The “L” in IDEAL GROWER stands for Leverage.
When it comes to investing in general and specifically for retirement there is a big debate about the approach one should use to invest.
The media, most companies, and financial institutions lead us to believe that one of the best ways to invest for retirement is using plans, i.e. 401K that defer the payment of taxes into the future and allow us to receive funds from our employers to increase the amount that is being invested.
That part is clear to most people and we are blinded by the employer match and willing to disregard the following aspects:
- The money we put into a 401K plan (or similar plans) does not provide us any cashflow until we are allowed to start drawing from the account (without penalties)
- There is basically no liquidity. If you need any part of the money (dividends or gains or even our own many we put in) you pay hefty penalties
- The development of the money in the plan is out of our control. The funds managers and the market forces dictate if the value of our funds increase to now – we have no control over it
- As the investor, we don’t know the people who manage our money
- As the investor, we don’t know why the managers we trust buy or sell any of the assets in the funds
- As the investor, we can’t influence the costs of the management or the plan
- As investors most of the time we are not part of the negotiations our employers have about the plans or which funds or which providers they go with or if/when they like to change it.
- As investors in most cases, we don’t know the companies that the plans and associated funds invest in, what they do, how they manage, who benefits, etc. We just hope that the value increases
- As investors, we can’t move our money if we don’t agree with external decisions that impact our funds. Recall the creation of tariffs on industries and goods in the last 2 years, many of which massively impacted the companies in these industries and subsequently the stock prices. We saw it, we knew and read about it, we realized that it impacted our plan but we could not do a thing about it.
- We have no influence on changed to the rules. The tax-deferred plans are based on an IRS code. 401K is literally the name of a code in the IRS tax codebook. As we all lived thru in 2017, the government, at any point and without a consensus of a large majority of the public can change that code. If the budget deficits keep increasing it is feasible that we will all have to pay more taxes in the future. We assume we will have a lower rate if the system does not change until we die. In reality, it probably will or have to. Still, we believe that deferring to the future will help us.
- We are told that the tax rate we will fall under in the future will be lower than it is now. Even if the rules/laws would not change, a successful person how has worked and build wealth throughout her life would have much more assets and income in the future than she would have now, so paying the taxes now would actually be better than paying them later when they might be higher.
- We can not use leverage for any of these plans (as far as I know)
In summary, we are falling victim to financial planners who tell us about all these things and make it sound like it is in our best interest to invest in these tax-deferred or other investment plans to have a wonderful life in the future.
Now, if someone outside of the financial planning community came to you, say a friend or colleague and would say the following:
“Could you please help me out. I need some of your money for the next 20-30 years each month. I can’t tell you what I will do with it, and you wouldn’t understand what it is used for. I will try my best but I need to take some of it to pay my bills and my rent, etc., and the rest I will use for something you don’t understand. I promise that there will be a good pile at the end that I will give back to you.”
Would you give it to this friend? – probably not?
Why not” Because it’s gambling.
Strangely enough millions of people in the United States do that every day. When they change jobs they don’t even reflect or consider if it is still in their best interest to hand over money like this, they just accept the new employers’ plan and keep contributing.
Besides these contributions amounting to gambling, they also leave one of the most important aspects out of the picture: Leverage
Leverage is a term in this context that could also be called: Other People’s Money.
Banks make a great living out of this. They collect your deposits in your checking and savings accounts. They give you a tiny bit of interest (if anything these days) and then lend it out to other people as loans and mortgages.
If you want to buy a house you get a mortgage, but it is not really the banks’ money you receive, it is other people’s money that they deposited. When you buy a car and finance it, it’s not the banks’ money, it’s other people’s money they use to help you get the car.
Often, we just accept that one way to get what we want and need is to go into debt. We believe we know what that means, and the media conveniently bundles all forms of other people’s money under the term debt.
Garret Gunderson in his book, “Killing Sacred Cows” writes about debt. He debunks the myth that urges us to “Avoid debt like the plague”. Debt is massively misunderstood.
“In common usage, debt is usually defined as any borrowed money or material resource. This definition of debt creates real problems when combined with the common teaching that we should avoid debt like the plague because we assume that all forms of borrowing are bad.
If we don’t know the correct definition of debt according to business economics, we may be avoiding the very thing that is the most essential to our financial health. Debt is not any form of borrowing. Debt is simply having liabilities of greater value than our assets.
Liabilities are anything that incurs an expense in our lives, now or in the future. They may or may not result in true debt, but they always create an expense, monetarily or otherwise. Some common examples of liabilities include mortgages, car loans, small-business loans, and credit cards. An asset on a balance sheet is anything that results in or can easily be converted to cash flow.
Ultimately, the only way to stay out of debt is to create more value in the world than we consume. This is done by thinking beyond our relatively petty financial concerns to identify and fulfill the wants of others. The net effect of the common advice we hear on debt is the exact opposite of this; the entire focus is on reducing expenses and living in scarcity, rather than on production. But our human life value is the root of our prosperity; we are our own greatest assets. Our material resources and money are the fruits of prosperity, not the root.”
By now you might ask yourself what all if this has to do with leverage?
If you look at the IDEAL GROWER model, the underlying strategy is to find high performing real estate assets that give us cash flow for the invested money while being located in good areas (cat C+ – A).
The reason I am promoting this strategy and offer mentoring programs to follow my lead and benefit from my experience is the fact that it offers a plan to follow.
In most cases the people that follow my mentoring invest in the assets (real estate) by putting 25% of their own money into the asset and get 75% from a bank or mortgage loan provider. Basically using ¾ other people’s money and ¼ our own.
When you invest in a retirement plan as discussed above and let’s say the market is rising each year by 8%, you will have that as the return on your money. (we are leaving compounding out of the equation because it would apply in the same way for the IDEAL GROWER approach or the retirement plan approach)
So let’s compare:
You have $25000 and put that into your retirement plan. The financial planner tells you that the market has performed with 8% per year and you get that for each year in the next 20 years for your money. You don’t add anything, don’t care about inflations, etc. After 20 years you will have a little more than $116500.00, of which $91500 would be gains.
If you compare to real estate as an IDEAL GROWER investment plan, and you only allow 5% per year in gains, you will have a little more than $265000.00 after the same 20 years. More than double. Why? Because you have 75% of other people’s money to work for you. That’s the leverage. You put ¼, others put ¾ but you benefit from the full 100%.
Besides the performance as the income you are making form your real estate investment, you also get tax benefits on the full 100% of the real estate value, as well as theoretical gains from the increase in the value of the property. I say theoretically because you would only realize those gains if you were to sell the property, which would then cut off your cash flow and reduce your retirement income unless you take the proceeds of the sale and invest them again.
Most people acknowledge that real estate investments have 5 income streams that shall be described in another post. Leverage, using other people’s money, to acquire and manage a portfolio of properties makes it so powerful. I am not aware of any other asset you can easily buy that has those benefits and this kind of leverage.
That’s also the reason why I believe everybody should become an IDEAL GROWER. It starts by discussing what your goals should be and by what date you want to achieve how much passive income. Then, creating the plan and following it with discipline will turn investors into economically and financially independent people who have full control of their life and their assets.