BiggerPockets Real Estate Podcast - Pillars of Wealth by David Greene (Chapter 1)

Episode Date: November 21, 2023

Hear a sneak peek of David Greene's newest book, Pillars of Wealth: How to Make, Save, and Invest Your Money to Achieve Financial Freedom.  Enjoyed the first chapter? Click here to pick up your copy of the book today! Learn more about your ad choices. Visit megaphone.fm/adchoices

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This is the Bigger Pockets podcast and I am your host, David Green. Welcome everybody. We've got a special bonus edition of the Bigger Pockets Real Estate podcast. As always, we're bringing you the knowledge, the how-toes, and the changes to the market that you need to make the best possible decisions to improve your financial position and build the life you've always wanted. On today's show, I'm releasing a chapter of my new book, Pillars of Wealth for free. Yes, that's right. You're going to get to hear the first chapter of Pillars without having to buy it. In this chapter, I'm really going to lay the foundation for the book, primarily why you should be reading it, what you should be changing about your wealth-building strategy. Look, if we're just going to shoot

straight with each other here, you've probably been told that real estate investing is the key to becoming a multimillionaire. And while that is true, it is not the only thing that you need to know about becoming a millionaire. Real estate investing is one-third of the entire process. The other two are not talked about as often playing defense, which is saving your money and actually living by a budget, yes, having discipline, as well as offense, which is the art of making money. They are just as important as investing in real estate because of we're being honest, you need some money to invest. In this chapter, I'm going to talk about the three different ways that we use money. And I'd like you to focus on how money is an actual store of energy, but it's not always the

best one. When you trade your time, your effort, and your labor for money, you need to put that money somewhere it's going to grow, which is why we have this podcast. The holidays are coming up. And you can order pillars now as a gift for yourself or someone you love. If you want to help someone become a multimillionaire, this is the best way to do so. So give yourself the gift of starting 2024 from a place of financial power. Plus, and as an added bonus, all of the other BiggerPockets books are up to 60% off the

BiggerPockets.com slash store website. So head over to BiggerPockets.com slash store for a Black Friday through Cyber Monday on 1127. And as a quick tip for you, remember, the holidays are coming up. Order Pillars now and give it as a gift to yourself or someone you love. If you like someone to be wealthy, I can't think of a better way than giving them the blueprint for how every American can follow the same pattern of getting there, just like I did, as well as the wealthy friends that I know. Start 2024 off from a place of financial power. Plus, all the other BiggerPockets books are up to 60% off the BiggerPockets.com slash store website. Yes, we're giving you up to

60% off all Bigger Pockets books. Head over to BiggerPockets.com slash store for Black Friday through Cyber Monday on 1127. And I know it's Thanksgiving time, but I have an Easter egg in this episode. sure you listen all the way to the end because I'm going to have a discount code for you that you can save even more money off my book. Pillars of wealth how to make, save, and invest your way to financial freedom. Chapter 1. The goal. A cord of three strands is not easily broken. Ecclesiastes 412. Why work to build wealth through real estate? You're reading this book because you want to build wealth. Maybe you don't have any. Maybe you had some and lost it. Maybe you have some but want more.

Does it really matter why? According to Forbes, it does. Anyone who wants to get rich needs to know why they want to get rich. The why is often more important than the how. After all, it's the why that will determine whether a person's motivations really are strong enough to drive them for the years and decades it might take to get rich. As I mentioned earlier, we all have our own motives for wanting to become wealthy.

Some motives are noble, like having the time to do charity work and the money to help those who matter to us. Some are self-centered, like wanting to feel important over others. Your motives matter. They are your fuel, and not all fuel burns the same way or at the same rate. This same Forbes article listed results from the author's book,

The Wealth Elite, a groundbreaking study of the psychology of the super-rich. In-depth interviews were conducted with 45 super-rich individuals, most of whom were self-made entrepreneurs with a net worth of $33 million to $1 billion. On a scale from zero to ten, the interviewees were asked to explain what they associate with money. One. Security. Namely, that I won't have any financial problems unless I make a massive mistake. Two, freedom and independence.

Three, the opportunity to use money for new things, to invest. 4. Being able to afford the finer things in life. 5. Having money is personal confirmation that you got a lot of things right. 6. With a large amount of money, and despite the envy the wealthy are sometimes confronted with, you receive greater recognition and had the opportunity to meet interesting people. In first place, by a wide margin, the interviewees rated freedom and independence as the aspect they most strongly associated with money. Only five interviewees selected a value below seven for this aspect. Thus, it is the desire for freedom and independence, not the pursuit of luxury goods.

