The BIGGEST PROBLEM with Real Estate Investing In Canada (Hint: Cashflow)

He said, the problem is, is that I'm doing all the work and everyone else is getting all my money.

Well, we can solve that problem by implementing this process of becoming your own banker.

Today I thought maybe we could dive into real estate. We have a lot of people. If you're a business owner, you're certainly investing in real estate. There's a lot of investors. It's a pretty natural thing to be looking at as an investor alternative outside of the usual things like stock market and all that. If you're not interested in going there, that's where people are going. Maybe we can start just back to the essence of infinite banking. What is it? What problem are we solving?

That's a great question. The essence of the process of becoming your own banker, the infinite banking concept, it's all about recapturing the interest that you pay to banks, credit card companies, finance companies for all those things that you need, you know, throughout your lifetime. And when people are exposed to this process and they're looking at it from the vantage point of, okay, so take a real estate investor as a perfect example. You know, should I invest my money in real estate or should I become my own banker? Should I go into that joint venture opportunity or should I become my own banker? It's not an either or. You know, the process of becoming your own banker is not about addressing the yield of an investment or the selection of an investment. It's all about how you go about financing the things in your life which certainly include investment, especially for real estate investors, which we'll talk about. But I'll bring you back to, if I may. So the book that started it all, the book titled Becoming youg Own Banker. This book was authored by the late R. Nelson Nash, who developed and pioneered this process. And back in the early 1980s, inflation skyrocketed. Now, Peter, you've heard me have this conversation and share this story, which is so profound because at that time Nelson up to that point he had done really well in real estate. He invested in land, he invested in commercial space, he invested in property and so on. And all of the financial gurus were saying, look, you should, you should leverage other people's money, go and purchase these cash flowing assets. But nobody talked to Nelson about what would happen if the interest rate lever went the other way. And right now money is the cheapest it's ever been. And so banks are making record profits because people are lining up from here to the airport to borrow money. And the bank understands that it's not the rate, it's the volume. It's the volume that's creating that. And so Nelson found himself in a position where he owed a half a million dollars to the banks in the early 1980s and interest rates peaked at 21.5%. Now he wasn't a prime customer, he was paying closer to 23, if not more. And so he found himself in this really, really bad situation that created a problem for him. And most people were saying, listen, why don't you just sell the real estate? Wouldn't that be the logical thing to do? And he thought to himself, what fool is going to buy this property, this portfolio of properties from me knowing that they're going to have to access someone else's pile of money at such a high rate of interest? And so that gave birth to the problem. And the problem was Nelson was making the wheels of the banking business and the real estate business turn in that order.

All of the money that was flowing through his hands, he was only handling it.

He was flowing that money through the books of someone else's bank. I say that again, someone else's bank. And he recognized that that was a problem. And so what he quickly came to realize is that he had access to a growing supply source of money called cash value inside of his dividend paying, participating whole life insurance policies. He could get access to the money from the insurance companies in the form of policy loans, anywhere from 6 to 8%. So he could get rid of the snakes and dragons that were charging him 23 and it took him 13 years to get rid of those snakes and dragons. And then from that point forward, him and his wife Mary never saw a commercial bank again for anything other than the convenience of debit. And what a peaceful, stress free financial way of life it is when you get the bankers out of your life. Isn't that good?

Yeah, no, that's absolutely great. There's so much you can dive into just from that whole scenario in itself. I think one ultimately is control, right?

Oh my God, you can't overemphasize that. So I'll give you a more recent example. So take it back to April of 2008. Now Peter, like myself, you have a lot of experience in real estate investing, right?

Yeah.

And so back in April of 08, you could still get 40 year amortizations on mortgages. And this was, oh gosh, three months before I was first exposed to the process of becoming your own banker. And my wife Rebecca and I, we purchased our principal residence. I was an active real estate investor. I owned 13 doors at that point in my life. And when we bought our principal residence, we ended up with a mortgage. It was just over 426,000, give or take. And we thought, wow, this is pretty fantastic. This is our lot in life. Our interest rate was 2.68% and we had a payment and we were sending an extra 200 bucks a month. We thought, wow, we're going to put a real dent in this thing, Peter. So, Mr. Banker, we're going to send you, and don't worry about going to find another borrower. We're going to send you extra money every single month.

