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Joint Venture Property Costs vs Private Loans | What's Going to Cost More? | Simon Zutshi - YouTube
Channel: Simon Zutshi
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i believe if you have a deal that you
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can maybe buy below market value
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you can add value and you can refinance
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to take all of your money out
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then actually really should you be doing
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a joint venture where you're giving away
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50
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of the cash flow and 50 percent of the
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equity even though they've had their
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money back
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i see a lot of investors and a lot of
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them do loans but the majority do
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joint ventures and i think the the
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reason why
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is because people think well hey i've
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got a potential deal here i've exhausted
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my own funds and i'd rather have 50 of
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the deal rather than having nothing and
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so i completely get that and sometimes a
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joint venture is the right thing to do
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not just for the money but also
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sometimes the experience and knowledge
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that other person might bring to the
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table um so there are lots of great
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reasons for doing um jv's and it kind of
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makes a lot of sense
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or does it from a financial point of
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view um
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and and
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as i said sometimes there are reasons
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why you should not
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do
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joint ventures let me say that again
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sometimes you should not be doing joint
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ventures so for example
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i believe if you have a deal that you
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can maybe buy below market value you can
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add value and you can refinance to take
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all of your money out then actually
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really should you be doing a joint
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venture where you're giving away
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50 percent of the cash flow and 50 of
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the equity even though they've had their
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money back so that's going to cost you a
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huge amount of money
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and i think the problem is most
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investors they start by doing joint
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ventures because maybe they know they
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don't quite believe
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that people would lend the money or
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maybe they don't think they know anyone
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who's got money and so they think they
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have to give more and they think well by
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giving half of the profits and by giving
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half of the equity um i'll find more
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people who i can do deals with and if
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it's a good deal there are definitely
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people who will come in and work with
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you on that basis and i think investors
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get used to doing that and they get a
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bit lazy um
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in our minds i think it feels like more
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work
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to go and get a private lender because
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after all well they're only getting a
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percentage interest are they really
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going to be happy with that and some
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people you speak to they're not happy
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with that they want to get a slice of
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the cake they want a piece of the equity
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but they need to understand that there
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is an element of risk as well and
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they're taking some of the risk on if
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they're doing a joint venture whereas
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alone there's always a risk when
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anything but theoretically it's less
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risk than a joint venture so what i want
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to do is demonstrate to you
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just how much a joint venture could cost
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you now please please listen to what i'm
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saying in the joint ventures can be
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great in many circumstances and i think
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it's worth doing a few just to
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understand that but i think a natural
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progression is from joint venture on to
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private loan and i just want you to
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realize just how much a joint venture
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might actually be costing you so let's
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make up a theoretical example you could
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fill in the numbers in your workbook
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here let's say you buy a property below
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market value for a hundred and sixty
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thousand pounds let's say a hundred
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fifty thousand sorry and then you're
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going to spend
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sixty thousand pounds turning into a
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six-bed licensed hmo i think that's on
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the on the light side but let's say
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you've got some good contacts and it's
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pretty good you're just you're not doing
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too much to it but you're turning it
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into this six bed hmo
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and so uh when you've done this work
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let's say the value of this property is
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three hundred thousand pounds okay so
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you've bought below market value you've
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spent 60k on it and you've increased the
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value up to three hundred thousand so
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kind of believable numbers
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now if you were going to refinance that
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property at 70 percent loan to value
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which is i've used that because that's
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often a commercial rate that people use
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you'd get a mortgage of a hundred and so
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210 000 which means you'd get all of
