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The Pursuit Of Financial Certainty And Happiness with Will Street – Part 2

TWS FF 7 | Financial Certainty

 

In this second part of Financial Friday, we are still with wealth strategist Will Street as we move on to talking about the pursuit of financial certainty and happiness. We examine a scintillating article published by the Business Insider, detailing a woman’s insight by studying 600 millionaires on the effects of where you choose to live to building wealth. We discuss the importance of putting one’s happiness and where they find meaning in life to the equation of wealth-building. Learn how to balance financial certainty and security with real life, taking into account friendships, family, and environment. Know that we don’t have to give up the enjoyment of right now to the mirage of the good life in the future.

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The Pursuit Of Financial Certainty And Happiness with Will Street – Part 2

Financial Friday

We are in part two. We started with part one last episode. We’re going to continue with a scintillating article. I’m here with my friend, Will Street. It’s an interesting article from Business Insider. It is the insight a woman had by studying 600 millionaires and she discovered where you choose to live has two effects on your ability to build wealth. First off, we’ll recap the last episode. What did you think of the last episode? How did you like that discussion?

To recap it a little bit, it was good because we talked quite a bit about building wealth in the right way and building it from the base up and talking about uncertainty. Where a lot of people go wrong is they thirst after this uncertainty, but they seek it out without having the proper foundation in place. Not every financial decision is going to pan out. If you’re out and about in search of success or financial freedom or whatever that means to you and when you come across one of those scenarios where it doesn’t pan out. If you don’t have the right foundation to fall back to, that’s when things become difficult for people. You shared a couple of examples of some of those failures, the Puerto Rican fish farm. You got to do the due diligence. Things aren’t always going to work out. In fact, often things don’t work out exactly according to plan. The best that you can do is put yourself in a position to weather the storm and to have the right type of foundation, the right base and to keep moving forward.

You should always try to live within the possibilities, not the limitations – Will Street Click To Tweet

The other point that you made that I thought was super compelling was this idea about tier two. We used as examples a couple of tier two assets, real estate investments, starting a business. The investment in ourselves and finding something that drives us. Finding something that gives us purpose and meaning and the value that it brings as we feel that sense of drive to get out of bed and make it happen. If that’s what is driving us, more often than not, we’re going to have a whole lot more in the tank to be able to push forward and be successful.

It’s the distinction between escaping. Most people are pursuing retirement, which is the escape of what they’re doing because they wouldn’t choose to spend all of their time working in what they’re doing. They’d rather spend their time somewhere else. They’re trying to escape from that. We advocate the discovery of doing meaningful things. I referenced some Tony Robbins material that says that the most fulfilling life comes from discovering that meaning and then spending 50% to 60% of your time doing that, not all of it. That’s where you look at people that retire and are miserable or people that achieve tremendous wealth and then decide to take their own life.

Where that true, that core meaning wasn’t discovered. Money or success or something else they thought was going to help them to discover it, where it’s the other way around where you can discover it without achieving wealth. This is something that’s not talked about when it comes to financial planning or financial advice or what you should do with your money and I think that it’s a tragedy. Most typical retirement planning solves for a specific end, which I don’t think is the end that people are seeking. Let’s get into some typical financial advice by a woman who studied 600 millionaires and she discovered where you choose to live has two effects on your ability to build wealth.

Here are a couple of her claims. She says the key to wealth building is to live in a home that one can easily afford. If you live in a pricey home and neighborhood, you will act and buy like your neighbors. The more affluent the neighborhood, the more the residents spend on almost every conceivable product and service. If you’re high income-producing, high-consuming neighbors roll up to the driveway in a BMW or a Mercedes-Benz, it’s likely you’ll feel the urge to do the same. The pressure to keep up with the Joneses can also be affected by lifestyle creep. The tendency to spend more whenever one earns more. First off, let’s take her perspective. What is she saying? What is she trying to allude to when it comes to a person’s ability to build wealth?

One of the natural tendencies we have as humans is we value community. Click To Tweet

The common expression that you hear is somebody who’s house-poor. She’s saying, “Don’t be house-poor. Don’t spend or don’t buy a house that uses up more than a certain percentage of your disposable income. That’s a term that is somewhat familiar is this idea being house-poor. That’s the first piece, the size of your mortgage relative to your income. The second is if you live in this neighborhood and you see the neighbor across the street rolled up in a new 7 Series BMW, my 3 Series is not adequate anymore. I need the 7 Series. I need the S-Class Mercedes. I can’t resist that urge. If I see that my neighbor has something that I don’t, I’ve got to keep up with him or her. We’ve got home automation, swimming pool in the backyard, we’ve got it all. Pickleball court is the latest. “My neighbor’s got the pickleball court. I need the ball court. I’m going to spend it, even if it means I’m spending now what I would otherwise save.”

One of the natural tendencies we have as humans is we value community. We value friendships. We value relationships. If you live in a certain neighborhood, you want to be a part of that. I don’t think there’s anything wrong with it. She categorized that the wrong neighborhood, then you are most likely going to spend more than you make and you’re going to get into financial trouble. That’s what she’s alluding to. You’re not going to save and then you’re going to affect your future or ruin it, or both. Consider billionaire investor Warren Buffett. He lives in a modest house worth 0.001% of his total wealth. This is a commonly held perspective. I understand the accumulation of wealth. If you spend less, you’re going to accumulate more. It’s hitting on the financial principle, not the lifestyle and the meaning behind where you live and the memories and the experiences. It approaches it from a purely economic standpoint.

TWS FF 7 | Financial Certainty

Financial Certainty: Your home is not an asset because it does not produce cashflow.

 

The thing with economics is it doesn’t take into consideration human behavior. She’s saying that human behavior, you’re going to spend less and you’re going to have more to accumulate. Is there anything that’s lost? This is where we’ll pivot to the other side of the coin when it comes to home ownership, the home that you live in. I’ve heard it as your home is not an asset. Robert Kiyosaki talks a lot about that because your home doesn’t produce cashflow. Someone else isn’t paying your mortgage, you are. You’re putting money into the maintenance and you’re putting money into upgrading this and upgrading that. You have to have Mercedes-Benz and BMWs. I look at the value of living in a nice neighborhood, the value of living in a nice home and what value that provides you when it comes to lifestyle, meaning, memories, family, etc. What do you think of the other side of the coin? How could you say, “I see what you’re saying, but here’s another opinion?”

I see what you’re saying is this idea. It’s the Dave Ramsey budgeting. Is budgeting generally a good idea? To tip our cap to her a little bit, it would be generally should you not spend every disposable dime that you have on a mortgage? The flip side of that coin is that also doesn’t mean that you should live in a studio apartment if you don’t have to. You don’t need to live in a trailer park if you don’t have to. There’s something to be said about a good safe neighborhood with good schools and a good community feel where it’s safe to walk on the sidewalks at night and spend time together as a family. The other flip side to this hyper-focus on budgeting and saving and as most people probably do, you probably have met people in the past who are hyper-focused on saving a nickel. They drive 30 miles to save a nickel on gas. The rational person would be like, “What did you do? Why did you do that?”

Your environment has more to do with your experience of life than you think. Click To Tweet

The flip side there is you can take it to the extreme, where generally, are there some good core principles there? The flip side to that is the happiness piece, the safety piece, the security, the peace of mind. Especially when you consider how much time you spend at home with your family and the experiences all of us want to have with our families. Your house is the key component of that. You can do all that without obsessing over the neighbor’s car and making sure that you put in the pickleball court that’s slightly bigger than your neighbors.

These are all good points. I’m going to continue on with this perspective, hitting on some different things. I understand this person’s point of view and she makes valid economical points. At the same time, if you look at what life is about according to me and it’s different for everybody. I’ve had lots of clients. There’s a period of time within a year that they had divorces, eight or nine people all got divorced and they were around the same age as me. One, in particular, hit home to me because he had made the statement, “All the work I’ve done, everything I’ve done has all been for my family and now they’re gone.” He built tremendous wealth. He worked all the time. I look at that and his intention was genuine. His actions didn’t necessarily correspond to that. You look at a home and where you live. It’s like, “That’s what gives life meaning is the memories and things you can do with your family.” I’d also say the friendships that you have.

TWS FF 7 | Financial Certainty

Financial Certainty: Your environment has a lot to do with the ideas that are in your mind, the expectations you have of yourself, and the questions you ask others.

 

If you look at living in an affluent neighborhood, it’s affluent for a reason. They may drive BMWs or Mercedes-Benz, but the conversations that I’ve had with people in my neighborhood, I would not have had in another neighborhood. I look at my neighbor next door. I’ve had some fascinating conversations with him. He runs a microfinance bank and he consults with countries. He does a lot of work in Myanmar, Asia and Africa. It’s fascinating to have these conversations with him. He’s a computer programmer by trade. Those are the conversations. Those are the things that you can learn and be inspired by people. I have a neighbor that lives across the street and he’s been a successful attorney. What he knows and the books that he’s read. I have incredible conversations with him and we’ve made other friendships as well. I look at what’s the price of those relationships? What’s the price of those friendships? What ideas have they given that would not have come by living in a neighborhood that was 0.001% of your income? I looked at that and there are many intangibles associated with it.

