How to Leverage Debt to Create Cash

How to Leverage Debt to Create Cash

Mimicking the Federal Reserve

 

We were last talking with Eric on various ways to invest your money. He discussed why you’re actually losing money with it sitting in your savings account. He discovered the best way to gain wealth was through real estate.

He continues his discussion on the monetary system, using debt to create cash, and the best way to fight inflation.

In this Interview Learn:

  • The most important thing you need to do before investing
  • Why the monetary system is rigged
  • How to earn cash, tax free!
  • The power of compounding in RE

 

Tips for inexperienced investors?

Before you start investing. You need to have a clear understanding of what it is you want to gain from your money.

If you’re like, “I hate my job” or “I need to work less.”

Say you need to bring in 15k a month to live comfortably. If you can bring in an extra 5k from somewhere else, you can work less and be fine bringing in 10k a month. You can begin to figure out how to make that extra 5k passively without you having to work harder.

Then in this example, you would want to go after cash flowing projects. You don’t have to worry about building equity. You don’t need to worry about prices going up or down. This will take you down one pathway.

But if you love your job and you could do it for another 30 years, and just want to set something up for your kids or grandkids, to have something in the future. Then you might want to look at capital gains projects. Development projects that don’t need to generate immediate income. But will have a large payoff down the road. The great thing is that it will be backed by something real. It will be a real tangible asset with a structure set in place. So you don’t feel like you own nothing, like a derivative of something. Which is what most paper is, a derivative of some underlying asset.

I tell investors, the most important thing is to first figure out what they want their money to do for them in life. Because that will determine the pathway to go. Then it will be easy for you to say no to things or certain deals very quickly.

It either fits into what you’re looking for or it doesn’t fit. So getting really crystal clear on your investment philosophy is the most important thing you can do before putting your money in anything.

Also, any dollar above what it costs you to live your life expenses, is an investible dollar. I’m a firm believer that the investible dollar should be intentionally placed in an area that coincides with your investment philosophy.

If you’re sitting heavy in cash, you’re essentially saying that you’re investing in the US Dollar. As if you’re assuming it’s going to go up in value.

However, if you look at the history of the US Dollar in it’s ability to purchase things. It has lost 99% of its purchasing power in the last 100 years.

So I can guarantee you that if you’re sitting heavy on cash, that you’re losing 3-5% every year on inflation.

Now that’s inflation adjusted. People think that they’re not losing money because the balance in their account is not going down.

But the balance is not what’s important. It’s the ability to purchase goods and services. If your ability to purchase goods and services goes down every year, then you are losing money.

 

How do you fight against inflation?

The easiest way to fight against inflation is to own inflation adjusted assets.

That’s why we love real estate so much. Rents tend to go up every year, as pricing in the economy goes up.

If you own assets that people need and must use, they’ll be forced to pay for it. Everybody needs a place to live.

So you must make at least 5% return on your investments to stay ahead of inflation.

Because of the way our monetary system works, every time the federal reserve adds new currency into the system, it’s a debt that the US Treasury must pay back.

debt money

Every time they print money, there is new debt associated with it.

Technically speaking, there is always more debt than there is currency. The debt that needs to be paid back is a lot more than the total amount of currency that is actually out there circulating.

So you can never actually pay off the debt. Every time a new currency is created by the federal reserve, which is a private corporation owned by private banks, the US taxpayer has to pay back more than what was created. But if what’s being created increases the debt, you will always be behind.

 

 

That’s why those that understand the economy well, the economy around the world, knows that what we use is actually “debt money.” The debt can never be paid off. It may fluctuate in how much we use every year, but you can never get to zero.

Once you understand that the currency we use, is actually just debt, why would you save it?

Why would you hold onto debt?

It’s very deep, once you begin to understand how currency actually works.

 

So you’re actually losing money when you’re trying to save it.

Sitting on cash is not a safe thing to do. It only gives you the ability to decide what to invest in, that will hopefully beat the rate of inflation.

To take it a step deeper, all Real Estate is, is the ability to hedge against the US Dollar through property appreciation and cash flow. Because we use debt to buy cash flow and create dollars for ourselves today.

We continue to create more dollars by using more debt, which is what the federal reserve does. They use debt to create dollars. They create the currency, US Treasury promises to pay them, and they get their interest fee.

So what we’re doing is mimicking what the monetary system is. We use the vehicle of real estate to do it.

There is nothing mystical about real estate. It’s just the way the tax laws are set up. It’s the best way to use debt and not have to pay taxes on the income. We can shelter most of the income from real estate by using debt, to get cash, tax free.

