By now, you know my paradox. The more I invest in real estate, the less I pay in taxes because of my real estate professional designation. It could be worse. I could not have the designation and not be able to apply passive losses to all sources of my income! It’s a good problem to have. My situation makes me think about the profound impact of the basic tenet of microeconomics. That is, people do things because they are incentivized to do so. In my case, I am incentivized to invest in real estate. Because I have profound tax advantages from investing in real estate, it makes me hyperaware of investments and expenditures that do not have any tax advantage. It’s the reason that I won’t even consider investing in the equity markets. If I’m operating outside of my real estate happy place, there better be tremendous yield potential (ie bitcoin), a benefit beyond just the investment itself (Wealth Formula Banking), or something else compelling. As a car guy, this has put me in a difficult spot. I love cars—especially Italian sports cars. But buying a Ferrari off the lot just makes no economic sense at all. It’s guaranteed to depreciate by no less than 50 percent over the next 20 years. Then, it may or may not start to regain its value. Another option I have considered is focusing on maximally depreciated sports cars—say something from ten or fifteen years ago. At least then I wouldn’t have to worry about losing value as much. What I would really like to do eventually is have a collection of classic cars. I’ve mentioned this before and almost did pull the trigger on my first acquisition a few months back after a perceived near death experience. But the microeconomic incentives once again prevailed. I also realized that I didn’t really have the garage space to park a multiple six figure investment. So…for now, I am still driving my Prius. However, to be clear, I still love the idea of buying nice things that will likely appreciate over time. Nothing you buy from Ikea will ever go up in value. So, why not buy some things that are more expensive that you can enjoy for a lifetime and sell them at a profit someday? Anyway, I will follow my own advice soon enough when it comes to cars. In the meantime, I have found a super cool business that allows you to own a fraction of your favorite classic or rare supercar and trade it via an on-line marketplace. The business is called Rally Rd. and it functions solely as a mobile application. It’s a fascinating business model and one that you may particularly enjoy if you like to combine your hobbies with investing. This week’s Wealth Formula Podcast features an interview with one of its founders, Rob Petrozzo!

Wealth Formula

183: Investing in Collectible Cars!

I am in a financial position that may seem somewhat unusual to you. You see, the IRS rewards me for my real estate investments by taxing me less. If, on the other hand, I keep my income in the bank, or invest it in traditional equities or bonds, the IRS shows me no mercy! Admittedly this is by design. I am a real estate professional. One of the great benefits to that designation is that all of my passive losses flow through my personal tax returns. In other words, all that depreciation and mortgage interest I get by investing in real estate not only builds my net worth, but SAVES me money in the form of tax mitigation. Not a bad deal right? To illustrate the power of these completely legal tax advantages, remember that with bonus depreciation even limited partners often end up with K1 losses of 50-100 percent of invested capital. Those losses add up in a hurry! With that perspective in mind, why would I EVER consider investing in anything that is not tax advantaged? Think about the returns I would need to get in order to simply break even with the tax breaks I’m getting from investing in real estate. The returns would need to be HUGE. I’m not going to get that through Vanguard ETFs! In fact, I truly believe that the only way I can get higher tax equivalent returns on capital is by investing in asymmetric risk type investments. For me, that means a little bit of bitcoin. You may think I am crazy, but I actually don’t even consider investing in bitcoin all that risky. Sure it’s volatile, but I’m pretty darn sure that 5 years down the line anyone who buys bitcoin today will be pretty happy. I’m less sure about all of the alternative coins/tokens. They may have more explosive returns or they may simply go to zero. But bitcoin going to zero?—ain’t going to happen if you ask me. Now I don’t overdo it with my bitcoin portfolio. For one, it’s important to have discipline and value add real estate is my bread and butter. In fact, I bought bitcoin with only about 5 percent of my investable assets this year. Aside from its riskier nature, buying bitcoin does not save me any money! It’s not tax advantaged. So what’s a bitcoin HODLR to do? How about “Buy, borrow, and die”? That’s the mantra of the ultra-wealthy. The idea is that you can borrow against most assets that you own and invest in something else. You don’t get taxed on your loan and you’ve got a way to create liquidity out of an asset that is sitting around waiting to appreciate. If you invest those borrowed funds into real estate, not only do you get the benefit of investing your capital in two places at once, but you also get the tax advantages! You can do this with all kinds of assets. Traditionally, the wealthy have done this with brokerage accounts and other real estate but also with gold and fine art. The good news is that these days you can even do it with bitcoin and that’s what this week’s show is all about. Zac Prince is the founder of a cutting edge company called BlockFi. BlockFi is essentially creating financial products from the cryptocurrency ecosystem including the origination of loans and even savings accounts that pay cryptocurrency in interest. In this week’s Wealth Formula Podcast, Zac tells us all about it and gives us his take on the massive infrastructure that is creeping slowly but surely into the bitcoin ecosystem. Whether or not you buy bitcoin, you are going to want to understand what’s going on in the digital ecosystem because soon it will be part of your every day reality. Don’t miss this show!