Getting to this person’s point, how can you have both? How can you be responsible? How can you have the experience of life right now, not waiting 30 years or 20 years down the road to retirement where you are able to have the permission slip to experience life? This comes down to your financial education. It’s understanding a financial statement, money in, money out. If you can’t afford the neighborhood, it isn’t, “We have to live in another neighborhood.” It’s asking the question, “How can I live in that neighborhood? How can I live in that home?” That starts to engage a part of your brain where you start to look for opportunities. You may not be able to live there at this point or this point, but at some point, you may be able to live there. It’s the pursuit of that because you figured out ways to make more money. I look at the home that we live in.

We’ve lived in the same neighborhood for many years. This is the third home in the neighborhood, but I lived on the outskirts for a number of years. We almost moved a few times, especially during the financial crisis but it’s because this neighborhood is somewhat affluent neighborhood and it’s because I had established relationships there. I had friendships there and I wanted to also have a nice house for my family and also a happy wife because happy wife equals happy life. It was one of those things where I could have taken the money that went into a house and invested it. I would have had more money, have more cashflow, at the same time, I wouldn’t have had the experiences with my family.

You look at what that does to your soul, what that does to your drive. It can affect many different things. That’s the conversation that’s not typically had with these types of articles. They give you this, “Step one is to make sure that your mortgage payment is less than 20% of your earned income,” which are always technical steps and there’s merit to some of those. It’s disempowering because it almost assumes that you’re at the income level you’re going to be for the rest of your life and you better deal with it. If you want to retire one day, you better scrimp and save and not enjoy life until you’re 65. I don’t think that’s the right mentality. They may not say that’s what they mean. That’s the feeling you get.

You're one idea away from a totally different life. Click To Tweet

That’s where the motivation comes from where in order to build wealth, you don’t figure out how to earn more and be more valuable, but you scrimp and save based on the money you are earning. That’s the only money you’re going to earn. That money there is going to somehow compound and grow and you have enough money to live for the rest of your life at 65. It’s a narrative that is disempowering. Looking at our perspective, it doesn’t mean that you need to go out and buy a beautiful home and BMWs and Mercedes, but you need to start asking different questions. There’s merit to her perspective. There’s also merit to the other perspective. Hopefully, you’re seeing that. You sit on the edge. It’s up to you to determine what’s right for you at this point.

I can resonate with a lot of what you said about the neighborhood that you live in. For us, we moved a few years ago. It wasn’t to try and get into some fancy neighborhood where we wanted to be surrounded by a bunch of gazillionaires or anything like that. For us, it was family. We live within about a mile or so of my wife’s two brothers. The result of that is we live in a neighborhood that we love, that we’re comfortable with, that’s a good neighborhood. The interaction with our kids among their cousins and holidays and things like that, it’s a completely different dynamic.

The thing that’s interesting is for me, I didn’t grow up like that. It’s one of those things where I would have been stuck in that old mentality. I would have imposed this artificial ceiling on myself that, “We can’t do that. We got to take where we are right now, assume that that’s our maximum and operate from that level and below. We can’t do that.” My wife helped me stretch a little bit and see opportunity, meaning and value. Now that we’re there, my kids are having a completely different experience as kids from what I had. The family is so much more critical, so much more part of their everyday lives than it was for me. I wouldn’t trade that for anything. It’s huge.

Your environment has more to do with your experience of life than you think. It’s the environment, whether it’s where you live, the culture of your office and the social networks that you’re in. Those are environments and that environment can make life miserable or it can totally empower you. It can also stretch you. I’m going to give you one example. This was a long time ago, but after my sophomore year of college, I went to a hockey camp in Minnesota. It was sponsored by the Anaheim Ducks. It was a humbling experience because I was in an environment of these Triple-A players. There are a couple of pros there, it was a camp where it was training but also spotlight. I remember getting out onto the ice the first time and the speed that they were warming up. For me, it’s the speed of a game where it was all out. What it did, it raised my level of play because I was in an environment that stretched me. I believe that anybody can be stretched. Anybody can make more of a difference tomorrow than they did now.

A lot of it depends on the environment that you’re in. Some of it depends on your internal drive and what you want for life, your vision, your mission. Your environment has a lot to do with the ideas that are in your mind, the expectations you have of yourself, the questions you ask yourself and the questions you ask others. You’re one idea away from a totally different life. You’re one decision away from a totally different life. Your environment influences a lot of that. That’s why I try to go to events. I try to participate in mastermind groups. I try to be around individuals who are inspiring, who are pushing the limits, that doesn’t settle for the status quo. That inspires me, it helps me stretch. If I didn’t have that, it would be more difficult for me to do that. What do you think of part two?

We dissected it pretty well. There’s always a second side or even a third.

Life needs to be valued and celebrated. Click To Tweet

It’s one of those things where I find it disheartening sometimes that people sacrifice the enjoyment of life right now for what I consider a mirage of the good life in the future. Sacrificing now, I don’t think you’re suddenly going to have an amazing life when you retire or you achieve success. Life needs to be valued and celebrated.

I think so much of those limitations are mental. I can remember as a kid growing up where I had some friends who were better off than we were financially. They came from amazing families. I got to see from the inside. I had friends whose families were awesome and who included me in a lot of what they did, vacations and stuff like that. I got to be able to see it from the inside. My parents were that limiting frame of mind. They would refer to my friend’s families. It was with some jealousy and with, “We could never afford to do that. It’s nice that they can do those types of things, but we can’t do any of those things.”

I was living in an environment where I was hearing all these limitations, but I was spending a significant amount of time within these other environments where I was seeing everything that was possible. It’s not like they were burning $100 bills for the fun of it because they had so much money. It wasn’t anything like that. They prioritized what was important to them and they lived within that framework. Early on in my teenage years, I consciously made the decision what I wanted. I wanted out of where I was, that mindset, those limitations. I wanted to gravitate toward what my friends’ families had. The number one reason why I went on to become an attorney was that my best friend’s dad was an attorney. I saw the family dynamic. I saw the lifestyle. I saw what they did together as a family and what I didn’t do. I bee-lined it straight for that.

The idea was nurtured over the course of time, but it may have come in one experience. Those ideas can come frequently if you’re in the right environment. That happened to be the circumstance at the time for you. You can intentionally be in certain environments that can inspire you, stretch you and push you beyond what you consider your limitations. Hopefully, this has been a valuable episode for you guys. It’s setting the stage for some future ones that we’re going to do when it comes to investment and also some other financial strategies. Thanks for joining us. Make sure you go and listen to our past episodes as well as our primary episodes. We’ve had some awesome ones, G. Edward Griffin, Lawrence Reed, it was fun interviewing those guys. The topic’s capitalism so learn about capitalism. We’ll see you on the next episode. Thanks.

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About Will Street

TWS FF 7 | Financial Certainty

Will earned his Bachelor of Arts degree from Brigham Young University in 2005. After graduating from BYU, Will attended the University of Iowa College of Law and received his Juris Doctor in May of 2008. Will began practicing law with the law firm of VanCott, Bagley, Cornwall & McCarthy the oldest and one of the most well-respected law firms in the State of Utah. Will’s practice focused primarily on consumer finance-related litigation, consumer finance transactions, sale and purchase agreements, NDA’s, RFP’s, teaming agreements, security agreements, creditor’s rights in bankruptcy, and estate planning. Working directly with clients to analyze a problem, develop a solution, and working to ensure a successful resolution are what Will enjoyed most about being an attorney. Will comes to Paradigm after nearly six years in the private practice of law.

After his exposure to the Infinite Banking concept and seeing that his legal training would be directly relevant to his role at Paradigm, Will made the decision to leave his practice. Paradigm allows Will to continue to do what he enjoys most – develop client relationships, dissect problems, create solutions and work collaboratively with the client towards a successful resolution. Originally from the Tri-Cities area of Eastern Washington, Will currently resides in Salt Lake City with his wife, Sunny, and their three children.

 

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The Hierarchy Of Wealth Unpacked

TWS FF 1 | Hierarchy Of Wealth

 

This is a replay of the presentation Patrick gave at 2018 Cash Flow Wealth Summit about the hierarchy of wealth. When you look at the hierarchy of wealth, there is always a starting place which is the foundation. There is a process that you go through step by step. Patrick ranks these different levels or categorizations of wealth based on the degree of control as well as risk. Patrick created The Hierarchy of Wealth to help him as well as the clients that he works within the personal advising space to prioritize investments, financial decisions, and opportunities. Learn this simple model so that you can position certain assets in different places as well as their priority and sequence.

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The Hierarchy Of Wealth Unpacked

Financial Friday

It is an honor to be able to talk about financial strategy with you in the 2019 Financial Fridays season. This is going to be the first episode. Instead of me going into a diatribe of my financial philosophy, I’m going to replay the presentation I gave at the 2018 Cash Flow Wealth Summit. Some of you are familiar with it and some of you may not be familiar with it but for more information, you can go to CashFlowWealthSummit.com. We also have a podcast, the Cash Flow Wealth Show, but I’m going to just introduce the topic that I spoke of in the Cash Flow Summit relating to my financial philosophy. For those of you who have listened to The Wealth Standard for a long time, you probably came to an idea of what my philosophy is in general. When it comes to my financial philosophy, I believe it’s very similar if not the same.

