How you can avoid being a victim of a Ponzi Scheme

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History has seen countless shams, schemes, thefts and frauds — but how many con artists put their names into the language by their efforts? Charles Ponzi was an Italian con man who became famous (or infamous) in the 1920’s when the pyramid investment scheme he ran collapsed spectacularly. By the time the dust settled, it was clear he’s stolen $20 million from investors — the equivalent of $200 million in today’s dollars.

When the story hit the papers and the size of the scam became clear, Ponzi’s name became mud, and was forever linked to flim-flam schemes. The truth though, is that investment frauds have happened for centuries, and they are still frequent today. The most famous and largest to date was that of Bernie Madoff, who bilked investors over 30 years out of an estimated $65 billion in 2008. It’s estimated that at any given time, there are dozens of active Ponzi schemes that have yet to be exposed.

What It Is

At the heart of every classic Ponzi scheme are two things: an investment with (allegedly) an exceptionally attractive return, and a great story about just why the returns can be so extraordinary. Promissory notes are many times offered at high rates of return — so high that they should set off alarm bells among potential buyers. When an investment promises a guaranteed compounded monthly return, you can almost guarantee you are in trouble. These fraudulent promissory notes are never collateralized with anything of real value.

But the scam then must produce returns as promised for its investors, and usually, they do, for months or even many years — double digit rates of return year after year with no loss. How? With fraud, of course!

In most of these cases there is never any actual investing being done (though in some cases, there are initial attempts at legitimate investment in the short term). Instead, the “profits” come via the old “robbing from Peter to pay Paul” method. New investors’ money goes right back out the door to pay older investors, thus keeping them happily unaware that their original capital is at serious risk. Or rather, some of the money is used to pay returns to investors; much of it goes into the con artists pockets.

The long-term success of such an evil enterprise is highly dependent on the salesmanship of the con artists involved. Still, regardless of how good at selling they are, the reckoning will eventually come when too many investors want their original capital back — not just their dividends and returns. The house of cards can also collapse if too little new money is taken in to pay investors their promised returns. For example, during the financial crisis of 2007 and 2008, people went running for their capital to get them through some tough times, and investors in Bernard Madoff’s funds started trying to divest. He didn’t have nearly enough cash on hand to pay people back, nor the investments to liquidate, and his decades-long scam was exposed.

Despite all the press the Madoff case received, there are still crooks trying to use similar methods to steal your money. New schemes are uncovered every year, and usually after they are exposed, the investors manage to recoup about 5 cents on the dollar of their money. Those who might have been considered lucky enough to have gotten out before the collapse aren’t home free: bankruptcy trustees will go after them in what is called a “clawback“; even charities that received ill-gotten donations from the con artists are subject to having to reimburse of the donations.

One more subtle problem these scammers produce is that fear of them causes many people to shy away from legitimate investment opportunities. But rather than giving in to that fear, get educated instead. Here are some ways to differentiate between legitimate investments and scams.

Signs of a Possible Ponzi Scheme

  • You never receive real collateral for your investments, just promissory notes and statements
  • The rates of return you’re getting seem too good to be true (20 percent annually is generally the low end of these promises but Charles Ponzi promised 50 percent and even 100 percent rates of return)
  • You earn consistent strong returns with no losses, regardless of market behavior. There are legitimate financial products that offer and deliver stable returns with no market risk (such as some annuities) but these are backed by old, valuable companies with many assets on the books. And they don‘t pay those too-good-to-be-true returns.
  • You’re told complicated yet compelling stories about why the returns are so strong. Ponzi himself told the tale of postal reply coupons that could be bought and sold with different currencies producing huge profits
  • If you hear the terms “exclusive private placement,” that can be a red flag that something is amiss.
  • Recognize that new start up ventures are more prone to be frauds than older ventures, but remember that Madoff’s scheme ran for 30 years.

