Retirement after the great recession – will it still be possible?

I wrote an article a few years ago that was published in the OC Metro in Orange County, California called “Uncle Sam’s Snake Oil.” This article was designed to wake up all the sheeple (that is a half person half sheep) that is just following along and believing that what you’ve been told to be true is true.

There used to be the 3-legged stool for retirement but then the company funded pension went way and the last two legs which were only supplemental have been used to fund a lifestyle after work and has become disastrous. The other two legs are Social Security and the 401k plan which was designed to supplement your retirement and can be decent if you get a significant company match but those are going away.   The real key here is that as our deficit rises beyond $14,000,000,000,000 trillion that is a long number isn’t it? As things rise ever second, we know the only solution is to raise taxes and most likely back to the tax brackets of the 1990s where the top was at 39.6%. If you add your state tax, in California it is another 9.3%, your at 48.9% of your income just to taxes to pay this incredible debt down. That means anyone earning $250,000 or more was taxed as this rate and we hear a lot about that $250,000 income today. However a family of 3 or more needs at least that much just to stay above water in their live in various parts of California s housing and goods and services are explosively high. The proposed Obamacare or the Patient Protection and Affordable Care Act (PPACA) is going to send our taxes to at least these levels. We now have Homeland Security costs, War, underfunded benefits (Social Security, Medicare, Medicaid) and this is a recipe of inevitable higher taxes. In 1993 the family filing  jointly and earning $89,000 to $140,000 was taxed at a 31% rate which is just 4% shy of the highest current tax bracket for multi-millionaires and we are destined to go back to such a rate.

All of this legwork does not even account for how things really work on deferred pension plans and few Americans realized how they are going to be taxed on their retirement plans until they arrive at retirement only to be horrified. Millions run out of money and end up work in their eighties in fast food restaurants or as greeters in front of discount department stores.

So here is a break-down of an average person putting away $4,000 per year for 30 years and reaping that huge tax-deductible benefit and how he ends up paying 10x in taxes back to the government.

Break down of taxes on deferred program

This link depicts what it would look like to save $40,800 over the 30 years prior to retirement only to pay $532,800 in taxes over the time from age 65 to 85. As you can see that little savings in tax was no where near what you still end up paying, hence the perception of the deferred plan is snake oil.

How do these numbers stack up

We want people to know you have to start finding some form of tax-free strategy or you’ll be penniless in a few years into retirement and back out looking for work just to make ends meet. Most do not qualify for a ROTH and you can only put away $5,000 per year which takes forever to get any real build up but there are strategies for the small business owner or solo practitioner to use 401k ROTH strategies…this is way too long of a conversation for this article.

There are muni bonds but which municipality do you feel comfortable with? Most of them are running their budgets like a ponzi and robbing Peter to pay Paul. Even though the interest paid on a municipal bond is tax-exempt, a holder can recognize gain or loss that is subject to federal income tax on the sale of such a bond, just as in the case of a taxable bond. I see a little too much risk in these going forward but a few might not be a bad thing. Unfortunately some folks have turned 95% of their wealth holdings into these which could give a whole new meaning to the word “junk bond.”

The last frontier is exploring tax codes to find access to places to build tax-free and we find that in 7702a which is for life insurance. Now contrary to popular opinion, insurance is not all about you dying. In fact it can provide one of the last vehicles to grow money tax deferred and access it tax-free if designed properly. The caveat is that you must fund for a few years and be consistent like anything else in life. Many let their policies lapse and then the cash values go to paying insurance costs rather than being allocated to a savings component linked to one of our stock indexes.  As I’ve shown before, if you understand the equivalent taxable yield, you’ll understand that if you only did 5.5% in return tax-free that is the equivalent of 7.65%, depending on your tax bracket…it could be a little better if your in a higher tax bracket.

The insurance approach also allows you to pass on a death benefit to loved ones and if you don’t have anyone who loves you then think about it as a final expense policy to cover the costs of sending you to the great beyond which can cost anywhere from $15,000 and UP.  You can be covered for disability and terminal illness and have supplemental tax-free retiree income all with one policy. For folks who don’t qualify for ROTH IRA, can’t do the solo 401k ROTH or have already done as much muni bonds as you’re going to risk; the properly structured ‘savings grade’ life insurance policy may provide a unique combative tool to slay the retirement dragon.

