The Science of Building Wealth (course class 4)
Transcript
Mark Prather:
Hi, I'm Mark Prather, Founder of the Mark 1 Real Estate Wealth Academy. I've been in the real estate and mortgage industry since 1977. I've learned some really powerful and profound things about wealth growth. All of us want to be financially secure and at least have the option of being able to retire, but very few of us ever get there. The number of people that are reaching this level of financial security has been declining for decades. There's a real world solution that I've learned over my life journey that has never been presented to consumers before. I'm going to share with you that path.
Mark Prather:
I know a lot of you are really skeptical. So, let's just address, "What's real? What's not real?" I cannot take people that are unemployed and homeless and turn them into millionaires. But if you have a job, if you're making $50,000 a year in income, you can be wealthy. That includes a lot of people. Basically, anybody in the middle class can move and advance their lives, where they can be financially secure and can retire permanently if that's what they choose and even reach a serious level of wealth.
Mark Prather:
Our course is titled How You Become Wealthy Without Saving Money Through Real Estate. See, saving money is the number one challenge that we have. I'm going to share with you how we can eliminate... I want you to think about that for a moment. If you could become wealthy, you could reach financial security and saving money wasn't part of the requirement, how much would that change your life? Well, I'm going to show you exactly how we can do that. Now, don't get me wrong, I'm not discouraging saving money. If you can save money, that's a great thing. Saving money only helps. Save money, I call it the icing on the cake, but it's really not necessary. It's important that is not necessary, because 80% of the people in this country simply cannot save money.
Mark Prather:
Now, here are the objectives to our course. Number one is we want to address the biggest challenge. When I say the biggest challenge, your biggest challenge and my biggest challenge in getting you on this path to financial security, retirement, and real wealth is what you believe. Right now, as you're watching me do this presentation, as we get into this course, the fact that you're here, watching this is a great thing, because it means you still have hope. You still believe you can have a better life, but I'm sure you know as well as I know that most people have given up. We're going to go through this path, I'm going to show you this, but I know what you believe is the biggest challenge.
Mark Prather:
So, I'm going to help you to try to open your mind by bringing you some real information that will hopefully get you engaged with what is possible as we go through this. I'm going to show you how wealth grow through real estate really works, how it is so different than any other investment class and why it blows away other investment classes and why it's not only the solution to saving money, but creating permanent alternative income or what I call non-employment income that will morph into retirement income if you choose to retire. I'm going to share with you a path that you can actually do, something you can execute.
Mark Prather:
So, as we go through this, you're going to learn about the financial dynamics of how wealth growth through real estate works, but we need also to create a plan and a path that you can actually do, that you can actually execute, that you understand. So, we can advance down this path of building wealth, building the non-employment income.
Mark Prather:
Here's why I call it non-employment income is its income that is going to help you today because you have your employment income, right? But we want to create as much non-employment income as soon as possible, so that it can replace your employment income if you want to retire and go move on to other things. How to get started and apply what you've learned to begin changing your life circumstance. So, these are the key objectives that we're going to walk through in our course.
Mark Prather:
The wealth gap crisis in America today, this chart reflects where the wealth in America is today. Now, the dark blue represents 1989 and the light blue 2016. So, it's basically about a 30-year span. Now let's start off in the bottom right hand corner where it says top 0.1. So, this is top 1/10th of 1%. The top 1/10th of 1% has grown from 12 to 17% of the world. The next, 99 to 99.9. So, basically, these two groups represent just 1% of the people in this country. Their wealth growth has grown from 27 to 34%. So, if we add 34 and 17, we're at 51%. So, here's the point, 1% of the people own over 51% of the equity holdings in this country. Over half the equity wealth in this country. That's a pretty staggering number when you think it's only 1%.
Mark Prather:
Now, let's look at the next 9%. The next 9%, their wealth is contracted from 44 to 42%. But if we add this top 10%, you can see the top 10% of income earners own 93% of the wealth in this country. The next class, the 50 to 90 percentile. Now, the 50 to 90 percentile, right here, this is the middle class. The 50 to 90 percentile is contracted from 16 to 7% over the last 30 years. Think about that. This is the middle class where the middle class is struggling more and more to reach financial security and retirement and forget about wealth. This is why I said in the beginning, everything revolves around what you believe.
Mark Prather:
Most middle class people do not believe that building serious wealth or becoming wealthy is in the cards room. They just don't believe that's even possible, but it is possible. I'm going to show you how we can make that a reality. Where I began in the early years, now, I'm not going to bore you with all my whole life story, but I want to share with you some important points. You'll understand why as I go. Well, I was born, I should say, I was born at Los Angeles Community Hospital. Neither of my parents had a high school diploma. I spent from birth until about the age of 14, we moved a lot. I went to seven different schools by the time I was in fourth grade.
