Real estate investors either love or hate debt, but most know use of debt is a necessary evil to grow your assets and build wealth. Sometimes though, one form of debt can be used as a tool to help manage or reduce other types of debt…on YOUR schedule, vs. your lenders. Matthew Pillmore joins us today to share how you can use ‘debt weapons’ as a strategy to benefit yourself. Check it out!
Mike: Hey it’s Mike Hambright with FlipNerd.com. Welcome back for another exciting Expert Interview where I interview successful real estate investing experts and entrepreneurs in our industry. By the way, I have to give ourselves a shameless plug here. We just opened up sales for the REI Power Summit, REIpowersummit.com which quite frankly is going to be the largest real estate investing event ever.
We’re committed to that, you can hold me to it. We have over 50 speakers committed so far, some of the biggest names in the industry. And you’ll be able to meet lenders and other service providers and attend workshops on rehab and wholesaling, how to recruit and manage virtual systems and much, much more. So please check out REIpowersummit.com. It’s coming up here soon and we just opened up sales of tickets.
Today I’m excited to have Matthew Pillmore here with me today. Matthew is the president of VIP Financial Education which is the trusted pilot that people who want to dominate the banks, where they teach other borrowers strategies that quickly grow credit, unlock massive capital and rapidly wipe out mortgage and non-mortgage debt. Today Matthew is going to discuss how to use debt weapons to help you grow your assets, eliminate liabilities and stockpile emergency reserves. We actually talked for quite a while before we started here today, so I was like, “You have to teach me some of these tricks,” and it’s going to be an exciting show, so stick with us.
We’ve all been trained as real estate investors to either love or hate debt and so today you’re either going to love it even more or you’re going to maybe realize the reasons why you shouldn’t hate it as much as you did in the past. So before we get started with Matthew though, let’s take a moment to recognize our featured sponsors.
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Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.
Hey Matthew, welcome to the show, my friend.
Matthew: Thank you very much, Mike.
Mike: Yeah, yeah, glad to have you. So I don’t know if you’ve coined that term, debt weapons and how to use them against the banks or how to use them against lenders, but today we’re going to unveil that to the world for those that haven’t heard it before.
Matthew: You bet, absolutely. Of course we’ve coined it, yes. Debt weapons are phenomenal and it’s literally changed everything about the way that I personally as an investor look at money and banks. And I’ve made it my own personal mission for the last decade to help other investors benefit from the utilization of these tools and making sure that they’re utilized safely.
Mike: Yeah, even non investors. I mean a lot of people, they put debt all into one bucket. But there is a lot of ways to . . . I want to say the Robert Kiyosaki way of good debt and bad debt necessarily, but there are different variants of debt and how good or bad they might be, right?
Matthew: That’s true. Yeah, as an early investor, Robert Kiyosaki was certainly somebody that I admired and learned a lot from philosophically and attempted to practice as much as possible through my 20s. And you’re right, as the market started to shift in Colorado we were really some of the first in on the worst economic decline since the Great Depression.
Matthew: Come 2005, 2006 we were seeing some dramatic changes. On a personal level I had purchased a four-plex and closed in November of 2005 and in May of 2006 the purchase price that I paid of $315,000 was now met with a value of about $135,000 in six months.
So it was a real eye opening experience for us having already been turned on to some of the debt weapons that we’re going to be talking about and how they could play a role where we shift our focus from over-leveraging into what Robert might even consider to be good debt. Listen, if you have five, ten properties, all finance, what my translation of that book would lead me to believe is that those are all good forms of debt because the income produced from that asset is offsetting the liability.
Matthew: And that makes some sense.
Matthew: Theoretically borrowing at low cost rates and reinvesting under speculative rates of return that are going to exceed the cost of that money, is a road to wealth. Debt on paper makes tons of sense to me.
Mike: Yeah, yeah.
Matthew: In practice, I felt differently. And in practice, I saw some of the most successful people around me, people who I had admired for half a dozen years through my early 20s up until my now late 20s falling apart, losing everything. And if you’ve been involved in real estate investment long enough, you know who I’m talking about, you’re talking about . . .
Mike: Yeah, everybody knows those guys.
Matthew: That’s right, they’re a large group of people who short sold and foreclosed everything.
Matthew: Listen, the debt is the problem. You can’t argue that it was any other ingredient. And the debt that caused that meltdown economically for that household. So we’ve began . . . it was really that period in 2006 and going into 2007 where we began to identify with really the spectacular potential behind these debt weapons that allow us to continue to progress our asset acquisition at the same rate, if not even faster. But it also allowed us to rewrite the rule book on how we repay.
Matthew: So I think we believe in borrowing as much as Robert Kiyosaki, but I think the defining difference between our philosophies is that we don’t look at it as good debt and bad debt. The term good debt is like nails on a chalkboard to me. I hear that term and I cannot honestly think of something that’s more contradictory than a statement like good debt.
