The Banker's Code: The Most Powerful Wealth-Building Strategies Finally Revealed - Antone, George

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▪ If you adopt the mindset, the rules, and the strategies of a banker, you can have a much better life
financially. Just don’t let the power get to you. Always follow the banker’s rules. And don’t forget…
bankers make more money than investors, with a lot less risk.”

▪ Investors play by the banker’s rules. The bankers play by their own rules.

The investor’s rules are stacked to the banker’s advantage.

Of the average American’s income, 34.5% goes towards paying interest alone; 30% goes towards taxes.
That’s an indication that the average American is working two-thirds of his time for bankers and the
government.

Open your eyes to the possibilities!

▪ Bankers – and other wealthy people – realize that it’s about cash flow first.

▪ To create an arbitrage opportunity, you need to have the following criteria (a simplified formula for
passive income) in place:

1. An income-producing asset (such as an apartment building, rental property, insurance policy,

business, bonds)

2. A lender that is willing to lend against the asset as collateral (obtain leverage)

▪ Investors have to buy physical structures, such as properties or businesses, to use as collateral to get
leverage (borrowed money) so they can generate cash flow. Then they are forced to deal with the
aggravations of these assets, such as tenant problems, overflowing toilets, employee hassles, inevitable
lawsuits, and a myriad of other nightmare scenarios.

Bankers simply print a piece of paper – a mortgage – and as long as someone is willing to sign it as a
borrower, it serves as the collateral for borrowed money. This is known as hypothecation. The end
result is the same. Cash flow.

▪ Bankers create collateral out of paper, borrow against it, and create an arbitrage opportunity
immediately. This is power!
▪ Generating cash flow boils down to following a specific “formula,” outlined in The Wealthy Code.

At a basic level, generating cash flow requires two things: an income producing asset and the leverage
(borrowed money) to buy this asset.

For business owners and investors, the income-producing asset typically turns out to be a physical
structure with many aggravations. For bankers, the income-producing asset becomes a piece of paper
they print and the borrower signs.

Business owners or investors think they are in the business of doing what the structures they bought do,
but the reality is, they are in the business of generating a spread in the business of financing.

That’s what the banker recognizes.

▪ The world is divided into three teams: Consumers, Producers, and Bankers.

▪ Bankers make the most money. They use borrowed money to lend out and tie up the borrowers’
collateral. They cover their downside and let the upside take care of itself. They are masters of shifting
risk to the borrowers. If borrowers fail to pay, they lose all the collateral to the bankers. The bank ties
up enough collateral to make sure they make enough money. However, if the borrower is successful in
paying back the banker, the banker makes money.

Either way, the banker wins. The best part of being the banker is that they recognize they don’t need to
have money to lend out. Through a combination of using borrowed money and “printing” money, they
can make money, and lots of it.

▪ The banker (the money person) on the right just needs to learn how to borrow money to lend out and
how to make their position safer by shifting the risk to the borrower.

▪ The world is divided into three teams: Consumers, Producers, and Bankers.
The Consumer is conditioned to spend.

The Banker finances the producer and the consumer.

Producers leverage people’s time, skills, and efforts to make money.

Producers (business owners and investors) need Bankers.

Bankers leverage money to make more money.

▪ Banks create new money with interest. Someone has to borrow more money or work to pay this off.

▪ Every time you charge interest as a private lender, you “create new money” that did not exist
before, and someone has to pay it off by either borrowing more money or by working for it.

▪ Money is debt!

Being a Private Lender

Imagine being in this business.

Your company:

 Takes little risk and shifts it to others

 Makes more money with less work than most other companies
 Always gets paid first
 Needs no money of its own
 Borrows all the money it needs at very little cost
 Lends out the money and shifts the risk to the borrowers
 Has consumers fighting to lend you money at 1% or less when inflation is five times that
 Offers only the belief that the money is safe

▪ Hypothecation takes place when a borrower pledges collateral to secure a debt. When a property
owner pledges property as collateral for a mortgage, that’s hypothecation.

▪ The most important word in banking is “hypothecation.”

From that comes another word bankers use: “re-hypothecation.”

▪ Three Things Bankers Do

Bankers have to do three things. They cannot skip any of these steps, because that could negatively
affect their business. The steps are:

 Use leverage (OPM – other people’s money).

 Find borrowers. Without borrowers, they can’t make money.
 Do relatively safe loans secured by assets.

Bankers are always about safety; they’re not in the business of taking risks.

As a private lender, these things can be automated. But it’s important that you never miss any of those
steps.

The three things lenders do are:

(1) find borrowers

(2) find money to lend out

(3) structure safer and profitable loans then do safer and more profitable loans

▪ Banks create new money with interest. Someone has to borrow more money or work to pay this off.

▪ Private lenders are individuals that can make money just like the bank.

It’s important to understand and speak the language of bankers. In this chapter, we’ll cover these
important terms:

Collateral

Loan to Value (LTV), Combined Loan to Value (CLTV), and Protective Equity

Promissory Note

Secured and Unsecured Loans

Security Instruments

Foreclosure

Leverage

Arbitrage

Velocity of Money
Asset-Based Lender

▪ The maximum LTV on a single-family home or residential

property (1 to 4 units), should be no more than 65% in most areas

and situations.

▪ In asset-based lending, the two most important numbers are the

LTV and the value of the asset. This is in addition to a good

underwriting criteria.

▪ Make sure you know the basic terms of lending.

▪ Let’s start with this. For every dollar you have, you can earn interest on it, or you can give up the
interest you would have earned on it (if, for instance, you spent it or put it under a mattress).

▪ banker always looks at the interest everything can make them. That’s it.

▪ Bankers also know that they need to keep the money moving. They use the velocity of money to make
even more. They recommend that we save our money in their savings accounts, CDs, etc., all of which is
dead money, money that’s not moving. But for the bankers, it’s money they can move – or velocitize.

▪ Bankers want their money to be moving constantly; i.e., out in loans. However, they want to make sure
depositors don’t move their money on them, so they ask the depositors to keep their money idle in the
savings accounts or Certificates of Deposit. This allows the bankers to move that “dead” money and
make more money with it.

▪ Bankers are masters in shifting much of the risk to the borrower.

There is always a risk relationship between the borrower and the lender. One of the ways a lender shifts
more of the risk to the borrower is by lowering the LTV.

▪ Bankers want to shift as much risk to the investor as possible. Investors want to borrow money for
their deals and are willing to give up a lot for that. Bankers ultimately make the rules – they tie up all the
collateral – and end up making a lot more money than the investor, and with peace of mind. The
investors’ stress levels go up significantly for the duration of their projects because they have a lot to
lose for the potential money they could make.

▪ Banking is About Safety

▪ The Number 1 rule of banking is safety. They shift the risk to the borrower. They are in the financing
game, not the investing game. They dislike risks. And what’s interesting is that they end up making more
money than the investors they finance.

They finance the risks of others. They allow investors to take the risks while the bankers tie up all the
collateral and take a safer position.

▪ Bankers are masters in shifting risk to borrowers.

Bankers focus on covering the downside and letting the upside take care of itself.

A down payment on a property is in a higher risk position than a lender’s money.

For every dollar you have, you can earn interest on it, or you can give up the interest you would have
earned on it.

Bankers see every dollar as a little salesperson making them money (interest).

Bankers make the rules.

▪ Banking has been around for a long time for a good reason – the business model works!

Borrowers are willing to pay more to access money quickly without going through the traditional banks.
To them, it’s not about the cost of money as much as the speed and ease of getting the money because
of access to opportunities.

▪ The spread between the cost of borrowed money, i.e., the cost of money, and the return, is typically a
small percentage. For example, if you bor rowed money at 6% and loaned it out at 9%, you would make
3%. However, using some creative finance, it’s possible to increase that.

▪ Velocity of money increases your returns.

▪ Lenders can lower their effective interest rate from borrowed money by using a line of credit in a
certain way instead of placing their money in a checking account.

▪ By lending money and keeping it turning (using velocity of money), we can increase the yield. Even
though our borrower is paying us a specific interest rate, we are receiving a higher return due to velocity
of money. And by parking the money in a line of credit at your local bank, you are lowering the effective
interest rate. And even though our money source might be charging us a certain interest rate, we are
paying them a lower effective interest rate. All this results in a wider spread and more money in your
pocket!

▪ Lenders have access to some powerful financial strategies to boost more profit from a deal. One such
strategy involves the use of velocity of money, which increases the return by “turning” money as it
comes in.

Lenders can lower their effective interest rate from borrowed money by using a line of credit in a certain
way instead of placing their money in a checking account.

As private lenders become more experienced, there are other financial strategies that can help them
boost profit from a deal without charging the borrower more interest.

▪ “Have you heard of BOLIs?”

“It stands for Bank Owned Life Insurance, and all banks have them. These are a

form of life insurance purchased by banks where the bank is the beneficiary and/or the owner.

▪ Banking consists of four parts: vehicle, banking, borrower, and depositor.

Vehicle: the location of the money (the vault) where the money resides. It’s where you put your money
while it sits in your “banking system.” You can have your money in a tin can, in a checking account, in a
CD (Certificate of Deposit); wherever you decide to place your money for lending is your vehicle.

Banking: the process – how we lend the money and the methods (the advanced financial strategies) we
use to make more money.

Borrower: the person or entity to whom we lend the money.

Depositor: the person (or entity) who saves their money in the bank. This is just one source of money
for the bank.

▪ We lend money to anyone we believe is a low risk.

▪ Deposits in traditional banks are nothing more than loans to the banks. When banks pay depositors
1%, they’re really borrowing that money from them at 1%.