So you could put that money to work for the stockholders of the bank. And I can increase your margin of safety and decrease my own, but I feel pretty good because the mortgage balance is coming down. But whose margin of safety am I growing? It's always the banks. And so what Rebecca and I decided to do when we were introduced to this process of becoming your own banker, we cranked up several participating dividend paying whole life insurance contracts paying very, very high premium because we understood what we learned, which was the more capital that we put in, the more capital that we get out. And when you talk about control, it took us seven years to get rid of the commercial bank. So we took a 40 year amortization. We got rid of the Commercial bank in seven years. We took that mortgage debt, if you will, and we moved it, not all of it because we kept making our payments every month. So we were paying down that principal from our own cash flow, but we took that debt and we shifted it over to our own system. And we had about 220 plus thousand of policy loan balance outstanding when we got rid of the commercial bank. But if we do some simple grade three math, the $1,892 a month that we were otherwise obligated to keep sending to someone else's bank, guess where that money's going now?

It's going to your own bank.

It's going back to our own system and we're not obligated to send that same payment because when you take out a policy loan from the life insurance company, it's an unstructured loan. You control the repayment schedule of that loan. But when we got rid of the bank, I'll never forget it, I called Nelson, I said, nelson, I have got such amazing news. I'm one of the happiest people on the planet. We're going to have a mortgage inferno party. We're going to take those documents, pour a 30 liter tank of gas on it and light that thing so it bursts into flames and the whole neighborhood can see it. Well, Nelson said don't celebrate too quickly yet. You've got to be an honest banker. If you signed up to make 40 years of payments into someone else's system, then don't devalue your own system. You should redirect those payments back into your own system. And that was like getting hit in the face with a two by four. It was an epiphany, it was a eureka moment for us. So we own the asset free and clear. We now have renters in that asset and we've got money flowing back to our own system. So it's not flowing away from us. Right. We're not transferring it away to someone else's bank.

Right.

We hear real estate investors all the time. Our tenants are paying down the mortgage. Why don't you have the tenants pay down the mortgage that you own and control and the money's all coming back to you, not flowing away from you. And by the same token, we talk to real estate investors who say we've done quite well. You know, our real estate portfolio, we have a number of properties that are paid off. We own them free and clear. And that's fantastic, well done. But who's got all the money?

Where did that stream of payments flow to? So this is all about changing the flow of the money. So that is flowing back to you. And more importantly, who is that money being put to work for when you redirect that money into someone else's bank? Who is that bank putting the capital to work for the stockholders? When you crank up these dividend paying, participating whole life policies and you accumulate this pool of financial value and you achieve the very same outcome that the commercial bank achieves and you co own the company that's achieving that outcome, the money is being put to work for you and for everyone else who co owns that business called the life insurance business and you get to participate in the divisible surplus with dividends that attract no tax. It's brilliant. And so when real estate investors catch this, when they understand the problem.

The solution becomes clear and they know exactly what to do. I haven't met a real estate investor yet who has said, you know, I'm not really that interested in ready access capital to take advantage of opportunities that will most certainly track me down.

And no, I'm not interested in reducing my exposure to tax. I mean real estate investors love the process of becoming your own banker because they recognize the importance of ready access to capital. They Recognize the importance of being in a position of total and absolute control. And if a real estate investor gets excited about equity that's building up in someone else's bank, please tell me that they're going to be even more excited with that equity building up in their own bank.

Logic would dictate.

Yeah. Just in terms of what you just covered off there. I don't know. I took a whole bunch of points that I wanted to just dive, maybe dive into, but just take notice, right? Sure. One is cash flow. When you started making those extra payments into your mortgage, when you're using someone else's bank, you were impacting your own cash flow. Right. Extra couple hundred bucks and your monthly family cash flow was going down because you were paying the bank. The next piece was stream of payments. Right. And we always talk about real estate in banks and they say, well, is the real estate really the asset to the bank? Maybe it's.

It's the stream of payments.

Right, Right.

No commercial bank is ever going to send you a congratulations card to say, hey, we drove by the property that we mortgaged for you, and wow, you did a great job, great location, looks like you got great tenants. The bank cares about the stream of payments that's the asset to the bank. And if you're structured in that way where you're not practicing this process, then what you're doing is you're permanently transferring capital away from you, that you can just change that flow if you understand how to do it. And the banking function should be held at the you and me level. And Peter, so many people have so little understanding of the importance of the banking function in the economy, let alone in their own personal lives. And they not only abdicate the responsibility of banking to someone else because someone has to perform that function, but they also abdicate the opportunity that it represents. The banker is the one character in the play that's making the most money.

Right.

And so become the banker.

And so to that point, the bankers don't never want your house, they just want those stream of payments.

That's right.