179: Buy, Borrow and Die: Bitcoin Style

Have you heard of the 4 percent rule? I’m guessing you have as it seems to be some magical number espoused by traditional financial advisors and bloggers alike. The idea is that you should safely be able to withdraw 4 percent of your portfolio to live on for retirement. Theoretically the 4 percent is based on the idea that, over time, portfolio yield should outperform 4 percent and result in principal preservation. Is it really that simple? Maybe it is. Maybe that’s all you need to do and it will work out for you. As you may have guessed, I’m more than a little skeptical of the rule myself. Why? Well, for one thing, I’m a real estate guy. I like income producing assets with tax benefits that I can see, touch and feel. Admittedly, that’s just my bias. The bigger problem with the 4 percent rule is that it is based on old data. Specifically, the modeling uses data from 1926 to 1976. To me, that’s a little concerning. You see, the underlying assumptions of the 4 percent rule are that most of the most of the portfolio income is produced from dividends and fixed income. What is fixed income? Fixed income comes from bonds of course and bond yields are reflective of interest rates. I don’t need to remind you that we are at historical low interest rate levels now and our president is advocating for negative rates. How does that make you feel about the 4 percent rule now? It makes me very concerned for my high-paid professional colleagues—doctors, lawyers and engineers who are following the 4 percent paradigm like it is religion. While it may work out, it sure doesn’t sound like a risk that I would want to take. We live in unparalleled times. How in the world can we use  hundred year old data to guide us into retirement? No way I’m doing that. But the problem is that most of our colleagues will and all we can do is watch them like an accident ready to happen, hoping they will survive. In the meantime, we need to continue to educate ourselves. Financial education is our best weapon defense against going broke. In line with that, my guest on Wealth Formula Podcast today is an author and educator that I have invited to teach us about the biggest financial sector on earth: the bond market. Without understanding the bond market, you cannot understand the economy. Don’t miss this interview!

178: Fixed Income for Dummies!

There is clearly fear in the heart of investors in the equity markets and real estate alike as talk of trade wars and recessions abound. Meanwhile, I’m investing more in multifamily real estate this year than I ever have. In fact, I’m investing my 80 year old dad’s money in the same offerings—the opportunities everyone sees in Investor Club! So why would I do this? Well, lots of reasons. Here are just a few: 1. I can’t time the market. The podcast echo chamber has been warning of the impending zombie apocalypse for at least 4 years now. Since then, I have been in and out of multiple deals creating permanent wealth. If we do have a recession (which I don’t doubt), does it have to be a blood bath? Remember, the average length between recessions is 5.5 years. If you enter an investment today, you could very well be back at the top of the cycle by the time you are ready to sell. 2. I only invest in quality assets that are in quality markets. What does that mean? Well, I like multifamily real estate located in high growth areas. If there is strong growth in population and in jobs organically today, then there is no reason that demographic trend shouldn’t continue with or without a recession over the long term. That means a lot of people needing to live somewhere and multifamily real estate solves that problem. While it may be the case that my returns slow down for a year or two if rent growth slows, if I invest in quality assets in quality areas, I don’t worry too much about it. I don’t believe I will lose money. 3. What makes me so confident that I won’t lose money? Well, the basic thesis of my investing is to not buy and hope. For those in INVESTOR CLUB, you know that I am a believer in forcing equity through value-add strategies. That means we are dynamically decompressing our own property cap rates and giving ourselves a bigger cushion in the event of any slow-down. We create value from day one and that’s why our multifamily investment returns have averaged 30 percent annualized over the last 6 years—way above proforma's. If a downturn happens, we have a big cushion! 4. I believe in the volume averaging approach. This goes back to the fact that I cannot predict market cycles. I prefer potentially less growth and capital preservation during a recession (real estate) over negative growth or losing money (money in the bank or stock market). As long as I invest in the right deals with the right operators, I just keep deploying capital on a regular basis. The ups and downs of the market cycles will take care of themselves. 5. The longer I’m in the investing game, the more I’m convinced it has more to do with the team than the asset itself. Right now, I have operators that I trust that make it very easy for me to deploy capital and that is the BIGGEST reason I am investing so much in real estate NOW. Even if there is an economic downturn, I’m in a very safe position with an extremely competent team. In fact, we will continue to buy through any potential downturn and follow it all the way back up! Do I sound too optimistic? I would say I’m being realistic. Understand that, although I won’t be surprised to see a downturn in the next 12 months or so, I believe the next decade will be the “roaring 20s”—just like the ITR economics guys told us in a previous podcast. I don’t want to miss any of that! That said, I’m always listening to what economists and other experts have to say. In fact, on this week’s Wealth Formula Podcast, I have a highly respected economist who specializes in multifamily real estate. His name is Ryan Davis and he definitely knows what he’s talking about so make sure to tune in!

176: Should You Invest in Multifamily Real Estate NOW?

