Links & Resources Mentioned:
https://www.directorsmortgage.com/loan-officer/adrian-schermer
Episode 29 Transcript
SUMMARY KEYWORDS
assets, equity, liabilities, house, clients, people, home, home equity line, money, net worth, loan, real estate agents, pay, margin, home equity loan, stock, opportunity, tax, credit, tough
SPEAKERS
Adrian
Adrian 00:00
Sounded good though. Welcome back future millionaires to the get rich slow podcast. I’m Adrian SHERMER joined with my co hosts today, Lance Johnson and Robert delavan. How’s it going, guys? Good morning. Good morning. Good morning, Adrian and Rob. And today we are going to piggyback on our last episode continuing on this series of financial literacy. I’m going to call this one, allow your money to work for you. This is about taking assets, both cash, you know, value assets, liquid assets, and then real assets, like we talked about in the last episode, whether it’s real estate, or potentially even a car, or a jetski, whatever it’s going to be watch. How can you make an asset work for you? What assets work really well to work for you? And what ones maybe not as great? only get into if it’s a passion of yours? Right? So I’m gonna, I’m going to go through a few questions that we had freelance and let’s let’s dig into this. Okay, so first of all, give us give us just a very brief summary of the last podcast as far as the assets versus liabilities.
01:14
Okay, great. So, net worth is assets minus liabilities. So the most important thing that I feel like clients should do is draw a line in the sand, find out what your net worth is today, figure out some different scenarios of planning so that we can get a guesstimate of what your net worth will be in the future. And then as we do planning with clients on an annual basis, are we tracking towards that future number? Are we behind the curve or ahead of the curve? And that’s really based on tax efficiency, that’s based on rates of return that’s based on your savings rate, paying down debt, all that stuff. If clients can do that, the future will be less unpredictable. From there, it’s utilizing the assets and your income to, you know, better the ability of accomplishing that network, and, and having fun. So that’s what we’re going to try to do.
Adrian 02:21
So yeah, I love the focus of that is, or the the importance that we want to emphasize here is building those appreciating assets over liabilities, we want the growth on the appreciation side, and then obviously we’re paying down debt liabilities and so on.
02:39
Yeah, and the last podcast kind of introduced that. And then I think we, you know, we want to add some other avenues that we didn’t have time to explore in this podcast. And and if we can use those assets and those right liabilities to build assets, where other people are building our net worth, then that’s kind of fun too, as well.
Adrian 03:07
Right? Getting these these big making these basic sexy, right? Yeah,
03:13
exactly. That’s right. Loving. The very fun topic. There you go.
Adrian 03:18
So, so digging into fun topics, right? So the question becomes is what are the positive liabilities to take on? And how can you include those and leverage those to create more assets? So let’s explore that.
03:32
Yeah, so let’s explore that. So first thing is if somebody has a home and has more than 20% equity in their home, my encouragement is to think about getting a home equity line of credit. a home equity line of credit, allows you to utilize assets for emergencies are opportunities and opportunities. So I would
Adrian 03:59
use numbers for the benefit and you know, this this is a national or I don’t know, universal audience, right. Our our numbers are the Portland, the Portland Oregon general market where the average home sales in the $500,000 range.
04:15
Yeah, so let’s go back in time somebody buys a house 10 years ago, that average home might have been only 250,000. There we go. And they probably put 20% down, let’s just say, and so that’s 50,000. So they have a liability, that’s 200. That’s been slowly decreasing over time, let’s assume a 30 year mortgage, so maybe that liabilities down to, you know, 165. And now the house is worth 550,000. Right? So now they have $400,000, just under $400,000 of equity, and there’s nothing wrong with that. Right? They might have refinanced whatever over that time. I have a very low interest. So you don’t really want to mess around with that. But we’d like to use that equity to build more equity. And, and so that’s where the conversation so what would that be? So let’s, let’s explore that in a few minutes at the home equity line of credit, when you’re ready to put a down payment on the next house and vacation home, whatever you have available or if an emergency occurs, we’re both you lost your jobs, and you have this huge equity and you need to access some money to bridge the gap. You know, there are some different tax ramifications which, you know, every person should consult their tax advisor on, but at least it gives you accessibility to money.
