CY’s Case Study – Episode 176

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome back to the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have our co-host and bestselling financial author, Kim Butler, with us. I’m so excited today because, once again, we have gotten some information from one of our listeners. We will call her, see why, giving us particular information on her financial situation, asking us what we would recommend or what we would do different or what we would say she’s doing a great job on.

[00:56] And welcome, Kim. Thank you, Todd. Yes, so fun that we get some great facts from our clients and our listeners that we can cover and benefit everybody with. So why don’t you lay out see why’s situation and we’ll have a chat about it. Super. And again, I think that the big thing is, is that no matter where you are in your particular life, there’s something about see why situation that is similar to you. And, you know, take, you know, take advantage of the fact that we have Kim giving advice that I think all of us could use. So see why is a female, 40 years old and a medical professional. She owns her own business, which she allows herself to take a net salary of sixty thousand per year. She owns two rental properties which have a positive cash flow of eleven hundred dollars per month.

[02:02] She has one hundred thousand dollars equity in one and forty thousand dollars in equity in another. She has a financial advisor who has told her that she should have a universal life insurance policy versus a whole life policy because the universal policy will outperform the universal or the whole life policy over time. But has also I will give them credit for cautioning them that the fact that in a universal life insurance policy, you’re basically purchasing term insurance each year so that the expense of the insurance gets more expensive each year. So it is convertible to a whole life policy. At some point, she has also some additional term insurance for her business for two hundred and fifty thousand.

[03:07] She has a Roth IRA, which she’s put fifty dollars a month in for eight years, even though she can’t figure out why, which is kind of funny. She has a ten thousand dollar line of credit. Five thousand dollars of it is used. She has three months salary in investment metals, which is out of the bank. In other words, she’s trying to set aside some funds that, you know, this is my guess is she doesn’t really say this. But my guess is, is this is a person who worries about the devaluation of the American currency. So she’s trying to go into metals in order for protection. And she also has an AFLAC policy to protect her in case she’s unable to work. And and one more thing taught us six thousand dollar savings account.

[04:07] All right. And then she says, OK, the bad. I have one hundred and ninety thousand dollars in student loans at three point two five percent on income based repayments with five hundred and fifty monthly, which is currently messing up my debt to income ratio, making it difficult to get conventional financing from banks because her goal is to buy 15 rental properties. And I’m assuming that the reason that she wants those rental properties is that she’s trying to replace her income with cash flow from rental properties. Let’s see here. She has a mortgage at two hundred and twenty five thousand at three point one percent. Another mortgage at eighty thousand at four percent. She has five thousand dollars debt in the line of credit for three and a half percent, which is variable.

[05:08] And a nine thousand personal loan fixed at five percent, which is from my parents who wanted to help me acquire properties and got a better retirement on their funds by loaning her the money than they were in their own thing. So her goal is I have a goal of acquiring 15 rental properties, one per year to become financially free. And I would like to mention that, I mean, I’m not sure if taking care of 15 properties and keeping them fully leased makes you financially free. But we’ll address that later. Plus, the properties help mitigate my considerable tax expense. You always maintain student loan debt so far as the per student loan debts are so far below inflation that she feels that it’s not in her best interest to pay it off.

[06:11] And she’s basically asking at this point, you know, in her life, what are some some suggestions that you, Kim, would give her that would put her in more control of her financial situation than what she currently is? Love it. Well, super cool. So let’s just tackle this line item by line item, if you will. First of all, I love the fact when people own a business or they at least own an entrepreneurial mindset, I think that’s just delightful. The rental properties are great. And of course, we want to make sure that she’s not prepaying any of her mortgages, rental property mortgages, home, you know, primary residence mortgages, anything. And then I’ll come back to the equity and the financing issue in a little bit.

[07:08] But just to address this universal, indexed universal life insurance policy. And I agree, like you, Todd, it’s commendable that her advisor alerted her to the fact that universal life insurance is essentially term insurance with a savings account. The facts that it’s indexed universal means it’s term insurance with a savings account that’s trying to buy options in the stock market. And how interesting that they pointed out that it’s convertible to whole life insurance. I mean, that kind of tells you that maybe whole life insurance is the big boys game. And this universal life is the little kids game as, you know, a stepping stone, if you will, to get from one to the other. She laid out some additional facts. And so I’m going to lay out an additional recommendation.

