How Rich People Use Debt To Get Ahead

Since inflation is up and it's really hard to get by on the wages people are currently making. I thought today would be a good day to dive into how investors use financing to build long term wealth, the smart way and maybe not the way that you have heard in your finance classes. Yeah, I think it's probably you know, good to just have some refreshers around good debt and bad debt, right, like, Yeah, those those terms get thrown around a lot, you know, and and I think in its simplest form, you know, debt is actually good. But if you go to like on a Dave Ramsey or Susie Orman or some of these people and they say get out of debt, what they're really talking about is the people that don't understand it. And you know, you're you're call it your W two person. But debt is a powerful leverage compound. It can compound for you, so so bad debt would great example of bad that would be like a new car. You know, let's say one hundred thousand dollar car where you put five grand down, ten grand down, twenty grand down, you pick a number and you finance the other Let's say, you know, let's call it ninety grand and doesn't really even matter what the rate is. What's that car worth? Like, as they always say, when you drive it off the lot, it's worth a lot less. Okay, we know that, Okay, with some rare, rare examples. Most of the time, when you drive a car off a lot brand new, that is what we would call a depreciating asset. Now, if you're going to hold on it for ten years and pay it off and who cares, Like, honestly, who cares. But if you're planning on unrolling this car every two or three years, like a lot of people do, and they upgrade or maybe even a lease, you're always going to be behind the eight ball. That is a depreciating acid. Same thing with a with a you know, brand new TV. The minute you buy that TV, it's worth you're not going to sell it a year later, right, So those are depreciating assets. On the other side of that, appreciating assets would be things that other people pay off for you using debt to put cash flow in your pocket. And so it's a very very different thing to take a look at, right. Yeah, Because you can have a lot of debt, but as long as it's good debt, you're still in a good position. I mean, Ken has a lot of debt. I have a lot of debt, but it's more you know, what's your net worth after the debt, right, And so a car's not adding to your net worth. You know, buying a nice TV is not adding to your net worth. And a lot of people get stuck in this cycle of trying to prove they made it before they made it, and they get stuck in a bad debt cycle. And that is like the number one way to kill your chance of ever being wealthy. And I think probably the easiest way to cut through all this is to say who's paying it off? That's it? Is it you or is it someone else? And if you just draw the line there and say I'm paying off all this debt personally, then you're probably a little bit more financially burdened than others. So in our case, when we're talking about debt, you somebody else is paying it off. They like caveat. I would say that would be your house, right, Like you're paying off your house, But I still think your house is good debt because it's going to appreciate and add to your net worth. You know, I know my parents when they retire, you know, their house is they're almost whole net worth, you know. So I consider that a good form of good debt as long as you have the money to pay it every month. Yeah, that's true, if you know. Again, I'm really speaking more about on the investment side. But they do, these two things do bleed over. But personally, like I have multiple cars, I have boats, I have jet skis. I have zero debt on those, right, I pay all cash for those kinds of I would call them toys and and you know, but when you start to talk about good debt versus bad debt, you know, good debt. Is the the bank is looking at the asset as the collateral, and the bad debt the collateral as you. You know what I well, I want to throw one at you. So student loans good dabt are bad debt? It depends, and so you know, I hate that answer any way, but I'll just tell you why I think it depends. I know plenty of people that go into school and they rack up hundreds of thousands of dollars and they go into an industry where you know, they're you know, the average pay is thirty forty fifty grand I would say that's bad. I also know those same kinds of scenarios where you might rack up that same amount and the starting pay is in the one two hundred, So so I think someone has to do with that, right, Like, you know, look at the end game, like if you're going to spend a bunch of money on education. By the way, this is not about education. This is about the payoff of whatever you're spying, right, it doesn't really matter. You can do an online course, and if the online course is cheap and you start to make a bunch of money, it's a you crushed it. But if it's really expensive and you don't do a deal, then you have it, you know what I mean. So it's not really about a university at all. It's about the cost versus the payoff later. So that's why I say it depends. And so if you spend one hundred grand on education or for your education, and I think that might even be low these days, the real question is is if you pop out and you're an engineer, or you're a doctor, or you're a lawyer, and you're you know, a physician or something, then then I think it could be worth it. But you know, if I also know plenty of situations you know, like nurses and teachers and that are by the way, we need