JF1567: Increase Net Worth & Have Your Money Working For You with Mark Willis

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We all want to increase our net worth (usually). Mark is a financial planner and here to talk to us about how he has been able to increase clients net worth by over $500,000,000. One great way he does this is through real estate, and pairs it with whole life insurance. Confused? Me too, until I listened to his explanation in this episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Mark Willis. How are you doing, Mark?

Mark Willis: Good, how are you doing?

Joe Fairless: I am doing well, nice to have you on the show. A little bit about Mark – he is a certified financial planner, and he has written two books, and one of them he just published; you’ve gotta go check it out, it’s called “How to be an Amazon legend and fire your banker.” That is the name of the book, I’m not gonna continue — that would be a really long title. Mark is the owner of Lake Growth Capital Financial Services, which is a financial firm in Chicago. He has increased the net worth of his clients and their families by over 500 million dollars, and you can learn more about his company at LakeGrowth.com.

With that being said, Mark, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Mark Willis: Yeah, sure. I’ll keep it brief. I listened to Dave Ramsey all too well as a young adult growing up, getting out of college. I came away from that experience with six figures of student loan debt and no plan to pay it off in the middle of the Great Recession, looking for work.

Joe Fairless: Oh, wow.

Mark Willis: So does that sound like a great start, or what?! [laughs]

Joe Fairless: Yeah…

Mark Willis: Soon after we moved to Chicago – not the least expensive city in the world – and just was cranking at trying to do as many different income streams as possible. All of my training taught me that mutual funds, mainstream financial investments were the pathway to financial freedom, including of course Dave Ramsey. If he says it, it must be true. So we were plowing all of our money towards student loan debt, until we found out there were better ways to do it.

I guess that’s a short enough background… I ended up getting some state licenses, I got my certified financial planner designation, opened up our practice here, Lake Growth Financial Services, and I’ve been having just a ton of fun ever since.

Joe Fairless: What were the better ways that you found out that you should do it?

Mark Willis: Oh, man… Well, first of all, the traditional retirement planning system or industry in this country seems to have a very clear picture of where we all should be putting our money, which is in their pocket, right? So every dollar I put into investments, and mutual funds… Well, you have to keep in mind, I’m a post-recession planner, so every dollar I was putting into my investments were going down, down, down. Meanwhile, the student loans were requiring that giant mortgage payment, essentially. So we had to find something that wasn’t tied to Wall-Street, something that put money back in our pocket rather than taking it out of our pocket every month… Something that would grow predictably for us.

That really is what spurred us on to find other financial products and vehicles that more closely aligned with what we were trying to do and what we were trying to accomplish. And honestly, Joe, it gave me a chance to think critically about what Dave was saying on the radio every day, which is something I just had never really paused to think about. Obviously, your listeners know very well, the benefits of real estate — and of course, there’s drawbacks to real estate as well, but the point is thinking carefully and critically about what you want your money to do for you is probably more important than any product or place you might put your money.

Someone once said “If I had to choose between Tiger Woods golf clubs and Tiger Woods’ golf swing, I’d take the swing, over the clubs”, right? Same with financial vehicles – it doesn’t matter how great that golf club is, you can mess it up if you’ve got a bad swing… Just like any financial product, whether it’s mutual funds, or real estate, or anything else. It comes down to “What is the strategy behind the product?”

Joe Fairless: So what are the top three places where you put money, in order of most money to least?

Mark Willis: Yeah, okay… Well, you look back over the last 2000 years – where do people honestly keep their cash? Well, one, you can go back even further, the pyramids – that’s kind of the first and best case of real estate, right? So the three places people keep their cash are real estate, businesses, and then paper wealth.

We have been taught mostly that paper wealth – 401K’s, mutual funds, IRAs – is the only place to put it, wherein that is the least efficient way to generate financial independence. So the question is, again, what do we really want out of our money? What do we want it to do for us?

The top three places we put our money and our clients’ money – one of my favorite places is in real estate, because it provides so many great tax benefits. Typically, it’s non-correlated to the stock market, it gives you money in your pocket at the end of each month, rather than taking money out of your pocket every month… But even that can’t stand on its own. You really need some various different assets that complement the real estate product. That’s sort of like nitro and glycerin; if you can add the right combination of financial vehicles together, and you can really get some awesome, explosive growth, if you can just put the right products together to create a strategy. Again, it’s not about golf clubs, it’s about the swing. It’s not so much about one real estate, or another business, or another investment, it’s about how do you combine those things together to create a plan to help get you from where you are to where you wanna go.