So when talking about depositors, you have to think of them as sources of money and that you are truly
borrowing money from them. This means you must comply with all Security and Exchange Commission
(SEC) regulations. The SEC is a government agency that protects investors; maintains fair, orderly, and
efficient markets; and facilitates capital formation. Whenever you are dealing with raising private
money, you have to comply with federal and state securities regulations. Make sure you consult with the
right attorney in these matters.

When working with other people’s money, always work with the appropriate attorneys.

You must comply with all federal and state securities regulations.

▪ A “tax-advantaged” environment is something either tax-free or tax-deferred.

▪ You could use some of the most advanced strategies in banking to make your money grow for you, but
placed in the wrong tax environment, growth will be hindered significantly.

▪ It turns out there are a number of vehicles we can use. Which you select is a matter of individual
preference. One of the more interesting vehicles turns out to be a certain life insurance, of all things!

Banks use BOLI for a reason (BOLI), so what’s so compelling about it? The answer is pretty simple. There
are two components to permanent life insurance (whole or universal life): the death value and the cash
value. As we go through life, we’re told that if someone is trying to sell us whole or universal life
insurance, we should run away as fast as possible. We’ve always been told to buy term life insurance
and invest the rest. The life insurance companies try to get the death value up and the cash value down.

However, it turns out that the cash value of both whole and universal life has some interesting
advantages. If you minimize the death benefit and maximize the cash value, you can tap into these
advantages:

It’s a tax-advantaged environment.

Whole life pays dividends every year, allowing us to build cash value quickly; universal life has something
similar. Both pay interest every year.

In some states, the cash value is not accessible to creditors.

This insurance is structured differently than a regular life insurance agent would do. Insurance agents
want to market insurance based on the death benefit. Having a trusted, ethical life insurance agent
structure this for you is key.

Other vehicles exist for Qualified Retirement Accounts, as well.

Many investors are aware they can do lending in their IRAs, but even better is to invest inside of a
Qualified Retirement Plan

▪ Four-Part Harmony

If you create the perfect vehicle but never lend out the money, you’ve missed the boat. If you do
everything else right but place your money in the wrong vehicle, you’ve missed the boat, as well. You
must have all four components working ideally together. The four components together – Vehicle
(where the liquid cash for lending resides), Depositor, Borrower, and Banking process – are what makes
this waltz flow. The ideal situation will make double-digit returns in a tax-advantaged environment grow
in a compounding manner!

Let’s Talk Next About the Process

This is the core of a banking system, and it involves three activities. All three activities must be done on
an ongoing basis, otherwise the banking system fails. These three activities are:

1. Finding borrowers. Without a borrower, you have no business.

2. Finding money to lend. Without a depositor, you cannot lend.

3. Structuring safer and more-profitable deals.

▪ Banking consists of four parts: Vehicle, Banking, Borrower, and Depositor.

Vehicle: Where money physically resides while waiting to be lent out

Banking: The process of lending money

Borrower: The person or entity to whom you lend money

Depositor: The person or entity that deposits their money in a bank

Use a tax-advantaged environment for your money.

The three activities private lenders do are:

Find borrowers

Find money to lend

Structure safer and profitable deals

▪ To become a private lender, there are two phases.

Phase 1 - Is the one-time setup of the foundation.

Phase 2 - Includes the ongoing activities. This is similar to any investment.

For example, during Phase 1, when investing in stocks, you have to find a financial institution (such as
Charles Schwab), open a brokerage account, and learn how to effectively invest in stocks.

In Phase 2, you start buying and selling stocks, monitoring certain metrics, and making decisions to
maximize your portfolio while minimizing risk.

So let’s do just that for private lending.

Phase 1

In Phase 1, you set up the foundation to be able to start lending. Here are the non-recurring steps to
building the foundation to being a private lender:

 Understand private lending, including pertinent laws and regulations

 Build your underwriting criteria, your policies, etc.
 Build your team
 Get the right training

Phase 2
In Phase 2, you start lending. Here are the recurring steps in being a private lender:

 Find borrowers
 Find sources for other people’s money (OPM)
 Structure your deals for safety and profitability

Let’s take a closer look at each of these.

▪ Having a team that understands all these laws and regulations is very important, and in fact, required.

▪ They are licensed mortgage brokers that focus on brokering private funds as opposed to institutional
funds (like most mortgage brokers). They are known in the industry as “hard-money brokers” or “hard-
money lenders.” Most of them have a team of attorneys, title companies and appraisers that handle the
majority of the work for them. Because of the negativity associated with the term “hard money,” most
simply refer to themselves as “private money lenders.” They are licensed (in most states) to broker
private funds.

However, individuals who want to become lenders are also known as private money lenders. So it’s
important to distinguish between a broker and the money person (us). Brokers often refer to us as
“trust deed investors” or “private mortgage investors.”

▪ There are many differences. These brokers are, typically, licensed and we are not. They make their
money by charging the borrower points. We make money on spreads.

▪ introduce yourself as a trust deed investor or a private mortgage investor; otherwise, if you

call yourself a private lender, the Hard Money Lender may think you are a competitor.

▪ If a borrower stops paying you the way to mitigate that risk is to make sure that you lend them a low
LTV (perhaps 65% LTV) in the first place, which means the borrower has a lot of equity to lose. Also,
make sure the borrower has money in the deal, which would make them think long and hard about
walking away. The contingency plan is to call a foreclosure company and initiate foreclosure if that risk
becomes reality.

Building Your Underwriting Criteria, Policies, Risk Management, and More

Underwriting criteria are the conditions and standards or benchmarks you create that all your borrowers
must meet and that will help minimize risk. These parameters are set by the lender (us) and are
designed to filter the type of borrowers we are prepared to accept. For example, the parameters might
include the types of properties you lend against (such as single-family residences and duplexes), the
location of the property, whether it is owner-occupied or not, the credit requirements for the
borrowers, the maximum loan to value (LTV), the down-payment requirements, the borrower’s income,
and more.

In addition to that, the policies document contains the rules you set for yourself. For example, always
requesting an appraisal of the property could be included in your policies. Another policy could be that
you always wire money to an escrow company and never to the borrower directly. Or you always get
lender’s title insurance (which the borrower pays for), and perhaps you should always be on the
borrower’s hazard insurance. Another could be that you never use the borrower’s appraisal. The policies
you establish should follow what are considered best practices in the industry.

The other document you need to consider having is a risk management table. This is typically a
threecolumn document (in its simplest form) similar to the one shown below. List all risks in the “Risk”
column. Under “Mitigation Plan,” list ways to minimize or eliminate that risk.

In the “Contingency Plan” column, identify what to do if a “risk” becomes a “reality”!

Once you’ve created the first draft of these documents, you’re ready to build your team. Team members
will also help you update these documents.

Your team consists of:

 You
 Your mortgage broker (private money lenders or hard-money brokers), who specializes in
brokering private funds
 Your bookkeeper
 Your accountant

Your mortgage broker obtains the remaining team members, including a real estate attorney that
specializes in private lending, a servicing company (normally the broker), an appraiser, and others.

Finally, the right training will get you ready to excel in this arena without making too many costly
mistakes; this is arguably the most important step in the whole process. As a private lender, you are the
leader of your team. Not knowing how to play the game would be disastrous.
▪ Lending in every state is slightly different. That is an advantage in disguise. Only the ones committed to
taking the time to learn are successful; the ones that expect everything handed to them on a silver
platter will surely fail. I, personally, am glad that each state is a little different. It filters out 95% of the
individuals not willing to spend a few weeks to learn their state requirements.”

▪ Becoming a private lender consists of two phases.

Phase One: one-time setup of the foundation

– Understand private lending, including pertinent laws and regulations

– Build your underwriting criteria, your policies, etc.

– Build your team

– Get the right training

Phase Two: ongoing activities

– Find borrowers

– Find sources for other people’s money (OPM)

– Structure your deals for safety and profitability

▪ Every game has rules. Banking has its own rules.

The biggest challenge to becoming a successful private lender is the human factor, so we need the
Banker’s Rules, and we need to make sure that we follow the rules.

The difference between the Banker’s Rules and all other rules is that almost all other rules are written by
a third party to limit the benefits of the players in that game. For example, in the board game of
Monopoly, the rules were written to limit the benefits of the players (investors). However, bankers
wrote the Banker’s Rules not to limit their benefits, but rather to maximize their own benefits, safely –
an advantage and disadvantage at the same time. It is an advantage because you have the power to
write your own rules and make money at it. And it is a disadvantage because there is no one to stop you
from breaking your own rules, and that’s a problem. That’s when lenders start losing money.

Look at what happened to all the banks that started writing 100% LTV and 125% LTV loans. They got too
greedy and broke their own rules, and rewrote new ones that shifted the risk to themselves. (In reality,
they shifted the risk to the ultimate buyers of the notes – but that’s a different story.)

So it’s in your best interest to follow the rules you write to maximize wealth and to minimize risk and
headaches! Heed them, and you prosper. Disregard them, and you pay the consequences.
Banking gives you a lot of power, but be careful. Power can backfire if you misuse it. So manage the
power, but don’t let it overpower you. Stay in control.

▪ Rule No. 1: Banking is about safety. Shift the risk to the borrowers.

Read that again!

As a private lender, you learn to shift the risk to borrowers and take less risk when possible.

Bankers make more money while taking on the safer position in a deal. Consider this. Many of the
biggest buildings in cities across the globe have bank names plastered on the very top for a good reason
– more profits with less risk. Lenders just do not like risk. They make money on the financing strategies
of safer loans.

Never forget Rule no. 1!

Rule No. 2: Banking is about financing, not about investing.

