Is it possible you’ve been lied to? Are the numbers financial advisors use real or make-believe? What’s the truth?
Anti-Financial Advisor Chris Miles is going to pull back the curtain to show you how he was trained as a financial advisor. He explains why retirement accounts have been shown to have far less than initially expected.
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Is Your Financial Advisor Lying To You?
I want to talk about a concept that came from one of our current clients and a situation where cashflow got a little bit tight. You know who you are because you already got this ahead of time. A shout-out to this client. I’m so grateful that she has a situation to prove this point that I’ve learned over the years that the mortgage interest rate isn’t all what it seems. I get it because this woman has a little bit higher interest rate than even I have on my own first mortgage, yet this is a very debate I make myself.
The question is this. Right now, interest rates undoubtedly are higher. You probably have a mortgage that’s lower than the current interest rate. Does it make sense to refinance or not? That is the big question. When I was a financial advisor, it was always never. If this were the situation, I would say, “No way. Why would that ever make sense?” However, as time went on, I realized that there were more elements in here besides interest rates.
One, you got to understand that even if you had a 3% mortgage rate and now they double that, double sounds amazingly high, but when you think about it from a simple interest standpoint, double is not that big of a deal. Let me show an example. If you had a 3% mortgage for $240,000, it’s a $ 1,000-a-month payment. Now the payment makes a difference, but 3% interest on a 30-year mortgage is $240,000.
It’s over $1,000 a month. You’ll see the total interest rate here, $124,000. Many people look to say, “I’m paying half of this in interest.” The same thing here too if you raise it to 6%. Watch what happens. The interest goes from $124,000 to $278,000, even more than double. You might say, “Chris, would it make sense to refinance?” especially where lately, you might be getting closer like 6.5%, depending on the rates or whatever.
That’s almost $300,000 for a $240,000 mortgage. When I was a mortgage broker, I used to teach people this was bad. Folks, I would show them this thing right here. I’d say $292,000. You’re paying more than double what this balance is. If you want to stick it back to the bank, pay this off first. Pay it off as fast as possible. That is what the bank wants me to do. Does the bank want to pay off its debt?
Even with all the bank failures going on, even the banks that are strong, the ones that haven’t been taking a lot of risks. The thing they know is that they’re creating what’s called arbitrage. They know they can borrow money from you in debt and be able to turn around and make a higher interest rate than what they borrow with that.
For example, when they borrow money from you, they’ve taken it from your savings account. Your savings accounts, your CVs, money markets, they’re using that money specifically to create leverage. Let’s say you have a five-year CV that you’re getting paid. Let’s say now it’s 3.5%. However, they can turn around a loan on a car loan now at about 6.5% based on my current credit union’s interest rates.
You might say, “That’s just double.” No, they know the compounding effect. They know what that does. Even on the simple interest side, they know they’re making more money because it cost them none of their money. They’re just paying you interest, but they’re making more. It’s the same thing here. If you knew that you could take that money that would’ve normally been $124,000 of interest, you would have to pay over 30 years to bank savings account at 3%. You wouldn’t like that so much.
I’ll put that back again. Put that 3% on here. It is $124,000 which you have to pay for over 30 years. That’s expensive money, especially if somebody’s keeping that money in there, but you don’t care. Why? It’s because they’re paying you payments on that money. Now they’re paying your money back, interest and principles, so you’re getting that money back anyways. Again, you’re using other people’s money, not even your own, but if you turn around, you did loan that out at 6.25%. You made almost $300,000. Your net gain out of that total is roughly in the ballpark of about $170,000 that you made for free, essentially out of none of your own money.
Some people call it infinite return. I wouldn’t call it that. Instead of an infinite return, even though that’s technically true because it’s not your money, I would even say, “What’s the real profit here?” My profit’s more than double because if I invest $124,000 to make $292,000, I’m going to say that’s a good win, wouldn’t you?
That’s the concept we’re looking at here today. Can you create arbitrage with it? What is it you can create? Ultimately, what comes down for you is what it does for your monthly income. Let me use an example of Mrs. S. This is one of her clients here. On her first mortgage, she has a $64,000 balance. She’s getting closer to paying off. I put eight and a half years left. I miscalculated. It’s ten years left that she has on this mortgage here.
She has ten years left, even at 2.875%, the $890 a month does include escrow. Even when I do apples to apples, I’m including that escrow, the tax, and insurance payment here as well. Her second mortgage is at 7% plus. It’s variable based on the Feds. This is what’s making her stressed. Despite that, they’re making her pay 1% a month. A $44,000 balance means she pays $442 a month. Also, ten years left on this loan.
Essentially, what will happen in ten years is, if she keeps going the path that she’s going, she will have a free and clear home saving herself $1,147 a month because she’ll still pay taxes and insurance. That’s the tote, so $1,147 a month. That is the number to beat ultimately in ten years. Do we refinance or not? This is where it comes back to you as a steward. We talk about what you are able to do with money.