Joe Fairless: That makes a lot of sense. Just so I make sure I heard you correctly – top three places that you put your money is 1) real estate, 2) businesses, and 3) paper wealth, in that order?

Mark Willis: That’s right.

Joe Fairless: Okay. And now you mentioned it’s more about how to swing the club, not actually having the club, so using that analogy, what are the strategies within each of these three that you employ to do the best you can within each of them?

Mark Willis: Well, there’s probably more there than I can probably answer in a short episode, but…

Joe Fairless: We’ll go with real estate first and we’ll see where we get from there.

Mark Willis: Sure. One of my favorite discoveries in all of this, in my tumbling down the rabbit hole of things that don’t necessarily have to deal with Wall-Street and its kissing cousins, is a combination of real estate and solving the problems that most real estate brings with it. What are the problems that come with real estate? Well, let’s think about it for a minute.

There’s no guarantee that that asset will continue to grow. And when it does grow, historically speaking, over the last 100 years, it’s only been 1% above inflation, according to Robert Shiller. Of course, it’s not free to maintain or buy or sell real estate, and you’ve got this pesky problem of tenants not paying rent, or vacancies in your portfolio.

It’s important to realize that even real estate is only worth what someone’s willing to pay for it when you sell it. Until then, all you have is a Zillow [unintelligible [00:08:49].18] which isn’t worth a whole lot. And there’s really no control over the equity in real estate. So do you have control over the equity in there, or do you have to ask a banker every time you need a HELOC or need some money out of that property. And is that money in the house, or in the condo, or in the apartment complex that you own – is it guaranteed?

If you think about it, when are we most likely gonna need cash? Just kind of stop and think about that for a minute.

Joe Fairless: When they don’t wanna lend us cash.

Mark Willis: Right, yeah. During a crisis, when banks are least likely willing to give it to us, right?

Joe Fairless: Mm-hm.

Mark Willis: When is the price of your real estate likely to be at its lowest? Probably right at the same time, during a crisis.

Joe Fairless: Yup.

Mark Willis: So there’s pros and cons to everything, but one of the most interesting combinations of assets that I’ve ever seen is a mixture  – again, nitro and glycerin, peanut butter and jelly, Thelma & Louise… If you put the right two things together, they do great things. A mixture of all things – of real estate and dividend-paying life insurance. That’s been one of my strategies to work on with clients, that’s provided some blend between the best parts of real estate and the best parts of the business model, which is an insurance contract. If you want, I can go down that path and explain how that works.

Joe Fairless: Sure. Please.

Mark Willis: Okay. So if it’s designed correctly, an insurance contract is literally a unilateral contract between you, the real estate investor, and the insurance company, which is a business. So instead of using Wall-Street’s model, you’re using a business model. And that business model is typically an insurance business – it just so happens they sell life insurance, but it’s a business that’s been profitable every single year for over 100 years.

Imagine if you were an attorney and you were offered partnership with an attorney law firm that’s been around for over 100 years and always posting profits. That’d be an awesome deal to be offered equity share or partner share in that kind of business. That’s sort of what a mutually-owned life insurance company offers. When you purchase one of these contracts, in essence, you become an owner in that 100-year-old mutual life insurance company; you co-own the company, along with all the rest of us policyholders.

This is different than term insurance, which is just about the death benefit; just renting that death benefit. Instead of renting the death benefit, this type of cash value life insurance, Joe, is permanent, and it builds equity, just like when you purchase a home you’re building equity. And that equity is called cash value. The cash value is the money you can use for everything; not just your personal needs, but buying real estate, too.

So when you have one of these contracts, the contract guarantees you an annual cash value increase, meaning your equity will guaranteed be more this year than you had last year. On top of that guarantee, they’re throwing you dividends, profits from their profitable business, because you’re an owner… You get a dividend payment on that cash value every single year on top of what they guaranteed you. Before I move on, any questions on anything there so far? Anything that makes sense?

Joe Fairless: I have one of these contracts, so no, I don’t have questions, but please continue. It’s an interesting aspect of what we do.