Even down until. And we get back into the control piece. But even down to your last payment of your mortgage at a commercial bank, who's in control? The bank is always in control Right until that last payment. So something to be said to that. The other piece you talked about when you had extinguished your mortgage and you celebrated the most important point was to pay your family system back. And I think that's where people get caught too, is if you would pay down a bank and you don't miss a payment for 40 years. Why would you have a problem paying back your own personal system?

That's right. Again, it's just the point that I just made. People are abdicating the responsibility of the banking function and the opportunity that it represents. So if a person goes through their lifetime as you described, where they make payments every month to someone else's system, even if they believe they're not in debt, they still have obligations. Property taxes, car insurance, home insurance, et cetera, you've still got a constant stream of money that's flowing away. And think about how you earn the money. Where does it end up first? It ends up in the bank. The bank sees the money before you do, right?

So you think you're saving money and yet you save this pool. But it's constantly going away from you because you're paying all these bills and you're never getting, you're losing the opportunity to earn money on that money coming into someone else's bank.

Well, and that lost opportunity is permanent. So it's not just for you, but it's for every generation that comes after you. And you're going to need the use of money for the rest of your lifetime. And if that means of exchange, that money is just flowing away, you're losing out on significant opportunity. Whereas if you change the flow of the capital, then you get to take advantage of more opportunities that will most certainly track you down. When you have a ready access pool of financial value, opportunities will track you down. And think about what's happening in this COVID pandemic that we're in. There are, oh my goodness, there are so many businesses that are struggling, there are businesses that are closing their doors. And if you think back to the last financial crisis that we experienced, credit capital wasn't moving. And so there were so many great opportunities to take advantage of. And people who had these dividend paying, participating whole life policies, they were not subjected to that same limit or freeze in access to credit. They had ready access to capital to take advantage of opportunities that tracked them down. Think about what happened in the real estate market and all the opportunity that presented itself. And for people who had readily accessible capital, they were able to take advantage of it. And the same is happening. The same phenomenon is going on right now. And so you can position yourself to come out of this pandemic and be ready for whatever comes next. And there will be a whatever comes next. There's going to be something down the road and so you can get ready and shield yourself and also be Very well equipped to take advantage of opportunities, that I can assure you.

Right. And so the process, we go back to that, it's really about the volume of money that's flowing through someone else's system and the volume that's leaving us and whatever's left over, we're trying to make a return on that, remaining whatever we have, whatever is at the end of it. Right. So it's almost.

That's right.

We're paying ourselves last with maybe 5 or 10% of the money that's flowing through us. Whereas the process of becoming your own banker, you're able to save a bulk of the volume with intention. Can you get to, is it 20, 30, 40, 50? Can you get to 100% of your money potentially through this system?

Oh, yeah, most definitely, if you know how.

So if you're making rates on 10% and you make 100% return, you're like, oh wow, I've made 100% return on 10%, I've made 20%. Meanwhile, you're saving in this system, you're saving like upwards of up to a hundred percent. That's where you get to the rate doesn't matter because you're never going to catch it the other way. Right, Right.

If you're doing this and your peer group isn't and you're practicing this process properly, your peer group can never catch up to you, regardless of what they invest in. You can't get a better rate of return doing anything. If you're not controlling the banking function as it relates to the things that you're doing. That's why it's not an either or, it's an as well as. Understand the importance of banking. Understand the importance of someone has to control that function and it should be. You understand that your money needs to reside somewhere. And so when you take control of this function as it relates to your needs, then whatever it is that you're doing compared to whatever it is that everyone else is doing, you're the one that's going to come out ahead financially every time. Every time. There are no exceptions.

It's not an either or, it's an.

And it's as well as.

Right. You mentioned ready access to capital. Maybe we can get into some of the. I know it's, it's more about the process and how you bank, but the reason why we use this specific product is because of the great financial attributes it has to it. So ready Access capital. Can you talk about private and protection? Where do those fit into?

Oh, gosh, like, are you speaking like in terms of private lending, private is.

In like you going back to a.

