Creating Income From Assets – Episode 290

This transcript was auto-generated and may contain errors.

[00:01] Welcome to the Prosperity Podcast. Hello, listeners. And today, we’re going to take on two listener questions for the podcast. Kim Butler, I’m going to have you start out with question number one. All right. So I love this. Got a question in about using the cash value of life insurance and the criteria to choose whether or not to borrow against it for investing. So we talk all the time about your cash value should do two jobs. First, it’s your emergency fund. And then second, it’s your opportunity fund. And clearly, opportunity implies that you borrow against it for investments. And so I always reiterate how important it is to keep the emergency fund cash value amount alone first. And everybody says, well, what’s that amount?

[00:53] Well, it completely depends on your family situation. Of course, it’s changing all the time. But three to six months income is, of course, a rule of thumb. If you have a business or an all-commissioned job, it absolutely needs to be more like 12 to 24 months of income. Or for some people, they need to express it as expenses because income might have some other ancillary pieces and parts to it. So that’s the emergency part. But the opportunity part, to me, so here’s the answer, my perspective, anyways, some criteria for choosing whether to borrow against it for investing. And the first is I always like cash flowing investments for this space. Because when you borrow against your cash value of life insurance, you have an interest payment that’s due every single year.

[01:39] It’s either due to the life insurance company or it’s due to a bank that you used with which to have the ability to borrow against that cash value. When you want to be paying that interest every year, and if you have to pay it out of pocket, that’s not as fun. So I like cash flowing investments when I’m going to borrow against my cash value of life insurance to have something that cash flows to enable me to pay back not only the interest, or I should say pay the interest, but also to pay back the principal. So that’s the first criteria. Making sense so far? It does make sense. And I’ve got some leading questions, but I suspect that you’re going to address them. Well, the second part, I think, always is to really watch your timeframes.

[02:23] So I like to see that shorter two, three-year time frame. And I’ll admit, I absolutely have cash value that’s been borrowed out for 10 or 15 years, because it just keeps going, the investments are good. It may not be in the actual same investment, but it went from one investment to another, and it hasn’t been paid back. And that’s totally fine, but without a doubt, by the time somebody hits their 70s or 80s, they need to make sure that all of their cash value loans are paid back. And if you do it right, the cash flow from the investments will actually pay back the loan to a point where you still have the investment and the loan is paid off, which is just the best of all worlds. But that can take some time.

[03:07] Yeah, definitely. So my follow-up question was, if you’re setting up a criteria, and now you’re looking at it, and you’re going to put your money into cash-flowing investments, is there a certain range that you’re aiming for saying, I have to make this percent back on my money? Or is that really not on top of your criteria scale? Well, it is because we do have to pay attention to our costs and our ability to invest. So I’ll just cover something quickly. We often lose track of this because we don’t turn the costs, the interest rate, if you will, into dollar figures. So we get a little confused on exactly what the gain is. So as an example, if we have borrowing costs of four, which is a little on the low side, but I know the math, so this is the example I’m going to

[03:52] use. If we have borrowing costs of four and investment capability of five, that is not a 1% return. That is a 1% spread, but that is a 25% return. And there are a lot of truth concepts calculators that I can pull to prove that. The issue that we need to be aware of is, of course, the 5% is going to be taxable. So we have to be careful of that. So are you really going to do four to five? Probably not. You might do five to eight. You might do five to nine. Maybe even six to ten, something like that. Six to nine could even work. That’s the typical borrowing against and then investing environment that I’m seeing right now. And I think, do you also factor in opportunity cost? Meaning, if you’re pulling that money

[04:43] out and allocating for a certain investment, now it’s prohibiting you to do other future investments that happen. No. I mean, that’s a variety of exponentializing the calculations that, while accurate, doesn’t really lend itself to identifying one investment’s deal by itself. Because, yes, we talk about $1 to do lots of things. You want to be running the money through and borrowing against and all this velocity and leverage and all that. But when it really comes down to an investment, you want to analyze that investment for itself with its borrowing costs and its taxes connected. So even for our real estate fans, you’re going to be doing 1031s, yes. But you still have to let the property, quote, pay, even if you’re going to defer the tax in your calculations or you