That is the most important motivation for most rich people to become rich. Positive motivations like the freedom and independence to do what you want with your life are much stronger than negative ones, like seeking the approval of others. The right motivation also makes sense outside of a discussion about wealth. It's what drove leaders, like the Scottish Knights of Sir William Wallace, revolutionary war hero George Washington, and religious prophets like Jesus and Muhammad. Even fictional characters like Maximus in the movie Gladiator or any comic book superhero for that matter are motivated by positive reasons. There are four foundational reasons to create wealth, freedom, purpose, security, and passion or fun.

Focusing on these reasons will help provide you the right motivation to build wealth through real estate. On the other hand, if you want to make money only to impress others, you'll lose your drive, and the money will stop flowing because you've stopped being motivated. It's simply better to accumulate wealth for the right foundational reasons. Freedom. Freedom is the most important reason. It comes in many forms and shows its value in many ways. Some people say that money is the root of all evil,

but this misunderstanding comes from a misquoted Bible verse. For the love of money is the root of all evil. It means that loving money more than people causes pain and grief. What if you seek wealth, not for itself, but as a value that brings you freedom? There is freedom from pain, specifically the pain that comes with poverty. Money helps you and your loved ones escape into better living situations.

I'll talk about this more later in security. There's also the freedom from feeling stuck, like being able to leave a job you don't like, or worse, a job you despise, or that is physically exhausting. Working a job that doesn't use your talents, abilities, and passions is a terrible way to live, especially when you have stress, anxiety,

and discontentment in the workplace and in life. The freedom to spend, your time where and how you wish requires wealth. Being able to travel, work from remote locations, and have a well-balanced life or blessings. I would be miserable if I were forced back into working in an office or working for others. My abilities to speak, teach, write, and analyze properties are perfect for real estate, and I don't have to be in an office to do this. The teams I lead and relationships I build are much more fulfilling

than simply clocking in and out every day. Financial independence motivates me to do the type of work I love. Purpose. A strong sense of purpose, such as the ability to change your life or someone else's, is important when you're working

toward financial independence. Because money is energy, it's one of the easiest and most flexible ways to impact the lives of those around you. From the Greater Good Science Center at the University of California, Berkeley. Studies have uncovered evidence that humans are biologically wired for generosity. Acting generously activates the same reward pathway that's activated by sex and food,

a correlation that may help to explain why giving and helping feels good. It's impossible to pay attention to someone else's needs when you feel like you're drowning in your own problems. As you grow your wealth, you'll find you not only have more means and resources to help others, but that you also have more skills and knowledge. Why do I say this? Because those who accumulate wealth often are excellent problem solvers or have the desire to bring value to others. It's common to find the most successful folks guiding others and teaching them how to guide others in turn. this cycle helps many people in the beginning of their real estate journey toward wealth,

and then they help others follow their journeys. Security In Abraham Maslow's hierarchy of needs, only our physiological needs for food and water are more important than our security and safety needs. If you don't feel safe, you can't enjoy life. For example, if you live in a day, dangerous neighborhood, it's hard to focus on much else than trying to stay safe. Money provides the opportunity to live easier and happier in a more secure area and opens you

up to think about new opportunities. Wealth provides safety in other ways, like being able to buy health insurance or plenty of food. It allows you to not worry about how to pay your utilities or car payments, and especially not worry about paying your rent or mortgage. The constant fear of losing your home plays a significant role in your well-being. Research published in social science and medicine found that people over age 50 who fell behind on rent were more likely to experience depression. Renters living under the threat of eviction experienced poorer self-reported health outcomes, such as high blood pressure, and people threatened by eviction were more likely to have

alcohol dependence. In short, it's difficult to live a healthy, safe life without a strong sense of financial security. Passion and fun. Passion is what makes life fun. A 2009 study published in psychosomatic medicine revealed that those who experienced higher levels of fun and leisure time had a higher quality of life and better physical health. This is why following your passion is important. when you spend your life working a job you don't like or have no goals in mind or can't see a light at the end of the tunnel, your quality of life is low. Wealth also opens doors to activities that are fun. Beach vacations with zip lining and jet skiing, overseas trips, and sports like golf or marksmanship

are pricey, fun but pricey. So is eating at fine restaurants and living in areas with beautiful weather. Those with wealth have opened doors that lead to a better quality of life. How wealth is measured. Wealth can be objectively defined by determining net worth and cash flow. These are simple ways to measure wealth, but what do these terms really mean? Net worth. This is the most common way to measure wealth. Your net worth is determined by taking the value of all your assets and subtracting the total amount of your liabilities.