Steps to Take Before You Invest a Dime

  • Do your due diligence by researching the salesperson personally, as well as the company offering the investment. In these days of Google, and with the easy ability to to a criminal background check, you’d be foolish not to check these out. Get an official photo identification of your salesman. Is he really John Smith, or is that an alias?
  • Check with all relevant regulatory authorities and the Better Business Bureau for any complaints or investigations of any kind. These could include the Securities and Exchange Commission, state financial and securities commissioner’s office, along with the Financial Industry Regulatory Authority.
  • Ask what the collateral is for your investment
  • Find out who will be handling the closing of this investment? Are you giving them a check made out to their company? Maybe your attorney should handle all paperwork and work on your behalf to help verify whom you’re dealing with.
  • Referrals and references are important, but not nearly enough for a large investment because the people referring you could be victims of the con and not even know it yet
  • Don’t let greed overcome your good judgment. If your inner alarm bells are going off, listen to them and find another investment

The risk of getting taken a Ponzi scheme is much reduced if you invest with major brokerages and insurance carriers. Working through these kinds of companies doesn’t guarantee a good return, but it does give you the opportunity to make or lose money via above-board investments.

When you deal in private placements, venture capital, and private offerings, you must take extra care and time to evaluate that you are in fact, being offered a legitimate opportunity. There are tremendous amounts of money made and lost in such ventures but the risks are higher, so never put all your hard earned eggs in one basket.

Finally, if you’re going to take a chance and make a higher risk investment, invest only an amount that won’t seriously affect your lifestyle if it’s lost, whether due to the natural vagaries of the markets, or to the scheming of Ponzi’s modern disciples.

More Retirement Income? Many Look to Network Marketing

There’s no getting around it: Too many older Americans just haven’t saved enough for the retirement lifestyle they hope to enjoy. They add up their anticipated Social Security payments, their investment income, pensions and other sources, compare that sum to their expected expenses and — there’s a gap.

You can fill that gap by continuing to work, of course, but retirement isn’t really “retirement” if you’re still cranking away for a hovering boss. But there are alternatives, and one that is gaining popularity among those looking to pad their retirements is joining a direct sales enterprise. These businesses are also called network marketing, multilevel marketing, networking, direct sales and the not-so-flattering pyramid scheme.

In essence, you sell a product line or group of services to your “affinity groups” — in other words friends, friends of friends, family, and colleagues, past or present. You get a straightforward commission on your sales, and you can also invite people you know to sell the products as well — and you earn commissions on their sales. These sales structures can — and often do — go on for quite a few levels. Hence, the name multilevel marketing.

“In the United States, approximately 16 million people are involved in direct selling, accounting for almost $30 billion in annual sales,” the Direct Selling Association says. That averages out to $1,875 per person a year.
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How It Works

Some people believe that since the people at the top of the distribution chain make the bulk of the money, that the term “pyramid” is appropriate. I’d respond to that by encouraging you to look at any large corporation; they all pay their top people significantly more money than their lower-level employees. Yes, it’s true: The company you work for is probably also one of those dreaded “pyramids.”

Multilevel marketing is merely a different way to promote and distribute products and services. Instead of spending large amounts of money on traditional marketing and advertising, it uses that money to pay commissions to its distributors or agents.

Distributors get to tie into an existing product line, and it takes minimal capital to get started. The key is to represent a product or service that you believe in, and one that has a good, true story of how it is helping people. Let’s say a certain brand of weight management products has been a huge help to you. Why not tell other people who have similar goals and earn a commission if they try the product?

Before You Get Involved

Here are seven tips to a successful network marketing experience.