Bank, I guess, like I understand what you mean, yeah. So when. I'll give you an example. So when you borrow money from a commercial bank and you need that capital to purchase a piece of real estate as an investment property, well, the loan is going to be reported to Transunion, to Equifax, because obviously if you need access to more capital, then a lender wants to understand what obligations do you have already. And they run through a number of ratios, debt servicing, debt to income, et cetera. And when you access policy loans from the life insurance company, it's a private loan, it's not reported to TransUnion, it's not reported to Equifax. And so for me personally, I really enjoy, and my clients enjoy dealing with a private company, keeping your transactions and things that you're doing private. And people really value that. And so the most important element in this whole equation is control. And to give you a recent example, if you look at it from this perspective, so husband and wife, large family, and their daughter and son in law want to purchase a new home. And they had more than enough capital inside of their family banking system to facilitate this transaction. So the option was go to a commercial bank, put the money in as a down payment, get a mortgage and be contractually obligated to make a payment to the commercial bank every single month comprised of principal and interest. Very simple, right? Most people who have a mortgage understand that. Well, rather than do that, what the family did is they said, look, you were going to send that money, that down payment money to someone else's banking system. Don't do that, send that down payment to our family banking system. We will purchase the property using a policy loan, private loan, not reported to TransUnion, not reported to Equifax, and the payment that you would have otherwise sent away from the family to someone else's bank so they could multiply that money for the stockholders of the bank and nobody in this family, what you're going to do is you're going to send that same payment back to the family banking system and you get to re access everything that you put back in who's in a position of control. If the daughter calls and says, you know what, my husband just lost his job, he's going to be out of work and it's going to take him at least four months before he's back to work. He's got to go and get some additional training or whatever that is. Can mom and dad who control the family banking system say, you know what, that's okay because nobody from the insurance company is calling mom and dad and saying, why aren't you making policy loan repayments? They don't care because the insurance company itself is guaranteeing the collateral for the loan, which is the cash value of the policy, which is contractually guaranteed to rise every day. By the way, there's a lien on the death benefit for the loan balance. So God forbid, if something happened, there'll be no debt left behind. And the family now owns the asset that they used the money to buy to begin with. Who's in a position of total control and who's got the highest margin of safety? The family does not the commercial bank. The commercial bank's not even in the equation. And so I asked the family, Ellen and Janet, I sat down with them and I said, so how does this make everybody feel? And I talked to Laura, their daughter, and I said, how does this make you feel? Stress free, relaxed, at peace. And that's what gave rise to what Nelson shared with us so often over the years. He said what a peaceful, stress free way of life it is when you get the bankers out of your life. That is one of the sharpest examples of getting the bankers out of your life. And Alan and Janet have multi unit properties and they were able to get rid of the commercial banks 13 years ahead of schedule. When they started their family banking system, it took them just over three and a half years to accumulate the pool of value that they needed to get rid of the commercial banks. Isn't that good?

It is so powerful. And I think something you mentioned there caught me was those four months where you don't make any payments. Right. So you may have a policy loan that is, is still growing, but the cash is still growing at a faster rate than what's even borrowed as way faster.

Yeah, absolutely. And so when you access a policy loan from a life insurance company, you're not interrupting one penny of your total cash value, your total cash value is rising uninterrupted. And so the financial advantage that that in of itself represents is innumerable.

Innumerable. I was talking to a gentleman here just the other day and we were going through our process and having he went through, going through the webinar, he purchased a copy of R. Nelson Nash's book and he went through that journey of learning and then he reached out and said, hey, I'd love to have a discovery call. He went through the discovery call process and Jennifer on our team Put him in touch with the right person on our team, which just happened to be yours truly. And I had a conversation with him and I said, hey, so how do you earn your income? And he said, well, I've got basically real estate, I've got properties, I've got, in his particular case, ownership interest in a few different businesses, just purchased a couple of clinics. And I said, so, what's your income level? And he goes, well, my income level is currently $250,000 a year. I said, is that what you're making? And he goes, yeah, that's what I make. And I say, no, it's not. That's what you're handling. It's not what you're making because the money's flowing into someone else's bank first. I say that again. Someone else's bank. You're transferring that money away with all of the transactions that you're taking care of, and you can't use that money again. You can't earn interest on that money again. It's a permanent transfer away from you, your kids, and all the generations that come after them. And I asked him, can you describe to me in your own words, just from your own perspective, what is the problem? And his response was very clear. He said, the problem is I'm doing all the work and everyone else is getting all my money.

Well, we can solve that problem by implementing this process of becoming your own banker. And it made sense. But if I had started talking to him about policy design and looking at a bunch of numbers, if he didn't understand the problem, the numbers aren't going to matter to him anyhow, right? And because he truly understood the problem, the numbers didn't matter to him anyhow. And so if a person doesn't recognize or understand the problem, the solution just won't matter to them anyway. Banking is a problem, but it's also the solution. If you're the one that's controlling that function as it relates to your personal economy, it can, and it should be you. Someone has to perform that function. It should be you.

And you talk about this is where gets into some of the nuances of the financial attributes of it. Compounding.

In terms of everybody says they're compounding their investments, or maybe they're intending to things like fees, taxes. Are these contracts subject to that?

