How to Scale Commercial Real Estate Podcast with Sam Wilson On the New York City Podcast Network

Leveraging Other People’s Money: The Secret To Real Estate Investing

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Today s Guest is Eddie Martini Eddie was featured on Episode 778 on April 13th 2023 We d recommend you to give that show a listen before listening to this show If you are listening to the show we d recommend you to watch the show on the How to Scale Commercial Real Estate channel There will be visual aspects to this show in particular YouTube https www youtube com howtoscalecommercialreales334 In this show Eddie discusses the power of leverage and other people s money OPM in real estate investing He breaks down the math behind how banks generate money and the rate of returns they make using examples from the 1980s 1990s and the 2008 financial crisis Join Sam and Eddie in today s show ————————————————————– The Power of Leverage 00 00 00 Underwriting a Recent Transaction 00 02 01 Bank Rates and Returns 00 05 15 The Banks Brilliant Move 00 07 42 The Power of Leverage in Real Estate Investing 00 10 50 Underwriting a Real Estate Transaction 00 12 15 Finding the Right Lender 00 15 17 Calculating Rate of Return 00 17 05 Wealth Maximization Account 00 21 33 The Power of Leverage 00 23 38 Wealth Maximization Account 00 24 37 Accessing Funds from a Whole Life Insurance Policy 00 31 04 The Power of Leverage 00 32 15 Vesting Period for Whole Life Insurance 00 35 21 Patience in Funding Whole Life Insurance 00 39 11 Comprehensive Wealth Plan 00 40 53 Estate Protection 00 40 10 Contact Information 00 41 27 ————————————————————– Connect with Eddie Social Media martinilegacy eddiemartini Website www MartiniLegacy com Connect with Sam I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns Facebook https www facebook com HowtoscaleCRE LinkedIn https www linkedin com in samwilsonhowtoscalecre Email me sam brickeninvestmentgroup com SUBSCRIBE and LEAVE A RATING Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts https podcasts apple com us podcast how-to-scale-commercial-real-estate id1539979234 Spotify https open spotify com show 4m0NWYzSvznEIjRBFtCgEL si e10d8e039b99475f ————————————————————– Want to read the full show notes of the episode Check it out below Eddie Martini 00 00 00 – You do see people out there that are into real estate especially flippers that are really into accessing hard money because they do not want to touch their personal funds They don t wanna touch their checking account They would much rather go out pay interest to someone else essentially let them really take on a lot of risk They know that there s even a small amount of margin We re talking 6 in both of these scenarios A six it s a 6 margin One s a 66 67 rate of return The other is 200 we saw in the TARP funds it was only a 3 5 margin and it was a 700 rate of return on their money So it s really powerful when we start seeing that and that is why real estate is so attractive to I know both of us here and to a lot of our clients that we help you know get involved with it because of leverage Intro 00 00 47 – Welcome to the How to scale commercial real estate show Whether you are an active or passive investor we ll teach you how to scale your real estate investing business into something big Sam Wilson 00 00 59 – Eddie Martini came on the show on April 13th 2023 That s just recently here That was episode number 7 78 What I d suggest if you re listening to this episode is actually go back and check that one out first You get to learn a lot about Eddie what he does and why he does it We re gonna have a little different flow here to the show today where Eddie s actually gonna more lead the show and and I m kind of gonna be here as a participant and it s uh I think we ve got a lot of of good things here in store for you as well The second thing I d recommend is if you are listening to this check out this this episode in particular on YouTube because we re gonna be going through some some spreadsheets we re doing some math we re doing some kind of some fun things here in the show that we don t normally do and I think a visual version of this show would be particularly helpful for you So check that out uh there on our YouTube channel the How to Scale Commercial Real Estate YouTube Channel and you ll find this episode there as well So those are the two things I would suggest Eddie welcome to the show And if you don t mind just uh take it from here But if but first of all if you can just give us kind of a rundown to the flow of what this show is gonna be like here today And then uh the floor is yours Eddie Martini 00 02 01 – That sounds great Sam thanks again for having me back I really appreciate the opportunity and I thought today would be really good to actually break down the power of leverage and O P M which stands for other People s money I mean you and I both already have an attraction to it We know kind of how it works but like a lot of people we come into contact with that want to get into real estate investing they really don t understand the basics So if you re good I d like to share just some financial calculators with you We ll kind of again show the math behind how banks do generate money how they generate the rate of returns why they have the biggest buildings in the most prime areas across our country It s cuz they can afford to and they make some really great rates for returns So we ll share that with everybody and then if you re open to it I figure we can underwrite a recent transaction that a client called me on really see how people like you and I dive into the numbers to really make sure it s something s viable and worth pursuing Sam Wilson 00 02 52 – That sounds like a plan Eddie Let s uh let s take it away How do banks indeed then make money Eddie Martini 00 02 57 – Fantastic So we ll start here We re gonna take a trip back in time Sam we re actually gonna head back into the 1980s And believe it or not back then banks were actually paying 9 on CDs and A lot of my clients are like what Take me back to the good old days 9 That s