Up to 10 percent of my liquid assets are in very risky stuff—specifically digital assets and startups. A lot of people people think I am being irresponsible—particularly because I have a captive audience with whom I have influence. Now if I was shooting at the hip and telling you to put all your money in this stuff, I would understand. But even highly volatile investments (ie. gambling) may have their role in your portfolio. To be clear, every year, I allocate no less than 80 percent of the money I invest into real estate through Investor Club. There are many “wealth advisors” out there who would tell me that’s nuts too—that I would be better with a substantial portfolio of stocks, bonds, and mutual funds. Ain’t gonna happen. One of the great benefits of becoming financially literate is that you get to make your own decisions and feel confident about them. You don’t need someone with a three month long accreditation course to tell you what makes sense. In my opinion, residential real estate isn’t risky if you know what you are doing or invest with someone who does. People have to live somewhere regardless of the Dow Jones Industrial Average. Real estate in the hands of an ambitious immigrant with no money (my dad), ultimately paid for my upper middle-class upbringing and my education through medical school! Why would I consider it risky? The only time my dad got in trouble was when he invested in the stock market. Now, let’s go back to this buying digital currency thing again. You and I know this is seriously risky. But you know what?— a lot of people have gotten very wealthy off this stuff already and it’s still in its early days. So let me ask you this. Say you invested $20K into a variety of cryptocurrency projects today and lost it all. Would that kill you? Alternatively, say your $20K became $2 million—is it worth it for you to at least have a chance of this happening in your lifetime? That’s the kind of analysis you need to do for yourself when considering investments of the asymmetric risk profile variety. Chances are if you are a follower of Wealth Formula Podcast, you are already doing fine. You make a great income and have all the basic things you need to live a happy life. But what if you had exposure to something that could put you in another league of wealth entirely? Would it be worth putting a little capital at risk to make this happen? It is for me and that is why I invest in cryptocurrency. This is not foolish—this is calculated risk. It is the kind of risk that the wealthy take all the time. It’s how millionaires become billionaires and how ordinary people can make money that they never imagined possible. In fact, even the largest, most respected university endowments like Yale and Stanford are getting in the game with small allocations in the digital currency space just to make sure they don’t miss out. And why now? Well—because no one is talking about it. The bull market of 2017 had everyone and their mother investing in cryptocurrencies. Two years later, technology is better and institutional money is starting to get in, but investors don’t seem that interested. That’s exactly why, if you have not gotten exposure to digital assets, now may be the best time to take the leap. The more you read about this stuff, the more excited you will get! To help you understand what is going on with cryptocurrency and whether you should consider getting into the game, I invited Teeka Tiwari back on Wealth Formula Podcast. He’s a former Wall Street guy with serious credibility with institutional investors and family offices. He is also a great teacher so make sure you tune into this week’s show. P.S. To find out EXACTLY why investing in cryptocurrency makes sense NOW, make sure to sign up for Teeka’s upcoming webinar HERE: https://pages.exct.palmbeachgroup.com/page.aspx?QS=773ed3059447707dab10bf1b399f25b36bb74c900e3c63c5873ccff64e36c190&source=x

175: Cryptocurrency and Asymmetric Risk with Teeka Tiwari

Last week I was in Monterrey for car week. While I still drive my Toyota Prius from 2008 that I purchased during my final surgical residency year, I have an appreciation for vintage Italian cars so I attended the annual Concorso Italiano. Those old Ferrari's are beautiful! There was a particularly stunning silver 1973 Ferrari Dino that I couldn’t get out of my mind. There is a guy at my YMCA who drives a Dino (only in Montecito)—he bought it brand new in 1975! I was telling him about the event and, as it turned out, he was there too. “Yeah—but Dino’s are slow,” he said. “If I buy a new car, it’s going to be a Tesla. Those things are crazy fast!” “But Tesla’s have no soul!” I argued. To me we were talking about two different things. He was talking about performance, and I was talking about art. Now, I’m not much of an art guy but I think my love for old Ferrari’s is much more inline with an art critic’s love of Andy Warhol rather then a guy who just wants a fast car. I could care less if that Ferrari is slow. I just want to appreciate it for what it is. It’s a sensory masterpiece. Look at it. Listen to it! Tesla's are silent and damn ugly in my opinion—especially that SUV. It looks like an overgrown Prius. Now why did I go to this car show anyway? Just to torture myself with envy? No… I’ve been thinking about buying my first vintage car. There’s a few I have in mind. I love Ferrari's but a 1967 Lincoln Convertible sounds cool too, and I could throw all my kids and their friends in the back seat (and the rest of the neighborhood as well). A couple years ago, I would have never even considered buying something so “frivolous”. That’s because I never saw it as investment. While it’s true that buying a fancy new car would guarantee a loss of money for the foreseeable future, buying one that has fully depreciated in value and pivoted to become a collectors item is a totally different animal. The new car is what Robert Kiyosaki would call a “doodad”. While a vintage collectible car would be, what I would call, an asset. Sure it doesn’t cash flow but neither does gold. I would rather have a Dino than a few ounces of gold any day! In the world of the affluent, the theme of buying things that you can enjoy today and have as something worth more ten years from now is quite common. I didn’t really notice it until some of my wealthy friends opened my eyes. If you can afford it—it’s a very smart way to live. Just think about the amount you spend on cars, furniture, watches, and wall decorations that are sure to be worth zero some day. What if you could replace all of those with appreciating assets? It’s a very interesting way to live and one that I am really starting to warm up to—that’s not easy for a guy who still drives his 12 year old Prius. Now I get that not everyone can afford to spend $300K on a vintage car or $3 million on a piece of art. But financial technology is really making some of the things that were previously not attainable for most of us into a reality. How about owning an Andy Warhol? Did you know that right now you can invest as little as $25 and own part of a famous Warhol piece? You can even visit the painting at a gallery in New York and enjoy it for yourself. This whole new world of investing is very exciting and my guest on this week’s Wealth Formula Podcast is one of the entrepreneurs who is making it happen. So, if you want your piece of that Warhol or whatever blue chip artist gets you excited, listen to Scott Lynn tell us exactly how to do it.

174: How to Invest in Fine Art with Beer Money!