Unpoverishingly,

James Burns

Tax Free Now

Why Sabotage your Retirement?

There are five destroyers of wealth.

1. Taxes

2. Inflation

3. Procrastination

4. Expenses

5. Debt

So if we know these five exist that eat away our gains and slow our progress, then we know where not to invest. Debt and procrastination are personal things but the other three can be avoided. The typical vehicle most people use are mutual funds. There are now more mutual funds than there are stocks on the exchanges so one has to ask why. This is because of the tremendous money that is harvested off of them by greedy financial institutions.

How do fund expenses affect you? Well, with the expense ratio, which averages 1.6% per year, sales charges of 0.5%, turnover generated portfolio transactions costs of 0.7% and opportunity costs of 0.3%—when funds hold cash rather than remain fully invested in stocks— the average mutual fund investor loses 3.1% of their investment returns every year just on fees. While this might not seem like much on the surface, costs and fees alone could consume 31% of a 10% market return. Think about that. You could be losing almost a third of your return before it’s even taxed. You’re losing a third of your return just for the cost of maintaining your investment. Add in the 1.5% capital gains tax bill that the average fund investor pays each year and that figure shoots up to 46% of your return being lost to fees and expenses, nearly half of a potential 10% return. When you hear that, don’t you feel like you’re taking one or two steps back instead of going forward?

Taking what we now know, the best place to avoid expenses would be an index fund but if we buy the index inside a life insurance chassis, then we can eliminate the taxes under the Internal Revenue Code Section 7702 which allows tax-free build-up and tax-free distributions back to yourself because it is characterized as a loan. Now that we’ve eliminated two more destroyers the only one is inflation. As long as you can earn an internal rate or return that out paces the 3% of inflation which is possible when you have the right product you can eliminate all 5 destroyers of wealth and get so much further ahead.

If you want more information look for the book “The 3 Secrets of Wealth” on Amazon or contact the author of this blog.

Save Tax Free Now

Tax-free Retirement Planning that is hard to outlive in Orange County, California

Due to the rise in our deficit (paying $1 trillion per year on interest only) we are headed for higher tax brackets. The only way you’ll NOT run out of money is if you have some tax free strategies in your retirement plan. As you can see from the graph, sometimes tax-free is actually more when you consider how much you need to make just to cover the taxes and the haircut it gives your funds. To find your equivalent taxable rate you take the rate of return and divide that by your tax bracket (e.g., 28% etc.) and viola you have your equivalent taxable rate. In the example if you’re earning 4.5% in a tax free vehicle, and are at a 28% tax bracket…you’re earning the equivalent of 6.25% because you’re tax free and that is significant.

I have seen several clients retire on their IRA or 401(k) and they get hammered at ordinary tax rates usually in a higher tax bracket if they’ve been deliberate in being successful. You can always retire poor and live on the system while it is available but I don’t think people set out to do that…at least I hope they’re not going into retirement poverty by choice. Out of 100 people turning 65 right now, only 4 of them will be financially independent and the rest will be reliant on family, charity, government or a large portion are still working. In fact there was an article about octogenarian’s having to go back into the work force because they’ve run out of money. The typical deferral for all those years only lasts 18 to 24 months of your retirement as taxes ravage your income and usually without the tax deductions. Also, if you don’t take the distributions (MRD) by the time you’re 70 1/2 there is a penalty of 50% + the ordinary tax, about 70 to 75% of that distribution is devoured just because you didn’t need it and the government forces you to or they’ll penalize you.

Here are a few thoughts if you don’t want to end up as a greeter for a convenience or department store, you know the places I’m talking about. Also some are working as fast food window servers, tele-marketers, night watch persons, seat attendants at stadiums and I was at a restaurant recently and saw one on one knee with knee pads scrapping gum off the floor and this was not a hobby. Think about how difficult these things really are to do when you slow down and the body and mind don’t function like they used to. You are supposed to be doing other things…my people like to go on trips and send me post cards from exotic places. Some like to volunteer and give back to charity…but no schedule of showing up 8am to 6pm with an hour lunch.