Mark Prather:
It was mostly around Compton and those areas. We live most of the times in Compton, a bunch of different places, apartments, small houses and so on. Here's my point. My family was not educated. We didn't have money. All my friends, all my relatives in this environment did not believe that life could change and could get any better. That this was the way life was. The goal, the dream wasn't to become rich. The dream was to become middle class. That's what the goal was. Now, if you're watching this and you're in that place, the whole reason I share this is that what is possible is amazing, but it is not easy.
Mark Prather:
In my journey, it was extremely difficult, in fact, so difficult, so stressful, that at age 49, I had a massive heart attack from money stress. I was in critical condition for about 10 days. I was on the heart transplant list. Now, I survived this, obviously, with some severe heart damage. It took quite a while to get my life back, but you're going to see why I'm so passionate about this, because I don't want you to have to go through that. I don't want you to have that money stress over your life.
Mark Prather:
I'm going to show you the real world path, what has taken me basically my whole life to learn. It's taken decades to learn what I've learned. I'm going to teach you everything I've learned over this journey and how we can get to this path of financial security, retirement and wealth. As I said, it starts with belief systems and what you believe. So, we're going to advance through that and get you on the right track as far as your mindset and get your beliefs on the right track.
Mark Prather:
Now, what can go wrong? Here's our disclaimer. There's no guarantees in life. Life is a moving target, but I'm going to show you why real estate is going to be your fastest and safest path to wealth, but it's not that simple. To simply say that real estate is the solution is not true, because I'm sure you've known people like I have that have lost money in real estate just like they've lost money on their investments. It's more complex than that. There's a lot of moving parts. I'm going to show you those moving parts. Because of those moving parts, it's important that you learn these strategies and you learn the principles about what I'm going to share with you in this course. But things can go wrong. So, there are no guarantees in life.
Mark Prather:
So, what do you believe is possible for your life? Belief is the foundation to everything. Here's why? Like gravity, we will move in the direction of what we think of. So, I want you to just pause on that for a moment. What do you believe is possible for your life? What do you think about most of the time? Do you worry about money most of the time? Do you worry about your job? Do you worry about something else? Whatever you're thinking of, like gravity, you're going to move in that direction.
Mark Prather:
Here's the point is we need to control our thoughts. We need to build our beliefs. Right now, you have certain set beliefs about money and what is possible for your life, but I'm going to tell you, not only the odds that your beliefs are wrong, I would say from my experience and this isn't scientific numbers, by my experience, I'm telling you 90% of the people, their beliefs about what is possible for their life in just about all categories, but especially financially, is not accurate.
Mark Prather:
Here's why your beliefs are holding you back. Your core beliefs are tied to what you currently know and have experienced. Now, as I mentioned in the beginning, where I grew up, in my younger years of my childhood, everybody had the same experience. We had our families, our friends. They weren't educated. Everybody struggled to get by. When that is the environment and the lifestyle and you look around, it's like, "Why would you expect anything different?" I'm going to tell you something else that I learned is that when you aspire to have a better life, when you aspire to change your life circumstance, that is not oftentimes received very well. People will look at you and even comment and say, "What makes you think you're better than we are?"
Mark Prather:
Now, I don't know if you've ever had anybody tell you that, but it's not about being better than other people. It's about being the best you can be in creating the life, but this negativity that comes your way, it affects you. So, these are the things I want to make you aware of, of why your belief system can be limiting. I can show you the path and I'm going to show you this path as we go through this course. But if you don't have a belief that this is possible, you are not going to try and you're not going to take the steps and if you don't take action, then nothing's going to change. So, this is why belief is so critical.
Mark Prather:
A game changer is knowing the formula of how to change your perspective. Your perspective is how you view things. See, right now, you have certain beliefs that are based on certain life events and what you've learned either from your family, from your friends, from maybe teachers, books you've read, those kinds of things. But to change that perspective, because if the perspective that you have has been limited to mostly negative, negative input or limited input, it is a very difficult process. I am going to tell you again, just from a personal experience, there is nothing more difficult than changing what you believe. I'm going to show you the formula of how we change what you believe, but it will not be easy. For me, it took literally decades.
