Use Private Money to Fund Your Business and Investments

When I do seminars all over the country this is one of the top 3 topics each and every time without fail. I don’t care if the group is a bunch of beginning investors just starting out with limited cash or a group of millionaire business people. The people just starting out want to know how to access capital without all the red tape and ridiculous demands made by a traditional bank. The millionaires want to know how to loan out their own capital safely and at high rates of return. The truth is the banker you are trying to obtain money from has no idea how investment real estate or most businesses really work. You would be surprised to learn how little income most bankers actually make performing their jobs. Most people in these positions really care more about the prestige, titles, and their standing in the community than their actual incomes. It can be very frustrating dealing with a traditional banker when you are trying to achieve nontraditional goals via nontraditional methods. This is very similar to the frustration if you spent 30 days trying to put your round peg through the square hole. Most bankers are NOT business people and are governed by an old style economy way of thinking. If you want to make your entrepreneurial endeavors as easy as possible, you will need to start developing private sources of funds. Contrary to popular belief, banks don’t hold a monopoly on financing projects. There are many other sources to fund properties and projects. Just a few alternatives are:

  • Finance companies
  • Insurance companies
  • Government entities (national, state, and local)
  • Sellers of the properties and businesses (loaning you all or some of their equity by taking back a note and payments over a period of time)
  • Venture capital firms
  • Online financing options that act as a type of clearing house for all types of lenders

There is also a huge pool of billions of dollars that already exists of individuals and hedge funds that loan money to fund all sorts of projects. In our examples, we are going to talk about private individuals loaning money to fund our projects. There are people all over the country who are making private loans right now and you want to start knowing how and where to find these people.

Why Not the Banks? Banks require a huge amount of documentation and proof of everything to fund deals. This is especially true now after the last financial and banking collapse ushered in an era of even more regulations and hoops to jump through to get deals financed. Now, even simple straight-forward deals require loads of paperwork and much of it redundant. Many banks are looking for reasons not to do the deals instead of why they should do the deals. When you are talking about buying properties in the 1-4 unit category, almost every bank or mortgage company loan will be underwritten to Fannie Mae standards (FNMA) which are basically controlled by the government. If you’re looking to do anything creative, but yet safe with a financing package, you’re out of luck.

Investors unfairly received much of the blame during the last banking crisis. The fact is that most of the bad loans and way out mortgage programs such as “120% financing” and the “negative amortization loans” were approved for regular homeowners and not for investors. Investors are mainly responsible for stabilizing the real estate markets when they were in free fall. Investors pumped in many billions of dollars of their money to buy in at reduced prices. They have since been responsible for taking much of the bulk inventory off of the market so prices had a chance to stabilize and even increase off of their lows. Even with all of this, investors are many times frowned upon by FNMA underwriting standards and it becomes more and more difficult to obtain financing, even on great, safe deals. If I had a deal on my desk now that I could buy for $100,000 and was worth $200,000, and only wanted to borrow $80,000 from the bank, does that sound like a high risk loan to you? The lender should verify the true value, repairs needed, a little credit (but more character), and obtain a title commitment. After that, they should be ready to close quickly. This is not the case when dealing with traditional banks and mortgage companies. They will want a never-ending list of documents from me to prove I am good for the money. So let’s just not deal with banks to make profitable deals.

Tune in next week when we post part two of using private money to fund your business and real estate ventures. Visit us at www.wealthwithoutstocks.com

Introduction to Fast Turn “No Equity” Homes

The previous articles are what most people think of when they hear the term “flipping houses” for profits. The buy low / sell high method is as old as time and usually requires very little creativity. You must find a good deal, fund it, fix it, and flip it to a new retail buyer for cash. This is a very profitable side of the real estate business but by no means the only, or even the best, way to successfully fast turn houses.  Our next few articles will deal with how to take advantage of no equity and even negative equity homes.  There is a whole other world of profits available to you in the real estate world that very few investors will ever understand or try to implement. This end of the business is buying at higher prices but with attractive terms. When you buy with attractive terms you can also sell using creative terms, creating chunks of cash up front, monthly cash flow, and another chunk of cash a couple years down the road. This end of the business will require you to understand financing real estate at a higher level than just the buy low / sell high business.  Most of the properties in this side of the business are in nice shape, requiring little to no repairs.  My goal is to help you down the road of becoming a real estate transaction engineer.  This would mean that any motivated seller that comes your way you will have the tools to make them an offer (or several different offers) that would make sense to both of you to get a successful deal closed. I want you to be able to make an offer on any deal that comes down your lead pipeline that is owned by a motivated seller. If you only know the ugly or semi ugly house business you are limiting yourself and your income potential.