Because today’s money will always be worth less in the future.Click To Tweet

 

So today, we buy assets which over time will go up in price.

We begin by owning things that will actually go up in price. This allows us to pull out and reinvest in greater property.

It’s a continuous cycle of cash flow, debt, cash flow, debt.

So you’re never sitting on cash that devalues. But you’re sitting on assets which goes up in value.

You want to own the real things in the economy that go up in price. These hard assets will always go up in price, because of the way that our monetary system is set up.

 

 

Can you explain the Tax benefits of RE?

I mentioned depreciation previously. Depreciation is a phantom expense that the IRS gives you.

The IRS says, because you own this real asset, it is going to wear out over time. So you’re going to need to put money away to replace these things. Based on the purchase price of the building, you can take depreciation over 27 years.

You can also write off the interest you pay on the mortgage, you can write off insurances, taxes, and other business operating expenses. So you can deduct all these expenses from your taxable income.

By the time you write off all these expenses, often times you will have a negative number, even though you received cash flow, from the project.

So that means, you received cash, but you’re not going to pay any tax on it.

You’ve earned cash, tax free.

 

So how do you use Debt to create Cash?

This is how you leverage debt in real estate.

If you have a $100,000, instead of putting it all down on one house and owning it free and clear.

You want to put down $20,000 on 5 houses and have an $80,000 mortgage on each house. With that $100,000, you now have $500,000 in asset, as opposed to $100,000 that you completely own.

So let’s look at the power of compounding in RE.

Let’s take that $100,000 house and raise it up 5%, adjusted for inflation. So at the end of the year you have a house that’s now worth $105,000. You’ve made $5,000.

But if you have 5 homes that each get a 5% increase, you now just made $25,000 as opposed to the $5,000. This is only from appreciation. Not accounting for the year of cash flow you’ve made on the 5 homes.

This is why leverage in real estate is so powerful.

This is the whole point of investing in RE, based on the monetary system we discussed. I’m just teaching what I’ve learned over the years. And I recommend people to reread this discussion we’ve been having.

My goal is to own as many units of production as possible. Especially when the currency in a particular environment is debt. In an environment that must have inflation every year to maintain itself. It’s better to own 5 units worth $100,000 each. I’d much rather make $25,000 a year on my original $100,000 I put down, instead of owning one asset and only making $5,000 on it.

That is the power of Real Estate. It’s a way for you to leverage other people’s money with a smaller amount of your own money.

It’s pure mathematics and gearing.

 

How does this work when you invest in a group or syndicate?

Instead of just me getting the money, everybody in the group gets the benefits.

If you’re part of a syndication, you get a benefit called a K1, which is a partnership return. So whatever percentage of ownership your part is, you get a portion of. A portion of the depreciation, cash flow, capital gains, will go to you if you’re an equity investor.

If you’re a debt investor in a syndication, you will get your debt cash flow. You want to be lending your money and getting a 5-6% return to stay ahead of inflation.

But if you’re an equity investor, all of those benefits will flow to you. You won’t have to do all the hard work. You just sit back, collect your checks, get your tax write offs, and live your life.

 

This is what your company, VAM does?

Yeah so for me, I wasn’t going to invest in the stock market. I researched different investment opportunities and decided on Real Estate. My wife and I, who is also a physician, began to have great success with Real Estate Investing.

Then I had other physician colleagues who saw what I was doing and wanted to partner up and begin investing together.

I didn’t know if this was legal or not. So I found a securities attorney to guide me. It was a simple process. You just get the other investors to sign papers stating they understand the risks they’re getting into. Then I put projects together.

People don’t realize this, but Warren Buffet’s company Berkshire Hathaway, started this way. It started with him getting 10 doctors to give him $10,000. The original Goldman Sachs, Morgan Stanley, all of those private investment banks, all started as private partnerships.

All those real estate construction projects happening in your neighborhoods are all funded by private investment partnerships. A group of investors, through their pension funds, or savings, are the people that are funding these projects.

So people can get into these projects, if they can find the person putting them together. But for the longest time, the SEC, would not allow the people that put these projects together, like myself, to advertise them.

But the benefit of private investing, is you get to know the person putting projects together, and they get to know you.

But this is not something that is advertised. You can’t just ask your financial planner how to join syndicates. You have to be open to meeting people that put projects together. They can give you all the data you need so that you can make an informed decision to participate in them.

That’s how Vernonville Asset Management came to be. It was really accidental.

Our friends and colleagues wanted to invest with us and we started this private investment partnership.

 

Can you discuss the Evolution of an RE Investor?

The usual evolution of a real estate investor, is to start small and then go big.

They directly own the property or become a part of an investment group that owns it.