Mark Prather:
The biggest battle I was fighting over my entire journey was my own inaccurate belief, the pressure, the pressure that I felt, because I wanted to believe that I can have a much better life, but I didn't really believe it was possible, but I kept just fighting it and fight it. It created all this pressure, which created the stress. I'm going to show you how we can overcome that right now. First, it starts with focus. We have to control your thoughts. So, here's one of the things I want you to start with is writing down what you're thinking about. When you think about your day, what occupies your mind? What is actually occupying your mind and what should it be? What do you want it to be?
Mark Prather:
This struggle, we all have it, because we have our conscious mind and we have our subconscious mind. Our subconscious mind tends to be occupied with negative thoughts, destructive thoughts. So, we need to stay in our conscious mind. What that means is paying attention and staying focused. We can control what we are focused on. But when we slip into daydream mode, which is our subconscious mind, we slip into this negativity and into the false beliefs. We want to get out of the subconscious and the daydreaming. We want to stay conscious and stay focused.
Mark Prather:
So, think about it and write this list of, "What are your mind and your subconscious mind... What it thinks about most of the time during the day? What are all the negative thoughts that you have?" We got to get out of that. Let's move to your conscious mind and staying focused on, "What are the things that we want to focus on?" I'm going to show you that when it comes to the wealth growth process of what you want to focus on, but you need to apply this to all aspects of your life. Next is ambition is we want to be ambitious. We get one life. We get one opportunity. Let's be as ambitious as we can.
Mark Prather:
Now, I'm a big believer in just going for and shooting for the moon, but whether you get there or not is secondary. Let's create the best life possible. Enjoy the journey. And then as the money starts to come and you start to become more and more financially secure and more financially free, you enjoy that process along the way, because being stressed out and miserable, that's no good either. So, we want to have big ambitious goals, but we want to enjoy the journey as we go.
Mark Prather:
Next is integrity. Be someone that people can trust. If people don't trust you, life is really miserable. So, be someone people can trust. Building trust is not quick or easy to gain in people, but it is quick and easy to lose. So, be a person of integrity. Do things one way. Do it the right way where people can rely on you.
Mark Prather:
Next is tenacity, because life is difficult. Life is really difficult, because there are a lot of difficult people. I'd like to say that the best in life is people in the worst in life. There's going to be a lot of people pushing you around, whether it's physically, mentally, emotionally and so on. So, you have to be tough. You have to be tenacious. We have to move forward. When you get bumped around in life, like you will, don't let it stop you. Be tenacious.
Mark Prather:
Last is humility, is be humble. I believe the root problem, the number one root problem to this planet with people is their pride. Everybody wants to one up the next person. Everybody wants to communicate and act like they are better than other people. That is just simply not true. We're all on this planet for a very short time. Our life journey goes by very quickly. It just amazes me to think that now, I'm 62. Forty-four years ago, I was in high school. I see my high school friends on Facebook and what have you and how fast that time is just gone like that. Life is short. We're all here trying to do the best we can to this journey. Be humble and focus on helping as many people as you possibly can. That will make your life a great life and an amazing life.
Mark Prather:
There's one word for this formula. The word is FAITH. That is the acronym that I just shared with you. FAITH is focus and it is belief. This is my favorite verse in the Bible. Here's what this says, "According to what you believe will come to pass." I've seen that in all aspects of life, but it especially is true when it comes to advancing your life and becoming financially secure and building real wealth.
Mark Prather:
All right. I want to share with you step by step, this path of how we can start from nothing, because you don't need to have money. If you can get together $500, but you need to have a job. You need to have some income coming in. We need to have decent credit. And then I'm going to show if you have that foundation... Remember, I said decent credit, not great, just decent credit. I'll define what that means later. But I'm going to share with you the path of how you can begin this process of creating wealth on autopilot, creating non-employment income on autopilot, and positioning you so that you can exit the employment world if you want.
Mark Prather:
All right. There are five questions that will determine your financial future. Now, I'm going to walk through these five questions, but here's why I'm addressing it now, is these are the five questions that we're going to answer in this course. They are the five questions you need to have the answers to. Very few people know these questions. So, we need to start with you need to know the questions, you need the answers to. But throughout this course, I'm going to show you how we're going to get you the answers to each one of these questions.
Mark Prather:
So, number one is you need to know, "How long will your retirement money last?" Now if you have no retirement money, you're not saving anything, simple answer, right? But if you have a 401(k) or an IRA and you are saving money and you have a plan and a path to save this money, we need to know how long it's going to last. Number two is, "How much will your expenses be at time of retirement?" We need to do that analysis. That's basically an inflation analysis. Number three is, "How much retirement can we need, including income taxes?" So, when we know what your expenses are going to be, we know the amount of net income that we're going to need to pay those expenses, but we don't want to forget about income taxes. Income taxes are not cheap. They're a significant factor.