TWS FF 1 | Hierarchy Of Wealth

Heads I Win, Tails You Lose: A Financial Strategy to Reignite the American Dream

The presentation is one way in which I like to explain it. I thought this out quite a bit for the book that I came out with, Heads I Win, Tails You Lose: A Financial Strategy to Reignite the American Dream, and it’s what’s called the hierarchy of wealth. The inspiration behind it was the nature of an investment and how investment is evaluated by an individual. I don’t think it’s evaluated in the exact same way. I look at the Maslow’s Hierarchy of Needs as well as the framework in which I built the hierarchy of wealth. Maslow has a hierarchy or a process by which humans meet their needs starting with physiological ending with self-actualization. There’s a number of them in between, but there is a process where you go step-by-step. You don’t necessarily skip steps. I look at the hierarchy of wealth and I believe that there is a starting place which is the foundation.

I ranked these different levels of wealth or categorizations of wealth based on the degree of control as well as risk. There’s a different way of looking at something depending on the person looking at it and that’s where the control on risks come into play. Looking at the hierarchy of wealth, it starts with a foundation of tier one. That tier one has certain characteristics of wealth and a certain percentage of your overall financial strategies that should be in that foundation. Then there’s tier two where you progress to which has a good degree of control and perhaps slightly more risk associated with it. Tier three, which has less control and more risks. Finally, tier four which has very little control, if any control, and very high risk. Looking at the financial strategies, the typical financial plan, it’s an inverted pyramid. People start with the riskiest whether it’s mutual funds or stock market-based investing where they don’t have much control and also take on a tremendous amount of risk as it relates to the performance of their overall strategy. I believe that that is the opposite way to look at it.

You are going to learn quite a bit in this presentation but throughout the Financial Fridays, I’m going to be talking with who I consider experts. Some I know very well and some I don’t know very well. The nature of the questioning is around the financial strategy that is in their business. These are individuals who offer their services to investors and you’re going to see that I take two angles. The first angle is the actual service and product and what they do. What I believe why a business succeeds or fails is the other angle that I take, which is around their business operations. It’s an angle that most people don’t know how to take. It’s the most important because financial failures and investment failures come from the operations and not the product itself. A good example of that is a Wall Street model where they have an incredible business and operational system and a lackluster, poor product that has not performed. I look at why they’ve been so successful. It’s not because of the product and it’s very similar to the McDonald’s and the quality of their hamburger. They’re so successful because of their operations. It’s not because of the quality of their food.

If you look at alternative investments, I believe there are gems in the alternative space whether it’s a rental property or other alternative investments. However, there’s a tremendous risk and that risk may not always be the actual product itself and the offering of the investment. It’s the actual people behind it and their operational structure, their background, and their experience. That tells you a lot about what they will do when it comes to challenges in the economy or challenges with their business, which is an inevitability. I hope you enjoy this first segment of understanding the hierarchy of wealth so that you can figure out the ways in which you position where your wealth is, where your money is allocated, where you focus your attention and your time and what you decide as a pursuit of expertise when it comes to understanding certain investment categories. I hope you enjoy the rest of the season where we’re going to be talking on Fridays about financial strategy.

I wanted to acknowledge you for being here and the time you have been willing to invest in listening to what my expertise is. This is what I do outside of being the co-host of the Summit as well as the co-founder. It’s something I’ve dedicated my life to and it does mean a lot to me that you are investing time and you’re investing attention and I don’t take that lightly. Thank you for doing the things that I believe are necessary to accomplishing financial freedom and achieving your goals. Thank you for being here.

My topic is called the hierarchy of wealth. The hierarchy of wealth is something that I created to help me, as well as the clients that I work within the personal advising space, to prioritize investments, financial decisions and opportunities. Priorities are very important because there are so many choices. We’re adding to these choices and adding to the opportunities just based on what you’re learning at the Summit, but where do those opportunities fall in your specific strategy and your specific path to those end goals that you’re seeking? I believe that the hierarchy of wealth is a simple model so that you can position certain assets in different places as well as their priority and in sequence. This is something that I use personally and it’s helped me personally to stay focused. Before I get into the meat of the presentation, I wanted to introduce myself to those of you who may not know who I am.

Priorities are very important because there are so many choices. Click To Tweet

I am the author of the book Heads I Win, Tails You Lose: A Financial Strategy to Reignite the American Dream. It’s something that took me a couple of years to write and it’s been well-received. It has a lot of my stories and my experiences over the years and also a lot of details in regard to the financial strategies that my firm specializes in. I’m also the host of The Wealth Standard Podcast, which has been out there for years. It started about 2007. Something I love doing is interview a lot of people and talk about things that are of interest to me. The topics range anything from financial strategy to financial products to economic issues and theories to investing and business. I do get into a lot of personal development topics as well. If you haven’t listened to the podcast, I would encourage you to do so. It means a lot to me to support me and it’s something I love doing and I’m passionate about. This is getting into my expertise and my firm. I was honored by Investopedia as one of the Top 100 Most Influential Financial Advisors. It comes down to the influence that we’ve had in the marketplace by putting out what our financial strategies are and how they are benefiting the lives of our clients. I do that through my firm, which is Paradigm Life.

In Paradigm Life, I am the President and CEO. I also still do some personal advising, but we specialize in certain financial strategies that help people achieve financial independence. In addition to that, I’m active on social media. I’m relatively active on social media and I would love to connect with you out there. I share a lot of information and other resources that you may find valuable. Let’s get into the hierarchy of wealth. The hierarchy is something that didn’t necessarily just spawn one morning. It’s a conglomeration of the experiences that I’ve had with individuals and their unique financial situations. We do business with people all over the country and Canada and even outside of the United States. I have had the tremendous privilege to see where people are in their finances, what they’re trying to do, what are some of their challenges, what are some of the things that keep them up at night.

Maslow’s Hierarchy Of Needs

I’ve been able to position certain strategies to help them. In addition to that, I’ve experienced all of the investment opportunities, ideas, and innovations that are out there. It gets confusing sometimes and I get excited about certain things and become unfocused on others, so the hierarchy of wealth is something that helps me. It’s a simple model where you can position and prioritize your wealth building by essentially adding a label to the different opportunities that you have. The model and the pyramid and the word hierarchy was originated from Abraham Maslow and I was participating in a business event and the training was around the Maslow’s Hierarchy of Needs. As I was learning about that psychological model that outlines our instinctive behaviors to pursue the certain thing that’s called human needs, I made a connection between that and finance. What I’ll do first is just explain what the Hierarchy of Needs is for those of you who are unfamiliar with it. Abraham Maslow was a very famous psychologist and this is a very famous model that has been used in a number of publications and a number of contexts. The model essentially illustrates the sequence of needs that we have as human beings and also the order in which we seek those needs.

The first is the foundational level of the pyramid, which is physiological. The physiological is food, shelter and clothing. Ultimately, we seek those instinctively before we seek anything else. Once we have established food, shelter and clothing, we seek to establish safety. That could be the safety of our community, our neighborhood, the country that we live in, the state that we live in. It’s seeking a safe environment. We naturally seek that once we have established our physiological needs. As you’ve established physiological and safety, then once those two are established, the next need that we seek are relationships. Those relationships could be friendships, family or community but also our intimate relationship with a partner. That is something that comes after our basic foundational physiological needs are met and our safety needs are met. We pursue those relationships. Once those three sets of needs are established, the next thing we seek is self-esteem. Our identity, our meaning in the world and our self-concept. There are a number of ways to explain it, but we seek to separate ourselves from others. We seek to magnify who we are and, in our uniqueness, compare to others.

TWS FF 1 | Hierarchy Of Wealth

Hierarchy Of Wealth: Financial education and having a financial statement are foundational elements upon which rest all the other investments that you have as well as financial decisions.

 

The Hierarchy Of Wealth

Once you’ve established all of these others, physiological, safety, relationships, self-esteem, you pursue what Maslow called self-actualization. Self-actualization is pursuing something outside of you. It’s a common altruistic idea where you’re seeking not for personal gain but you’re seeking to provide ultimate value for people. What does this have to do with anything? For me, it is a very famous model that makes sense. I believe as human beings, we like models to create a context for us which we organize, help us understand, give us direction or simplify. What I did is I connect the dots between the Hierarchy of Needs and how to position investments and financial decisions and that’s where we created the hierarchy of wealth. This correlation is important for you to understand and I’ll try to make it as simple as possible. The first arrow going down is control and influence. I’d also say it corresponds to the nature of certainty. If you go to the red side, it is uncertainty and then risks, the probability of loss. The idea is on tier one, tier two, tier there and tier four. These are different types of investment decisions and investments themselves. Financial decision could be considered here.

The bottom tier is where you have the highest degree of certainty and it’s because of an element that you possess or control and influence. The higher up you go, the more risk you take on because of the uncertainty. It’s the categorization of assets. Tier one is your financial foundation. The easy way to explain that is your reserves, your sleep well at night account, the money that’s set aside when things don’t go the way in which you had planned. I would say financial education is a big part of tier one. Insurance, insuring against those events that you may not be able to adequately prepare for. Organization skills, your business and how your business is set up and your overall financial strategy. Having a financial statement is also part of tier one. These are these foundational elements upon which rest all the other investments that you have as well as financial decisions.

