Not Just Another “Rags-to-Riches” Story
Gary Mountain held nine appointments in the first week of April 2005 to discuss “The Real Estate Financial Planning Workbook”. In each case, Gary was able to save each family over $13,400 for the year by restructuring all of their debt. Some might think this is a very small amount of money, but to many clients such a savings is life-changing.
Many of California Star Properties’ clients are married couples where both the husband and wife are both employed outside of the house. The demographics for the past 12 months with 127 clients served are as follows. The average family has a gross income of about $150,000. But then life takes hold and the actual results that are seen most often are illustrated in the table below:
Income: |
|
Gross Annual Salary |
$150,000 |
Expenses: |
|
Federal, State Income+ Social Security +Sales Tax |
- $ 60,000 |
Housing Cost |
- $ 36,000 |
Property taxes & Insurances |
- $ 12,250 |
Two Car Payments |
- $ 12,000 |
Utilities |
- $ 6,000 |
Health Insurance |
- $ 6,000 |
Food |
- $ 9,600 |
Auto Insurance |
- $ 2,600 |
Clothes |
- $ 4,500 |
Auto Maintenance |
- $ 1,000 |
Gas and Oil |
- $ 3,600 |
Educational Expense |
- $ 9,600 |
Hobbies, Sports, Activities |
- $ 4,000 |
House Maintenance |
- $ 3,000 |
Entertainment Vacations Trips |
- $ 2,500 |
Negative Cash Flow: |
<$ 22,650> |
Credit card payments cover the negative cash flow, with interest at 12% average per year more! |
- $ 2,718 |
Total Negative Cash Flow: |
<$ 25,368> |
This means that the family has spent $172,650 and they have accumulated debt in just that year of $22,650 which shows up mostly on credit cards and lines of credit.
Can they ask the State or Federal government to accept less for taxes? No. Can they go back to the car dealerships and ask to pay less on their auto loans? No. Can they go to the credit card firms and ask them to accept lower payments? Again, the answer is no, so here is where California Star Properties can make a big difference for these families every day.
The average home is $1,250,000 in the Los Gatos/Monte Sereno/Saratoga area so here is what Gary and his team will do. First, a new home loan refinances all current debt, including the $500,000 mortgage they are carrying at 6%, all credit card debts (6-25%), and the two auto loans (2-8%). The total of the payment on this debt was $50,718 per year.
These debts are now restructured into the new home loan at 1.75% on a bi-weekly payment which is then $1,161.04 for a loan amount of $650,000. This means that the new payments are just $30,187 a year.
Reducing debt payments from $50,718 to $30,187 saves them an average of $20,531 a year! Also, there is no tax deduction for personal loans, credit card debt, or auto loans but these are now part of the home loan, the interest on which is tax deductible.
In the above example the same people have not fully funded their 401(k)s or the IRA and Roth IRA retirement plans they will need later in their life! Now the funds are freed up since $20,531 is no longer going out and can now be invested in these accounts to retire them in dignity.
The Real Estate Financial Planning Workbook
When we look at our records of past clients’ Real Estate Financial Planning Workbooks, we notice that if we have a two-income family with a total income of $80,000 a year and we also have a two-income family that earns $180,000 a year, they spend the same percentages of their income and go into debt the same percentages as well. The only difference is the size of the dollars being spent.
Our clients usually download the Real Estate Financial Planning Workbook from our Web site and the husband and wife fill them out independent of each other. Then they download another one and create a combined plan to put into action. Once they fill it out they often ask that we facilitate their goals which often leads to refinancing a current property, or properties, and then assisting them to make additional property investments.
Here is a real example of what we have done for many other families and what we may be able to do for you.
We are not new to performing services to assist our clients in making money. In 1992 we had a man walk into our office and he stated that he owned a home and wanted to refinance his 9.75% first mortgage loan and reduce his payments. For the purposes of this story, we are gong to call him “Steve.” The market had just jumped way up due to the first Desert Storm War and interest rates were near what he already had. There was not enough reason to just do a “rate and term” refinance loan for him.
However, in asking Steve to fill out The Real Estate Financial Planning Workbook he became very defensive and required a complete explanation of why it was important for him to do so. When Gary went through it page by page it caught his attention because it was a self-directed action plan, and not a sales pitch. He agreed to take two workbooks home and fill them out -- one for his wife and one for him.
Upon completion of the workbooks, Steve came back and Gary spent about two hours discussing with him that at his current “burn” rate of money that he would become insolvent in about 20 months time.