With the rocky stock market and concern for recession in the air, it is always interesting to go back and reflect on investing behaviors over time. These days, when people are frightened, they don’t invest. Instead, they keep all of their money in the bank. Why? Well, you’ve probably never witnessed a bank failure and lost your money. In fact, unless you've lived through the Great Depression, you’ve seen nothing but bank bailouts and smaller banks being gobbled up by huge banks that are too big to fail! But during the Great Depression, thousands of banks failed and there was no FDIC protection for those who lost their life savings. People living in that period of time experienced banks closing their doors and not allowing them to withdraw funds on a regular basis. As it turns out, as banks turned their backs on people, the life insurance industry provided its policy holders with substantial amounts of liquidity at a time when it was much needed. Cash value life insurance policies saved many families from financial ruin. It is no surprise, therefore, that after World War II the life insurance industry entered a Golden Age. Those living through the Great Depression wanted nothing more than reliable growth and stability. Bank failures and the stock market crashes were fresh in people’s minds making the safe haven of life insurance all the more appealing. It is this sense of steady growth and security that has made Wealth Formula Banking such a major part of my investment strategy. It is a dynamic tool providing tax free growth, the ability to have access to significant asset protected liquidity and an opportunity to provide leverage to all of my cash flow investments (double dipping as I call it). Apart from all of these features, it is simply the safest investment I have. Now don’t get me wrong, the majority of my money is in real estate which, when done properly, can be pretty darn robust in a downturn as well. In fact, part of what makes insurance companies as strong as they are is that they own a lot of the most expensive real estate in the country. The stability of life insurance products makes it incredibly appealing to me. How do I use it? Well, typically people have portfolios of stocks and bonds. In my case, I own almost no stocks. I own real estate instead of stocks. My version of bonds is Wealth Formula Banking. What's funny to me about being such an advocate for Wealth Formula Banking is that, despite the fact that it is a life insurance product, I think of it as an investment tool for when I am living. Until recently, I didn't even think about the death benefit. But recent false health alarms in my life have led me to start considering legacy and the value of the death benefit as well. As investors, we don’t get to see the upside of the death benefit on our own policies obviously. However, there is a way to get exposure to this part of the life insurance benefit—by buying someone else’s life insurance policy. You see, permanent life insurance policies are assets that can be legally sold to someone else. When I first heard about this concept a few years ago, I was amazed that I had never heard about it. As it turns out, it was because only hedge funds, banks, and other institutional players were playing in this market. When I set out to find a way to get exposure to this asset class myself, I was lucky enough to run into a company called ASR that, after significant due diligence, I decided to partner with and they have been part of my team since that time. Tim Wright is a partner at ASR and a wealth of knowledge when it comes to life insurance products and their role throughout history and in your portfolio. If you need some hedging in your portfolio, you are not going to want to miss this week’s episode as I talk to Tim about the different ways to get exposure to life insurance policies as an investment.

173: What Worked During the Great Depression?

A while back, I had a guy on the show who had created an entire business focused on the creation of new Udemy content. Udemy is an app that allows anyone to make a course and publish it for others to buy. Courses are peer reviewed so you get a pretty good idea of what might be worth your time. It’s actually a really good deal. You can cherry pick only highly reviewed courses and buy them for just a few bucks. It’s amazing how cheap learning can be online these days. Because of that, I have developed a rather bad habit of accumulating courses that I never watch. So, this morning, while at the YMCA chugging away on the elliptical, I decided to pick out a course to finally start. I had several options dating back to over six years ago. Most of them were not really that relevant. The archive of courses gave me an interesting glance into my thought patterns over the last few years. I once bought a course on how to buy probate properties. It’s probably fine for someone doing this kind of thing full time, but the idea of sending out letters to executors about buying single family homes and hoping someone responds doesn’t quite make any sense any more. It sounds like a lot of work for relatively modest gains—sort of like wholesaling or flipping houses. I know some of you are probably really good at it but it’s not an easy thing to do and even harder to scale into an eight or nine figure business. Frankly, I have come to realize that the effort required to scale something to eight figures is not any more than what it takes to get to six figures. The only difference is the monetary reward of each endeavor. If you are in the wrong business, you can very easily be highly successful yet struggling to pay your bills. So, if you are just starting out, make sure you focus on something with some real upside. Here’s an example—rather than flip houses, why not flip apartment buildings instead? You can make millions of dollars that way. Don’t think it can be done? Well, that’s how Western Wealth Capital started and now they have over a billion dollars of multifamily real estate under management. Just watch one of our Investor Club presentations and it will blow you away! It took me a while to come into this kind of state of mind—to think only big and to say no to everything else. I used to have a problem that a lot of entrepreneurs have—chasing shiny objects. Not anymore! That’s why you don’t see me at every conference and you don’t see me investing with a million different groups. It’s really not about how much you work. It’s about spending your time doing things that are actually impactful. I have found that the best course of action is to find something that works that is scaleable and keep working on it rather than looking for new projects or partners. I wish I had come to this realization earlier but I’ve never really had a mentor to help me get there quicker. I’m not sure it would help as I have been told that I am uncoachable anyway. That said, I am always happy to share my own experiences and evolving perspectives these days to anyone who will listen. That’s why I do “Ask Buck” shows like the one I recorded for you this week!