[05:39] haven’t made a proper calculation on that. So it gets a little tricky because you do. You want to mix in, well, the cash values are already growing, and we’re not really taking from the cash value we’re borrowing against it. So can’t we mix that in? Yeah, you can, but it’s not really accurate. This is actually coming from Todd Langford, the creator of Truth Concepts, where he will help us isolate a particular investment, look at the cost, look at the taxes, look at the fees. Yes, there are absolutely opportunity costs sometimes that you want to build in. But the opportunity costs are more, for example, what are the opportunity costs of the fees that I have to pay for the investment, not the additional expanded

[06:18] opportunity costs of what else could I be doing with those dollars? Is that distinction clear? That is clear. And I think maybe sometimes that’s just trying to engineer the situation to death instead of making something happen. Really well said. So what is another part of the criteria that you’re looking for? I want to make sure that I do not lose principle. If I’m going to be borrowing against something, anything to invest, I have to be very, very careful that I don’t lose principle. And so our listeners know that that is absolutely one of the criteria that I look for. We are not perfect. We’ve made mistakes. We have absolutely lost principle. I don’t like that any more than anybody else does. And yet, without a doubt,

[07:01] that’s something that I’m seeking. And if an investment has the capability to lose principle, I want to be darn careful about borrowing against anything to do that investment. Okay. So I think we got question number one answered pretty well. What do you think? I do think so. And it leads us so well into question number two, which was, is there really such a thing as passive income? So Spencer, I know you’ve had some experience with this. How would you answer it? When I first heard the listener question, I actually started laughing because I think oftentimes you can read a book or watch a show and think that you buy a real estate property and then all you do is go to the mailbox and cash that check. And it doesn’t always work out like that. So I’m going to actually say,

[07:56] might sound a little contradictory, but yes, I do believe that there are such things as complete and total passive income. Now I’m going to put a caveat on that. And it’s rare for most people to get complete and passive income. That’s my experience. And I’m happy to dive deeper into that. But what do you think, Kim? Well, we absolutely have some investments that do provide passive income, serious quote mailbox money. And yet I am also very well aware that for most people, the typical approach like real estate is what most people look at, businesses occasionally. Those things require involvement. It may not be active involvement, but it is absolutely involvement. But I think it also really boils down to a very important question, which is,

[08:49] how do you spend your days? And do you spend your days creating value in a way that is best for you? And then you have to think about, well, what is that? And so maybe it is managing real estate. Maybe it’s not. So if you have a goal of passive income, just so you can sit around and do nothing, I’m not sure that’s super healthy. Oh, it’s not. Not at all. And in fact, I see a lot of people that do that. And you’ll notice oftentimes those people create illnesses. They create additional problems in their life, or they just grow bored and they end up sleeping 15 hours a day. You don’t want that. So let’s talk on the passive income. So I’m going to speak from the side of my personal experience and experience of people that are really close

[09:43] to me on the passive income side. And I would love to hear your side as an advisor and someone that’s had years of experience with that. So I’ve owned various online companies, software companies. I owned e-commerce companies and affiliates. Yes, I have developed passive income with my online companies, where we had subscription models on our software company. And there was no work that was involved at all on my part. I’ve been what they call an affiliate, where I had websites and I had other properties and I just got paid every single month for no work that had to be done on my part. It was wonderful, but it’s not the most common. Now, I’ve also been in the world of royalties. So in the music industry,