  1. Make sure you love the products and that there is a true story you can to tell to your prospects about what the products have done for you or someone you know. Don’t get involved with any company just because of a compensation plan and its promises of riches. Passion is important to be successful selling anything.
  2. Understand how much you can make if you just sell the product and don’t recruit new sellers below you. Members of the association are required to give out “fact-based information about the company’s compensation structure and earning potential.”
  3. Look for a company that has been around for at least five years — and 10 would be better. Launches and failures of networking companies are common. Don’t worry about getting in on the ground floor — focus on dealing with a solid company with a track record.
  4. Investigate marketing support. You will most likely get a replicated website that you can use. How else does the company bring help distributors?
  5. Be wary of seminar companies in network marketing clothing. If you are forced or strongly encouraged to buy the CD of the month and a ticket to any and all events, that is the best sign that more money is being made on those items than on the actual product. Gatherings are a good thing in moderation. There has to be more than just hype and training materials.
  6. Be patient. It might take you a year or two to achieve that income goal — or more if you have bigger goals. Steady, persistent action is the key.
  7. Ask about if there are monthly minimums for personal production to qualify for commissions and if there are monthly personal points to be maintained.

Don’t judge direct selling by just the numbers. Judge by how it would work for you, with your own solid plan of action. One of my business ventures is a real estate brokerage, working with out-of-area investors. Realtors average a little over $14,000 a year. This encompasses everyone with a license — even if they don’t sell anything. Many friends and colleagues — and I — make many multiples of that amount. So don’t let an average scare you.

Do your homework, and look before you leap. Then be patient, persistent and refine your marketing campaign and sales skills. If you succeed, it could be just the boost your retirement needs.  I will share more information on this subject in my new book, Wealth Without Stocks or Mutual Funds, releasing this year.

Profiting from an IRA Conversion?

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Many Americans have traditional Individual Retirement Accounts, where your annual contributions are reduced from your taxable income, yielding a tax deduction now, but your withdrawals are taxed. And many also have Roth IRAs, where the money you invest is taxed normally in the year you deposit it, but the profits grow tax-deferred and can be withdrawn tax-free after you retire.

The two options raise the obvious question: Would you rather pay tax on the seed money now or the crop of money later? This point has been debated for years, but for this post we are going to assume you would rather pay the known tax now vs. an unknown tax later.

Many people with traditional IRAs also open and fund a Roth IRA. But, if you’d like, you can convert a traditional IRA into a Roth account. Taxes are due on any amount you convert. The benefits of conversion:

As great at these benefits are, a conversion may not be for everyone. The longer you have until the money is needed, the better a move conversion can be. Get advice from a professional, input your data into one of the many software programs designed to calculate the costs and benefits, or email me for a free customized analysis.

Partial Conversions Can Be Powerful

Many people don’t realize that they can convert just a portion of a traditional IRA. If you combine the partial conversion with certain financial products, your tax burden can be lessened dramatically.

Let’s assume you have $400,000 in a traditional IRA and your effective tax rate is 20 percent.

You initiate a partial conversion of $130,841, which would mean you have to pay $26,168 in taxes. This gives you $104,673 for your Roth account and leaves you $269,157 in your traditional IRA.

You could elect to combine the conversion with a rollover into a solid fixed indexed annuity that offered a initial premium bonus. If you roll over your $269,159 traditional IRA into a product that gave you a 7 percent premium bonus and did the same thing with your new Roth account with a balance of $104,673 after taxes, then you would receive a $26,168 bonus that would put your starting balance of your combined IRA accounts back to the original $400,000 before the conversion.

The difference is that now $104,673 is now tax-free and not just tax-deferred. Assuming a modest 5 percent growth rate inside of both accounts, after just 10 years, you would be $43,785 ahead with this strategy than if you just let your traditional IRA stand. In 20 years, you will have over $83,000 more in your combined accounts (even after factoring in the taxes on your traditional IRA) than you would have had without the conversion.

Creating and preserving wealth is much like any other endeavor in which you would like to have success. A good system plus discipline equals more success than just “winging” it in life. This one simple strategy can create tens and even hundreds of thousands of extra dollars in your later years or to leave behind for those you love. If you would like more information on this strategy visit us and request your free report.

Is it too Late to Leave a Nice Estate For Your Family

When my mother entered her 70s, she began focusing more on what she would leave for her kids than her own financial well-being. She was more than fine; she had assets and steady income from two pensions, Social Security and an annuity. If you’re in that phase of life, you may have similar priorities. The question is: Do you know the best ways to increase your estate?