Think of these upcoming articles as a continuation of the last several real estate articles about flipping homes, but starting after the “finding” article. The “finding” part is almost identical in either case; you are looking for flat out motivated sellers that have problems that you can solve with your offer. This will open up possible deals you could have never done with just the buy low and sell high method. When a motivated seller is talking with you and you quickly realize that they owe $195,000 on a $200,000 house, will you be able to buy this at a huge discount? Almost never—except for the occasional short sale (I will not be discussing short sales because they are not nearly as profitable or common as they once were) or if the seller is willing to bring $50,000 to the closing to sell to you at this time; which will happen about never.  For example: the seller has to relocate and is motivated but cannot sell their house at a cash price that will make sense to us and our criteria. For most investors that is the end of the conversation because they are one bullet hunters; they are the “Barney Fifes” of the real estate investment world.  I do want to add one extra strategy for finding the kinds of homes we are going to talk about in this chapter. A great pool to fish in will be expired listings from your local MLS system. You will either need to be an agent with access to this system or work closely with one that is willing to share information with you in exchange for your loyalty when you or someone you know needs a good real estate agent. A great lead source (for the kinds of houses described here) are expired listings that occur every day in your own backyard. Listings expire for many reasons but one of the most common is that the list price is too high. Why is it too high? Again, there are many reasons including a thick-headed owner that does not understand the free market telling them that their house is listed too high in relation to other similar properties. The condition of the home is secondary. After all, you can always adjust the price to accommodate almost any problem with the condition. Many times the price is too high because the seller owes too much on the property and is trying to sell the home for enough to pay off the house and pay a real estate commission. If they are unsuccessful with this route they will need other solutions. Some in this position will just stay and wait but many can’t afford to stay and wait and must move now!  Tune in next week for part two of this article on how to profit from over financed properties.

How to Make Investment Real Estate Profitable

All profitable real estate investments start out at the same place and that is where you must:

Find a Good Deal

The term “good” is such a broad term and is in the eye of the beholder. My definition of good and yours might be totally different. From the perspective of a guy who has bought and sold tens of millions of dollars of real estate let’s talk about what’s a good deal. This assumes you want to buy a fixer upper cheap and rehab the property for immediate resale. This also assumes you are going to cash out of the transaction by selling to a retail buyer who wants to live in the property.

You must buy your property at a big enough discount off its retail or repaired value to allow you to make repairs, pay holding costs, pay sales costs, and make a nice profit. The first thing needed is to know what the value of the home is after you put it in nice shape. One of my first mentors, Mr. Nick Koon, told me this “son, until you know value, you know nothing!”

We need to know what similar homes in the same area are selling for and are currently on the market for offered by other sellers. You are looking for as close to your style, size, lot size, school district, age, bedrooms and baths as possible. Does the subject property have a basement? Does it have a garage? These are the biggest factors in pulling the comparables (or comps as they are referred to in the trade).

There are many sites on the internet that will allow you to gather comparables but none will be as good as the local multiple listing service (MLS for short) that Realtors™ have at their disposal to conduct their business. Working with a real estate agent (or becoming licensed yourself) will be a huge asset to your business but make sure you don’t waste their time. I would use these other sites (Zillow, Real Estate abc, Trulia) to get a ball park and then ask my agent for their “comps”. By the way, real estate agents and brokers pay big money every month to have the best information in the marketplace so they should have the best and most up to date information.

If my prospective investment home is a 3 bedroom, 2 bath, 1,500 sq ft ranch than that is the kind of home I am looking to compare against my home. On the same street or in the same subdivision would be great but at least as close as you can get. You are looking for a range of value because no two homes, however similar, are rarely exactly the same. If I see similar homes in nice shape selling for $240,000 to $260,000 then my value will be about $250,000. You would like sold comparables to be within 60 days or sooner when possible for the most accurate snapshot of current market value.