So what do I need to be thinking about? Well, I’m glad you asked because here is the personal inventory:

1. What are my current retirement assets earning?
2. How much are the costs/fees associated with my current investments?
3. Are they tax-free?
4. Do I qualify for ROTH IRA or a self-directed solo-401(k) ROTH since I’m self-employed?
5. Are there any Municipal Bonds I could use?
6. Do I have savings grade life insurance that builds up tax deferred and is accessed tax-free and carries a death benefit and final expense?

Most people do not follow or track their portfolio and know what they’re earning, they just know it is down or up but don’t even know by how much. The old adage of when does a negative -30 + 43 = 0 does not seem to resonate with most and there needs to be more accountability on our future retirees to know what they have and what it is doing. We know one geo-political event like terrorism can knock our market down by 50% and they are trying something every few months. The market was devastated for a long time after 9/11 and many people lost millions over night and never recovered since stocks tanked in March 2003.

Are there any municipalities we can rely on that are not running their budget like a ponzi scheme since they are taking in tax dollars to pay for last year’s expenses and just raising taxes. It is only a matter of time before things catch up with some of these local governments and a scary domino effect starts. While I like real estate there have been some many pirates schlepping that stuff and the only one making money is the pirate because they are buying low and selling really high to unsuspecting people because it is hard to really get into the numbers on a property unless you visit the area and bring in all the factors.

We are running out of time before some of the nastier taxes tucked into the Health Care Reform act take effect as well as The Deficit Reduction Act gets full swing for people to start taking back their retirement and stop the bleeding that will occur on your nest-egg when you start taking out the income at the higher ordinary income rates.

In your service,

James Burns, Esq.

Learn Tax-free now

(949) 231-9979

The Expenses in your Retirement Plan are Blowing your Financial Independence

While incomes have gone up the cost of living has gone up much faster and in California the sales tax on your goods is through the roof. The idea of financial independence may be just an idea but it is supposed to be about replacing your current income so that you’re not working forever. Only a few tools will be reliable enough going forward to get you there. Everyone must simply have some tax-free retirement funds if they are going to survive and tools that might not be subjected to the Mandatory Retirement Distributions (MRDs) which require you to take funds out of your retirement plan whether you need them or not and if you don’t, you are penalized 50% on that distribution + the ordinary tax which usually equals 70%.

The idea of pooling money together for investment purposes seems to have started in Europe in the mid-1800s. The first pooled fund in the U.S. was created in 1893 for the faculty and staff ofHarvard University and on March 21, 1924 the first official mutual fund was born. It was called the Massachusetts Investors Trust. It came to life when three Boston securities executives pooled their money together, not knowing how popular and lucrative the funds would become for the financial companies that peddled them.

In recent commentary, insiders have adopted a more skeptical outlook on mutual funds. Richard Rutner, author of The Trouble With Mutual Funds, said in 2002 that “Most investors in mutual funds have no idea what they are invested in, which is the way the industry wants it.”[1] Others have said that mutual funds are troubled because they are rewarded for the amount of money they attract, not the amount of money they earn.[2]

SEC Chairman Arthur levitt, Jr. warned of growing unfairness in the relationship between individual investors and mutual funds in January 2001. Mr. Levitt made the following comment:

“There are a number of instances that, quite frankly, do not honor an investor’s rights. Instances where…hidden costs hurt an investor’s bottom line, where spin and hype mask the true performance of a mutual fund, and where accounting tricks and sleight of hand dresses up a fund’s financial results.” [3]

What most people don’t know is that there are five separate bills that mutual funds charge.[4] The best way to determine if an investment is effective for you or not is to dollarize the benefit or the burden. When you invest in the typical mutual fund (assuming outside of a qualified retirement plan), you face costs that erode your benefit. Chances are you’re not aware of them, they’re not in your prospectus and your broker isn’t going to sit down and tell you about them. The five costs of mutual fund investing are:

1. Tax costs – excessive capital gains from active trading.

2. Transaction costs – the cost of the trades themselves.

3. Opportunity costs – dollars taken out of portfolios for a fund’s safekeeping.

4. Sales charges – both seen and hidden.

5. Expense ratio, or “management fees” – no end to increases in site. This is a calculation based on the operating costs of the fund divided by the average amount of assets under management.