Adrian 05:43
I might even take that a step further. Lance, I might, I might disagree with what you said a little earlier, I do, I do think that there is something wrong with that. That not taking the equity because it’s I just think people don’t realize, you know, that it’s it’s the term I love using is the opportunity cost, right? Like it’s, it’s, it’s sitting there, it’s it’s basically saving you at this point in time, maybe three or 4% interest, but it’s not making any more money, the house gains value, fully separate from whatever loans are against that property. So I’m a fanatic when it comes to the home equity loan, especially because my wife’s business was started on a home equity loan, the the loan for a business loan, when she walked into a major bank with a wagon on their logo, they were going to charge her seven to 9%. And it was you know, it just made it really difficult for the feasibility of the business to work out, especially in those first few months, right, you know, when you’re running a business, you’re bleeding, so you got to you got to build up that income and get there to match your liabilities. a home equity loan ended up being that we paid two and a half percent. So, you know, it was pretty consequential chunk of money. And it was an opportunity afforded by equity in the home. And home equity lines of credit are I mean, they’re really one of my favorite products, because like as you mentioned, it’s it’s on a whim, you lose your job, you want to refinance your home, that’s tough cookies, no one’s gonna be able to do a new loan for you and give you cash out. But you already have a home equity line of credit, they’ve already staked that money for you, and you have an opportunity to use it, whether it’s investing in a business or or, you know, helping someone in need or getting that next home. You know, it’s something that you can set up and you don’t have to touch right away. But, you know, Robin, I have seen people use it for repairs and improvements on homes that that have greater than dollar for dollar return on investment. It’s just such a flexible thing. And to have, as you mentioned, I think in our last episode, you know, when when a liability is tied to some real property they can offer you, you know, the risk is lower, so the rates can be lower. And that that really brings the terms down into where you can have a net profit. You know, we talked about that, that businesses that get loans, they even borrow money at 9%. And it still makes sense. So you can imagine if you can tap 2.5 3.5, whatever it is percent interest on? I mean, what are we talking about? You can get a $200,000 home equity line of credit, that’s a real serious amount of throwing around money.
08:28
Yeah, no, I don’t disagree with you on that, um, you know, as a financial advisor, we, you know, we don’t say wrong or right, I got you. We have a fiduciary responsibility to understand the choices and home equity line of credit has choices, and there’s tax ramifications that need to be understood on the use of the money. We would also explore other options, so that the client is educated about their choices. So do you take a 401k loan, which is another option? Do you use a margin loan if you have stock, which is another option, and then, you know, a home equity line of credit and margin loans are adjustable, and versus fixing it and shit. So at the end of the day, I’m not disagreeing with you, you just have to as a financial advisor, my goal is to educate the clients on the choices. And then we figure out what’s the best route, they figure out what’s the best route for them. And and we wouldn’t want to encourage going from a less riskier position to a more riskier position and less fiduciary wise it was just hands down the best option. Right? So
Adrian 09:48
yeah, so don’t pull out a bunch of equity and invest in something highly volatile. Let’s don’t pull 100k out of your house and yeah,
09:54
so let me let me let me flip the other side that you know, I’ve him my career, I’ve only had a couple clients and one client in my tutelage where they both lost their jobs, but really aggressive on real estate, and their business. And it all came crashing down. I’ve only had one in 28 years. And of all the clients that I’ve had a couple real estate agents that got really heavy in real estate, and real estate’s very illiquid. When it starts to go south, and they got their head over their skis and use the equity lines of credit, the interest rates went up, let me know they weren’t selling. And it, it was just unfortunate, but the only people that I’ve had file bankruptcy are real estate agents. And yeah, that’s what I do know. Sure. And the problem is, is it’s just the illiquid, pneus of real estate. So here’s a couple of things I would tell you is part of having assets like the stock portfolio, in the client, that having a margin loan, which is like a home equity is like a line of credit against, I don’t use margins to buy aggressively buy stocks, I use it for accessibility to money in tough times. That’s how I use that account. So if you have clients that have a lot of Intel, Nike stock, Apple stock, whatever, and they build those non qualified assets, you have accessibility to money without paying taxes. It’s just like a line of credit against your house, it’s just against stock. I also believe that a home equity line of credit is against Real Estate. So the mistake that people make is they don’t establish it Now, why times are good, when times are tough, like the pandemic, when the pandemic care, your ability to get a home equity line of credit was really tough.