A Simple Formula to Keep You Profitable

Determine the After Repaired Value and multiply that amount by 70% to 75% maximum. Then back out your estimated repairs. This figure will give you your maximum offer on a fixer upper. It would be nice to buy it for less than this figure but this figure is the maximum you can pay.   Deviate from this formula at your own risk. This will allow you to make a nice profit on the deal. By paying more you put your profitability at risk. The “After Repaired Value” is what your property would sell for assuming it was fixed up nicely to compare with or even better than the other properties that have sold in the last 60 days.

We need to be buying this $250,000 home (depending on repairs) in the $170,000 to $190,000 range.  We will first focus on bringing good prospects and leads to us so we can find a good deal as described above. We will focus on a few key ways to find good deals in this and subsequent articles but we can only scratch the surface. I would like to give you 100 best sources to consistently find good investment prospects. Please visit www.wealthwithoutstocks.com for a free download of the 100 ways to find great deals.

  1. The local Multiple Listing Service- This is usually only a good strategy when the overall market is very slow and there are large numbers of unsold inventory on the market. During those markets there is usually enough inventories in any good sized market to keep you busy.   Most local MLS’s download to realtor.com where you can access millions of listings from all over the country. When your market is hot you can expect to find very few deals on the MLS and the rare times there is a great deal listed it will most likely have multiple offers.
  2. Getting the word out that you are a serious investor and are looking for good deals in any condition.
    1. Get business cards made stating that you buy houses, in any condition, any area, and close quickly. Buy 1,000 and leave them all over and pass them out as often as possible
    2. Over-sized flyers stating the above as well as domain name for a website. May consider passing these out (services do it for cheap) or mailing to a certain geographic location if you really want to own properties in that area
    3. Good old fashioned bandit signs still work. These are usually yellow signs with permanent marker hand written on them and placed all over town. Get a service to put them up for you but check with local zoning ordinances so you don’t get fined. Add a 21st century technique to the sign and put something like text to “webuyhouses123” for a quicker response. This will get you cell phone numbers from prospects instead of just bad email addresses
    4. Pay an ant farm to bring you deals. After you download your 100 ways to find deals find all the people on there that are around houses all day, every day and make connections with as many as possible. Tell them if they bring you a lead that ends up as a successful investment you will play them $300.00 or some figure that makes sense to both of you. You also might just pay them $10.00 per each lead sheet they bring you back filled out with the information you need to make a decision. Think of having 20 or 50 “ants” in the field bringing you solid leads. This is leverage at its finest!

If you missed my last article on real estate investing, I recommend you read that one as well.

Sellers Sell For Just Two Reasons

 More ways to find killer real estate investments:

This is another article in a series of how to invest in solid real estate deals. Please read the previous article before proceeding with this new article.

  1. Put up a website and get a decent domain. Many sites do this but I get my domains and some of my sites through GoDaddy®. The website does not have to be fancy or expensive but make it solid and clean and keep it current. So many sites get put up and forgotten about it blows their credibility. I suggest a 4 minute video every month to post to the site. Keep the site relevant and use the domain in all your marketing
  2. Make up your wedding list. Imagine you are getting married and going to have a huge wedding.   Who would you invite? Get that list together and get all their contact information and let them know periodically (at least every quarter) that you are looking for real estate investments
  3. Find out who in your area handles bank foreclosures (otherwise known as REO’s or real estate owned by a bank) and send those agents a letter introducing yourself. Follow up these letters with calls and ask for a one on one appointment and buy these agents and brokers lunch. If there is a good sized foreclosure market in your area this one strategy can be a gold mine for your business
  4. The internet is loaded with properties but depending on the site the information can be very old so nothing will replace building relationships with real human beings who are in the world of real estate
  5. Estate properties sometimes can offer a great opportunity at a bargain. I have bought dozens of properties from my local probate court lists. When people pass away many times they leave a will that will have to go through probate court. These probates are public information and usually posted in a county legal news and/or website. These notices will have the person who passed away and the person who is the personal representative for the estate. These are the people in charge of opening and closing of probate and the estate. A well placed letter and follow up phone call have provided me with some great deals and large profits. I always got more excited when the personal representative is located out of town because they are sometimes more motivated to get the estate closed as quickly as possible. I would never send letters to spouses who just lost their mate; they have enough on their minds without me seeing if they want to sell. Most of the time you can tell by the address of the decedent and the address of the personal representative. If Ken Jones passed away and Lisa Jones is the personal representative and both live at 1234 Maple Street it means that Lisa is probably Ken’s wife. If the representative lives at a different address they are more than likely a child and that property will more than likely be sold in the next 30 to 90 days. I also got better deals when there were several siblings which meant the money was being split by several people. A $40,000 price reduction might only be $10,000 per person and easier to accept