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Most people mistakenly believe that once they stop working, their net worth will shrink as they draw on assets for living expenses. Many people who are still working into their 60s and 70s also believe that it’s too late to add any significant wealth to their estate. Neither of those has to be true — if you have a well-designed plan.

Whole Life Policy

Let’s consider a client who is 64 and plans on working another 10 years. He is reallocating some existing assets and putting some extra cash into life insurance. We are not talking about an end-of-life policy sold by the truckloads by TV personalities with a $10,000 payout to cover funeral expenses. This might be a good call if you have very little in assets and worry about your kids paying for your funeral. This client has some resources, so we could do something a little more creative.

He elected to fund a whole life policy with $25,000 a year for eight years for a total of $200,000. His starting death benefit is $310,000. If he dies in the next eight years, his family would receive $310,000 to $508,000, depending on when that happens. If he reaches 72, he will have the entire $200,000 that he put into the policy over those eight years back in the form of cash value in the policy. He is free to take loans and disbursements, or just let the money sit and grow during the rest of his lifetime.

Should he reach 85, he would have more than $376,000 of cash value in the policy — even though he has only paid in $200,000 into it. Upon his death, his family will receive more than $470,000 of tax-free cash. He will more than double his estate by simply reallocating assets and letting tax-free compounding and guarantees go to work. Meanwhile, he can access the cash he is funding the policy with. If he does, he will lower the death benefit, but he has no need in the foreseeable future.

Fixed Indexed Annuity

Another client, who is 70, had concerns about leaving money behind to benefit a child with a mental handicap. The first step was finding a rock-solid trustee to make sure any money benefits the child after the death. Since the client was 70, the cost of life insurance was prohibitive.

The client had put away $300,000 for the child. The last market downturn had cost $130,000, but most of those losses have been recouped.

The client was very clear on wanting no market risk and elected to go with a fixed indexed annuity with a death benefit rider. This rider guarantees that the $300,000 will never decrease in value and will increase at a minimum of 4 percent — plus any indexed market gains. The least average growth rate combined with the 4 percent percent guarantee means that if the client dies in 10 years, the client will leave behind more than $650,000 in cash. If the client lives only five more years, annuity will leave behind $488,000.

A fixed indexed annuity can also have a lifetime income rider that guarantees you income no matter how long you live and even if the underlying cash goes to zero from income withdrawals. The National Association of Fixed Annuities has more information about how these products work.

 

Image Credit iStockPhoto -by nanita

Give Yourself a Raise!

In last week’s article we gave you an introduction to the United States Tax code and why you need to take control of how much you pay to the government. This week we will give you the most powerful strategy to legally and dramatically reduce the amount you pay in taxes.

The #1 Tax Strategy in America – Do something with the INTENT to make a profit from your home!

The “Business” tax breaks were passed by Congress for 2 reasons:

 1) To stimulate the economy by creating more businesses and more jobs.

 2) Encourage people to have additional sources of income to pay off their debt and contribute to their retirement.

An activity with the INTENT to make a PROFIT, can be considered a “Business” and qualify for “Business” tax deductions. You can do this as a sole proprietor (in your own name) or as an entity (corporation, LLC, etc…) either way works. In order for a business to be able to deduct all ordinary and necessary business expenses it must be able to show that the business is being run with the reasonable intent of making a profit. You do not need to actually make a profit as long as you intend to make a profit.

So here are the requirements set forth by Congress

  •  Have the intent to make a profit
  • Work your business on a regular & consistent basis
  • Treat it like a business – Keep good records

Meet these 3 requirements and you can qualify for $1,000’s in new Tax Deductions.

So let me share with you just 4 of the many Tax Deductions you will qualify for when you take the time to meet the above 3 requirements.

TAX DEDUCTION 1 You cannot deduct expenses for attending a convention, seminar, or similar meeting held outside the North American area unless:

  1. The meeting is directly related to your trade or business, and
  2. It is reasonable to hold the meeting outside the North American area.

