want. Okay, when the assets you have provide the income you need to live the life you want. And you can do that when you're in your 30s. You can do that in your 50s. You can do that when you're 60. Right? In other words, you can become financially independent at any age. And if you choose to work, great if you choose not to work, great, right? We just want to make you financially independent. That's our job to get you there as fast as we can. Okay, so that's the question, what can we do right now to achieve financial independence? Let's talk about what financial planning is what financial planners are. And it's kind of go into that a little bit here.
This is a local guy here. His name is Carl Richards, he's I think he's in Park City actually is a financial advisor who works out of Park City, draws these things for the Wall Street Journal, I love them. Okay? So because they're so simple, but they tell the story. So this is a traditional financial plan, you make a bunch of assumptions, you wait a long time, and you see what happens. Right? So taking out the spreadsheets and the colors, and the codes and the bar graphs and the charts and this and that the other stuff, they're giving that to you, and you're in your 30s and like, you're gonna wait like 40 years, and it's gonna look like this and get richer. That's a financial plan. Okay, the problem with that, right is, you know, you're trying to use a linear approach to a nonlinear reality, right?
Life doesn't go straight up in a row, right? Life has ups and downs, things happen, and you know, good things and bad happened in your life. So using that linear approach, that traditional financial planning approach just doesn't work. Real financial plan? Is that intersection between your money and your life, you know, what's your situation, I have clients that have longevity in their family, my wife's grandmother lived to be 103 years old. There's somebody on the planet today, statistically, that's going to be 150 years old. That person is like, we don't know where we all know what sex they are. But that person could be 150 years old is there, that's you.
You're gonna need a lot of money. The point is, it's more personal, right? Financial Planning is very personal. It's not about spreadsheets and the bars and graphs. It's about listening to what your reality is, what your family's situation is. That's another thing. You know, grandma, grandpa probably remarried your whole life to 40 5060 years, right? The amount of America today, people might have been married two or three times, they might have a couple, you know, sets of kids and increasing ex-spouses and who knows what's going on. There's just all the stuff that filters into the financial planet. It's pretty fun, actually. That's why you keep doing it right.
So the financial planning process, so you have a necessity, created my own financial plan, planning process. I looked at the CFP model, the Certified Financial Planner model, which is like the model that you got to go by, and I didn't like it. And the primary reason I didn't like it is again, the reason we're all here, it was really still all about stocks, bonds, and mutual funds. It really was. And it didn't help, I didn't feel that it covered all of the important parts of what a financial plan is. So let me describe for you what they are. The four by four stands for four essential elements, and four sequential steps.
These are the elements. So your income independence, asset protection, legacy preservation, and tax optimization, we'll walk you through each one of those income independence, what we just talked about five minutes ago, the assets you have, but Newcomen need to live the life you want, right? That's a primary goal, we got to get enough assets together to provide that ongoing lifetime income for asset protection. You know, when he gets stuff, people want to take it from him.
They do, right. And I don't like talking necessarily about a guy with a gun. But there are people that will swindle your money, there's the IRS that always has their hand out, right. There are people that will take your money, and we're going to help you protect it. By the way, those of you that are number you know what your biggest asset is? Anyway, what you get, it's your ability to make money, right?
It's your ability to think your ability to work and earn money and provide for you and your family is the biggest asset, a lot of young folks outright, and you need to be able to protect that. That's part of asset protection as well. So it's not just about corporations and LLCs. And, you know, all that kind of stuff. We use those as tools, but it's much more it's much broader than that legacy preservation, that's passing things down to our heirs. Right? How do we take what we talked about real estate being a multi-generational investment, Real Estate's one of those things we have to do.