If you’re a gambler or spender, don’t even read the rest of this. Please, stay away because you’re going to ruin this anyways. This is specific for people that know how to be wise stewards of their money and how to use this better. She’s hired us specifically because we help her strategize and help her do things like this and help her find more money. By the way, we found other money in total with this and we’re finding over about $15,000 a year, but we’re taking this money and, ideally, we’re investing it.
She can invest in a lot of different places. I’m going to use an example of her buying a free and outright free and clear property first. We’re going to use that as an example. What happens then? I took a very specific property. It had about $1,000 a month. It was a little over $1,000. I round it down. I put $1,000 a month net gain. That’s after they pay the property manager and everything.
The cool thing is that she doubled that $120,000. The payment is only $400 more a month. Our payment only went up $400 a month despite it going to a 6.375% mortgage. We locked the rate. We locked the 1st and 2nd into 6.375%, much higher than her 2.875%. People will say, “This puts me back. I’m going back 30 years.” She does the math here. She’s like, “I’m going to be well beyond retirement age when this mortgage would finally get paid off.” That’s not our goal here.
Our goal is to get you in the best cashflow position possible, the healthiest financial position to essentially do what the bank has been doing to you for years, yet you haven’t done it. The reason the banks have done it well is because they know how to be wise toward their money. Most banks, as we know. We can’t trust those banks always, but the ones that aren’t taking unnecessary risks, they’re doing the usual banking business that they’ve done for hundreds of years. That’s what they’re doing here.
Already, by refinancing this mortgage and by investing that $120,000, she now has a $600 net gain. Her cashflow position now in real-life is better. That’s a huge benefit right there. What’s that going to do in ten years? Her total cashflow with all the rents and everything and we’re increasing rents only by 3%. The average has been between 4% and 5% over many years. We’re just putting it at 3%. I’m trying to play devil’s advocate against this point here.
Cashflow’s $153,000 total with appreciation, and I only put that at 3% appreciation on this property. That’s it. I didn’t put a huge amount of appreciation, very conservative. Some of you folks saw 20% or 30% in a year. Sometimes you got to have 1 or 2 years that could do all the appreciation and have a flat market the rest of the time and still hit this.
No guarantees, but it’s not too far-fetched. Total appreciation is $194,000 or almost $195,000. Here’s a scrape. Her mortgage balance is $200,000. What happens is that based on equity and cashflow and everything else, she’s about the same position. Here’s what’s important, that rent right there is $1,344 a month. Remember, that’s $200 more a month. Let’s go back. $1,147 is what she would’ve freed up by paying off her mortgages. Free and clear.
Here, she has a $ 200-a-month net gain. It only takes a few years before she has a net gain there. Now she’s in a healthier position. She could sell off this property and pay off her mortgage and be fine and be in the same position as before, but now, the nice thing is she’s got cashflow coming in better than just hitting zero.
This is the problem. All the Dave Ramsey fans get you to the point of the check, pay off her mortgages, pay off everything, then you’re at zero. You don’t have positive cashflow. You don’t have passive income. You simply have nothing. No payment. You still have to live. You still have expenses in your life beyond payments. That’s the important thing. Remember, she buys this with leverage, a completely different scenario here.All the Dave Ramsey fans get you to the point of the check, pay off everything, then you're at zero. You don't have positive cashflow. You don't have passive income. You simply have nothing. You still have to live. You still have expenses in your life… Click To Tweet
I even put this at a 20% per year conservative gain. That’s including appreciation because there’s a multiplier effect. When you only put 20% down on a property, there’s massive appreciation because you get more. This includes cashflow, which cashflows depending on the property between 5% and 10% now cash-and-cash. Not great. Appreciation helps. Also, if you buy it with a mortgage, you also have renters paying down your balance for you.
You’re gaining equity even if the property doesn’t appreciate. Between those two things happening, I’m saying this is conservative, but if I say you get 20%, some of you folks will think it’s too good to be true. I’ve shared examples of different properties I’ve had. I’ve had properties I’ve had for five years that have done on the ROI of my down payment. It’s done over 300%.
To say that, to get a 20% per year gain is foolish. In many cases, it can be 30% to 40% per year depending on the cashflows. Again, I try to be conservative. I have 20% per year. If you include appreciation and equity buildup from them paying on your mortgage balance from you gaining that equity as the difference between the balance of the mortgage and the equity gain, that’s what you get. That’s where the $700,000 of gains come from.
Most likely, it would be selling and refinancing. Either way, you would probably have it somewhere in the ballpark between about $5,000 and $6,000 a month of cashflows right there. That’s even healthier than $1,344 because you get that appreciation or those equity gains that you get when you buy it with leverage. Nothing’s guaranteed, even if you cut that in half. What if we cut that in half? $350,000 is still way better than where she was before.
She would have now in the six figures more money after ten years than having it paid off the mortgage, even better than that, even if this was 10%. Let me show you this. Let’s say she put this into a fund. She puts this into a fund of $120,000. Interest is 10%, and she compounds it annually. After ten years, that’s still $311,000. There are plenty of funds and investments that are out there paying this, and sometimes more.
