Wealth Formula Podcast

This is a 5 minute update on Wealth Formula Banking changes that are occurring because of current tax legislation. PLEASE LISTEN NOW!

It's not easy becoming a physician. You have to be at the top of your class in college to get into medical school. Then medical school itself is a pretty big commitment. Of course, I'm one of those crazies who added 7 years of residency training to my education. But by the time you get done with all of that training, you really do get an opportunity to master a body of knowledge. And while medicine is always changing, what we know about human physiology doesn't change much these days—at least the basics. You know that the heart has to keep beating and your brain needs to keep functioning to live. You know that it's better not to be obese and that cigarettes are bad for your health for a myriad of reasons. There is some beauty in knowing the consistencies of the human body—that despite the fact that futuristic medicine is on the way and will change the way we live, the basic knowledge of form and function of the human body remains constant. That makes it easier as a practitioner. Now if you are on the diagnostic side of the economy, it's a little different. What financial diagnosticians, aka economists, use as the core principles to predict the health and well-being of the economy are in flux. The rules are changing rapidly. This has made it much easier to predict the rhythm of the heart than the future pulse of the economy. It used to be that the United States Federal Reserve Bank had two mandates: to maximize employment and to stabilize prices. It typically did not respond to the whims of the financial markets. In other words, if the heart stopped on the New York Stock Exchange, stocks would get crushed and there would be no immediate resuscitative effort by the federal government or the Fed. Now, the rules seem a little different. The Fed artificially suppresses interest rates and responds briskly to any potential downturn. The Fed responds to what's going on in the stock market—emboldening people to continue investing even during the pandemic when it made no sense to have sky-high asset prices. The net result, in my view, is that whatever rules we played by in the past don't matter anymore. It's a free for all. We are living in times characterized by an artificial economy without natural cycles or anything else that you could previously use to forecast its future. And let me be clear, I'm not imposing my ideology here. I'm simply making an observation of the way I believe things actually are. On a recent episode of Wealth Formula, Marin Katusa made the point that as investors, our job is not to be stuck in dogmatic positions because of our beliefs. It is to respond to the reality on the ground. So with this chaotic new economic paradigm, it is interesting to speak to someone from the economic old guard. Dennis Gartman is famous for his Gartman Letters that he consistently wrote since the early 1970s until just recently. In this episode of Wealth Formula Podcast, I discuss what Dennis thinks is going on in the current economy and what his predictions are for the coming years—especially in light of what is an obvious new world economic order. Listen HERE.