This means adding together the value of your assets like real estate, stocks, and capital, and then subtracting the amount of the debts you owe. Assets can be rental properties, your home, your car, your retirement account, and so on. Your debt includes mortgages, your car note, credit card debt, student loan debt, and so on. The following items are the components of net worth.

Asset. Anything you can sell that has a market value that's easy to measure. Liability. Debt you owe, often tied to assets used as security for the debt. Equity. The difference between the market value of your asset and the amount of debt you owe on it. Example. You have a primary residence worth $250,000 with a mortgage balance of $175,000.

That means you have $75,000 of equity in it. This is $75,000 toward your net worth. Tracking your assets and liabilities on a spreadsheet is simple and extremely useful. The following is an example of a portfolio of real estate. Asset. 44 Main Street. Your home. Value, $250,000.

Debt, $175,000. 35, Jones Street, rental. Value, $150,000, debt, $100,000. $416, Pine Street, rental. Value, $75,000. Debt, $50,000. $22, Finnerly Road, rental. Value $300,000, debt, $200,000.

$765 Athens Drive, rental, value, $125,000, debt, $75,000. $965 Stone Road, rental, value, $200,000, debt, $100,000. $20,000, $2,000, $2,000, $2,000, $2,0,000. $2,0,000, $2,0,000. your car, value $10,000. Debt, $5,000. In the example, we can easily determine that the assets total $1,110,000, and the liabilities total $705,000.

This gives a net worth of $405,000, subtracting liabilities from assets. Adding the amount of capital you have in the bank would be all that's needed to complete the In most cases, it's faster, easier, and more efficient to build equity, that is, increase your net worth via real estate by exchanging earlier equity in smaller properties for more equity in bigger deals or more income in different asset classes. As you can see, net worth is simple to measure, especially with the help of a spreadsheet. Tracking the value of your assets and the amount of debt you owe on each asset is useful when combined with measuring cash flow.

The keys to building your net worth are buying appreciating assets, exchanging them for better, bigger assets, tracking your equity growth and its relationship to your net worth, focusing on assets that can be easily exchanged or sold. For example, a business that depends on your involvement is difficult to sell and thus not a true asset. Considering 10 ways to build passive wealth through real estate and how to then capitalize on them.

Explained in Chapter 12. All right. Here's that Easter egg I promised you. Just like the defense pillar and saving more of your income, I have a code to get an additional 10% off. Be ready. Use Listen Up at BiggerPockets.com slash store to unlock more savings on your next book order. That's Listen Up, L-I-S-T-E-N-U-P to save an additional 10% on pillars. Don't say I never did anything for you.

Cash flow. Cash flow is the difference between what you make and what you spend. In real estate terms, it's the difference between the income a property produces and the expenses associated with it. If at the end of the month, you have income left over after expenses, then you have a positive cash flow. Spreadsheets are useful to track the cash flow of your properties. Let's take the 22 Fennerly Road rental property as an example. In this example, the rental property produces $2,500 per month, with $2,010 in total expenses for the month. This means a monthly cash flow of $490 for the property, provided all the expenses stay the same and you don't increase the rent.

With your rental properties, you can add rows to track additional cash flow in, total. expenses out and the final amount accumulated. Cash flow is an important metric in measuring wealth because it represents a recurring amount that will more or less be the same every month. This money can be saved or invested. With enough cash flow, you can substitute it for your W to income and quit your job you don't like. If you like your job, you can use cash flow to cover your living expenses and then save

100% of your income. At later stages of the wealth-building cycle, this income can be used to purchase extravagant items like nicer cars, trips, second homes, and jewelry. Building streams of cash flow allows you to stop trading time for money and exit the rat race, a strategy that will become much more clear later in the book. These streams also allow you to earn more income than is typically possible when trade trading time for money, and it increases your rate of savings. Many fundamentals of prudent investing can be learned and developed through acquiring cash-flowing

assets. While real estate investing is the best-known form of cash flow, you can also acquire it through the purchase of certain equities, investments into funds or syndications, and business opportunities, all of which will be covered in more detail later in the book. The keys to building cash flow from real estate are learning to analyze properties from the perspective of the profit cash flow that they may produce. Viewing real estate and other assets as income streams,

as opposed to emotional objects. Comparing one asset class to another and looking for the highest cash-on-cash, COC return, with the highest passive income, explained in passive income below. Learning the fundamentals of being a landlord and property manager in the early stages of your wealth-building journey to keep more of your income. Buying assets with income streams likely to grow each year. Passive income.