Mark Prather:
As your income rises, the income taxes go up, too. So, we need to do that analysis to make sure we know where the income taxes are. So, we have that included. Number four, "How and when, how and when will you create the retirement income you will need for retirement?" This is the hardest part is how and when. I'm going to show you this process. We're going to get into each aspect.
Mark Prather:
We're going to talk about this in four different categories. Are you a renter? If you're a renter, I'm going to show you the journey of how a renter can go from just renting with very little money and not only reach retirement but build serious wealth. Are you a homeowner? If you're a homeowner, you've already taken a huge step. I'm going to show you as a homeowner, how we can take you to the next level. Are you an investor? Are you someone that has a fairly decent net worth? Maybe you have a home and maybe you have a rental property. Maybe you got a fair amount of money in your 401(k) or IRA. We'll analyze that.
Mark Prather:
And then number four is we have the seniors. Are you a senior? If you're, let's say 55 plus, we do a lot of consultations with seniors that don't think they can retire. It's simply not true. So, we sit down with them and we show them how we can get them to retirement as well. So, we're going to analyze each one of these categories. I'm going to show you different strategies on how we can get you on the path, so that you can become financially secure, retire, and build some serious wealth.
Mark Prather:
And then number five is, "How you will protect your assets and life savings from a major recession or lawsuit?" It takes a lifetime to build wealth. One big lawsuit or a major recession can rock your world and if not wipe it all out. Take a big beating. We've seen in 2008, 2009, that recession devastated a lot of people and especially retirees. And then most recently, with the COVID virus, that has really impacted a lot of people. There is a way to become what I call financially bulletproof. We're going to go through that process. So, you can learn how to protect yourself so that you can weather these storms.
Mark Prather:
As I said earlier in our disclaimer, there's no guarantees in life. The path I'm going to show you is going to position you in a place where you can become as legally positioned as you possibly can to avoiding lawsuits and how you can weather the worst recessions.
Mark Prather:
All right. The number one stress in America is money. Now, I want you to look on this chart. The percentage of people that money is their number one stress, does that surprise you? When I saw this, this didn't surprise me. This is a Wall Street Journal report. Every generation from people in their 20s through people in their 60s and 70s, money is the number one stress. And then you look at the next one, work and then the economy. Financial aspects is the big stress. I lived this. As I said earlier, this money stress is what caused the heart attack. That's why I've created this program.
Mark Prather:
All right. What does it mean to be rich? Now, here's why I asked this question, because I didn't know what it meant to be rich. Most people don't know what it means to be rich. I remember when I was a kid in Compton, if someone had a two-story house, they were rich. If they had a pool, they were rich. If they had two bathrooms, they were rich. If they had a fancy car, they were rich. Most people think it's a big house or maybe it's a big savings account, but it's really neither one. Rich means having a lot of non-employment income. I want you to think before you get out of bed, have enough income to pay all your bills and you're only going to work because you want to go to work, that's what rich is.
Mark Prather:
Here's why I share this. Remember I said in the beginning, F is focus, that's what I want you to focus on. Now, I've owned a mortgage company for 40 years now. I started my own mortgage company when I was 22. Think of a thousand loan apps over the years. When I ask people what their employment income is, "How much you get paid per hour, per week, per month, per year?", they know. If I ask them and say, "How much non-employment income do you have? How much investment income?", the only people that know is the ones who are at zero. Because they don't focus on it. We only move in the direction of what we focus on. So, the question I have for you is, "How much non-employment income do you have?" If you don't know, then odds are it's not very much.
Mark Prather:
So, I want to make it your focus. We're going to focus on creating non-employment income now, the sooner you get this. I say now, because in a 401(k) or IRA, 59 and a half is the soonest you can start getting any help from your 401(k) or an IRA. So, if you're in your 20s, 30s or 40s, or even 50s, it's not helping you along the way. We want to create non-employment income now. Let's start making your life better now, but it's focus. That's where we're going to stay focused. F is focus. Focus on non-employment income. That's what we're going to do.
Mark Prather:
All right. I call this the Save and Hope Strategy, is why people don't. They're not aware of non-employment income. They don't know about those five critical questions. So, their whole path to financial security is what I call the Save and Hope Strategy. They set up a retirement account, a 401(k) or an IRA, and then they're going to save as much money as they can, but they have no idea if it's going to be enough. They're just going to hope like heck it's going to work out. Well, in most cases, it isn't working out. As you saw those stats in the beginning, the 50, the 90 percentile of the middle class is they're just getting by. They're not building wealth. They're just getting by.
