CW 196: Ronald Reagan & Mortgage Planning with Ric Edelman Author of ‘A Tale of Two Brothers’ & ‘The New Rules of Money’

Welcome to Creating wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven't thought of before. And a new slant on investing, fresh, new approaches to America's best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self made multimillionaire who not only talks the talk, but walks the walk. He's been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason's footsteps on the road to financial freedom. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors.

Welcome to the Creating wealth show. This is your host, Jason Hartman, and this is episode number 196. First of all, I want to start off by wishing everybody a very happy holiday season, very merry Christmas, and I hope you're looking forward to a great 2011, all things considered, given this economy and the mess that Goldman Sachs and the powers that be put us in, the banksters, the bank robbers basically is what they are. And the whole thing that's going on with the financial crisis and the economy, you know, it is creating a lot of great opportunities for our investors. And I see it almost every day where one of our clients just picks up a phenomenal property well below the cost of replacement, well below the cost of construction. They get free land in the deal. I've been doing it myself this year. And I tell you, it's like the Chinese have the symbol for crisis, which is the same as the symbol for opportunity. And it means crisis is an opportunity riding the dangerous wind. And the crisis only creates an opportunity for those who act, for those who actually do something about it. Those who sit by and are spectators as if life is some kind of spect, well, they miss out. And the opportunity is really nothing more than just a tragedy for them. So it requires action. It requires us all to have the nerve, the chutzpah, the guts to take action in the face of bad news out there, in the face of what's going on in the media, in the face of understanding that the housing market or the real estate market, as the talking heads on TV say, is not one single national entity. Understanding that all real estate is local, understanding the value of having a diversified portfolio portfolio in markets that make sense. When you have 400 distinct markets in a country as large and diverse as the United States of America, you have rampant opportunities. Again, like we've talked about in prior shows, you look at the Case Shiller index of 20 markets that are profiled, and in my opinion, 16 of those markets are markets I wouldn't even come close to considering nowadays. Only four of those markets, in my opinion at this time are worth considering. So when you consider the weighting of that index, of the Case Shiller index, the most commonly used barometer of what the quote unquote housing market is doing, as the talking heads say, you would think that things are pretty bleak out there. But we again profile 15 additional markets. And last year, I know many of you took advantage of our white paper, and this year we are changing the name of it and we're calling it a real estate forecast book. And it is more than doubled in size. I think it's going to be about 80 pages this time. And we're going to launch that hopefully January 1st or very shortly thereafter with our predictions. And we, we added some new things to our methodology this year that are pretty darn interesting where we're looking at 35 markets in total and we're taking the predictions of many other prognosticators into account. So several of the the famous sources that make predictions every year for whatever they're worth, some are worth less, some are decent. And we're taking some of these major predictions that come out every year and we're going to evaluate them, but then we're going to add on to them our own predictions. Plus we're going to consider in this kind of matrix that we're using, we're going to consider the multidimensional nature of income property. And again, if you've been listening to the show for a while, you know that it is actually possible. And this is not fuzzy math. It's not double talk, it's not spin, believe it or not, you can actually make by losing money in the income property business. Now, what do I mean by that? Well, what I mean by it is that Charlotte, North Carolina, last year about this time when we released our white paper, we predicted a slight decline in values in Charlotte. But because the cash flow was good and because the opportunities for leverage were good, you actually would make a positive return in a declining market. Now that is unusual because if you were to invest in most of the California markets, most of the northeastern markets, the really overvalued and still overvalued high land value markets where you largely have liberal political ideologies, you have generally municipalities that are in financial crisis, entire states that are in financial crisis, those types of places, the depreciation is too big and the cash Flow still doesn't make sense. It seems like every day someone asks me when I'll start recommending several of these higher value markets such as California, etc. And I tell you it just needs to decline a little bit more before I'm going to recommend them. Because we will sell no real estate before it's time. You remember those old commercials, we will sell no wine before it's time. So now our forecast book, and we're really calling it a book because it's much larger this year we've added some stuff to our methodology and it's pretty interesting and I think you'll really like it. And so more to come on that. And we'll point out, given the multi dimensional nature of income property, which nobody else by the way, there is nobody else. And by the way, if there's someone I have not discovered, please call me, take me to task on this. There is nobody else out there who makes a forecast and properly evaluates the multi dimensional nature of an income property investment or they consider appreciation or depreciation as the case may be, where they consider cash flow and they consider leverage. Now we could also really to do a true multi dimensional thing, we could also consider tax benefits, but we don't in our forecast book because everybody's tax situation is different. So that was sort of too complex. But that definitely makes the return on investment better in virtually every case. So it's only better than we forecast when you consider tax benefits. So what are we going to talk about on this show? Well, here on show 196 today, the first thing I want to do is share with you, I think a rather moving sort of Christmas story. I believe it's about eight or nine minutes long. It's pretty short. And then I want to talk to you about mortgages and financial planning with your mortgages and a story called the Tale of Two Brothers. So first we're going to go back quite a few years and I believe it's 1983 if I'm not mistaken. And about a hundred episodes ago I actually shared this particular soundtrack in my own voice. But of course I didn't read it in as moving away as the speaker, we have coming up really a guest from the past, a late deceased guest, but a person who made a really big impact on history will share kind of A Christmas Story. And really it's a story that just happened to be broadcast on the radio at Christmas time back in the early 80s. But it's a story about gratitude and about really understanding how lucky we are because if you're listening to this, you live in a country that offers freedom. And of course, I'm so grateful that I happen to be American. I know that many of our listeners are not. But America really has always been kind of the symbol of freedom around the world. Now, of course, since America was launched 230 some odd years ago, I guess. 233 years ago, right. Many countries have followed suit, thankfully, with that example. But back in 17, it was pretty rare to have a concept like the American experiment. And so I'll just share this because it's a pretty moving story and I just always think of it around the holidays. It's not religious really or anything like that, but it is, it is something that I think we can count as something to be grateful for if we are lucky enough to live in a free country and a prosperous country. So we'll do that. And then I will be back to talk about financial planning with your mortgage and the tale of two brothers. And I'm not going to even tell you who is on this because you'll instantly recognize it. And I'll be back in about nine minutes to talk to you about mortgage financial planning. Here we go with our next guest.