No. And so again, recognizing that your money must reside somewhere, what better place to have it reside than in an environment where it's contractually guaranteed to grow daily? There's no pandemic or government intervention or bad economy that can take any of that accumulation away, where you're participating in the divisible profit generated by a business that's never failed to be profitable through the Spanish flu, the Great Depression, Wuhan H1N1SARS, Covid 30 recessions, the Great Depression, the financial crisis of 08 09, to name a few. And these life insurance companies are the most financially solvent institutions on the planet. And you get to participate in the profit generated by those companies because you become a part owner. And so if your capital can reside in an environment like that, and the daily growth of cash value attracts zero tax, and there's a death benefit thrown in for good measure, which also happens to be paid without triggering any income tax, how much capital do you want residing there?

As much as I can put in, Absolutely.

And then you can take advantage of all the opportunity that tracks you down. If it's real estate, if it's purchasing a business, expanding a business, if it's taking care of something that's really special for you and your family that requires money.

What about as a business owner? I mean, this is relation. Either you're a business owner or you are a joint venture, right? I think that's a pretty common theme for real estate investors. How does this hedge against that?

Oh, gosh. Well, I mean, in position of control is certainly one of the big elements. But if you and I were going into a joint venture together and I said, peter, look, I'm going to bring all of my real estate investing expertise, I'm going to make sure we select the right investment to produce the maximum amount of net positive cash flow. But what I need you to do is put up the capital. Well, for you, I'd be thinking, okay, one of the things that I want to do is I want to insure Jason's life, because heaven forbid, if something happens to him, I know that we're jointly and severally liable for the indebtedness on this property, I need to have more than enough capital available to take care of that indebtedness. And if we're growing this pool of financial value inside of this policy, and we recognize another opportunity to join venture, I now have ready access to more capital to expand this great relationship. And so it's just win, win, win, win, win. And what's interesting is that when joint venture partners pick up on this, they catch it real quick. They just catch it because they're like, okay, I understand that. I understand the problem. I understand the solution to the problem. And now I know exactly what I need to go and do. But like we share often in all of these Facebook communities that I have the privilege of speaking to and sharing knowledge with is that one of two things is going to be certain. Five years from now, you're either going to be alive or you won't be. That's the certainty. And in between now and then, you're going to need the use of capital. Create a system where you are independent, where you're not dependent on someone else's pile of capital to achieve what you want to get done. And so whatever your aspirations are, whatever you're planning to do or whatever you're already doing financially, that is going to be radically improved. When you introduce the process of becoming your own banker. Isn't that good?

Yeah, no, it is great. I think that's where I want to go with some of these things because I want to be able to talk to different examples this week was real estate. I think there's some other areas topics we can, can dive into. But it all comes down to the. It's the same problem we're solving no matter what industry we're looking at. Right. Whether or not you're an investor, whether or not you're a business owner, whether or not you're paying down debt. Right. That's maybe something too you already covered off in terms of the mortgages. Right.

In terms of, you know, my experience, Peter, with real estate investors who are very driven is most often my experience has been is that they get themselves in a position where they're over levered. So they purchase one property, it's a great buy, they accumulate this net realizable equity. They go back to the bank, they refinance, they take property out, go buy another one. They repeat that same process over and over and over again. And then you've got an assessment. You've got a tenant who decides to renovate the property unsolicited.

You've got toilets that explode like Lethal Weapon. What part of the Lethal Weapon franchise was that? Part two, when he got blown out of the house and he was sitting on the toilet. So you've got all these problems that can come up.

And then if there's a change in finances, if there's something that disrupts all of that great activity in the expansion of your real estate portfolio that is not going to create a peaceful, stress free way of life. You're going to be stressed out, you're going to be suffering from anxiety, you're going to be perhaps feeding a property. So I refer to that as an alligator. That's a property that's not positive cash flowing, you have to come out of pocket every month to keep the darn thing going. And then you begin to lose sight of why you became a real estate investor to begin with. And all that you're focused on is what you purchased and how to maintain it and how to do those things. Well, if you're in a position where you fully embrace this process of becoming your own banker, those headaches go away. Because when the toilet blows up or you have a tenant that doesn't pay and you can't get them out of the property and you still have to make the mortgage payments, you've got ready access to capital to help you through those times and to help you thrive when opportunity tracks you down. Good.

That's so good. So good. But as I said, it covers off a major gap, a problem that people just see because the system's not set up to let you see it.

Maybe I can absolutely assure people. I mean, the book, it's a 92 page read, so takes a little less than an afternoon to get through. And once you start reading it, it'll be very difficult for you to put down. And that's why it's important to get in touch with someone like Peter and talk about what lingering thoughts and questions come up for you.