In this episode, I breakdown why having loans doesn’t necessarily mean you’re in debt, and how understanding the distinction between liabilities and debt can help you make smarter financial decisions.
Whether you’re thinking about cashing out equity from your home or simply want to understand how to create more cash flow, this episode will help you explore strategies to grow your wealth.
TRANSCRIPTS
Speaker 1 (00:00):
You can get ahead. You can actually get ahead with no dollars out of pocket by having an asset that can be leveraged to work in your favor. Just remember, just because you have loans, I like investments that can more control. If it’s not invested in me, like in who I am and my business or whatever it might be, something I can control, then investing that in something like,
(00:36)
Hello my fellow Rippers. This is Chris Miles, your cashflow expert and anti financianal advisor. This shows for you those that work so hard for your money and you’re now ready for your money to start working harder for you today. You want that freedom and cashflow right now, not waiting 30 or 40 years, but you want to be able to have it today so you can live that life that you love, but those you love right now. But I know it’s not just about getting rich, it’s about living a rich life because as you’re blessed financially and you keep prospering, you now have a greater capacity to create a ripple effect and bless the lives of those around you. Thank you for tuning in today. Thank you for being part of this show because you guys are what make this show great. In fact, this ripple effect cannot happen without you.
(01:13)
So big shout out to you, especially special shout out to those of you that actually have been reaching out lately. There’s been increasingly bigger number of you guys reaching out, looking for ways to create financial freedom and passive income for yourself right now. I invite anybody if you want to see if you qualify to even work with us to do so, go to the website, money ripples.com. There’s a passive income calculator that you can try out to see how much passive income you could create in the next 12 months if you’re doing it the right way. Again, check that out@moneyripples.com. So I want to talk today, I want to go a different shift because I know that cashflow is becoming a tight thing and as I’m starting to talk with many of you, and even as we’re talking online or even if we’re interacting on Facebook and things like that, I have a lot of Facebook friends that will chat about different concepts and I brought up a topic about Dave Ramsey, how he cost me my home, and basically the whole premise was that because I was taught to pay off my debt aggressively and put more money into equity of the home because they can always get it out if I have to or sell the house, then I should be okay, especially when I was a mortgage broker, I thought there’d be no problem getting access to my equity.
(02:20)
But when 2007 hit and things started to shift and change in that marketplace, that banks started restricting what they would allow you to get. This is kind of like what happened in the apartment space in the last couple of years. Even though there’s equity in apartment buildings, people can’t get equity out because the banks require a lot more equity before they let you cash it out. Well, 2007, 2008, during that period of time, they didn’t want people cashing equity out of their homes. And on top of that, of course, when that happened, when the banks got tight with their money, as a result, the values came crashing down. And this is why this is one of the few recessions where you actually saw real estate values drop most recessions. They at least stay the same or even increase. This had a different effect and I learned firsthand.
(03:00)
I said, man, paying off my house or trying to pay down my house aggressively wasn’t good. Now, does this mean that having a paid off house is a bad thing? No, of course not. But I was talking with another friend recently and she was saying, I have a paid off house is so nice not having a bill. I’m like, I agree. It’s nice not having one extra bill to pay. It’s like, but now I’m looking at going home equity line of credit to cash out to pay off some other debt. I’d hate to go into more debt. And this begs the question of what is debt? And I want to go into that today is what is debt? Because if you actually understand what debt is, these dilemmas that have been taught to us by banks and financial institutions that don’t want us to carry debt long term, believe it or not, banks actually don’t want us to have debt a long time.
(03:46)
I know this is a shocker because I didn’t teach this either. As a mortgage broker, I was telling you stick it back to the bank, pay off that mortgage early. But that’s the thing that bit me back in the butt in the last recession because I couldn’t get the equity out of my home. And when I tried to sell the house because values were tanking, eventually I could even sell it for what had massive equity in it. The equity would disappeared over that period of time when I was trying to sell because nobody was buying because the banks weren’t lending and that made it harder for people to qualify for a loan. It created this ripple effect. Well, I told her, I said, I hope you don’t mind if I use your situation with your house. I actually think I can do a good podcast on this.