Matthew: I get it is as a necessary evil. I’d like to acknowledge that it’s evil. I think everyone should acknowledge the evil behind debt. But I think that leverage borrowing is the key necessary ingredient to creating wealth. You have to borrow.
Matthew: The only difference between our approach and Kiyosaki’s is how we choose to repay that debt, that leverage. And that’s what I think makes it actual leverage versus debt, is that just because we took it out doesn’t mean we’re going to allow it to sit there and just trickle in the repayment.
Mike: Right, right.
Matthew: We’re going to attack that aggressively, even more aggressively than we would’ve before because the utilization of that debt in the first place, the leverage, was to acquire something that increased cash flow. Why else would you have gone into debt unless you were being fiscally irresponsible?
Matthew: So we’re looking at these tools as we borrow it just to grow cash flow and then we use all the cash flow that we’re bringing in to drive away the leverage. But creating at all times ongoing vast amounts of liquidity where we always have access to massive amounts of money.
Mike: Sure, sure.
Matthew: Always take advantage of that next opportunity that comes across our desks.
Mike: Awesome, awesome. Well hey, we got into this a little bit far, maybe take a minute and just tell us your background and how you got into this. And then I look forward to diving in some examples and I know these are complicated people that are listening, they’re not that complicated, but maybe hard to follow as we’re talking here but there is some great stuff. So I look forward to going over some examples with everybody here. So maybe take a minute and tell us more about you.
Matthew: How I stumbled into this? Sure. I went to college and focused on finance and business and yet I found myself faced with the decision to either take a promotion for a business I was currently working in or decide to go ahead and continue to finish my degree. And at 20 years old I left to accept the promotion. Now a short time after that I was working as the manager of this business and I had this unique skill of business development and marketing and it was recognized by an outside individual who quickly recruited me to become one of the founders of VIP back in 2000.
Matthew: So at the age of 20 I reluctantly accepted this offer, it was with him and another individual both of whom I admired, both of whom were in their 40s. Much older than me, much more experienced.
Mike: Forty is not old my friend.
Matthew: Well, I know that now.
Mike: I just turned 41. Forty is the new 25 or something like that, I don’t know.
Matthew: We’ll give it 20, 40 is the new 20. So yeah, we were . . . The most embarrassing thing thinking back on it now is I’m not sure I even knew what a mortgage was at the time but we were opening as a wholesale residential mortgage company.
Matthew: And that’s why I was a little reluctant because I didn’t know if I’d really fit in. But interestingly enough just a few months into this new business, my specialty being that of the development and marketing, I really found myself most intrigued with the underwriting guidelines and the actual mortgage origination part of the business.
And so I was moonlighting, I was spending tons of time after hours speaking with people who could teach me and working with the underwriters and the banks and the lenders to know really what it took to be a qualified borrower. And so just a year, a year and a half later I was doing loans myself.
Also, we began to expand our approach to mortgage origination through education. We wanted to stand out from all the competition 15, 16 years ago and become really recognized for something new.
Matthew: So we started teaching classes locally in the Denver area. They became very popular and we actually decided to expand on these classes and wanted to become authorities, but we wanted to become authorities on niche subjects. And one subject that really appealed to me at the age of 22 was that of the relationship between credit scoring and borrowing. And it was something I hadn’t necessarily understood.
Earlier in my life and in college, I went to school in Colorado State University and my very first week on campus they’ve got tables set up outside the student center and you’re just being bombarded by credit card companies. And I signed up for my very first credit card, Discover Card because I got a free t-shirt.
Mike: I was about to say that.
Matthew: What better reason?
Mike: A t-shirt or something like some foam mascot or something that was going to last you forever.
Matthew: Exactly. Well, I still have the t-shirt. So within a month I maxed out the card. It was like free money. I had no idea how credit scores worked, I was just as undereducated in school as anybody else. My friends were following the same plan. And so by 22 I had already gone through the routine of establishing and ruining credit and now I realized, wow, here is why good credit is so important.
So we decided to make one of the scariest investments that I had ever made as entrepreneur at that age which was to spend tens of thousands on a mentorship with pioneers of the industry both personal and business credit scoring. And we partnered with one of the original creators of the first FICO credit score and with his mentorship and guidance, which by the way, they’re still on retainer with our company 14 years later.
We paid tens of thousands up front and $300 a month ever since. And we became, by the age of 23 I was youngest certified FICO credit scoring expert in the country. So by 25 I was traveling and speaking from New York to California, we were heavily sought after with media and we had 70 weekly radio shows that we were [inaudible 00:12:49] casting and we were speaking four times a day.
So that’s really how my real estate career started. And by the age of 24 I was investing aggressively at that time. They were getting loans to absolutely everybody and so real estate investing was easy then as far as getting the capital. By 2005, 2006 I began to realize the danger that was involved with a completely liquid lending market and everybody started to either pay the price for their behavior or realize that they made some good decisions along the way and they were safe.
Mike: Right, right.