The problem is, Marco's just watch your marketing, anybody who sees Mark Kohler thing is fine. He's a lot of fun, you know, you know, when you die, you're you don't have any control over your money because you're dead, right? But you can have control over through a trust, right, you can like mark the cloth, and you can control your assets to the grave. And that's important too. Because, again, you want to protect your kids from creditors, you want to protect your kids from yourself and then making bad financial decisions. Right. But for me, it's also more about not more about but also about what if you're not dead, but you're not able to make decisions about your money? In other words, what if you had a stroke, right? Or what if you develop Alzheimer's or dementia, right? So now you're alive. That's kind of like a worst-case scenario. Now you're alive.
People are making decisions about you know about you and your money, and you can't do anything about it. Unless you prepare for it and want to do it. That's one of the elements of a good financial plan is legacy preservation. And then finally, tax optimization. Taxes are black, single biggest expense period, you will spend more on taxes and your life, anything more than your mortgage more than your credit card interest more than, you know, whatever it is you think you're spending money on. Uncle Sam's always got his handout, right?
And so we want to help you to minimize those taxes. Because what do I say about the three states of money, right? stem land in spam, land invest, right? When you pay taxes, you're spending money, it's gone forever, right? So we want to be able to help you keep more of that money by optimizing your taxes. Those are the four elements. How do we do that? We use these four sequential steps. Step number one, optimize everything. What does that mean? No, you're a little older than say the guy behind it. That's a gift.
You probably have a whole bunch of different things that you've accumulated different strategies, different investments, different things that are going on in your life, and you're certainly somebody coming right out of college, right. So what we do is we lay all our cards on the table, we want to see all of the assets you have, we want to see all the different liabilities you have as well, mortgages, student loans, cars, leases, all those types of things.
Then we consolidate, simplify, right? And put all those things together so that you have a system that you can not only manage, but you know that everything you have is doing all it can for you. That's optimization. Step one, by the way, that can be you know, something that takes us a month to do together. It could take us a year just depends on you know, what you've got going on your businesses and we're having a lot of real estates, you can get more complicated, but that's the first step. The second step is I want you to eliminate that.
Anybody Dave Ramsay fan? Yeah, I like to I like people. I do see a lot of people who have seen my stuff here because he influenced me early on as well. I like to think that I take a lot of what Dave does, and I made it actually better. Right? Because they actually proposed me I've heard not me personally, but he talks about, you know, financial gurus to talk about two kinds of debt. Dave, there are two kinds of debt. Okay. There's good debt, there's bad debt. There's good debt, which I call productive debt and there's bad that I call reactive that reactive debt is a debt you used to acquire things that usually get consumed or depreciate in value, right?
So you buy a car goes down in value by boat goes down, now you got me on a trip, whatever it is you put on that credit card that you bought, that doesn't produce income he appreciates goes down in value, you have debt for it, that debt one it all go away, right? Student loans, leases, car loans, credit cards, by the way, as a financial planner, if I'm going to lose somebody as a client, this is where I live. Right? Because I see it all the time people come in, believe it or not, 7080 100 $120,000 worth of credit card debt. Imagine. Yeah, I mean, it's huge. I do see people come in more and more often with huge student loans too huge student loans. I had, I had one guy, just recently $500,000 in student loans, is a doctor and you can actually afford it, you know because he's gonna make about a million bucks a year.
What's worse is the person that has a $150,000 student loan got, I would maybe call it healthy, we haven't seen your mind, you know, I would degree is not gonna make any money. Basically, we're gonna make $40,000 a year, right, and you have $150,000 of student loans, right, is that these are all bad debts, what goes gone, right. And so we put people on a debt plan to accelerate those debts, we use a technique called snowballing, which is Dave Ramsey, and we make that debt go away as fast as we can. And again, a lot of people that I meet don't want to do that. It's like the guy this morning, you know, his legs cramped up, and he wanted to lay down and not move.
But with the debt, we got to make the debt go away, because the depth doesn't go up, go away, then all that money that's going to serve the debt can't go into financial independence. So we have fights over that. Right? As I said, this is the place where all these people, because you know, they want to get to step four, which is the saving the task, right? Mark likes to say, you know, that's like, I want to get to the dessert tray right away. That's the dessert tray, the flag stuff, right? paying off debt isn't fun, especially when I tell them Yes, right. You know, we can get you out of debt, just like two years. And they're like, you know, depressed. But when you look at the credit card statement, as they looked at them in one payment, they see that they're going to get out of debt in about 20 years, that they paid those minimum payments, right?