[10:38] you can write music and you get royalties. And that’s another one where you don’t have to be involved. But when it comes to real estate and I’ve owned a portfolio of homes, as much as you don’t want to be involved, you’re still involved. But however, if you’re doing an alternative investment with the right people, you have involvement of looking over the deal and being in touch with the people because if the deal is going good, you’ll want to do more in the future. If the deal is going bad, well, obviously, that wouldn’t be passive because it’s actively taking up your attention. So I’d love your feedback, Kim. Well, I think your definitions are good and it is important for us to get clear on them because truly passive can be done with

[11:25] bridge loans and other investments like you mentioned. The idea, though, I think, is subject to needed introspection because this whole issue of sit back and do nothing, it’s just not healthy for a human being. It’s interesting, too, that not all investments are cash flowing investments. You have to be clear on this is dollars that I need and come from versus this is money that I just need to grow for later. And whether it’s passive or not needs to be kind of a secondary part of it in my mind because, to me, it’s important to identify that growth versus income thing up front and then it’s also important to practice creating income from assets. That is not an easy thing to do and most stock brokers are

[12:19] horribly inept at it. The stock market, as a general rule, is not good at it. It used to be when there were dividends and that kind of thing. I don’t really see that much anymore. As you identified, real estate, you can create fabulous income from it. Is it passive? I’d be careful with that word. Are there other things, land leases and, like I said, the bridge loans and other aspects of life where an asset can be turned into cash flow? Again, I want to reiterate the importance of practice because we do not want to wait until we’re in our 70s to try to figure out how to create passive income or should I just say cash flowing income from our assets and yet, at the same time, I think too much focus on the passive part is not helpful.

[13:08] I like just to focus on cash flow. Yeah, absolutely. I think you hit the nail on the head perfectly when you said creating income from assets. That’s truly the holy grail when it comes to all this, at least from my mind. I agree. Once you learn to have your money, start making money and then repeat the process, you’re on the track. The problem is I think most people can’t do it because they don’t do the first thing you always talk about. They don’t have savings. Then when you don’t have savings, you’re worrying about to the short-term future. Then if a hiccup happens, well, you can’t get your assets to be making money because you have to tap into those assets and then you got to start over. Yes, and that is always something that I think every family goes through early on and sometimes

[14:02] again later. The whole starting over thing can be scary in and of itself. So the building of savings first step, without a doubt, we talk about the foundation of wealth, saving, saving, savings. Then oftentimes, the next step is going to be the growth orientation just because you typically are going to have maybe a retirement plan or 401k IRA, that kind of money tends to be growth oriented. Then the third step, often the creation of cash flowing results and income that is produced by assets because in order to get assets to produce income, you typically have to have lump sums. In order to get lump sums, you typically have to be saving and you have to be saving in a way that’s not tied up in a retirement plan

[14:49] or 401k because creating income when you’re under 59.5 in that space is not going to do you any good at all because that income has to go back into the IRA. So we’re kind of full circle here in that the saving, the ability to save, viewing savings as an important verb, that’s the precursor to then creating that cash flowing asset and income. That is so well said. Kim, we would love to hear a book suggestion. What are one of the books that you’ve written you would suggest for our listeners to check out? Well, it is called Busting the Real Estate Investment Lies and depending on when this podcast airs, it will either be live and ready to go on the Amazon bookshelf in quotes, audio version included, or it will be forthcoming super fast. So this has been done with a co-author,

[15:42] Jimmy Vreeland, who owns a fabulous company that helps people create cash flow out of assets and in a fairly passive way. So that will be a fabulous one for listeners that enjoyed this show to get their hands on the title again, Busting the Real Estate Investment Lies and Spencer, I have to give you a huge shout out and much gratitude for helping us get that audiobook recorded, edited, and up into audibles. Well, thank you. And you know, I think our listeners know as well. I just love being the co-host on the show and I have a love for real estate. That was my first career and profession. I owned a brokerage, owned an investment firm, and I absolutely love what real estate can do. So I suggest for everyone

[16:31] dive into the book, read it. You’re going to learn some things that are amazing. So thank you for letting me be a part of it, Kim. Absolutely. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.