Matthew: And that’s really when we stumbled into what we’re teaching here today. What we’re teaching today by 2005 was really a game changer for us in all the businesses that we were part of the point, as well as our real estate investing careers. And I’ve just been obsessed with it ever since.
Mike: Sure, sure. What’s interesting, we were talking about before the show here, was that when you started talking about really two things, as soon as you said it, it was like so obvious to me. One is that, a lot of the ways that people pay down debt on the real estate or anything really, is the way that that bank or lender asked you to pay it down. Which of course is done in a way, really to do two things. One, to probably make their processes easier, it’s like ordering a combo from a fast food restaurant, what number do you want? When we were younger of course it wasn’t that way, everything was a la carte, right? But now it’s like, “Well what number do you want?” and if you order off the menu it’s like, “Well, that’s not on the board there.”
So just the fact that one, they’ve done it to make it easier. But two, they’ve done it clearly to their benefit. Here is exactly how we want you to do it because that’s how they make the most money and the fact that you don’t have to do that necessarily. And two is, that a lot of us and hopefully a lot of our listeners, I hope everybody is blessed to be living below their means and has money in the bank that sits there earning nothing and that could be used to pay down debt.
A lot of us stockpile it because we think we might need it. But it’s like you could effectively just you know borrow that at a low interest rate from something else in the event that you do need it. And so there is a couple of really interesting things that I know you’re about to get into, but maybe I guess take it from here in terms of giving us examples.
Matthew: It’s a great generalization. And I think that it is important to respect the conceptualization of this process although conceptualization and speculation never really make it very far with me. And I was explaining that to you before today’s show where we . . . math is the defining precision that I’m always most interested in. And I’ve learned them all along and especially in the real estate investor community, people care about the numbers because the numbers really should be dictating the direction that you’re choosing to grow.
I found that the inside of this equation the numbers are really the constant and the variable, the wild card so to speak, is the person, the human on the other end. We psychologically screw ourselves up to where we don’t always make the best decisions because there is an emotional element there and we’re imperfect creatures. So the perfection comes in the math. And so with that in mind we have to start from the logical perspective.
And I was the most skeptical person when I was first exposed to some of this because the conceptualization was all I was introduced to. It was, “Hey, did you know there are ways that you can dominate the banks?” “Hey, did you know that you can turn banks against each other?” “By the way, what if I told you, you could save up to 80% of the interest rates that you’re about to pay on your mortgage and non-mortgage debts?” that’s all concept to me.
Matthew: To me that’s all I’m waiting for when somebody is bringing that information to me, is the other shoe to drop.
Mike: Sounds like a great title for a blog.
Mike: Put the banks against each other.
Matthew: That’s right, perfect. I’ll give it to you.
Mike: But there is some meat behind them.
Matthew: There is tons of meat, the math is the meat. That’s the best part. So what I had to do to overcome my skepticism was really understand the numbers. I had to understand the numbers because skepticism plays no role in mathematical results. I can be skeptical about the sum of two and two being four but I’m just an idiot, right? So skepticism is easy to overcome with math. So I had to look at the numbers and I did and I finally concluded, wow, what everybody has been saying, these people who I have been coming to and asking is this real and they’ve been saying yes, they were right. And why isn’t this taught in school? And why is it so hard to find information about this? Why was it so hard for me to find the mathematics?
And what we did was we vouched for this to become an additional part of the already existing popular curriculum that we were sharing around the country. And this became really the full wheel. When we were dealing originally with credit scoring and proper borrowing and first time home buyership and first time investment property purchasing classes these were spokes in a wheel that was much bigger that we didn’t really realize first, which was the cash flow wheel.
And once it all registered, then we started to say, how can we help people avoid that same initial confrontation of skepticism? How can we help you stop asking why this might be too good to be true and start asking, “Hey are the banks rules too bad to be true”? Because every time I ask these conceptual leading questions after a decade of asking tens of thousands of people these same questions, I already know everybody knows the same answer which is, do you think the banks are building the rules for us? A thousand out of a thousand people are going to say no, right?
Matthew: If banks get their way, if the banks accomplish what they want to get from you, how long are you going to be in debt?
Matthew: Thousand people are going to give me the same answer, right? So if we all know this is common sense, my skepticism again was a little bit unwarranted. I needed to come in from the back door and say, “Well, wait a second why isn’t there a better way to bank? Mathematically, why can’t I accomplish eliminating interest more easily?” Interest is one of those expenses that tops the list of what people don’t want to pay.
Matthew: Tops the list. And if I were to ask you, you’d probably give me the same three answers that almost everyone else does too, interest, taxes and insurance. These are the three things people hate to spend money on.
Mike: Personally I might put taxes at the top, but yes I understand.
Matthew: I understand that and I don’t disagree because I don’t like to pay them either. I don’t want to pay any more than I should.
Mike: I understand.