So who is better than 20? Right? Pretty simple. And anyway, we get a deck. And then the third thing if you want to establish significant liquid cash reserves, I think there's a slagging there, we're going to go into a little deeper with that. I'll save that for a moment. And then against that, so four steps, four elements. This is what a financial plan should look like. Okay. Financial Planner, real financial planners, fiduciary consultant, and Coach, what is the fiduciary?
Tony Robbins, who wrote two books, was a really small picture book recently. And he really uncovered a whole lot of stuff in there, which I was pretty happy to see. what he found was the 93% of the, quote, financial planners work for broker-dealers, right, which means that they're held to what's called for duty, not a fiduciary, but a suitability standard, right. Now, what does that mean?
The suitability standard means I can recommend that you should buy this investment, invest your money into this particular investment. And if it goes south, and you lose all your money, you can't sue me, as long as you can afford the loss. So if you can take the hit, I did my duty. Okay. fiduciary can't do that fiduciary has to always do what's in your best interest. That doesn't make us you know, God, it doesn't make us anybody that's smarter than the next guy down the street, but it does make us accountable to make a decision not based on my commission, or based on what's best for you. Right.
So real financial planner, first of all, should be a fiduciary, right? But you ought to be acting in your best interest. And most people don't even know that their advisor is not a fiduciary for that. They work for a broker-dealer and they're responsible primarily to their employer. You know, consultant and coach again, a consultant is about analyzing the situation and helping you figure out ways to get it done.
That's what consultants do. Here's your problem, how do we fix it, and then the coach helps you along the way, right to make sure that it happens. I put this is on our website team, you can read it to smaller read understand that, but I went through Tony's book and I found his seven characteristics of the ideal. This is a great thing to take to your financial advisor. They argue that and Tony must have called me before I wrote the book because I also have another good thing. Good thing. Okay. Next thing, before we get into the part of the actual numbers of it, this is another thing I like to watch.
My clients would call it the perfect investment. Okay. I just asked them to look, if I have an investment, it was 100% safe 100% liquid, it gave you 100% rate returns on your money, and it was 100% tax efficient. So you got a tax deduction when you put it in. It grew tax-deferred and you got Pull out 100% tax rate pretty good, right? And you don't have to do anything for it either. 100% passive, how many guys want to invest in that? When everybody, right and knows what everybody wants?
That is the perfect investment, and it doesn't exist? It absolutely doesn't exist. So the question is, if it doesn't exist, you know, you're going to compromise on something. What are you willing to give up? Right? If I put my money into real estate, what am I going to give up? Mostly acquitted? Right, I'm going to give up liquidity. If I put my money in a checking account, what am I going to give up the rate of return and tax efficiency?
Because even if I did get interested on that money, it would be taxed? Right? So you're always going to give up something in any investment? What are you willing to give up? Okay, it's a good paradigm to look at investments, right? To help you understand what you're, what you're doing more depth in the book, right? There's a little bit in the book. This is a list. Mark Kohler said, Hey, can you like give people examples? So I put this little matrix together, of all the different types of investments I could think of so here's, you know, checking, savings, money, market account stocks, bonds, commodities, mutual funds, exchange, traded funds, income, property notes, life insurance, businesses, annuities, and again, where the state is, you know, lending investing, you know, tells you what the state is, and whether you can see, none of them here are perfect, right? income property? Almost, right. The almost This is the liquidity, right, that you've given up.