better my retirement accounts doing And I m like absolutely But with the good came the bad and on average they were charging around 15 to lend money to people So before I really understood the truth behind the numbers I kind of looked at this and in plain sight we re like great we have a 6 margin they re making 6 of their money But when we actually dive deeper and see what that looks like year over year for them just creating that small margin it s actually a 66 67 rate of return Can you believe that Sam Wilson 00 03 48 – So break that down for me I m I might be uh not had enough coffee yet this morning How s that possible Eddie Martini 00 03 53 – Yeah you bet So this right here this is how we are showing proof of actual leverage and utilizing other people s money They re taking money in even though they re paying 9 out for every dollar that you are paying 9 out you re actually able to lend out at 15 So when they break that down that actually generates not just a 6 margin That is actually showing that that is a 66 67 increase in the dollar is value Right Right right So it s it s just phenomenal when you start seeing that And so I looked at that and I I think you and I both get this a lot on what s the purpose of opm Why do we look for other people s money Why are we paying someone else interest when we could just utilize our own dollars And so I wanted to break that down real quick And again we re back in time Eddie Martini 00 04 42 – We re in the 1980s and let s say I went to the bank and I borrowed a hundred bucks from em while they re lending money out at 15 So at the end of the year I would owe them 115 This one s a little bit simpler when it comes to the math because that comes out to 15 rate of return Sure Right So they re utilizing their own dollars In this scenario here they re only making 15 but up here they re able to leverage and borrow essentially other people s money and utilize that to actually lend now to others and make that small margin Sure Eddie Martini 00 05 15 – So it it just it become became super powerful for me And if we even take a step further into time and we head into the nineties you know we had that whole savings and loan fiasco going on and even with the banks making 66 67 rate of return they still got themselves into a pickle And good old Allen Greenspan he was the head of the Federal Reserve at the time and he started looking into bank s books and he is like wait a second here guys you re paying 9 on CDs Are you kidding me Because those are guaranteed rates of return This isn t supposed to be re a retirement account this is something that is supposed to be a safe place for people to just save some dollars So he said this is absolutely ridiculous You guys really should only be paying 3 on CDs The bank said okay that s that s fine Eddie Martini 00 05 57 – We ll we ll we ll do our 3 but we still want to have that 6 margin So bank rates for around 9 on average Then So when we look at that math and see what they re able to do on that spread 200 rate of return And it s just amazing to me Everyone thought Alan Greenspan had some magic fairy dust No he understood the math behind the scene He understood that you guys if we can get our rates of return at 200 you guys are gonna climb out of this hole rather quickly And they did within months they got themselves out of that savings and loan fiasco So it s really powerful when we start seeing this and we take another further step into time And a lot of people don t realize that during 2008 uh during the unfortunate mortgage crisis and and and resulting real estate market crash the the government looked around and said wait a second all these foreclosures that are still coming to market if we start seeing all of that continue to happen there s not even gonna be dominoes to continue to fall Eddie Martini 00 06 59 – we our economy could just be gone Poof So we need to step in here and see what we can do So they came up with an emergency program called TARP and they started releasing funds to the banks and it was billions of dollars that they were able to lend out to them And I saw it at certain points it was down to 0 That actually carried for a very long time 0 dollars to the banks At certain points it was a quarter percent and the highest I saw TARP funds being available was a half a point So we re just gonna give the banks a worst case scenario of Hey you guys caution you guys a half a percent in order to access these funds They looked around and yes they had some derivatives that they had to pay off on those bad mortgages and kind of get themselves get their books balanced a little bit better Eddie Martini 00 07 42 – But by the time they all of that figured out they ve realized well we actually still have cash reserves on hands and we actually have more TARP funds available So they said let s see here what can we do Oh you know what right now treasuries are actually paying 4 and it s a guaranteed rate of return and there is nothing s forbidden us to hop into a treasury So let s see what that does for them 700 rate of return Sam even worse as far as my opinion even worse they re utilizing taxpayer dollars in this scenario to access the funds They re using taxpayer dollars to pay back the rate of return Pretty darn brilliant Don t you think Sam Wilson 00 08 23 – It s absolutely brilliant Yeah You look at it from this perspective like this is crazy Like we have a a government created entity that s lending money at a half a percent the turnaround and buy government backed treasuries that they re gonna get 4 on it It s it s just a convoluted cluster if you ask me Eddie Martini 00 08 42 – I couldn t agree more And the feds did uh finally catch on to what was going on It was of course down the road after these rates of returned we re still going bananas and the treasuries were dropped down accordingly But we still look at this and we go well you know 300 rate of return that s still not a bad day for those banks Why in the world would they ever get back into banking When you start looking at this it s like well let s just keep accessing TARP funds right