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It is considered “REASONABLE” to have a business meeting in any of these countries! (See chapter 1 of IRS Publication 463)

TAX DEDUCTION 2Travel Rule Basics:

Basic Rule: For each business day of travel, you can deduct 100% of your lodging and 50 percent of your meals and entertainment.

Workdays: You can count a business day as any day during which your principal activity during normal business hours is the pursuit of business. You must work more than half of the workday.

Tried-to-work days: You count a business day as any day you intended to work but circumstances beyond your control prevented you from actively pursuing your business objective.

Weekends, holidays: If a weekend or holiday falls between two business days, the weekend or holiday is considered to be a business day and is tax deductible. This applies only when it is not be practical to return home for the weekend because of time required or expense involved.

Saturday night travel: Airlines sometimes charge you less if you stay over a Saturday night. If you can save money by staying over Saturday night, you count the stay-over as a business days.

Travel days: Travel days are business days.

TAX DEDUCTION 3  –  Meals & Entertainment

The IRS considers “entertainment” to be any activity that provides “entertainment, amusement, or recreation, and includes meals provided to a customer or client.”

You are permitted to deduct 50% of all of your ordinary and necessary meals and entertainment costs for your business.

The 50% limitation applies to all meals (whether local or in travel status) and entertainment expenses.

In order to qualify for the deduction, you must discuss business during the entertainment (directly related entertainment) or immediately before or after the entertaining – within 24 hours (associated test for entertainment expenses).

You must be able to document Who, Where, When, What & Why. Most receipts have the Where & When printed on them – you just have to document the Who, What, & Why

  • The Tax Code does not provide any guidance as to what constitutes a “substantial and bona fide” business discussion for purposes of meals and/or entertainment.
  • There are no rules that specify how long the discussion must be before it will constitute a business discussion for deducting your meal or entertainment expenses.
  • Your business discussion does not need to take a greater amount of time than your non-business discussions for the meal or entertainment expenses to become deductible.
  • As long as a business discussion is the primary purpose of the entertaining, the expenses will qualify for a deduction.

TAX DEDUCTION 4  –  Dutch Treat

DEDUCTING “DUTCH-TREAT” BUSINESS ENTERTAINMENT

Many business expenses do not involve paying the expenses of clients or prospects. They are Dutch-treat. Everyone pays for himself or herself.

But how do you handle Dutch-treat expenses? How do you know if they’re deductible?

General Dutch-Treat rule: IRS regulations state that the taxpayer may deduct entertainment “even though the expenditure relates to the taxpayer alone.” The IRS says its objective test precludes arguments that “entertainment” means only entertainment of others.   Further, the IRS acknowledges that business entertainment may include an activity that satisfies a personal, family, or living expense. The IRS notes that an individual in business may deduct the entertainment cost, including his personal benefit, as a business expense.

Translation: Business entertainment deductions aren’t limited to the costs of treating others; you’re also allowed to deduct your own costs if you “go Dutch.”

Tune in next week when we will give you more strategies to reduce your income taxes thereby giving yourself a raise!

The Biggest Wealth Drain? Income Taxes

These next couple of articles will show you the US Tax Code as you probably have never seen it before. The tax code is over 70,000 pages of boredom and confusion and is designed so badly that even all the authors of the tax code really don’t have much idea of how the system actually works. You can be sure that the code is designed to be difficult and keep you, as the tax payer, intimidated and paying the most money possible to your old Uncle Sam.

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Income taxes are the single biggest expense most Americans will ever have and yet very few people have a real clue how the system works. It is my belief that since you are going to pay taxes for your entire working lifetime and probably even some taxes after your death that you should have a handle on how they actually work and how to legally pay the absolute lowest amount of taxes allowable. To pay the lowest amount of taxes possible is your responsibility and not your tax preparer or CPA. Nobody will ever care more about your money than you do so think of this as your spring board to saving a fortune in income taxes over your lifetime. You will be amazed at how relatively simple it is to legally and dramatically reduce the amount of taxes you pay every year.