No investment, perfect. No investment perfect. Yeah, I was gonna give up something. This is not in our book. It's almost there, we just have quiet time to get in the book itself. But this is a matrix because when you started out investing, we had to build the foundation, right of where we invest. So I don't know if you can read this. But down here, I have a Roth IRA and the Kaleen, I'm assuming that we're, I'm starting with a young person for the purpose of the matrix. And if you're older and have more money, and maybe up here somewhere, but the idea of a Roth is that you know, you pay the taxes today, right? And then the money goes in there and it grows tax-deferred, and you can take it out tax-free. That's pretty cool. Right? problem is with that, that the formula.
You may remember this, I think from like, junior high school math, algebra, but remember, a times b times c equals v times v times a member that at all, so one time two times three equals six, three times two times one equals six. Okay? So let's pretend A is the tax you pay in your money going in, and B is the interest you earn on that money over time. And then C is the tax you pay when you take the money out. Okay? So I start with $100,000. Okay, and I'm gonna put it in a traditional 401k I get the whole $100,000 that goes in why because a tax I paid upfront is zero, right? Because it's all deferred. So my $100,000 goes into my 401k. Now, let's say over time, $100,000 becomes $200,000, doubles in value. Okay, and now I'm going to start withdrawing the money, see, and I'm going to pay a 25% tax.
So my, my 100,000 went in intact, everybody got that? Right. And it doubled the 200,000. And now I'm gonna pay 25%. Tax when I take it out. How much do I get to take out? Any 150,000? Right? 25%? tax, like $150,000 of spendable money net, okay, Roth $100,000 25% tax, because we're gonna keep the taxes the same.
Okay, how much goes into my Roth 75,000 75,000? doubles? 252? A pay me tax when I take it out? No, what do I got 150,000? Wow, they're equal. They're equal, you get that? The Roth and the 401k are exactly equal. So if I can't have a change in my tax rate, when I take the money out, a Roth doesn't necessarily a magic bullet, that's going to make you all kinds of money. It doesn't matter, right. So if I believe my taxes will be lower. When I take the money out, I'm better off putting it in pre-tax today. If I think the taxes are going to be higher tomorrow, then I'm better off paying the taxes today, getting it over with, and then withdrawing it without paying taxes on it. That makes sense. Right? no magic bullet.
Now, who knows the taxes will be higher or lower in the future? Anyone? No one, right. I mean, that you got a government that's in debt over its head, right. So we got you to know, we got that, right. That is positive, the likelihood is taxed will be higher, but the reality is none of us really know. So the solution for me is to diversify, right? diversify taxes, just like you would any investment. And so you might have some money in Roth, and you might have some money in Roth like investments this Cally is a cash accumulation life insurance policy, which works just like a Roth the benefit of the callee though Let me put it this way, we love the Roth because we can put the money in it grows tax-deferred comes out tax-free. The problem is we can't take it out of that until we're 59 and a half, or we're going to get, you know, some penalties, right, we got the width, and we get five years and a few other things. Plus, once you take it out, you can put it back in.
Plus, if you make too much money, you can't put it in the first place. Right. So the callee doesn't have any of those restrictions, you can put the money in today, you can take it out tomorrow, you can put it back in the next day, you can make a million dollars a year, right, and you still have the ability to let that money grow tax-deferred and pull it out tax-free anytime you want. So I put it down at the bottom because it's a great place to start. For somebody that that's younger, we use calories, a lot of different ways. But that's one way. And then you see the next level up, I put IRA, I put some Roth conversions, I don't advocate Roth conversions across the board, again, for the reasons I just told you, unless you know that your taxes are going to excuse me, your taxes are going to be different in the future than they are today.
A Roth conversion may not be a good idea ever, right? And then it's a good time to start investing in a property real early, right income property. You may actually put primary residence here, but a lot of my clients will invest in income property before they even own their home. They're renters. Okay, they're renting property, but they're buying investment properties to rent others, right? Why? Because they want to create financial independence, they want to create that asset that provides ongoing income. So someday, they won't have to work. And you work your way up the matrix. And we have some really good fancy things cash balance.