I am a natural entrepreneur. It's not something I tried to be. I'm just wired this way. School does not teach you to be an entrepreneur. However, there is no doubt that certain subjects parallel my thinking as an entrepreneur. It may surprise you to know that the classes I took that most resemble my way of entrepreneurial thinking, were in the area of organic chemistry. Higher level organic chemistry relies on integrating the knowledge of how chemicals interact in order to create new relationships. My organic chemistry exams typically consisted of just a couple of exercises. There would be an image of one complex molecular structure and then another more complex molecular structure. The exercise would be to use all of the chemical reactions that I learned as tools to help me figure out the appropriate reactions in appropriate sequence to make one structure out of the other. There were often multiple ways of doing it. You just had to prove that the way you got to your destination was supported by all of the chemical interactions that were possible. It was challenging for sure. In fact, organic chemistry is considered the primary "weeder" class for pre-med students. Most people didn't like it much. I was one of those odd balls who really liked organic chemistry and excelled at it. In fact, my campus job for two years in college was to serve as an organic chemistry tutor. I loved the idea of solving complex problems via logical progressive reactions. There was a certain creativity about it that I now find in my entrepreneurial life. In organic chemistry, the primary limitations of the problems I could solve were chemical reactions, with which I was not familiar. If I had the knowledge of a reaction, it served as a tool for solving problems. If I wasn't aware of the tools that I needed, then I couldn't solve the problem. There is an interesting parallel with that limitation in the entrepreneurial world. First, you have to recognize a problem. You have to at least be exposed to it. If you don't have any exposure in a particular field, then you don't know what the problems and inefficiencies are. That is to say, if you are in the medical field, you know what the problems that need to be solved are because you are confronted with them every day. Where there is a problem, there is a business. However, someone with an entrepreneurial mind can only solve that problem if he is familiar with that specific inefficiency in the medical field. He may be the guy to solve the problem, but he will never know it. Therefore, I contend that the best thing for an entrepreneur to do is to learn about as much stuff as he can in hopes of finding problems. The benefit of broad education spanning multiple fields, is the ability to use tools acquired in one field to tackle problems in others. In organic chemistry parlance this would be akin to learning more chemical reactions to solve different kinds of organic chemistry problems. These days, my entrepreneurial spirit is focused on investing. You know by now that most of the time, I like to keep it boring. Apartment buildings and self-storage are things that people need and will continue to need in the foreseeable future. However, as an investor, it would be foolish for me to not pay attention to technology. Wouldn't it have been great to get in early on the internet? What about blockchain? I started talking to you about bitcoin and blockchain in 2017 when I discovered it for myself. Many of you benefitted from those podcasts significantly through the financial gains we have seen in that arena since then. But what if we got in just a couple years earlier? So what should we be paying attention to now? I think the next major technology disruption will be in the field of artificial intelligence (AI). We are already seeing it play out in real time. But believe me, we haven't seen anything yet. AI may be the single biggest technology disruption the world will see in the next decade. We need to pay attention to it. It will change our lives in ways that we can't even imagine. And when you are aware of that kind of disruption on the horizon, you have an opportunity to make a lot of money along the way. Martin Ford is one of the world's leading experts on Artificial Intelligence and is my guest on this week's episode of Wealth Formula Podcast. You won't want to miss this interview! Listen HERE!

At our Wealth Formula meetup in Dallas a few weeks ago my CPA, Tom Wheelwright, got up on stage and surprised me. Tom is a very smart guy. He wrote one of the books that I consider a "must read" for personal finance called Tax Free Wealth. He is the Michael Jordan of CPA's. He has several high profile clients including Robert Kiyosaki and is Robert's Rich Dad Advisor on taxes. I thought I had read up on or been exposed to just about every strategy Tom taught, but then he got up on stage and completely caught me off guard with a structure I hadn't before seen. It solves one of the biggest questions that high earning business owners have—how to turn active income into passive income. Of course, being able to use depreciation losses from real estate is a tremendous advantage. But if you are not a real estate professional, you can't use those passive losses against your active income. But…if you can figure out how to turn that active income into passive income, then you can benefit from all of those tax advantages that real estate provides against your earned income. Tom got up on stage and drew out a structure that not only showed the way to convert active income into passive income, but also showed how to do it while creating bullet proof asset protection and estate planning benefits that would survive even if the current tax legislation passed in entirety. Not bad right? Well, after that talk, I got a lot of questions about how this all worked so I decided to ask Tom to come on our show and explain it to all of our Wealth Formula community. And lucky for us…he agreed. Curious on how it works? Make sure to tune into this week's Wealth Formula Podcast!

Economics is a social science. While science is knowledge and application of existing aspects of the world and applications through physical laws, mathematics and research, social sciences deal with society and human behaviors. Certainly there is plenty of math involved in economics but the math is predictive insofar as the behavior is predicted correctly. That is not an easy task when trying to predict things like the way the Chinese government will react to an internal crisis. That's why very smart economists often disagree with each other all the time. The disagreements are not insignificant either. One might predict hyperinflation while another predicts deflation. One might predict a decade of prosperity while the other predicts an outright depression. I am not an economist, I am an investor. In that role, I pay attention to as much as I can understand and make my own conclusions on how to proceed with my money. If I followed a gold-shilling Austrian economist to make investment decisions over the last decade, my wealth would be a standard deviation or more below where it is right now. That said, the reality of all these predictions is that someone is usually right. While you might not be able to predict the future, you should be aware of what's going on and make decisions based on knowledge rather than emotion alone. A good example of economists disagreeing is playing out right now. China's largest real estate development company, Evergrande, looks like it is about to go bankrupt. If you were at our meetup last week, economist Ryan Davis felt that the fallout would be isolated to Chinese banks. My guest on Wealth Formula Podcast this week, Richard Duncan, does not buy that. He is far more concerned about the global ripple effects of default from this behemoth company. Make sure to tune in to this week's Wealth Formula Podcast to get his perspective!