[07:59] And that’s that this policy is only a year and a half or two years old, I think, and that it has about a thousand dollars of cash value. She’s been putting in four hundred a month. And so that right there tells us the issue. There’s just so many costs that go on inside universal life and index universal life. And clearly this is essentially still a brand new policy. And it’s not like whole life looks great for its first year either. But for four hundred a month, this thing ought to have a lot more cash value. Well, again, we’re talking about the difference between gross and net. And I mean, this is where you really have to key in on the fact that if you gross an eight percent return and net a three percent return,

[08:54] but yet in a whole life policy, you’re able to net a three to four percent return consistently over time, which is better. Yep. Really good question. And that is so misunderstood around the universal life because the agents will say that you can’t go below zero. But that’s at the gross level, in other words, before the costs. So, yeah, your cash value itself might not be able to earn below zero. But when you take into consideration the costs, you’re pulling yourself below that watermark of two and a half to three percent negative. So I would absolutely recommend that she seriously consider stopping that policy. And I do not recommend that very often. But this is brand new. And this is a time to catch this problem before it gets very far down the road.

[09:52] That four hundred dollars a month could be so much more secure for her. If she chose to put that in a very minimal death benefit, maximized cash value whole life insurance policy. So the four hundred would be, let’s say, maybe two hundred a month of premium and two hundred a month of pay to petition. And that would enable her to, again, arguably suffer through the first year of whole life, which is not a good year, but then fairly quickly get to the second year when those policy cash values would build and build and build, never to go down ever on a net basis, just like we spoke of earlier. And that would be a much more effective place for her to build her emergency opportunity fund such that not only could she use it for real estate down the road,

[10:49] but between now and then it could truly be an emergency fund for her. Whereas right now she’s trying to keep some money in a bank. She’s got six thousand dollars in a savings account, which is great. And she should keep it there for another year or two, but then fairly quickly move to keeping all of her emergency opportunity money in a life insurance policy. But in a life insurance policy that’s never going to go down and that has a fixed cost of insurance rather than the rising cost that the term insurance. Part of the universal life policy has. So that’s what I would have her do is unfortunately I’m just going to say cancel it. A lot of times I just want to alert our listeners that if she was four or five years into it, I wouldn’t have her cancel it.

[11:32] And so if you have a universal life policy or you have an index universal life and it’s four or five years old or older, consider reducing it rather than canceling it. That’s a much better strategy. You just call the insurance company, tell them you don’t want to pay any more premiums or you want to pay just a minimal amount and have them reduce the death benefit. That’s going to lock in a lower rate. It’s going to keep your cash value right where it is. You’ll be putting less money into it. It’ll just be a much smaller piece of the whole pie. But for her, because this is such a new policy, I think I would have her cut her losses and move on. Got it. It mentions that she has the ability to convert it as well.

[12:15] Exactly. In fact, thank you. Yes. Yes. Thanks for bringing that up again. So that’s what she could do as long as that conversion was a whole life with a mutual company. I’m going to say that if this is a stock company, I would prefer her not do that. But yeah, I’m so glad you brought that up. That’s absolutely what she should check into is converting within the same company. And again, you know, as a financial representative, I can tell you that I mean, there is so much sexiness, I guess, is the way I would describe it of a universal policy and be an index to the stock market and all of these type of things. It really wasn’t till I spent several hours with Todd Langford being shown that it’s more important to receive consistent positive returns over time than it is to be tied to an index will win every single time.

[13:27] And I, I absolutely got there kicking and screaming. Yep, it is a very common thing. So moving on for see why I really want to applaud her for having some additional term insurance. That’s fabulous. And then this Roth IRA that you and I already were laughing at. Yeah, that’s crazy. I mean, I don’t blame her for doing it. But it’s just because she doesn’t know what else to do. So $50 a month isn’t going to do anything for her there that locks the money up till 59 and a half. And if she’s looking for the good tax law, life insurance, whole life insurance has the same tax law. And so she can absolutely get that benefit just by putting that 50 bucks into the whole life insurance. So now we’ve got 450 that she’s got the capability on.

[14:22] And that would be a much better place. Well, my question, my big question to you is, is, OK, everything goes the way she wants it to. She ends up with 15 rental properties to manage. I mean, is that really freedom? Yeah, that’s a really good question. And so only she can decide that. And that will allow her to make a decision over time, thankfully, because sometimes you just don’t know the answer to that. Now, clearly she has a business that is doing a good job also. And because of that business, she can’t find the time to find more rentals. So we’re going to have a great suggestion for her in the form of one of our bridge loan providers that enables people to actually keep the rental property that they’re lending money against.