And we ll just keep recycling this Well the challenge with that Sam is that this can only be done once a year It s a one year commitment to get that rate of return from the treasury Whereas if we step back in here in the nineties this is our fractional reserve banking system So for every 10 it gets deposited they get to go they can go lend out nine of those and just keep the 1 in reserve So they can do this over and over and over again which is why they did of course get back into their day-to-day of being bankers Right Sam Wilson 00 09 34 – But Eddie Martini 00 09 34 – Right right Sam Wilson 00 09 35 – That makes that makes perfect sense You borrow at three you can lend at nine you re you re 200 rate of return That s uh that s a great model Eddie Martini 00 09 45 – Indeed indeed So when we look at this and like the banks are the OGs of O P M Sam Wilson 00 09 51 – For sure Eddie Martini 00 09 52 – Right I mean they figured this game out a long time ago and the rest of us which is smart of us we re looking to duplicate success There s no point in reinventing the wheel And so this is why you do see people out there that are into real estate especially flippers that are really into accessing hard money because they do not want to touch their personal funds They don t wanna touch their checking account They would much rather go out pay interest to someone else essentially let them really take on a lot of risk They know that there s even a small amount of margin We re talking 6 in both of these scenarios A six it s a 6 margin One s a six 6 67 rate of return The other s 200 we saw in the TARP funds it was only a 3 5 margin and it was a 700 rate of return on their money So it s really powerful when we start seeing that And that is why real estate is so attractive to I know both of us here and to a lot of our clients that we help you know get involved with it because of leverage Sam Wilson 00 10 50 – Right Right And that cuts both ways I mean because we we we do that again you know when we go out and buy a property with leverage we re doing the same thing It s just the numbers are changing You know maybe let s say in this case I m borrowing at nine and I m I m returning an 18 Now my spread is you know I m I m getting a 200 rate of return on my money or I guess a hundred percent hundred percent rate to return on my money Eddie Martini 00 11 13 – Yeah you re doing great Yeah Let s see this Yeah you do nine 18 boom Sam Wilson 00 11 17 – Yeah it s a hundred percent rate Eddie Martini 00 11 18 – It s a hundred percent rate of return Right So it s it s super powerful when you start looking at it And so if you d like we can kind of hop into an underwriting transaction now and really see you know kind of how this works in in Yeah Sam Wilson 00 11 30 – We can let let let s do that And and I m I m I m again I m I may not have had enough enough coffee here this morning but it s just the same I know I already said that It s the same thing just repeated like we borrow because leverage is beneficial It it it juices our returns um you know and not the same thing for the bank They borrow my money to then lend out to somebody else and it juices their returns So yeah I guess there s there s always the debtor and the lender somebody else s debt is somebody else s is uh somebody else s equity and it just seems to keep repeating itself So I think at some point in this show you re gonna give us how we get outta that cycle I know I know that is part of the uh part of the equation here today But let s let s do an underwriting uh underwriting let s see let s see what that looks like on a deal maybe that you ve done recently Eddie Martini 00 12 15 – Absolutely That sounds great So yeah we ll hop into and this is what s great Sam is you know you and I both know that to get into real estate the first thing you need to learn how to do is how to underwrite a transaction Yeah right We have to see is this a viable option or not Because I mean that s really what I think causes a lot of failure in this industry is people getting a little bit too far ahead of themselves They get too deep into a transaction without doing their due diligence And this is the very first step I think any of us should take if we re considering investing in real estate So we ll look at a recent transaction uh this is based in the California area It s a really cool um industrial building uh actually happened to already have two great long term tenants in it Eddie Martini 00 12 58 – So it was a really clean deal and I think it s a great one for us to kind of go on display here And so we ll hop in here and first thing we wanna start start with the course is our purchase price what were we looking to purchase And these fields can be different So that s why I had to type that in actually twice is because we ve have been in markets you and I both have been through them where property values can either be higher or sometimes lower than what the actual purchase price is going to be coming in at So it s important be able to have that flexibility Right Sam Wilson 00 13 25 – So in this case if you re just listening to this Eddie s putting in 650 000 in both the value and the price of the property Eddie Martini 00 13 31 – That s correct Very good I appreciate that And closing cost wise is gonna be the next field we re gonna input here And this was a buyer transaction So typically really across the nation that I ve seen it s very typical for sellers to cover for the majority of the closing costs This client in particular just had around 1 So 6 500 was gonna be their closing cost uh fee here And that was really just going towards some miscellaneous title and escrow fees and a few inspections So nothing too major there Sure Again realtor fees we can plug them in It is an important field to be able to have access to In this instance though uh this was a buyer that I was looking to conduct this analysis for So there s gonna be 0 in real TURs The next important thing that we need to understand is why we re gonna get a cost value approach when it comes to our appraisal is we want to determine what the