The Debt Millionaire
Page 11
lower your risk, give you the best return for the risk you selected, and move
you towards the result you identified in step 1, all in the most efficient manner
possible.
In my previous book The Wealthy Code, I focused more on “Wealth Pairs” and touched
on “Equity Pairs.” In this book, I’m filling in some of the gaps for both of them, but more
specifically the “Equity Pairs.”
The main thing to realize is that the capital structure for Equity Pairs must move you to
right side of the WealthQ and start increasing your net-worth automatically.
Structuring Equity Pairs:
So how do you go about building the framework for Equity Pairs? Here’s a simplified
framework. Let’s discuss each side; the asset side and the capital side separately:
1. Asset Side: Your asset needs to have the following characteristics:
a. You should be able to obtain a loan against it (preferably you should be able to
“encumber it” with a loan). There are ways around it, but this would simplify it. In
simple terms, this means you should be able to find a lender that will lend to you
against this asset. You are not able to “encumber” all assets.
b. The asset must appreciate in value over time. It would be great if it kept up with
inflation, but that is NOT required, since the profit is made on the debt side, as
discussed earlier.
c. The asset must have low volatility in value. You don’t want something that
fluctuates wildly like the stock market. You are looking for assets that are
relatively stable such as real estate.
d. The asset should be income-producing to pay for the debt, even if it’s breakeven
(income covers expenses and loan payments). Being income-producing is highly recommended, but not required, however it makes things so much easier if it is.
e. The asset must allow for long term hold, ten years or more if need be.
2. Capital Side: This money needs to have the following:
a. The money side might have to be divided into debt and equity.
b. The debt must be long term and match with your holding period. If you want to
hold the asset for 20 years, the loan must be a 20-year loan or longer.
c. The debt must have the lowest annual loan constant possible. Refer to my book
The Wealthy Code for an explanation. This is a requirement.
d. The debt must be (preferably) a fixed interest rate for duration of the loan, or at
least for the duration you plan on holding the asset.
e. It is preferred (but not required) that the interest rate on the loan be lower or
equal to the projected appreciation rate of the asset.
f. The amount of debt (loan to value) should be set no higher than an amount
where there is enough cushion to cover any fluctuation in the income. There are
several metrics for this. For advanced investors, mainly, the debt-coverage ratio
should correspond to the standard deviation of the income from the asset. This is
beyond the scope of this book, but the main point of this is that the amount of
debt should be capped so that the risk is manageable.
g. Make sure not to have too much debt against the asset. The remaining capital
should be structured as equity financing. Refer to The Wealthy Code for more
information.
This is your simplest framework for Equity Pairs. This pairing of the financing and the
asset allows you to start automatically moving to the other side of the WealthQ.
Where’s the capital structure “glue” in the above framework? It is in the details, the
questions. For example, when we say “The debt must be long term and match with your
holding period” and “The debt must have the lowest annual loan constant possible” etc.
That’s the glue. That’s the capital structure. It’s embedded in the details of the capital
and the asset side.
Here’s where it gets really interesting. When you combine the Wealth Pair framework
and the Equity Pair framework above, you can have some fascinating things happening in
your portfolio. You move to the “Receiving” side of the WealthQ and you generate
passive income as well. Now you have the best of both worlds.
If you refer back to the WealthQ table, you will realize there is another built in secret
in there. The interest row is for generating income (Wealth Pairs), the inflation row is for
an increase in equity (Equity Pairs), the opportunity cost is for cash efficiency to do more
of both income and net worth, and taxes is similar to opportunity cost!
Table 15: WealthQ Table Showing Income & Growth
This puts you on the “Receiving” side of interest, inflation, opportunity cost and lowers
your taxes.
This, my friend, is what everyone should do!
This is building portfolios that automatically work for you! There’s working hard and
there’s working smart. This is working smart. Take the time to learn and understand the
information this book contains then implement it, and start letting the system work FOR
you!
Step 3: Pick the Right Vehicles That Meet Your Criteria
Once you build the frameworks, you essentially have a checklist. When you select the
assets and the capital that fit your criteria you will have built a Wealth Pair to help you
accomplish the result you selected in step 1. Step 3, picking the assets then becomes
much simpler. There is no more guess work. The vehicle either meets your qualification
for step 2 or it does not. No more random picking of vehicles.
Investing will become a lot more systemized and interesting.