How do fund expenses affect you? Well, with the expense ratio, which averages 1.6% per year, sales charges of 0.5%, turnover generated portfolio transactions costs of 0.7% and opportunity costs of 0.3%—when funds hold cash rather than remain fully invested in stocks— the average mutual fund investor loses 3.1% of their investment returns every year just on fees. While this might not seem like much on the surface, costs and fees alone could consume 31% of a 10% market return. Think about that. You could be losing almost a third of your return before it’s even taxed. You’re losing a third of your return just for the cost of maintaining your investment. Add in the 1.5% capital gains tax bill that the average fund investor pays each year and that figure shoots up to 46% of your return being lost to fees and expenses, nearly half of a potential 10% return.[5] When you hear that, don’t you feel like you’re taking one or two steps back instead of going forward?

According to Richard Rutner, “No one denies that the average mutual fund returns 2% less per year than the stock market returns in general (see below on the breakdown). Yet the mutual fund industry spends billions of shareholder dollars to promote its money managers as experts who can manage investor’s dollars with skill. The vast majority of mutual funds (94% according to a recent five-year survey by Lipper Analytical Services) have underperformed the stock market as a whole.”[6]

James Burns

Retirement Rescue Solutions <click>

Accountability in your Personal Retirement Planning

As the author of “The 3 Secret Pillars of Wealth” I have identified what I think are seven to eight steps all Americans need to respond to and become accountable to right now. Accountability is when you’re going to get serious about what you’re doing and where you’re going. Jeff Combs, a great coach and trainer says “your word is your bond” and what is your word worth to yourself? Do you constantly procrastinate and fail to examine your finances because your fearful, don’t understand them or you are addicted to poverty consciousness rather than prosperity consciousness? Some people are addicted to struggle so much that they get in their own way of success.

It is shocking how many Americans are not accountable for their own retirement and do not do the things it takes to be financially independent. The Wall Street Journal recounted on how much apathy is out there and there is no room for slip-ups or lackadaisical attitude.

Here are the 7 things you absolutely must be doing to get the type of result you’re looking for which is financial independence in your retirement.

1. Build up cash flows
2. Build an emergency fund
3. Eliminate debt – (bankruptcy, short sale or debt settlement)
4. Rebuild credit if necessary
5. Create an emergency fund (all families need this for unexpected events)
6. Protect what you have (protect your principal from market loss
7. Build a plan for long-term income and savings
8. Have an estate plan in place to care for your affairs

It is very effective to just have steps or a checklist. Some of the most complicated machines (aircraft) and computers are run on systems and they have checklists to keep them functioning optimally. Why avoid this evident fact of how to keep things in order and follow a checklist? Everything you need is in 8 steps to financial freedom. Sure, there is a little bit of work in each step but things are now isolated and broken down into manageable pieces and that is problem solving.

To your success,

James Burns

Wealth Strategies – click here

Domestic Financial Terrorism – How do we defend?

The level of destruction on our financial system is incredible compared to what even Timothy McVee did as a domestic terrorist. You have to ask yourself who do some of these bankers and investment firms work for when you look at what they’ve done to the once wealthiest nation in the world.

Right now we’ve got $2 trillion in short-term debt that has to be refinanced this year of 2010 and China, India and Russia are not buying. This is not counting the extra deficit spending which should top $1.35 trillion this year…more or less. The fact the countries we’ve relied on are not buying means we have to fire up the printing presses again. We would already acknowledge that we are at a 10% inflation but the money folks have been using tricky phrases like “core inflation” which ignores half the things we spend money on so that way they can keep the numbers looking low.

A great book called This Time Is Different: Eight Centuries of Financial Folly by Carmen Reinhard and Kenneth Rogoff shows that EVERY TIME a nation’s debt went above 90% of GDP or Growth Domestic Product…the nation failed. The book studies 25 countries over 800 years and there were NO exceptions to the 90% rule. Every nation that ran their deficits to this 90% ratio is now off the map or turned Third World.

