Wealth Formula Podcast

The end of the year is a good time for giving. Of course we are already in the mood with the holidays. Buying presents has a way of greasing up the credit cards and making it easier to pull the trigger. The end of the year is also a good time to give to charity. Even if you are a kind hearted human being, I'm sure it's not always easy to part with your hard earned money. However, at the end of the year, you come to the realization that charity is also tax deductible so it starts to make you feel more philanthropic. That being said, I would like to direct you to a cause that I think is really worth your attention. One of our listeners, Dr. Eric Payne is a craniofacial surgeon. He's the kind of plastic surgeon who can change lives for children with facial deformity such as cleft palate/cleft lip. A few months ago, Eric did a webinar for us on what he does on these international trips. It was pretty pretty inspiring. You can watch that webinar replay HERE. You see, one of the things we take for granted in our lives is how we look. Even if you aren't a supermodel, chances are that when you walk around town, people don't look at you like you have a deformity of some kind. We take anonymity for granted and focus on higher level stuff like making money. Now imagine being a kid with a facial deformity that everyone can see in plain site that also interferes with your basic functions like eating, drinking and speaking. That's what kids born with cleft palates and lips are up against. I want to help these kids by supporting Eric's work. My goal is to raise $100K for his organization to fund the next mission to India. Then, Eric will take lots of photos and videos to show you your money at work in a follow-up webinar. $100K will result in unparalleled return on investment in terms of the impact it will have on these kids. We have A LOT of people in this community so all we need is for everyone to participate and donate SOMETHING. It could be $10 or it could be $10,000—no pressure! Everything helps. Use the following link to get to the donation page: https://www.leapmissions.org/donate-form/ Make sure that you include Wealth Formula as your referral source. I would like to keep track of how much we donate as a group. In addition, anyone who donates at least $1000 to the cause will be acknowledged on a "Giving Back" page that will be added to WealthFormula.com. If you have been to our events or are part of our online community, you know that the Wealth Formula Community is extraordinary. As a community, I want to see us increasingly make an impact on the world around us. As for this week's podcast, it's about how giving can also be designed to make or save you money at a higher level. Merry Christmas.

If you are struggling about finding the right Christmas present for your loved ones this year, I have a suggestion for you. Think EXPERIENCE. Last week I snuck my ten year old daughter out of school and drove her down to Los Angeles to be part of a live studio audience. It was for her favorite Nickelodeon show called All That—sort of like a kids Saturday Night Live. She was on cloud nine the whole five hours of shooting. She saw all of her favorite child stars and even got to give them high fives! Afterwards, she called it the most exciting day of her life. She thanked me profusely and couldn't stop taking about the show for the next two days. I am quite sure she will never forget that day. On the other hand, I pretty much guarantee you that I will be getting her a fair amount of stuff for Christmas that she will forget about within a few weeks at best. It's just the reality of stuff—it doesn't last. Memories do. The stuff will also cost me a lot more than this experience did. What's crazy is that being part of the live studio audience was free! If you go to on-camera-audiences.com, you can get a full list of free show tapings that you can attend at no cost. Of course, doing this sort of thing isn't for everyone. My seven year old daughter would prefer a Vikings game which we are going to do next weekend! That one is not cheap obviously. That said, the general idea of experiences over stuff is a good one and I have been trying to implement it into my gift giving as much as possible. Hopefully it helps you with a gift idea or two this season! Speaking of the gift that keeps on giving, this is the third week in a row of "Ask Buck". I was a little hesitant about releasing this but the feedback I'm getting has been quite good so it seems it's not necessarily a bad thing to finish off the recent tranche of questions with one more show. By the way, if you have questions for future shows, just reply to this email or record your question HERE. I prefer the recorded questions but either one is fine. In the meantime, sit back and listen to this week's show.