"It's tough to make predictions, especially about the future." -Yogi Berra The residential real estate market is on fire. No doubt. We are seeing this across the board from single-family homes to massive apartment complexes. I'm not an expert on single-family home values. I don't understand them as they are not rooted in cap rates etc. However, I can comment on larger residential real estate. Cap rates have gone down primarily because of mortgage interest rates being at historic lows. This is just math. Leverage only works if the money you borrow at is less than the cap rate. Otherwise, you are leveraging losses, not profits. So the question I often get from investors is, "What if interest rates go up?" It's a good question but we have to understand that no component of the economy happens in a vacuum. Cap rates are low because interest rates are low. Interest rates are low to avoid asset deflation. The fed is controlling mortgage interest rates by buying up 10 year treasury bonds. The 10 year treasury typically reflects inflation. If it goes up, that means we've got inflation on the horizon. So, even if cap rates go up following increased mortgage interest rates, we should be able to raise our rents to match that inflation and offset the negative impact on us as sellers with increasing cap rates. That's why I consider apartment complexes a hedge against inflation. But the reality is that the economy is pretty darn fragile right now. The likelihood of the Federal Reserve allowing interest rates to naturally rise seems unlikely as any downward trends in the economy would likely result in a knee-jerk response and economic stimulation. Of course, I could be wrong, but my personal feeling is that we have a runway of a good 5 years or more before the party ends. So what to do? I'll tell you what I'm doing. I'm doing what I always do. I'm investing in value-add real estate that does not rely on market appreciation to be profitable. If the market keeps heading north, then great. If not, it's not the end of the world. We still have equity that we force through our value-add programs. The bottom line, in my view, is that a reasonable approach is to continue to volume average into your investments. Not investing in an inflationary environment guarantees the loss of your buying power so you don't have a lot of choices. But my friend Jorge Newbery is trying to give us a few more choices. He's a little less enthusiastic about the market over the next few years and is hedging his bets in a different way. On this week's Wealth Formula Podcast, Jorge gives us his perspective on the real estate market and his formula to come out ahead in this economy either way. Listen HERE

Personal finance is personal. However, there is a type of conventional financial wisdom that leads us to believe that there is one right way of doing things. That becomes very confusing to people…especially in our alternative investment world. After all, financial advisors are the experts, right? In reality, financial advisors are usually most interested in your money going into traditional investments such as stocks, bonds and mutual funds so that they can charge you for assets under management. I'm not vilifying them for it. It's just the way it is. Furthermore, traditional advisors tend to know very little about our world of real estate and other tangible assets. There are some out there who offer coaching as a way to navigate the alternative space. But in my experience, these coaches are not wealthy. After all, one-on-one coaching takes a lot of time. If you are really wealthy, would you spend your time coaching or focusing on what makes you a lot of money? Whenever I try to learn something new in this space, I try to learn from people who are wealthier than I am. I don't take financial advice from people with less money than me. I am unaware of anyone who makes more money than most of us who is offering one on one coaching. So, what do you do? It's a very good question. To me, the single best resource for learning personal finance in the alternative space is through peer groups. As you may know, we have our own private peer group called Wealth Formula Network. I can honestly say that I have learned more from this group over the past few years than any other resource. Collective intelligence is very powerful. If you have friends and family of like mind that can help you navigate through this space and feel confident, then good for you. Otherwise, I strongly suggest you consider finding a group of peers for collective learning. There simply is no better way to increase your financial IQ and to feel confident about your decisions. Ask questions. Don't be afraid because someone else will likely have the same question, but is afraid to ask for fear of looking stupid. But everyone has the same questions at some point in their journey. Speaking of questions, this week's episode of Wealth Formula Podcast begins the latest series in our "Ask Buck" episodes. Make sure to tune in as we have got some great topics. I can pretty much guarantee you will learn something. I know I did! P.S. If you want to submit your question to the show, click HERE!