Let me say upfront that I am not a CPA or a tax attorney. I am just a tax payer like you that wanted to understand how I could get the tax system to work in my favor as much as possible. I have read countless books and listened to many live presentations from many experts on the subject of taxes. In these next couple articles I will be sharing information from a tax expert who has been teaching taxes all over the country to thousands of people for 20 years. He blew my mind when I saw him speak with all the great information he shared. We have become friends and had many business dealings together over several years. His name is Pat and he will be a huge asset for these taxation articles.


 

I am going to try to simplify some of the 70,000 pages of the tax code and supporting documents to help you capture more deductions and ultimately saving you $1,000’s of dollars on your taxes every year. A leading tax expert has graciously agreed to make one of his books available for FREE. Just go to www.wealthwithoutstocks.com to obtain the book. This book will show you little known secrets such as:

  • Why people over-pay their taxes
  • Two tax systems in America
  • #1 Tax Strategy in America
  • Profit Motive
  • Business Trips VS Vacations
  • Travel Rule Basics
  • Ski Trips
  • Cruises
  • Meals & Entertainment
  • Golf & Other Activities
  • Dutch Treat
  • Automobiles – Your KEY to a HUGE Deduction
  • Motor homes & Yachts
  • Medical Expenses
  • Tax Deductible Gifts
  • Insurance Premiums
  • Depreciation
  • Deducting your Spouse & Kids
  • Work Clothes
  • New Business Start-Up Deductions
  • Deductions for Employees W-2 Wage Earners

Obviously I can’t cover all of these topics in a couple of articles so I will just pick a few (5 to be exact) to give you an idea of what’s possible.

First we need to understand why People Over-Pay Their Taxes…

 Most people over-pay their taxes for 3 reasons:

1) Fear of the IRS and being Audited. As long as you are following the laws in the Internal Revenue Code there is no need to fear an audit. The IRS just wants to make sure you are doing things right and following the laws.

2) Not keeping good records therefore missing out on deductions – Would you be willing to spend just a few minutes a day, (about an hour a month) to put $6,000 of your hard earned money back into your pocket? That would be a great use of your time. You have the ability to make that a reality but you will need the “know how” along with the desire.

3) Not knowing the rules – What’s deductible and what’s not. The follow up articles and free book will open your eyes to available tax deductions most people don’t even know about. Remember, to consult with your tax professional to make sure you qualify and are documenting your deductions correctly.

TAXES- COMPLEXITY:

The U.S. Tax Code is very complex and confusing. No one, including any of the 100,000 or so IRS employees really understands it in its entirety.

TAXES – THE LARGEST SINGLE EXPENSE:

The average American pays about 30% of their gross income in taxes (Federal, State and Local), representing their single largest family expense. Taxes cost the average family more than housing and medical care combined.

Yet, few families ever realize the great expense that taxes cost them. While many people budget for food, clothing and other necessary expenses, they typically do nothing when it comes to planning to legally reduce their biggest expense: taxes!

We have all heard that middle class Americans pay the bulk of the taxes – there could be some truth to that.   Let me explain. You see, for the average American wage-earner, a W2 employee, there are about a dozen tax deductions they are entitled to however if you are doing something in your life with the intent to make a profit on a regular and consistent basis, you can be entitled to 100’s of tax deductions.

Tune in next week for our next article to find out how to dramatically and legally reduce your income taxes!

RE/MAX Event

I have been spreading the word all over the country speaking at seminars to people who are interested in getting ahead financially showing how to easily create and protect more wealth.  After being in real estate sales and investing for over 23 years I decided to take this message to the real estate community as well to help them grow and protect wealth.

John Jamieson with Pam Bellante and Joe Sabatini of RE/MAX of Southeastern Michigan
John Jamieson with Pam Bellante and Joe Sabatini of RE/MAX of Southeastern Michigan

If you are a real estate professional you know that one of the biggest problems you have is actually putting money away in a tax favored environment.  The reason most agents don’t come close to maximizing their savings efforts is that those tax favored environments lock up your money.  Since you are a commissioned salesperson how do you know that you might not need that money during a slow time?  You always need to have plenty of liquid cash in the bank to make sure your personal and business expenses are met.  Just because you had a good month or two does not mean you might not get slow in the next month or two.  It is a vicious cycle of thinking that is holding your financial growth way down.