We do not invest to make money; we make money by lending. It’s a financing game. You’ll hear this
statement: “We finance the risks of others.” Consider this sentence for a moment. Simply put, it means
that we finance our borrowers’ risks by tying up all their collateral and taking on the more secure
position. We do not absorb their risk. Investors (borrowers) are welcome to take as much risk as they
like, but we want to be in a safer position. We do so by tying up any and all collateral we can get our
hands on. We should have at least 150% of collateral tied up, as we shall find out later. That means for
every $1,000 of money we lend, we need to tie up at least $1,500 of collateral.

Let me say it again: We finance; we do not invest.

Rule No. 3: Be a disciplined money manager.

Have control over spending habits. The power you get as a banker is the same power you can abuse.
Because as a banker you have access to money, you can be tempted to spend it on items like a new car
and new clothes. Always remember: You are not the consumer or the producer. In this equation you
are the banker.

I’m not suggesting you shouldn’t buy these things, but your “bank” should not buy them for you. Your
bank should lend the money to you to buy them, and then you are obligated to pay back your own bank.
(Family Bank)

So, as a disciplined money manager (i.e., banker), you always want your money to be lent out, and you
want to be receiving timely payments. Avoid the temptation to use the money for other activities or
“toys.”
Remember: Every dollar can either make you interest (work for you) or you can spend it and give up
the interest you make on it. Said another way, the real cost of anything includes the interest you paid
and the opportunity cost of not having that money working for you!

This is, by far, the biggest downfall of a banker. You’ve been warned.

Rule No. 4: Be an honest banker.

When you lend money to yourself to buy something, pay it back exactly the same way – at the same rate
of interest – as if you had borrowed it from another lending institution! If you miss a payment back to
your bank, make up that late payment as soon as possible!

This is a rule that bankers commonly break – because they have the power not to pay themselves.

However, this is the first step to the demise of your bank! This rule cannot be overstated. You have to
always pay back your bank.

Think of your bank as a separate entity. When you borrow money from it, treat it as you would any
other lender or bank. Pay on time. If you’re late, ask for an extension. Be “formal” with yourself.

Recognize that there are two sides to banking. You have the consumer on one side and the banker on
the other. The consumer is the wealth spender. The banker is the wealth builder. We lend money to
consumers to have them do all the work and pay us on time. We make the money.

The minute we start thinking like a consumer, we lose the game. Act like a wealth builder (banker)
and become an honest banker.

Rule No. 5: Remember The Golden Rule of banking: “Whoever has the gold makes the rules!”

Consumers do not save money. As a result, someone else must provide the capital necessary to sustain
their way of life. This comes at a high cost. As a banker, with access to cash, you dictate the rules and
the terms. In addition, all sorts of good opportunities will appear, and you can also negotiate favorable
purchase prices.

So overcome the temptation to buy that new luxury car. Overcome the temptation to buy that mansion.
Live within your means, and let your money work for you as you dictate the rules and the terms by
which the borrowers buying these toys have to follow. They will make you wealthier while they work
harder and harder.

Cash flow is everything! Access to capital is king. Control is everything.

Rule No. 6: Adopt the banker’s habits.

Most people get into a comfort zone that causes them to lapse into their old way of doing things – a
lifetime of conditioning that determines how one conducts oneself.
There’s nothing worse than getting trapped in the comfort zone. Most people are stuck there and never
get out. You must learn to develop new habits. Becoming a banker must become a way of life. You must
use it or lose it! Ingrained habits are like muscle memory – you will have challenges in making these new
habits work for you. Develop and adopt the banker’s habits.

Rule No. 7: Follow the rules!

The biggest challenge to having a successful “banking system” is the human problem, so we need the

Banker’s Rules. And we need to make sure that we follow the rules.

The only thing holding anyone back from being able to develop this new banker mindset is overcoming
human behavior. If you can control these, you can build wealth. But if you break any rule, you lose!

▪ The power of controlling money is a double-edged sword. It can make you wealthy, and it can also get
you into trouble. It might seem easy now, but when you start controlling money, and especially lending
it to yourself, you will understand. If you break any rule, you lose! These rules are thousands of years
old. They have been proven by the test of time! They have created dynasties!”

Banking has existed from the beginning of time. The wisdom of the ages is now being passed to me!

▪ Every game has its rules. Banking has its own rules, too.

Rule no. 1: Banking is about safety. Shift the risk to the borrowers

Rule no. 2: Banking is about financing, not investing

Rule no. 3: Be a disciplined money manager

Rule no. 4: Be an honest banker

Rule no. 5: The Golden Rule

Rule no. 6: Adopt the banker’s habits

Rule no. 7: Follow the rules!

▪ All monies you lend to yourself must be your money and not other
people’s money.

▪ What is a Financing System?

Let’s say you decide you want to buy a car. You walk into a dealership and pick the car you like, with the
shiny rims and the best stereo system available.

There are three ways you can finance that purchase:

 Leasing
 Borrowing the money from a third-party lender, such as a bank or credit union
 Paying cash

With all three of these methods, you lose money. When leasing and borrowing from a traditional bank,
you lose money (interest) to the third-party source. In the third traditional way to purchase a car –
paying cash – you lose your opportunity to use that money for investing in something or buying
something else. This is called the “opportunity cost.” So, in each of the traditional ways of
buying/owning a car, you lose money each month to a third party, or you lose money you could have
used in some other way.

A fourth method – another way of financing – is referred to as a “banking system.” This requires a
major shift in mindset. The problem most people have in understanding this is in trying to associate this
fourth method with one of the other three traditional methods and not recognizing this as an alternative
to the other three. Don’t confuse this method with the others.

Assume you own a bank. Your bank lends you the money like any other bank. You buy the car, and you
start making the loan payments to the bank. This is like any other loan; the difference now is that you
own the bank. So essentially, you’re taking money from one pocket to pay another. It’s your bank, after
all.
Are you really losing this money? The answer is yes, partially, but the entity gaining the payments is your
entity. So the money you would have paid another bank is now going into your bank.

Obviously, this bank does not exist. But anyone can use the concept of borrowing money from an entity
they control to do this. It’s not a true bank, but it serves like a privatized bank. Let’s call this your
“banking system.”

The banking system method allows you to recapture your interest.

The other three methods – leasing, borrowing, or paying cash – cause you to lose money!

With this new method, you build wealth!

By simply using this financing system, you’re building wealth automatically. This will become more and
more obvious.

▪ The banking system method allows you to recapture your interest.

By simply using your banking system, you’re building wealth automatically.

▪ Believe it or not, 34.5% of the average American’s income goes towards paying interest alone. This
could include interest on mortgage payments, car payments, credit cards, etc. Assume in your case that
$1,700 per month of your $5,000 goes towards paying interest alone. The average American saves very
little at the end of the month, but let’s suppose you’re extremely diligent and that you save 5%. So, if
you’re lucky you’re left with $250 in your pocket.

Recognize that, as you read this, that money is currently going out of your pocket to financial
institutions.

The average individual is losing money every month in interest to third-party financial institutions!

Utilizing a banking system allows you to recover at least some of that money. The cost of not doing this
equals the monies paid and lost now and in the future for as long as you don’t have a banking system in
place.

▪ Your goal should be to redirect, as quickly as possible, most of that 34.5% into your banking system.

▪ Money Growth in Your Banking System

The money that resides in the banking system can grow in interesting ways.

1. It has to be growing in a tax-advantaged environment.

2. By using the power of velocity of money, we start making money work for us and get higher returns.

3. We gain the opportunity to invest our personal cash (i.e., the cash we have, not cash already in the
banking system) that we normally would have used to buy stuff. That cash can now be invested.
4. The money residing in the banking system should be earning money while sitting there.

5. Depending on the vehicle, you should be able to make a small spread on that money in the banking
system.

▪ Setting up Your Banking System

Like any small business, your banking system will need to be self-funded. Remember, it’s your personal

financing source. The money doesn’t magically appear there. You have to fund it with your money.

So where does your money come from? There are several sources. Many people have money lying

around earning next to nothing, such as a retirement account, savings accounts, CDs, stocks, bonds, etc.

“But I need to invest my money to make money!” you say. The obvious rejoinder is: Would you pay

someone 6% when you’re making only 1% on the same amount of money?

Take a look at this example.

Assume Bob (with the help of his wife, Julia) makes $100,000 in income per year. As an average

American, $34,500 of that is going towards paying interest. Bob might save as much as $5,000 by the
end

of the year.

Most people end up placing that $5,000 in a savings account or CD at their local bank. Bob does the

same and gets paid very little in interest. Meanwhile, Bob (like most people) is paying 10% or more on

his other loans. So, instead of saving money or investing that $5,000, Bob can use it to “buy” some of the

$34,500 – an income stream.

He does that by placing the $5,000 in his banking system, then using part of that to pay off existing

loans, which effectively transfers the loan from a third-party financial institution to his banking system.

Bob continues to make payments on the loans, but the payments – part of his $34,500 worth of interest

payments – are now going into his banking system. It’s important to recognize that Bob is not paying off

his loan with that $5,000; he’s essentially having his banking system buy the loan from the other
financial

institution while continuing to receive the payments from the borrower (himself).
Now, instead of earning a small return from a CD or savings account, Bob’s banking system is

earning the same interest rate he was paying the other financial institution! If he had been paying 8% on

the loan, then Bob’s banking system would receive that 8%.

So, here’s what happens (refer to the three diagrams below). A portion of that $34,500 in interest

paid per year will start getting redirected to Bob’s banking system. Notice how, over time, the amount

going to the Third-Party Lender gets lower as the amount going to Bob’s banking system gets higher.

▪ What Vehicle Should One Use for Their Banking System?

The vehicle (refer to Chapter 9) has to have certain characteristics, the most important of which is the
tax-

advantaged environment. Let me expand on that again. You can run your banking system from a tin can,
a

checking account, or any one of many vehicles. However, it turns out that one of the ideal vehicles is

permanent insurance. Now, we’ve been conditioned to stay away from certain life insurance; however,

this is very different.