172: Ask Buck

Everything was fine until I got up from that recliner and walked down the stairs of my parents home to call it a night. Suddenly something seemed very wrong. It was like I was in a dream. I could not keep a thought and my whole body started to feel very heavy. I made it down stairs and saw my wife getting ready for bed. As I lie down, I felt like I was losing consciousness. “Olivia, call 911. Something is very wrong with me.”, I said. She looked very confused and I told her what was going on. She called 911 and the next thing you know, a couple of horribly out of shape paramedics showed up. My elderly parents also came down the stairs. My mother was terrified and took a bad spill on the stairs as the ambulance loaded me up. As a physician, I was trying to figure out what was going on. I had no chest pain. My vital signs were normal. But I couldn’t stand up, my body was tingling all over, and I had an impending sense of doom. I didn’t know what was wrong, but I knew it couldn’t be good. As the ambulance took me to the University Medical Center (in case I was having a stroke), I felt that there was a very good chance that I was about to die. I was terrified of losing consciousness for fear of never waking up. I started thinking about my wife and kids. Had I set them up properly? Christian and Rod were finalizing a significantly larger life insurance policy for me that was lacking just one thing—my signature! I couldn’t believe it. Had I taken care of that a day earlier, my family would have been set for life. Now I was thinking about what I actually had and wondered if it would be enough. I also started wondering how my wife would ever know about where to find all of our investments. I had not done a good job of keeping her in the loop on the basic stuff. Just imagine my poor wife, Olivia, trying to get into my crypto accounts! What a nightmare. And all that investing and deferred gratitude—was it worth it? Would it really have hurt if I had splurged on that Vintage Ferrari that was up on my bulletin board or that 1967 Lincoln convertible that I passed on for more real estate positions or bitcoin? Indeed, all of those years of hard work coming down to these last few hours—all I could think about was how I didn’t adequately take care of my wife and kids with enough life insurance and cars I didn’t buy. When I got to the hospital, they put me through a myriad of tests. The good news was that they seemed to rule out anything big and bad. I started to feel a little better mentally at that point—maybe I was going to make it after all. Then, after a few hours of tests, I was given three liters of fluid and I started to feel normal again. As it turned out, it was a false alarm. I just had a very bad drug reaction and the fluids seemed to wash it all away. I spent that night in the hospital but fortunately went home with my wife and three little girls the next morning. I felt very grateful for being alive and seeing those little faces again. For the next few days, I was on a bit of a high and grateful for everything around me. And of course, as soon as I could, I signed those life insurance documents and vowed to make Wealth Formula Banking an even more important aspect of my personal portfolio. What would you be thinking about if you were convinced that you were going to die in just a few hours? It can happen to anyone at any age of course. Tyler Jenks, who was on my show a couple of times died suddenly a couple weeks ago. He was on Twitter posting videos just a day or two before that and there was no indication that there was anything wrong with him. And what about all of those people who got killed in the recent mass shootings? No one expected it. It just happened. I was lucky. Not everyone gets to “stress test” their own sudden death. I found that I wasn’t ready for it but I’m getting another chance. Most of us never really think about mortality despite the fact that it remains the only guarantee in life. You may think of it as a depressing topic but I have to say that it is critical that we keep it in mind to live our best lives. To discuss my experience and help us all learn from it, I interviewed Dr. Colleen Crowley for this week’s Wealth Formula Podcast. Make sure to tune in!

171: Sudden Death, Vintage Ferraris and Wealth Formula Banking!

Is this market hot? Are real estate and equity prices too high? Invariably you are hearing this left and right these days. In fact, I can honestly say that I have been hearing that for at least the last three or four years. My initial response to the impending zombie apocalypse was to stop deploying capital. That was a mistake. While those of us listening to Chicken Little sat on cash a few years back, other investors made money hand over fist. So who’s to say that that people sitting on cash three years from now won’t be saying the same thing? It is very difficult to time the market. So, what do you do? If you lose money by not deploying cash and letting inflation eat away at it and if you are worried about deploying capital into an over-heated market, what’s left to do? Of course there are options like building up cash in Wealth Formula Banking that may make sense for cash accumulation that is very conservative. However, another simple concept is to be selective of where you deploy capital! For those of you in Investor Club, you know that I am deploying capital heavily right now. Why? Well, the projects we are doing are not of the “buy and hope” variety. We are buying heavy value add properties and budgeting significantly for capital expenditures. We are not relying on market appreciation to increase the value of properties, we are creating value through forced equity. In doing so, we effectively deleverage ourselves and perpetually de-risk our assets. Am I afraid of an oncoming recession? Not really. A recession is part of the business cycle. We just happen to be in the longest economic expansion in the history of the United States. I fully expect a recession in the next few years. But a recession does not necessarily mean zombie apocalypse. We used to have recessions all the time that people barely noticed. Despite my belief that a recession will happen sooner or later, I am also of the belief that the next decade will be one of prosperity along with a fair amount of inflation. That long-term perspective helps me to focus on the idea of buying high quality assets in good markets and the creation of equity through value add strategies. Even if the economy slows and markets correct a bit, I consider this is a pretty solid approach and superior to sitting on cash that simply erodes in value over time. Now, I should point out that when times are good like they are now, it is also not a bad idea to take some profits off the table. If you were lucky enough to invest in real estate over the last five years, you look like a genius right about now—even if all you did was buy and hope. Selling a business is a pretty good play as well given private equity’s on-going quest to find yield wherever they can. Whether you’re selling a business or real estate, liquidity events can be very exciting. The idea of a big lump of money headed my way always puts a smile on my face. But one of the things you have to think about before it gets to you is how you are going to keep as much of it as you possibly can. If you don’t, the tax man will be happy to take some of that big wad of cash out of your hands. Unfortunately, most people having liquidation events have little knowledge of all of the potential options that they have to defer taxes. In fact, there are multiple strategies to do so and my guest on this week’s Wealth Formula Podcast is here to tell us exactly what they are. Don’t miss it.