(04:23)
So for you guys and for you, you know who you are. I’m not mentioning you by name. I’m doing this. I’m dedicating this podcast to you because this concept of debt is big. So first, what is debt? Debt is simply this guys, and I’m oversimplifying this. I know there’s going to be somebody that’s going to try to challenge it, but debt is really simply this. It’s negative equity, negative equity. So think about this. If you have a $500,000 house that’s worth 500,000 and you owe $300,000, what do you have? You have $200,000 of what? Equity right? Now. Someone will also say what? You have 300,000 of debt, and that’s not true. The definition of debt is actually the exact opposite of equity. Equity is equity. Debt is negative equity. This is why if you ever look at Wall Street and anybody who’s an accountant already knows this, right?
(05:19)
When you’re looking at financial numbers, you look at if there’s equity, there is no debt. Why? Because if you had that 500,000 house that has a $300,000 mortgage and you sold it, what happens? You get $200,000 back in your pocket. Does that mean you have debt? No. You have 200,000 of cash of that equity that comes back to you. Now, let’s reverse it. What if your house was worth $300,000 but you owe 500,000? What’s your debt amount every able to save 500,000? And that’s not true because if you were to sell that house, you would still owe $200,000. You have 200,000, a hundred thousand dollars of debt. Another way of looking at this is when you have a car that if you happen to be upside down in that car, that upside down amount is the debt that you would owe to be able to pay it back and be square, right?
(06:06)
To have your bills paid off there. That is debt. Debt is negative equity. It’s not the amount of the loans. That’s a liability. If you read Rich Dad Port Debt or Cashflow Quadrant, you’ll hear there’s assets and liabilities. They’re also in opposition to each other. A liability is the loan amount. So if you have a $300,000 house that has a $500,000 mortgage on it, you have 200,000 of debt, but a 500,000 liability, which is a mortgage. So understand that these are different definitions. Most people commingle these together, they call liability debt and they just lump it all into one category. So when someone says you should be debt-free, I agree. I think it’s actually good to have equity, not debt, but that does not mean you do not have loans. It does not mean you don’t have liabilities. Does this make sense? And now when you do have these liabilities, these loans, you have to be wise.
(06:58)
Remember, stewards are wise of the money. Also, remember this in the Bible, the parable of the talents, there was the three servants, right? That borrowed money from the remaster. Jesus is actually talking about using debt. The one that got in trouble is the one that paid his debt back, but he didn’t do anything with it. That one person had that talent, that one bag and sum of money that was called the talent was given to the guy that had five of those sums of money and made 10. So he’s like, yeah, I’m going to give the one that had one, give it to the guy that made 10 because he’ll make more with it. Or she who knows, it could have been a she. Women are definitely sometimes better with investing than men are. There’s no doubt about that. And so think of it that way.
(07:38)
Think of it like the parable of the talent and the stewards that are given the money, borrowed it. They had to pay it back, but they went to do something better with it. That is what wise stewards do with their money. Now, does this mean you just go and leverage everything to the help? No, because stewards realize that they don’t fear debt, but they do respect it. They do respect it knowing that this could be something that could hurt you. So you got to be able to take your risks very wisely if you have or you’re using debt. I have a friend, Sam Prim, who does a lot of social media videos, great guy, and he teaches a lot of good stuff and he talks about how he has 50 million of real estate, 30 million of debt. He’ll use the traditional term, but it’s really 30 million of liabilities.
(08:21)
And he’ll say, if I sell all these off, I have $20 million of equity. He’s not in debt per se. He has a position of equity if you were to sell off all his assets. Now if those assets all of a sudden depreciate and they lose value, and now he owes more than what he has now he’s in debt. Now he’s in trouble, isn’t he? But the real question is, can you service? See, it’s not the debt that you worry about. It’s not even the balance of the loans that worries people the most. If you had a million dollar mortgage, but you only had to pay $1 a month for the rest of your life, would you really give a crap about it? No. No, you wouldn’t. And you might say, well, that doesn’t work, Chris, that numbers don’t work. It doesn’t matter, guys. It’s the principle of the matter is that it’s the payment that creates the stress.
(09:03)
The reason why people want to be debt-free is because they don’t have to keep making these payments and rightfully so. One more payment is just one more thing to put on your brain, one more thing to have. So yeah, all things being equal. If someone has a lot of cash leftover, great. Pay off your debt. If you have no idea what to do with it, pay it off. I’ve actually had clients that have said in your situation, maybe you should just pay off this debt, be debt free. I even have people that of you that have been listening to the show saying, Chris, I know you hate this. I have a paid off house. And I’m like, no, that’s not a bad thing. Now, if you have a paid off house and then you have nothing else asset wise to help create passive income for you, that’s a problem.