Mark Prather:
Building for retirement is first, we need to understand what we need to accomplish. Retirement is about just two numbers. It's about how much money's coming in and how much money is going out. So, that's what we need to build a plan. We need to have in our plan, where we're monitoring how much money is coming in and how much money is going out. So, we're going to build and have a path. This course is all about building the retirement income. So, it's about the income coming in, but we also want to have a budget and we want to have some debt strategies. So, that the money going out is going down. It's declining as years go by.
Mark Prather:
All right. How do you become wealthy without saving money through real estate? Americans struggle to save money. 77% of Americans live paycheck to paycheck. If you're living paycheck to paycheck and trying to rely on the Save and Hope Strategy, it's never going to happen, right? This is why those numbers are so awful in that initial chart that I showed you. By the way, that's a Goldman Sachs report that you can see. This is why the middle class are struggling so much as they are just in this paycheck to paycheck mode. But we're going to solve that problem as we go through this course. But don't rely on guesswork with your family's future. We need to know what to do. You can't win the inflation game by saving money.
Mark Prather:
So, here's in a nutshell, the biggest advantage that the wealthy have over the middle class is first, they work with knowledgeable people, either CPAs financial planners or they've gone to school and have business finance degrees, these kinds of things. They understand the power of inflation. You have to have a plan, but the whole game is either winning the inflation battle or losing it. If you're trying to save money, you're going to lose the inflation battle. I'll show you what I'm talking about mathematically.
Mark Prather:
All right. In our chart here, let's say you're 40 years old and you want to retire in 25 years at age 65. If your current expenses are $5,000 a month... So, this is rent or your mortgage. It could be your car payment, utility bills, food bills, all your expenses. You're saving $400 a month. Your total savings in your retirement account is $20,000. Inflation in this country has averaged about 3% a year for the past 100 plus years. Now, different regions of the country, inflation's even more than that or it could be less in certain parts of country. But in California, inflation rates are much higher than this. Rent levels in certain communities are 5.5 and 6%. Property values in California appreciate 7.3%. So, that 3% inflation rate is actually on the low side if you're in California, and then anticipate rate of return.
Mark Prather:
So, let's say you're netting 4.5%, I say that because to net 4.5%, these retirement accounts are not free. You're probably paying 1% and 1.5%, sometimes even 2% on your earnings. So, you need to have closer to 6%. Most people are averaging less than 4.5%, but we're going to use 4.5% as a return rate. Here's where they're going to be in 25 years, $282,000 in their life savings. Their expenses are $125,000. If you simply divide these numbers out, they have two and a quarter years of retirement. The reality is it's actually less, because if you have $282,000 in a retirement account, you still have to pay the federal government, the IRS and the state, pay them their income taxes. So, if you take those out, the number is actually less than that.
Mark Prather:
Now, if you're going to get social security, that will help a little bit. But you can see in these numbers, the retirement income, $1,000 monthly retirement income. So, here's what's going to happen. Your monthly expenses over 22 to 23 years with inflation are going to double. So, your expenses have doubled. This is all the retirement income you have. You're going to have a $9,400 shortage. So, you have this big shortage. This is why the number of people that are able to retire is declining every year. So, if we analyze it, they get $10,000 a month in expenses. This is not including income taxes right now.
Mark Prather:
So, if they have $10,000 a month in expenses, $10,000 in expenses, they're going to have to make somewhere around $13,000 to pay that $10,000. But if we simply reverse engineer the numbers, basically, meaning that if you had $10,000 in expenses and you get 4.5% return, it means you're going to need to save $2,791,000 over 25 years. It means you need to save $3,000 a month. Now, when I share this with our clients and ask, "Can you save $3,000 a month?" What do you think the question is? Most laugh because they're struggling to save any money. So, the idea of saving $3,000 a month is simply not realistic.
Mark Prather:
All right. Now we're going to get to how we can solve this problem. Remember, I mentioned earlier about perspective. Our perspective is tied to what we know or what we've experienced. And then when our perspective is tied to what we know or have experienced, that's our beliefs. I'm going to share with you what you don't know. So, you don't know what you don't know.
Mark Prather:
So, when we go through life, and this applies to so many things in life, when you don't know what you don't know, then you have this huge blind spot, I'm going to share with you what you don't know about wealth growth and what you don't know about real estate wealth growth in particular. And then you need to be aware of what those facts are. And then we need to know how to apply them to your life circumstances. As I said before, whether you're a renter or homeowner or a senior or what have you.