* * *
The key was in building these frameworks (which you have in this book and my
previous book The Wealthy Code). My mentor shared with me all his frameworks, and it
just made my life so much simpler. Little did my mentor know the impact this would have
on people around the country and the world! Many people have told me how much
confidence this has given them to invest safer and smarter.
One of the biggest lessons I learned from all this was that the type of asset almost
didn’t matter, what matters are the characteristics of the asset; does it do what I want it
to do to help me obtain the result I want? Many investors on the other hand “fall in love
with the assets” (as my mentor would say), but my mentor would always joke that
“owning assets is annoying, and those people that say they love them are lying, we just
own them because they move us towards the lifestyle we want.”
I recall walking into his office once and stating “I love real estate” as I grabbed a seat.
I had just purchased my 4th property. Without a flinch, he responded “you love it because
you don’t own enough. Wait until you own twenty properties” he chuckled. He went on to
say “These assets beat having a job, and they help move us toward a better lifestyle, but
we do not love them. We love the results they bring, and that’s why we buy them.”
I would later find out how true that was, but it is all part of the game. The fun part I would find out later is what you do with the free time these assets buy you, and how
SIGNIFICANCE would play a huge part of my life—just as my mentor and Emile had
mentioned. In fact, the quote from Oprah would start coming to life for me; “The key to
realizing a dream is to focus not on success but significance—and then even the small
/>
steps and little victories along your path will take on greater meaning.”
* * *
Debt Millionaires Know the Secret is In the Capital Structure
Hopefully by now, it’s becoming clear that what drives this method of investing is the
Capital Structure. Debt Millionaires know that, and that’s where they focus most of their
time. Putting the right capital structures (called “Optimum Capital Structures”) are core to
The WealthQ Method. In fact, while most investors think they know “deal structuring”,
very few do. For example, many real estate investors will tell you to put on as much debt
as possible when buying a property for long term rental. “If I can obtain a 90% LTV
mortgage, I’ll take it all” is a very familiar belief. That’s really the first sign of trouble.
Debt Millionaires know better. The frameworks they build will dictate how much debt
versus equity to take. These frameworks will allow the investment to move them to the
“Receiving” side of the WealthQ.
This brings us to an important and powerful lesson.
When looking at any investment and putting the capital structure together, there are 3
layers of things to consider.
1. ASSET LEVEL: How does the capital structure affect the risk and return from the
asset? This is the topic of my previous book The Wealthy Code.
2. PORTFOLIO LEVEL: How does the capital structure affect my whole portfolio? For
example, do I have too much debt (debt-to-asset ratio, debt to income ratio, etc.)?
3. ECONOMY LEVEL: How does the capital structure on this one investment move me
to the “Receiving” side of the “Financial System” and how will it be affected by
what’s going on in the economy?
As you can see, every investment plays an important role in all 3 layers. The capital
structure has to take all 3 layers into consideration. The beauty of this is that once the
framework is built, all of these are built into it automatically.
One of the principles of The WealthQ Method is that for every investment (and
its structure) you consider, you should also consider how it affects the 3 layers:
(1) Asset Level
(2) Portfolio Level
(3) Economy Level
Hopefully you now see why the wealthy on the right side of the WealthQ think and do
things very differently, and why they seem to build wealth easier and more automatically
than the rest of the population.
Many investors might purchase one asset and the capital structure for that one asset is
fine, but it skews the whole portfolio towards having more debt. That one transaction
might be the downfall of that portfolio. It’s critical to know how to look at each
transaction in relation to these three layers.
Here’s what the Debt Millionaires end up with:
Table 16: Portfolio Building System
* * *
This information was overwhelming the first time I heard it. I recall taking all these
notes scribbled on loose paper and reviewing them at home, and having long
conversations with my mentor about them.
What eventually dawned on me was the realization my mentor had shared with me the
most important leverage anyone can have—and the one you cannot do without…
And with it, you can build all the wealth you want…
Chapter Summary
· Most people approach investing by picking some investing vehicle first. That’s the
wrong approach. There’s a more systematic way to approach investing.
· Every portfolio must have “income” and “growth” (“cash flow” and “capital gains”).