Steve worked as a copy machine repairman and his wife didn’t work outside the home. The total gross income was $3,000 per month on salary and he received no bonuses or commissions and had no other income producing assets.
Then Gary ran sales comparable sales on the computer to determine what the value range of the family’s home. It was determined that sales had closed in the $750,000 to $800,000 range depending on the condition and size of the lots and structures in the neighborhood.
Gary then structured a “Stated Income” loan (without any verification of tax returns, pay stubs, w-2s) and verified cash assets which were about $67,000.
We choose to refinance the property with our “Solid Gold Equity Builder Loan.” The start rate at that time was 2.5%, while the cost to close the loan was close to 4%, including the taxes and insurance impounded at the clients’ request.
click to enlarge
These properties were placed into a Golf Course Vacation Rental Pool (located at PGA WEST) of homes and managed by an onsite property manager. At the time these properties were not really known and were not as popular as they are today. Gary has been selling the desert since 1986 and averages about 23 home sales a year in La Quinta to Palm Springs from his clients who live in the nine bay area counties. During this time frame the appreciation was fairly low by today’s standards and the cash on cash returns were very high.
After five years the same client refinanced each property that was a rental unit and here are the results of the rental unit’s equity and cash flows.
Gary then assisted Steve to buy an additional seven properties with the funds from the refinance loans. This means that this client has grown from one home, which was suffering from equity rot, to now owning a total of 15 properties. Consider that at the time this was started Steve was earning just $ 3,000 a month repairing copy machines. After ten years had gone by he was still repairing copy machines and his income had increased to $ 4,500 a month from that same chosen career. However, his life had become much more enriched as he was earning a huge rental income and had assets that went through the sky. His desert properties increased in values:
2002 averaged 36%
2003 averaged 32%
2004 averaged 35%
2005 averaged 41% YTD, as of October
The housing bust is nowhere in sight! Do the math on the accumulated values of these properties that were performing at a 5% a year growth rate (appreciation rate) to what the recent years have done. In January of 2004 Steve pulled the plug on working full time and retired to the island of Barbados and the town of St. James. He lives on the beach and has bought a hotel in one of the most beautiful places in the world. Steve has converted the rental stream to be reinvested into a cash-on-cash investment fund and so he now even has those monies being compounded!
Each year Steve and his wife fill out The Real Estate Financial Planning Workbook and they write the plan of actions down and then implement them. It is no longer about survival and about trying to save money on monthly payments…it is about being a “good steward” and about management of their assets. Often times we meet people who are tripping over tens of thousands of dollars while on the way to trying to save a few hundred dollars. We call this scarcity thinking and it shows up whenever you have pent up equity and you are not making the use of the funds to reinvest them into yourself!
Often people just don’t know what is possible for them to achieve financially. We sit with clients and review the investment strategy and assist them to create their own personal plan of action. Sometimes people are just stuck. They know that they should be doing something and yet they feel that they are frozen and stuck in a rut. We at California Star Properties, Inc. refer many of our clients to Klemmer and Associates who have a series of personal growth and coaching programs available to assist people with getting past what is holding them back. All of our team goes through this same training and we are using the lessons in our daily lives to always improve upon ourselves and the relationships we have with our clients.
When our clients have gone through the four training classes we often expose these graduates to a different level of investing and we assist them to grow their cash flows at a rate that ranges from 3 to 5% per month compounded on cash investments as low as $40,000.
We can do this because the graduates have learned to accept opportunities and to take advantages of the same. Some clients have as much as $ 600,000 in the same investment pool.
In the past 14 months the funds have increased abnormally and have yielded as much as 150% a year (8% per month compounded) as a result of allowing the compounding of the monthly income reinvested.
We teach our clients to become open to investments in our LLCs and they buy part of commercial and residential properties for investments. These are all secured by real property. We make these investments with cash and carry no loans. Hence, on our investments we are never under any pressure to perform. There is no interest rate risk. Our worst case exposure is the cost of taxes and insurance and routine maintenance on each investment property. Our investment properties must cash flow at a 10% “cap” rate or more.
When you decide you want to become a client, start by filling out The Real Estate Financial Planning Workbook and then make an appointment to meet with our staff. We are here to assist you and we will always have the time for you, your family, friends and associates, since we perform as a team and not as individuals. We want to serve them in the same way as we serve you. On our website we always have seminars open to the public to provide an overview of what we are doing and the products and services that we offer.
Start now and open the doors of opportunities available to you.