difference is between land value and our structure value Eddie Martini 00 14 24 – And you and I both know Sam the reason why that s so important is because we can only depreciate the structure value on these properties So this instance it came out to around a hundred thousand dollars was gonna be our land value that left 550 000 for them to depreciate in Since this is a commercial transaction we get 39 years to spread that over So it s this this I hope you guys are starting to see why Sam and I really like real estate as as part of our retirement our investment tools Because of this leverage because of depreciation the tax advantages are just really almost unmatched So we also have the ability after we get the land value and structure value uh calculated we re able to see that You could see my basis for depreciation did not auto-populate Again this is because sometimes Sam you and I have people that come to us that already own a property and so they ve already done some depreciation Eddie Martini 00 15 17 – So we need to have that field as being flexible In this instance it was a brand new purchase so the basis for depreciation is also gonna be 550 000 We did find um a first mortgage that was able to go ahead and pick up um the transaction here which again you know that s why it s so important for us to have you know the right um network put together as far as trusted advisors because not all advisors are created equal And having a trusted lender advisor is super crucial In this instance our lender advisor was able to find uh someone who was able to carry 80 loan to value in a first mortgage They did not charge any extra points and they were gonna charge em a 6 99 rate fair All in all in my opinion since it was a commercial transaction they re gonna spread these out over two years which would be a loan term of 240 months I Sam Wilson 00 16 13 – Think you missed 20 years there Eddie Martini 00 16 15 – Oh thank you sir I appreciate that Loan term of 20 years spread it over 240 months right So that s gonna calculate uh a loan payment of 4 028 per month is what that s gonna come out to for overhead on this transaction In our first analysis here there s not gonna be a second mortgage This particular buyer did have the ability in their checking account to go ahead and come for this total down payment uh which again is going to be 136 500 for this initial analysis And uh property taxes came out to about 6 77 uh 19 per month His insurance was gonna be around 450 And the maintenance was really light Like I said it was a industrial warehouse space all pretty much paved very little landscaping So quick mow and blow nothing major there But you can see Sam we can get quite detailed as needed right Eddie Martini 00 17 05 – People look to purchase condos town homes we can plug in the homeowner association fees here to really get deep into this If there are other any miscellaneous fees we can go ahead and plug them in here and make sure that we actually understand really from a macroeconomic approach what we re looking at Mm-hmm we did have tenants already in place which again is super magical Not always gonna be the case but in this instance it was they re paying around 7 000 per month And the next important thing Sam you and I both know this that s super important is that we need to understand what are the costs of being an investor And at the end of the day there are gonna be taxes in implicated Now I know you re screaming going Eddie what about 10 31 exchange I get it We will go there Sam we will get that calculated in a second Eddie Martini 00 17 52 – But I always like to conduct analysis In a worst case scenario situation how can this transaction stand on its own two feet If we can make it better with these other tools great But let s really see where we re at So this particular buyer was in a 25 income tax bracket will all be in a 15 capital gains bracket And since depreciation recapture tax is a sliding scale and it goes u up to 25 uh and it really depends on what your actual personal income tax bracket is He would ve been subject to the maximum of 25 and uh depreciation for capture tax And so he we also had the opportunity Sam for people like you and I who are real estate professionals we can t go ahead and check a couple of these other boxes Or again if someone s just looking to see hey what is my personal what is my primary residence I m looking to buy what does that look like rate of return wise Eddie Martini 00 18 43 – We can plug that in we can get some extra uh tax advantages that could auto calculate over here So when we take a look at you know what this transaction um is able to do we wanna see how long are we holding this for And he said okay Eddie I I really only wanna hold it for about five years Like to see at least what that looks like If it s still pencils out after that great But I really wanna take take a look what that is And Sam he was looking to hit 10 That was his goal And if we look right here even uh well one thing we need to factor in right We want worst case scenario let s factor in 6 in closing costs okay Again you and I both know it s to negotiated both fee but we wanna hit him with worst case scenario And Sam Wilson 00 19 23 – We re assuming where where you are right now is on disposition of this property in five years Eddie Martini 00 19 28 – That is correct Thank you for yeah clarifying that So this now is getting kind of the end of the road We ve now plugged in for as far as the analysis goes We wanna see if I hold this property for 60 months I also knows five years what does actually look like for me And really it was healthy I mean 12 52 rate of return And that is without factoring in any appreciation So again on its own two feet I think it s really a fantastic opportunity But Sam you and I both know also we love real estate It has a extensive track record of having positive appreciation I think 4 is actually pretty conservative at the end of the day Um but again we can always play with this If someone wants to be even more conservative of that or if they wanna be more aggressive we can really