Passive income is important to include when determining wealth because it's easy to build a large cash flow or even net worth. but be handcuffed to the assets that build it. Not all assets are created equal. Some will require more of your time, attention, and energy. Oftentimes, assets with the greatest cash flow also require the most work. It doesn't make sense to build your portfolio, the bedrock of your wealth, on a foundation that will prevent you from experiencing the freedom, fun, and security that your wealth is meant to provide.

I use what I call the headache factor to evaluate any potential investment opportunity. For instance, owning Blue Chip stocks is much less of a headache than owning a pool service company that requires your direct involvement and intervention. Even though buying or starting a small business may provide a higher COC return, it comes at a price. The idea in building wealth is to buy investments.

not trade one job for another. The ideal portfolio requires little of your time and attention and performs reliably without your involvement. Earning income through passive assets gives you back your time as you're increasing your wealth, which in turn supports your freedom. You also get agency over where you must be. earning money through assets and investments

doesn't require you to be in any particular location to manage them. This is so different from clocking in to work on site or overseeing a business or franchise. Passive income can be measured by tracking how many hours a week you spend managing your portfolio. As you get older, you want assets that require less of your time and attention. If you find the passive income streams you've built require more than five hours of your time each week,

you don't have passive income or a pure form of wealth. Understanding wealth for more than just its net worth or cash flow means you learn to build a portfolio geared towards passive income, not just massive income. The keys to building passive wealth are looking for more than just the COC return, also considering the world. work, time, and energy involved.

Understanding that higher risk often comes with a higher return, while options with lower returns may come with less risk. Early in your journey when you have less cash flow, focusing on acquiring, appreciating assets that may take more of your time and attention, but will increase in value. You can exchange them later for more passive income projects. To save money,

learning how to be your own property manager. Later, you can hire others to manage your assets to make your passive income streams even more passive. Learning to master leverage, eventually hiring others to manage your properties, allowing you to focus on higher revenue-generating activities. Learning tools like the 1031 like-kind exchange, return on equity, and cash-out refinances

to buy passive income streams later, in your journey. These tools will be covered throughout the book in more detail. The Three Pillars This book is called Pillars of Wealth because financial independence is the result of having these three pillars as your foundation. Defense, offense, and investing.

Defense. The first pillar is defense. In this context, I'm referring to your ability to save, what you've earned, a concept that's simple to understand, but difficult to master. Sound defense also will create a hunger for later offense opportunities. If your goal is to become wealthy, how important is defense? According to a Forbes article, in the mid-1990s, two American researchers, Thomas J. Stanley and William D. Danko surprised America with their book, The Millionaire,

next door, which quickly became a bestseller. They based their book on interviews they'd conducted with 1,000 Americans with an average net wealth of $3.7 million. 50% of the millionaires had paid $399 or less for the most expensive suit they ever purchased, and 75% had never paid more than $599. 50% of the surveyed millionaires had never paid. spent more than $140 on a pair of shoes, and 75% had never spent more than $199. 50% of the millionaires had never in their lives spent more than $235 for a wristwatch,

and 75% had only ever paid less than $1,125. $50% of the millionaires never spent more than $29,000 for a motor vehicle, and 95% had never spent more than $69,000. It was clear that those interviewees weren't interested in showing off or spending their wealth foolishly. Yet the interviewers also found that the average American buyer, not a millionaire, spent 78% of what the typical self-made millionaire did for his or her most expensive motor vehicle. That is not a defensive play.

Those who were interviewed were not motivated by what you might expect. They didn't spend money on glitzy expensive items just because they could. They played defense with their money. Without defense, you can't establish any reliable traction. Making more money only to spend it won't benefit you. To guide you on this journey, repeat this mantra. Every dollar you make is yours to keep.

Offense The second pillar on your journey to wealth is to play offense, which is your ability to earn income. After you've mastered the fundamentals of defense, your next step is to add offense or earn more income to net you more results. It's not just about saving money, defense. You must first earn it and keep on earning it.

And that's offense. One pillar without the other cannot build wealth. To build your wealth, you typically acquire capital, that is, money, and then invest it. Pillar two in this book teaches you how to master offense. Investing Now for the third pillar, intelligent investing. There are many ways to invest your money,

but as Andrew Carnegie said, 90% of all millionaires become so through owning real estate. This is how Barbara Corcoran says real estate investing snowballed her wealth. Buying real estate has made me rich, mostly through necessity, not by design.