With permanent insurance, you have basically two options: Whole Life and Universal Life. Both of

these have two components, called the “death benefit” and the “cash value (or “cash surrender value”).

You can think of the death benefit as going towards maximizing your death payout when you die. Think
of

the cash value as somewhat like a savings account. When you buy permanent insurance, the life
insurance

agent sets it up so that most of the money you pay goes towards the death benefit and less to the cash

value.

▪ The “typical” setup is to maximize the death benefit and minimize the cash value. However, for our

banking system, we want it the other way around. We like the characteristics of the cash value, which
would work ideally for our banking system. So we actually want to maximize the amount of money in
the

cash value and minimize the death benefit.

The diagram below shows the allocated percentage of the premium payment. In the “typical” setup, a

higher percentage of the payment goes towards the death benefit and a smaller percentage towards the

cash value. With the banking system, it’s the other way. A higher percentage of the premium payment
goes

towards the cash value and a smaller percentage towards the death benefit.

The problem is that most insurance agents are not familiar with how to set up everything correctly;
there’s

a lot to know and a lot more to it. Make sure you find a competent insurance agent who can support
your

plans correctly. For a list of potential insurance agents, please refer to the Resources page at the back of

this book.

▪ Find the right insurance agent to set up your insurance for you.

The wrong agent can cost you a lot!

▪ Warning!

Your own banking system is a great way to build wealth. However, be aware that getting this structured

correctly is very important. Also, be aware of the importance of the insurance agent you select. I’ve not

had good experience with insurance agents. Many of them seem honest enough, but I still have had bad

experiences. I can’t warn you enough against working with the wrong individual. Many agents position

themselves as experts with banking systems, but please be careful. For example, I worked with a couple

of men from Utah that presented themselves as experts with banking systems. Unfortunately, they
proved

to be dishonest and the worst kind of individuals anyone could work with. Please, do your due diligence.
Some “experts” are extreme advocates of using the banking system for any and every loan. I

disagree. For example, if you can get an auto loan for 0% to buy a car, why would you use your banking

system to do that? Use the third-party financial institution. Some of these “experts” insist on using your

banking system to buy the car loan and charging yourself a higher interest! They’re not considering the

opportunity cost. Just use common sense and ask a lot of questions!

Your banking system can truly be a great wealth builder. Use it.

▪ The key to remember is that you want to place your own money in the banking

system, not borrowed money. When you end up lending money to yourself, it comes from your banking

system. When you lend money to others, it could come from one of three sources: your banking system,

your personal cash (not in the banking system), and other people’s money.”

I was starting to get it.

▪ At the basic level, the banking system will recapture all of your interest payments! You then grow

your money in your “bank” using velocity and compounding in a tax-advantaged environment.

Banking system is a method of finance.

Traditional financing methods are:

Leasing

Borrowing

Paying Cash

Banking system is a fourth method.

In the first three methods, you either lose money to the finance source, or you lose the opportunity

cost.

▪ Life is more than just money. It’s about enjoying an incredible journey
through life. It’s about giving back, learning, and enjoying it. The income from lending buys me the

time to do so. It buys me freedom of time to do whatever I want in my life. I know that some people to

whom I’ve passed this information used their time to become teachers, to build businesses, or to run

charities. When you have enough money to live on, then you need to live! You need to recognize that

life is not about being a lender or being a business person, life is about the journey.

“So, to answer your question, I’m not a banker or a full-time private lender. I do not own banks,

either. I simply make money like a bank. I use the same strategies to generate passive income while I

give back to the world in my own way,” he said with a smile, waiting for a reaction from me.

▪ Over time, private lenders start thinking very differently from consumers or savers.

▪ Private lenders and real estate investors need each other.

In terms of returns and cash flow, income properties and private lending are similar. In fact, private

lending can be more profitable.

In terms of safety, private lending is safer than property ownership.

In terms of liquidity, private lending can be more liquid than the downpayment for property

ownership.

A combination of private lending and owning properties is ideal.

Advanced private lenders often own several homes, all paid off by borrowers from the private-

money loans.

▪ How many types of banks are there?” I asked curiously.

“Well, there are three types of banks. There’s the corner bank, which is the neighborhood bank

most people go to for their weekly deposits and withdrawals. This is the bank we all think about when

we hear the word ‘bank.’ But there are two other types, as well. The first, a shadow bank, doesn’t take
direct deposits like your corner bank. Instead, they run hedge funds, money market funds, and

structured investment vehicles. Many of the exotic investment vehicles you hear about in the news,

such as mortgage-backed securities, happen within shadow banks. The third type is the central bank,

which is the banks’ bank. For example, the Federal Reserve of the United States is a central bank.

They manage the creation of a nation’s money supply and lend money to banks and other financial

institutions. Many think of central banks as government agencies. They’re not. They’re controlled by

the richest families in the world. They are powerful bankers.”

▪ The stock market is a minus-sum game.

You’re competing with the best of the best and with very fast computers.

The stock market doesn’t create wealth; it simply transfers wealth from one to another.

The way returns are calculated in the stock market is not what you would expect and is not

dependable.

Financial institutions that are involved in the stock market shift risk to the people. These same

financial institutions are known as shadow banks. They profit from our risks.

If you’re going to trade stocks, it’s important to spend time educating yourself how to do it right.

▪ Find five, active real estate investors in the area.

Find an expert in raising capital and have them teach you how to do it.

Find three hard-money brokers.

Find an escrow company.

▪ Find a great coach.

Finally, make sure to get the right training.

▪ Banking is much more than making money. It’s a major shift in mindset. Bankers just think
differently.

It’s about making money in a safer position, using finance strategies to increase yields (return),

and simply thinking differently. It’s about adopting the mindset and the rules of the banker. I

recognized that becoming the banker wouldn’t be easy, but I knew that the persistent ones are the ones

earning their stripes.

▪ Consider how financially important it is that you teach your children to think like bankers. Begin by

lending them money that will ultimately belong to them. You will be leaving them with money and a

lifetime of lessons that they too can pass along.

The Debt Millionaire - George Antone (Highlight: 77; Note: 0)

───────────────

▪ Chapter Summary
· The ultra-wealthy see wealth building in a very different way than everyone else.

· This book will introduce you to what the ultra-wealthy know and use a method called

“The WealthQ Method” and it is based on “The Wealth Equation.”

· You have to have an open mind when reading this book because it will challenge

many things you believe to be true, no matter how many years of experience you have

in investing.

· Read this book more than once.

▪ Understanding the Wealth Equation, known simply as WealthQ is the first step to

building your wealth on auto-pilot.

· The second step is to understand that you need to move over to the “Receiving” side

of the WealthQ.

· By moving over, you allow the four main forces of inflation, interest, taxes and

opportunity cost to work for you instead of against you. There are actually more forces,

but we only focus on these four in this book.

· The WealthQ Method is not about increasing returns or buying bigger assets, it is

about a complete change in perspective on wealth building. It is about making the

financial system work for you.

▪ , THE TRUTH: there is no way to build real wealth except to use

▪ LEVERAGE. Without leverage, it is virtually impossible to build wealth. Most “experts” on

TV tell you not to use leverage, yet the affluent tell us they cannot do without it. You can

see they are right. Their numbers prove it—and their wealth proves it as well.

Financial leverage can be good or it can be bad. It can work for you or it can destroy
you financially.

However, once you know how to use it properly and manage the risk, it can MOVE you

to the right side of the WealthQ.

The secret to moving to the “Receiving” side of the WealthQ is well-structured

leverage!

What does leverage do?

Used right, leverage can move you to the right side of the Wealth Equation. Leverage

allows you to position yourself on the receiving end of inflation. That means as inflation

rises, you benefit. And, as you will find out leverage also positions you on the receiving

end of interest and opportunity cost as well.

Leverage is to the wealthy as candy is to kids.

▪ This is not just any leverage. The key with this leverage is that it is correctly

structured leverage. “Correctly structured” includes both the terms and the

amount of leverage.

▪ We started with $10,000 cash. Now (using leverage) we will replicate it several times.

So we have expanded the $10,000 to $50,000 instantly in this example. No waiting for a

gazillion years! We now place each $10,000 into a compounding environment. We then

make sure we place each of those five $10,000 sets in a tax advantaged environment.

We make sure we minimize or eliminate fees. Then, because we are using leverage,

inflation works to our advantage, as we will discover later in the book. Each $10,000 can

return less than the 16.67% return we calculated earlier as “necessary”, but the sum of

▪ A “Debt Millionaire”…
· Is someone who knows how to MANAGE debt to move themselves closer to their

financial goals

· Uses debt STRATEGICALLY to build wealth

· Is one of the most sophisticated investors on the planet

· Is someone that understands that debt can destroy them if they don’t manage it

well

“Debt Millionaires” are the investors who know how to use debt strategically to

move to the “Receiving” side of the WealthQ. They understand “The WealthQ

Method” of investing.

▪ Chapter Summary

When investing there are multiple factors, variables, influences, and

▪ alternatives to be considered. We looked at and discussed:

· 1: We started with some cash, then

· 2: We put it into a compounding environment, then

· 3: We made sure we placed everything in a tax-advantaged environment, then

· 4: We made sure we minimized or eliminated fees, then

· 5: We considered how inflation affects our investments, then

· 6: We made sure we considered the opportunity cost, then

· 7: We calculated the actual “Break Even Return” we need before taxes and inflation,

and after fees. The break-even return needed just to break even and not even build

wealth was high!, then

· 8: We added “balanced” portfolio. That translated to our having to invest in much

higher risk assets just to break even!, then

· 9: We learned how financial leverage will allow us to replicate the above several times

to speed up our wealth, and in fact allow us to BECOME wealthy.

· The traditional method of investing doesn’t work!

