Epic Real Estate Investing - Rich People's Secret to Using Debt & Taxes to Build Wealth (Buy, Borrow, Die) | 1356

Episode Date: September 26, 2024

In this eye-opening episode, we dive deep into the financial strategies that the wealthy employ to harness the power of debt and the tax code, revealing how you can apply these techniques to accelerate your own wealth-building journey. Discover how to reframe your perspective on debt, transforming it into a powerful tool for acquiring income-generating assets. We'll explore how to effectively leverage investment properties, multiplying your returns and maximizing your cash flow. Unpack essential concepts such as borrowing against your existing assets to fuel further investments, and learn about cost segregation, a strategy that allows you to optimize depreciation benefits for significant tax savings. We’ll also introduce you to the intriguing 'refi till you die' approach, a long-term strategy that wealthy investors use to maintain liquidity while minimizing tax liability. But that’s not all! We’ll provide you with practical tips on how to mitigate investment risks, ensuring your financial journey is as secure as it is prosperous. Plus, learn how to leverage real estate professional status to offset W-2 income taxes, making your investments work even harder for you. Whether you're a seasoned investor or just starting out, this episode is packed with actionable insights that can help you reshape your financial future. Don’t miss out on these powerful strategies—tune in and start your journey towards wealth today! Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terio Media. Hey, strap in. It's time for the epic real estate investing show. We'll be your guides as we navigate the housing market, the landscape of creative financing strategies, and everything you need to swap that office chair for a beach chair. If you're looking for some one-on-one help, meet us at rei-aise.com. Let's go, let's go, let's go, let's go, let's go, let's go.

Let's go. The greatest secret the rich have about building wealth. isn't loft away in some vault or hidden behind complex formulas. It's right in front of you, hiding in plain sight disguised as something most people fear. You see, what if I told you that the very things the average person tries to avoid are the exact tools the wealth that use to grow their fortunes? While most people are working hard to avoid debt and complaining about taxes, the rich are using both to their advantage up until the very day that they die

to build wealth faster and bigger than those that are not. Now, what if I told you that you don't need to be rich to use those same tools to build your wealth? The same strategies the wealthy use to get richer, you can use them too, even if your means are limited. By the end of this, you'll know exactly how anyone can use debt and the tax code to build wealth, no matter your starting point. First thing, debt is a tool, not a burden. Most people use debt the wrong way. In the immortal words of George Carlin, 70% of the American economy is based on consumer spending. The only true lasting American value that's left buying things.

People spending money they don't have on things they don't need. So they can max out their credit costs to spend the rest of their lives, paying 18% interest on something that costs $12.50. And they didn't like it when they got it home anyway. That's not a good use of debt. It becomes a burden when you use it like that. And that's how most people use it. So debt, it gets a bad rap.

That's not how the rich use debt. And how they do use it, it's not exclusive to them. Their principles apply to anyone. Instead of using debt to buy things that cost them money, they use debt to buy things that make them money. They know that the more debt they use like this, the more wealth they create for themselves. But it works even when starting small.

Just like a few thousand dollars can kickstart the wealth machine. And I'll give you some example of what a few thousand dollars can do for you in just a second. But the second component, taxes. Taxes consume half of the assets. average Americans' income over a lifetime. And the rich know this, that income is taxed. Wealth is not. That's the game we're playing. So as you are building your wealth, no matter the size of your investments, you can play this game of using debt as a tool and avoiding taxes legally. You'll see how as we move along. And when I show you those five ways to virtually eliminate your

risk, you'll be all in. Second thing, leverage is power. It allows you to take a small portion of your own resources and control a large amount of someone else's. For example, real estate, it's a popular investment because it has utility value, it appreciates, it can produce income, it provides tax advantages, it serves as a hedge against inflation, and through traditional means, you can purchase real estate with a small down payment, and a bank will lend you the rest. Now, although you won't officially own 100% of the property until you pay the bank back, you do own from day one, 100% of all the property's benefits. Through untraditional means, you don't even need money to do this.

Leveraging your know-how is enough. I lay out 10 different and very realistic ways of how to pull this off for my private clients in the Zero Down Kit. You can grab a free copy if you'd like. I made it easy and uploaded it for you at zero-downkit.com. But here's the catch. Leveraging just any asset, that's not enough. Rich people know this, and that's why they focus on three-exam.

assets, the ones that multiply returns through tax saving, cash flow, and appreciation. Instead of simply growing their wealth, they compound it, stacking these three forces together. For example, the first tax benefits, like depreciation, can save you thousands in taxes, allowing you to reinvest that money for future growth. The second, positive cash flow from assets like rental income provides ongoing income that you can reinvest or use for expenses. Meanwhile, number three, appreciation grows the assets value, over time, increasing your equity and borrowing power.