Tier two is investments where you have more control and influence. In tier two, you can identify yourself as an asset or something that produces cashflow. I believe we are our number one asset because there is the greatest rate of return based on the money that we put into ourselves whether it’s a financial education or professional education or just maximizing our ability to create value. I’d also say that there are some other investments that would fit in here that have collateral that produces cashflow where you have control and influence. I’m trying to get the general concepts across. Tier three are investments that you have less control over. It’s money that you will give to another person. When you do give money to another person, you have a level of education where you can ask the right questions and you understand what the money is doing. There is cashflow associated with that investment. That investment is where you’re able to ask the right questions, do the right due diligence, understand the mechanics of what is going on and potentially also have collateral associated with it. It’s an actual tangible asset of the underlying investment and the money that you’re putting in.

Tier three is not where you have the ultimate control and influence, but it’s where there are investments that you understand, and you hand your money over to somebody else to make a return. Tier four are assets that you have the least control and influence over and it’s where the highest risks exist. The education that you possess is not adequate to understand the underlying investment. Tier four is where most people have their money. If you were to flip the pyramid around, the typical financial mindset and typical financial plan are to start with your mutual funds and your 401(k) assets that are in something where you just hand your money over to a money manager or an investment bank. You trust that they’re competent enough to make a return for you and give you the end result that you’re looking for way down the road. I don’t think that’s realistic. I think that’s irresponsible. If you look at establishing foundation and building on that foundation, that is how I look at wealth-building. That’s how I have looked at success based on the numerous experiences that I’ve had with individuals and their personal finances.

It's important to establish your foundation first which creates an abundant mindset that allows you to make better decisions. Click To Tweet

The Hierarchy Of Wealth Unpacked

It is almost the complete opposite of how we as a society are taught to manage our money and what we’re supposed to do with our money and how to invest. That’s the basics of the hierarchy. I’m going to dive a little bit deeper into the story of how this was created. There was an event back in 2013 that touched me deeply and it helped me start to put some of these elements together. It was an investment conference where I was speaking and a number of Rich Dad’s advisors were speaking. Robert Kiyosaki is the author of Rich Dad Poor Dad. He spoke on our Summit and his wife has also spoken a few times, Kim Kiyosaki. The Rich Dad’s advisors are specialists in a particular field that Robert Kiyosaki has chosen to have as his personal advisors as well as those who have written books underneath his brand. I get Andy Tanner and Tom Wheelwright, the other Cofounders of the Summit. Andy Tanner is one of the co-hosts. they are Rich Dad’s advisors in particular areas and very intelligent and very giving people.

I’ve learned a tremendous amount from all of them but this particular time in 2013 was very simple but I had not connected the dots. This is what I was taught by Ken McElroy, Josh and Lisa Lannon. It came down to a continuum or an order of focus to create the most amount of wealth. It started with producing money as a business. It’s where your business is going to produce the most amount of wealth and cashflow. I would also add to this, it’s not just your business. If you don’t have a business, it doesn’t mean that it’s not going to produce cashflow. It’s the business of you. It’s your ability to educate yourself, figure out ways to be more valuable to others and in return, receive compensation for that value. The idea is to produce as much of this cashflow as possible. Once you’re producing that cashflow, it’s setting aside a certain percentage outside of your lifestyle to capitalize on investment.

If you haven’t read the book Rich Dad Poor Dad, the definition of an asset is something that puts money in your pocket. An asset according to that definition is also producing cashflow. The idea is to build your cashflow to the point where it’s passive. There’s not much time or effort on your part which allows you the mental wherewithal to produce more money as a business or as an individual. Here is where there are infinite possibilities associated with you learning something and being a value to other people. The financial decisions I make and the investments that I position is to be an infrastructure for me to figure out a way to be the most valuable to others. You taking on this mindset, you first have to consider yourself your most valuable asset because you are. Once you have established that belief or that idea, now it’s figuring out ways to educate your assets so that you are more valuable to other people. It’s a model or a continuum that’s simple but it connected so many dots for me.

It doesn’t matter how big your business is or no business. If you’re an established business owner or you’re just out of college in your entry-level job, it doesn’t matter. When you identify yourself as an asset, you figure out ways to maximize it. It requires education but also requires leverage. It requires insights by others, coaching, being in the right environments and these right social groups. There are so many different ways in which you can figure out how to take who you are and be a value to somebody else and have a financial remuneration for that exchange. There’s no barrier to entry to understand yourself as an asset. The equation that you do want to understand is here you are and if you improve your education and education I would say, the definition is to improve your capacity to be valuable to somebody else. Increasing education increases your value and an increase in value gives you more money. There are infinite possibilities there. There’s something you can always work on. As you establish passive cashflow, that enables more of this. Hopefully, I’ve established that point.

TWS FF 1 | Hierarchy Of Wealth

Hierarchy Of Wealth: Start to look for opportunities to increase your cashflow to make more money.

 

I’m going to expand off of that continuum. You have your specific business or the business of you and you produce value, you get money in return and then you make an investment. This is where it comes down to the hierarchy of wealth where you are able to categorize the priority of what you established first, second, third, and fourth. I’m going to break down some of the assets and give you some examples. First, as you are producing cashflow and that you are investing that cashflow, tier one is what gets filled up first. Tier one is assets but they’re also financial decisions. Some of these decisions may not be an investment that is a stereotypical investment or something that puts money in your pocket. It might be an organization. It might be a financial team. Whatever dollar amount allows you to sleep well at night and not have to worry about losing the primary income and having six or twelve months to figure it out, that is some of the most valuable money ever. Getting rid of bad debt, if that’s the situation that you’re in, is a good decision in tier one. Your financial team is important to establish. Asset protection falls there as well as your business structure.

There are numbers of other things that relate to the specific situation of the individual, but this is your foundation. This is a foundation that may not produce any return, but it is a foundation that will ensure that wherever tier two, tier three or tier four investment goes, you are protected. Whereas I see most people when one of these goes wrong, it crashes the entire house of cards. It’s important to establish your foundation first which creates an abundant mindset that allows you to make better decisions to focus more on where your strengths are and how you can use those strengths to produce massive value for others. Establishing that foundation is paramount. This is where my team and I and our expertise falls. We feel and have used it over the test of time in thousands of clients that we’ve worked with, but there is one fundamental tool that should be in your tier one arsenal. It is a specific type of life insurance policy and it is a life insurance policy that isn’t your stereotypical life insurance. It’s a life insurance policy that when you design it, it acts as a growth vehicle that has a liquid cash value as well as a number of other benefits.

As we’re talking about the foundational asset, as you are producing cashflow and you’re filling up your bucket as far as reserves are concerned, we encourage that you systematically save and put aside a certain percentage of your income. That percentage first builds whatever your reserve requirement is in six to twelve months, but then beyond that, is where you start to get into other investments. Even in the six to twelve months of reserves, the account that we encourage which we have defined as the wealth maximization account, which is this specific type of life insurance policy designed in a specific way, meets the criteria of this tier one asset. It’s something that you have control and influence over but it’s also something that you can’t lose. There is a contractual guarantee backed by some of the strongest institutions in the world, but you have a higher amount of interest that’s earned on your reserves. You have a level of protection as well, but you also have the ability to take a loan against the growing value in this account. That is important when it comes to making investments in tier two, tier three and tier four.

The wealth maximization account is something that we designed based on what your situation is. We designed it first to establish the reserves that help you sleep better at night. Once that is established, the money beyond that will become your opportunity fund. The opportunity fund or opportunity amount is what you identify as the amount of money to invest and that investment is going to be in tier two. I’m going to get into something that may seem somewhat complex. The idea of establishing your reserves is paramount than getting into money above and beyond that reserve amount as your opportunity fund. At that point, as you start to acquire tier two investments, it also produces cashflow. As you use the loan provision that is afforded to you by the insurance company, the cashflow from that asset is paying back the loan that was taken to capitalize it. It will keep you disciplined to continually save and be disciplined to payback and then capitalize more investments. Every time you make a loan payment, that money is available to make another investment.

Ask questions based on your expertise or education around an investment instead of blindly giving money to people. Click To Tweet

As you establish your reserve amount, the six to twelve months of your comfortable living expenses and you have money that is available that’s above and beyond that which we are calling the opportunity fund, it’s when you start to look for opportunities to increase your cashflow to make more money. This might be first as far as tier two is concerned. These could be personal development type of investments and that’s basically investing in yourself. It could be a certification for the career that you’re in or the profession that you’re in. It could be learning leadership and management skills. It could be to invest in a paid mastermind group. Kyle Wilson, that’s one of his primary businesses is establishing these high-level paid mastermind groups in different parts of the country. These are groups of people that get together. They’re in different professions, different ages, different goals, and different priorities, but they get together and exchange ideas, brainstorm and mastermind so that you can get insight. Have your own board of directors in a sense to gain insight into what your biggest and best opportunities are. If you’re interested in that, pay attention to Kyle.