When I first read The Cash Flow Quadrant by Robert Kiyosaki (the purple pill), I was fascinated by the concept of using earned income to produce streams of passive income, that would eventually become a great river that would replace ones earned income all together. That concept is what I now call Wealth 1.0. You see, while the concept is appealing, the math is not. Let's do some simple arithmetic to understand the challenge. Say for example you make 500K per year. Let's assume that at a 30 percent tax rate, that leaves you with $350K. Let's be generous here and say that, out of that remaining $350K, you invest $200K per year into something that yields a consistent 8 percent cash on cash. How much would you have to deploy to replace your $500K? (.08x=500,000). The answer is $6,250,000. If are investing $200K per year, how long would that take you? It would take you about 31.25 years. By that time, with inflation, your 500K wouldn't be worth nearly as much as it is today. Ok, I know this is a very simplified model, but I think you get the point. Linear cash flow growth is not particularly efficient. When I realized that, I knew there had to be a better way. That better way is what I call Wealth 2.0 and can be described with the mathematical Wealth Formula: Wealth=Leverage(MassXVelocity) Mass is simply how much you invest. In the above example, if you invested $400K per year, you would get there in half the time. Velocity is the amount of time it takes to get your money back from your initial investment and redeploy into the next opportunity. Leverage is good debt. We can amplify our results with using bank money or anything else that can lever our investments. Practically speaking, significant growth in your wealth can be obtained by deploying as much capital as possible into leveraged assets that can quickly be refinanced or divested. This allows you to recycle capital rather than simply using new earned income to grow your wealth. A well-known example in our investor club is from an early investor with Western Wealth Capital who deployed a total of $750K across multiple offerings. Through a series of refinances and divestments with quick redeployment of capital, his principal is now worth over $4 million. In our earlier example of Wealth 1.0, had he simply gotten 8 percent on that initial 750K, he would be looking at about $60,000 per year. But now, if he deployed that $4 million into simple 8 percent cash on cash investments, he would be making $320,000 per year. The idea is to grow that principal rapidly until you are ready to flip the switch into linear cash flow. Again, I know the modeling is simplistic but it is illustrative of the power of a Wealth 2.0 model. The difference between the two approaches is the difference between checkers and 3-dimensional chess. Of course, this is not to diminish the value of straight up cash flow investments. You may want to have some of those in your portfolio as well. Mailbox money does certainly make you feel good. Speaking of cash flow, my guest on this week's Wealth Formula Podcast spends a lot of his time looking into cash flow investments. His name is MC Laubscher aka the Cash Flow Ninja. Make sure to tune in to this week's podcast to hear what he has to say on the topic! Listen HERE