Mark Willis: Yeah. Most people see it, and they’re like “Life insurance? I don’t need that. And Dave Ramsey says it’s all bad.” Again, this is a contract, it’s a business model. You are buying into a life insurance contract, yes, but the business itself is less important as to what the money is doing inside that contract. So again, once it’s there, you’ve got this big pool of contingency capital. What could you do as a real estate investor with a six-figure, seven-figure pool of opportunity cash? Well, I could come up with a couple ideas; I don’t know about you, Joe… But once it’s in there, you can use it for everything.

You could use it for purchasing a property, or several properties. You could use it to pay the property tax on your building. You could use it to float you when tenants don’t pay rent or there’s vacancies in your property. You could use that cash anytime; there’s no government restrictions, there’s no required minimum distributions, there’s no prohibited transaction, unlike a self-directed IRA or a self-directed 401K. There’s no prohibited transactions, there’s no self-dealing rules. The government can’t put limits on how much you put into one of these contracts, or tell you when you have to take the money out.

In four simple steps, here’s how you can fire your banker and become your own mortgage company to yourself. Step one, open up one of these life insurance contracts and use the equity, the cash value in your policy to purchase some real estate. Because of the kind of contract – and this is maybe the most important part of the whole thing, Joe – if it’s designed correctly… And that’s super-important to keep in mind; if the policy you bought was designed correctly, the cash will continue to grow, even when you borrow that money out.

I’ll say that again – if you took a loan against your cash value, the policy will keep paying you growth and dividends as if you had not touched a dime of it.

Joe Fairless: Yeah, because you have the policy; that doesn’t change. You’re simply borrowing against it, so the original principal that you put in the policy is what you’re making the dividend on.

Mark Willis: Absolutely. If anyone here is familiar with how HELOCs work, your home is gonna appreciate in the neighborhood whether you have a HELOC or not, right? You’re just using your home as a collateral for that cash in the HELOC.

Joe Fairless: Yeah, good analogy.

Mark Willis: Same way to use it with the life insurance contract, if it’s non-direct recognition. So many people think they have one of these policies and it turns out they don’t, because they have what’s known as direct recognition loans. Lots of great mutual life insurance companies out there, but they’re offering direct recognition loans, which lowers the dividend when you borrow against it. If it’s non-direct recognition, you get that sweet, beautiful sensation.

I took a loan a few years ago, my wife and I spent a month in Hawaii. While we were there, we got the dividends, even on the money we had pulled out of our accounts to go to Hawaii. It’s such a cool feeling. It’s like a no-guilt vacation.

So first step – use the cash in the policy to buy your real estate. Two, the policy is gonna keep growing over here, even on the capital you borrowed. Three, you get to decide your own repayment schedule when you wanna repay that loan. A lot of our clients decide to use rent money to help repay that policy loan, so they can free that dollar up in the policy to spend on the next real estate.

And then four, whenever you’re ready, you sell that property and recycle the money back into your policy. Those are the four simple steps to firing your banker.

Joe Fairless: And I know I’m just adding fuel to the fire with you, you’re gonna like this comment – when you die, it just gets the money that your spouse or whoever would receive… If when you die you still have that loan outstanding, it just gets deducted from that total amount, and you still get paid out, which is a nice feeling, because you can always have a loan out there, and  know that when you die, it’ll just take care of itself by being deducted from the sum that your beneficiary would receive.

Mark Willis: Super, super-awesome, Joe. I love it. Yeah. Thinking about that for just a quick minute, just to use some simple numbers, let’s say that your cash value is 200k, and let’s say your death benefit was two million. Let’s say that you took a loan for as much as you could. Let’s just say you could access about $200,000 of that cash value. Typically, they’ll let you have 90% or so.

Just for simple math, let’s say you had a loan of 200k, and you use that 200k to buy a piece of real estate. And then let’s say you got your wings that night, you graduated, you passed away. Now, a lot of folks are like “Well, why the heck would the insurance company do this crazy deal where you’re getting growth on the money even when you borrow against it?” and you just answered it, Joe  – when you pass away, if there’s a loan on the policy, the life insurance company has been off the hook for that loan amount. So  instead of giving your family two million bucks, they’ll take two million and minus out any loan on the policy. So they’d get 1.8 million, and of course, the real estate that you just bought the day before.

Joe Fairless: They get the real estate, too?

Mark Willis: The family gets the real estate, yeah.