Adrian 11:52
They let you down, they were pulled fully out of that market and said we’re just gonna wait, we’re not even I mean, products disappeared overnight,
12:00
right? I got to know a person for 400,000 or 250,000. Look what they were able to take a look at, they were able to go to Home Depot and do some house remodeling when wood prices weren’t four times the cost. Yeah, because they had the home equity. So those people, there was an opportunity through the HELOC or the margin to better their house at a lower cost. Because everybody was now kind of tight on work and couldn’t do work. So people needed work. And the prices of wood lumber resources were lower, those people were able to take advantage of an opportunity, because they planned ahead, even though they didn’t need it when they needed the heat lock, they were able to utilize it to build equity.
Adrian 12:50
Yeah, and I think that touches on a real core component of wealth and how wealth can build wealth, right? It’s the difference between patching your tire or getting a new set, it’s the difference between the band aid fix, and the right one, you know, when you have again, access to liabilities like this, you know, what’s that old story about the worker who has to buy a new pair of shoes every year, but the boss gets the nice fancy shoes that cost twice as much, but they last for five years, you know, you can make decisions like that, that are in your greater interest to you know, the law, we all have a lot of time on this earth, I know life is short, but we truly do have a lot of time stretching ahead of us. And these are the kinds of choices that can give you the power to make those decisions that you know again, it all compounds, the more you can save by making smart decisions like that. The more you end up with, right? Yes, um, let’s let’s pivot to how do you utilize your current assets to generate new assets. And I mean, we’re already kind of stretching over to that, but assets beget assets. So what would like funny is you can just put them in a room and they’ll multiply what would you say is is your your take on that lance? Say that again, please. So assets, beginning assets, your current using your current assets to generate new assets.
14:15
Okay. Alright. So, um, so one scenario would be, you know, let’s use that example of that person who bought the house 10 years ago, it’s now grown, their family has grown when they purchased the house, it was a two or three bedroom house and, and now they have a family of four, you know, two kids or three kids and they’ve outgrown that house. Right. Um, and, you know, they get in podcasts and they, we they hear us talk about rentals and how good they are and so forth. And what better way to know a rental than your old home. Right, you know, all the pits and falls and the things you like about and what What’s good and bad about your house? So that knowledge is I think huge. So one strategy is, can we take that equity? And can we take some of that equity out to put a down payment on a new home and make the old home become a rental. And then there’s pros and cons to selling, you know, an old home, that you, you know, you could sell and not pay taxes on and read stablish your cost basis. But I’ve seen a lot of people do it and building house, you know, they get 510 years into a starter home, and they’re ready to move to that next home. Could we do it in a way where, you know, they could make that a rental, and that’s a good if you haven’t done a rental? That’s a nice way to kind of start the rental program for a client, which you all three of us are big proponents out? Yeah, yeah, yo, could they use the HELOC? Again, consult your tax person on the deductibility of the interest when you use it? But could you use the equity to put a down payment on the new house, generally over 10 years, your incomes go up? Not everybody, but generally. And so now you’re ready for that next home. And that’s a great way to use a home rental, put it in. And there’s all sorts of strategies that we explore around there. And
Adrian 16:28
I think each house, we’re not each house, each client needs their own individual analysis, right? We’re going to we’re going to talk about high level subjects. But at the end of the day, you’ve got to run the math for yourself. But I think that’s a great concept that you’ve touched on is could you leverage the equity products like home equity loans allow you to pull some of that equity out without what’s the alternative you sell, and you roll your equity into the next home. And that’s what a lot of people do is this kind of dominoes, you know, pouring equity into the next one in the next one. And that works really well. But there’s a bigger picture of like a somewhat low risk opportunity to still get some of that equity, you earned it, it’s yours, and use it as the down and maybe the payment will be a little higher on the new one, you’ll still have to make payments on the old one. But now you’re getting rent income, and you’re running that business that is a net positive. And now you own two houses. And the total net value of those houses is the value on which you experience appreciation, which is primarily a series
17:23
x creation and a network and you’re dropping your liabilities and somebody is paying for it. There’s a there’s a lot of pros, the con to it is, you know, a lot of times, you know, what’s the income, is it a sole income earner? Are there dual income earners? So the risk of losing a job, you know, independent market?