· “Debt Millionaires” are the ones who know how to use debt strategically to move to

the “Receiving” side of WealthQ. They understand “The WealthQ Method” of investing.

· Use leverage properly and you can become a “Debt Millionaire.”

▪ To “hack the game of finance”, you need three steps:

1. You need to understand who created the system, because there-in lies the biggest

clues. “They” have built the system to work for them. In this book the “They” we are

talking about are the global bankers.

2. You need to understand how the system works. We will not be doing that in this

book, but rather we will be giving you an indication of how the WealthQ was

discovered and why “The WealthQ Method” is so effective.

3. You need to recognize that many of our beliefs about money, investing and the

financial system were actually initiated by the ones that created the financial

system. They did this in order to make us function better inside their system.

Instructions and beliefs like “pick a 15-year mortgage over a 30-year mortgage”

actually benefit them and not us (refer to my book The Wealthy Code). It is

important that you question all your financial beliefs and what were the true

intentions behind those beliefs.

Once you have addressed and worked through these three steps, then the fun starts.

Remember, it’s a game that you play. With your new understanding of the answers to the

three steps many things are possible including playing the game to win.
▪ You know that the bankers have their system set up for you to use but to make them

richer, not you. One of the ways they squeeze money out of you is with inflation among

other things. One “hack” we use is debt as was mentioned before to counter these

“forces” that were created. Debt is actually more than just a hack, it is a weapon. Debt as

a hack works because of the way the base plate, the (monetary system) was built.

Before we dive into debt, first let’s talk about what is “good debt” and what is “bad

debt.” “Good debt” is debt that we use to purchase assets that appreciate or pay us

regularly, or both. “Bad debt” is consumer debt that takes money from our pocket, such

▪ as credit cards, auto loans, etc. In this book, all debt we talk about is good debt, but

more importantly, good debt that is structured correctly, because “good debt” can hurt us

if structured incorrectly. Currently, most investors seem to structure their so-called “good

debt” incorrectly.

▪ Let’s say you purchased a $100k asset with 6%-interest debt, and let’s assume you

decided to pay the debt down with the $200 per month you were going to “save” up.

You don’t do this for the sake of buying an asset, but rather to get into well-structured

debt. This statement will become obvious later. For now, notice how I said that. You buy

the asset to get into debt, not the other way around. I will expand on that later.

So here are some of the characteristics of your loan:

· By using the $200 per month to pay against the loan, you are essentially “saving”

6% (in this example), which is similar to making 6% tax-free. So taxes work to

our advantage—i.e. we are not paying taxes on “saved” money. As a

reminder, previously, you were depositing the $200 into an account, being paid a lot

less than 6%, and paying taxes on that measly interest rate.
· By using debt, you are using other people’s money to buy the asset, and not our

money. That means you are not losing the opportunity of buying the asset in the

future for all cash, you are buying it today. So you are gaining the advantage of

the opportunity, and that works to your advantage.

· Since you are using debt to buy the asset today, and you are paying for it over

time, you are using the “time value of money” to your advantage. That essentially

means you are paying for it with future money. The $200 payments are spread out

over many years which means it is “cheaper” money. This allows you to use inflation

to your advantage. In other words, inflation works to your advantage! More on

this later.

We use our understanding of the financial system to turn things around. By using this

understanding we are not playing against the creators of the financial system. Using the

right tools, you are now aligned with the creators of the financial system and the system

now works for you, not against you. You are not “partnering” with them, you are simply

hacking the game of finance that they created to improve your lifestyle. The result is that

your net-worth skyrockets over time from the simple example above—automatically.

That is how you play the game.

That is how WealthQ was discovered.

▪ Chapter Summary

· We are all players in the game of finance. To play the game better, it’s important to

understand WHO created the game (the financial system), and then HOW the system

works, which includes the monetary system etc. Finally we must question everything

we have been told about money and investing because these beliefs were spread to

serve the creators of the system.

· The secret to moving from the “Paying” side to the “Receiving” side of the WealthQ is

DEBT. It has to be the right type of correctly structured debt.

· The three new terms we have introduced are:

o The Wealth Equation (aka. WealthQ) which has 2 sides in the equation; the

“Paying” side and the “Receiving” side.

o The WealthQ Method is the method of investing that focuses on moving the

investor to the right side of the WealthQ.

▪ o The Debt Millionaires are those investors who have implemented “The WealthQ

Method” and have mastered the use of debt to move to the right side of the

WealthQ.

▪ Lenders create new money that doesn’t exist with interest. Someone has to

borrow more money or work to pay the interest off.

▪ Lenders create new money that doesn’t exist with interest. Someon

▪ To be on the “Receiving” side of interest, you can be either the banker or the producer.

You can either create interest or pass it on and make money off of it. This will be

explained in more detail a little later.

To be on the “Receiving” side of interest in the WealthQ, you can either

CREATE interest or PASS it on to the others.

▪ The world is divided into three teams: the consumer, the producer and the

banker.
Bankers and producers are also consumers, but they are bankers or producers first;

consumers second.

Every person on this planet is in one of these three teams. There is no other choice. By

default, people start as consumers. The rich are producers and bankers.

What most people don’t realize is they can also be on the “bankers” team, as

explained in my previous book The Banker’s Code.

▪ So how does one move to the “Receiving” side of interest without giving up the

inflation position?

There are several ways:

1. Lend money at an interest rate that is higher than the inflation rate after taxes,

especially if the loans are short term loans, 12 months or less for example.

2. Borrow money at a lower rate and lend it out or invest it at a higher rate.

3. Use the “velocity of money” to turn money around as it comes in to increase your

overall yield.

▪ Passing Interest

When passing interest to a consumer or another person, it is important that you do it

right.

Again, let’s look at various examples of passing interest. You are borrowing money,

paying interest to the lender, and somehow making more money on the borrowed

money.

There are various metrics to look at when doing so. I cover that in more detail in my

book The Wealthy Code. Here are the highlights from the book:

· The capitalization rate on the income stream (from the asset) should be larger than
the annual loan constant and the interest rate on the loan, or more appropriately

the cost of money (Refer to the chapter Debt Metrics).

· Match the loan period of the underlying loan with the exit strategy on the income

stream. For example, if you are buying an income producing asset for ten years,

make sure the underlying loan used to purchase the asset is a ten year or longer

loan.

▪ these are some important lessons you can use immediately from this

chapter:

· Be a producer, investor or banker. Learn how to pass interest or create interest.

· Pay off all your high-interest consumer debt, especially credit cards. This allows you

to move to the right side of interest.

· If you decide to “pass” interest, learn how to use debt effectively. Knowledge is the

key.

· Consider building a Family Bank for your family. This is covered in chapter twelve.

· Be aware of the annual loan constant; the interest rate compared to the

capitalization rate as mentioned in the previous section and in my book The

Wealthy Code.

· Do not pay off your other low interest consumer loans (such as car loans) yet. Not

until you have read chapter six on Opportunity Cost.

▪ Chapter Summary

· You are either paying interest, creating interest or passing interest. You want to be on

the side of the latter two.

· One of the ways to recapture the interest you are paying out is to start your own
financing entity called a family bank. That is covered in chapter 12.

· Examples include buying commercial properties, becoming a private money lender,

and using your family bank.

· Redirect most consumer debts for now into your family bank, or pay them off,

▪ especially credit cards.

· When structuring deals to pass interest from lender to someone else, be aware of

certain metrics such as period of loan, exit strategy, annual loan constant, interest

rate, cost of money and capitalization rate. Refer to the appendix on debt metrics.

· Read the book The Wealthy Code on structuring debt.

▪ First, let’s understand what opportunity cost means.

Every financial decision you make has missed opportunity potential. For example, if

you made the decision to invest $20,000 into buying a car and not buying a stock, that is

a missed opportunity. In fact, the cost of missed financial opportunities can be calculated.

For example, imagine that buying the car in the above example allowed you to own

the car free and clear but the stock ended up being $45,000 in five years. You obviously

missed out on that opportunity. You could have used a low-interest car loan to buy the

car and invested your capital in buying the stock.

▪ It is believed that the biggest cost to the average American, more than taxes

and inflation, is opportunity cost.

▪ Opportunity cost is the cost we pay when we give up something to obtain

something else.
▪ As investors, you have to understand opportunity cost, and recognize ways to

choose the right financing option for the right acquisitions.

▪ When you invest

your money, you are looking for a “return,” but you lock up your money and lose the

opportunity to make more money with it. Looking for a “spread” allows you to make more

money using other people’s money and you also have the ability to do many of them.

▪ How much more valuable is having cash than spending it? Another way of

thinking about it is how much additional borrowed money can we access by

having the cash?

▪ There is also the option of structuring the deal as a combination of the above.

Furthermore, each of the above has various options to consider. For example, with

debt, we have various types of debt including:

· Installment loans

· HELOC

· Mortgage

· Credit cards

Let’s consider some specific examples to illustrate the above.

1. Instead of using your money for down payment on an asset, consider finding

someone as an equity partner. An equity partner is someone that invests money in

exchange for a percentage of the profit. The equity partner invests the down

payment in exchange for piece of the profit. You could be on the loan and you keep
your cash for liquidity.

2. Many investors that do short term deals (one year or less) tend to refinance to pull

money out for these short term loans. It’s actually better to have a HELOC instead

of refinancing if the money is for funding these short term purchases.

3. Always keep your financials looking strong to be able to obtain financing for

▪ purchases. This includes your credit score, your debt-to-income ratio, liquidity, etc.

4. Consider having certain loans in your name and others under your partners’ or

spouses’ name. Avoid both of you being on the loan because it impacts your

borrowing capacity.

5. Use 30-year mortgages over 15-year mortgages.

6. Find the lowest annual loan constant for all your loans for as long as possible. Refer

to the book The Wealthy Code for more information.