There is a saying, "People grossly over-estimate what they can accomplish in a year and grossly under-estimate what they can accomplish over five years." As I write this to you on my 48th birthday (September 8th), I look back on the last 5 years and it's hard to argue the point. Five years ago, this podcast did not exist. Today, Wealth Formula Podcast gets about 25K-30K downloads per month and we have an Investor Club with over 2000 members that control over $800 million in assets. I am in awe of what we have created together. But the bigger lesson here is that even though it may not seem like it, all the little things you are doing now DO make a difference over time. If you don't like change, you are out of luck. Change is inevitable in life. You can either fight it or guide it in the direction you want to go. The same can be said about investing. The type of investing we do in our community requires planting seeds today and waiting patiently for a few years in most cases. Just think about those people who sat on the sidelines over the past 5-6 years while Western Wealth Capital delivered average annualized returns of over 30 percent to its investors. Indeed, time IS money. Understand that investing in real estate requires some level of faith. You can't track your net worth daily on an app. However, once you are in it a few years, you start to see things come to fruition in a big way. Once you've been through the cycle a few times, it really gets exciting. But again, the choices and investments you make today are for 3-5 years from now. The longer you wait to start, the longer it will take to get results. It's time to get off the sidelines. While you take action today, it is also important to keep contemplating your next move for the future. In my case, I have been interested in the hotel industry for a while and have been collecting data and looking for the most opportune time to get involved. On this week's Wealth Formula Podcast, I reconnect with hotel broker, Steve Usher, to get an update on the hotel investing landscape. Listen in as I get the scoop on whether it's time to buy!

As a flaming entrepreneur, I had a serious problem when I was a young man: Shiny Object Syndrome. After surgical residency, I had a couple of major business successes. Having never failed in business before, I kept pushing the limits. It wasn't about the money back then. You see, natural entrepreneurs like me enjoy money—no doubt. But we use it mostly as a way to keep score. If you create a successful business, you make money. That means you win the game. If you don't make money, you lose. At first it wasn't a big deal. I was tinkering with businesses that were costing me thousands of dollars but I was already making seven figures. Then, I made a major mistake. I pushed the limits on the goose that was laying the golden eggs. I tried to expand a highly successful business way too fast while financing it entirely myself. It was a big gamble. In fact, had I won that one, it would have been game over. But I lost. And losing this one was a big deal because I killed that gold laying goose! I was millions of dollars in debt and things only seemed to get worse (it's a long story). In fact, the reason I survived that big mess was because of something boring I was doing on the side. You see my dad has been a real estate investor all his life. I grew up thinking that real estate was the only conservative investment. So while I was tinkering with shiny objects, I also decided I would buy apartment buildings like a grown-up the way I was taught. Admittedly there was some luck involved, but the buildings I bought during those early years ended up yielding about 500 percent return in less than 5 years—enough for me to sell them and bail myself out of the big mess I had made. The whole thing was a big lesson for me. Sure I saw cash flow from those buildings but I only truly appreciated the equity growth that had occurred at divestment. It was a real eye opener. Too bad I had to spend it all paying off the sins of bad decisions made by me and my management team. This all happened pretty quickly after residency so I was fortunate to have plenty of time to recover and re-build myself. When I retired from medicine and became a full time investor 4 years ago, I still had to control my impulses. Shiny objects existed not only in the business world but with investments as well. I made some stupid investments in exotic things early on as well but quickly learned that the only asset class that was consistently making me money was real estate. I had to keep repeating a mantra to myself that I continue to do every day: "boring is good". There is nothing sexy about working class apartment buildings. You're not going to brag to your friends about owning them or drive by them with a ton of pride. They are often ugly and in areas you might not even want to drive through. But in the right hands, they consistently make money. In many cases, the returns themselves are quite sexy. My lifetime annualized returns on real estate are probably 40-50 percent all in. So, even though it seems boring, every year the vast majority of my investable income goes into apartment buildings. Do I invest in riskier stuff? Yes but it's calculated. 10-15 percent of my investable assets now go into things that could potentially create a meaningful change in my quality of life. What's a meaningful change? Well, it's going to be different for everyone but it usually means adding some zeros to your net worth. On the other hand, I approach those investments knowing and being ok with the possibility that there will be no return of capital at all—like the Maserati I bought last year. There are some people, however, who make their living entirely on the asymmetric side of the investment world. This week's episode of Wealth Formula Podcast features one of those guys: Jonathan Hung. If you are curious about the world of angel investing, make sure you tune into the show!