Even at 10% here, we’ve even got funds that we’ve talked about on the show that we have paid that return or better. Again, no guarantees. Anything can happen. There’s always a risk, and I’m not saying that this is the case, but 10% for our clients is the baseline average of what they look at. Think of this, 10% compounding on $120,000 gets you at $311,000. Remember, her mortgage balance after ten years was supposed to be zero if she paid it normally.
Her mortgage balance could be about $200,000 after ten years even at the 6.375% interest rate. That means she now nets $111,000 more than she would’ve had anyways. It always comes back to cashflow. It always comes back to this full circle. What’s it ultimately going to do? What’s your real profit? What’s your real gain? That’s what we are always looking to do. It’s about creating that arbitrage. It’s about following the same rules that banks have been doing on you the whole time, but it’s been the banks that have taught you for years that you shouldn’t do this.
Why? It’s because they love having your money locked up so then they can play with your money and do whatever they want. Why not turn the tables around and be the bank yourself? Notice, I’m not even talking about infinite banking. I’m not even talking about taking the money and rolling it through this. This is purely dealing with cash. You are doing the same thing to the bank, where now you become the one that you create arbitrage. You’re the one that creates a spread, making more. When that compounds over time, you can’t beat it.
By the way, when you pull out equity from your house, I recommend you do put into real assets, something that is asset-backed like real estate. When people are feeling scared about that, I say, “Do what I did in that example, put into a property. Put into equity in something else because at least it goes from equity to equity.” Put it somewhere else. If it’s coming out of your own house, great. Put into something else that has equity but now pays you cashflow. It pays you profits.
It doesn’t mean that anything’s risk-free. It doesn’t mean that there won’t be bumps and bruises along the way. I even had a client who bought a duplex and he was complaining after a couple of years. He said, “Chris, I haven’t been making money. I would’ve been better off in a 12% fund.” We looked at the equity gain he got from appreciation. Even though he did have some positive cashflow from that, he had some negative experiences because HOA fees went up. By the way, I’m not a big fan of HOA fees, just so you know. Tip to you. HOA fees went up beyond what they were predicting. It killed some of his cashflows. He still made in net profit, but he also made a $60,000 equity gain, which would’ve beat that 12% fund that he was trying to do.
That’s the thing. There can be hiccups and things along the way. You might have cashflow restricted. You might have a situation where there’s no appreciation game for a few years. That’s very possible even in today’s current environment. I wouldn’t bank on the appreciation. Bank on cashflow. Make sure that there’s a spread. This is the warning. If you’re going to use this mortgage strategy to cash out, you’ve got to run the numbers.
This is why we run these numbers with our clients to help them see this. Run the numbers because you need to have a positive net gain. You got to be able to service that debt payment. With that extra $400 a month, she needs to make at least $400 a month of cashflow. Is that possible $120,000? Absolutely. As I said, if you buy real assets that appreciate with inflation, which is always a big concern, and I think that’s still going to be a concern in the future, that is a good thing for you because you have a real asset that you’ve used that money.
The truth is your home is going to appreciate whether you have a mortgage or not. That’s going to appreciate, regardless. If you can get that equity out that’s earning 0% doing nothing for you but it’s dead equity sitting there, giving the bank less risk as you pay down your mortgage while increasing your risk because your equity is trapped in there, get that money into your control. Use it and deploy it in a way that gives you more financial freedom now.
This woman wants financial freedom. She doesn’t want it to be a twenty-year thing. She’s like, “Tell me. In ten years, could I be financially free?” The answer is this, maybe or possibly. Even we did nothing else other than this one strategy. As I said, “For buying certain properties, and there’s that equity gain, that even gives there an extra $5,000 or $6,000 a month of cashflow or passive income. Mrs. S, I’ll let you decide.” You decide what you think. Is it going to help you feel freer?
If you have an extra $5,000 or $6,000 a month, you tell me. That choice is always up to us, but I will tell you, it’s a much more happy time than paying off more. You’re saying, “Now I have no payment, but now I’m at zero. I’m not anywhere close to having any income to get me out of the rat race.” That is where it needs to be focused.
That’s why cashflow creates freedom because cashflow creates more options in your life. More options are what give you more freedom because you have the ability to choose what you’re going to do with your life. You can maneuver and weather bad storms while everybody else is suffering. You’re the one that is able to play it safe because you’re able to get that money out of prison and use it to your advantage.
Folks, if you have any questions on this or if you want to know how that might work in your situation, you can always reach out to us at MoneyRipples.com. If anything, this is specifically for our client, Mrs. S. I hope this is valuable for you. I hope this gives you an insight of why this, even though it more than doubles, your interest rate can still make sense.
There are other situations where it wouldn’t. In this one specifically, this is a no-brainer. This one is free money. It is an infinite rate of return off of your cash because you put no cash into it yet you net $600 a month. That is pretty incredible. Anyways, that’s my message to you. That’s leverage. That’s what banks do. You do the same thing to create freedom for yourself in your life today. Make it a wonderful and prosperous week, and we’ll see you later.