Matthew: Here is the question I would have in response to that, show me a country where nobody is paying taxes and my guess is you wouldn’t want to live there anymore, right? We like first class countries too. We don’t want to live in a third world. So selfishly we’re getting something from paying taxes.
Matthew: And we’re getting something from insurance.
Matthew: So what I want people to understand is that conceptually this is one of the most logical approaches to managing how you bank on a monthly basis. And frankly I don’t know how you could achieve even half of the potential in real estate investing without relying on the three steps that we’re going to be covering through the rest of the interview.
Mike: Yeah, let’s dive in man.
Matthew: Okay, so we’ve broken them into a very simple process. The process starts with step one which is the optimization of both personal and business credit profiles. Optimization of personal and business credit profiles. Now most people are aware of the significance behind their credit but most people are unaware of just how important it really is, and it’s only becoming increasingly so. Now, because of our background and studying under the pioneers of the industry we became authorities and have been able to create methodologies and strategies that really allow people to drive credit scores much higher in a fraction of the time possible by just being proactive with credit.
Credit repair, while we’re on the subject, has developed a somewhat compromised reputation and I don’t think it’s really due to the industry. I think the industry does serve its intended purpose. But let’s talk about that purpose. If you have negative information or inaccurate information on a credit report, a credit repair company is going to persistently dispute that information for correction and hopefully it will be corrected.
Now, that’s all related to one category of your credit score which is your payment history whether or not you paid your bills on time. As an average borrower we might think this is the single most important part of our credit which is true but it’s often much less impactful than people think. It’s only worth 35% of your score, whether or not you pay your bills on time. So what that means is you can pay your bills on time for 20 years straight and still have poor credit. And it’s because of the other four elements.
So let’s assume that you have six negative items on your credit report. We have managed to achieve one of the highest ratios of correcting negative and inaccurate information for removal of anyone in the industry and we are at 69%. Let’s say that a credit repair industry is successfully attacking or fixing negative information for you and they do it at let’s say 75%. Let’s say that they’re able to get, you’re at 66%, let’s say right at that same ratio. Let’s say four out of those six items have been removed. You might think that’s a 66% success ratio of helping my credit. Not true. You’re really only getting 35% of that 66%.
Mike: I see.
Matthew: Does that make sense? So you’re really only getting about 22% success or impacted credit scores versus 66% because it’s only impacting one category. What we did was we coupled methodologies that will focus on all five components of your credit profile in order to drive credit scores up in twice as far and half the time.
Mike: Sure, sure.
Matthew: But really you’ve got to focus on all five elements if you want to have the impact on your personal credit that you need.
Matthew: Second and third steps to this process involves then using that new credit very strategically to leverage in these very special accounts. And these accounts are what give us the ability to fast track our financial objectives. The third step in the process . . .
Mike: So approving your credit, just to make sure I’m following here, you optimize your credit profile so that you can get access to effectively cheaper credit to pay down and I know we’re not saying good and bad debt, but relatively speaking more expensive debt, right?
Matthew: A more effective tool or more effective vehicle for the intended purpose.
Matthew: Our argument is the initial default vehicles that we’ve been provided, are really strictly intended to benefit the banks.
Matthew: So what we’re doing is, we’re manipulating the way that debt is being serviced in order to really see the rubber meet the road.
Matthew: And ironically enough that’s actually an analogy that we use more often than anything. Is comparing these vehicles to physical motorized vehicles, motor vehicles. And we all as a modern society rely on those. So I find it easy for people to create a reference point in their minds to compare it to something, but all we’re doing is taking people who are used to riding around on horse back and saying, “What if we gave you a car? What would be the downside of that?” Now, are there risks involved if you’re irresponsible with operating a motor vehicle? You bet, horrible risks.
Matthew: In fact the risks in our financial equivalent are nearly as severe because you can die in a fiery financial train wreck like you can in the real world with [inaudible 00:24:38]. But there are risks with this so proper utilization of these vehicles is the third step in the process. Where you’re just not using the vehicle responsibly like it should be used you’re also using the vehicle and following the right road map.
Keep in mind that you could learn how to drive a car and you could be responsible. You could drive sober, follow the speed limit, wear your seat belt, stay in your lane. But you might be going south when you need to go north. You’re not going to end up where you want to go. So the idea is safe utilization but also following and creating the right road map in order to end up where you really want to.
Mike: So Matthew give us an example here of these three steps, optimization, leveraging that debt and then proper utilization. Give us a real world example for those that are . . . there is probably right now people who are driving their car listening to our show and now they’re worried about a fiery crash and we probably owe them an example to not get into an accident with everybody. But no, just give an example, a real world example of how this process works.
Matthew: Why don’t I do this? I’m going to give an overview of a case study from a couple of clients that we like to share in our group classes very, very specific with the math behind this.
Mike: Perfect, perfect.