Right now, the US is above 90% and there appears no way to bring it down for decades unless some obscure genius comes out of the woodwork as they are not in the White House, Treasury or Fed.

It is unclear what Americans will do, especially for their retirement as the very tool our bankers use against us (stock market) they expect us to hand over our life’s savings and just be ok with negative 30 or 40% loses. You know, its just the market reacting and it goes up and down. Why is that Ok? Why should we accept losses that take us forever to recover just to get back where we started be considered alright?

We need to redo some of the Healthcare Reform Act that President Obama so valiantly promoted before 2013 when our investments could be ravaged with a sur-tax just because we are in a certain income bracket and that bracket is not hard to be in if you live in a state with a high cost of living. Where is Sarah Palin and the Tea Party when we need them.

It is time to look at guaranteed opportunities that does not go down when the market goes down. When Wall Street was once honorable a man named Benjamin Graham (mentor to Warren Buffet) extolled what was an investment. It preserved principal and gave an adequate return. We need to get back to this simple idea and quit trying to find home runs since base hits get you to home plate just as well.

We also need tax-free strategies to weather the storm our own government and their brainy bankers have left before us. It was like turning on the gas to an already smoldering economy.

James Burns

It’s A Shame For You Not To Find Money — When These People Do It So Easily

Times are tough and without money it can be a long cold winter until we have economic recovery in this country.

Enter the life Settlement – this is a strategy to take a non-productive or useless insurance policy and turn it into cash today so you can get in on the opportunity that is out there.

WHO BUYS THESE LIFE INSURANCE POLICIES?

Institutions continue to provide the majority of funds to purchase life settlement contracts.  Some more notable players who have participated include Berkshire Hathaway (Warren Buffett’s firm), Citibank, Credit Suisse, Goldman Sachs, Deutsche Bank, and Morgan Stanley.

WHAT KIND OF LIFE INSURANCE POLICIES ARE THE MOST DESIRABLE?

Universal life and term life insurance policies are the most desirable.

Term policies should still be within their conversion period for maximum value.  Whole life policies are also considered.

HOW SMALL CAN THE POLICY AMOUNT BE?

An amount of $250,000 and greater is preferred, however.

WHAT CAN I EXPECT TO RECEIVE FOR MY POLICY?

Life settlement offers have ranged between 10% and 40% of the policy’s face value. Some offers have been less and some higher—always dependent upon the health of the insured and premium costs.

WHO’S ELIGIBLE?

Eligibility is fairly straightforward:

• The insured must be at least 65 years of age (Age 62 if health is significantly impaired).
• The insured is not terminally ill or have a catastrophic illness.

HOW LONG DOES IT TAKE TO COMPLETE A LIFE SETTLEMENT?

It generally takes 6-8 weeks from the time a completed application package is received until funds are wired into the policy owner’s account.

If you would like to have your policy assessed for settlement please contact my office.

Some of the most common reasons for a life settlement are:

• The premium payments have become too costly
• You may no longer require the policy
• You may be considering the surrender of the policy or the policy may be about to lapse
• There may be a change in your estate planning needs
• You may have a need for liquidity
• You want to give a gift to a family member
• You may need to retire other debt
• You may want to purchase a new less expensive policy
• You may want to generate funds for charitable giving

Common Business Reasons:

• The “Key Man” insurance no longer needed
• The Buy/Sell insurance taken out for the business partners is no longer needed
• Increase liquidity needs for the business
• Eliminate company debt

Untaxingly,

James Burns, Esq.

“THREE WAYS YOU CAN AVOID GOING BROKE IN THE NEW ECONOMY”

The first thing you can do as illustrated in “The 3 Secret Pillars of Wealth” book is take ownership of your monthly expenditures by having a family budget and a family balance sheet you observe with conviction. If you’re desirous of change, you have to do the work since the only place success comes before work is the dictionary.

Number two, if your home payments are too high because you’re job or industry has fallen off, seek a loan workout with your lender or use a law firm to assist you that has a success rate.

Mr. Burns also states that if you are carrying too much bad debt like credit cards and you’re slowing sinking into the quicksand, think about debt settlement or management services that don’t have an upfront cost and can get you from point A to point B in terms of eliminating this debt. While it may have a temporary blemish on your credit score, at least you get back to the surface where you can breathe.