When you receive leads from the above and some of the other 100 ways on the downloadable list they will come in 3 basic categories of properties:

  • Ugly
  • Semi Ugly
  • Pretty

When you are looking to buy and sell for a profit most (but certainly not all) of those deals will be ugly (they need a lot of TLC and money to bring them up to snuff) or semi-ugly (needs work for sure but more simple cosmetics than real contractor television stuff)

Before you even go to the next step of analyzing the lead, first pay attention to why the seller is selling the property. What is their true motivation for selling? All sellers sell for only two reasons. The need for cash or the need for debt relief are those two reasons. Yes, there are dozens of sub reasons such as divorce, pending foreclosure, settle estate, relocation, getting non performing loan off the books (REO’s aka bank foreclosures) and many others. All of those sub reasons go back to the two main reasons above.

Is the seller’s reason for selling strong enough that might allow you to buy this property under its current market value? The stronger the reason, the bigger the discount on the price you could expect to receive. If a seller wants to sell because they are upgrading their home and need more space will that usually allow you a chance for a deal? No, it will not! On the other hand if the seller has inherited the property and lives out of state and has just been informed the property is a beat up old mess does that sound like you might have a better chance at the kind of property we are trying to secure? You have a much higher chance of success based on that need to sell.

Investing in Killer Real Estate Deals

All Profit Comes From 5% of the Sellers

To get killer deals on real estate you must understand one simple fact:

At any given time across America there are really two real estate markets. The first is the regular or retail marketplace. This is usually about 95% of the market and this world is inhabited mainly by Realtors™, builders, banks, mortgage brokers, home owners, home inspectors, mortgage originators, and any other group of people that focuses on helping “normal buyers and sellers” buy and sell properties.

There is also a secret sub culture of the real estate market. This second market is usually around 5% to 10% of where the total marketplace falls. This world is inhabited by investors, REO brokers and agents (bank foreclosure brokers and agents), private money lenders, hard money lenders, foreclosures, probate properties, highly motivated sellers, contractors, subprime buyers, and anyone else that’s geared toward the investor buyer/seller and subprime buyer.

The profit for the savvy investor is dealing only with the 5 to 10% of the marketplace that will allow you to make the profits you require for your business. So many beginning investors will waste the bulk of their time dealing in the 95% world and wonder why they don’t buy any properties or the properties that they buy are subpar deals.

Make a decision right now to only deal in the 5 to 10% world and your life and business will be far more enjoyable and profitable. You need to become an expert in dealing with the 5% world and all its players. There are great deals all around you but you must be the prospector and focus only on the gold and not the dust.

In my over two decades in real estate I have been through every kind of market imaginable from red hot multiple offers in hours kind of market to a free falling value market where it seemed you could not give properties away. I have found that unsuccessful investors will always find reasons why they are not doing well or finding good deals. See if any of these sound familiar:

“The market is too hot here to find any good deals”

“This market is so bad that nobody is buying”

“You can’t do those kinds of deals in this market”

None of these are true and I don’t care what cycle your target real estate market is currently experiencing. During red hot markets I bought properties and got great deals. During dead dog slow collapsing markets both I and my clients have bought killer properties at rock bottom pricing. During a red hot market you really need to stay tuned to the 5 to 10% of the market. When you buy in these markets most of the houses are never “officially on the market” but rather the properties were found by you or your ant farm using the marketing strategies above. They also might have been on the open market and did not sell. They had some kind of problem that the agent and owner did not know how to solve.   If the property hits the MLS and is a super bargain it will always be hard not to overpay for the property. The rule of thumb is the more people that know the property is for sale the more money you can expect to pay to acquire the property.

That’s the bad news; the good news is because that kind of market is so hot you don’t always need as big a discount to make the deal work. The hotter the market is when you go to resell the quicker sell you will have and less holding costs you will need to pay. When you are dealing with very slow markets, many times you can pick and choose the deals you want to buy right off the MLS and find solid deals that make sense.   You must customize your buying and selling machine based on the market conditions.

The third type of property is “pretty homes” and those are homes that require a whole different approach than the ugly and semi ugly homes. These will be covered in a future article.