At a recent investor conference in Tenafly, NJ, I spoke on the topic of what I call Wealth 2.0. This is my preferred paradigm for investing that can be simplified into the the following equation: Wealth=Leverage(Mass X Velocity) Mass is simply the amount of money that is actually deployed into investments. After all, it doesn’t matter what kind of return you get if you aren’t investing any money in the first place. You’ve got to deploy enough to move the needle. The good news is that mass, like all variables in this equation, can be manipulated by the savvy investor. For example, paying attention to the tax implications of your investments can actually decrease your tax burden and free up more money to invest. Case in point, I have invested a significant sum of money into projects that we have presented through our Investor Club this year. I am estimating that, in addition to creating equity through my investments, I am simultaneously significantly reducing my tax burden for this year—up to 80 percent of all my invested capital should be tax deductible! How is that possible you ask? Well, It’s because I am a real estate professional and can utilize bonus depreciation on all of my real estate investments (even those done passively in syndications). If you navigate the tax law thoughtfully, you will have more money to invest. It’s that simple. Now let’s look at the next variable—velocity. People often talk about a certain cash on cash return when they think about investing. That’s useful, but I prefer to ask the question, “How long before I get my money back?”. You see, 10 percent cash on cash is great but that means that for the first ten years of my investment, I’m just getting my own money back. I prefer investing in opportunities that get me ALL of my invested capital back within 5 years and yet still allow me to keep my equity in the asset. In that case, my cash on cash return is not five or ten percent—it’s infinite! Think about it. If you have all your initial invested capital back in your pocket and still have equity in a deal, its like recycling capital and using the same money in multiple deals. That certainly speeds up the wealth building process—another reason to call this variable velocity! The last variable in our equation may also be one of the more underrated—leverage. Leverage is critical to building wealth. In fact, infinite returns as I have described above, are virtually impossible to attain without the skilled use of leverage. Most people familiar with real estate understand instinctually that leverage is important to making money in real estate. But when you do the math, the numbers can be staggering and explains why so many real estate investor have become so darn wealthy. However, leverage is not just about borrowing money from the bank. Inherently, the word leverage simply implies the use of a tool that amplifies ones efforts. Certainly bank money fits that description but there are many other creative uses of leverage that often go underutilized. For example, what if there was a way to leverage your charitable giving? In other words, what if you could support your cause by donating a certain amount of money that had the simultaneous benefit of amplifying the size of the deduction on your tax returns? Wouldn’t it be great if you could donate $10K but get the benefit of donating 50K on your returns? Believe it or not, there are ways to do things like that. My guest on this week’s Wealth Formula Podcast is in the business of land conservation. It’s something that, in my opinion, is a very important cause that I would support even without the financial benefit. However, there happens to be some pretty significant leveraged benefits to this kind of giving so it’s even more appealing. Suffice it to say, this is an interview that you simply cannot afford to miss!

169: Wealth 2.0: Leverage Your Deductions!

Learning is an electrical function of the brain. When we first start learning something, our brains start developing connections to integrate that information. Over a period of time, those electrical connections become stronger and stronger giving the perception of something becoming second nature. It isn’t until a basic function becomes second nature that you can then start adding layers. For example, a professional baseball player was, at one point, an infant who couldn’t walk. Eventually he went on to develop his athletic prowess to the point where he might even chew tobacco while hitting a hundred mile an hour baseball with a piece of wood. At that point, he doesn’t have to think about how to walk anymore. You see, expertise in things requires depth of experience that allows for complex neural circuitry to form and to make certain, more basic skills, run on autopilot. At that point, you are able to absorb information in multiple dimensions—some conscious and some not. This next level in learning allows us to function at a higher level. So how does this relate to investing? Well, becoming a sophisticated investor requires some of the same layering of information and development of neural circuitry to allow for a more comprehensive approach to personal finance. I’ve talked before about how novice investors are often attracted to the “good from far but far from good” investments. You know—the kind with big front end cash on cash returns that then depreciate to zero in just a few years. Seems obvious to avoid such things but cash on cash is a simple thing to cling on to for novice alternative investors after reading books like Kiyosaki’s Rich Dad Poor Dad. It represents the metaphorical “learning to walk”. Over time, the successful investor starts layering depth and complexity to his investing strategy. He might even start paying attention to the more nuanced lessons in the Kiyosaki books that are often overlooked at first glance. I will admit whole heartedly that there was a time several years ago that I was just “learning to walk”. There is no shame in that. Over time, I just spent so much time thinking about this stuff that I got more sophisticated than most when it comes to thinking about money. That said, I’ve been around for a long enough time to know that five years from now I’ll be a hell of a lot smarter than I currently am! Now, over the last several years, one of the most critical elements of investing that I have learned is to understand the importance of the interplay between deploying capital and taxes. In fact, I would say that taxes play a DOMINANT role in my investing decisions and, for that matter, my life decisions. Earlier, I mentioned that the tax code has not only influenced my investing decisions but actually some life decisions as well. You see, after I left medicine, I had to decide where to focus my time. I was already investing in real estate and enjoyed it so one of my options was to become a full time real estate professional. A real estate professional, defined by the IRS, requires a minimum of 750 hours documented real estate activity per year with no other activity that you spend more time doing. If you meet those criteria, the tax benefits are HUGE. Specifically, all of those passive losses you get from investing in real estate become “activated” making them applicable to any other source of income that you or your spouse (if filing jointly), may earn in a given year. If you don’t understand what I just said, read this paragraph again. It’s huge and it was one of the major reasons that I decided that the best option for me was to become a full time real estate professional. Say you were one of the lucky ones and sold your dental practice for $10 million. What if you then decided to focus the rest of the year on going full time into real estate investing and became designated as a real estate professional? Well, all of that money gained from the liquidity event could theoretically be invested into real estate and, with bonus depreciation applied to offset capital gains, you may not have to pay any taxes at all! That’s not theory. That’s reality and it’s totally legal. I’ve seen it done over and over again. I just wish everyone with a big liquidity event knew that it was an option. Think of how much money you could save if you were in that situation! Of course when I finished surgical training a decade ago, none of this was remotely on my radar. It wasn’t until a couple of years later after following Robert Kiyosaki that I discovered a book that would fundamentally reshape my thinking about taxes. The book, Tax Free Wealth, was written by Robert Kiyosaki’s CPA, Tom Wheelwright. Tom is a genius and has taught me a great deal over the past few years. Now, I’m happy to call him my CPA as well. The more you listen to Tom, the wealthier you will become. So listening to my interview with him on this week’s Wealth Formula Podcast should be a no-brainer.