Adrian 17:46
You mentioned real estate agents being you know, sure. And I’m gonna poke fun. Yeah, I mean, hey, Rob, you know, do you get paid if you don’t sell a house, not $1. So, you know, if you own a bit each person, I like the idea of analyzing risk on a layer by layer and deciding, you know, if I’m a, if I’m a nurse, right? If I’m an RN, how long you know, what are the possibilities of me being jobless is pretty slim, when you know, what happens to the world that I can’t find a job, it’s a very, very stable income, you may be able to take more risks on another part of your life. Whereas if you’re a pure commissioned salesperson, right,
18:25
yeah, I mean, are a luxury in hospitals, it was tough for them to get into hospitals, like pharmaceutical rap, and, you know, their, their bonuses weren’t as big or restaurant, you know, there’s just certain things, so I call it you know, I’m sure a lot of other people financial budget, it’s calculated risk. Yeah. So everything we do is what’s what’s, what’s the calculated risk factor of that this thing would blow up? And what are your backup plans? How much do you have in stock that can be accessed through a margin? or selling, you know, or how much equity do you have? Are you dual income earner family versus a single? Is the single have health problems? You know, and so that can happen? And do they have, like, you know, there’s just all sorts of things, that we are moving a client to a potentially more riskier position because they’re gonna have more loans. And, and, and is that the right thing to do? And a lot of times it is, but we want to explore it, and if it’s not, and a person has a tough time saving 10% of their gross income. I may not encourage that because they don’t have backup plans, whereas I know if they took that risk, and they’re saving 25% of the gross income and they can bring it down to 10 and cover that mortgage. We can do that, you know, to deal with a down market. So I call it calculated risk and what are other backup lads,
Adrian 20:00
you you basically answered you, between the two of you there, you answered my final question, which is the basic assets our listeners should look into purchasing or investing in, and how you determine which assets are appropriate for a specific individual situation. Yeah. Up market down market nurse versus real estate agent versus pharmaceutical rep. You know, all of those things. Before we wrap up, is there anything that you would add
20:27
to that? Yeah, there’s two investment. Three investment that I would look at is, let me let me get the ones HSA is and Roth IRAs. If you’re a person that has the means, the cash flow, to do a Roth or an HSA, I would encourage people to never miss that opportunity, if they can do it. Even shifting assets from you know, you can own an Intel or a Nike and sell it, yes, you would pay taxes and move it into a Roth IRA and still own the Intel or Nike? I would. I’m sure there’s a couple reasons why you wouldn’t do it. But there’s just a plethora of reasons why you should do it, or why you wouldn’t do it. But there’s a plethora of reasons why you should do it. I’ve never missed that opportunity personally. And reason,
Adrian 21:23
let me interject very dumbed down for me. The reason why I would want to do that is because with a Roth, I never pay tax on the gain ever again, right? Under certain circumstances, under certain circumstances in talking to our CPA, we’re not giving tax advice, all of those,
21:41
right? Well, you have to give it the 59 and a half. But you still can access the principal when you make the contribution after five years. So it’s a medium term asset that’s really kind of sold on being a long term retirement asset. But there’s some and then you’re comparing, you know, the taxes you had to pay. But if I’m, if Nike is a good investment, which has been, and I can grow that tax deferred and tax free, and you do make it to 59 and a half before you need it. Wow. Right? Like why wouldn’t I want that same investment in a tax free position versus a taxable position? Right. Yeah. HSA is, you know, a health savings account, right? a health savings account? HSA? Yeah, pre tax tax deferred, and if used for medical, it’s tax free? Where does that exist? No, yeah.