Analyze Deals Quickly

The next step once you have found a deal you think might be a good deal is to run your fast turn numbers.
Here is a simple formula to use every time.

  • After Repaired Value (what you believe it will sell for after repairs are made, based on comps)
  • Repairs to be made (more on figuring these in a future article)
  • Holding costs (utilities, taxes, insurance, lawn, snow) (budget 5 months minimum)
  • Interest on funds (interest paid to outside lenders or your own bank (remember being the bank?)
  • Buying closing costs such as points on money, insurance, title company fees etc (check with local investors and title companies to get an idea)
  • Selling costs such as real estate commissions, transfer taxes, title insurance (check with local investors and title companies to get an idea)
  • Cost over runs and oops factor
  • Your minimum acceptable profit

    Maximum offer allowed by you

    You can visit us at www.wealthwithoutstocks.com

“Investment Grade” Life Insurance and What You Need to Know

I was staunchly opposed to whole life insurance because that’s what I was taught by national “gurus” 25 years ago. I wholeheartedly believed (as
many people still do) that if you need life insurance, you should buy a term policy, then take the difference in premiums between whole life and term and invest it in mutual funds.

So when a good friend of mine sat me down several years ago and tried to show me a whole life insurance plan, I nearly refused to listen. Many of you reading this will feel the same way, and nothing I say will change your minds. That’s fine — you’re entitled to your opinion just as I was entitled to mine.

Thankfully, my friend told me about “Investment Grade” life insurance. I soon realized that the gurus in my early years and the gurus of today were correct — based on the information they’d been given. The problem was their information was incomplete.

Whenever I hear a financial consultant (or anyone, for that matter) talk about less expensive premiums for term, I know they really don’t understand how this animal of properly designed “Investment Grade” whole life insurance really works.

With a properly designed whole life insurance policy, you get:

1. Principal protection guarantees of your money. Your cash value isn’t subject to market losses, as it is with mutual funds and other programs. When the stock market tanks again (and it’s never a question of if but when), you won’t lose a dime.

2. Guaranteed growth of your money every year. This will be interest-rate-driven based on the economy, but your account will move forward every year regardless of what the market does. This is compound tax-free growth and not the “average rate of return” you get with mutual funds. To be fair, in our current low-interest-rate environment, the growth rates are only in the 2 percent to 4 percent range but as you study further you start to realize the real wealth is not in the growth rate even when rates go higher.

Many financial advisers will tell you that your money would do better in a good mutual fund. But remember: When someone shows you an “average rate of return,” they can start taking that average from any time that benefits their example. This is not compounded growth but rather a factor of timing as to when you enter and exit the market. The stock market has wild swings; if that is acceptable to you, you should have much of your money in stocks. If not, maybe it’s time to consider a different way to think about investing. (Remember the period from March 2000 to October 2002, when the Nasdaq lost 78 percent of its value? It’s been 16 years since the dot-com bubble started to pop, and the tech-heavy index still hasn’t quite recovered to that level. If you like guarantees and stability then you have no business putting most of your money in the stock market.)

3. Dividends paid to policy owners are not taxable. Dividends aren’t guaranteed, but many reputable life insurance companies have been in business for more than 100 years and they’ve paid out dividends every year. The amount of that dividend will depend on several factors, but it boils down to how much profit the insurance carrier made. When properly paid to the policy owner, those dividends are not taxable.

4. A high starting cash value amount, based on what you contribute to the policy. Whole life policies that aren’t properly designed will have very little cash value in the early years.

But a properly structured life insurance policy will have high cash value percentages, even in its first year, and they increase every year. This becomes an important fact when you realize that access to your cash will help you grow wealth systematically regardless of market conditions

5. Access to your cash value at any age, at any time, for any reason — without taxes or penalty. This is a huge benefit of whole life policies compared to 401(k)s and IRAs, which impose multiple obstacles if you want to access your cash before retirement, and penalize you if the funds you borrow from them are not paid back by a certain time and at a certain interest rate. No such obstacles exist with a whole-life policy. So leave your cash in the policy if you wish, or borrow it back out and use it, the choice is yours.

6. The ability to use your account’s cash value to recapture lost depreciation on major purchases and interest and fees paid to banks. If you treat this pool of money inside the life policy like your own personal bank, you can loan it out to yourself and others to create wealth. (More on this in future articles, but suffice it to say for now that banking has been around in some fashion for thousands of years. Any business model that lasts that long is worth understanding and using to your advantage.)