(09:39)
Then you’re asset rich and cash poor. Then you end up being like some of my farmer or rancher friends and clients that they have millions of dollars of real estate of land, but they don’t have the cashflow to help support to stay on that land. And that’s why you hear about farmers and ranchers going broke, that they’ve had it for generations and they can’t keep it going. They can’t even keep up with the tax payments because again, there’s no cashflow. There’s no passive income coming in to help them keep that thing afloat. Does that make sense? It’s not about the net worth. Although lemme show you something kind of cool about net worth. You kind of ready for this, okay? Now if you’re listening to this, you’re going to have to follow along with me, but I want to share something that’s pretty cool concept that got me to see this here.
(10:21)
Because for example, I’m going back to my friend here who is, she’s debt-free on her house, but she’s actually done some renovations to it. She’s looking to maybe do a cash out refinance. Now, I don’t remember the exact value of her home. I know it’s right around here and I’m just rounding numbers up to make it easy. But let’s just say that this home is worth 250,000 and she wants to get 200,000 of money out of it. So let me share something with you using just, we have our cashflow optimizer. We have our clients use. Let me show you at the balance sheet. What happens, I want you to show you what happens to her net worth when she decides to do a cash out refinance, is she going more into debt or not? That’s the question. Okay, so this is the balance sheet right here.
(11:01)
This is the actual cashflow optimizer we have. Yeah, total assets, total liabilities, everything’s zero because I haven’t put anything in it. It’s a blank blank sheet. Now, let’s just say that this primary residence that she has here is worth $250,000. Now you’ll see the balance sheet, the net worth, she’s debt free. The assets, 250,000 net worth is 250,000. There’s no liability, there’s no loan, there’s no mortgage on this property right now. Someone will say, yeah, but Chris, if I pull out the equity right, if I get either a home make me line of credit or I do a cash out refinance mortgage, which by the way, sometimes that’s better than doing a home make line of credit right now if I do that, now I’m in debt. Good point. Let’s put that in. So let’s put in the mortgage. So we put in the mortgage here, scroll down and say that she got it for $200,000.
(11:52)
So now she a $200,000 mortgage. What’s her debt or equity? Here it is. Net worth is 50,000. She has now 50,000 of equity. This positive net worth means your place of equity, not debt. Just so you know, if you ever have a positive net worth, you are in a place of equity, not debt. You are debt-free according to accounting terms. Even if you look at Wall Street, when they look at debt to equity ratios, if someone has equity, they are not in debt. The equity to debt ratio, that’s what’s happening here. Now, you can look at this in different ways, but the truth is she has $50,000 of equity, but that’s not all because remember, she doesn’t just have a mortgage. Remember, this was a paid off house. She’s getting out $200,000 as well. So let’s say we put that $200,000 into savings, right? Watch what happens to the net worth ta, what’s the net worth?
(12:44)
250,000. Now this is what happens on a balance sheet because remember that 200,000 comes out. Now if you blow it in Vegas and you get nothing back, yes, now you’re in trouble. Now you just have 50,000 of equity, but that 200,000 comes out in cash, goes into savings or even just into cash, and it gets added back in. So now you have 450,000 of total assets because 200,000 of cash plus 250,000 home equals four 50,000 minus the mortgage, which is 200,000, means that the net worth is 250,000. Notice the net worth did not change. She is still debt free. She’s not liability free. She stills a mortgage, but she is debt free. Understand this. So from a balance sheet standpoint, nothing has changed. It’s still the same. Here is where it’s different though. It’s got a monthly payment. That’s the thing we have to take into account.
(13:39)
So I did this at 6.75% on $200,000 and what do we get? We get a payment of $1,297 a month, so a little over $15,000 a year that you’re paying on this mortgage. So yes. Now the expenses when it comes to your cashflow, you’re now nearly $1,300 a month less in cashflow. If you were paycheck to paycheck and then you got this home equity line of credit out, or you got this cash out refinance, guess what? Yes. Now you’re starting to experience stress. Now you have this payment you didn’t have before. So when someone’s going to use debt, the big thing is can I service the payment? Is there a way to make sure that this payment gets paid? Either one, you got more than enough cashflow that you can weather that storm, having that extra payment or two, we do something with that $200,000 to make more than that payment.
(14:34)
So let’s say for example, you give $200,000 and you invest it, and many of the investments that our clients do, sometimes it’s anywhere from 10 to 12% is pretty typical. So let’s go on the low end 10%. That means you make 20,000 a year. What does that mean? That means net profit is this. So what does that do? That means your net profit right there is 44 36. That means if you have 20,000 a year coming in, you have more than enough money coming in to pay the monthly payment and you have an extra $4,436 that year coming in. Now if you have that 44, 36, you still got to service the payment. So remember to make all the things equal, we got to make sure we’re paying off the payment because a debt-free person would not have this payment. So now you have a $4,436 a year profit off of this income coming in.