The Perpetual Wealth System and Real Estate Agents Build Wealth were put together with that specific problem in mind.  We now have a way that you can put money away in a tax free environment and yet maintain control of the money and use it any way you see fit in the months and years to come.  So how much more money would you put away if you knew you could access it in 48 hours if you really needed it with no strings attached?   You can use the money for anything you wish with no taxes or penalty for accessing the funds.

We thank RE/MAX of Southeastern Michigan for hosting an event where I could speak to real estate professionals about their unique financial challenges and ways to help them build and grow their wealth so they are more confident as they are growing their business and prepared for when they retire.

See the RE/MAX of Southeastern Michigan Testimonial and from other events.

Free Webinar – Banking and Life Insurance

Please join us on Thursday, May 28th 2015 for an absolutely FREE Personal Banking and Life Insurance Webinar hosted by #1 Best Selling Author, John Jamieson

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Ask yourself this question; How much money would you have today if you had back every payment you had ever made on anything in your life? Every car, house, credit card, student, business loan, and any other debt in your life, you would have today. Not only would you have all those payments back but they would have been growing for years, tax-free, at a strong rate of return and you had access to the money any time for any reason without penalty.

You see, the average American family spends approximately 40% of their income on outgoing payments. We pay that money to banks and finance companies for the use of their money; in the form of principal and interest. Meanwhile we are told to invest 10% of our income into 401ks, IRAs, and other similar investment vehicles and hope the stock market goes up so maybe one day we can retire. Yet, as of December 2014 the US National Average Savings Rate was just 4.3%.

What if you were the bank and could pick up all those payments for yourself and your family? Would you be much wealthier than you are now? The answer for all of us is a big YES! If that interests you and would like to know more, join us on the webinar to get more details. You have the ability to start your own finance company and build wealth rapidly and safely.

Banking and Life Insurance Webinar is May 28,2015 at 8:00 pm EDT. This is free to join, please share this with others you know that would benefit from the great information being shared by John Jamieson. Don’t forget to register and put the date/time on your calendar!

Private Lending the Answer for You?

Many of us first think of getting a bank loan when we want to buy a house, a car, vacation home or a boat; invest in real estate; launch a business; and finance a college education. But a bank is just one source of funds for these items. No law says when you need a loan that you have go to a bank.
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They key to a traditional bank loan is partly collateral but even more so income and credit scoring. On the other hand, the private lending world is built on collateral. Many private lenders might make more money if the loan recipient defaults.
What is the Key to a Successful Loan? Collateral

Let’s consider a hypothetical real estate investor. He has found a fixer-upper with great potential. It’s on the market for $75,000. With $30,000 in repairs, it can fetch $150,000, he believes.

Banks don’t like to loan on fixer-uppers even if you personally qualify for the loan. If the bank makes the loan and secures it with a mortgage (or deed of trust, depending on the state), the borrower might pay 6 percent on the note and pay 1 discount point. The bank informs him that it makes no promises, and it will take 45 to 60 days to close — if it will close. This uncertainty puts the transaction at risk, so he needs another option.

He approaches another investor, who loans her own money for such transactions, so she is very concerned about the collateral. She will make the loan based on terms where she would be happy if the borrower defaulted.

How a Deal Might Be Spelled Out

The investor is buying the fixer-upper for $75,000 and is planning $30,000 on repairs, for a total into the property for $105,000 plus closing costs. He has $30,000 to make repairs but does not have the $75,000 to acquire this great deal. The private lender agrees to make the loan of $75,000 if the borrower will put his $30,000 into escrow and take three draws of $10,000 to make the repairs. If the investor flakes out after closing or defaults, the private lender has only loaned $75,000 and has the $30,000 cash needed to repair the home in escrow that she can use.

