Skip to content

Real Estate, wealth, the FIA, and the IUL Part 1 of 2

Today, let’s chat about real estate and dig deeper into an overview for investing in it for your retirement portfolio. This is a two-part series covering the subjects of Real Estate and Wealth. Let’s begin, shall we?

There are a TON of books and information on building a business and investing in Real Estate. Real Estate can be a college course with all the information and subjects to cover. Whether you are someone who wants to be a property flipper and all the lessons to learn from those who did it before us. Knowing and using the critical legal documents to do the project right and safely to protect your investment. From knowing how to assess and analyze the purchase price of the property and create a repair estimate to decide if there is enough meat on the bone for the deal to work. To create a scope of work and negotiate and execute contracts with contractors as a professional and a bunch of details in between. In Real Estate for sure, the devil is in the details. My last fix and flip was in the heart of San Jose, California and also known as Silicon Valley. It was a nightmare for many reasons, including a gas main explosion next door and the fire department destroying the new landscaping. Then there were the squatters who threw a wild party there while the property was on the market to be sold, not to mention it was on the market way too long adding to holding costs while vacant back in 2014. I had a hard money loan on the property at over 12% interest with a $20,000 account funding fee to get the cash in 3 days for a fast closing, very typical with a hard money lender loan in my experience on what was a $600,000 lent amount.

Then there are people who buy a property and hope it appreciates. The amount of money property is worth after the loans and debts on the property are called equity, which is what people take a Home Equity Line of Credit or HELOC loans out against on the appreciation of said property from your bank or federal credit union. That money can then be used for anything you want, like a high limit credit card but based on prime rates, and you only pay the interest on it when the money is being used and an annual access fee for as long as you have it. Great way to come up with earnest money to close a deal and show the hard or private money lender that you have skin in the game.

To someone like me who buys real estate for passive income. This was always my retirement plan until COVID opened my eyes and my renters stopped paying into their lease obligations. I have loans on these properties that I depend on my renters to cover by making their monthly access fees to my properties and if I don’t get it, I can’t pay my obligations without going out of pocket. If I was retired and dependent on that money to live, what would I do then? That made me reassess my passive income property plan for my retirement, I needed guarantees.

I remember what got me started in Real Estate was when I heard back in 1998 that it has built more wealthy people in this country than any other investment. I got started right away, and as a broke kid in his early 20’s I spent $2,500 on a course from Carleton H. Sheets, who got into Real Estate in 1970. He was selling courses on how to buy positive cash-flowing passive income properties. I even paid for private mentoring and listened to his courses on cassette tapes if any of you know what those are? Well, the joke was on me because guess what, there is no such thing as positive cash-flowing passive income properties in California. All the properties sold in this state are negative cash-flowing properties. What are positive and negative cash flow properties? Basically, what positive cash-flowing property means is if you put 20 to 25% down on a property, the renter in your property covers the cost of the mortgage, the property taxes, and the property insurance, property managers if you don’t want to deal with the headache of managing all your properties or if they are out of state. After all that you still come out with a tiny bit of cash in your pocket which makes the property considered to have positive cash flow. In California today and even back in 1997, everything you bought was negative cash-flowing. If you buy a 3 bedroom 2 bath house which we call a 3/2 to make it easy and are also known as bread and butter homes, let’s say in San Jose, California, you will pay well over a million dollars for that house conservatively today. Your mortgage alone will not be covered by what the renter pays on a monthly basis for that property, if it doesn’t make dollars then it doesn’t make sense as an investment.

As I mentioned previously, when COVID hit in March of 2020, my renters, after learning that there was a moratorium on rent, stopped paying their rent. That forced me to put my mortgages on my properties into forbearance status since I can’t pay mortgages on these properties if my renters aren’t covering their lease obligations and essentially get to live in my properties for free. I also help manage the properties for my father, all of his mortgages were paid off long ago or he bought the properties for a mix of cash and used a self-directed IRA account to fund the purchases. My father today is 76 years old and is retired; his income is dependent on the cash he’s getting from his passive income properties and a little from Social Security benefits. Smartly for him, he saved a nest egg and has the cash to hold him over in addition to Social Security. Will we get social security as a safety blanket 20 years from now? That’s a whole other subject for another day. In short, I have read that in the future it will be reduced by 30% at best, if not removed altogether which as someone who has been paying into Social Security since age 13 none stop, that frankly would be upsetting. Anyway, when this happened, I realized I need to diversify my retirement plan as well, I even sold one of my properties, one of the ones I had in forbearance, and I plan to roll that over into a Fixed Indexed Annuity or FIA for the guaranteed for life-income that provides. Yes, it will be taxed, but it can replace my dependency on Social Security. Remember, we don’t plan to fail; we fail to plan. Note also, if you can roll over money from your retirement account after paying the taxes today during this huge tax sale, the Roth IRA will allow the money in an FIA to grow tax-free.