Matthew: So the very first time I met Dan and Megan Albright was at a class that I was teaching live north of Denver. And there were probably 120 various real estate investors in that room and at the end of the class as you know, when you’re sharing a lecture at the end, you end up swarmed by people with questions. And I happened to take note, while I had a number of people standing around me of Megan. She was there by herself standing up on the wings.
This was a bit of a stadium seating type of venue. And I saw her standing up on the side, on the stairs and she looked like she wanted to come and approach, but she was holding off and I, it was when I was loading my car that she finally approached. And the only reason I remember that is because it was like a blizzard out. It was December in Colorado. So I remember it was just snowing on us and she thought, “Okay, now I need to get him.”
Mike: Now is the time.
Matthew: So I invited her to sit in the passenger seat. We had a conversation and my initial observations of her were that her physical condition was being impacted by her finances. I could tell just based on looking at her that that she was very emotional about their current state of affairs. And once she explained, my suspicions were correct. She explained that she thought that she and Dan were in a hole they were never going to be able to get out of, which is not our typical demographic, Mike.
I mean our typical demographic are people who are, like you said, they’re living within their means, they have a cash flow position that’s at least comfortable. They already have good to excellent credit scores, they have done a great job at minimizing non-mortgage related debts. That’s our typical middle class demographic that we’re focusing our education towards.
Well, here Dan and Megan with almost $50,000 in non-mortgage related debts. There were two car loans totaling about $35,000 and there were several credit cards totaling just under $15,000. So it was about $49,500 in outstanding non-mortgage debt and they were renters. Another key ingredient missing from our typical demographic. Well we decided to give them access to the cash flow contra spreadsheet which we’re going to make available to your listenership as well and she filled it out and sent it back. And they had a starting cash flow position of just $390 on average.
Matthew: Now Dan was self employed, which meant inconsistent wages. Megan was W2, which meant consistent wages. So that meant everything needs to be average. And I want to encourage your listenership as they manage their monthly finances to always average. It’s difficult when you’re self-employed to hold yourself accountable to proper awareness of your budget and spending plan every month because your income is difficult to forecast.
Matthew: But it does not excuse us. I hate to say it. But what we have to be doing is saying, “Okay, over the last 12 months what has been my average?” and if you’re noticing an uptick or a downtick then take that into consideration and say, “Okay, the average appears to be coming down now or the average appears to be going up,” but always be conservatively realistic about these numbers because we can lie to ourselves. We can put whatever we want to in a spreadsheet.
I would argue that everybody has to remain consistent with averages because cash flow is never consistent even if both members of the household, if it’s a two-party income. Even if it’s W2 income and it’s consistent, the expenses are always inconsistent. As borrowers and as consumers our expenses every month vary all time.
Mike: Yeah, especially for entrepreneurs, a lot of times you tend to pay yourself last, right?
Matthew: That’s right. And Randy, that’s a real estate investor, I mean how many times have unpleasant surprises creeped into our lives where all of a sudden there is an issue at a property and we’ve now got this new expense we weren’t planning on. So you always want to use averages for both income and expenses.
Now, $390 in positive monthly average cash flow is a fairly dangerous position to be in, in my opinion. When you’re averaging less than $5000 a year of discretionary leftover money, things are tight. One side step and you could really be in a big problem position and that’s where they felt like they were.
So long story short, what we did was apply the techniques of helping them drive credit scores higher, because their credit scores were not that strong, they were in the high 600s. We really want to try and achieve 700 minimum first. That’s priority number one, 700 plus. Priority two is to then consistently work on credit to get it to a 760 and up, 760.
Now simultaneously to achieving over 700 while working to enhance to 760 and up, we start on that second step of accessing these capital accounts which is what we did with Dan and Megan. We started acquiring these new tools, these vehicles that were going to speed them up.
Mike: So can we get some examples of that?
Matthew: So we’ve identified 16 groups of these, 16 groups. And look at them the same way that you might group and categorize physical vehicles. So you might have a category of airplanes and a category of motorcycles and automobiles and scooters and jet skis and snowmobiles. All of them are very different. And I’d like to just pinpoint that, listen, I was in your neck of the woods last week. Driving there would have been a ridiculous choice of vehicle options, right? I mean flying was really the best choice.
Matthew: But I have to be aware enough of the vehicle options I have and the processes of utilization of each of those vehicles in order to even make that a reality, right? So in order to get to Dallas and take an airplane, there is a lot that has to go into that, starting with the online research and then going to packing and then getting myself from my home to the airport, figuring out parking, getting through security. This is a big ordeal and frankly, one that I despise.
You and I were talking about travel before this show, so I know for a fact that you may not always be into the same nuisances that come with travel either. And frankly it’s the same in a car. I mean show me one person that doesn’t get frustrated driving around in their car.
Matthew: But ask them if any of those frustrations are reason enough to take that motor vehicle option out of the equation. No one will agree to that, everyone will say, “No, no, no. It’s not enough to make me walk everywhere. But I hate rush hour traffic because I hate fender benders, I hate filling my gas tank.” So again, these debt weapons are a pain in the butt, all 16 categories. The financial equivalent to these categories might be credit cards, one of our great debt weapons. When used properly how much interest, if you pay a credit card in full every month before it’s due, are you going to pay? How much interest on a credit card do you pay when you pay the balance in full before it’s due?