Mark Prather:
So, here's what you don't know about real estate. Number one is utility value. We'll get into that analysis. Now if you saw my webinar, you're familiar with the utility value, but no one does this analysis. I call the utility value the secret sauce to real estate. It is why real estate is the fastest path to growing wealth. Next is the five economic benefits of real estate. You're making money five different ways on real estate. We're going to go through that analysis. Make sure you're aware of that. Number three is, "Why real estate outperforms the stock market?" It's not really even close. Number four, why real estate's the fastest and safest path to wealth? We all want to build wealth as fast as possible. Fast without safe is no good.
Mark Prather:
I'm going to share why it's the safest and how we can have in your plan to keep you in a safe space. So, that as you're growing this wealth, you don't have to worry about going backwards or getting into financial struggles. Number, five real estate can eliminate the need to save money. Now, again, as I said before, I'm not discouraging saving. Saving is a great thing. Financial discipline is a great thing. But as you saw on that chart, the 50 to 90% top middle class, most cannot save money.
Mark Prather:
So, when you have a solution or a proposed solution for financial security and retirement, like a 401(k) or an IRA, what good is a 401(k) or an IRA if you can't save money? Well, the obvious answer is it is of no value. We need a path and a plan that does not require saving money. Until now, that path didn't exist. Well, it does now, and we're going to go through that in this course.
Mark Prather:
All right. If you're a renter, we're going to start at this level. Why renting is a financial disaster? Most renters are losing thousands of dollars per year. The majority of renters will never be able to retire. Rent payments never end. They never end and they never stop going up. I was talking to a client. I asked her, "So, do you own or rent?" So, I rent. So, I asked her. I said, "Well, when do you expect to have that rent paid off?" Well, she laughed. She got my joke. Her answer was, "Never." That's why most renters never retire. How many bills do you want that you can never pay off?
Mark Prather:
Most of our bills, we're in a world where people don't want you to have things paid off. Different businesses, everything is around having a membership or a service, but you don't want bills that you can never pay off. But it's hard to get them because think about that. Utility bills, you can never pay those off. Your insurance bills, you can never pay those off. Even if you pay your car off, what happens to your car? It wears out. It has all kinds of surface issues. And then at some point, it gets to where it's too expensive to even keep up. So, it's really difficult. But here's the other thing of why it's so important to not rent is that not only can you not pay it off, but it's going up with inflation.
Mark Prather:
But here's the other factor is for most people, housing is their number one expense. In many cases, it's on the low end 40% and very often 50 or even 55% of their income. So, if you have an expense that's 50% of your income and we eliminate that expense, remember, I said retirement is about two numbers. How much is coming in and how much is going out? Well, if half your money is going to housing and we eliminate that, didn't we just lower the bar and make it much easier to retire? Much easier to be financially secure. So, renting is a financial disaster.
Mark Prather:
Let me show you the math. Here's what I call the real cost of renting. Let's say you're paying $2,600 a month in rent. You're looking to buy a property, but the payments can be $2,917. Very often, in fact, in most cases, the renter's like, "Why would I pay $2,900 for something I can rent for $2,600? Doesn't make any sense to me." So, they don't buy. Lots of renters are in that place, but they don't understand the real cost.
Mark Prather:
Let me show you the real cost. When I say real, I mean real actual cost to you. Say you bought a $500,000 property, taking a conventional loan, 3.375, interest rates are incredibly low. You have your mortgage interest deduction. Now, depending on what state you're in will dictate whether you'll have the property tax deduction, because there is a limitation that California and New York, some of the high cost areas, hit that ceiling. Some write off some of the property tax, but many don't write off any of it. So, we're not going to have the property tax deduction. So, basically, we're taking the mortgage interest deduction, bringing it down. Okay. So, you can write off your mortgage interest deduction. By the way, $750,000 loan is the maximum that you can write off.
Mark Prather:
So, in this case, we're going to write off all the mortgage interest. So, we're taking 30%, this number. So, this is basically saying your state and federal income tax rates are about 30%. We got $4,867 tax write off. And then we have principal reduction. What people don't realize is that as interest rates go down, the percentage of your mortgage payment that is principal reduction goes up. With interest rates at these incredibly low historic levels, that percentage of your payment that is principal is more than ever. Now, here's what that means. That is not money that is being lost like rent. That principal reduction means your loan balance is going down.