Not long after taking office, President Reagan began to deliver weekly Saturday afternoon radio addresses reminiscent of Franklin Delano Roosevelt's fireside chats. President Reagan used this time with the American people to discuss current issues in the news, but also shared items that came across his desk, such as letters and newspaper clippings.

Christmas Day radio address to the nation, Cabinet Room, The White House, December 25, 1982.

Merry Christmas from the White House. Nancy and I wish we could personally thank the thousands of you who sent us holiday cards, greetings and messages. Each one is moving and tells a story of its own, a story of love, hope, prayer and patriotism. And each one has helped to brighten our Christmas. Some of the most moving have come from fellow citizens who, unlike most of us, are not spending Christmas Day at the family hearth surrounded by friends and loved ones. I'm thinking of the 12 US Marines who sent us a card from Beirut, Lebanon, where they'll spend their Christmas helping to rebuild the shattered hopes for peace in a suffering land. And I'm thinking of the petty officer serving aboard the USS Enterprise who asks that we remember him and his shipmates this holiday season. Christmas in the Indian Ocean is no fun, he writes, but it's for a very good cause. Well, that's right, sailor. You're serving a very good cause indeed on this, the birthday of the Prince of Peace. You and your comrades served to protect the peace he taught us. You may be thousands of miles away, but to us here at home, you've never been closer. One of my favorite pieces of Christmas mail came early this year, a sort of modern American Christmas story that took place not in our country's heartland, but on the troubled waters of the South China Sea last October. To me, it sums up so much of what is best about the Christmas spirit, the American character, and what this beloved land of ours stands for, not only to ourselves, but to millions of less fortunate people around the globe. I want to thank Mr. Gary Kemp of Neenah, Wisconsin for bringing it to my attention. It's a letter From Ordnance Man 1st Class John Mooney, written to his parents from aboard the aircraft carrier midway on October 15th. But it's a true Christmas story in the best sense. Dear mom and dad, he wrote, today we spotted a boat in the water and we rendered assistance. We picked up 65 Vietnamese refugees. It was about a two hour job getting everyone aboard, and then they had to get screened by intelligence and checked out by medical and fed and clothed and all that. But now they're resting on the hangar deck and the kids, most of them seem to be kids, are sitting in front of probably the first television set they've ever seen, watching Star Wars. Their boat was sinking as we came alongside. They'd been at sea five days and had run out of water. All in all, a couple of more days and the kids would have been in pretty bad shape. I guess once in a while, he writes, we need a jolt like that for us to realize why we do what we do and how important really it can be. I mean, it took a lot of guts for those parents to make a choice like that, to go to sea in a leaky boat in hope of finding someone to take them from the sea. So much risk. But apparently they felt it was worth it rather than live in a communist country. For all of our problems with the price of gas and not being able to afford a new car or other creature comforts this year, I really don't see a lot of leaky boats heading out of San Diego looking for the Russian ships out there. After the refugees were brought aboard, I took some pictures, but as usual, I didn't have my camera with me for the real picture. The one blazed in my mind as they approached the ship. They were all waving and trying as best they could to say, hello, America, sailor. Hello, freedom man. It's hard to see a boat full of people like that and not get a lump somewhere between chin and belly button. And it really makes one proud and glad to be an American. People were waving and shouting and choking down lumps and trying not to let other brave men see their wet eyes. A lieutenant next to me said, yeah, I guess it's payday in more ways than one. We got paid today. And I guess no one could say it better than that. It reminds us all of what America has always been, a place a man or woman can come to for freedom. I know we're crowded and we have unemployment and we have a real burden with refugees, but I honestly hope and pray we can always find room. We have a unique society made up of castoffs of all the world's wars and oppressions, and yet we're strong and free. We have one thing in common. No matter where our forefathers came from, we believe in that freedom. I hope we always have room for one more person, maybe an Afghan or a Pole or someone else looking for a place where he doesn't have to worry about his family starving or a knock on the door in the night, and where all men who truly seek freedom and honor and respect and dignity for themselves and their posterity can find a place where they can finally see their dreams come true and their kids educated and become the next generations of doctors and lawyers and builders and soldiers and sailors.