Matthew: Right, what if it’s a 30% interest rate?
Mike: Yeah, it’s going to kill you.
Matthew: What if it’s a 30% interest rate and you pay it before it’s due?
Mike: Oh, of course it doesn’t matter.
Matthew: Still zero, right?
Mike: Right, right.
Matthew: Now, it’s interesting because one of my . . . I was telling you, one my closest friends is a really aggressive real estate investor, he owns scores of properties and he uses a credit card for his personal stuff just outside of his business. He was bragging to me this week that he just got $500 worth of gift certificates and he has only been using this card for two months. You pay it in full every single month before it’s due, he has a serious liability with the credit card companies. And when you use credit cards properly you become a serious liability for the credit card company versus an asset for them and that’s how we operate using credit cards as one category.
Now I look at that as a bit of the daily driver. So if we’re using the metaphor of motor vehicle operation, that’s like getting in your car and driving from point A to point B around town in nice, smooth roads. That’s the Ferrari. Now if I were to say, “Hey this Ferrari is a great vehicle option,” and I put it side by side with a Jeep Wrangler like I drive, you’d almost be foolish to take the Jeep unless we’re going to the mountains, right? For me, that Ferrari is going to stink in the mountains, off road. It’s not the right vehicle. So credit cards are terrific for those daily expenses. You want to use them all the time for things we’ve already budgeted for but we pay it in full before it’s due, zero interest.
But what we’re then doing simultaneously is relying on these more utilitary vehicles, right? The unsecured capital accounts that are revolving accounts that are far more liquid than credit cards. Credit cards aren’t liquid. Credit cards are only used for things that a vendor accepts the credit card for the merchant, right? You don’t have complete liquidity with it. If I wanted to go and get cash, I’m going to pay a heavy penalty for that.
Mike: Right, right.
Matthew: So we get vehicles that offer a far more rugged liquidity that we can use large chunks of to pay things off to manage cash flow and then we’re relying on that same tool to replace our checking and savings accounts, which are inadequate. So that’s the next big phase of what we teach which is, that if you think about the monetary value of your checking and savings, you will conclude the same thing that everyone before you has concluded which is, you are being suckered my friend. They are relying on your deposits to generate income to lend out to other borrowers where they can collect large amounts of interest and pay you an insultingly low amount.
Mike: Right and possibly even charge you for the account.
Matthew: I mean it’s ridiculous and it’s a constant game of cat and mouse, the rules this year are different than the rules last year. Banking rules today look almost entirely different than the banking rules six years ago.
Matthew: So you’re right, it’s a constant action reaction process as far as strategically banking. But it ultimately is worth hundreds of thousands of dollars better and most of the time per household. So what we did with Dan and Megan was we took a couple who arguably would have never gotten out of debt, and I’ll often ask a question, based on the $390 starting average cash flow position, with almost $50,000 in non-mortgage related debts, how long if they don’t change behavior, will it take before they are non-mortgage related debt free? And almost everybody gives the same answer.
First of all, nobody says less than 10 years. And most people seem to think it’s going to take them forever because there is a pattern there of borrowing. Once their auto loans are paid back, what’s the next step? Getting a new auto loan.
Matthew: So it just never ends. With the change of behavior and with techniques that are far more result based, they were able to get out of underneath of that $50,000 in non-mortgage debt in under three years and then we immediately transitioned into their home ownership which is the most important part of today’s call because real estate investors have the biggest opportunity to save in what otherwise might be called good debt.
Matthew: I look at mortgages as the worst debt, but it’s the best necessary evil. Now why do I look at it as the worst debt? Why would I care more about $50,000 worth of debt when Dan and Megan go out and get a $290,000 loan that’s now almost six times as much debt as their $50,000? Why would I worry more about the $50,000? Because it doesn’t have an asset associated with it? I don’t care about the assets. The income from the rent comes in regardless of whether or not they have that mortgage.
Matthew: The rent is not associated with the mortgage, the mortgage is just debt. So I’m looking at that debt and saying well, $50,000 in non-mortgage related debt, how much interest would that cost them? Over a lifetime if they never paid it off, it will be substantial. But it’s still much smaller in reality than the now . . . you realize that $273,000 interest costs to Dan and Megan, I’m sorry, $283,000 at 5.2%, 5.2% interest over 30 years on $290,000 loan size is going to be $283,000 in interest costs.
Matthew: Making this property almost $600,000, well over half a million. And what we’ve done is we’ve showed these people how they can then utilize the same techniques that they were applying to the non-mortgage related debt to pay the property off in just eight and a half years. They saved over $210,000 worth of mortgage interest on this one property.