Mark Prather:
So, the loan balance that you have on this property would be going down. Even if the property didn't go up in value, if it just stayed at the same place, you're building wealth. So, this principal reduction is basically $9,500 is a forced savings account. So, you're building wealth. I said without saving money, this is the amazing thing about real estate is real estate has this intrinsic wealth growth mechanism. Meaning that within real estate, you're building this wealth. So, your total homeowner savings, if we take the tax savings and your principal reduction, it's $13,374 per year.
Mark Prather:
So, here's the difference. 100% of rent dollars are lost. So, whatever we're paying rent, that's just lost money. Now, with real estate, we've got the tax savings. So, you're going to get $4,800 back. You've built up equity in the house. You got those. So, you have $13,374 in dollars in wealth growth that you don't have with renting. Divided by 12, that's $1,198 per month, almost $1,200 a month, found dollars that you don't have with renting. So, if your mortgage payment is $2,917, subtract the $,1197 in newfound dollars, your actual cost to own is only $1,720. You're paying $2,600 a month in rent, subtract that $1,720. So, your real estate advantage is $880 a month. Let's annualize that. We have a $10,560 advantage with real estate and additional wealth growth that you don't have in renting.
Mark Prather:
Now, the bonus advantage is the appreciation rate. The appreciation will range by area and by state. The appreciation rate we're using in this scenario is 4%. Now, the national average is 5%. In California, your average is 7.3%. So, 4% is very conservative. We're talking $20,000. So, our real estate advantage of $10,000 plus the $20,000 depreciation, there's over $30,000 in new wealth growth that would be lost if you're renting. That's per year. So, you can see as a renter, I mean every year, every day, you're losing all kinds of money. But then to make a bad situation worse is the rent's never going to get paid off. The rents just keep going up and up and up. This is why seniors that are renting are in such a difficult place. Many of them, if they're living in a high cost area like California, they're going to leave the state.
Mark Prather:
Your path to wealth is through your home. I want to repeat that. Your path to wealth is through your home. When you buy a property, over time that property value will go up and your loan balance will go down. So, your building all of this wealth. But there are many moving parts or dynamics to why real estate wealth growth is so superior to every other asset class. I'm going to show you a real simple presentation that we have created so that you can visually see all these moving parts. I like to say this, these moving parts are like the engine in a motor.
Mark Prather:
Most of us never even look under the hood anymore. We just buy a car, start it up, and look at the interior, and then we go. Well, it's important you know how the motor of wealth growth works. Because if you don't understand all the moving parts, the chances that you're ever going to go anyplace with building serious wealth is really slim to none. So, let me show you how the real estate wealth growth works.
Mark Prather:
All right. These red chips represent your money. So, let's say you put $1 in the bank. Now, interest rates are pretty much next to zero. So, you're not getting really any money. There's not even conversation whether interest rates will actually go negative or it will start charging you. That's the way it is in Europe in Japan, but so far, we're not there in this country. But for simplicity, I'm going to say that you're getting 1% on your money. So, this black chip represents your 1% that you've earned. So, it's 1¢. So, $1 and 1% equals 1¢. This is called linear wealth growth. Here's the problem with linear wealth growth and especially with the bank, first off, 1% is much lower than inflation so you're actually losing money.
Mark Prather:
Second is that the wealth growth from money in the bank is never... The good news to money in the bank is that it's secure. All right. It's not really an investment, but you're only making money on your money. You're not making money on anyone else's money. It's just your money. You're going in alone. So, you're actually going backwards, because inflation is going faster. So, you're making next to nothing. Because of inflation, you're actually losing money. And then the fact that it's only your money. Now, let's go to the stock market or let's look at your 401(k) or IRA. Let's say you put another dollar in your 401(k) or IRA, it goes into stocks and you get 8%.
Mark Prather:
So, here's 8%. Let me show it, 2, 4, 6, 8. So, you get 8%, way better than the bank, but it still is linear wealth growth. Meaning, you're only making money on your money. Now, when I do my consumer events, I ask the audience, "How many of you believe that people are getting rich, becoming wealthy through their 401(k) or IRA?" No one raises their hand. People know, you're never going to get rich this way, but they don't know why. The reason is it's a linear wealth growth. You're only making money on your money. This is where the wealthy play the game entirely different. The wealthy understand these dynamics.
Mark Prather:
One of the things you will hear wealthy people talk about all the time... They don't talk about it with middle class people, because they don't understand. But they talk about how to scale their time and how to scale their wealth. Let me explain to you what that means. It's how you're scaling or leveraging your time and your wealth grow over other people and other people's money. That's what real estate provides. So, let's say we take another dollar. So, $1, just like the stock market or your 401(k), just like the bank. You buy a $10 property. So, $1, 10% down is $9. The bank loans you $9. You have $9. Now, you have a $10 asset. What do you think you're going to make more money, on a $10 asset or $1? Well, it's pretty obvious.