These are investments that you control and have influence over. It may not be a personal development course. Maybe it is purchasing a property, a property that you hold title to, a property that you control, or a property that you have influence over. If you are a business owner, it also could be to capitalize on hiring somebody or a marketing strategy or ways in which you can improve the cashflow of the business. Tier two assets are vast, but the idea is that as you acquire those, you acquire them by using your opportunity fund which is a loan provided by the insurance company. Once you capitalize it, the discipline over whether that investment is working or not is the cashflow that it’s producing. The loan payback acts as a disciplined way to ensure that it was a worthwhile investment.

I’ve personally analyzed hundreds of different types of investments ranging from real estate investments to commodity type of investments to training investments. I would never say that I’ve heard them all, but I’ve heard about lots of different types of investments. This is where I would say it’s important to realize that it’s all subjective. These aren’t just absolute rules because you may know a certain field better than another field. That may for you be a tier three or tier two investment. For me, it might be tier four investment because I don’t have that background or education. As you’re positioning where your investment opportunities are, a great thing to ask yourself is how much you know about the mechanics of an investment? How much control do you have? How much influence do you have? What’s the liquidity?

If you don’t some of those variables, then it kicks into tier three and you are now asking questions based on your expertise or education around that investment instead of blindly giving money to people. That’s what I would consider a tier four investment. The idea here is to have a way in which you categorize your investments. From a percentage of wealth standpoint, I have broken them down into different ranges as far as how much of your total wealth should be in tier one, tier two, tier three, and tier four. Here are the ranges that I’ve found to be the most successful. Your foundation which is your tier one investment is 30% to 50% of your wealth. Tier two is 30% to 40% of your wealth. Tier three is 10% to 30% and then tier four, I put 0% to 5%. I believe that a focus on just the first three can get you to the point where you have achieved financial freedom in a short period of time, but it’s establishing a foundation and going in the right sequence.

TWS FF 1 | Hierarchy Of Wealth

Hierarchy Of Wealth: The hierarchy of wealth is a great way to set the foundation of a context that could give you the direction of what to focus on first.

 

As this whole ecosystem is working for you. The idea is to focus the financial returns from the investment as a means and as a medium to discover what is truly the best thing that you can do with your time to create value for other people? I would consider that as an infinite type of investment that you should always be focused on. What I wanted to do is to teach you about this in the context of a story. It’s a client that I believe represents the story very well. It’s also a client that is stereotypical of those that we work with and how the concept of the hierarchy of wealth has helped them to be more organized, have more certainty and have more direction associated with their finance.

Paradigm Life

I’d want you to meet John and how we do business at Paradigm Life which is virtually where we don’t meet with people face-to-face in person. We do meet with some, but 95% plus are those that we connect with and do business with virtually. We meet through a video conference and John was one of these relationships. I met John years ago and he was one of those driven guys that were excited about life. Similar to my four-year-old who has an on switch and he has an off switch. He’s on switch is all out all the time and that was like John. He was excited. He was motivated, and he was driven. He was excited about life. At the time, he was in a high paying government job which was difficult for him to leave especially with the carat of a pension that he had now. It was in California but regardless he had put a lot of time into this profession and he wanted to stick it out for a certain period of time where he became invested in his pension.

He had money in the stock market. He had a 401(k) on his pension but he discovered this entrepreneurial drive inside of himself and started to pursue those types of investments. He had a few real estate investments, a couple of single-family homes. He also had a handful of individual mobile homes. His master plan was to leave this particular municipality once he achieved his tenure or his vesting which is twenty years. His dream was to open a hospice franchise for a variety of reasons. I knew a lot of this before I even met John because of the team that I work in and how they do some discovery to see if our services are the right fit for people. I was excited to meet him because of how driven he was and the interactions that took place before I was able to meet with him.

How I usually start my meetings is by asking a very simple question which is, what keeps them up at night? I asked John this question and that’s when he unloaded. He described this drive within him and this frustration that his job was creating to pursue what he wanted to do. He talked about his investment experience and also talked about some of the investment losses that he had. He also went into his time is spread thin where he’s not able to focus because he’s going to conferences and he’s going to events. He had a financial coaching thing he was doing. He had his job and he had his family as well. He started to drop balls and he made some bad decisions with some investments. It started to run up credit cards. He was using credit cards to purchase the mobile homes and the thought that he would be able to get enough cashflow to pay them off before the 0% phase was done which didn’t happen.

How I usually start my meetings is by asking a very simple question which is, what keeps them up at night? Click To Tweet

He had his finances all over the place and everything was disorganized. It was keeping him up at night and the level of uncertainty that he had was at an all-time high. As I took his story and then took some of the concerns and challenges that he was facing, I sympathize with him. I had seen those similar financial situations with other people that I’ve met with. This is where I started to explain to him how the hierarchy of wealth worked. It was a model that was so simple that we started to talk about all the different things that he was involved with and it started to place him in those different tiers. We found out that most of what he was doing was in tier three and tier four and it was putting his entire life in jeopardy. The first milestone was to figure out a way with some of his budgeting and cashflow to set aside 10% of what he was currently making into a wealth maximization account. He committed to me to not make any other investments or made investments decisions until he had established his sleep well at night account. We wanted to achieve twelve months of his expenses because it wasn’t just him sleeping well at night, but it was his spouse who was also not sleeping very well at night.

The first order of business was to set aside a systematic way in which John could save into a wealth maximization account. We started to establish reserves at the same time we were paying off some of his high-interest credit card debt which required selling a couple of his properties. One was sold at a loss, but we felt that this was something that made sense because of the high interest that he was paying. Also, the fact that two of the properties were not performing at what he was anticipating. Those are the first couple of priorities. The fourth priority and milestone was to start to establish in his opportunity fund the down payment for that first franchise, but something else occurred during this whole process. It was the fact that with this franchise that he wanted to open up. There was a team involved, a team of experienced nurses and licensed people which he was not. I can’t remember what the minimum number of people was, but it was just under a dozen and John hadn’t had much leadership or management experience. This was one of those overlooked things. Because he didn’t have that background or experience, he was now going to have to rely on those skills which he didn’t have to operate a franchise.

We came to the conclusion that this was something that he should not invest in until that experience or that understanding of leadership and management was in place. The plan was his idea. He found some opportunities within the municipality to do a lateral move which would have put in jeopardy anything that he had established as far as benefits were concerned. It was being over first and the second-year employees to the municipality. It wasn’t a two-year plan. It ended up being a little bit longer than three years, but he established an idea of how to run a team. He started to study management. He started to study leadership. He felt he was adequate at being able to provide a good office environment, a good team and business environment to make this franchise work. That mindset was paramount, and everything changed. His priorities changed, and some other opportunities presented themselves. The idea behind the hierarchy of wealth that it helped to create context and focus of what he had and how that related to what his goals and the things that he wanted to achieve with his life were.

It was an amazing experience for me and for him as well. As I look at John’s situation, your situation and the countless others that I’ve been fortunate to meet with, this is a model that is subjective. It is based on your situation which could be having a lot of money but still not being able to sleep well at night to having no money. The hierarchy of wealth is a great way to set the foundation of a context that could give you the direction of what to focus on first. This is something that I’d love to talk about. I love finance and I love seeing people succeed. I’ve seen a lot of success over the course of my career and it’s something that is inspiring to me personally, but I also see a lot of failures. That failure is preventable and at the same time, there are only so many things that we know. I’ve failed a lot at investing and business as well in the past and I’ve discovered ways in which I can take those lessons and use them to empower me and achieve better things for myself. From a financial perspective, I’m confident that this is a model that could benefit you and can help you. It could allow you to position your investments in a way that gives you a degree of certainty that is part of the mindset of financial freedom and it’s impossible to be financially free without it.

Thank you for being here. I hope that you found value in this. As far as learning more about this mindset, this philosophy, these strategies, the best direction to give you is through the audio and PDF that talks about the hierarchy of wealth as well as the wealth maximization account. There’s a whole study guide that’s online that has dozens of videos in there and you can access it even without the book. You can go to HeadsOrTailsIWin.com and you can register for the study guide and also subscribe to the podcast. This is where I’m always talking about these ideas and talking about the ways in which you can improve your life and finances. I would be honored if you subscribed. Thank you so much for spending this time and for investing in yourself. I wish you the best when it comes to your investing and on your road to financial freedom. I hope to hear from you soon or at least hear about your success. Thank you.

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Property As A Wealth Strategy with Paul Moore

TWS 7 | Property

Wealth isn’t simply a bank account balance or a dollar amount of monthly cashflow, rather, it’s a state of mind. John Locke, the philosopher whose words we used as the backbone of this season, argued that the law of nature obliged all human beings not to harm another in their inalienable pursuit of life, liberty and property. He lived at a different time period, the mid-1600s, yet the liberties he fought for would produce a similar mindset we are seeking when it comes to wealth. One of the keys to wealth is the principle of property. Paul Moore, managing director of Wellings Capital and host of the podcast How To Lose Money, talks about the importance of understanding knowledge, education, and experience, and how that relates to property.