Recently I started poking my nose into various physician financial facebook groups. I try to stay away from these things because they tend to put me in a bad mood. But facebook alerts make them constantly pop up on my phone and my brain reacts instinctually for its dopamine hit. When I do poke around in these groups, I'm often left a little bit nauseous. It's not just because I have a fundamentally different investing paradigm than most people. I am pretty immune to hearing people wax poetic about outdated conventional financial wisdom regurgitated by various mindless pundits. What really bothers me is the attitudes people have in these groups. The over-all flavor of conversation in these forums can be best described by the word scarcity. I'm not talking about the young doctors who are broke and buried in debt. They actually do have limited resources. No…I'm talking about the know-it-all followers of various influencers in the space. There is a certain language that has now become pervasive amongst them that I simply cannot stand. There is a lot of talk about "living like a resident". For you non-physicians out there, this means living like you make $50,000 per year or less. The idea is that you should live like a hermit so you can get to that magic number, dictated by the "4 percent rule", sooner rather than later. On top of that, there are often discussions on how little money you actually need to retire. I recall one well known blogger saying you only need about 25 percent of what you make today. All of this is predicated on some strange machismo related to how sparse one can (and should) live. In fact, I see people making negative comments about physicians who elect to drive nice cars deriding them as financially irresponsible. How dare you drive a Tesla! Now I know I am a personal finance podcaster not a self-help guy necessarily, but I do have to say that attitude goes a long way. I can honestly say that I don't have a scarcity-type bone in my body. I attribute this attitude of abundance to the financial success that I have had personally. To me, the wealth available to you and to me is limitless. Don't spend all your time trying to live like a peasant. Instead, focus on expanding your means and letting your lifestyle expand with it. Life is short. Isn't it depressing to think that your sole purpose in life is to save enough money not to outlive it? That's essentially what "live like a resident" means. Now if you are one of the devotes of the aforementioned movement, no need to reply to me with a cynical remark. I get plenty of those in the forums and that's why I try to keep my hand off the keyboard. The good news for me is that my listeners tend to be people who truly believe in abundance and it is a pleasure to speak to people who have an open mind. It is no coincidence, I should add, that these are the wealthiest physicians and dentists that I know! People with abundance mentality are fun to talk to and that's why I do this podcast. It's even more fun in a question/answer format like we will do in this week's Wealth Formula Podcast. Tune in for Part 2 of Ask Buck!

I spend most shows interviewing other people. However, once in a while, it's fun to speak to you directly. We call these question answer shows, "Ask Buck". I recorded this podcast episode just before the holidays and I hope you enjoy it. By the time you get this note, Thanksgiving will be over but I do want to express my thanks to you for being part of the Wealth Formula Community! Enjoy the show!

With the recent boom of real estate crowdfunding platforms, I often get this question, "What do you think of the (fill in catchy name) platform? What platforms do you like?" The problem with this question is that it's really not asking the right question. I am a real estate investor. When I invest in real estate, either as a general or limited partner, I am looking at the asset itself, the business plan, and the people who are going to carry out that business plan. All that a platform is doing is bringing deal flow to investors and then collecting fees the way a broker does. So when you invest on one of these platforms, do you know what you are buying?—Sometimes. Do you know what the business plan is to yield the projections?—Not usually. Do you know who is operating the asset, their track record, or whether or not you like the way they do business?—ALMOST NEVER. You see, investing in real estate or any kind of real asset fund requires some due diligence and, in my book, it always comes back to the people who are operating the asset. Investing in real estate is not like investing in stocks. People can invest in the exact same stocks online from anywhere in the world and they get the same exact thing. So, you can ask someone, "Do you invest in Apple? What stocks do you like?" and it actually has meaning. After all, the Apple stock I buy is the same one you buy. That's just not how real estate works. And to be clear, these real estate crowdfunding platforms know that. They give you the same type of experience that you get on E-Trade so that you think that real estate functions the same way. But it doesn't. Unlike Apple stock, there is an unlimited flavor of real estate equity and it should not be mistaken for a commodity. A specific asset can't even be looked at that narrowly. Case in point—I was once in the best and final for the acquisition of a $25 million asset in Dallas. As it turns out, it came down to two groups. One group is a heavy value-add player with primary goal of creating forced equity and a large increase in value for investors. They did not intend to make this into a cash flowing asset but saw great opportunity to increase its value and to sell it quickly. The other team looked at it as a unique long-term opportunity to cash-flow while adding value in a more modest way. This involved keeping occupancies high and increasing rents more gradually. In the end, the cash-flow team won that battle and it is performing very well. However, it's being run very differently than it would had the other team won. It would still be doing very well, but the business plan would have been very different. I know this for a fact because I was on both teams! Bottom line is that it's not about the platform. It's about assets and people. I see financial bloggers and self-proclaimed financial experts writing about these platforms as if they were specific investment opportunities, and frankly, they sound like bozos. Don't take advice on real estate investing from someone who knows nothing about it. They are probably just trying to get you to click on a link to get an affiliate commission. For me, investing is personal. The majority of my assets are deployed into specific real estate holdings or funds that that are run by specific people. In some cases, I make the decision to invest more because of the people than I do the asset. A good example of that is AHP Servicing. AHP servicing has provided a fund of non-performing notes that I have, on multiple occasions, participated in as an investor over the years. I understand what they do but the note business is not something in which I would consider myself an expert. Would I invest in any old note fund? The answer is no. However, I do know the founder and CEO of AHP Servicing well. I also like and trust him. I am, of course, talking about Jorge Newberry. Jorge has been up to a lot of interesting things lately so I invited him back on the show to get us caught up. Listen to this week's interview with Jorge and I think you will get a good idea why I like him and his fund as much as I do. He is one of the smartest and most interesting entrepreneurs I have ever met.