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your money out so you bought for 150 you
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spent 60 so it's cost you 210 you
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increase the value to 300 and you get
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the value on the new higher value you
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get the mortgage on the new higher value
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70 of 300 is 110. so in other words you
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get back all the purchase money the
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deposit the mortgage and all the refurb
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costs so if you were doing a jv with
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someone they'd put the money in
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six to 12 months later you'd give them
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all their money back so they can now go
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into another deal maybe with you or
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somewhere else and that's great you know
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you've got half a property which you
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wouldn't have had maybe if you'd uh
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hadn't had anyone to put the money in
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now let's say this is a good hmo good
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six bed making a thousand pounds a month
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profit so you would share that typically
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with your joint venture partner so they
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would get 500 pounds a month and you
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would get 500 pounds a month
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so they're getting this cash flow and
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also they might get 50 percent of the
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equity so the mortgage the mortgage is
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210
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there the value is uh 300 so the equity
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in this property is 90 000 pounds the
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difference between the mortgage and the
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value so
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ninety thousand split between two that's
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forty five thousand pounds of equity
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that you have each
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so what you're giving to someone
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is
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forty five thousand pounds of instant
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equity
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and six thousand pounds a year of cash
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flow now you're getting that as well and
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i get the argument that you wouldn't
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have had that if they didn't put the
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money in but i just want to be clear of
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how much you're actually giving away
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now in theory the value of that property
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might will go up over time you know
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there's no guarantee that will happen
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but because we live on an island with a
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limited amount of accommodation and an
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increasing population over time the
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value of properties go up so if it's 300
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000 now in 10 years time that property
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could well be worth 600 000 pounds
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so if it's 300 now up to 600 that's an
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extra 300 000 pounds of equity that you
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haven't had to work for it's just
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happened because that's what's happened
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over time as values go up so therefore
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you're going to be giving them away an
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extra 150 000 pounds of equity
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so if you think about it you're giving
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them 45k of equity up front
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then over the time of growth another
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150k so you're giving away
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190
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195 000 pounds of equity in this
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particular example
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and you've given that sixty six thousand
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pounds a year cash flow well over ten
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years at sixty thousand pounds
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so by doing a joint venture
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where you were able to get all the money
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back to someone and then you shared the
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cash flow and the equity growth in this
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example this might have cost you 250 000
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pounds you've given away to someone or
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the equivalent of 25
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000 pounds a year 25 000 pounds of
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profit you've given to someone just
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because you're doing joint ventures
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so if you are doing joint ventures right
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now i hope this is kind of ringing true
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to you and you're going to listen really
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carefully to what i'm going to talk
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about next about raising private finance
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because this is going to save you an
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absolute fortune and if you're new to
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investing and haven't done joint
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ventures yet i don't want to put you off
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joint ventures it might be a great place
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to start but ultimately you want to be
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moving on to doing private loans okay
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it's very costly doing just joint
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ventures okay
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so
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a natural progression for you as you
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become more experiences go from jv's
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into private loans
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so
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let's look at the cost if instead of
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doing that deal we just talked about as
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a joint venture what's the cost of you
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doing it as a loan now let's say you had
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to borrow 110 000 and that's made up of
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the deposit the closing costs um the the
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refurb costs et cetera it might be
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slightly lesser but let's just do it on
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110 000 pounds
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so how much will it cost you if you want
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to buy that money for 12 months and
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theoretically you buy the property you
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do it up you refinance it might take a
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couple of months to that so it should be
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within 12 months but let's say it takes
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you 12 months
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of borrowing this money how much is that
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going to cost you