those people probably more than anything. But the payoff sucks, right. Yeah, it really does depend on that, you know. I know back in my day, everybody went to college and you could not even have a major. You could just go and graduate. You could be an english major, you could be a marketing major. I was a teacher that AROI was terrible, you know, So, you know, you really do have to look at that in these times, if you have kids this age or you're this age of is college really a good investment because, as we've talked about in other shows, the debt will hold you back. If you're not making the income, not only the payment, but the debt to income ratio, you're going to have to be able to buy anything or you know, start investing in things. So you really have to pay attention to that. It's not really about the name brand of the school or the university or anything like that. It's literally about the education you get, is it applicable and I make money from it. That's actually how you have to look at everything. It's like a real estate license, you know, you can go through school for that. So yes, it's much much shorter time frame and it's a lot less money. The reality is, though, the payoff, if you're doing it like the dan Neil did it, it's already paid for itself, right, correct, that's the point. Yeah, same thing with your esthetician license already paid for itself. So that's what I'm talking about. Does the degree pay for itself? And that's actually how you have to look at it, right. Yeah, My dad was a journeyman plumber, you know, and that the education, everything that paid it paid it paid for itself. The trade schools oftentimes pay for themselves, like especially on the HVAC and some of those blue collar trades right now are crushing it. People are just crushing it, right, and so that's why the trades are doing extremely well right now. So the question is how many coders, how many graphic artists and you know how many you know, content writers? You know, how are they going to do now in this next generation? And is that a hundred is that one hundred thousand dollars expense? You know, what is it going to be? It's an investment and so that's why I say I am one hundred percent for education. But you also got to look at the bigger pictures. So I would say, go into debt for education if it has a good payoff, for sure, But if it doesn't, I would say no. So let's talk about why investors don't need to start with money, or they don't need to start rich because I, you know, obviously did not use other people's money. I use my own I saved it, and that is an option. But you know, KEN uses a lot of oh PM, other people's money, and that could be in bank loans, private lenders, partnerships. You don't have to necessarily have the whole entire starting amount. That's a good question. I think you got to start with how money works. So so as people work their butts off and they get their paychecks ach or pay per checks if they even still do those anymore, it all goes into the banking system, let's say. And then there's always the life insurance person that pulls some away from you and the wealth manager that you know with the match program and or the pension or the four to one K or whatever it is the RSP for you know if they in Canada, or the superannuation if you're in Australia, whatever it is. You know, everybody's everybody's trying to take a piece of your paycheck. That system, all those things I mentioned. Their business is to use your money to make money. I think that's a really important thing to understand. So as you make money, there's all these industries trying to take a piece of you. Okay, So where does all that go? If it all goes into the bank, then the bank's job is to lend it, right because if they're paying you one, two, three, four percent whatever, you know, that's all debatable. They have to make more. It's a liability to them. It's an expense to the bank. Period. If I'm the bank and you give me one hundred grand and I'm paying you two percent, then I owe you two grand. Period, I have an expense to you. Okay, So I'm going to try to lend out your hundred for more at I'm going to try to make five, six, seven, eight, ten thousand dollars on that, and I'm going to use your money to pay you back the two thousand that I owe you. So that's how it works, and so I think that's why that's what OPM is. So the system is designed where everybody puts their money onto the shelf, the banks, the wealth managers, Wall Street. Let's just put this whole thing. Let's let's put the whole category at Wall Street. So I think this is a wall Street main Street issue. What we try to do on this channel is try to under make you understand that you are main street. Most of us are main street. I'm certainly main street. D Niel's main Street. Everyone I know is main street. Wall Street wants your cash, and a lot of cases they have it in the form of savings or whatever it is, or pensions or insurance or retirement. We already went through all that. So your job is too okay, since I already know this is the system, how do I go borrow from it? You know? And what are the costs and the prices and all that kind of stuff. That is the way it works. So so understanding how money works and understanding how the system works is as important as why you would use oh PM. And then of course, if you can, like if you're going to buy something, let's say a house is I don't know, five hundred grad and you have a you don't have five hundred grad, Well, if you can borrow the through debt and equity. If you can borrow thee hundred grand from you