In college, my two favorite courses were biochemistry and organic chemistry. The logic was very soothing to me. In high school, the only thing that gave me that sense of logically progressing to an answer was mathematics—especially geometry proofs. In other words, I like concrete answers and am not as comfortable leaving arguments unsettled. Like you, I also like money and am interested in how the economy works. Sometimes I wish I had studied economics so I could better understand the nuanced aspects of what is going on today. But economics is not science. It is a social science. What that means is that while you can build models and make predictions, it's very hard to accurately come up with the answer to a problem ahead of time. It's not that exacting. That's why a room full of Ivy League educated economists can look at the same numbers and come up with different conclusions. There is no answer—only theory and forecasts. As an investor that is frustrating for sure. In fact, sometimes all the economists are wrong because the data they focus on ends up not being the right data to look at! Case in point—I remember back in the late 1980s when everyone was talking about Japan becoming the next financial powerhouse. Virtually no one, except Harry Dent, predicted that Japan would go into a tailspin for the next three decades. Harry predicted that would happen because the population of Japan was shrinking—less work force, less productivity. Today, everyone is looking at China as the next global financial power. It has certainly grown at an incredible clip over the last few decades. But China did something in 1979 that could seal its fate as another failed Asian power—it created a one-child per family policy that continued until 2015. Will China become the next Japan over the next few years? Or, will another unforeseen variable like technology save its drop in productivity? There is no way to know for sure. The best we can do when we consider macroeconomics is identify the right trends and get ahead of them as fast as possible. Harry Dent has a pretty good record of doing this. Right now, just like a lot of bears including Peter Schiff and Jim Rickards, he is predicting a major financial crisis. But his flavor of armageddon is a little different. He's predicting a deflationary recession. How would this affect you? Find out by listening to this week's episode of Wealth Formula Podcast! P.S. Listen to the very end if you invest in apartment buildings.

A simple question can have so much complexity around it. Here's one I get all the time: "Should I pay off my house?". Conventional wisdom says this is a no brainer. Look at all the financial gurus out there like Dave Ramsey and Suzi Orman—they all think you ought to be paying off your mortgage. Is it possible that they are wrong? Even in the unconventional alternative space, this is a controversial issue. A mortgage on your house is debt. If you follow Robert Kiyosaki, he says that there is good debt and bad debt. Good debt puts money in your pocket (ie. mortgages on investment property) and bad debt takes money out of your pocket (ie. buying a television on your credit card). That's straight forward. But what about the debt on your personal residence? Clearly that does not put money in your pocket. You could argue that with appreciation it might some day, but it certainly does not make you any money in the short term. So…it's a bad debt, right? Yes, but wait a second. Chances are, your interest rate is pretty low. Instead of paying off your mortgage that is 3-4 percent, one might argue that putting excess capital into something relatively safe like Wealth Formula Banking that yields 5-5.5 percent compounding might make more sense. In fact, that would give you not only tax free-arbitrage, but also liquidity to borrow against at a moments notice. I hear some people say that they keep equity in their home in case they need to access it for liquidity through a home equity line of credit. But the problem there is that if you have an emergency (ie. you lose your job), your bank may not let you access your home equity anyway. Banks only lend to people with income and good credit. In other words, you may not be able to get to your own money when you need it the most! And let's not forget why that bank doesn't want you to pull that equity out if you get into trouble. When you have a lot more equity in your home, you become a bigger target for foreclosure. If there is little equity in your home, the banks don't see nearly as much value in foreclosure. Lots of equity in your home, on the other hand, makes you a bigger target for creditors. Just remember, when you get sued, debt like mortgages and other loans are your best kind of asset protection! Now, you may be reading this and concluding that I am a fierce advocate of leveraging your home to the hilt. That's not necessarily the case. I am just a fierce advocate of thinking about what you are doing rather than just following conventional financial wisdom. What I will say is that the math favors not keeping a whole lot of equity in your home if you consider the time value of money and asset protection. The rest, in my opinion, is psychological. When it comes to debt on your personal residence, the psychological often supersedes the math and that's okay too. I just want you to think about why you do what you do. Now, what if there was a way to access home equity without borrowing? What if you could sell part of the equity in your home and not have payments to worry about? There is actually a relatively new product known as a home equity contract that could potentially allow for you to have your cake and eat it too. That's what we are going to talk about on this week's Wealth Formula Podcast so don't miss it!