7. Guaranteed insurance. Once the policy is in place, your insurance is guaranteed for the rest of your life. Many people assume they’ll be able to buy new insurance at any point in their life. But nothing is further from the truth — especially for those who’ve been diagnosed with chronic or terminal diseases. If you become seriously ill, don’t expect to be able to buy a new policy.

With many whole-life policies, you can add an “accelerated death benefit rider” for little to no cost, which will give you access to a large portion of your death benefit during your lifetime if you have a terminal or chronic illness. I just had a colleague with a client who was diagnosed with Lou Gehrig’s disease, or ALS, and was sent a check from his insurer for more than 70 percent of the eventual death benefit. He’ll be able to enjoy his remaining time without worrying how he will pay his bills.

8. The ability to combine your life policy with the worlds of real estate, private lending and auto financing to accelerate your wealth, both inside and outside of the policy. Just remember that any funds inside the policy are tax-free for life.

9. Protection from long term care and chronic care expenses. Well written policies with the proper companies could provide the ability access a portion of your eventual death benefit during your lifetime to help pay for assisted living or long term care expenses. This will insulate and protect your other wealth so you don’t spend a lifetime building wealth only to give it all back before you pass away leaving nothing for your family.

10. Death benefit. In addition to all the benefits you can make use of while you’re still here, at heart, this investment is still a life insurance policy, so when you eventually die, there will be a sum of money left behind to your beneficiaries — tax-free.

There’s a reason family dynasties, banks, and big corporations have been using life insurance for generations to grow and protect their wealth. Even when subject to estate limits, these death payouts go a long way toward promoting the tax-free, inter-generational transfer of wealth.

Of course, insurance company policies and riders will vary by state due to state regulations and depending on the actual insurance carrier. But you won’t find another type of account or investment that has all these benefits in one investment — not 401(k)s, IRAs, mutual funds, stocks, bonds, precious metals, real estate, nor any other account.

To engage with me further on this kind of policy, please email me directly at john@wealthwithoutstocks.com and visit our site at www.wealthwithoutstocks.com for many free videos, articles, archived interviews and more!

Lock in your recent profits now

Since the election of Donald Trump the stock market has had an incredible run up.  Regardless of your political views the facts are the facts and your money and wealth don’t really care who is president.  Our job is to play the cards as they are dealt regardless of who is in charge at the White House.

The old saying is in play, “what goes up is sure to come down” unless we take steps to lock in our gains and protect against future loss.  If you are in mutual funds you have no doubt experienced the ups and downs of the market.  Many people think that’s just the way it is, and to some extent they are correct.  However, there is no law that says you have to play by those rules with your money.

There are strategies that allow you to participate in most of any market gains but none of the market losses.   You can accomplish this through a strategy called indexing.  One of the most popular ways to practice indexing is through the product of a fixed indexed annuity.  This is one of three major classes of annuities (with thousands of products between hundreds of companies available) with the other two classes being a fixed annuity and a variable annuity.

A fixed annuity will guarantee your money against any downside and promise to pay you more than you will be able to get at a bank.  Now many fixed annuities are paying 2.75% to 3.25% depending on the actual terms and carrier offering the annuity.  The upside is you know you will never lose money and that your money will grow every year regardless of what the stock market does.  The downside is that during large run ups, like we are currently experiencing, your account will not experience the big run ups but rather a much smaller gain.  There are also early withdrawal fees for pulling money out of the annuity early (this will be true for every class of annuity so be sure that you understand how much and how long those penalties exist).  Fixed annuities can be a great play for very conservative investors who want protections but need more return than a savings account or CD’s at the bank.

A variable annuity will track the stock market and its ups and downs.  Many will have floors and ceilings as far as how much you can lose or how much you can make.   Being as these are generally heavily traded accounts the fees associated to variable annuities are usually greatest of the three classes of annuities.  The variable annuities are for more aggressive investors who believe the carrier can do better with their money than they can personally and are aware of the fees and penalties for early withdrawal.