know, friends and family, and then a four hundred from a bank, and and and the the cost of the return from that house is significantly more than that, then you've just made everybody a bunch of money, including yourself. So that's why you don't need money, because you know, you just need a deal. You need something that makes everyone money. And so when you find an actual deal or something that makes money, it's compelling. Now all of a sudden, the banks want to lend against it, investors want to invest in it. I mean, you guys have seen this. You've probably been there, You've probably seen these deals, you probably invested some of them, and maybe you're even the one that creates those things. And so it's important to understand that the deal. You start with the deal because that is the only thing that pays everyone back. So that's what the bank's going to look at and lend against. That's what the investor is going to invest into, and then they look at you as the team or the team that you might have to be able to pull all that off. So you can save all you want and try to do that on your own. It's just gonna be a lot fat and a lot slower and more methodical, and it'll take a longer time and it'll take longer time. And to be honest, that's kind of what Daniel does, Like you know, at this point she hasn't really done oh PM. I mean she has in the form of debt. I've in the form of debt, like I've learned to leverage the bank more. And I think that's what a lot of our listeners too, would relate to, is that, you know, if you only put ten percent down on a house, you really are using other people's money the banks for the ninety percent. Where on my first condo that I bought, I basically paid like ninety percent cash and then leveraged ten percent debt, where if I would have done it differently and bought more when homes were cheaper, my net worth would be higher. Now. I just didn't understand that. And so I think a lot of people, you know, they think they need twenty percent down on a home or more, when really they need to be leveraging that bank loan more if they can afford to do so. And let's chat about the role of inflation in real estate because the only you know, the reason it works is because when you're like leveraging other people's money, or you're leveraging a bank, you also have inflation and asset inflation going on at the same time. Right, So so let's take a look at the inflation rate today. Three percent. Okay. Now we're gonna make some assumptions here. Let's assume that whatever you buy today is going to be three percent more in a year, right, Okay, I mean that's essentially what an inflation rate means. Right. So now it may may or may not be. It might be actually lower, it might be actually higher. But the point is we have to use something. We have to make some kind of hypothetical. So we're gon we're gonna use three percent. If you buy a home at three percent, I'm sorry. If you buy a home at five hundred grand and the inflation rate is three percent, that means that that home has inflated three percent. Fifteen grand. Yeah, that's what that means. Okay. Now, if you've only put down twenty percent of that five hundred grand, let's say you put down one hundred that means that you've actually borrowed the four hundred grand, and that's also made three percent. So your one hundred grand has made three percent, but the four hundred grand that wasn't yours was also gone up three percent, so you know, that's twelve So you know, so you your one hundred grand went up by three grand, but the four hundred grand that you got from a bank went up twelve grand. So you actually, this is kind of the point. And then if you do it correctly and you have a renter in there, the renter pays all the mortgage payments and the costs and everything, and hopefully you're cash flowing as well. But if it's just you, that's how that works. And so inflation drives up hard assets, right, but. Then it also compounds, right, so like the next year, you know, your place went up fifteen grand, but then it exponentially goes up more because what inflates also goes up three percent. Yeah, so next year, now you're at five hundred and fifteen, right, and then it's three percent of that, which this course is more than than fifteen grand. Right, So so that's what compound means. And so you know, now, as we know, we've seen inflation under three and we've seen inflation as high as nine just in the last few years. But asset inflation in the last five years has been fifty percent of. Right, right, So that's that's kind of the point. And so when you use o PM, you're also benefiting from the you know, some people will call it appreciation, you know, but appreciation is part of that is literally inflation, but it also can be what I would call forced appreciation, which is another huge benefit. And forced appreciation means like what Danil did when she bought her first place. It needs a lot of work, right, so she put I don't know fifteen twenty grand into it and it was worth of forty called forty It was a double, right, She spent twenty let's say, and it was worth forty more. Right, A renovated house in that market was worth forty more. And so she made twenty grand on her twenty grand. If she would have sold right away, which she didn't, thankfully, she held it and kept it and was renting it, and it's cash flowing like crazy. That's kind of the point. So you could that's that's called forced appreciation or forced equity. That's different than inflation. But then again, if now in her case, where that house was up forty grand and she spent twenty