see what things look like Eddie Martini 00 20 13 – We plug in 4 and appreciation over those five years We just went from 12 52 to 21 77 rate of return This buyer was ecstatic He couldn t believe what he had kind of stumbled onto here And so it was really powerful for him to be able to go in not really have to be too aggressive on his negotiations He knew it already penciled out to you know what he was able to do And it made for uh you know a really successful analysis uh conversation with he and I Now again we wanna see Sam what does it look like with the 10 31 exchange right If we don t have any tax consequence if we re basically gonna forward all of those on to a future property look at that We can break 27 greater return on this transaction if he does not have to if he s gonna exercise a 10 31 exchange So we can conduct these again rather quickly uh with people give em a really nice snapshot of where they stand and you know make sure that something s viable But as you mentioned earlier you know in our conversation I help people make this even better And that s what I really love about creating strategic savings accounts is that we can take an awesome investment opportunity like this real estate transaction and we can forward a five x the rate of return Would you like to see how that works Sam Wilson 00 21 31 – Yeah let s uh let s dig in Eddie Martini 00 21 33 – All right my man So we wanted to factor in that this gentleman had worked with me in the past and he had built what s called a wealth maximization account It s basically a strategic savings account that allows our funds to grow at 50 to 80 x The rate of return that you d get at a commercial bank allows us to still maintain the access the liquidity that we need to be able to invest in opportunities like this when they come So I ll just point out some really important factors to why a wealth maximization account is better than just relying upon another source of op p m such as like hard money So in this instance he did have access to 130 000 in his wealth maximization account that he could put into this transaction What s really important again to understand is your first lender that s putting this 80 up If this wealth maximization account was actually a true loan where there were strict repayments scheduled payments coming into play we d have to report that to the first mortgage We d have to tell them that hey there is actually a second lien at being it put in place on this transaction And so in this instance that would be going back to the first mortgage and saying Hey surprise we re at a c LT v a combined loan two value of 100 Do you still wanna gimme the money Their answer would ve been no Right Sam Wilson 00 22 54 – Yes Eddie Martini 00 22 54 – So this is really powerful in that you re you ve built your own private family banking system you re able to access those funds just as you would with getting a hard money Second I think it s also being a good steward who d wanna see what would a hard money lender charge me for a lean being in second position We actually did find one they weren t that unreasonable It was actually really cool to see that there was money out there available at 9 98 And so I just told the client you know you actually get to decide what you re gonna pay yourself back but I just think being a good steward of our money we should pay ourselves back what someone else would ve charged us So he agreed to that He at least wanted to see what it looks like you know in this analysis to see okay it is actually still pencil out Eddie Martini 00 23 38 – I said let s check it out We re also gonna amortize this over the same time period We would the first mortgage they re basically being paid paid down at the same rate So we re gonna do a loan term of 240 months which again is 20 years So yes this is going to affect our cash flow Um we are now uh looking at 52 81 per month just for our mortgage payments where before we were at 4 028 So that did uh affect our cash flow But Sam if you look at our rate of return we just jumped to 91 84 rate of return from from 21 So that is largely due to the down payment right here only now needing to be 6 500 as the actual cash out of pocket for this buyer And he was able to turn 6 500 into a net cash out of 141 672 over these five years Sam Wilson 00 24 37 – That largely stems what you re calling a wealth maxim Do we call it wealth maximization max Eddie Martini 00 24 44 – Yeah Wealth maximization account There Sam Wilson 00 24 45 – You go See I told you not enough coffee here today uh I can t even speak I m on podcast all day long Uh so I m guessing this wealth maximization account is just another name for a whole life insurance policy Does that sound about Yes Eddie Martini 00 25 02 – That is Yeah that s correct So instead of the traditional way of doing whole life insurance where in my opinion you might as well go dig a hole in your backyard put 30 grand in it and then 20 years go dig that hole back up and pull your 30 grand back out That s about as efficient as most whole life insurance policies are traditionally speaking But modern whole life insurance that s created that s a cash value focus purpose It turns into a very very powerful financial tool as we can see right here It Sam Wilson 00 25 30 – Does And the and the reality of it is that that 130 000 is still your 130 000 You ve just put it in a different account right Eddie Martini 00 25 41 – That s correct Right That is exactly correct and that s the big key Uh whereas you know we get our money locked up a lot of times into you know qualified retirement plans where we don t maintain that access that liquidity Now we re have the opportunity or the option of missing out on these opportunities of a lifetime Just like this gentleman found He was able to pick up the phone get a wire 130 grand sent over and consummate this deal with a big smile on his face knowing what the future looks like Sam Wilson 00 26 10 – Sure yeah I mean your rate return your rate return and and I might be contrarian here on this on this podcast but but I think it ll shed some light Maybe