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well if you were to borrow it
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at twelve percent it would be thirteen
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thousand two hundred and fifty two
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hundred sorry thirteen thousand two
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hundred pounds um at twelve percent now
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i use twelve percent because that's a
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very high interest rate but in the
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property world if you meet people at
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network meetings or people who are in
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property a very common figure that
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people pay is one percent a month i.e 12
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a year so some people pay more than that
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and actually if you have a really good
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deal it might be worth paying more that
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some people pay a lot less than that but
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i just want to help you understand if
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you're speaking to other property
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investors who know about this kind of
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thing that's a kind of return people
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want to get okay
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but if you think about it that's pretty
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much equivalent to your first year of
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profit you're gonna make a thousand
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pounds a month
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twelve thousand pounds uh in a year so
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really it's just a bit more than your
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first year so in other words if you were
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to borrow this money at 12 percent
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um just giving away your first year of
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income
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means after that well you get to keep a
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hundred percent of the equity and a
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hundred percent of the cash flow going
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forward um even at 20 percent now i'm
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not suggesting you borrow at that rate
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be at 22 it would cost you 22 000 pounds
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which basically would be two years of
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cash flow and after that you would have
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the whole thing
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um
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but really you should be borrowing at
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more like a five percent interest rate
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why because if you're boring from
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friends and family or work colleagues
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people who don't understand property if
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you offered them a 10 or 12 percent
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return and this is a mistake i see
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investors make they say okay give you 10
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your family and friends say hang on a
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minute i can only get like 0.1 in the
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bank and yet you telling me you can give
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me ten percent
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and it's almost
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too good to be true
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and if you offer someone too much money
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and they think it's too good to be true
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they will actually walk away saying no
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i'd rather not do it even though you're
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trying to help them and give them a
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great return so please write this down
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first lesson
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do not
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offer people a certain rate what you
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need to do is ask them what rate they
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would like now we've done a lot of
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research on this uh and actually the
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average person i mean it might even be
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slightly less now we got to an average
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figure four to five percent but that was
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when you could probably get one percent
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in the bank now you can get a lot less
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than one percent in the bank i think
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three to four percent
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is a more realistic figure that most
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people would be really happy if they
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could get that incredibly high return
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compared to what they're getting in the
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bank um so
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you know if you are getting it at five
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percent it would cost you uh 5 500
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pounds per year which is
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you know less than half your cash flow
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in the first year so this is why instead
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of giving away half the equity and half
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the cash flow
[687]
learning how to write raise private
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finance is going to save you an absolute
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fortune moving forward uh those of you
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that are more experienced you've done
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joint ventures i want to sit and think
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about
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how much it's costing you to be in that
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joint venture and you know maybe at the
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time it was the right thing to do but i
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wanted to change your thinking moving
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forward there might be a better way so
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how do you go about actually raising
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money the first thing is you need to
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change your thinking about this um
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one of the challenges we're going to
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talk tomorrow about some things that
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block people from moving forward one of
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the challenges i know is where people
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think well if i'm asking for money i'm
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kind of like got my hands out like this
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and i kind of feel a bit bad because i'm
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kind of asking someone for a handout or
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can you give me some money for my for my
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property investment and people worry
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what people think about them and in fact
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i want to all get your hands in front of
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you like this and just imagine what it
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feels like to ask someone for money it's
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not a great feeling
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but actually
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if we just twist things slightly and cup
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your hands together and imagine that in
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front of you your hands are full