(15:25)
Now that’s compounding, right, and also you’re taking that money to reinvest at that 10%. Guess what happens after 10 years, you now have $77,768 of actual cash. Now that’s come in. So you have really almost $80,000 after 10 years. Now, that’s not going to make you rich, but think about this. If you’re thinking, should I have a house that’s paid off, which again, you have a paid off house. Now someone would say, yeah, but you don’t have the payment. You could save the payment. Yes, but you can do that here as well. If you had enough cashflow to save the payment, you could still do that here. Remember that investment is covering the payment and giving you another 4,400 a year with $0 out of your own pocket. That’s an infinite rate of return. Guys, if you make $1, it’s still an infinite rate of return because it was $0 out of your pocket and you still have to make the payment.
(16:14)
So I’m taking the payment out and still these with 4,436. But if you keep using that money to reinvest what I call the income avalanche, where you keep building this cash and building reinvest in the income to build up and create more and more passive income where it’s compounding for you, yeah, you’ve got 77 7 68 right now. Remember this payment, this money you’re earning from the investment also paid down the home. So I just a 6.75% 30 year fixed mortgage because right now I probably would be more leaning towards a 30 year fix versus a heloc, even though we know that the feds are starting to lower rates still, I don’t count on the feds always doing what they say, right? We’ve seen times where they’ve lied through their teeth, so I don’t always want to count on that. So yes, a homemaker line credit you could do more or less, but I’m going to go with the fixed mortgage right now because I want to prove that you could still have a good low interest rate on this mortgage and pay down and create more equity after 10 years is just paying those minimum payments using the investment money that was paid in.
(17:16)
You pay down almost $30,000 of equity. So now the mortgage balance you have is about $170,600, right? That’s what’s left on your mortgage after 10 years, because remember, you’re paying down principal and interest with this money, so your investment’s paying down principal and interest, and it’s also compounding with the bonus returns. That means you have a total equity gain. This does include any appreciation of the house because you’ll get that with a paid off house. Anyways, $107,000 that you invested, zero of your own cash out of 107,000. But that’s not all because by this point, the net cashflow coming from that total money coming through is averaging to be $1,017 a month, about 12,000 more a year than what you’re making, than what you’re paying in mortgage payments. So now you have this net cashflow, you’re positive a thousand dollars a month and you’ve gained more equity total between the cash that’s being invested and the equity by paying down the mortgage anyways.
(18:13)
Of course, if the house appreciates rate, you still have equity in that house. You still have the ability to sell it and do things. I take out the equity gain for that reason. I don’t worry about appreciation because you’ll get appreciated regardless. By the way a house appreciates, even if I have mortgage on it the same way, nothing changes whether you have a mortgage or not. It’s always about the income and the cashflow. What is it doing? How is it getting you further ahead? Even people say, well, net worth’s your ultimate measure. Well, great, well then why not create more leverage with my money and create more net worth? Now again, if you have a paid off house, this doesn’t mean you should go and run up debt. You may not need to. We’ve had several clients where they had more than enough cash they could invest, be debt free and create all the passive income to be able to retire sometimes in a year or two.
(18:57)
But if you’re someone that’s saying, I’m not anywhere close, I need something more, what can I do? Your house could be one of those things to generate more cashflow for you. The key is this, guys, is that if you’re going to do that, you got to be very careful. You got to make sure that you’re actually investing in things that have some other assets backing it up. I would not take this money and throw it in the stock market, which by the way, they don’t want you to anyways. They tell you to sign off and say, you’re not going to borrow money to then go and put in mutual funds or stocks. They don’t want another great depression repeating itself. They also don’t want you to put in stupid things like crypto and things like that. Yeah, you can make more money there, but what if you lose it?
(19:38)
There’s no control over it. I like investments that can more control. If it’s not invested in me, in who I am and my business or whatever it might be something I can control. Then investing that in something like real estate is a much more certain thing, especially if it’s a real asset backing it up. Not like something that looks like real estate, but really you have no real claim to any kind of real estate if something goes wrong. And by the way, even our clients, they’ve learned that if you have money that goes into debt, like you’re lending your money to an investor, did you know that those lenders actually get paid before equity investors? Many times people will say, oh, I’m going to be in a syndication. I’m going to be an equity investor. Then I have a real asset. It’s true, you do.