I bought my first itty-bitty studio after scraping together a few bucks because I needed to live somewhere anyway. A few years later, the studio doubled in value, giving me enough cash to plunk down 50% on a one-bedroom apartment. That soon rolled into a two-bedroom, then a three-bedroom, and finally landed me in my 10-room penthouse on 5th Avenue in New York City. buying that tiny studio was the most important decision I made because it got me in the game. Corkeran has built a real estate empire and is a regular investor on the TV show Shark Tank. Some of her simple but powerful facts about real estate are.

Scraped together enough of a down payment to get started. Use loans to buy real estate. Real estate appreciates at above-average rates, compared to other investment options. Exchange one property for a bigger and better property. Use the idea of a snowball rolling downhill. The longer you hold real estate, the better it performs. Some people look for creative ways to purchase real estate.

They borrow money from friends or family. They buy properties directly from sellers with no money down. They even use credit cards or short-term, high-rate loans to get started. While it's possible to start investing in real estate this way, it's certainly not advisable. For one, it's obviously risky. More importantly, those who have built sustainable wealth through real estate have done so using the value principles they developed in the workplace and in life. Making and saving money to build your first down payment and eventually using that real estate purchase as the financial reserve, the equity,

you can use to buy more real estate is the only smart way to grow your real estate portfolio safely, consistently, and over time. Those who use the discipline of earning and saving their own capital have an advantage over those who use other people's money. It means more to them. The danger in skipping the pillars. The three pillars. Defense, offense, and investing will give you the foundation for building your real estate wealth the right way.

Wealth easily gained doesn't last long, as Reader's Digest will tell you. Whether they win $500 million or $1 million, about 70% of lotto winners lose or spend all that money in five years or less. Five years is an amazingly short period of time to lose that kind of money. How does it happen? Because most of those who inherit wealth quickly simply aren't prepared to manage it. Those who make their money through fame don't always fare so much better. For example, singer Michael Jackson was over $400 million in debt and close to foreclosure on his Neverland ranch at the time of his death.

Boxer Mike Tyson, who once amassed more than $300 million, later filed for bankruptcy. Rapper M.C. Hammer went from having $30 million to being $13 million in debt. Actor Bert Reynolds, by his own estimation, was worth over $60 million, and he lost it all. Reynolds admitted, I've lost more money than is possible because I just have me. watched it. Were these people not intelligent enough to manage money? That's a hard argument to make when

they all reached the pinnacle of their respective careers. The common thread woven into each story is that they made massive sums of money, but they also led outsized lives and didn't properly manage their fortunes. Being a lottery

winner, sports star, or performer can mean big bucks and no preparation on how to handle big wealth. When compared to the small business owner who learns strong financial fundamentals to keep their business in business, or the corporate employee who climbs the latter by taking on more and higher responsibility over time, it's easy to see how quickly money leaves those who have no preparation, let alone preparation for that kind of wealth. Building your three pillars will not only give you the best chance for success in real estate,

but it also will make it difficult for you not to succeed. Key takeaways. True wealth from real estate, the kind that can be sustained over time, is built on the foundation of three pillars. Defense, offense, and investing. Sustainable wealth takes time to create. Net worth is determined by,

adding the value of all your assets and subtracting the amount of liabilities. Cash flow is defined as the difference between the income a property produces and the expenses associated with it. Not all assets are created equal. Beware the ones that require too much of your time, attention, and energy. Passive income is measured by tracking the number of hours you spend each week managing your portfolio. Be disciplined to earn and protect your wealth and know how to manage it.

Want to keep listening while you're in luck. Pillars of wealth and all BiggerPockets, audiobooks, paperbacks, and ebooks are up to 60% off this Black Friday Cyber Monday sale. Head to BiggerPogs.com slash store and stock up for the rest of the year. Plus, you can use ListenUp for an extra 10% off your order because you're a loyal listener of the podcast, and I love you for that. Hurry, the sale ends on Monday, November 27. Thank you all for listening to the Bigger Pockets Real Estate podcast.

Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K, copywriting is by Calico content, and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.biggerpockets.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own.

Investment in any asset, real estate included, involves risk. So use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose. And remember, past performance is not indicative of future results. Bigger Pocket's LLC disclaims all liability for direct, indirect, consequential, or other damages arising from a reliance on information presented in this podcast.