Together, these three elements work to accelerate your wealth building far beyond traditional investments. And here's a real-life example that demonstrates how you don't need to be rich to make this work for you. In 2020, when the pandemic shut the world down, a seller who was panicking, called me and asked if I would buy a property he had just purchased for $135,000. Long story short, I did, using leverage. I only put down $28,000 and a bank

gave me the rest. The property went up in value by 27% over three years, earning me $37,000. If I hadn't used leverage, that would have been my return, 27% over three years, which isn't bad. But because I did use leverage, my return on the $28,000 I invested was actually 134%. And when you add in the rental income and tax deductions, my total return was closer to 162%. You don't need millions to apply the 3x asset concept. Even on a smaller scale, you will see significant returns. By introducing leverage to acquire 3x assets, you're tapping into the same strategies that have built generational wealth for the richest people in the world.

Now, whether you're into real estate or not, there are plenty of other options that fit the 3X asset concept, like stock, dividend paying stocks specifically, because they offer ongoing cash flow in the form of regular payouts, and well-chosen stocks appreciate in value over time, increasing your overall wealth. Tax advantages like capital gains treatment and tax-sheltered accounts like IRAs and 401Ks, those provide significant tax savings.

Or small businesses produce cash flow from the business's profits, tax savings from deductible expenses, and appreciation as the business grows in value. Or life insurance, like whole life or universal life insurance. Those accumulate cash value over time, and you can borrow against this value tax-free, use it to generate more cash flow, and then benefit from tax savings since the growth of the cash value is typically tax-deferred. And that leads us into the third thing, borrowing against your assets. And the rich do this because the IRS doesn't tax borrowed money.

And here's what's important to understand. You don't need a mansion or a huge stock portfolio to take advantage of this. Even a modest home or investment can work by using cash out refinancing, reverse mortgages, he locks, and asset-based loans. Here's how it would work. Let's say you own a $350,000 home and it builds up $100,000 in equity. You can take out a home equity line of credit to borrow that $100,000, tax-free, and then use it to buy a rental property or diversify and invest in stocks. The same tax-free rules apply, no matter the size of your assets.

If you have a small stock portfolio, you can borrow against it using a margin loan or securities-backed line of credit. And if that sounds too complicated, I use Wealthfront to do this. And with literally a click of a button, anything I borrow against my stocks is immediately transferred to my bank account. It's as simple as it can get. If you use the link in the description to sign up, we both get a 0.5% boost in our yield. But here's the best part about borrowing from your real estate or stocks. This is how the rich really hacked the system by double dipping and the tax deductible interest. What this means is when I borrow, say, $10,000 from my stock portfolio to invest in something else.

My $10,000 that stays in the stock portfolio and continues to grow as if I never took it out. At the same time, that same $10,000 is also growing. in my new investment. So it's like my $10,000 is working in two places at once, growing as if it were $20,000. Plus, the interest that I pay on the loan that I took from my stocks is tax deductible, even on the smallest of loans. Think of it like planting two trees from the same seed. One tree grows in your stock portfolio, and the other grows in your other investment, say your real estate portfolio. Both trees bear fruit at the same time, even though you only planted one seed. And the cost of planting that second seed, it's a tax write-off. Thing number four, the tax code is your friend,

if you know how to use it. If you don't, the tax code will crush you. And this part here doesn't seem fair, but here's the reality. When you work for your month, you are taxed at the highest rate. When your money works for your money, you're taxed less. And when other people's money works for your money, you're taxed even less. And the money you borrow isn't taxed at all. The rich know this, and it's why they borrow so much, even if they don't have to. And if you don't believe that the rich borrow a lot, as of this recording, only two companies in the S&P 500 are completely debt-free. Despite having the cash reserves to serve their debt, their debt status reflects their strategic approach to leveraging debt for growth and operations. You don't have to be an S&P 500 company,

nor do you even have to be a millionaire to leverage debt for your growth like they do. The idea is, you may be able to get rich by using your own money, but you get wealthy by using other people's money. And I'm comfortable going out of limb here by saying you'll have a very tough time getting rich if you don't use other people's money. Now, back to taxes. Cost segregation is another strategy of the rich. It's primarily used by real estate investors and businesses who own the buildings that house their businesses. They use it to reduce taxable income by accelerating depreciation deductions. If you need some help with this regarding how it pertains to, your situation specifically, I arranged to have an expert from my community discuss it with you for free at freeentity.com. But this is how it generally works. Normally, a building's value is depreciated over 27 and a half years for residential properties and 39 years for commercial ones. With cost