All of these details are spelled out in a note and mortgage agreement drawn up by a good real estate attorney. What are the chances of the borrower not paying the private lender with $30,000 of cash in the deal plus the chance at another $30,000 net profit? The private lender will almost always be paid back per the terms of the agreement.

The terms of this private loan are negotiable but must not conflict with state usury laws. Maybe the private lender charges 3 discount points and a 10 percent note rate. That’s more expensive money than the bank, but the deal gets done in just a few weeks as opposed to maybe never with the bank. Sometimes the most important factor in making a good deal is not the cost of the money but the access to the money.

Making private loans as the lender or obtaining loans as the borrower might be a great fit for your personal financial goals. But either end of the deal will require more education and a team of professionals to make sure these are safe, profitable deals for all involved.

To Rent or to Own… That is the Question

Rent_or_Own

In 2007 and 2008, property values nationwide dropped dramatically in sympathy with the banking crisis, mortgage crisis and the stock market crash. Never before had values of residential real estate fallen so far, so fast and in so many places. It seemed that one of the staples of American wealth was a lousy place to invest money.

During those brutal times, many investment advisers started suggesting renting a home was the way to wealth. Their theory was that if you invest your down payment money in equities, you would have piles of money in 20 years. Rubbish! These recommendations always come from people who broker your money into equities and are backed up by dubious math.

Some Simple Arithmetic

Let’s look at buying a $175,000 home — and renting one of comparable value. In most areas of the country, due to the down market (although values have had a nice rebound over the last seven years) and very low interest rates, your payment to own will be less than the rent for a comparable home.

If you bought a $175,000 home and put $8,750 down and negotiated the seller to pay most of your closing costs, you could get into this home for around $10,000 total investment. Your 30-year mortgage for $166,250, at 5 percent, would produce an $892 monthly payment. Taxes of $200 and insurance for $70 gives you subtotal payment of $1,162. Because you put less than 20 percent down, you will also pay mortgage insurance until you hit that 20 percent equity. This will give you a total payment of about $1,232.

Rental markets vary (look at www.rentometer.com), but in most areas of the country a $175,000 home will rent for $1,300 to $1,600. Let’s use $1,400 — or annual payments of $16,800 — with nothing to show for it but receipts. If you lease homes for 20 years and rents increase even a little, you will pay approximately $360,000 in rent and have nothing but rent receipts.

Consider These Variations

If you bought the home with the numbers described above, what might your situation look like? In 20 years you will have paid $295,680. You will owe $88,000 on your mortgage balance. But what if you had used the $1,400 that a home like that would rent for and paid down your mortgage balance by an extra $168 per month? In 20 years, your mortgage balance is only $18,500 — so your payments have created equity and wealth.

What about the increase in value of the home? I never try to predict the ups and downs of any market, but even with a modest appreciation rate of 4 percent, your $175,000 home is valued 20 years later at $389,000. The house is almost paid off (if you used that $1,400 rental payment) and is worth $389,000.

But what if the value increases less, stays the same or falls? Who cares? You had to pay to live somewhere. Whatever the value is, you own it free and clear and have only the taxes and insurance in your later years. Almost all successful retirees own their properties free and clear. If you are always renting, you create wealth for the landlord.

But Wait, There’s More

I didn’t forget the theory about putting your down payment money into equities. If that $10,000 grows at a strong 8 percent, it would grow to just under $50,000 in those same 20 years. This is a far cry from financial stability — or the equity in your home that you can access in several ways.

Even if you factor in the additional expenses of owning a home — say $50,000 for repairs and updates — most of that will be offset by your tax write-offs of your interest and property taxes.

According to the Federal Reserve, the average net worth of a homeowner is over $174,000 and average net worth of a tenant is $5,100. This is where financial theory collides with the realities of human nature. Home ownership is a natural forced savings and possible investment account that requires nothing but you to make your payment and enjoy your home. You also have the ability to alter the home as you see fit and are in charge of how long you stay. A home is where you will create memories for you and your family. The investment part is a bonus.