grand doing it. Now she's also getting three percent on that forty So it's just it's exponential and its compounds. But the one of the things is that we have in the US that I don't know if they have anywhere else in the world. If they do, it's not very many places. Is we have true fixed thirty or debt. So you know, that is how you benefit from the inflation because if you get a home for five hundred grand at six percent and then it appreciate, it's over all this time and inflation goes up, let's just say three percent a year, even though it's been more in ten years, you're making thirty percent more income just based on or probably more, but just based on the same exact job. From that three percent increase a year. Your payment is still the same. Your rents go up, you know, over time with inflation, your payment stays the same. And that is the main way people are getting wealthy through real estate, and why they're getting wealthy is it has a lot to do with that fixed year thirty year debt. It's a big deal. Yeah, Like we were in dinner last night with four Canadians that friends of mine that I did some deals with years ago, and they're in town playing golf, and Daniel got into a fascinating conversation with one of the guys on this issue. Yeah, because you know their debt, their fixed rate debt, it's not really fixed. It resets every five years to the market rate, but it's considered fixed rate because you stay the same averages blow or above what the debt. You're what the rate is, right, And so he could not believe that. I told him I have a two point six percent rate on one of my properties, and he goes, yeah, but like not like fixed. I'm like, yeah, fixed. He's like, but not for thirty years. I'm like, yeah, fixed for thirty years. Because I was trying to explain to him why sellers aren't really in a bad spot in the US and they're not urgently selling. We're in Canada. It's a little bit different because their rates are resetting, so they're you know, crunched on income as well, but then their rates are resetting, so their home prices, their mortgages are going up. So it's very different and that's a huge benefit to the US real estate market. So think about up there. You buy something and you have a mortgage payment for five years, it could go up in year six or could go down. But in this case they were saying it's going up. Yeah. So and of course now you're back to this wage growth and all that kind of stuff. And my friend Bruce said, well, we are, you know, because we did a whole thing on Canada. The price of homes is in the sevens on the in the nation right average. We are, yeah, we're we are three hundred thousand dollars less than them on their average price. Yeah, imagine that, guys. Yeah, they think our price is a steal. They could not believe that you could get a starter home in the Phoenix area for five hundred and fifty thousand. Yeah, they fell over and share of less then. And but you know, you tell people here that they're like, oh my god, that's so much money, But Canadians, that's like a steal. I just want to remind you one thing today, what did you pay for your first house? Much? Two hundred and thirty grand? Say that again? Two hundred there are right right right? And what's that thing worth today? Over five? Well? There you go, so I got a rich one over here. Well, but but the thing is, though, is it's a real thing, you know, like you have to take advantage of that. You know, it's all about taking advantages of our laws and how our structure is set up. One of the biggest things is a thirty rate fixed more year thirty year. Yeah, yeah, you're right, and I think that's that's something that we don't actually pat ourselves on the back from a US standpoint enough. We take it for granted we do because that is not normal guys. And so there's you know, well we're always bitching loan. You're where you're inside the fish bowl. You know, you don't realize that the water you're in right like so, and it's it's actually not so bad. So let's talk about how real estate protects in a down market, unlike stocks or maybe even crypto so, you know, like real estate value. So when you own real estate, the biggest thing is for protecting your cash flow. Right, it doesn't matter the value of the real estate. And that's hard to wrap your head around if you're not invested in real estate, because it's every buyer's biggest fear is that they buy something and then the price goes down. But at the end of the day, as long as the rent is staying close to the same and you are cash flowing, you can withhold that store, right, which is a lot harder in like a stock market or a crypto market when it crashes. Well, there's there's a bunch of variables I think that you have with real estate that you don't when you buy a stock you think of the control you have, really, I mean, the only control you have is selling or buy right. That's it. And with real estate you do have more levers. I think that's the important piece, right. So if the market is becoming really competitive, then there are things on the manastra side that you can do to try to keep your tenet there long term, right, and to mitigate your cash for long term, and you can kind of weather the storm. There are things that you can do on the expense side. There are things that you can do on the other income side. There are things that you can do on the occupancy side, and in the worst scenario where you have a move out, there are things that you can do temporarily to attract somebody in there, to kind of hedge up whatever you might need so you have a tremendous