Adrian 22:36
Right. Yeah, all kinds of kooky medical stuff, too. And medical is gonna come even if you have health insurance, I mean, I personally, I used it to leverage, you know, I’m lower risk where I am in my life. So, you know, I was able to do a high liability insurance, and I took the difference and threw it to an HSA. And, you know, it was a gamble. In in my favor. I said, if I take care of myself, I will net positive off of this.
23:01
But 80% of people’s medical expenses, total lifetime medical expenses come in the last two to five years of your life. So
Adrian 23:10
you’re gonna have medical expenses, talk about calculated risk. Yeah,
23:13
yeah. And, and if you didn’t use them for medical, it’s just like an IRA. So like, like a 401k. So again, if you had an option to do one of those, and you’re not taking full advantage of it, I think you’re selling yourself short on your net worth in the future, because you will have medical issues and so forth. And they’re you, they’re they’re coming up with new ways to use those HSS and save forum, you know, you can buy like a band aids on it even right, the last thing I want to touch upon is just non qualified assets. A lot of people there’s not as much tax situations, but having a good reserve or having a margin against your brokerage account, or your stock. stock options that become stock is like a foundation to a house. And if you build a house on a hill, you want to be doggone sure that your foundation is solid, right? It’s right. And, you know, and so the more of the reserves are, are covered, which is you know, there’s all sorts of examples three to six months, 12 months, depending on your whatever it is that you decide with your financial advisor. When you have those reserves, and the times get tough, you don’t have to change your strategy. So if I’m working out all the time, and I’m trying to get fitter, and all sudden now I got sick and I couldn’t work out for four weeks. At the end of those four weeks. How fit would you be after working out for three months?
Adrian 24:53
It’s a tough day at the gym when you go back,
24:55
right? So what what what the foundation, the knowledge qualify there cash reserve deals with those ebb and flows and cash flow so that you don’t have to disrupt your strategy. Because one month, you know, you had bigger expenses, less income, you have a consistent process. Because once you change your process, that’s when people, you know, don’t really hit the regimen and everything’s about regimented. Doing your finances. regimented. So you have
Adrian 25:31
to live reactively at that point, right? Yeah, you’re, most of us, you’re paycheck to paycheck, you’re living a very reactive financial lifestyle,
25:39
right. And my clients, I, you know, want to make sure that they have good reserves as part of the key component and the net worth. And when they do have it, that consistency, they don’t often make a lot of changes. And so then time is on their side, because they’re doing the same thing over and over over time, versus being it broken up and fragmented. And once you change that, that strategy, it’s hard to get back onto that system.
Adrian 26:08
Yeah, yeah, and this is bad. This is not just anecdotal, by the way, this is backed by big, um, just for the audience, you know, this is backed by big data. You know, there are, there’s some jokes online, some memes about it. But there’s, it’s, it’s backed by data that shows you know, for example, people jump on maybe one of those apps where they can invest in their own stocks, that you get into that kind of day trader mentality, you talk to someone who said, I got into the stock market, I didn’t like it, oftentimes, they’re doing that kind of reactive trading, and they’re jumping around, because they’re trying to, you know, catch the trough of every, you know, dip and the peak of every wave. And, you know, when we talk to Lance, you, especially, you’ve looked at long term strategy, you know, we say that that stocks not low it’s on sale, you know, it’s it’s about because you bought that stock, because of the long term value, you’re aware that it does not matter what happens to that next week, short of a major collapse or something, you know, it’s it’s about I know, I’m confident in what that’s going to be worth long term. And that’s what I’m in for. Are you guys saying that I shouldn’t pay in my retirement account in Bitcoin go into a million dollars? I mean, I would love to join you on your Bitcoin yacht, but I don’t know if that’s the sound. That sounds like a whole different conversation. All right. Well, gentlemen, thank you. I want to I want to stop there. We have before we anchor you on continuing with this, this mini series here of episodes and appreciate your time today. Thank you, Adrian. Thank you, Lance. Thank you. Hope our audience enjoyed it with us. Yeah. Thanks for joining us, guys. We’ll catch you next week. Really appreciate it. Thank you.