uh maybe you can you can tell me why I m wrong but the rate return has gone up so much just because as we re modeling it it s just showing basically all but 6 500 bucks in leverage So I mean obviously the higher the leverage the greater your rate return would be Eddie Martini 00 26 34 – Absolutely You got it Sam That is that is exactly what we re trying to get out with people And also again he had the money he had 130 available in a checking account still but what he can do now Sam is technically if he can qualify for more mortgages he can go basically 10 x this now so that 130 grand he can spread it out if he only needed 25 or 6 500 increments of it I mean he s got a long ways that that money can now stretch where he can go repeat this process And that s what I think is really really powerful about having other sources of op p m For Sam Wilson 00 27 08 – Sure For sure And and I know some very smart people in the real estate uh uh world that are big proponents of this model Uh so it s it s when you hear me give contrarian views it s I think it s cuz I I want to I want to really um just clarify some things on this So the questions I would have would be like okay so you got cool we we did this in a a cash value whole life policy We ve paid into it over all these years and now we re gonna pay that policy back a 9 98 rate of return At what point in time do I as the investor in my own private bank get to then have access to the fruit of paying myself 9 98 How do I get that back without taking a loan outta that policy and then then owe it back to the the insurance company Does that make sense Eddie Martini 00 27 54 – Yeah no I I can I can follow what you re doing there Yeah I mean essentially this rate of return it s kind of a it s kind of a moot point as far as how you re paying it back You re not able to inflate uh the rate of return that your policy is actually gonna get So even if let s just say the the cost of these funds were even 1 or even 2 let s say it actually costs you money to borrow your funds back right If you re paying yourself back at 9 98 you re just accelerating the amount of principle that will now be available for future transactions So it s actually a really cool process cuz once you actually get to years 10 and beyond there actually is no cost to take these loans out So you re credited to the account exactly what the cost is for the loan So you re at a zero cost from years 10 and beyond to repeat this process here where that again in that scenario that 9 98 I mean that s that s gonna rapidly accelerate how much equity essentially you re establishing back in your cash value of your policy Eddie Martini 00 28 51 – And what s really powerful the reason why you do not have a repayment structure is that those policy loans are backed by a life insurance policy So the life insurance company understands that heaven forbid something happens to you they can deduct whatever outstanding loan balances are from your death benefit right So it makes it a real big win And that s why I like storing my cash with these type of companies is that they are extremely conservative with how they generate their rates of return And so I m not looking for them to hit any big home runs I want a nice safe place I want contractual guaranteed rates of return I do want the ability of participating in margins I do like that part of it Uh but I don t want that to be based upon why I m doing this this this decision is purely made on if I could save at x y Z bank at 0 015 or I can save in my family bank at four two 5 where would I put my money Sam Wilson 00 29 48 – Well sure sure I mean in that scenario that makes sense But I guess going back to we re growing this principle right We re growing this principle balance But to what end other than just growing that principle balance at what point in time can you go to that Sam s personal bank and say all right cool I want to go buy a you know I don t know let s make something stupid up I wanna go buy a million dollar airplane and I wanna go flight around the country and uh how do I get that money out of Sam s personal bank to buy my airplane I wanna fly around the country Eddie Martini 00 30 21 – You bet I love it So yeah the great news Sam is actually year one the very first year you established this you already have access to cash value So there s not really a vetting period as far as hey once you hit this year now you can access this you have access to it from year one right So in in that scenario yes uh you had the ability you ve stored up enough cash value to purchase uh you know your private jet it is as simple as there is zero underwriting involved It says that s what lsem I really enjoyed about this is before when I was so real estate focused and EC building equity focused in my real estate there were times in my life where I could not qualify to access the amount of money I needed to purchase more transactions I couldn t document enough income for the underwriter to say yes I ll give you another loan Eddie Martini 00 31 04 – Right Well in this instance my money s not locked up it s still a phone call away I do still need to make a phone call but it is where do you want the money sent Not what are you using this for So that s really powerful I mean you and I both know Sam there s times where we need to invest in ourselves We need to be able to join some mastermind groups develop some skill sets whatever it may be to actually sharpen our sauce We can be successful in the investments we re looking to pursue Well it takes means to be able to participate in those kind of things So I ve utilized my funds for those exact reasons Like I m actually flying out to Houston at the end of the month uh to further dive into this truth concepts training And those are funds I m gonna access for my family bank to again reinvest in myself so I can add more value not only to my own investment pursuit but as well as to my clients Sam Wilson 00 31 52 – That loan that you take out from that policy to do what it is that you re talking about is just that though it s a loan right You now owe that back to the