7. Instead of using your credit card for large purchases, consider using your family

bank. This is discussed later in the book. By doing this, you are recapturing higher

interest payments and directing them into your pocket.

▪ When we decide to use other people’s money, we have to know how to

structure the deal.

▪ Chapter Summary

· Opportunity cost is the biggest cost for most people.

· Debt allows you to move to the “Receiving” side of opportunity cost.

· The use of the correct debt can help you tap into more opportunities, which can result

in significant wealth for you and your family.

· It is important for you to understand and be able to measure opportunity cost.

· When you purchase something, you typically have 2 main options, buy with cash and

give up the interest you would have earned on that money, or borrow money to make

your purchase, which means you pay a 3rd party interest. However, you can give

yourself a 3rd choice by building your own family bank and using it to finance the

purchase, and then you pay the purchase interest to your own family bank instead of a

3rd party financial institution.

· It is important to have guidelines for when to use what type and source of capital. An

example was given in this chapter. Being able to match the right capital source to the

right investment and scenario is critical. I believe everyone should have a diagram that

summarizes their capital usage guidelines. It will prove very effective.

▪ “Real dollars” means TODAY’s dollars. “Nominal dollars” are FUTURE or PAST

dollars without consideration for inflation.

▪ Real dollars = Purchasing power

Nominal dollars = Countable dollars

▪ Inflation makes wealth flow from the left side to the right side of the Wealth

Equation.

▪ People on the left side of the Wealth Equation think in terms of nominal dollars,

while people on the right think mainly in terms of real dollars.

▪ Most people think of inflation as an increase in price levels. That’s not totally accurate.
Inflation is actually a decrease in what our money can buy us.

▪ The asset just keeps up with inflation; the loan is the secret sauce to profiting from

inflation!

▪ When you buy an asset today using well-structured debt, you are buying it

with real dollars today, but paying for it in nominal dollars in the future!

▪ Who Are The Losers From Inflation?

In an economy where inflation is rising quickly, there are many losers. Everyone on the

left side of the WealthQ is losing.

Here is a list of people losing the most:

Savers: People savings money in checking accounts, savings accounts, certificates of

deposits, etc. The interest rates do not keep up with inflation.

Retirees: Many retirees have their fixed income payments coming in from their “nest

egg” and their “safer” portfolio. Inflation erodes the value of both their “nest egg” savings

and their “safer” portfolio.

Credit card debt holders: Most credit cards have a variable interest rate tied to a major

index such as the prime rate. This affects them negatively. Credit card holders end up

experiencing quickly climbing rates and higher payments.

▪ Consumers: Consumers on a set salary will feel the crunch right away from

dramatically higher inflation.

Investors: Investors in long-term bonds. In a high-inflation environment, bonds work

against you.
▪ . “The people on the “Paying” side of the WealthQ borrow money to buy

assets, or buy these assets with all cash and no debt, but the people on the “Receiving”

side of the WealthQ create the right debt by finding the right assets to encumber them.”

It was a complete switch. The left side buys assets thinking it is the assets that make

them rich. The right side creates debt with the right assets because they know it is the

debt that makes them wealthy.

▪ Chapter Summary

· It’s really important to understand “nominal” dollars versus “real” dollars before trying

to understand inflation.

· Real dollars means in TODAY’s dollars. Nominal dollars means FUTURE or PAST dollars

without consideration to inflation.

· Think of “Real dollars” as “Purchasing power” and “Nominal dollars” as “Countable

dollars.” One tells you what you can purchase in today’s money, while the other tells

you how many dollars you have in the future or in the past without consideration to

▪ what you can purchase with it.

· Real dollars are also called inflation-adjusted dollars.

· Inflation makes wealth flow from the left side to the right side of the Wealth Equation.

· People on the left side of the Wealth Equation think in terms of nominal dollars, but

people on the right think in real dollars mainly.

· Well-structured debt is the key to moving to the right side of the Wealth Equation.

· When you buy an asset today using well-structured debt, you are buying it in real

dollars today, but paying for it in nominal dollars in the future!

· Well-structured debt for inflation should be at a fixed interest rate for as long a period

as possible. Aim for the lowest loan constant you can get

▪ The strategic use of debt may have tax benefits. Work with your tax

professional.

▪ surprised to receive a box of Emile’s documented systems. This box

included his “Tax Management System”, “Debt Management System”, “Credit

Management System”, “Inflation Management System”, and “Family Bank System

▪ Chapter Summary

· Taxes can have a devastating impact on our wealth

· The affluent on the right side of the Wealth Equation know that and therefore plan for

it. They do so by doing the following:

o Build the right team

o Use a system to manage their taxes

o Use debt strategically

o Place their investments in tax-advantaged environments

o Educate themselves

o They know that it is important to reinvest their tax savings and not just spend

them carelessly.

▪ So the problem isn’t debt itself, but rather HOW to use debt.

▪ My mentor went on to fill in the gaps in my understanding of what we had covered that
day. He explained that most people who mastered debt in conjunction with The WealthQ

Method could reach financial freedom much faster than those without that mastery.

He explained that most people think it’s the ASSET that they purchase that makes the

difference. But the reality is different. The asset and the debt both fit into the bigger

game of FINANCE. It’s a financing game, and the game pieces (think of Lego) such as

assets and debts have to fit together to fit your financial goals.

The WealthQ Method was a holistic method, taking into consideration how the finance

game worked, and built to make the system work for you the investor.

The mindset for most people is to borrow money (debt) to be able to buy an asset.

▪ That’s the wrong approach. The more effective way is to establish the correct type and

amount of debt and equity against a stable asset to help generate a specific goal.

▪ The wealthy use debt strategically. They obtain the debt against low risk and stable

assets.

The rest of us use it as a necessary evil to buy assets, typically assets with a lot of

volatility (higher risk).

▪ Chapter Summary

· Debt can be used to make you rich or destroy you. Not knowing how to use debt could

really harm you.

· The problem isn’t debt itself, but rather HOW it is used.

· People think it’s the ASSET that they purchase that makes them rich. It’s not. It’s much

more than that. It is the asset, the debt and the way they are put together, among

other things in the bigger game of FINANCE. It’s ALL these components together that
can make you rich.

· “Debt Millionaires” are the investors that understand how to use debt strategically to

build wealth.

▪ For “Capital Gains,” you will need an “Equity Pair Framework.” For “Cash Flow”,

you will need a “Wealth Pair Framework.”

▪ · How much debt versus equity should we have on the capital side?

· How much can we afford to pay for each debt and for equity, and what are the

exact terms of each.

· What are the characteristics of the asset we are looking for on the asset side?

I normally draw a triangle to represent this. Remember, here we are just focused on

building step 2 to accomplish our result from step 1.

Figure 36: Three Sides to an Investment

▪ The three sides to any investment: Capital, Asset and Capital Structure,

sometimes referred to as “Deal Structure.”

Capital Structure is simply how an asset is financed. In simple terms, this

includes how much of the capital is debt and equity.

▪ Structuring Equity Pairs:

So how do you go about building the framework for Equity Pairs? Here’s a simplified

framework. Let’s discuss each side; the asset side and the capital side separately:

1. Asset Side: Your asset needs to have the following characteristics:

a. You should be able to obtain a loan against it (preferably you should be able to
“encumber it” with a loan). There are ways around it, but this would simplify it. In

simple terms, this means you should be able to find a lender that will lend to you

against this asset. You are not able to “encumber” all assets.

b. The asset must appreciate in value over time. It would be great if it kept up with

inflation, but that is NOT required, since the profit is made on the debt side, as

discussed earlier.

c. The asset must have low volatility in value. You don’t want something that

fluctuates wildly like the stock market. You are looking for assets that are

relatively stable such as real estate.

d. The asset should be income-producing to pay for the debt, even if it’s breakeven

▪ (income covers expenses and loan payments). Being income-producing is highly

recommended, but not required, however it makes things so much easier if it is.

e. The asset must allow for long term hold, ten years or more if need be.

2. Capital Side: This money needs to have the following:

a. The money side might have to be divided into debt and equity.

b. The debt must be long term and match with your holding period. If you want to

hold the asset for 20 years, the loan must be a 20-year loan or longer.

c. The debt must have the lowest annual loan constant possible. Refer to my book

The Wealthy Code for an explanation. This is a requirement.

d. The debt must be (preferably) a fixed interest rate for duration of the loan, or at

least for the duration you plan on holding the asset.

e. It is preferred (but not required) that the interest rate on the loan be lower or

equal to the projected appreciation rate of the asset.

f. The amount of debt (loan to value) should be set no higher than an amount
where there is enough cushion to cover any fluctuation in the income. There are

several metrics for this. For advanced investors, mainly, the debt-coverage ratio

should correspond to the standard deviation of the income from the asset. This is

beyond the scope of this book, but the main point of this is that the amount of

debt should be capped so that the risk is manageable.

g. Make sure not to have too much debt against the asset. The remaining capital

should be structured as equity financing. Refer to The Wealthy Code for more

information.

This is your simplest framework for Equity Pairs. This pairing of the financing and the

asset allows you to start automatically moving to the other side of the WealthQ.

Where’s the capital structure “glue” in the above framework? It is in the details, the

questions. For example, when we say “The debt must be long term and match with your

holding period” and “The debt must have the lowest annual loan constant possible” etc.

That’s the glue. That’s the capital structure. It’s embedded in the details of the capital

and the asset side

▪ When looking at any investment and putting the capital structure together, there are 3

layers of things to consider.

1. ASSET LEVEL: How does the capital structure affect the risk and return from the

asset? This is the topic of my previous book The Wealthy Code.

2. PORTFOLIO LEVEL: How does the capital structure affect my whole portfolio? For

example, do I have too much debt (debt-to-asset ratio, debt to income ratio, etc.)?