But you know, 401k, we like it better than the IRA, because you're able to put away a lot more money, right. And, and you can do more tax efficiently dollar for dollar, you're still between the 401k. And the profit-sharing plan, you're limited to about $60,000 a year. But when you add on what's called a cash balance with a plan, which is a special kind of defined benefit plan. Now we can deduct to $300,000 a year. That's significant, right to $300,000 of pre-tax money going into your retirement plan that you can self-direct, that's a big deal. In the captive insurance company, you can put over $2 million a year in tax. Well, tax-deferred, and well anyway, lots of money.
So this is the matrix, okay. And it's not in the book. But if you want this, I'll email it to you. Just send me an email that says matrix. Okay, I'll send that to you. So now we got to get into the real reason I brought you guys here. So this is a spreadsheet that I created for the clients that come to me, and they and this particular client had a bunch of rental properties already. So the first thing they want to know is should they keep them, right? So you missed the first session on how to evaluate real estate. So, unfortunately, you're not going to get this, but we put the properties in here. And we do a quick evaluation, our V factor, and it tells us whether we should keep this property or get rid of this property, whether we should take equity out of it and put it into more properties or not. Right. So it's a quick and dirty evaluation of their entire real estate portfolio, which we pull off their tax return.
Now, I'm going to take only this kind of pullback here. Let's see we have six properties and rentals. And then we have a primary residence where the first and the second I got that. Now, what can we do? So we have the value of the primary residence $400,000 and they owe $287,000. on it, I'm going to say they have $125,000 in cash investments earning 2%, they have a 401k of $250,000 only 5%. Maybe they have $995,000 of rental properties, that's giving him $7,375 a rent per month, not bad.
They owe $546,000 or the average interest rate that we got through that previous spreadsheet 5.85% their average term left on their mortgages is 25 years. Okay? All looks pretty good, looks pretty normal. They have altogether $470,410 tied up in total equity in that property in those properties, a lot of equity in that real estate, right? So scroll down to the bottom here. And we can evaluate this right now. But that's $7,862 a year is providing them a 1.7% return on their investment. Not that good, really right? Because what's happened is they bought good properties, and then they appreciated in value. So all that equity is not earning them any interest anymore.
They're getting a principal reduction of 60,060 $700 a year, they have depreciation and you put it all together, and this little portfolio is giving them about a 4.6% rate of return on their money. So that's all the money they have in real estate, all the money in their 401k all the money they have in savings. What can we do? Let's see what the potential would be. Okay, so we take that $995,000 of real estate, hypothetically, we're going to sell it all right.
No, we're not going to really do that. We just want to show you what you could do. And we're going to pay 8% selling cost to do that. So 6% Real Estate commission 2% costs, and we're going to pay off the loans, and we're going to have $368,685. Instead of those properties, the average RV factor, I think was below point 7% of is a pretty low rent to value for those that missed the first section to gross rents divided by the value of the property, we're going to repurchase more properties, but with a higher RV factor of 1%. And we're only going to put a 25% down payment. So we're going to leverage up sorry, Dave Ramsey, we're going to leverage up our investment. Why? Because that leverage is going to increase our rate of return and actually reduce our risk in owning these properties.
Why is that, because we're gonna have more cash than we can set in cash reserves, we're going to have less equity for some lawsuit potential, so we get asset protection there. And we get to buy more real estate, which is going to give us more diversification because we own more properties to get more sources of rent from so all those reasons, advocate, let's put a smaller downpayment and buy more properties, how many more properties we're going to buy $1,140,000 worth of real estate, okay, remember, we had almost a million now we're going to get $140,000, more with an RV factor of one. Now let's look at what that does to our rate of return. And again, I'm skimming through all the details of the calculations, because it was in the first session, you can watch that first session to see how I came up with these final numbers.
But what I did is I took away 25% of the gross rents, right and just right off the top, and paid for the new mortgage at five and a half percent. And here's what happened, my cash flow went from $7,000 to $27,000. And I'm now getting a 7.4% cash on cash rate of return.