Love, John.

Well, I think that letter just about says it all. In spite of everything, we Americans are still uniquely blessed not only by the rich bounty of our land, but by a bounty of the spirit. A kind of year round Christmas spirit that still makes our country a beacon of hope in a troubled world. And that makes this Christmas and every Christmas even more special for all of us who number among our gifts the birthright of being an American. Until next week, thanks for listening. Merry Christmas and God bless you.

So wasn't that great? I just love when Ronald Reagan says there are no ships leaving San Diego harbor to look for Russian ships out there. It's really very moving. And the people that were rescued say, hello America, sailor. Hello freedom man. We have a lot to be grateful for. If you're listening to this, you live in a free country. And I think that's the first thing we should remember about the hul season is the gratitude that comes with it. So now let's talk a little bit about mortgage, financial planning. And what I'm going to play for you next is just a little YouTube video that I found. I really don't know the person who produced this or anything. I just found the YouTube video and I want to play for you the soundtrack of it. And I know the same story. It's a pretty popular story actually, and it's used by financial planners a lot. And what it really talks about is the wisdom of having as Rick Edelman, we had him on a recent show here, having a big long mortgage and never paying it off. And it still amazes me how many people just don't get this. And this drives the point home in a very specific way by comparing two brothers. And it's called A Tale of Two Brothers. And it shows how one did the old fashioned thing and they made a point of paying down their mortgage and doing that as fast as possible and saving on interest cost and retiring debt. Listen, I am certainly aware that tens of millions or maybe hundreds of millions of people have gotten themselves into trouble with debt in this wealth cycle, this huge wealth transfer cycle that is going on in the US economy and really the world economy right now. And I get it. But when you really step back and you look at the big picture, you realize the wisdom of mortgage management, of the prudent use of long term fixed rate investment grade debt and how incredibly powerful that can be. People will be borrowing money during their lifetime. So my question to you is, doesn't it make sense to borrow the money as inexpensively as possible and avoid high interest, non deductible debt, credit cards, auto loans, personal loans, and harness the power of your mortgage or mortgages and stock up on high quality long term fixed rate investment grade debt, get the lowest rate mortgage, do not make bi weekly payments, do not make one extra payment per year, do not try to retire that mortgage early, because we are now, and I can say it officially now, we are in an inflationary environment. A year ago I couldn't really say that. But when we've seen what's happened to the price of food and energy, especially this year, it's hidden a lot because we've had credit based assets which have declined in value, namely real estate. Great opportunity for us. And of course that depends on the market. And all real estate is local, you know that. And we've had technology based assets that keep getting cheaper and cheaper. So we think that there is deflation. But when we look at the real necessities of life, which don't include iPhones by the way, or flat screen TVs and great electronics and technological based things like that, when we look at the necessities of life like food and energy, we realize we're paying a lot more for those Things, aren't we? So the old way of thinking does not make sense. It's the Depression era mindset and some would even argue that we're in a depression now. Or many are calling it the Great Recession. But those big long mortgages are great tools. And just remember, it's almost never, there is almost never a case where it is wise to send extra money to your mortgage company and pay down your mortgage early. It's like putting money under your mattress that earns no return on investment or no return on equity. And so I want to ask you this. People quote a metric when they're looking at investment properties. Sometime they call it ROE or return on equity. And I submit to you that there is no such thing as return on equity. It's SIMP doesn't exist. And the reason it doesn't exist is because think about it. You get a 1099 on all of your investment accounts every year. On all of your savings accounts every year. If you earn interest in an investment account, in a savings account, you get a 1099, right? And you have to declare that income to the irs. And on your equity in your properties, if you have equity in your properties, did you get a 1099 on those properties? Did you have to declare income on that equity? Well, the answer is no, of course you didn't. And that's why there is no such thing as return on equity. In my opinion. It is a completely faulty metric and people still use it. And I think it's just, it's a misnomer. It simply doesn't exist. So let's listen to this short video again. This one is also about eight or nine minutes long and then I'll be back to wrap up and then we will talk about some upcoming shows for you. So listen into this short little audio track here. There are a lot of numbers in here. I'll review a couple of them when I come back on after this.