segregation, however, you break down the property into different components like fixtures, electrical systems, office equipment, and exterior improvements of the building that can be depreciated much faster over five, seven, or 15 years. This lets them claim larger tax deductions up front, reducing their taxable income in the early years of ownership. Essentially, it's a way of unlocking tax savings faster, allowing them to reinvest the money that they save elsewhere. Again, you don't need to own your office building to do this. One small rental property puts you in the game to take the same advantages of the tax code. And contrary to popular belief, you don't need an expensive, high-powered CPA either. And there's not a better deal in 10. And there's not a better deal in

than the team at freeentity.com. Now, still coming, the five ways you can mitigate your risk to almost nothing. And I have a bonus strategy for you, too, how to stop paying taxes on your W-2 income. Legally, of course. But here's my favorite part about gaming the system, legally and ethically. And even with Uncle Sam's blessing, I mean, he's telling you to do it. And it's thing number five, refi till you die. The wealthy use the buy, borrow, die strategy, not only to build wealth,

for themselves, but to pass it on for generations. By borrowing against appreciating assets, they access cash tax-free, continue growing their well and pass it down to their heirs with little to no capital gains taxes thanks to the step-up basis. The step-up basis is a powerful tax benefit that allows your kids to inherit your assets, like real estate or stocks at their current market value, rather than what you originally paid for them. Any capital gains you would have had to pay are wiped out for whoever you leave your fortune to, even if it's a small one. You don't have to be wealthy to do this. When your heirs sell the asset, if they do, they only pay capital gains taxes on any increase in value from the time they inherited it, often resulting

in little to no taxes owed. The rich stay rich because they teach their children to keep the cycle going, ensuring the family wealth stays intact. And now you can teach this to your children too, just like I'm teaching mine. I'm first generation. rich in my family, and I want my son to carry the baton and pass it on to his kids. The real power of this strategy comes from compounding wealth via the wealth-building formula, borrow, reinvest, repeat. Once you borrow against an asset and it appreciates, you can reinvest the money into new assets growing your portfolio faster. Whether you start with a $100,000 rental property or something larger, the key is leveraging debt and the tax code to accelerate your growth. It's not about starting big,

It's about starting smart. But when do you pay all the debt back, you might be asking? You don't. You refi till you die. Now, your bonus strategy. How to stop paying taxes on your W-2 income. And it has to do with a little-known tax hack called real estate professional status. And what the tax code says, if you or your spouse qualify as a real estate professional,

even for a small portfolio, you can use real estate losses to offset your W-2 income. For example, under IRS Code Section 469C7, owning and operating a single short-term rental property can qualify you as a real estate professional, even if you don't meet the real estate professional requirements, thereby allowing you to depth all real estate losses, including depreciation, repairs, and management costs against yours and your spouse's W-2 income. Check with your CPA on other potential stipulations, but as of the recording of this, as long as you actively participate in management, managing the property, the property is rented for an average of seven days or less, and you spend significant time managing the property, you qualify for this special treatment. All right, now let's address the pink elephant in the room, the risks of debt and how to avoid them. It is true. Debt can ruin people, and it has. But it's not the debt that's risky. It's the person using it, and how they use it is what inserts the risk. Whether you're leveraging a small portfolio or a large

one, the same rules apply. So here are five ways to mitigate your risk to almost nothing. One, invest in your own education, no matter your starting point. The smarter you are when it comes to your investments, the lower your risks will be. Number two, stay involved in managing your assets, even if it's just one rental property. Passive income doesn't mean uninvolved income. Number three, buy with equity in place. Market fluctuations, they happen. And if the value of your asset is down when your loan comes due, that equity will alleviate the burden should you have to sell to satisfy the loan. Number four, and this one, it seems basic enough, but it's been the downfall of many debt users. Ensure that the asset generates more income than the debt costs.

And number five, maintain a conservative leverage ratio at any scale. A common rule of thumb is to keep your loan to value ratio below 70 to 75%. This means, for example, that for every 100,000, thousand dollars of say property value, you would borrow no more than $70,000 to $75,000 against it. The idea is to maintain enough equity in the asset to cover potential downturns and value and minimize the risk of over-leveraging. The bottom line, the rich don't work for money. They borrow and use the tax code to work for their money and accelerate their wealth building.

But anyone can do this. The same strategies that work for millionaires will work for non-millionaires. If you want some help, get a good start by downloading an investor's package. at cashflowsaddy.com. See you next time. Take care. And that wraps up the epic show. If you found this episode valuable,

who else do you know that might too? There's a really good chance you know someone else who would. And when their name comes to mind, please share it with them and ask them to click the subscribe button when they get here and I'll take great care of them. God loves you and so do I.

Health, peace, blessings, and success to you. I'm Matt Terrio. Living the dream. Yeah, yeah, we got the cash flow. You didn't know home world. We got the cash flow. This podcast is a part of the C-suite Radio Network.

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