Mark Prather:
Now, with real estate, there are five economic benefits. The first one here is the leverage factor. Remember, I talked about scaling your time and your money. So, we've scaled your time. We've magnified your money from $1 to $10. The bank is like a partner basically. They've allowed you to buy a $10 property. But here's what's awesome, the bank isn't your partner. Would you loan someone 90% of the money to buy an asset and not participate in the ownership? I wouldn't do that. I don't think most people would do that, but that's what banks do every day. So, you only have 10% of the investment in it, but you own 100% of the property.
Mark Prather:
Here's why that's relevant and significant is that that means you own the property 100%. So, you get 100% of the profits. So, now, we've magnified your $1 10 times, and now we have a $10 asset. Let's say the property goes up 5% a year. So, stocks, we said 8. So, what's better, 8 or 5? Well, let me show you. Is 8% on stocks better than 5% in real estate? Let me show you. 5% of $1 will be 5¢. 5% of $10 is 50¢. So, here's 10, 20, 30, 40 and 50. Okay. Now, we've covered two economic benefits, leverage being the bank's money.
Mark Prather:
Here's the appreciation. Very often you will hear people that are big stock market proponents go, "Well, I'd rather go on the stock market, because I can get 8% in the S&P 500. Real estate nationwide is only 5%." Well, look what 5% just did to 8. You can see the return is 50 versus 8. It's not even close when we only covered two of the economic benefits. Now, there are three more.
Mark Prather:
Next, we have tax write offs. We talked about that in our rental analysis. So, real estate has tax write offs. We showed if it's your home, you have the mortgage interest deduction. But if it's a rental, you have more deductions. The key one being depreciation. The tax deductions are worth thousands and thousands of dollars every year and over your life. It's big dollars. It raises your return on investment to a level that as you can see, we're blowing away the stock market.
Mark Prather:
Next is we have our principal reduction. Meaning the mortgage balance is going down. Now, if it's your home, you're paying this principal down and you're building this wealth. But if it's a rental, it's even better, because now we have rental cash flow. Now, the rental cash flow, let's say you and I have rentals, we have one-year leases. Every year, I raise the rents 4% like clockwork. So, the rents are going up. So, you're collecting this rental cash flow, but here's what's awesome. Rental cash flow comes in. You make the mortgage payment, which is the bank's money. So, the bank loans you this money. Because of the utility value, stocks have no utility. Rents do or real estate does. You're collecting the rents or you're taking the renter's money. The renter is paying off your loan.
Mark Prather:
So, if the renter pays off your loan, didn't this become free money to you? Yes. This is the key reason why real estate blows away every other asset class. Where else are you going to get this level of free money? Real estate investments, you can get properties, where 75 or even 80% of the purchase is free. It's free money, because you have a renter paying you to pay off the loan that you've secured. This is why you can grow your wealth at a speed that no other asset class can come close to. We'll get into that a little bit more as we advance.
Mark Prather:
As I said, in this journey, the first thing to understand is this false belief about saving money is the only way to become financially secure. It is not. Saving money is a losing way with inflation. If you own a home already, you've experienced this where you buy a home at a certain price. As the years go by, it gradually goes up. You have a mortgage. The mortgage goes down. So, we're creating what they call equity, but it's really, we're creating wealth growth. But the next thing is to understand is, "How do we use this wealth growth? How do we turn it into serious non-employment income?"
Mark Prather:
The dynamics to real estate and wealth growth is very comprehensive. We're going to go through this in our next class about understanding these financial dynamics about wealth growth through real estate. So, we're going to go through all of that. And then as we go through this course on this wealth growth, you'll understand the mechanics. I want you to look at it this way, it's like the motor in a car. I know we all want to make life easy. We say, "Look, I want to go from A to B, from location A to location B. Just give me the keys." Go get in the car. You start it up and you get there. Well, when it comes to wealth growth, if location A is broke and location B or destination B is wealthy, there's things to learn. I want you to learn what these are.
Mark Prather:
First, we're going to make you aware of how these wealth growth principles work. And then we need to apply them to your life circumstance, whether you're a renter, whether you're a homeowner, whether you're a high net worth person, or whether you're senior. So, on our next class, we're going to go through what these principles of wealth growth, what I call the science of building wealth. We'll walk through that step by step, and then we'll go into how we apply it to your life circumstance.