Listen to the podcast here:

Property As A Wealth Strategy with Paul Moore

What is the key to wealth? Is there a magic bullet or a fast track? This year in the podcast, my focus has revolved around these questions. 2018 is almost over, as is season three where we are focusing on the principle of property, where are we? First, I chose the phrase, “Life, liberty and property,” because it’s a simple way to describe the foundational principles to achieve wealth. What I came to realize is that there is a natural human inclination to be wealthy. There always has been. There is an essential variable to consider when determining whether or not there is a key or a magic bullet. That variable is the definition of wealth. Ultimately, what I believe we are seeking is the combination of two mindsets, the state of mind that comes from being free and the feeling of certainty regarding your vision of the future.

Wealth isn’t simply a bank account balance or a dollar amount of monthly cashflow rather than a state of mind. Think about it. John Locke, the philosopher whose words we used as the backbone of this season, “No one ought to harm another in their inalienable pursuit of life, liberty and property,” lived in a time period, the mid-1600s, that’s impossible to fathom. Yet, the liberties he fought for would produce a similar mindset we are seeking when it comes to wealth. This mindset is available to all and is why I wrote the book and why I do this podcast. It’s so that you too can believe that it’s possible for you.

Season one, life. Do you consider yourself your most important asset and invest in ways to be more valuable to others? Season two, liberty. What are you pursuing? Independence and freedom or retirement? Season three, property. Does your wealth strategy, including your investments align with what you know or do you delegate that responsibility to someone else? My guest is the co-host of an insightfully charming podcast, How to Lose Money, which is one of the best ways to learn about business and financial strategy. Paul Moore is an experienced businessman, a real estate investor and the Managing Director of Wellings Capital. Let’s turn our brains on and get ready to learn.

TWS 7 | Property

The Perfect Investment: Create Enduring Wealth from the Historic Shift to Multifamily Housing

My guest is Paul Moore. Paul is the Managing Director of Wellings Capital. He’s also one of the hosts for the How to Lose Money Podcast. He is an acquaintance of mine and I can’t wait for this interview. Paul is also the author of The Perfect Investment. Paul, welcome to the show. Thanks for taking the time.

Patrick, it’s great to be here. Thanks.

I had a wonderful time in your podcast when I was invited to it. I had heard of it before, but the theme is amazing. It’s an incredible opportunity for you as a business person to learn from the failures of others through the theme of losing money. It’s pretty fascinating. I told the story on it that I’ve never told before and it was a great opportunity. I’d love to hear your background and how you got to the point you’re at right now with your real estate investment company as well as the podcast.

I wanted to be a parapsychologist in junior high. I’d seen the movie Ghostbusters at some point and it seemed like a good idea. I didn’t have any counsel. No one told me, “You’d probably be good at this or bad at that.” I found out there was no degree in that, especially not at the University of Utah or out in that area. I went and got a petroleum engineering degree, which sounded like fun drilling oil wells but I never used it. I went on and got an MBA. I went to Ford Motor Company for about five years. After that, I started my own company. We’re an HR outsourcing company, a staffing firm. About five years into it, it turned out that a lot of publicly traded companies were interested in gobbling up companies like ours.

When we sold our company after five years for almost $3 million, I thought, “We are smart.” I started investing and I thought, “I’m an investor now. I’m semi-retired at 34 and I’m an investor.” I found out that I wasn’t an investor at all and I wasn’t at all qualified to make the decisions I was making. I confused investing with gambling. I ended up losing a lot of the money I had made in that company, but I did get into real estate, which was a great move.

It’s much easier to avoid failure than it is to copy success. Click To Tweet

Losing money is one of the best investments you can make. We approach life knowing certain things and we try to go to school. We try to gain an education by reading books or listening to podcasts, but there’s nothing that’s a better education than losing and feeling a level of pain. From a human standpoint, it’s an indicator that something needs to change. You experienced that firsthand as do most successful investors. What was the early lesson that you had that woke you up to the fact that you weren’t necessarily the investor you thought you were?

I started losing money. I invested $100,000 with a guy who had this amazing foreign options trading thing. He was showing us how we could make 3% a month on our money. He was doing them. At least my paperwork said I was getting 3% a month. It’s $3,000 a month and it looked great on paper. Then I went down to visit him in Charlotte and I had this funny feeling. Something he said didn’t add up with what I had heard about him. I had this gut. I went to consider investing another $100,000 and I left there with a distinct impression, “I should not invest more with this guy.” I wish I had followed my gut and withdrawn the $110,000 or whatever I had in there but instead I didn’t.

About two months later, the FBI caught up with him. He still won’t tell me and the other 2,000 investors where he hid the $18 million offshore. He’s even faced with 153 years in the federal penitentiary. He still hasn’t told anybody where he hid the money and I’m not sure why. That was one of the many examples of things I invested in where I confused investing and speculating or gambling. I think investing is when your principal is almost completely safe, and you’ve got a chance to make a return. Gambling or speculating is when your principal is not at all safe and you’ve got a chance to make a return. I confused the two and found myself about $2.5 million in debt for those reasons and other reasons ten years after I sold my company in 2007. It was a tough time.

How did you piece it all together? I introduced you to the theme of this season’s podcast where we are combining the first two seasons, which talk about the importance of understanding knowledge, education, experience and how that relates to property. That combination is what creates an element of value. Looking at investments or property, you experienced investments that didn’t create value, they did the opposite. You have seen successful investments now, I’m assuming. What are some of the differentiating factors between the investments that lost money and the investments that gain money? We’ve talked about gambling versus investing. What are some of those variables that determine whether it’s a successful investment?

There was this guy on a TV commercial from the ’70s. He was a little whiny guy. He was sitting across the desk from this guy with his huge chair and he said, “Son, we only hire people with experience.” The kid turns around the camera and said, “How do I get the experience?” The experience of losing money and the experience of doing a lot of these things gave me a lot of the wherewithal I needed to make money now and to make smarter investments. Lack of due diligence was a big part of it. Trusting one other person’s word who was investing or who was paid to tell me to invest with them was helpful. This is the experience thing and the reason I told that little story is I was always surprised.

We put together a lot of successful real estate deals through the 2000s and beyond. I was always surprised when people say, “No, I don’t want to invest in that. I don’t know anything about it.” I’d say to myself at least, “You’ve got tens of millions of dollars, but you don’t want to invest $200,000 in this wireless internet project?” Warren Buffett said, “I invest in things I understand. I don’t invest in general on the internet because I don’t know where it will be in ten or twenty years. The internet will never change the way people chew gum.” When I stopped investing in things like the wireless internet or throwing money down to a bottom of an oil well or things that had a risk and things I didn’t know the outcome of, I began to do much better. The bottom line is I stopped swinging for the fences and I started trying to hit singles and doubles and that’s when everything changed.

Tell us about Wellings Capital. What are some of the projects? Who’s on the team? How do you determine who’s on the team? Tell us the story behind how you put that company together, which has resulted in some successful investment.

TWS 7 | Property

Property: The experience of losing money and doing a lot of things gave me a lot of the wherewithal I needed to make money and to make smarter investments.

 

Wellings Capital has three principals: Wade Myers, Dr. Brian Robbins and myself. Wade and I had been talking since 2007. He’s a Harvard MBA. He’s got a property management firm that has 220,000 doors under management. It’s not multifamily. It’s doing condos, HOA, POA type of work. He bought quite impressive companies. He’s had some big failures and big successes. He told me he never had any experience in real estate. He didn’t understand it. When I showed him a draft copy of my book, he read about four chapters and skimmed the rest and two hours later he said, “I want it. I want to invest.” We invited him to join our team because he’s got an incredible 55 different M&As and startups, acquisitions, plus some failures. He has invested a lot of money in Hollywood films. A big hit was I Can Only Imagine. The big money guys were behind that. He’s done well over the years and made a lot more money than he has lost.

My other partner, Dr. Brian Robbins, has been a serial entrepreneur as well as a pain management physician. I had asked him to invest with me in a multifamily project I built from the ground up in North Dakota and he said, “It’s too risky.” A Hyatt hotel that my friend built that I helped him with, “It’s too risky,” wireless internet, “It’s too risky,” something else, oil and gas, “It’s too risky.” When he heard about multifamily and I showed him the demographics that I think are going to make multifamily a great investment for decades to come, he was fairly stunned. He said, “This is something I can get behind,” then he jumped in with both feet.

What year was that when he joined up?

That was in 2013.

What’s your take in the multifamily space now? I’ve observed, and I have a personal investment in several multifamily projects in various states. I look at what the market has done even in the last four years and how much money has come into it, how much syndication is being done to either do a ground up or acquire and remodel and value-add play. I see more and more as weeks go on. How are you looking at the multifamily space these days? What are some of the conclusions you’ve come to?

First of all, we’ve concluded at the title of my book. It’s The Perfect Investment because it does a great job balancing risk and return. The Sharpe ratio measures return divided by risk for a whole lot of different asset classes. Multifamily and self-storage are at the very top of the list. They’re performing about 460% better than the Dow Jones and the S&P 500 in the return divided by the risk because the beta, the up and down of multifamily is much more stable. It’s much more predictable. Freddie Mac and Fannie Mae, according to a report I read, haven’t had a single foreclosure in multifamily in three or four years. Where else can you get something like that? We’re talking about nationwide. That does speak to the great underwriting and the conservative underwriting that they do.