3. ECONOMY LEVEL: How does the capital structure on this one investment move me

to the “Receiving” side of the “Financial System” and how will it be affected by

what’s going on in the economy?

As you can see, every investment plays an important role in all 3 layers. The capital

structure has to take all 3 layers into consideration. The beauty of this is that once the

framework is built, all of these are built into it automatically.

One of the principles of The WealthQ Method is that for every investment (and

its structure) you consider, you should also consider how it affects the 3 layers:

(1) Asset Level

(2) Portfolio Level

(3) Economy Level

▪ Chapter Summary

· Most people approach investing by picking some investing vehicle first. That’s the

wrong approach. There’s a more systematic way to approach investing.

· Every portfolio must have “income” and “growth” (“cash flow” and “capital gains”).

That is the result you are attaining and considered step 1. In step 2, build a framework

of characteristics you need to accomplish these goals in step 1. The framework to

accomplish “Cash Flow” is called a “Wealth Pair”, and the framework to accomplish

“Capital Gains” is called an “Equity Pair”. These frameworks must also move you to the

“Receiving” side of the WealthQ. Once you have these frameworks, you can filter which

assets (step 3) will help you accomplish the goals. Notice that we worked backwards

into the assets (or vehicles) to help us accomplish your financial goals as opposed to

how most people pick assets, randomly.

· When you combine the information you are learning in this book about the WealthQ

table and the idea of moving to the “Receiving” side, and in combination with this 3-

step approach to building your portfolio, you will start to realize how powerful this can
▪ The most important leverage of them all is KNOWLEDGE.

▪ You are the GREATEST Asset. Invest in yourself. Invest in gaining the

knowledge that will help you, your greatest asset, generate the wealth YOU

need.

▪ Chapter Summary

· The most important leverage of them all is KNOWLEDGE.

· Financial literacy is critical to your success

· Financial literacy allows you to be a better hacker of the game of finance in order to

improve your lifestyle.

· We have built a community of people that have the same goal—better lifestyle and

less greed. Collaboration versus competition. Enjoying life versus accumulation of

money.

· Always be working on improving your thinking capabilities.

▪ You never TAKE money out of your family bank, you simply BORROW it and

pay it back with interest

▪ a family member, instead of you being the only one making the decision on what to fund,

the whole family, or a committee made up of family members makes that decision. After

all, it is a family bank.

I’m simply trying to paint a very simplistic picture here to start. As you will see, it

becomes a lot more interesting.

When you borrow money from your vault (checking account in this case) and pay it
back with interest, your vault starts accumulating money. Now you have a little more

money in your vault to re-lend out (money from the pay back of the loan and the interest

earned from the loan).

That in a nutshell is a family bank.

As you build this bank’s vault (again, checking account in this example), you start

establishing some “family bank” rules for the family to follow.

▪ Benefits of a Family Bank:

There are many benefits to the family bank. Here are a few.

Part of the family bank is having these regular “family meetings” mentioned above.

These are where the family meets to discuss loans to fund or not for family members.

These meetings include everyone, but typically the younger family members (under age

of 16) cannot vote. By having all the family members participate in these meetings the

family bank and the financial knowledge acquired by the family is shared within the

family and passed on from generation to generation.

The Rothschild’s (Mayer Rothschild) started this concept in the late 1700s. This is how

their wealth has been passed from generation to generation, not only their financial

▪ wealth, but also their intellectual wealth.

Through these meetings, the family members come together often (at least once a

month), and the extended family at least once a year or more. This brings the family

closer and builds a stronger family unit.

Another huge benefit of the family bank is access to and control of money. The ever

growing amount of money in the family bank gives the family peace of mind knowing

they have financial security in the event of an emergency. Beyond that as well, it gives
the family access to money for major discounts and good deals, and access to such

money quickly.

Additionally, by using specific vaults, some of the money can be used to grow in a tax-

advantaged environment earning 4% to 8% which the family can borrow against while

the money keeps growing. Talk about using money efficiently. The average American

with a college degree makes $2.1 million over their career. Approximately 25% of that

amount goes towards interest alone, not principal and interest but interest alone.

By having the family bank, that interest can be recaptured into the family bank and not

paid to some third party financial institution. Every family member, including you, each

child, each sibling, and your parents can have their interest over their lifetime recaptured

into one place. The amount of interest that is being paid out to third party lenders that

can be recaptured into the family bank is massive.

The family bank also has some pretty advanced features which make sure the amount

of money in it keeps growing with every generation, beyond what we have discussed

here. This is beyond the scope of this book.

▪ Velocity of money increases your returns and allows your money to grow

exponentially.

▪ Where to Start?

This book’s objective was to introduce you to a new method of investing. It can be

overwhelming since a lot of it goes completely against what we have been taught.

So the question is where to start?

The best first three things to do are the following:

1. Start and build your family bank. Keep it simple. Don’t complicate it.
2. Practice by analyzing portfolios and identifying what can be done to move to the

“Receiving” side of the WealthQ.

3. Read this book again.

▪ Chapter Summary

▪ Move to the right side of the Wealth Equation

· The four forces we discussed in the book are Inflation, Interest, Taxes and Opportunity

Cost. Make them work for you.

· Become educated on how to use debt correctly. Become a “Debt Millionaire.”

▪ When writing the story of your life, don’t let anyone else hold the pen.”

▪ Don’t make money the measure of your success.

▪ A Few Debt Metrics

In this chapter, we will briefly discuss a few metrics related to debt. These metrics will

allow you to start to learn how to measure debt. Before learning to control and make

debt work for you, you need to understand and measure it.

Interest Rate

According to InvestorWords.com:

“A rate which is charged or paid for the use of money. An interest rate is often

expressed as an annual percentage of the principal. It is calculated by dividing the

amount of interest by the amount of principal.”

When buying for appreciation, consider keeping the interest rate on the debt lower
than the projected appreciation rate on the asset. This is not required, but it is

recommended.

Cost of Debt

According to Investopedia.com:

“The typical metric to measure “cost of debt” is the interest on the debt. For example,

a 5% interest loan means the cost of the debt is 5%. However, one should also consider

any tax implications.

To obtain the after-tax rate, you simply multiply the before-tax rate by one minus the

marginal tax rate (before-tax rate x (1-marginal tax)).”

Loan Constant:

According to Investopedia.com:

“An interest factor used to calculate the debt service of a loan. The loan constant,

when multiplied by the original loan principal, gives the dollar amount of the periodic

payment.”

The annual loan constant is used when using debt to buy income-producing assets.

The income coming in from the asset (measured as the capitalization rate) is compared

with the loan constant and the difference is what generates “passive income.”

Also, the loan constant is a measure of risk. A lower loan constant represents a lower

risk since it offers more flexibility. A higher loan constant is an indication of higher

obligation for the investor, which results in a higher risk loan.

Loan Term:

This is the time period over which a loan agreement is in force. Before or at the end of

▪ the period the loan should either be repaid or renegotiated for another term.

You should match your loan terms to your exit strategy. For example, if you want to
buy an asset, hold it for ten years and sell at the end, then your loan term should be ten

years or longer.

Amortized Loan:

A loan with scheduled periodic payments that include both principal and interest. For

amortized loans, in general, you want to have them amortized for as long as possible. A

30-year amortized loan is much better than a 15-year amortized loan in many ways.

Interest-Only Loan:

A type of loan in which the borrower is only required to pay off the interest that arises

from the principal that is borrowed. Because only the interest is being paid off, the

interest payments remain fairly constant throughout the term of the loan. However,

interest-only loans do not last indefinitely, meaning that the borrower will have to pay off

the principal of the loan eventually. Interest-only loans typically have the lowest loan

constants.

Points:

Points mainly come in two varieties: origination points and discount points. In both

cases, a point is equal to 1% of the total amount mortgaged. For example, on a $100,000

loan, one point is equal to $1,000. Origination points are used to compensate loan

officers. Discount points are similar, but are there to compensate the lender as prepaid

interest.

Fixed-Interest Rate:

An interest rate on a loan, that remains fixed either for the entire term of the loan or

for part of this term. Fixed-interest rate are usually better than adjustable rates due to

the uncertainty with adjustable rates. Furthermore, fixed-interest rates are a better

hedge for inflation as mentioned in this book.

Adjustable Rate Mortgage (ARM):

A type of loan in which the interest rate paid on the outstanding balance varies

according to a specific benchmark. The initial interest rate is normally fixed for a period of

time after which it is reset periodically, often every month. The interest rate paid by the

borrower will be based on a benchmark plus an additional spread, called an ARM margin.

An adjustable rate mortgage is also known as a “variable-rate mortgage” or a “floating-

rate mortgage”.

The Wave Machine: Debt magnifies returns and risk

▪ the period the loan should either be repaid or renegotiated for another term.

You should match your loan terms to your exit strategy. For example, if you want to

buy an asset, hold it for ten years and sell at the end, then your loan term should be ten

years or longer.

Amortized Loan:

A loan with scheduled periodic payments that include both principal and interest. For

amortized loans, in general, you want to have them amortized for as long as possible. A

30-year amortized loan is much better than a 15-year amortized loan in many ways.

Interest-Only Loan:

A type of loan in which the borrower is only required to pay off the interest that arises

from the principal that is borrowed. Because only the interest is being paid off, the

interest payments remain fairly constant throughout the term of the loan. However,

interest-only loans do not last indefinitely, meaning that the borrower will have to pay off

the principal of the loan eventually. Interest-only loans typically have the lowest loan

constants.

Points:

Points mainly come in two varieties: origination points and discount points. In both
cases, a point is equal to 1% of the total amount mortgaged. For example, on a $100,000

loan, one point is equal to $1,000. Origination points are used to compensate loan

officers. Discount points are similar, but are there to compensate the lender as prepaid

interest.