168: Multidimensional Investing with Tom Wheelwright!

If you can’t explain it, you don’t understand it. Remember that the next time you look across the table at a financial advisor type and feel confused. Ask yourself if you could explain what you were just told to someone else with some level of confidence. If not, start asking questions because the advisor will not expect you to! You see, this is a set-up—a financial ambush so to speak that high paid professionals get caught up in all the time. Let’s say you are a hotshot surgeon coming out of residency and you just signed a contract that’s going to pay you $500K per year. You know nothing about about investing, taxes, or asset protection and suddenly, you have a bunch of new “best friends” who want to help you invest that money and do your taxes. The money manager starts talking about all these buckets and different kinds of risk and yield. He seems to know what he’s talking about but you don’t really get it. Even though you don’t know how those different buckets produce the returns the way the guy said they would, you figure he knows what he’s talking about. After all, he manages money for all the other guys in the practice. Instead of asking a lot of questions that might sound dumb, you decide to just to trust him and give him all your money. After all, like you, he is a “specialist”. Let him do his job! Now, as a Wealth Formula Podcast listener this scenario may sound ridiculous to you, but I can guarantee it happens every year when surgical residents graduate and start making money. Even surgeons with massive egos are fooled into thinking that personal finance is too complicated for them and should be handled by a professional. After all, we have all been brainwashed into believing that by Wall Street. They want you to be afraid. They want you to think that what they do is so complex that you would be down-right irresponsible to take things into your own hands. It’s actually a brilliant marketing play if you think about it. The idea is to weaponize complexity to generate fear. The highly educated, highly paid professional falls for it all the time! Do me a favor, next time you are in a situation like this with a money manager, tax professional or asset protection attorney, start asking them all the questions you can think of even if they seem stupid. After all, if they can’t explain it, they either don’t understand it or they are simply trying to make you feel dumb. None of this stuff is over your head. Furthermore, if you think you are too busy to learn about your own financial matters, you will pay a steep price that you won’t discover until the end of your career when you look at your bank accounts and start wondering why you don’t have more money. I see this all the time with doctors and other highly specialized professionals and its sad—people making hundreds of thousands of dollars per year for decades and winding up with less than a million bucks to retire! I am sympathetic though. The fear of complexity is powerful. I have to admit that I have followed the lead blindly into some things as well. A few years ago, I signed up for a foreign asset protection trust because it seemed like a good idea—and for me it was. The problem was that I didn’t really understand the strategy very well. But the guy who recommended it to me seemed like he knew what he was talking about and was very confident that it was the right thing for me. And to be clear, he is a smart guy. But I always left meetings with him a little confused and frankly embarrassed to ask any more questions. I figured he knew what he was talking about and that he was taking care of me. When it comes to asset protection, that’s pretty dangerous. After all, when push comes to shove, you have to know exactly what your situation is. There is no time to be confused in a knife fight! For better or for worse, I was in some asset protection knife fights over the past year after a business failure. Everything turned out ok but I found significant flaws in the way I was set up. It’s never a good idea to stress test your protective mechanisms in real time but that’s what I did. Since then, I have been on a mission to really understand asset protection at a higher level. I told my CPA Tom Wheelwright what I was trying to do and he recommended I speak with Doug Lodmell—my guest on this week’s Wealth Formula Podcast. Doug is unique in that he is brilliant, practical and a great communicator. If you want to start understanding this stuff and protecting your assets in a practical manner, don’t miss this interview.

167: Are You Ready for an Asset Protection Knife-Fight?

Let me tell you about another one of my failures. A few years ago, I was listening to a well known podcast and I heard about this concept of turning single family houses into elderly care facilities. The idea sounded pretty compelling so I decided to go to the “course” in Phoenix. In fact, I went out there with another entrepreneur buddy of mine. In short, we both got sold on the concept (and I mean sold). The next thing you know, we were dropping five figures on a coaching/mentorship program. Have you ever bought something like this? I bet you have if you think about it. Good marketers know that people respond to fear and greed and this one had elements of both. Now I am not saying that this program that I signed up for was worthless. I did learn a lot and I believe that had things gone another way, I could have had a successful small business on my hands. However, a lot of things got in the way. First of all, I bought a house that was clearly zoned for such conversion, but it was clear that the neighbors were not going to have it. But wait..if you are zoned properly, shouldn’t you be able to do whatever you want to do? Not really—that’s where the theoretical and the real world of local real estate politics collide. In short, the neighbors were making me jump through all sorts of hoops that they knew would be time consuming and expensive. The proposed traffic feasibility study alone would have cost me tens of thousand of dollars. In the end, I asked my business attorney if the neighbors could really stop me and he said, “no, but they can make you wish you had never started”. If you want to know how this thing ended ask me next time you see me. But suffice it to say, this did not end up the way I wanted it to. When all was said and done, I was down over $250K with nothing to show for it. Now, I don’t blame my coach/mentor for this. The service provided was reasonable and had circumstances been different, I might have had a profitable little business. But there was a valuable lesson there. No matter how you cut it, what I was embarking on was an extremely high risk endeavor. I was doing something that really had not been done before in the Chicago suburbs. It involved significant investment into real estate and there were an enormous number of moving parts—many of which were out of my control. For a guy with some highly profitable businesses at the time, did it make sense for me to take this on? In retrospect the answer was clearly no. Even had things turned out ok, the reward simply was not high enough for the risk involved. Understand that I am a serial entrepreneur. I have successfully started multiple businesses with seven and eight figure yearly revenues. But I have also failed on some. That’s why, when it comes to my entrepreneurial activity, I never accept investor money. I am willing to take a lot of risk on my own dime but I’m leaving you out! So, losing money in that venture was not that big of a deal to me. I’ve lost a lot more than that with other efforts. But what bothered me about this one was that the upside was so limited. Why did I think it was worth it? Well, I think I had mistook a business start up for a real estate investment. When you hear about 30 percent cash on cash projects, that sounds pretty good to a real estate investor but it’s not that big of a deal for a business start up. You should expect that kind of return from buying an established business. But for a start-up??? No. That’s enough. For reference, my successful startups have had returns in the 400-500 percent range and have been incredibly scalable. That makes up for the big losers. The best case scenario for this start-up was 30 percent cash on cash, lack of scalability, and a ton of work and responsibility (it’s a big deal taking care of the elderly!) Bottom line, I chalk this experience up as a mistake. Now, don’t get me wrong. I know there have been people doing this successfully but those who are doing it well are not treating this as a passive endeavor and, in my view, could be making a lot more money doing other things with the same level of effort. That’s my opinion based on my experience. However, others have had other experiences and are doing quite well with this. I find that those most successful in this arena are those who really care about what they are doing and don’t see it through the lens of pure profit. Loe Hornbuckle is one of those guys. If you want to explore senior living as something you want to get exposure to, you will want to listen to this week’s Wealth Formula Podcast. I didn’t hold back. I asked Loe hard questions and he did a very good job of answering them.

