How I plan to reduce my mortgage by almost 50% using RE! (2 of 2)

Welcome back to those of you that read part 1 of this article. If you didn't get a chance to read the first one, I highly recommend you do so to have some context to part 2. Here are a few highlights from part 1 real quick.

In the first article I laid down my mortgage stats and also a few scenarios that I could take. The way that I plan to do this is to use my home equity to make investment/s using passive investments in real estate. You see, even though I am a general partner in large apartment complexes I also passively invest in them as well. Using the passive investment as a tool I will be able to halve my mortgage payment or come awfully darn close. I also talked about how this method has a huge potential to pay itself off and with the smallest amount of risk. Now let's get back to the second half of this where I describe some of the huge benefits that come along with this method.

I am sure that after article 1, most of you think that this method and its potential results would be hard to pass up, but you haven't even had the cherries on top yet. I would like to create a case scenario so that we can all be on the same page and I can use some actual numbers.

Home Value - $400,000, Original mortgage - $300,000, Payment (30yr 4.25%) - $1347

Current loan balance - $200,000, $120,000 in available cash out equity

New loan - $320,000/$1437mo @ 3.5% for 30 years

Now that we are looking at some real numbers, let's figure out what it will take to get to 50% of the payment. Using the new mortgage payment of $1437 and the cash out equity of $120,000, you would only need to get an average return of 6.7% after taxes. That means if you got 10% I would actually reduce my payment by 74.2%. Right now you must be thinking that this sounds fake and too good to be true. Let me just throw this out there: a good portion of investment opportunities out there right now are offering a preferred return of 7% or higher at times. That means that as a passive investor I get the first 7% of the profits returned to me. Remember, in this scenario, I would only need a return of 6.7%. Then once that benchmark is hit, I will typically still get the lion's share of equity split after that 7%.

The more I keep going, the better this gets, right? So now let's talk about tax benefits with this. One of the biggest benefits of investing in physical real estate is the tax benefits. (I am not an accountant so please consult a professional accountant on your own that specializes in real estate) With these investments come depreciation expenses. Simply put, depreciation is a paper expense against your profit. You don't have to pay anyone, but you get to deduct it from your income. Example, if you make $50,000 in profits and the depreciation expense is $20,000, then you only pay tax on the remaining $30,000 but you may still walk away with $50,000 in your pocket. Now, with these large complexes most operators will take it another step and opt to use cost segregation depreciation, this is when you break down every aspect of the property from the structure down to the carpet and everything in between. You determine a lifespan of each of those items rather than evenly spreading them out over a longer period. Without getting in too deep, I will just say that this allows a huge deduction in the first few years. Most likely not only allowing tax free profits, but also paper losses that you can then roll into other income avenues that you may have. Paper losses means that even though you make a profit and get checks sent to you, that you will not show taxable income when you file your taxes.

Let me use the $120,000 in our example. If I made a 10% return, I would end up getting $12,000 in a year. Now if cost segregation was used, I may end up with a depreciation paper loss of $50-60k or more for the first few years. Let's say $50k. That means that the $12,000 in actual distributions that would be paid out to me, I would not have to pay taxes on and it also leaves me with a $38,000 paper loss. That loss could go towards other similar income and this is where you would need to consult your accountant. There are some people that are able to take that paper loss against either their own W2 income or a spouse's, and then pay no tax. At a 30% tax rate that could be over $11,000 additional that year that you would not pay in taxes. That means for a few years that could essentially double my returns.

Now at this point I realize that I probably should not have committed to only 2 parts in this series, so bear with me as I have another potential huge benefit to share with you. This benefit revolves around the initial $120,000 you invested. Most of these investments revolve around improving the performance of the property. After the property has increased it's income, lowered it's expenses, or both, the operator will typically have it planned to refinance the property loan. With this refinance comes the biggest potential bonus in my opinion. I say potential because not every project is planned for this to happen.

I could receive all or some of my initial investment back, tax free, while still maintaining my equity and continued profit in the property. That means that in just a few years, on top of the continued income coming in each year, I could have all or a sizeable amount of my money back. Let me stress this again, in just a few years I may have ALL of my money back to buy whatever I want. Getting back my initial investment back and continuing to make returns means INFINITE RETURN! Most likely though I will end up putting it into another deal to continue earning more profit to pay off more of my bills. This is how you can snowball your returns as the years go on and potentially create generational wealth.

The potential I have laid out is truly outstanding and I hope you agree. We only did an example of starting off with 50% equity in your home. What if you had an $800k home, free and clear? What could you do with that equity? Let me ask you one thing after all of that information. What would you do with that extra money each year?

Hopefully you know there are more details involved than just 2 LinkedIn articles, but it is my hope that I was able to give you a good overall idea of just how good this can be. In my last article I put in a link to how these deals work in more detail, and I will include it here as well. FREE EBOOK.

These last two sections have been condensed quite a bit and I plan to touch on them in more detail in future articles. Of course if you have any questions at all, feel free to reach out to me. I hope these articles will help open up the opportunities that are available to you. If you have done something like this before, please leave a comment and let me know how it worked for you.