Multifamily has got a lot of big things going forward. Number one, in 1995, the government tampered with the housing market and they thought that anybody who could fog a mirror should be able to get a loan. Homeownership skyrocketed from its historical low 60s to 69.2%. In 2005, I had a friend who was making $40,000 or $50,000 a year who bought a $600,000 mansion as his second home. He had no business doing it, no way of paying the mortgage. It was before Airbnb. I don’t know what he was thinking. He lost that back to the bank in a matter of months. That was happening all over the US homeownership. When things plummeted from 69% to about 63% from 2005 to 2015 and every percent dropped meant a million new renters.

Fall in love with the numbers. Don't fall in love with the property. Try to be as objective as you can. Click To Tweet

There were all kinds of other renters coming into the renter pool as well. Number one, Baby Boomers, the smallest group of renters are the fastest growing group. The statistics say that when a Baby Boomer starts renting, they’ll never purchase a home again on average. The second group is Millennials. That’s the largest demographic group in US history with about 80 million strong. In general, they don’t see the reason to be tied down to a 30-year contract on a seemingly overpriced home when they might have new friends, new opportunities, new jobs in another part of the city, the state or the country next year. They’re much more transient and they have much more debt as well. They’re on the position with the slightly more difficult qualifications than 2005 house standards to qualify for a mortgage. They’re not quite there. Even though Millennials are starting to get married, starting to move into homes, on average, they rent far more and for far longer than Baby Boomers historically. Third, we’ve got immigration. Immigration is still playing a very significant and increasing role in the US demographic picture. Immigrants rent more often and for longer than people born in the US. I think we can look out for many years and say that this is a great investment.

In my book, I called it the perfect investment because it seemed to balance. It was a property, which is a big thing. You own a hard asset. You get all the tax benefits. There are twelve significant tax benefits you get from owning real estate directly and you get this fairly stable, fairly predictable, single or double typically. Although a lot of multifamily syndicators have been hitting homeruns for a long time. I see that coming to a place where maybe they won’t happen anymore. I’m even wondering how people are affording and why are people even investing in multifamily right now because the perfect investment is no longer perfect if you can’t find a deal that makes sense.

That’s where I was going to go because what I talked about on your show was the product could make all the sense in the world. There could be the right cap rates, there could be the right market. It doesn’t mean the investment is going to be successful or the apartment complex is going to be successful. My first question is going to be around not necessarily the market or the metrics that you do due diligence on, but how do you know you’re working with the right person? Then the second thing is there were a lot of apartment investors back in 2007 and 2008. I know in the single-family market why people were leaving their homes.

Another tangent that’s interesting and this came from the chief economist at Fannie Mae where people during 2008, 2009 weren’t even in default about leaving their homes. Fannie Mae went into bankruptcy or was taken into receivership. Because of that, people thought that they had to leave their house. That’s another side issue. My underlying question is what constitutes a good investment, not necessarily from the return, cap and market standpoint, but the operator’s standpoint? Talk to us about how important that team is.

We think that the right property manager and the right market make up about two-thirds of the likelihood of success in buying a multifamily asset. It’s incredibly important to have a market that’s large enough to support multiple significant national or regional property managers. If you might have one that goes South, and we’ve had that happen, you want to have other options. That’s one thing, the property manager. Going back to more of the philosophical level, it’s incredibly important. In our design, we have a built-in gut check thing, like the guy who invested $100,000 within Charlotte years ago. It’s incredibly important to follow your gut. I don’t know about you. I know you’re married. If you’re like me, your wife might have better instincts in some ways than you. She may not know anything about business and my wife doesn’t, but she can somehow spot a phony or a fraud and say, “I don’t know why.” I go, “I want reasons.” She goes, “I just don’t think you should invest with them.” We need to learn to listen to our gut and sometimes it sounds like the voice of our wives.

TWS 7 | Property

Property: Our brain at a very deep level allows us to be able to see things in a deeper and a more sensible way than we do.

 

Have you done that with your wife, had her do gut checks with the people that you’re doing business with?

Yes. I ignored her many times. Those were some of the things I lost money on. The wireless internet company in North Dakota, several of us started that company. She was like, “I don’t think that’s going to work.” I said, “It’s got to work. Let me show you.” I thought we were going to make a huge profit in the third month and here we are seven years into it, shutting it down. There are other times I have listened and now I eagerly seek her out. Even if she doesn’t meet the people in person, I lay it all out for her and I try to get her feedback. Now that she knows I listen, she’s way more likely to try to take a deep breath, be reasonable and not let fear drive for what she had some in the past. That’s why I was able to discount her advice. I said, “That’s just fear. I’m not listening.” That was not a great thing. She didn’t go with me on that trip to Charlotte but she if she had, I know she would have seen through that guy.

I’ve had my wife be part of business discussions and retreats and off sites but as far as bringing on key people, I’ve never had her involved. That’s an incredible idea. It depends on your spouse and their knowledge of people in business investment and so forth. I would definitely agree that she’s one to understand body language and understand the tonality at a level that is almost instinctive.

There are 3,000 signals we send off between tone, eyebrows and body language and all this stuff. We don’t consciously know what those things are, but our brain at a very deep level can make 40 quadrillion calculations per second. Our brain at a very deep level is involved with some quantum physics that I don’t understand. It allows us, and especially our wives in general, to be able to see things in a deeper and a more sensible way than we do. I’ve found that over the years, I’ve often shut that part of me off because on paper it looked like such a good profit and the wireless internet was a perfect example. It was a lot of greed on my part and it was one of the worst investments I ever made of time and money.

The balance of human emotions. That’s a game we’ll always be playing. Maybe talk through some of the elements of your book because using the word perfect could be a slippery slope in a sense. Talk to us about how and why you chose that word to define the core theme of the contents of the book.

One of my favorite internet marketers is Perry Marshall. We had him on as a guest on our How to Lose Money show. He has a book called The Ultimate Guide to Google AdWords so I named my book The Definitive Guide to Multifamily Housing. I thought it was great but everybody I talked to about it seemed indifferent or yawned. I had a friend who goes, “Multifamily, after skimming your book, it’s like the perfect investment. You should call it that.” That’s too big of a claim.

Age, wisdom, and counsel all goes into the mix of knowing when to cut your losses and get out and when it's time to start another business. Click To Tweet

I didn’t know much about self-storage at the time. I realized that I couldn’t think of any investment I’ve ever seen, and I was a couple of years into this that was a better investment with a better balance of risk and return. That’s why I had the audacity to name it that. It’s selling quite well. I just don’t know what to do with my next book because I might write a book on self-storage someday. A lot of people in BiggerPockets, which is the ultimate forum for real estate investors with a little over a million strong, a lot of people want to come in and they want a house hack. They want to be a single-family landlord. They want to build up a portfolio of 100 single-family homes and they don’t realize the incredible toll it takes emotionally and in every other way on you to do that.

I’ve seen one person after another who gets up to ten or twenty single-family rentals of whether they’re duplexes or mobile homes or whatever. They sell off the portfolio in frustration. They never make any money because there are so many hassles involved. My argument in the book is there’s a better way. There’s a better way than dealing with toilets, tenants and trash, and that is to invest with a great trustworthy syndicator. The book goes through all the different reasons. Multifamily is a great investment and then a lot of the demographics, a lot of the reasons Freddie Mac and Fannie Mae love it. Then how to find a great syndicator using that same test, that gut-level test. One of the great things toward the end is I talk about a couple of things. Number one, I talked about the various tax savings that commercial real estate provides, which are incredible. I talk about my big why which is my, “Why I’m doing this?” at the very end.

I look at the Trump tax cuts and a lot of the stuff that went through a lot. There are some big benefits to investors, especially in commercial.

A friend of mine showed me how you could take $20 million and turn it into $211 million and throw off $130 million in cashflow over twenty years. He said, “Where else can you get returns like this?” I was like, “That’s amazing.” He said, “If you play your cards right, this passive investor might pay virtually zero in taxes over those two decades.”

Your podcast is fascinating and some of the topics are fascinating. I’m going to definitely start listening because I had seen the best lessons in failure, especially when money is lost. As you have experienced, you’ve learned firsthand 100 ways that people are losing money. What are some of the primary lessons you’ve taken from that and applied to your businesses?

It’s great because it’s a weekly reminder of what not to do and that’s a key for this. I could tell you how we grew our company and sold it for $3 million in under five years in Detroit. That was great. That seemed smart and everything, but I couldn’t replicate that. If I heard that story, if you heard that story from me, it worked out well. The timing, the relationships, all these things, there’s no way to easily replicate that. The lessons I learned from that and the lessons I could teach from that, were pretty small. If I hear all these guests and if they hear me talking about how I lost $500,000 or how one guest lost $70 million, I can say, “I’m not going to do that.”

TWS 7 | Property

Property: Making a good investment comes down to not just investing because of an idea, but investing in the people that are actually supporting and running it.