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of golden coins gold coins and that gold
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coins are quite heavy and they represent
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the profit that you can make from your
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property investing the cash flow and the
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long-term equity growth
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and instead of going to someone with
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empty hands you're going to someone with
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your hands filling overflowing with gold
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coins you say look
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who do you know
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who do you know who might want to share
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some of my profit
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and so you're giving some profit to
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someone
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and that's interest you're going to pay
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them
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and that's coming from a place of
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opportunity no longer am i coming from a
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place of lack can i have some money it's
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i've got a great opportunity for you to
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get a great return on your money are you
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interested kind of thing in fact you
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never really ask anyone directly if
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they're interested because even if they
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have money no one's going to say oh yeah
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i've got some money what's it for
[804]
because they might feel that you know
[806]
they might feel obligated to you so
[808]
instead of asking people have they got
[810]
money or would you like to lend you say
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who do you know who
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might want to get a great return on
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their money who do you know who might
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want to get a great return on the money
[818]
who do you know who might want to share
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some of the profit from my property
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investing that i'm doing and so it's all
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about knowing how to approach these
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people
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um the best people to approach are
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people around you
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people who already know you and already
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trust you um yes you can go and find
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people at property investor network
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meetings and events like this we've had
[839]
when we have live events and hopefully
[841]
if you're if you're following what we're
[842]
saying if you're doing the networking
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and you people can read your name
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clearly and you're you're in the group
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and you're telling people what you want
[848]
you might attract people here who
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eventually once everyone's done their
[851]
due diligence might want to lend you
[853]
money and work with you okay
[855]
but um
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the problem is those people need to get
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to know you and like you and trust you
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people who are family and friends
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they're far more likely to want to lend
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you because they know that you're
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already a trustworthy person well i'm
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assuming you are a trustworthy person
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obviously
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you need to speak to everybody you know
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and it's important because
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sometimes we make assumptions we might
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say oh that person is not going to have
[878]
any money or that person they're not
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going to want to lend to me
[882]
we we just don't know
[884]
until we ask the person who thought had
[886]
no money maybe they've just inherited
[888]
some money maybe they've just been made
[890]
redundant and got a redundancy maybe
[892]
they just had a divorce or they've got a
[894]
settlement um maybe they've just had an
[896]
accident i've got a big compensation
[898]
claim we've got some money sitting here
[899]
you really don't know
[902]
what people have got in the bank and
[903]
that's because in this country we don't
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really like to talk about it it's kind
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of a bit it's a bit secret really it's
[910]
it's not seen as etiquette to talk about
[911]
what you have so that's why most people
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don't do it
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um
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you don't know
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who might have money in the bank that's
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the point here so don't judge or
[921]
pre-judge anybody
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and if they do have money in the bank
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they are literally losing money hand
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over fist every day because the amount
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of interest they're getting in the bank
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is so small
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it's a lot less than inflation so if
[936]
someone puts some money in the bank at
[937]
the beginning of the year
[939]
and by the end of the year they got a
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tiny tiny tiny amount of interest and
[943]
yet prices have gone up so that money
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they put in the bank at the beginning of
[949]
the year cannot buy as many goods and
[951]
services
[953]
at the end of the year than it could at
[955]
the beginning there because things have
[956]
gone up in price so inflation has eroded
[958]
their money so really you want to be
[961]
making at least an inflation return
[963]
otherwise your pot is going to get
[965]
smaller and smaller the same amount of
[966]
money but less buying power so anyone
[969]
who's got money in the bank right now
[971]
really has a big issue now many people
[973]
are aware of this
[975]
um
[976]
but many people are not because they
[977]
don't know what else to do with the
[978]
money it's just sitting there and you
[980]
might think surely everyone puts it into
[982]
isis or bonds or shares well no they
[984]
don't because again you're assuming that
[986]
people are financially savvy you're
[988]
gonna have someone who's really really
[989]
smart doesn't mean they're financially
[992]
smart because guess what no one ever
[994]
teaches us in school how to manage our
[996]
money how to be financially independent
[998]
maybe they should teach that to us in
[999]
schools but unfortunately they don't
[1002]
um so you can help them
[1005]
while they are helping you
[1007]
and that's the key here comes back to
[1008]
this win-win you want to give them
[1011]
something that they want and in return
[1013]
they'll give you something that you want
[1015]
and you obviously have to be very
[1017]
careful when using other people's money
[1019]
be more careful with other people's
[1021]
money than you are with your own money
[1023]
i've had situation where i've put money
[1025]
into a deal it's gone wrong i've had to
[1028]
take the loss and i've given the person
[1030]
back all their money plus their profit
[1032]
which i think is fair and ethical and
[1034]
i've had to take the loss because if i
[1036]
put it into something that hasn't worked
[1037]
that's my responsibility so you have to
[1039]
be very very careful when using other
[1042]
people's money i do hope you enjoyed
[1044]
watching this video if you enjoyed it i
[1047]
highly recommend some live online
[1049]
training that we're doing all you have
[1051]
to do is click on the link below to get
[1053]
full details and the great thing about
[1055]
live training is obviously we can
[1056]
interact you can ask me questions and we
[1058]
can answer them live in the moment so
[1061]
come and click on that live online
[1063]
training i look forward to you very soon
[1064]
in the meantime i've lined up another
[1066]
video i think you're going to find very
[1068]
useful so investment knowledge investor
[1070]
skill
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