With the end up the year coming up, my mind is focused on what I can do to mitigate my tax burden. We've done multiple investor club webinars on different strategies already this year within investor club. However, my favorite strategy to minimize my tax liability is to maximize depreciation. As it turns out, I have two houses in the Chicago area that I rent out. I used to live in one of them. Because they are single family homes, I did not consider doing cost segregation analysis studies on them. I figured that it would not be cost effective to do so. As it turns out, I was very wrong. There are some providers that are very skilled that provide highly reliable cost segregation studies of smaller assets as well. David Brizel, CPA is the guy who kept coming up in Wealth Formula Network. The way people glowed about him, you'd think they were on his pay roll! Anyway, he's based in Phoenix but I'm flying him out to Chicago to do the studies because it will still save me money compared to the big firms out there. I'm glad I decided to look into this. As it turns out, the two houses combined will result in about $200K of depreciation for me that can be applied to 2019! Anyway, I can imagine some of you are in the same boat—rental houses that you didn't consider doing a cost segregation analysis on. So, I asked him to be on the show for a bonus episode. Hope you enjoy it!

By now, you know my paradox. The more I invest in real estate, the less I pay in taxes because of my real estate professional designation. It could be worse. I could not have the designation and not be able to apply passive losses to all sources of my income! It's a good problem to have. My situation makes me think about the profound impact of the basic tenet of microeconomics. That is, people do things because they are incentivized to do so. In my case, I am incentivized to invest in real estate. Because I have profound tax advantages from investing in real estate, it makes me hyperaware of investments and expenditures that do not have any tax advantage. It's the reason that I won't even consider investing in the equity markets. If I'm operating outside of my real estate happy place, there better be tremendous yield potential (ie bitcoin), a benefit beyond just the investment itself (Wealth Formula Banking), or something else compelling. As a car guy, this has put me in a difficult spot. I love cars—especially Italian sports cars. But buying a Ferrari off the lot just makes no economic sense at all. It's guaranteed to depreciate by no less than 50 percent over the next 20 years. Then, it may or may not start to regain its value. Another option I have considered is focusing on maximally depreciated sports cars—say something from ten or fifteen years ago. At least then I wouldn't have to worry about losing value as much. What I would really like to do eventually is have a collection of classic cars. I've mentioned this before and almost did pull the trigger on my first acquisition a few months back after a perceived near death experience. But the microeconomic incentives once again prevailed. I also realized that I didn't really have the garage space to park a multiple six figure investment. So…for now, I am still driving my Prius. However, to be clear, I still love the idea of buying nice things that will likely appreciate over time. Nothing you buy from Ikea will ever go up in value. So, why not buy some things that are more expensive that you can enjoy for a lifetime and sell them at a profit someday? Anyway, I will follow my own advice soon enough when it comes to cars. In the meantime, I have found a super cool business that allows you to own a fraction of your favorite classic or rare supercar and trade it via an on-line marketplace. The business is called Rally Rd. and it functions solely as a mobile application. It's a fascinating business model and one that you may particularly enjoy if you like to combine your hobbies with investing. This week's Wealth Formula Podcast features an interview with one of its founders, Rob Petrozzo!