amount of flexibility and more control. I believe, although you have to know how to do it, you have to understand that that is really literally the purpose of this channel is that you have to understand what are what are the things that I can do to mitigate my risk in the future as markets change, and they will change. That is the most important thing. And I think you just don't have that. You know, I know a lot of people that wake up in the morning and look at how a stock's done or how our bigcoin's done. Are you know, and you know, we have friends that are obsessively just grind away on, you know, the the price of crypto and the price of bitcoin and all that kind of stuff. And that's okay, but but man, you know, I would be very very careful with having all my eggs in one basket, right. So I'm not against crypto or bitcoin. We have something. But the point is, you know, you need to be well diversified. And all these things are moving at different paces, but on the specific land of real estate side, you know, like I'll give you an example. As rates started to go up, you know, this is twenty twenty two, inflation shot up and then the FED started raising prices. Ross and I looked at a couple of deals and we're like, oh, like, you know, we have these loans maturing here in the next year. Right, So again things move slow. There's two FED meetings in the next sixty days. There's plenty you can do now, and based on where you things might be going. So what we did is we did what was called a cash in REFI. And everyoney's like, what is that? Oh, just like a cash out refin. We actually we actually paid money. It was a couple hundred grands all to actually fix our dead and so I wanted to know. I wanted an assurance through whatever was happening next of what my payment was going to be because it cash flowed. So as I had a floating debt on that one, I was like, okay, we better, we better do this. And they were moving fast. So it was a cash in refin. Well, normally you don't buy properties for cash in refies. You usually do them for cash out refise. But in this particular case, and that point of that story is is that you know there are things that you can do that are in your control without selling, and you know, and there's no cash out refines happening right now, guys, you know, not for any time soon. And so in hindsight, look, it's a brilliant move that we did. At the time, we weren't sure, you know, We're like, let's just let's just let's let's let's be assured of the cash flow in this property with this new debt and and then we don't have to think about it later and we can deal with this later. But we just want to make sure cash flows for the long period of time. And thankfully we did that because because prices continue to run or interest rates continue to run, and the real estate market's a little bit in trouble, so that that's what I mean by control. And when you say the real estate markets in trouble, you mean multifamily. Yeah, multiple The values are down and certainly uh income, you know, the amount of rents are flat, and there's concessions and all that kind of stuff, and and expenses are up. So you know, right now we're working on the expense side. Again, that's within our control, which had a huge insurance meaning last week to talk about, you know, how do we mitigate our insurance costs and still comply with the lender, you know, and so there's things that you can do, you know, when you have a bunch of options and you just don't have that in my opinion, uh with with stocks or pitcoin or anything like that, you're just subject to whatever's happening. So let's also talk about building generational wealth, because real estate is a great way to build generational wealth. Part of this is the pass through you know, tax deferred way you can pass on real estate without having your kids paid to taxes on it. Yeah, there's a lot of ways here, the ones that a lot of people will just fixed stick to those. There's the two big ones I would say are the ten thirty one tax pert Exchange, which is an IRS. Ten thirty one is actually the code on IRS, which basically says that you can roll your capital gains forward into another deal. So you just keep rolling that forward through tax. Really you're deferring your tax. That is a really, really, really good way to do it. Another one is to set up trusts. And this is more complex, so I'm not going to get into the details of it, but essentially there's revocable and irrevocable trust and you can you can move assets into those trusts and they grow inside of the trust. And so that is certainly another way to do that. Yep. And so let's kind of wrap up for today. So we learn that not all debt is equal. There's good and bad debt, other people's money. Let you scale without saving up forever. Inflation hurts savers, but it rewards smart buyers. That's a big one, right, Yes, And cash flow makes real estate resilient in downturns. Yeah. All incredibly an incredible list theory. Ken loves the lists I do. Deda loves lists. I really love to do lists every day. What are we going to do today, Let's put it on a list, Let's just schedule. I'm like, I don't want to schedule. Well, our friend's wife has a hair washing calendar. She has a hair washing calendar and I and I said, that's crazy. She goes, I have one too, I just don't show it to you. That is true, as you ladies know, if you only wash your hair every few days, you really got to plan out what days it's going to be clean. I don't know about you, guys, but I've never thought about this before. We'll see you guys next week, all right,