Most people start with smaller projects and then get into larger ones.

They buy a condo or single family home and rent it out after they move. Then once they see the benefits, they get into larger real estate investing.

Once you get a taste of a check coming in which does not require you to work, it literally can change your life. You can have the option to not work if you want.

You begin to realize, “If I can keep doing this, at some point, I won’t have to work anymore.”

For me, I’m a physician, but I only work one day a week now. Because I have passive income streams coming in, I can do this. But it took some time to get to this point.

The other thing that people don’t realize, is that you don’t have to start small if you know what you want.

It’s actually safer in many aspects to start off in larger projects. Because you have more “eyes on the deal.” The larger projects have construction teams, bankers, insurance agents, and all these other people that are looking at it with their expertise, to say “yay” or “nay” on the deal.

Whereas, if your looking at a single family home or a condo, you as an individual, with your limited experience level, has to make all the decisions. You don’t have a group of experts to give you advice and guide you.

So you can actually end up making a lot of mistakes on smaller single projects, rather than the larger ones. In the larger projects you have more people to catch things that can slip by or go unnoticed, which may become an issue.

 

Any advice for people interested in Real Estate Investing?

The biggest problem I see is “Analysis Paralysis.

They want to do it, but they’re just scared.

They often end up talking to people who were not successful investing in real estate. But they can’t tell you what works. All they can tell you is how they failed. They’ll say that RE doesn’t work.

But nobody can come up to me and tell me that Real Estate Investing doesn’t work.

Going to people who don’t have have success in something. Trying to get advice, guidance, or encouragement, is the wrong thing to do. And that’s for everything in life. Not just RE.

Inaction is also another problem. Inaction is the biggest hindrance for people trying to create their own future. You have to act in order to succeed.

The great thing about action, even if you make a mistake, is that you get the lesson with it.

If you do nothing, nothing ever changes.Click To Tweet

 

So you gotta do something. Doesn’t mean for you to be reckless though.

If someone explains exactly how the investing process will go, showing you data and everything you need to understand it. And you end up understanding it better than how your other investment portfolios work, but you still don’t pull the trigger. You don’t really want it. You say you’re ready, but you’re not.

This is the biggest problem I see.

You have to take action.

Imperfect action is better than no action at all.

Because imperfect action will give you the lesson in how to course correct, to do something differently.

The second thing is to be very clear on why you’re investing and your investment philosophy.

Make your life binary. Either you’re money is moving you towards your goal, or it’s not.

It’s simple. It is or it isn’t.

Stuffing a bunch of money in your mattress is either moving you toward your financial goal, or it’s not.

The other problem I see is the lie of saving up for a nest egg.

That there is a magical number for you to reach that will make you financially independent. It’s just not true.

A nest egg is not what will make you financially free. It’s what you buy with the nest egg, that will generate income for you to be financially free.

Do you want to wait 30 years after you saved enough? To let 30 years of inflation, on these income producing assets go by. Then try to buy them, down the road? When your purchasing power has gone down and prices have gone up over 30 years?

Or does it make more sense to begin to buy one or two income producing assets every year. And let inflation take you 30 years down the road. Gaining price inflation and income inflation for your assets.

That’s the biggest lie, to make people think that they’re safe holding onto a pot of money sitting somewhere.

Not understanding inflation, not understanding market cycles, and not understanding the things that actually affect whether money will even be there in the future can hurt you. People are uncertain about these things.

But one thing is for certain,

“There will always be inflation.”

Life expectancy could go up 50% with a major medical breakthrough in the near future. Then that nest egg you saved isn’t enough to last. Just from an inflation viewpoint.

So not creating streams of non labor income, early in your career, is one of the biggest mistakes you can make.

 

Finally what’s the best way for people to contact you?

People can reach me through vernonville asset management.

They can also directly call me anytime at 1-877-668-3311.

 

 

ERIC TAIT M.D., MBA

Eric Tait is founder and fund manager of Vernonville Asset Management. VAM is a private investment firm that helps investors maintain their wealth through alternative investment strategies.

Eric has analyzed, purchased, managed, repositioned, and developed numerous income producing investment projects both domestically and internationally. He has personally overseen all aspects of the company’s day to day operations with help from trusted advisors and experienced contract professionals.

Eric is also President of Pinnacle Physician Management Organization, a Medicare Advantage partnership with Universal American Corp that has generated over $25 million in revenue since 2009.

Eric received his M.B.A. in entrepreneurship from the Jesse H. Jones Graduate School of Management at Rice University as well as his medical degree from Baylor College of Medicine. Eric is also a practicing physician in Internal medicine at a private practice in Houston, Texas.

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