Matthew: One home. You don’t have to have two homes for that to be substantial, but if they have two now all of a sudden it’s not $210,000. It’s potentially $420,000.
Mike: Right, right.
Matthew: So every property we own, we have the opportunity to create a technique that sometimes refer to as snowballing. We call this cash flow stack where every property we buy increases cash flow and every property we pay off increases cash flow and every time we increase cash flow, we keep pay check working and rent check working against balances where we create ongoing increased liquidity, where we always have access to the money. And like you said, instead of just parking that money unemployed, idly in checking and savings constantly getting part against the front loaded impact of the interest costs that are going on in the traditional amortization schedule.
Mike: Yeah, that’s awesome. So maybe just take, if you can find a way to give a CliffNotes version of that for a real estate investor. So you gave an example of somebody that presumably was not a real estate investor. So talk about, let’s just say somebody that has five rental properties, they’re a real estate investor, how they might utilize some of the vehicles you just talked about to pay down debt on their investments.
Matthew: Well there are three target objectives for these tools to accomplish. The first is asset growth. So we want to grow the nest egg. Most of the listeners that’s already on the forefront of their minds. I mean they’re not tuning into shows like this if they’re not already thinking about, how can I grow my assets?
Matthew: And they’re interested in real estate. The second is liability elimination. So we want to make sure that we’re able to drive away the leverage that comes with the good and bad debts. And third, we want to stockpile emergency reserves. In the event of the problem there has to be funds there to take care of it.
And these three objectives are rapidly accelerated with the use of these debt weapon tools, okay? So what a real estate investor with, let’s say five properties would initially be focusing on, is how do we first optimize credit to get access to the tools, then leverage into these tools in order to accomplish and accelerate those three priorities, assets, liabilities and emergencies? So our specialty, what we’ve really become best known for is when it comes to the utilization of that third step. So the first two steps is credit development and leveraging into these tools. That’s what we help with first.
So we’re experts in both of those first two steps. But the third step is the utilization portion and our specialty of utilization isn’t to help your listeners with the real estate investing per se. I’m not here to say “Buy that house, don’t buy that one.” We’re not investment advisors, we’re here to help leverage into the liability elimination while still freeing up as much if not substantially more capital than what you ever originally had so that you can go out and develop assets more quickly.
Matthew: Let’s assume that you’re an investor with five properties and you don’t want to buy any more. Because I’ve just addressed that those tools can be used to buy more and those tools can be used in the event of an emergency. But I want to focus on answering your question on what we really are best known for, which is how do we then take that and allow you to own five properties free and clear in a fraction of the time. The first thing we would do is again, leverage into those proper capital accounts. And we’re never done looking for and accessing more of those tools, Mike. And that’s an important takeaway from today’s discussion.
Matthew: Because most people have been taught along the way that they should minimize access to credit. We do not minimize access to credit ever. We don’t believe there is such a thing as having access to too much capital. The only disclaimer that I would want to provide to that, is if you are incapable of fiscal responsibility you should not access more credit. And that’s the Dave Ramsey education which is, you’re going to learn cut up credit cards. It could not be worse advice for a fiscally responsible person. But it’s great advice for somebody who can’t control themselves.
Mike: Right, absolutely.
Matthew: With control there is no such thing as having access to too much credit. And what we’re doing is adding anywhere between $25,000 to $250,000 of access to these capital accounts per household each year. That’s the objective. Now, as you add these tools, you can use them to grow and buy more. But like I said I want to use a small portion of this and recycle over and over and over again that same amount into and apply it against the lump sum of the debt weapon or of the original debt.
So let’s say that we have five mortgages and no non-mortgage related debt. We normally pay off non-mortgage related debts first. So anything that’s not a mortgage we’re usually going to attack that as a rule beforehand. But it’s just a nuisance. I’m just trying to get it out of the way. Most people will look at it as the worst debt, I’m just looking at it is an obstacle. Now I get to the mortgage and I say, “Okay, I’ve got this first mortgage now and I’m going to normally isolate to one mortgage first and then to the next and then to the next,” we’re not paying them all down simultaneously. Does that make sense?
Matthew: Okay. So I will attack that in large lump sum amounts. I will take from a capital account in Dan and Megan’s case, $20,000 and it’s different for everybody. We calculate that lump sum for each individual and we will apply it towards the mortgage. So in their case they got a $290,000 mortgage. We took from one of their new debt weapons, an unsecured revolving capital account, a very special type of debt weapon that’s available to all of us and we take $20,000 and we apply it to the $290,000. It immediately drives that balance down to $270,000. Now we have another balance of $20,000, so we have $270,000 and $20,000. Does that make sense?
Mike: Okay, so we have the same amount of debt at a high level at this point, right? Okay, I follow you.