It’s my belief that investing for passive income in California is a huge mistake, I myself identify as pretty liberal and love living in a liberal state. I invest, however, in conservative states because it just makes financial sense. We pay a lot here for homes and in property taxes for that reason. California is also a tenant-friendly state which means even before covid it could take over 6 months to evict a non-performing tenant. For those depending again on that income, how do they then survive? Not all landlords are rich in the bank, many are only wealthy on paper and can’t even leverage the equity if they are not earning a paycheck, the bank will make it much harder for them to qualify for a loan without showing consistent income coming in.

Another term to be familiar with is ROI or “Return On Investment” which is presented in the form of a percentage. ROI is defined as a performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments. ROI tries to directly measure the amount of return on a particular investment, relative to the investment’s cost. So for example, if I buy a property for $100,000, and it brings in $1,000 a month, the ROI is 8.33% which is pretty good; that’s positive cash flowing property that would pay itself off in approximately 10 to 12 years depending on unexpected maintenance items that pop up. Texas has high property taxes, for example, and in Florida it is low. The ROI on a property in California is about 3%; in my opinion, people who purchase property in California to rent them out are like people who have 401k’s; they invest in them without knowing the cons or knowing of the better options out there that’s available to them. In the Fixed Indexed Annuity, for example, the ROI on the FIA beats the ROI on their properties here in the San Francisco Bay Area and because the FIA is guaranteed growth and pension-like income, it’s like collecting the guaranteed rent month in and month out with no dependency on people making their obligatory payments, no property insurance or taxes, no maintenance, no property management fees, in fact, no fees at all in some FIA’s, and no headaches. Just the peace of mind in the pension-like quality of an FIA brings in year after year until the policyholder passes away. On an overall cost basis, the FIA invested $1,000,000 in on investment for example and if you ignore the 20% signing bonus you get at funding, remove that perk from the equation, it still comes out to 103% ROI after 10 years and after 30 years it’s 723%. One of the best investments my dad did was buying a 2/1 in Menlo Park for $110,000 and ended up spending well over $200,000 over the 35 years he owned it. Even with the remarkable real estate growth from 1984 to 2020 in this area, when he sold it for $1.5million and after the agent’s commission fees and rehab costs to get it to market. The ROI on that in comparison was 287% over the 36 plus years. Remember the FIA was over 723% over the 30 years, which sounds better to you if you consider the risks and the variables you aren’t able to guarantee in property ownership. To compound the issue, the more properties a person owns, the more that turns into a full-time job. The FIA is maintenance-free with guaranteed Index-based growth that outpaces inflation by a significant margin. True, the property will bring instant income after the first month instead of waiting for 10 years for it to grow, but that’s why I believe in a diversified portfolio which includes both property and an FIA for those who have the stomach to be landlords. Also, it’s best to know all your choices as maybe in your case you can wait to draw funds for 5 to 15 years. We can find a solution that makes sense for your goals after you decide to hang up your work uniform for good.

Next week is part 2 of this video where I cover the risk of one door in real estate and alternatives. My forecast of the real estate market in late 2022. And 5 questions you should be asking yourself. Thanks for watching and please feel free to comment below or send me a message from the website on the “Get in Touch” link at the top of the web page where there is also a calendar link to customize a lesson for you there and in the comments section here below. Please like this video and subscribe to this channel so that you don’t miss any future content. I also would appreciate it if you shared my videos with friends and family as I love helping everyone and want to get to as many people as I can. I look forward to speaking with you very soon. Please make every day beautiful, and a smile is contagious!

YouTube Link