166: Should You Invest in Assisted Living Facilities?

We recently had a Wealth Formula Network call in which we talked about an offering some members were participating in that I didn’t care for as much. One thing to remember is that smart people can disagree about things without anyone necessarily being wrong. I pointed out some things I avoid when I invest and the topic seemed to garner a lot of interest. So, I decided to share some of the lessons I have learned over the years. After all, the best way to become a good investor is through age and experience. The problem is that age and experience are hard to teach. When I did my first face lift, I thought I was good. But looking back after doing 500, I definitely was not. I had the basics down and got lucky with my results, but it was no where near mastery. When you are a young Turk plowing ahead full of energy, you look at guys a few years older and wonder why they are so cautious until, one day, you learn for yourself—the hard way. When you make a mistake that matters it will stick for ever. The good news is that while mistakes are critical to learning, they don’t always have to be your mistakes. But in order to learn from others mistakes, you have to be humble and receptive. So, let me give you a few investing pearls that have come along with my graying hair. 1) When it comes to investing, it’s not just about the numbers. It is also an over-simplication to say to “invest with people that you know, like and trust.” Of course I truly believe that is a requirement. The problem is that I know, like and trust a lot of people with whom I would never trust my money. Would you trust your grandmother to choose where to invest your life savings? Look for people who you know, like and trust, then judge their competence by looking at what they have already achieved. A track record is important and really is the report card that you need to look at. Don’t be part of someone’s resume building exercise or someone’s multimillion dollar lesson if possible. If someone has a full time job as a software engineer and trying to get you to invest in their $20 million dollar real estate acquisition so they can work toward quitting their job, politely decline and say you might be interested in 5-10 years. 2) Avoid “good from far but far from good investments”. Every species has some kind of physical attribute that make it more likely to reproduce. Think of the peacock with colorful patterned plumage fanned out for display purposes to attract a mate. Investments have similar qualities that are irresistible to investors and deal sponsors know it. Cash-on-cash is probably one of the most attractive features to the novice investor because, on the surface, high cash on cash numbers can be pretty seductive. Everyone loves the idea of replacing their income with passive cash flow asap. Let me ask you this—would you rather get 25 percent cash on cash or 7 percent cash on cash? 25 of course, right? Well, what if the 25 percent depreciated down to zero in 4 years while the 7 percent cash-on-cash investment increased in value by 100 percent? All investment proformas must be considered holistically. As investors, we should be looking at the profit we make from our investments rather than being content with monthly checks that represent our own money being given back to us in small increments. I would suggest looking at investments in terms of annualized returns or internal rate of return instead. In the process of making this calculation, you will need to get an idea of how the investment will be exited. In some cases, you may discover that there is NO EXIT! No exit is not a good thing—tough to get a return of any kind on that. Anyway, I could keep going—in Wealth Formula Network we recently talked about the classic great deal that is highly dependent on one guy—that’s another recipe for disaster. There are lots of patterns of bad investments that you recognize after you’ve been around the block a few times—sort of like PTSD. In fact, I would go as far as to say that the key to becoming a good investor is to quickly identify the bad ones so you can spend time diving deeper on the rest. The good news is that most deals out there are not that great so you should be able to spend an increasing amount of time on good ones as you get better weeding the bad ones out quickly. Anyway, those are just a few pearls. I could go on for a lot longer but I’m sure what I have presented is more than enough for one sitting. That said, when you are ready for more investment advice, make sure to listen to this week’s Wealth Formula Podcast that is focused on investing in those high risk, high reward start-up businesses. Damion Lupo literally wrote a book on this which he calls Unicornomics and you are going to hear all about it on this week’s episode.

165: Gray Hair, Peacocks and Unicornomics

The Wealth Formula - by Buck Joffrey Financial education & entrepreneurship for professionals. Wealth Formula is about you, the overworked but well paid individual looking for a better life. We define wealth as freedom to do what you want with your life. We want you to decide for yourself if you want to work 80 hours per week and not see your children. Your decisions should not be dictated by your golden handcuffs–the need to make lots of money to fund the life that you have created. We want to help you to create other multiple streams of income that do not involve trading more of your time for money. Through a strong foundation of financial education, we advocate the use of entrepreneurship to generate money which, in turn, works for you to create a cycle of perpetual wealth. Visit Us at http://www.wealthformula.com

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