Matthew: Same debt, balanced differently. All I’m doing as a borrower is I’m just taking more control over the servicing of the debt and I’m saying no, I’m not repaying it back based on monthly installments. Here, I’m taking $20,000 from this tool and applying a big lump sum to that mortgage. Now, as income comes in from Dan and Megan’s jobs and self employed profession the income would normally go directly to checking and savings. Instead we’re going to pass it through checking and savings where it’s monetarily worthless other than the convenience and liquidity of it and we’re going to park it against that $20,000 balance paying it down substantially.
Now when we do that, it frees up the availability of that account just like a credit card. If you paid your credit card down substantially you would have all that money available to you again, all right?
Matthew: The difference being that this capital account is 100% liquid versus a credit card which is not 100% liquid.
Mike: Right, right.
Matthew: So we have far more control of this account. Now when bills come due we take from the availability of this account and we pay the bills, including the mortgage or mortgages, including the capital account for Dan and Megan or the credit card rather where they’re spending every month, all their monthly expenses. We pay that in full using the new debt weapon. And by the end of the month the cash flow position which is now increased for Dan and Megan from $390 up to over 2000, $2025, $2035 remains parked against that debt weapon balance dropping it down by that $2035 as opposed to that money sitting in checking and savings.
Matthew: And then when we need the money it’s there. By the way, if we ever need the money for a down payment on a new property, we pull it out, we put it in the bank and we season it, 60 days. So at all times we’re never giving up the liquidity. A lot of real estate investors have it in their minds that they need to take this income, the cash flow, their normal source of revenue and put it in checking and savings so that they have the reserves available to show in underwriting, hey I’m qualified.
Matthew: So we have work arounds for all of that where your money isn’t sitting in the bank doing nothing for you. And that’s really the heart of what we’re getting at here. And Dan and Megan are real estate investors at this point, they own three properties now. So they’ve accomplished a lot and it really is just a matter of recognizing that, hey, if they don’t have to pay an extra $210,000 in interest on this property, what could they do with it instead? If that money is not going to the bank, that’s a whole other property.
Matthew: That’s really what we’re doing here. It’s keeping the interest for ourselves to where we’re then able as investors to go out and buy that much more because we’re not giving all that money away unnecessarily to the banks.
Mike: Yeah, yeah, awesome. Well Matthew I know and for those listeners out there, I know that this could get a little complicated but it’s very fascinating about how to really take more control and pay down your debt and have more liquidity. I know there are a lot of folks that are just sitting on money in the bank in case they need it, it’s earning nothing and you could be using that to effectively pay down debts.
In any event that you need it later, pull it out of something like a home equity line of credit or some unsecured line at a really low interest rate and generally you’ve already proven that you won’t need it. So it’s there if you need it, but in the meantime why have your hard-earned money just sitting in an account doing nothing really?
Matthew: While you’re paying interest on all your debts on the other side of the balance.
Mike: That’s right, that’s right, yeah. Awesome. Well, Matthew I know you’ve got some more information, if folks want to learn more about what we talked about here and maybe see some more examples like that, where do they go to learn more?
Matthew: What we did Mike was we created a free class where people can actually see the arithmetic for themselves.
Matthew: So we’ve talked at a high level today obviously if you’re just listening in your vehicle or watching on your computer, it’s very difficult to, I think, follow with the arithmetic. So what I want to do is show the twos and the twos added together. So we put together a brief class, about 50 minutes long that your listeners can go to. It’s one of our most popular classes.
We teach this all over the country. They can visit mortgagekillerclass.com, mortgagekillerclass.com. To attend that class it does not require anything special. There’s no payments, completely free of charge for your group and it’s also non-solicitous as well. We at no point in time have something to sell your group. So that they’ll get a lot of great content there.
Mike: That’s great, that’s great. Well, Matthew, again this is not something that everybody is talking about because it’s unique. But I think that it’s really fascinating. And I have read up on this technique a little bit recently, it was really fascinating. It’s really counterintuitive to how a lot of us think. But very powerful if you can find a way to use it in your in your life and in your business for sure.
Matthew: No question, and there are very few exceptions to who would not benefit from this. You’re either the uber wealthy or the uber poor. Everyone in between really, really needs this information. And the more you watch . . . I would encourage taking the time to watch it a second time. Once it clicks, you begin to realize that if you’re banking under the old fashioned approach, you’re just a fool. And nobody wants to be a fool. It’s not intentional. But I’ve got something like 10,000 people in just the last month who have given feedback for that rate the class an eight, nine or ten out of ten.
Mike: Oh that’s great.
Matthew: Because of just how valuable the content is that they’re going to see. In fact the example that I used in the class that we created for you, is the same example that we were just sharing with Dan and Megan, so you can really see all the dots get connected.
Mike: Awesome, awesome. Well, Matthew thanks again for joining today. So that’s mortgagekillerclass.com. We’ll add a link down below the video here for those that want to check it out and learn more. Thanks for joining us my friend. I definitely appreciate your time.
Matthew: You too Mike, I appreciate everybody listening today. Thanks a lot.
Mike: Awesome, awesome. Have a great day.
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