Joe Fairless: Oh, right, right. I was like, “Wait a second… Who’s “they”, because I don’t remember?” [laughs]

Mark Willis: Yeah, yeah. That’s the thing, it’s a non-recourse loan on life insurance, and so yeah,  they are the family in this case.

Joe Fairless: Okay, got it. I was following you, I just wanted to make sure I was —

Mark Willis: Yeah, cool.

Joe Fairless: It’s something I’ve done a lot of research on over the last couple years. It seems like black magic, quite frankly, when you hear someone talk about it, but… I had to read multiple books, and I’m in a policy right now and I’m going to see how that goes, and go from there.

Mark Willis: For yourself, Joe, and for many of your listeners, if they’ve also heard it, I’d be happy to share two or three different strategies for how that combination works in these minutes we have here.

Joe Fairless: Yeah, please.

Mark Willis: Alright. I’ll just run through a few of these… These have been just so fun to really think up with my clients over the years. The first would be simple, straightforward, small stuff like homeowners’ insurance, property taxes, HOA specials, repairs and maintenance, the down payment on the property – all of those are just drags on your yield for your  real estate, and if you could use an asset that would grow, even on the capital that you were spending for those regular assessments and expenses, you’re increasing the yield without any additional market risk. You’re overcoming opportunity cost.

In my opinion, using these policies is better even than paying cash directly for real estate, or big purchases. So that’s the simplest, easiest, smallest step to take. The next step would be to pay cash from a policy loan, just straight up be a cash buyer. Using a policy loan, you can get access to this money in about 3-5 days. So when you see a deal you like, request your loan. I had a guy who took a loan for $350,000 and went to cash close on the property, and bought the property as a cash buyer, and got the property, and now the policy itself is still continuing to grow. That increased his ROI as the policy was growing, and the real estate was growing at the same time.

Another option – and I’m just kind of flipping through these…

Joe Fairless: These are loans that you do have to pay an interest rate on, so what’s the typical interest rate that you pay?

Mark Willis: Yeah, the interest rate depends on the insurance company you work with. I’ve seen them upwards of usury rates, or as low as 5% simple interest.

Joe Fairless: What’s a usury rate?

Mark Willis: Oh, usury – it’s kind of a derogatory term for super-high, like with credit cards. I’ve seen 10%, 12% policy loans, compounded… Not fair, I don’t think. Most of the companies I recommend have 5% simple interest, and only compounded annually in arrears. That’s like a mouthful there, Joe; basically, what that means is – rule of thumb, if it took you four years to pay the loan off on your policy, you pay about 1.9% APR.

Joe Fairless: Got it. Okay.

Mark Willis: Quick example, this guy who had the $350,000 loan, with some other deals he was doing, and the rent money he received on that real estate he bought, he was able to get the loan paid back in about five years… He paid a 2.1% APR, which worked out to $38,000 of loan interest. That’s real, actual money that’s a finance charge on the life insurance loan, so why the heck would he do that? Why wouldn’t he just pay cash, and not have to pay interest on his own money? That’s what Dave Ramsey would say, right?

It’s important to remember that the policy was growing more than the loan interest that he was charged. So he paid – I’m just looking at the numbers here on this particular example… He paid $38,000 of loan interest over five years, which is a 2.1% APR on his loan, but his policy grew – without him adding any money to it – over $119,000 at the same time. [laughs] Plus the house was growing in the neighborhood, too.

That gives you a higher yield — even when you think through the loan interest, even when you factor it in… That’s what we call positive arbitrage.

Joe Fairless: When you go to secure one of these — and you call it a whole life insurance? Cash value? What’s the exact term you use for this?

Mark Willis: You know, there’s lots of terms. Unfortunately, too many terms.