Hello, my name is Brian Sewell and I have helped many like yourself discover how to leverage your mortgage mortgage, use it as a financial tool and dramatically improve your financial circumstances.

If you had enough money to pay off your mortgage right now, would you?

Many people would. In fact, the American dream is to own your own home. Imagine owning your own home without sending payments to a mortgage company or bank. Being so fortunate invokes such a sense of security and satisfaction and well being that you can only dream of it. Imagine after 30 long years, 360 monthly payments, you finally make that last payment and the house is yours forever.

If the American dream is so wonderful. How can you explain the fact that so many financially successful people, people who could pay off their mortgage if they wanted to, refuse to do so?

Consider these facts from my research. Less than 2% of our population is self made millionaires. Of these, 100% the ability to own their own home without a mortgage, 83% carry a mortgage anyway. 100% have the ability to send in extra money along with their monthly payments to eliminate the mortgage ahead of schedule. But 90% choose not to. Instead, 85% of the respondents have a 30 year loan. And no one in this group sends in extra principal payments or participates in bi weekly mortgage plans.

Clearly, these financially successful people are not afraid of carrying a big long mortgage. Compare yourself to them. If you have a mortgage and are trying to pay it off or are dreaming of the day when you make the last payment, you're trying to do something that financially successful people do not do. What do they know that you don't?

It's vital you understand what's happening here. And we begin with the fact that talking about a mortgage is not a conversation about economics or finance. It's about emotions. You love the idea of owning your own home. You hate your mortgage. If you're like many, you may even fear it. All of these are emotional words, none of them financial. Yet a mortgage is a financial tool, not an emotional state of mind.

Let me quickly share with you some facts. Fact number one, mortgages don't lower home values. Your house will appreciate or depreciate in value regardless of whether you have a mortgage. Fact number two, your mortgage is the cheapest money you'll ever buy. If your interest rate is about 5 and you're in an average tax bracket of say 35%, then your effective rate is closer to 3%, meaning the money only cost you 3%. Fact three, your mortgage is the best way to lower your taxes. Fact number four, financial security is not in having equity, it's in having cash. Fact five, your mortgage becomes cheaper over time. Because of inflation, our incomes gradually increase over time. However, our mortgage does not. To illustrate how these facts affect you, allow me to share with you a story of two brothers. They each have $40,000 in savings and both are buying $200,000 homes. Brother A believes in the old way of paying off your mortgage as soon as possible. So he gets a 15 year mortgage at 6.38%, puts $40,000 down, has zero left over to invest. 1383 is his monthly payment. 1227 is his net after tax cost. Then he sends an additional $100 a month to the lender in an effort to eliminate the mortgage sooner. Brother A's paradigm easily represents over 98% of the population, all of which are so focused on saving money they miss out on the opportunity to make money. Brother B believes in the new way of carrying a big long mortgage and never paying it off. So he gets a 30 year interest only loan at 7.42%. He puts a small down payment of $10,000. He has $30,000 remaining to invest. 1175 is his monthly payment, 100% of which is tax deductible in the first 15 years. So his net after tax cost is 799.

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This show is produced by the Hartman Media Company. All rights reserved. For distribution or publication rights and media interviews. Please visit www.hartmanmedia.com or email mediaartmanmedia.com Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate or business professional for individualized advice. Opinions of guests are their own and the host is acting on behalf of Platinum Properties Investor Network, Inc. Exclusively.