[15:14] And this is where the the company is finding the rentals and renting the rentals in a lease to own environment. And so whereas CY doesn’t have the time to go out there and find these properties, these guys do. And that will be a really good solution for her as well. So, I mean, the big difference is, is, you know, are you plunging toilets or are you walking to your mailbox and collecting the checks? I mean, to me, that’s the difference and that’s a huge difference. Yeah, absolutely. Absolutely. So let’s see. What else does she have here? Her big challenge, of course, is the student loan debt. And this is interesting because I think that she could potentially have a little lower interest rate.

[16:03] So she’s at three and a quarter. There’s a company that I’ve recently become aware of, and I don’t know a lot about them, but it’s called SOFI, S-O-F-I. So Sam Office Frank Income, SOFI.com. And they say that they refinance student loans, sometimes as low as two percent. Well, she has an income based repayment. So while her interest rate is three and a quarter, her five hundred and fifty dollars a month, very possibly. Now, I don’t know this, but it’s very possibly a lower amount that she’s having to pay because of where her income is than the actual one hundred and ninety thousand at three and a quarter. We don’t know. We can’t calculate this because we don’t know the time frame of which that student loan is being amortized over.

[16:56] But I don’t know that going to SOFI and getting a two percent rate would help her. She’d have to find out because the chances are decent that though the interest rate would be lower, the payment would be higher and that wouldn’t really help her. So I’m going to just encourage her to leave it alone. I mean, she can check out at SOFI to see if there’s some options there, but I’m going to guess there’s not. But let me ask you this. If she continued to accumulate money inside of the whole life policy, perhaps even accelerating it past more money than what she’s currently putting in and then eventually build up enough money that she could buy. Some of these investments that continued to give her a 10 to 12 percent return on her money, she’s no longer having to qualify for a loan.

[17:59] Is that correct? Yeah. And so this is where I think our real value is to her. First of all, I suggested that she consider some owner occupied financing, like go find a rental that somebody wants to owner. Sorry, not owner occupied financing, just owner financing, owner like where the seller of the property holds onto the mortgage. So owner financing. However, she may not have the time to do that. People that run a business don’t have time to be seeking out real estate deals and then furthermore trying to get the owners to finance those deals. That’s a challenge. So you’re absolutely right. And I don’t know that we could get her 10 to 12 interest rates have come down a little bit from that, but 8 to 10 percent for sure.

[18:44] So that is going to be a better environment for her. And her loan is going to her student loan is going to continue to be a challenge. But she can either do some of these bridge loan deals with us and get the problem solved that way and or pursue some property in her own area and get owner financing. Because with her student loan debt at the banks right now, she is not really able to get new properties. And if that’s truly her goal, regardless of what we think of it, she’s going to have to develop a solution around that in some form. Another alert that I would like to just kind of get your comment on is is that, you know, she does have equity in her two existing rental properties. But how hard is it to access that equity?

[19:41] Yeah, very difficult because of her debt to income ratio. The banks are not going to want to lend. Even though a property is cash flowing, they are not going to want to lend to her because she has so much other debt. And so that equity is essentially locked up. I mean, after 2008, we found out that, you know, equity can change over time, can it? Absolutely. You can’t eat equity. It’s a statement by Jimmy Vreeland of Joint Ops Properties that just cracks me up. And it’s a very accurate one. Super. Well, any comments you’d like to make or any suggestions you want before we wrap up? Well, just thanks to see why and all the other listeners that have submitted case studies will continue to play them out and happily help along the way.

[20:34] And I’ve even privately emailed her back a couple suggestions that I think she can act on. And we’re always happy to have case studies if you want to send them in. Hello at partners. Number four prosperity is a good way to do it. That’s hello at partners. Number four prosperity dot com. And see why you said, I hope I make the podcast and I want you to know that you do. And any other listeners that are out there, we are always happy to take your questions. We seriously consider those just as important if we know you or we don’t know you. We will be glad to give you the best advice that we possibly can. Kim Butler has just gone out of her way to share her time both through her books, through her website, which is partners.

[21:26] The number four prosperity dot com as well as the book she’s written on Amazon. And again, we thank Kim Butler and we thank all of our listeners. This is no BS. Money guy, Todd Strobel for the Prosperity Podcast. Thank you for listening to the Prosperity Podcast to take control of your money and have it work for you. Visit us at partners for prosperity dot com. If you liked this episode, make sure you subscribe and leave a review.