Lastly, if you’re crunched for cash to invest or pay down bills, look if you or your parents have an old universal life or convertible term life insurance policy that has underperformed or is not really needed and consider having it sold in the secondary market as a life settlement.

More power solutions are available right here so stay tuned, get involved and please send in comments so we can save or pick up lives in this down economy. In numbers we are strong.

James Burns, Esq.

“Buying Foreclosure Without the Exposure”

Start your retirement planning early

Real estate investing is exciting because we get the opportunity to use wealth pillars like leverage which allows ordinary people the ability to considerable wealth in a short time; I know because I’ve seen it happen. Another exciting aspect is there are always opportunities to make strong returns, regardless of how the market is doing and right now that is especially true as we bear witness to hundreds of thousands of foreclosure nationally per month. But like other forms of investments, real estate investing takes discipline, education and smart decision making to become successful. I’ve met with clients who made impulse purchases and the result is usually disaster.

There are fundamentally at least eleven reasons why real estate deals are always available no matter what the real estate market is doing. There is no magic here, just human circumstances that create opportunity if you know how to look for them.

1. Divorce
2. Job loss
3. Job relocation
4. Bankruptcy
5. Health problems
6. Incarceration
7. Reduced income – market conditions
8. Death
9. Failed business
10. Military duty or activation
11. Adjustable rate mortgages – on stated income that was unreal

Right now all eleven of these personal circumstances are widespread since American is in two military conflicts, unemployment expands monthly, record business failures and layoffs and numerous professional incomes reduced due to market conditions. In my own practice of modifying loans I see that there was a serious abuse of the stated income loan that has now come to boil and are popping left and right leaving folks unable to make the payments. The inability to make adjusted payments should be no surprise as there was no way for them to ever afford the home with their current income.

Enter the REO. An REO (real-estate-owned) is a form of distressed property and is similar to buying a short sale (sale of a home for less than the owner owed), except the property is already back in the possession of the lender or bank through the foreclosure process. In an REO situation the banks end up owning the property when no one bids to cover the amount owed against the property at a public auction. REO homes are often considered the best way to buy a distressed property because the seller is already out of the picture. It’s just the investor or their agent, the bank or the bank’s agent negotiating the transaction. Some REOs can be purchased directly from the lender for pennies on the dollar especially for those who can buy them in bulk. However, if you combine the purchase of an REO with a system for investing where you don’t have to do anything but collect your checks then you can leverage your time and resources to make and find more opportunities.

Normally REOs are purchased on what is referred to as tapes and the more money you have to spend the better the tape but on these large tapes there are the good, the bad and the ugly which are properties that you wouldn’t want because the fix up costs eat into the profits. Also, to get really good deals or the actual pennies on the dollar you have to come in with millions if not billions the way the hedge funds do who typically have purchased most of the good deals by the time the individual investors or small investor pools can get a hold of the REOs. Nevertheless, there is an old fashion way of acquiring these properties if you have the time to fly all over to numerous states and get into the underground or you can rely on a systematized approach to investing in this distressed market where you’re able to not only get all good properties (bedroom communities), the system operators actually cherry pick and buy properties that are livable, fix them up bring you not only positive monthly cash flow from your systematized property but also has built-in exit strategies that put a cash windfall on top of your positive cash flow.

All the most successful business in America follows a system. Once you have real estate you are in business in a sense, you’ve become a real estate entrepreneur and why wouldn’t you want a system to take care of your investing? To make sure we understand what a system is specifically here is a great definition: System (from Latin systma, in turn from Greek systma) is a set of interacting or interdependent relationships, real or abstract, forming an integrated whole. The concept of an ‘integrated whole’ can also be stated in terms of a system embodying a set of relationships which are differentiated from relationships of the set to other elements, and from relationships between an element of the set and elements not a part of the relational regime.[i] Now this is just a very technical way of saying things that work together or “special sauce” if we were to look at Kentucky Fried Chicken (KFC™).

