Common Sense Financial Podcast

The Wealth Building Strategies of Entrepreneurs and Real Estate Investors Revealed

Episode Intro

It’s no secret that entrepreneurs and real estate investors are responsible for the majority of the wealth creation in the world, but did you know it’s possible to take the same strategies they use and apply them to your own investments? Learn how to multiply your wealth through the power of leverage and how to use the idea of internal and external rates of return to acquire assets that not only appreciate but generate cash flow at the same time.

Show Notes

  • Many investors have a contradictory attitude when it comes to investments and leverage. With their investments, they favor risk but when it comes to leveraging they adopt a scarcity mindset.
  • Entrepreneurs and real estate investors are the biggest wealth creators in the world, but the typical investor can benefit from using the same strategies they use.
  • There are two primary reasons those two types of people create so much wealth. The first is they effectively leverage other people’s money. The second is they create cash flow using internal and external rates of return.
  • Rarely do real estate investors purchase a house in cash because the more money that is tied up in one property, the less there is to purchase another.
  • By using the bank’s money to leverage the purchases, they have the ability to use the same amount of money to acquire multiple properties. This allows them to grow their wealth using internal and external rates of return.
  • What many people fail to understand about real estate is that the property is worth the same whether or not it has a mortgage. The investor benefits from the appreciation of the property, not the bank.
  • A $100,000 property with a $75,000 mortgage on it that appreciates 5% is the equivalent of a 20% yield on the investor’s $25,000 investment. That’s the internal rate of return.
  • Real estate investors also have the ability to create cash flow from the investment. The rent collected can vary, but assuming a rent payment of around $1200 per month or $14,400 per year, using the same example as above, $14,400 would equate to around 14% of the value of the property and a whopping 57% on the investor’s $25,000. Even factoring in the interest on the mortgage, the total rate of return is still exceptional.
  • This is why it makes more sense to leverage $100,000 to buy four separate properties than to buy one $100,000 property in cash.
  • The concept of external and internal rates of return can be applied to anyone who owns real estate or cash value life insurance policies.
  • The challenge many people face is that they dislike the idea of holding a mortgage and would prefer to pay it off quickly. If you can leverage the mortgage to get a higher rate of return, the logic doesn’t support the decision to pay down the mortgage quicker than you have to.
  • There are very few subjects more misunderstood than the subject of life insurance and with so many options it’s easy to see why, but when a dividend-paying whole life insurance policy is designed and funded correctly, its benefits mirror that of most real estate.
  • Both are properties that build equity, grow tax-deferred, allow for tax-free access to cash, and can be owned free and clear. Both are conduits for internal and external rates of return.
  • With insurance, cash values will appreciate the same whether or not there’s a loan. That’s an internal return, and you can use tax-free loans to leverage as capital and generate cash flow.
  • Using your home equity to make home improvements can increase the home’s value and possibly increase the overall cash flow, while essentially costing you none of your own money. Taking a loan from a life insurance policy and leveraging it into an investment or property accomplishes the same thing.