insurance company Eddie Martini 00 32 03 – Yes sir That is correct Sam Wilson 00 32 05 – Okay That is correct Is there ever a point in time in which you can in which you can harvest that equity that you have built without then owing it back to the insurance company Eddie Martini 00 32 15 – That s a great question Yes So similar to your qualified plans any funds that you ve actually contributed towards it cuz these are all post-tax dollars that are being contributed to these funds You have access to all of those funds zero cost no loan needed you can liquidate there s no penalty behind that The only time you re gonna see a tax consequence in these is if you go to liquidate above and beyond principle that you ve put in and now you re tapping into the gains that have been earned in this If you do not wanna take a policy loan for whatever reason if you actually do the math on it and for a reason you decide that it makes more sense to liquidate it and take the tax consequence you do have that ability but you would only have a tax consequence if you tap into liquidation of gains Sam Wilson 00 33 00 – Got it Okay So again going back to that 9 98 that is gains So you start liquidating those gains then you start getting taxed on it Is that correct Eddie Martini 00 33 11 – Yes It s actually more so the policy itself that s generating the four to 5 internal rate of return Those are more so the gains that I m referring to Cuz again I wish the policies would allow like you said to say Hey I ve got an investment opportunity that it pencils out and I can pump 9 98 now into this cash value focused life insurance policy Unfortunately it does not work that way You cannot backfill gains It s gonna be the gains are earned on you contributing monies towards premium And way I the way I set it up most insurance agents do not like me because I build these things where they are cash value focused And so that means that there is the least amount going towards actual principle based premium and there is the most amount going towards cash value So that s what turns these around into again from a typical and traditional whole life insurance policy that again that whole digging a hole in your backyard scenario versus a modern cash value focused whole life insurance policy that turns this thing into a supercharged savings account which happens to come with a life insurance policy Sam Wilson 00 34 15 – Right right All right I got one more one more thing to throw at you that has been kind of a a maybe a hiccup or something Maybe you can explain here in our analysis and tell me what I m missing with a say bank A right You go to bank A you put a hundred bucks in bank a I can go to bank a tomorrow and I can withdraw a hundred bucks I go to a whole life where in this case your wealth maximization account and I put a hundred bucks in the cash value might be I don t know especially early on 30 bucks 40 bucks something pretty low So we re we re not taken into account like what the the amount of time it takes to break even mm-hmm on that policy before it s like okay I ve contributed and again I m just using that number uh I wish my million dollars would buy a jet That would be fantastic Uh I m not sure I wanna fly in a million dollar jet That that sounds sketchy to me Um but either way it s gonna take me a certain number of years before my cash value and actually deposited funds equali or or kind of become the same Is that correct Eddie Martini 00 35 21 – That is correct So that s a great point you did there Sam and I appreciate you bringing that up So there s gonna be a certain time I guess you d call it a vesting period vetting period however you wanna put a label on it But yes how these policies work is it the insurance companies do have to make money right If they don t make money they they go out of business and then this whole family banking concept which is really cool of them to do they give us everything we need to have a bank without the brick and mortar and we can all access it It s really neat but they have to go stay profitable So yes those first couple of years there s gonna be premiums paid that and some of those dollars are gonna go towards paying commissions They re gonna go towards their just administrative costs and just again to make sure they stay profitable because guess what at the end of the day it is a life insurance product Eddie Martini 00 36 02 – So heaven forbid something happens to you in year one through five or even one through seven but let s say you ve only contributed a hundred thousand dollars by your seven well your death benefit is probably gonna be seven to 800 000 that they re paying out to you So when you start doing the math on that as far as rate of return you re still into the 50 60 80 rate of return which again it s not supposed to be considered an investment but if we re actually looking at the numbers that s how that works I would say typically Sam years six or seven is when we re actually at a breakeven point if not positive in the amount we ve contributed versus the amount we have access to Sam Wilson 00 36 39 – Right And that that is just I guess a part of the equation that you have to you have to build in there Again there s some really smart people that I I know and respect that uh use this strategy quite a bit It s I m still warming up to the idea Uh it s something it s just personally it s like okay I gotta figure out how this how this all plays in And I think this has been very very helpful So when you hear me throwing things out there that are um clarifications on it that s just it It s like okay how do you make this work And again there I know there s a thousand ways to structure these and like you said there may be you know traditional methods of whole life policies we might as well just you know stuff the trash bag full of money and lit it on fire and called it called it a good time Sam Wilson 00 37 19 – So um I know there s ways to to do this I just wanna get some clarification on that and thank you for pointing that out Your six to seven is about when that when the dollar amounts are the same So all