My principal reduction went up to $10,000 year 2.9%. My depreciation because I went from properties that had high land values to properties that had high building values because the land I can't depreciate, went to $33,000 a year guaranteed by the government for 27 and a half years, right? Whether I have a tenant in there or not, I'm going to get this income. That's another 9% a year, but that together have no appreciation, here's what I'm looking at 19.3% on that money that was sitting in that real estate $71,000 a year pretty significant change. This is taking the real estate and paint, taking the haircut on all the selling costs, and transforming it. And then I go But wait, there's more. Because what if we took the house and pulled a little bit of equity out there? Say a 75% loan to value if we could earn 19.3%? on that excess equity?
That's another 20 $300? What if we took the liquid cash reserves from $125,000? down to 100? Assuming to 100 from 125 to 100? And what if we took a loan on our 401k or money trapped in a 401k? Right, we can take a loan of $50,000 pay ourselves back, remember all the interest that's on that 401k loan that you're paying is going back to you, right? Who's paying the interest on that 401k loan, your tenant, right, because we bought real estate with all that money.
So now I have another $1,324. So what we did is we transform that to $14,869 of income, same net worth of $935,300. But my return went from $40,000 a year to 4.3%. Remember, that's everything real estate money in the bank money in the 401k to $86,000 a year with a 9.2% average rate of return. And we still have 25% equity in your home, we still have half of our money sitting in our 401k we still have a lot of your 25% equity in the properties we had. Now, is this the right thing to do? Probably not. But is it a possibility? Absolutely. And that's what I showed my clients, you know before he asked this question because I've only got three minutes. Let me, Yeah, but it has the next session.
Alright, great. So let me just roll back to here. So again, what I'm showing you is possibilities what I'm showing you is something a Merrill Lynch will never show you right in gonna happen. So let me flip back to the PowerPoint here and come back up. And then we'll take questions because I'm the next speaker so I can talk as long as I want. Okay, so takeaways from session two, there's no perfect investment including real estate. It's not a perfect investment. a financial plan is a process. It's not a sales pitch.
And unfortunately, a lot of sales. financial plans are about to buy stocks, bonds, mutual funds, life insurance, this all comes back to it's really about you and your life. Financial planners, a fiduciary, a consultant, and a coach. You can and most importantly, you can really live the life you want. This kind of ties in with the guy this morning. You can really live the life you want tomorrow if you start to make better, smarter, safer financial choices and decisions today. If you want to walk out of here with one thing, that's the best thing to walk out of here.
Now of course is handing out a financial assessment. This is my little giveaway to you. So a couple of things, we have about 20 copies of the mark Kohler, Randy Luebke book out there still to, to sell the 20 bucks a piece, I'll be happy to autograph it for you, I think Mark still here and he'll do the same. You're all going to get a financial independence toolkit, which is a really, it's a great get gifts you're going to get, how to budget, you're going to get how to get rid of your debt, you're going to get 12 different financial guides.
And finally, as a consultant, I charge 265 an hour for my time. But everybody for being here is going to get 30 minutes of my time for free. And your ticket for that 30 minutes is to give that assessment to Cory when you leave here today. So if you have time, between now and the next session, fill it out. If you don't have time, at least put your name and email on there. And Korto gets back to you because we want to get that assessment because when we have that consultation, I want to have a good idea about what's important to you and what we can do to help you. So thank you all for attending. And now I'll take your last question.
When you look at the calculations, you're ready to return when you move money from 401k. Yes. Can you account for the last gains that you would have received in for Okay, yeah, the question was when I took the money out of the 401k did I count for the money that was lost because I was in the rate of return on the money in the 401k was 5%. But now it's gonna get 19.3%. So it's actually you're gonna make more money because I took it out. What I thought you're gonna ask me is did I account for the loan? And I did, right? Because the loan is 5%. And I even took it out and pretended you weren't going to get it.
But the truth of the matter is that 5% that you pay an interest goes right back to you. Yeah, so there wasn't a loss, it was actually a gain. And the more money I could have taken out, the more money I could have made, which would have made it even better.