(20:19)
But remember, you’re the lower on the pecking order, right? When it comes to, they call it the waterfall, right? And when it comes to who gets paid off first, when an asset sells, the debt gets paid off first. Those that have debt on the property get paid off first. Then the equity investors gets whatever’s left over. So in this case, being in debt in a debt position can be better and safer than even having an equity position. Again, opposite of everything, you’ve always been taught by financial advisors, the so-called experts on the media who are really just filling it full of crap. That’s the difference. So remember that the debt, you got to be a wise steward. You got to make sure you’re putting in places that are wise. This is why a lot of our clients, they’re saying, where do I put it? We got to be very careful with it.
(21:02)
We have to take this very seriously and weigh the options. When we look at these of what could be the better type of strategy to go into, it’s possible you could go into a safer investment that may not cover your full mortgage payment. For example, right now, if I took that money out of my house and I went and bought just simple like a turnkey real estate property, I may or may not make exactly what it’s going to cover my payment. Or I might have zero net profit in those first year or two, but afterwards, as they keep increasing rent and those profits increase, then I can start to see more income being made. And of course, if I buy those also with a mortgage, getting a mortgage on those properties, any appreciation gain actually gets a multiplier effect because for example, if I have a $400,000 property that I put a hundred thousand dollars down payment on and all of a sudden that thing appreciates 10%, that’s $40,000.
(21:52)
It goes from 400 to 440,000. I didn’t make a 10% return. My a hundred thousand, which got a $40,000 boost in appreciation made a 40% return. If I put a quarter down payment, a 25% down payment on a property, guess what? There’s a four times multiplier effect. So if I make there’s 10% of equity bump in appreciation, I get four times that effect. I get a 40% bump on my cash that was actually invested. There’s just so many ways to build wealth faster than just doing the traditional cash. Only traditional set it and forget it, throw it away in your mutual funds and everything else, but it does require you to make wise decisions, and that’s why a lot of times our clients are really trying to be careful. You got to treat that money carefully. If it comes down to this, if you don’t know what you’re going to do, then don’t do anything.
(22:43)
Don’t cash out money out of your mortgage and say, I’m going to throw it in this or that. Be very, very careful. Do not come back later on and say, Chris, you told me to take money out of my mortgage. No, I didn’t. I did not say, take cash out equity out of your home. I just want you to open up to realize that if you do get cash out of your home or anything else like that for that matter, it doesn’t mean you are in more debt. Remember, debt is negative equity. The real question is what is it due to my cashflow? Those monthly payments, those are the things you got to be worried about and the money, yes, it does have to be paid back, of course, at least at some point even it means you have to sell off the house to be able to pay it back, right?
(23:22)
Worst case scenario, that’s why I recommend people get a hundred percent line of credit, which they don’t offer anyways right now, but if they did, I wouldn’t want to do it. I think that’s very, very dangerous. That’s why I like to leave at least 20% equity in my house sometimes. Occasionally, if it’s an appreciating market, I might think 10% equity left of it, but even that, I mean, that’s kind of testing my own personal conservative comfort levels a little bit. It could still work financially or mathematically, but I like to have that 20% buffer of equity in a property. Anything else above and beyond that 20%. Great. I’ve got some extra wiggle room, and so my whole point is you can get ahead. You can actually get ahead with no dollars out of pocket by having an asset that can be leveraged to work in your favor.
(24:07)
Just remember, just because you have loans, it doesn’t mean you have debt. Debt is negative equity. That’s the main point I want you guys to get out that what is debt really that is just simply negative equity. It’s not loans separate. The two, remember loans or liabilities. Debt is negative equity. You want to be a position of equity, of positive net worth, and then the question is, how do I take that net worth and create more income with it? That’s the key, and like I said before, I mentioned at the beginning of this podcast, I was going to say, interview this podcast episode. I mentioned at the beginning that cashflow calculator actually takes those factors into account, even says, Hey, we got to leave certain amount of equity in those properties, but how much cashflow could be actually create in our situation? That’s what the passive income calculator actually helps you pretty accurately determine, assuming that 10% type of return on the actual investments you have liquid and available. So go check that out@moneyripples.com today. And of course, let us know if you have any questions about this topic, the situation. If you’re on YouTube, leave some comments below and let us know what you think. Did you get any haws from this? I would love to hear your insights as well. Guys, make a wonderful prosperous week. See you later.