 

Failure is much easier to avoid than success is to copy I think. People like Tony Robbins might say, “No. I can show you how to get successful.” I agree that’s a point as well. For me, it’s been easier to replicate not failing than it is succeeding. One lesson we’ve learned is lack of due diligence, jumping in quickly and falling in love with the property. A lot of our investors, a lot of our How to Lose Money guests are real estate investors. For some reason, a lot of them seem to lose a lot of money in 2007, 2008 and 2009. That’s when I was $2.5 million in debt. Thankfully, that was all tied to real estate, so I was debt-free thirteen months later right in the middle of the recession. Speculating versus investing has been another big lesson. Picking things for wrong reasons, like saying, “I like the Buffalo Bills. I want to invest in Buffalo.” Not that Buffalo is a bad market, I just picked that out of the air but you get the point. It’s easy to do things like that or it’s easy to justify things. It’s easy to fall in love with the property. Donald Trump when he was about 30 or 40, I heard an interview with him. The only thing I remember about it was he said, “Don’t fall in love. It’s so easy to fall in love with the property and then use every argument after that to justify why that’s a great purchase.” We all do this with cars. We do it with future spouses. We do it with investments, “It’s got a leaky basement, but the kids need a wading pool. Right, honey?” It’s maddening in all the way we justify what we want to do. My thing on that will be fall in love with the numbers. Don’t fall in love with the property. Try to be as objective as you can.

Another piece of advice would be to get great counsel. I know you spend a lot of money every year on coaching and masterminds and all that and I am starting to dive back into that as well. We’ve got a mentor. We paid $25,000 one time for this mentor and they’d been worth their weight in gold. That’s in the multifamily space and I recommend them to people all the time. We still use them four or five years later for questions. Another harder to quantify thing would be what you do with the lessons you’ve learned. I can argue both sides of this. I’ve heard both of them on the podcast. You’ve got somebody who says, “You just paid all your tuition in this horrible loss. Are you going to quit and start some new business?” Ours was, “Are you going to start out as a freshman in another business, a freshman in college again? Or are you going to dive back in and take all you’ve learned since you’ve paid the tuition and go deep and use that lesson to expand on and succeed?” That’s one argument.

The other argument on the other side of the coin is you’ve got to know when to cut your losses and get out. I’ve heard guests passionately tell that story of why you’ve lost enough and that with the wireless internet business. If we would have cut our losses four years ago and had just taken the $300,000 or $400,000 loss, then we would have been way better off than where we are now. That’s another argument but those don’t seem the same. Years, age, wisdom, counsel, all that goes into the mix and we’ve got to know when to do the one and when it’s time to do the other. Those were some of the main lessons we’ve learned from our How to Lose Money guests.

We’re in this information sharing world and oftentimes information has a candy wrapper on top of it. I thought it was refreshing to see the theme of your podcast. It was a pleasure to be on there because that’s when things get real and that’s where the true education is not by the shiny objects on the surface, but what went on to create them in the first place. There are so many points you’ve made throughout this interview that I would echo. In the end, financial tools, whether it’s real estate. Whether it’s a stock, a business, some startup or venture, it’s one of those things where the less you understand, the less involvement and value you can bring to the table the more risk you have.

As it pertains to real estate, it’s a fundamental need that we have and it’s always going to exist. It’s not necessarily just investing because of that idea, but it comes down to investing in the people that are supporting and running it. It is where I’ve seen the majority of issues. It’s not just your failure to learn from but one of the criteria I have is I won’t ever put money with people that I’ve earned who have not failed. It’s understanding what happened, what they learned from it and what they did in those moments of failure. Oftentimes it’s not even what they say but what those who were involved as an investor said during those times.

That’s what tells the story about things not going as planned, which tends to be the case with humanity. You want to know what their principles are, what their mission is and what drives them. Also what values they have so that you can get a barometer as to what decision they’re going to make and how it will affect the money you’ve given them and invested with. In your book, you talked about real estate. You talked through certain details of your story. One thing you said in there was where you talked about your purpose, the purpose of that company, your why with what you’re doing.

Real estate is a fundamental need that we have so it's always going to exist. Click To Tweet

I don’t know how much you’ve heard about human trafficking, but people are starting to hear about it thankfully now.

The Operation Underground is here in Utah, the big one that Tony Robbins sponsors. There are tons of money in there. The ex-Special Forces guys.

If you took the total record profits from General Motors, Nike, Apple and Starbucks and combine those, double that number, and that’s less than what is believed to be the annual revenues from human trafficking worldwide. It’s a big deal. They say there are over 30 million people trafficked and a lot of those people are sex trafficked. I want to believe that if I was alive years ago, pre-civil war, that I would have been fighting for abolition. I’d be fighting to free slaves. If I would have been an adult in the 1960s, I want to believe that I’d be fighting for civil rights. We’ve got an emergency here that doesn’t get headlines and it’s not caused a civil war. It’s not causing marches on Washington, but it’s slavery and it’s a big deal.

My company Wellings Capital and I are dedicating ourselves to donating a significant portion of our profits to fighting human trafficking and rescuing its victims. We’re identifying organizations we can back and we’re already doing that. I’m also part of a group called FreedomPlaceProject.com. Our goal is to build a billion-dollar office complex in Dallas, to use that as a prototype and then build other office complexes around the country and say, “We’re giving 100% of our syndicator, of our internal profits to fight human trafficking.” That’s in the works and we’re excited about that. There’s nothing to do with that now except maybe visit the website, but I’m excited about that. My goal is to donate $1 billion to fight human trafficking and rescue its victims through my influence and personally over the next years.

Can you give out those website addresses again and if there are other new sources, feeds or groups that are out there that people can learn more about the human trafficking problem?

One I would go to is ExodusCry.com. They’re based near Kansas City. They’ve got an incredible gut-wrenching movie out called Nefarious. If anybody wants to get ahold of me, I’ll send you a copy of the film. I’m friends with the director. He’s got 800 hours of film footage and he’s making a lot of films. He’s made other ones since then but Nefarious is the one that had opened my eyes. We also have FreedomPlaceProject.com. We’re looking for a CEO to run that company. Then my company is Wellings Capital. We’re at WellingsCapital.com.

I knew it was a problem and you travel around and in airports there are signs everywhere to keep your eyes open and pay attention. From the numbers side of things, I didn’t know it was that big.

We talked about Apple, Starbucks, Nike and GM times two. Let’s go down to small. One preteen or teenage girl can generate up to $500,000 a year in revenue for her trafficker, for her slave owner. Think about that. Think about what that means to that girl.

I didn’t know it was this prevalent and this big. Thank you so much for sharing that and at a minimum, helping me be more aware of it. Thank you for what you’re doing by dedicating some of your profits to that cause. What are some of the groups that are getting together and what type of impact are they having? Is it slowing down or is it going to take a while to eradicate as it seemed like a social epidemic?

There are some great groups. There’s one well-known group that’s rescuing girls in places like the Philippines, but the reports I have are that 99% of those girls are going back to prostitution later. It’s a tough situation and now it’s becoming more prevalent. There are more ways to kidnap these girls and social awareness in airports and all over the place is going up. However, the problem I think is probably getting a little worse.

Where’s the concentration in the world? Is it international or is it the US?

It’s both. There are some statistics that say one out of every 500 girls will be trafficked. I don’t necessarily believe that because I know of people of the places I’ve visited, but I don’t know anybody in my personal sphere or anybody that I’ve ever heard of personally be trafficked, in the news but not myself. I think it’s probably more prevalent in other countries. This documentary, Nefarious, goes over some of that.

The Operation Underground Railroad, which is out of Utah, they have a documentary out as well. Hopefully, the awareness continues to rise. I didn’t want to end on that sad of a note but still inspiring that you are trying to do your part to make a difference. Thank you for that.

Thanks. I’m glad you asked about it. We all have a part to play in this. They asked Mother Teresa how to feed a billion starving kids and she said, “One mouth at a time.” We are making a difference and good will prevail. I’m sure of that.

Paul, we appreciate your time and thanks for joining us.

It’s been great. It’s been an honor to be on your show. Thank you so much.

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About Paul Moore

TWS 7 | PropertyAn expert in the real estate space, Paul Moore of Wellings Capital graduated with an MBA from Ohio State and entered the management development track at Ford Motor Company. After five years, he departed to start a staffing company with a partner. They sold it to a publicly traded firm five years later for $2.9 million.

Along the way, Paul was Finalist for Ernst & Young’s Michigan Entrepreneur of the Year two years straight (1996 & 1997). Paul later entered the real estate sector, where he flipped over 50 homes and 25 high-end waterfront lots, appeared on HGTV’s House Hunters, rehabbed and managed rental properties, built a number of new homes, developed a subdivision, and started two successful online real estate marketing firms.

Three successful developments, including assisting with the development of a Hyatt hotel and a very successful multifamily project, led him into the commercial multifamily arena. Paul is the author of The Perfect Investment – Create Enduring Wealth from the Historic Shift to Multifamily Housing. Paul also co-hosts a wealth-building podcast called How to Lose Money, is a featured guest on numerous real estate podcasts, and is a regular author for Bigger Pockets. Paul is married with four children and lives in Central Virginia.

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