things being equal you probably just had to calculate in you know on the you know somehow the time value of money over that period to make it just slightly more clear as to what it is you re doing But again I know there s some advanced strategies here we re talking about and ways of of of making this work So I m not saying you re incorrect by any stretch just getting my head wrapped around it Anything else you wanna clarify on that front maybe that I ve I ve missed there Eddie Eddie Martini 00 37 53 – No you actually Sam I appreciate and I really welcome those challenges because that s how people I mean there s a lot of people that are listening and watching this right now They re gonna have similar questions and so I don t want them getting hung up on hey my grandpa always told me that life insurance is expensive and not to pursue it I get it I m not saying your grandpa s wrong because the way he understood it the way he was presented life insurance it probably was not as valuable of a financial tool right But there are strategies out there that with some really simple changes and some simple writers that you can add you can make these really powerful financial tools And it was hard for me too Sam to wrap my head around initially I m like wait a second if I ve got a hundred grand right now why would I only wanna have access to 92 of it you know at the end of the year right Eddie Martini 00 38 35 – At the end of year one right Well you have to look at the macro you have to understand okay first of all do I need access And you might do I need access to that a hundred grand this year If you do if you already have something that we just went over that scenario where you re earning 22 rate of return you need to commit those dollars over there you may wanna look into that right But if we can be patient if we do see that hey especially right now we re in kind of some uncertain times Yeah I m getting a lot of people hopping on the train right now because they don t wanna put their money into a market currently There s so much flux going on They re like I wouldn t invest right now I m not saying they re right or wrong That s just what their comfort level is on their risk tolerance Eddie Martini 00 39 11 – And I said okay great This is an ideal opportunity to start funding one of these policies cuz when you do hop back in the game instead of you squeaking by with a 12 or even finding that awesome 20 plus percent rate of return now because you were patient over the last five to seven years and you funded this you re now able to knock that first deal right out of the park and you re earning 90 plus percent rate of return on the first transaction you go back to market with So I feel like over time you actually made a better financial decision being patient and saying Hey I didn t take a transaction down the past five years but now when I do take this next one down I can almost make up for that lost time I get to deal two I have more than made up for lost time I m talking deal three four and five man I truly afford to five Xed what I could have done without taking that strategic saving step Sam Wilson 00 40 00 – Right Right And I think one of the other things here that that s and and again I don t wanna get into all the nuances of you know these particular maybe I have I probably have already done that All right Eddie Martini 00 40 09 – You re doing great Yeah you re good Sam Wilson 00 40 10 – scratch that Uh the one of the things I think that s interesting in these and I ve done done a fair amount of reading uh on these policies and and just kind of how these are structured and how like you re talking about you know wealth wealth building strategy is probably some of the estate protection uh tools and things that are inside of there So I think it s a more as a more comprehensive um plan these could fit in very nicely especially on that front where it s you know it s not subject to creditors and things like that So you can kind of shovel some shovel some money in places that you know God forbid somebody comes after you that they can t uh that other other people um you know lawsuits et cetera just can t access So I think some of those things are are also super powerful Sam Wilson 00 40 53 – Eddie this has been uh very insightful I ve really enjoyed the way you came on the show last time And we just talked about the comprehensive kind of wealth plan how to look at the holistic view of building wealth and how the the tools and strategies that are available to us I know we ve gone really deep in the weeds here on on strategies of how to use uh the correctly structured cash value whole life policies inside of our real estate transactions and how that can maximize our returns This has been a blast Thank you for sharing it If our listeners do wanna get in touch with you and learn more about you what is the best way to do that Eddie Martini 00 41 27 – Yeah I d say the simplest way is visiting martini legacy com You can read more about me there and it s a really simple way to hop on my calendar schedule a free complimentary consultation that we can kind of go over your wants and needs see where you re at on your real estate and investment and retirement journey See what we can do to make some tweaks there And if you re on social media just look up at Martini Legacy or at Eddie Martini Be happy to chat with you there Eddie Sam Wilson 00 41 49 – Thank you again so much for your time today I do appreciate it It was a blast having you on the show a second time Eddie Martini 00 41 54 – Thanks for having me ham Hey Sam Wilson 00 41 56 – Thanks for listening to the How to Scale Commercial Real Estate podcast If you can do me a favor and subscribe and leave us a review on Apple podcast Spotify Google podcast whatever platform it is you use to listen If you can do that for us that would be a fantastic help to the show It helps us both attract new listeners as well as rank higher on those directories So appreciate you listening Thanks so much and hope to catch you on the next episode Click here to 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