The system works like this, you buy the property, management places a new buyer in the home that will pay you the going rate for rent is in the area as their new mortgage payment to you, and you’ve just become the bank. For example, say rents at the local apartment are $500 and you only make $1,000 to $1,500 net after taxes. If I came up to you and said hey, “how would you like to own a home for $500 down and $500 per month,” the same you’re paying right now in rent, what would the reasonable person do? They are going to want to own and you have them on a land contract, no landlord/tenant relationship here so you don’t fix sinks, toilets or anything else…it is their home. You just hold this contract like the bank and are akin to the note which is reverse engineered at $500 at 10% time 10 years amortized. Did you get a deal? Of course you did and until this person repairs their credit so did they because we made it affordable just like a car dealer would…it’s all about the payment.

Management collects your $500 per month minus a 10% servicing fee for collecting and disbursing your money and making a website available to you on line where you can manage your property and check on it and see pictures both interior and exterior.

The lynchpin in this type of investing is the land contract. A land contract (sometimes known as a “contract for deed” or an “installment sale agreement”) is an agreement between the owner of a property and a person who wants to buy the property for an agreed-upon purchase price.

What are the Benefits of using the land contract you might ask? Well, there are plenty but they include, not having to fix anything, you don’t pay taxes or insurance, payments are predetermined and there are minimal liabilities (asset protection).

Finally, for the first time you have multiple exit-strategies inherent in your real property investment. I usually ask real estate investors that come in to my office two questions – #1 what is the exit strategy? And #2 did you buy retail, wholesale or discount? In both cases they give me a look like I spoke a foreign language at them. In this system these two threshold concerns are integrated because you have the exit strategies and you are definitely buying discount.

You or your new buyer could choose to refinance as it behooves them to get conventional financing which may be lower than structured in your land contract. For example, if you had an investment entry point of $23,900 and a $37,900 sales price fixed in your land contract. After a year of timely and seasoned payments the land contract Buyer’s credit is restored. Buyer can refinance property to lower interest rate and cashes out your $37,900 note which creates a high return on investment (ROI).

Alternatively, since you own this note you might choose to sell it to a note buyer. For example if you have an investment of $29,900 which you sold for $90,000 ($500 down@ $500 per month @ 12% interest) and after the loan seasons for 12 to 18 months you have the option of selling your note in a marketplace that is a trillion dollar industry. So you sell your note for $67,500 (25% discount). But you’ve also received the $5,400 in monthly income for the past year. The combined profit is in Excess of $40,000 or more with the monthly payments and the note sale even though it is discounted. That’s another hard to find ROI particularly if you’re accustomed to market returns from mutual funds and the like.

You can always just hold because you have an investment of $29,900 with a documented sales price of $60,000 via the land contract.

This system has been a huge success with waiting lists of approved applicants nationwide just waiting for properties to come available as the secondary buyers. We are watching this program transform families, neighborhoods and communities. In addition to the socially redeeming value of this program, it provides investors with massive advantages. Some of those include:

1.       Triple Net – Your buyer is responsible for taxes, insurance and maintenance

2.       Pride of ownership – Your buyer typically improves home and maintains well

3.       Lower Default – Owners paying the same amount as they would for rent rarely default

4.       Socially redeeming – You can help a hard working family become home owners

5.       Cash flow between $450 – $650 – for properties purchased all under $30,000.

The next five to ten years will be defining and you have the power to change your financial future if you only get off the sidelines and in the game. I played football in college and whether you were at a real game or a practice scrimmage, while you were on the bench at the sidelines you were helpless to change the outcome of the game. It was only when you got in the game and you knew you placed your entire being into the game that you hand control to change an outcome and in effect, you can only take control of your own personal destiny by getting in the game.

To prove the point that you can be more victorious in a down market you’ll want to take a lesson from the playbook of Floyd Bostwick Odlum. He has been described as “possibly the only man in the United States who made a great fortune out of the Depression.”

After struggling as a corporate attorney in Salt Lake City, Odlum received an offer to a law clerk at a New York firm, and in 1921 became Vice-President of his primary client, Electric Bond and Share Corporation.