That is the result you are attaining and considered step 1. In step 2, build a framework
of characteristics you need to accomplish these goals in step 1. The framework to
accomplish “Cash Flow” is called a “Wealth Pair”, and the framework to accomplish
“Capital Gains” is called an “Equity Pair”. These frameworks must also move you to the
“Receiving” side of the WealthQ. Once you have these frameworks, you can filter which
assets (step 3) will help you accomplish the goals. Notice that we worked backwards
into the assets (or vehicles) to help us accomplish your financial goals as opposed to
how most people pick assets, randomly.
· When you combine the information you are learning in this book about the WealthQ
table and the idea of moving to the “Receiving” side, and in combination with this 3-
step approach to building your portfolio, you will start to realize how powerful this can
be. The Capital Structure is where the secret sauce lies and where the “Debt Millionaires” focus on and excel.
Chapter Eleven
The Last & Most Important Leverage
“This is just amazing!” I smiled.
“George, what do you think the greatest asset is?” my mentor asked me as I pondered
all the information I had just learned.
“Not sure. Real estate, stocks, businesses…” I guessed.
“YOU!” he said. “You are the greatest asset. Everyone looks at external things seeking
the greatest asset to invest in, but it is right in front of you every morning as you stare in the mirror. You are the greatest asset! Invest in you because the wealth you are seeking
will be generated from you” he said as he pointed to my brain and my heart.
“You are the greatest asset. Everyone is their greatest asset, but they never seem to
understand that. If they truly understood this, they would invest in that asset more than
any other asset” he said.
“Wow!” I exclaimed. “Another powerful point to ponder.”
I then leaned back in my chair, looked around and noticed all the people around us in
the restaurant.
The waiter wearing white attire is running around from table to table…
The young couple sitting two tables from us…
The older gentleman that just walked through the door looking for someone…
All these people I thought had no idea what just happened in this restaurant. All of
them have no idea that they are their greatest asset. All this knowledge I was gaining
would have changed the trajectory of their lives.
“What are you thinking about George?” my mentor interrupted.
I shared with him my thoughts on how this information could help a lot of people.
“Not exactly” my mentor said. “Most of those people believe they already know all the
information that they need to know. It’s called the ‘I know’ disease. Others that hear this
information never implement it. They allow fear to hold them back. Yet others don’t want
to learn to think, they just want to be told what to do and follow like robots. They will
never make it.”
“In fact the most important leverage of all is the…”
* * *
So far, we discussed the four “forces” we want to work for us and not against us. There
are other “forces” as well which we will not discuss in this book, but there is one that is the most important of all… knowledge.
Knowledge is the most important aspect of the Wealth Equation. No matter how much
you implement the information in this book, without understanding how to THINK about
your finances, you will likely end up no better and perhaps even worse off than where you
are today.
The most important leverage of them all is KNOWLEDGE.
Your “thinking capability” is the
most important leverage you can have. The key is
knowing who you are learning from. Many people learn from others who think like the
middle class or the poor. They learn about being debt-free and the likes. There is nothing
wrong with that, but you need to know that it leads you to different financial results than
what you might be expecting.
It has been proven mathematically that you cannot become wealthy without
understanding and using debt correctly.
Furthermore, besides knowledge, what’s even more important than the knowledge
itself? The passing of that knowledge on to your loved ones. Many people build their
“empires” just to find their loved ones or the 2nd generation spends most or all their
fortune.
The most effective way to transfer your acquired financial knowledge is through the
family bank concept. The family bank concept is a lot more than just money. It’s an
effective way to pass knowledge from one generation to another.
In the beginning of the book, I started with a phrase about being hackers of the game
of finance in order to improve your lifestyle. As I mentioned, this has nothing to do with
illegal activities, it is simply trying to understand the financial system well enough to find shortcuts to make it work for you. You can spend a year or two to find a “hack” and it
would be worth it, because it would help you and your loved ones move ahead. But more
importantly, imagine if you were part of a community that works together and helps each
other move ahead, and they all share their learnings together. That’s a community that
exists today for the goal of living a more fulfilling life by leveraging these financial hacks.
There have been so many hacks learned over the years and this book is simply the
“big picture”, the WealthQ and moving to the “Receiving” side of the WealthQ. There are
other “forces” that slow us down such as fees, unexpected deaths, lawsuits, serious
illnesses, etc. Again, as you develop your skills in this game of finance, you will start
loving this field, for this game is real and the results are real money that goes into your
pocket.
You are the GREATEST Asset. Invest in yourself. Invest in gaining the
knowledge that will help you, your greatest asset, generate the wealth YOU