Joe Fairless: I know, I know…

Mark Willis: So part of the reason why I went through the extra hoops to being a Bank on Yourself, authorized advisor, Joe, is because there’s so much misinformation out there in the market. I kind of view the Bank on Yourself Authorized Advisor program as kind of the one and only quality standard, so that consumers know “Hey, if I get a policy from a Bank on Yourself Authorized Advisor, I’m gonna get one that’s truly designed correctly, with a non-direct recognition loan, and it’s a dividend-paying whole life policy from a mutual life insurance company, with paid up additions…” I mean, that’s a mouthful; that’s not even the full list there. And if it’s gonna be taxed in retirement or not, and if it’s gonna be limited by the insurance company in terms of how much you can pay in – all that stuff I’ve seen unfortunately with people who thought they had one of these (other people call it a certain thing), it’s been called cashflow banking, it’s been called infinite banking…

Joe Fairless: Got it. Alright, fair enough. So you’ve got the Bank on Yourself term. Okay, I’m with you. So my question is not everyone can get a $100,000 policy, because the insurance company needs to make sure that it’s not overwhelming financially for the person, because it’s not a “one-and-done, you put 100k into it.” You have to feed that on an annual basis… Or am I missing something?

Mark Willis: Great question, Joe. Most of the time, folks are wanting to keep their money somewhere. Your money has to live somewhere. And most of the time, people think they’re gonna need to pack more money away later; so yes, most of our clients are packing more money in every single year. But you know, a good chunk of our clients do single premium contracts. This is where you just take one lump sum, you’ve got some money in a CD that’s just kind of souring, the CD not earning a lot of interest, and you just put the money into a policy, and it gives you all the advantages we’ve described, without having to come up with more cash next year.

Joe Fairless: So if it’s not a single premium policy, then is it called multiple premiums policy?

Mark Willis: Probably, I don’t know. It sounds right.

Joe Fairless: That would be logical…

Mark Willis: Yeah, that makes sense.

Joe Fairless: Got it. Alright, fair enough. Based on your experience as a certified financial planner, what is your best advice ever for real estate investors?

Mark Willis: Wow. Well, we’ve been talking about a cool concept, but of course, we have to do the disclaimer that “Hey, I have no clue what your goals are, what your transitions are, what you’re trying to accomplish…” I’m describing a concept that may or may not even fit your particular situation, so my best advice ever is think more carefully about your function of money than about the label that you put on it. Think more carefully about “What do I want this one dollar here to do for me for the rest of my life?” and think less about whether I can get 5% or 6% rate of return, or “Is this the latest hot stock, or best cryptocurrency?”

Take the labels off the money, and think about “What do I want that money to do for me?” Because where you put your money makes it do different things.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Mark Willis: Ka-boom! Let’s do it.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:24:27].11] to [00:25:52].17]

Joe Fairless: Best ever book you’ve recently read?

Mark Willis: The best book I’ve read recently – Never Split the Difference, Chris Voss. I love it, great book.

Joe Fairless: Best ever transaction you’ve done?

Mark Willis: I think investing in my CFP, probably the best transaction ever. It gave me the biggest, broadest view of how money really works.

Joe Fairless: How much does it cost to be a certified financial planner?

Mark Willis: They take your soul, and then they take about 4k. [laughter]

Joe Fairless: How long does it take to study to become one?

Mark Willis: About three years, I guess. It was a little bit longer than three years for me.

Joe Fairless: And is that because you took three years, or the process takes three years?

Mark Willis: You could technically, if you were doing it full-time as a student, probably get it done in two years. I was working a job, growing my business here, so it took another little bit of time.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Mark Willis: Paying off debt, rather than saving in one of these policies first.

Joe Fairless: Best ever way you like to give back?

Mark Willis: I love the idea of helping people become better versions of themselves. So rather than pouring into someone, I’d love to draw out from them the best parts of themselves.

Joe Fairless: And how can the Best Ever listeners get in touch with you and learn more about what you’ve got going on?

Mark Willis: Check out our podcast, NotYourAverageFinancialPodcast.com, and if you’d like to chat further about some of these strategies – obviously, Joe is very aware of this strategy – I’d love to share some more with you if you’d be open to it. Click on “Book a meeting” on our NotYourAverageFinancialPodcast.com website, and if you mentioned the Best Ever Real Estate Investing Podcast, I’ll be sure to include a free copy of my latest book, compliments of Joe.

Joe Fairless: Awesome. Well, thank you so much, Mark, for being on the show. I am a proponent – clearly, because I’m doing it – of the strategy that you mentioned, and I’m glad that we got to talk about that and went deep into it… As well as your overall approach to investing, both not just in real estate, but also in other vehicles, too. And it’s not just the vehicle, it’s the actual strategies within each, and making sure that that’s the right fit for individual goals.

Thanks so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Mark Willis: Thanks, Joe. Thanks for willing to have me on your show. It’s been a pleasure.

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