About 1923, Floyd Odlum and friends along with their wives pooled together a total of $39,600 and formed the United States Company to speculate in purchases of utilities and general securities. Within two years, the company’s net assets had increased 17 fold to nearly $700,000. If Mr. Odlum got started with $39,600 during the Great Depression, can’t you get a few friends or family together and pool funds to get in on this once in a lifetime historical opportunity to purchase discounted REOs at a modern price-point of $29,900? We only see great declines once or twice in our lifetimes and who can predict the next one as this one came without warning; will you have done something by then?

“Opportunity is missed by most people because it is dressed in overalls and looks like work.” — Thomas Edison, Inventor

Success Driver,

James Burns, Esq.

(949) 440-3243

Using Other People’s Money to Create Wealth

We all love the idea of creating something out of nothing but this is usually fantasy and does not exist…right? A famous saying in business is that you should always use ‘Other People’s Money’ (OPM) which is great way to get ahead with no money out of pocket and no personal risk.

There are strategies to create wealth for you and your family using other people’s money in the same way you used the bank’s money to purchase your home or investment properties and that is by using leverage.

Using other people’s money, or leverage, to increase your own financial gain is an established practice. Today, though, leverage is being used to purchase life insurance, and has gotten the attention of insurance promoters and financial professionals. It’s important, though, to examine all the angles before trying something like this.

The technique is called Premium Financing and allows a wealthy family or a corporation looking to create a continuity plan by funding an insurance policy can do it using the bank’s money. By borrowing the money to pay the life insurance premiums with a loan, the insured individual/s free up capital that can be used more efficiently. The use of premium financing may lower out-of-pocket costs the potential gift taxes.

The lender bases the current loan interest rate on the one-year London Interbank Offering Rate (LIBOR), adding a profit margin spread of 175 to 250 basis points. Essentially, lending rates are determined on a case-by-case basis, taking into consideration the loan amount and the lenders’ risk exposure. Loan interest rates can be fixed on an annual basis, but may vary from year to year, based on fluctuations in LIBOR or changes in the borrower’s financial conditions, which must be updated annually.

The twelve-month LIBOR is a common index as well as the prime rate. If there is a fixed interest rate, it is important to determine how long it will be fixed. In many instances, the fixed rate is only fixed for a certain time period, such as five or ten years. A cap will be set on how high the loan interest rate can go during the loan term. So, while the loan interest might be variable, there is a cap that will limit how high the interest rate can grow, such as eight percent.

You can also secure what’s called a “collar,” which is when a loan has both a cap and a floor on the interest rate. It basically keeps the interest rate from spiraling too high but ensures that the lender can charge a minimum in exchange for that security.

Caps are more expensive than collars because caps protect only the consumer, while collars offer some protection to the lender. Because of this, the extra costs are usually built into a loan origination fee or into the amount of spread placed in the offer. Caps and collars are usually only offered on loans greater than $1 million.

The best candidates for premium-financed life insurance typically have a minimum net worth of $5 million. Collateral for the loan usually consists of personal assets and can be reduced by the cash value in the policy being financed.

Plan highlights include:

· Target market: at least $5million estate and minimum of $100,000 annual life insurance premium.

· Frees up business or personal investment capital for more efficient usage.

· Leverages available assets to provide needed insurance coverage with minimal out-of-pocket expenses.

· Potential to reduce gift taxes.

· Loan rate typically tied to a published rate like LIBOR, plus a spread.

· Required collateral can be offset by cash values growing tax-deferred in the policy.

· Can provide substantially greater internal rate of return on the life insurance policy death benefit over non-financed payment methods.

The power of premium financing lies with the same simple concepts related to leveraging of permanent life insurance for estate liquidity and wealth transfer in uncertain financial and political times. It also provides an excellent tool to insurance key executives of a business so that unwanted family members do not become partners. The key is to evaluate premium financing not as a stand-alone transaction, but as an alternative to the traditional funding of life insurance.

I have been involved in cases where it made sense not to drain cash flow and instead use leverage to accomplish payments of the life premiums. If the structure is designed properly, it can have an exit strategy built in. There is also one planning technique for families that have done no estate planning but are uninsurable and have healthy children. This planning tool is too technical to discuss here, but if you’re reading this and know someone who has an illness, no estate plan and over $10,000,000 of net worth, you can have them give my office a call.

James Burns, Esq.

(949) 440-3243