A fixed indexed annuity will be a kind of hybrid between the other two classes.  Your principal balance will be protected against any downside loss and your upside will be determined by tracking of an index. (Many indexes are available but most are tied to the stock market performance in some way)  When the indexes go up your account will be credited accordingly and many accounts have caps for how much you can make in a year and others don’t have caps on profits.  If they don’t have a cap on profits they will generally have a “spread” which determines how much of total index gain you receive minus the spread.  A simple example is the index has a 10% run up but there is a 2% spread on the product.  This means your account is credited 8% of gain that year.  Your index level is now locked in and the next year “resets” as far as gain or loss.  If the index comes down 10% the next year your money will not go down at all but will also not go forward at all either.  In short, when markets go up you participate at some level in the ups but never in the downs of the market.

With many of these annuities you can also add a lifetime income rider on top of the base contract.  These riders will usually guarantee that your eventual income you start drawing out of the account (kind of like your own private pension) will be guaranteed no matter how long you live regardless of what happens to the cash in the account.  So if you live to be a ripe old age you will receive the agreed upon income amount until your death.  If you pass away and there is still money in the account verify that your particular product has a death benefit that would assure any remaining monies go to your loved ones.  The income rider will come with an annual fee but will usually guarantee your income rider value will rise every year even if your cash does not increase.  In short, your eventual income increases every year regardless if your cash does or not that year.

For the right investor these can be attractive places to put money as long as you understand the rules going in and use them to your advantage.  If you would like a free chapter from my book on this very topic and or to watch a video presentation about this program, just visit www.perpetualpensions.com and download these two great resources for free.

Note, not all products and features are the same and will vary state to state.

The Hidden Secrets of a 401k

I want to share with you items to consider before investing in a 401k.  Some of those items are the tax ramifications and the control over your money you will be forfeiting.  Uncle Sam makes the decisions on when you can access your money without penalty, what the penalty is for early withdrawals, the taxes you pay, the required minimum distribution (RMD) amount, when you must begin to take the RMD and more… Watch my short presentation below for more information and view a full expo by both Frontline and 60 Minutes.

Revealing the Self-Directed IRA

There are 11 types of IRA’s; that’s right Eleven! But do you know about the Self-Directed IRA and what the benefits are?

Most investors mistakenly believe they have a “self-directed IRA” when in fact they have one that limits their choices to a few investment types. Within your plan, you can choose stocks, mutual funds or bonds. And while you may have hundreds and even thousands of choices of where to put your money inside that account, chances are you won’t be able to invest in nontraditional retirement assets — especially if your IRA or 401(k) rollover is with a traditional brokerage house.

So just what is a true self-directed IRA? It’s an account allows you to invest in many other options within your IRA, including:

  • Rental real estate
  • Fixer uppers to resell at a profit (flip)
  • Private loans made at higher interest rates to other investors
  • Discounted private notes
  • Tax liens or tax deeds
  • Privately held companies and startups
  • Precious metals
  • Leases and lease options
  • Straight options (real estate options, not stock options)
  • Partnerships

Such investments receive the same tax treatment as more traditional IRA assets. Any tax due is deferred until withdrawal, typically at age 70½, when your are required to start drawing down your savings, or possibly sooner.

This is an account for hands-on active investors with unique knowledge of some of the asset classes in the approved list, not for a “set it and forget it” investor.

By using this type of account it is possible to make some sizable returns from a relatively small amount of money. Here’s an example:

You have an opportunity to buy a rundown house from an estate that would like a quick sale. You determine the house is worth $200,000 — after you have spent $40,000 in upgrades. You contract to purchase the property for $120,000. But lacking the $160,000 to proceed with the sale, you enlist a partner who agrees to provide the full amount, provided you handle all the details, including closing, rehabbing and reselling the home.

You further determine that you would like your share of the profits to go inside of your IRA for the obvious tax benefits. You only have $10,000 inside your IRA with which to invest. The proper play given these set of circumstances is to have your partner buy the property in his name or an entity he controls, such as a limited liability company. You enter into an option agreement to purchase half ownership in this property. You pay $100 from your self-directed IRA and fill out option paperwork and give all the papers to your plan administrator.

This deal now moves forward, and the property is rehabbed and ready for sale in 60 days and sells and closes quickly for $200,000. You have $10,000 worth of sales and holding expenses, netting a $30,000 profit on this deal in five months. The actual title owner to the property agrees to pay you $15,000 for you to close out your option. This $15,000 is a return on the $100 option investment and is deposited back inside your IRA tax-deferred or tax-free (for a Roth IRA).

Your investor put up $160,000 and received $15,000 for a five-month investment. This represents more than a 20 percent annualized return on his money, which is pleasing to almost every investor. If he used his IRA money for this investment, then his profit would be tax-deferred as well.

Rental Income

Here’s another example: An investor from New York became aware of the self-directed IRA and used some of his IRA to acquire four rental homes in Metro Detroit. Each home was purchased for around $55,000 and rents for about $900, and the cash flow goes back to the IRA on a tax-deferred basis. If he sells these for big gains years from now, that profit will also be tax-deferred.

Be warned: There are also some prohibited investments with your IRA (see IRS Publication 590-B):

  • No loaning of money to yourself, your spouse or any family member in your direct linear family chain.
  • No investing in collectibles.
  • Your IRA can’t personally guarantee any loans in which it borrows money. This means that any money borrowed by your IRA must be “non-recourse” funds, which means that only the asset can be put up for collateral and may be foreclosed upon for nonpayment. The creditor may not file suit against the IRA for any shortfall in the loan goes delinquent.

4 Wealth Drains Robbing You Blind Each Month

And You Don’t Even Know It

The first and biggest “wealth drain” is taxes.

Our tax system is designed to penalize hourly and salaried workers while rewarding entrepreneurs and business owners. Salaried workers pay taxes based on what they gross, while business owners pay taxes based on what they net. To that end, most people think Fortune 500 companies getting something over on little guys. Keep in mind, you don’t have to be a big business to get great tax advantages. Even startups get huge tax benefits. So rather than complain, maybe you should run a business from your kitchen table

To qualify for tax deductions in that business, the IRS says you must intend to make a profit. When that standard is met, you automatically qualify for dozens of tax deductions that you don’t get as an individual. Most losses and startup expenses can be written off against other income from your job (limits apply, so get a good business CPA to work with you). Realize that nobody else (not even your CPA or tax preparer) cares how much you pay in taxes, so it’s your job to understand how the system work and how to use it effectively.

Losing the Chance at Compound Growth

Another set of huge wealth drains are market losses on investment capital that you control. When a stock or a piece of real estate drops significantly in value, it could take years for you to get back to even. And, of course, there are no guarantees that it will come back during your investment lifetime. The less capital you have invested, the less you can benefit from the power of compounding growth.

If the compounding curve of your money is broken by market losses or premature withdrawals, it has a massive effect on your final pool of wealth. For example, if you were offered a job that lasted only 36 days and you had two choices on the pay plan, which one would you take? (A) You could be paid $5,000 per day at the end of every day, for a total of $180,000. (2) Your second option is to be paid one cent starting on Day One, but your pay would double each day — be compounded by 100 percent — and payable at the end of those 36 days.

If you jumped at the $180,000, you missed the power of true compounding of money. If your coworker doing the same job chose the compounding penny, he wouldn’t be a millionaire. After 36 days … he’d be a filthy rich multimillionaire with a final check of $343,597,384. Obviously, your investments won’t experience such rapid (or consistent) compound growth, but do the math —
the power of the compounding curve is strong over time — if you don’t break it with big losses (which you can’t always control) or withdrawals (which you can).

Money Lost in Fees and Interest to Banks and Financial Companies

The next massive wealth drains we face are interest and fees paid to banks or finance companies. Money-lending has been around for thousands of years, and any business model that’s lasted that long is a winner — for the business. But when you’re on the borrowing side of the transaction, it’s a wealth drain, especially if most of your borrowed money is spent on depreciating assets

Now, people will tell you that if you can borrow money cheap and invest it in something that has a higher rate of return than the interest rate you’re paying, then you’re using leverage properly. That can be true, but those attempting such a move should be aware of the caveats. Try this simple exercise: Add up all the money you’ve paid out over your lifetime in monthly payments. Then compare that total to the amount of money you have saved for retirement and see which one’s bigger. (If you’re willing, we’d love to hear about your results in the comments section below.) Then think about how to be a lender, and not a borrower.

Depreciation of Vehicles and Other Large Assets

Another massive wealth drain comes from the depreciation of cars, boats, equipment, appliances and most other large assets we buy. Most people will lose more money on cars during their lifetimes than they’ll ever save for retirement, let alone all the other depreciating assets they’ll buy. But there’s a way to make money on these items.

Think of your financial life as a big pie. Don’t fall for the old magic trick and focus only on what’s happening to your one slice of the pie (i.e., your investment gains or losses). Instead, pay attention to the whole pie and put a stop to your massive wealth drains.