Fixed-Interest Rate:

An interest rate on a loan, that remains fixed either for the entire term of the loan or

for part of this term. Fixed-interest rate are usually better than adjustable rates due to

the uncertainty with adjustable rates. Furthermore, fixed-interest rates are a better

hedge for inflation as mentioned in this book.

Adjustable Rate Mortgage (ARM):

A type of loan in which the interest rate paid on the outstanding balance varies

according to a specific benchmark. The initial interest rate is normally fixed for a period of

time after which it is reset periodically, often every month. The interest rate paid by the

borrower will be based on a benchmark plus an additional spread, called an ARM margin.

An adjustable rate mortgage is also known as a “variable-rate mortgage” or a “floating-

rate mortgage”.
Wealthy Code (Highlight: 103; Note: 0)

───────────────

▪ CHAPTER 1 - Summary

• Have enough passive income to pay for your expenses.

• You need to understand how to control, measure, and build wealth.

• Aim to become wealthy before worrying about being rich.

• Read Robert Kiyosaki’s book, Rich Dad Poor Dad.

• Focus on how to build wealth without using any specific investment vehicle.

▪ Remember:

Wealthy = enough passive income to cover all living expenses and losses incurred by negative cash flow
from assets in the Appreciation column.

▪ CHAPTER 2 - Summary

Understand the “Big Picture of The Wealthy.”

• Which column are you playing in today?

• Focus on the Cash Flow and Appreciation columns.

• Don’t get stuck in the Cash Influx column.

• Replace the “job” in the Cash Influx column with one or more of three things:

1. Keep your daytime job.

2. Systemize one of the strategies under the Cash Influx column and turn it into a business that does not
depend on you being there every day.

3. Learn to raise OPM (Other People’s Money).

• Understand that wealth comes from cash flow. Cash flow comes from arbitrage (or spreads). Arbitrage
comes from leverage.

▪ Financial leverage is what we use to control an entire asset using a small amount of money.

▪ CHAPTER 3 - Summary

• Financial leverage = Use of borrowed money.

• No leverage = Use of all cash; no borrowed money.

• Positive leverage = Leverage is positive if the investment return increases with the use of borrowed
money compared to the return without the borrowed money.

• Neutral leverage = Leverage is neutral if the investment return does not change with the use of
borrowed money compared to the return without the borrowed money.

• Negative leverage = Leverage is negative if the investment return decreases with the use of borrowed
money compared to the return without the borrowed money.

• As wealth builders, we want to use positive leverage in our investments.

• The key is to understand that positive leverage applies to assets you are buying for the Cash Flow
column and that long-term holds for the Appreciation column.

▪ Measuring Leverage

Compare all-cash return (x%) with

financed return (y%).

▪ NOI = Income – Expenses

▪ CHAPTER 4 - Summary

• To measure leverage, you must measure returns.

• Cash-on-cash return = annual cash flow/money invested.

• Leverage has an effect on the return of an investment.

• The return of an unleveraged investment must be compared to the return of various leveraged
scenarios to determine which one to use.

▪ What you want each and every purchase to do for you. Borrow money at a lower rate, and get a
spread (or arbitrage) that will provide you with passive income.

▪ To reiterate, when you make any purchase, you need to measure the cap rate and the loan constant to
get the best spread. That is the essence of an income property or business.

▪ To maximize cash flow, and ultimately wealth, you need to be able to measure the cap rate of an asset
(property) and the loan constant of the leverage. This allows you to calculate your spread.

▪ Your loan constant is a measure of your annual cash outflow.

▪ loan constant is the annual cash going out of your pocket, regardless of how much principal or interest,
divided by the loan amount.

▪ Loan constant = Annual loan payment/Loan amount

▪ Anytime you are dealing with borrowed money that is being used to buy an asset that generates cash
flow, always calculate the loan constant.

▪ Anytime you’re buying for cash flow (for a spread) you need to look at the cap rate of the asset you are
buying and the loan constant of the leverage you are using.

▪ Assets are to cap rates as leverage is to loan constants.

▪ The property price and the NOI

(Net Operating Income) are very important in determining the cap rate.

Cap rate = NOI/Price

▪ The greater the spread, the greater the cash flow, and the greater the return.

▪ Compare the cap rate of the asset with the loan constant of the borrowed money (leverage). The loan
constant must be lower than the cap rate, and then you can look for the best (highest) spread in order
to maximize cash flow.

▪ Remember this: No matter what building you are buying, if your primary objective is to develop cash
flow, you have to look at both cap rate and loan constant. Forget what the real estate agent might tell
you about not using cap rates.

This is how cash flow is generated!

▪ CHAPTER 5 Summary

• Leverage affects four components:

1. Cash Flow

2. Equity buildup

3. Tax

4. Appreciation

• We focused on the effects of leverage on cash flow alone.

• You can use leverage to create a nice cash flow stream.

• To use positive leverage, make sure the cap rate of the asset is higher than the loan constant of the
leverage.

• The higher the spread, the more passive cash flow you can put in your pocket.
• The result of this positive leverage allows for higher cash-on-cash return and passive income.

• The larger the spread, the higher the cash-on-cash return.

▪ To maximize our return from appreciation, interest rate on the leverage should be less than or equal to
the projected appreciation rate.

▪ In summary, to maximize building equity, use leverage. Buy in traditionally appreciating areas. Also buy
the right property types, such as single-family homes. Try to use an interest rate that is the same or
lower than the projected appreciation rate. Be careful to keep an eye on the loan constant, because a
higher loan constant is a higher-risk loan.

The Wealthy Code

Loan constant is less than cap rate.

Interest rate is less than appreciation rate

▪ Loan constant is less than cap rate.

Interest rate is less than appreciation rate.

▪ CHAPTER 6 - Summary

• Appreciation compounds. This is a very important point.

• Compounding appreciation allows us to buy a property using leverage with fixed payments while the
asset (property) grows in a compounding manner.

• Use the Simple Leverage Loan Calculator to figure out the numbers.

• It’s ideal to borrow money at an interest rate less than or equal to the projected appreciation rate.

• You can still borrow money at an interest rate that’s higher than the projected appreciation rate, but it
will take a number of years to break even.

Beyond that, though, it starts working for you.

• To maximize your appreciation return, buy in traditionally appreciating markets. Buy property types
that have better appreciation, such as single-family homes. Condominiums and high-end homes do not
perform as well, depending on the market.

▪ You want the loan constant to be less than the cap rate and the interest rate to be less than the
projected appreciation rate. This is what every savvy investor strives for. Yet, most investors I speak to
these days have no clue what I’m talking about when I use these terms or talk about these concepts. It’s
extremely important that you know what you’re looking for and that you start using leverage in the right
way.

▪ leverage is less than property

Loan Constant Rate

Interest Rate

Interest Rate

Capitalization Rate

Capitalization Rate

Projected

Appreciation Rate

▪ CHAPTER summary

• Make sure that deals fit your criteria, and match the leverage effects on

the profit centers to your goals.

• You can choose leverage that maximizes cash flow over appreciation; you

can also choose the opposite. And, with the right kind of leverage, you

can maximize both cash flow and appreciation.

• If you’re not sure where to begin, start with cash flow. Savvy investors

start by generating cash flow first.

• The perfect leverage is when the loan constant is less than the cap rate

and the interest rate is less than the projected appreciation rate.

▪ “Cover the downside and let the upside take care of itself.”

▪ For the savvy, building wealth is not risky.

It’s not risky because they invest

and manage risk.

▪ The greater change there is (up and down on the chart) the greater the

risk.

“Volatility” refers to the amount of

uncertainty or risk about the size of

changes in a security’s value.

– INVESTOPEDIA.COM

More leverage can lead to higher returns

(if positive leverage).

More leverage also leads to more volatility.

More volatility leads to more risk.

More volatility also leads to more

fluctuation in cash flow.

More fluctuation in cash flow leads to

more fluctuation in returns.

▪ “Volatility” refers to the amount of

uncertainty or risk about the size of

changes in a security’s value.

– INVESTOPEDIA.COM

▪ So in summary, leverage magnifies returns, which in turn magnifies

volatility. That in turn reflects an increase in risk. The goal is to find a

stable asset that appreciates steadily over time with little volatility and

that has consistent income stream.

▪ Spread Risk

Remember that cash flow comes from spreads, or arbitrage, and arbi-

trage is a leveraged strategy. Anytime you talk about spreads, especially

when you have small spreads, make sure you control both ends of the

spread: the loan constant and the performance of the asset (the cap rate).

▪ Controlling both ends of the spread becomes important, and both

ends of the spread are important risks to control. Here is a simple way

to control the risk. Make sure you minimize volatility on both ends.

That means you want to have little or no fluctuation on either end.

In a perfect world, both the loan constant and the cap rate will be

fixed for 30 years. This guarantees your spread for 30 years. But, alas,

not everything is that perfect.

So what do you do? Here are a few things to consider.

• Make sure the loan constant is either fixed (by getting a fixed-rate loan)
or based on a stable index, such as the London Interbank Offered Rate

– LIBOR. The LIBOR is a daily reference rate based on the interest

rates at which banks borrow unsecured funds from other banks in the

London wholesale money market. This is important because it is also

the rate upon which rates for many other borrowers are based.

▪ Basically, anytime you can get a fixed-interest-rate loan, get it. If you

can only get a variable-interest loan, get one that adjusts less frequently

(maybe once a year) and is based on a stable, minimal-fluctuation

index. This allows you to control one end of the spread.

• To control the other end, the cap rate, make sure the asset you’re buy-

ing is also stable or has minimal volatility. I pointed out earlier that

real estate is not a volatile asset. However, even within real estate,

there are factors that can make it more or less volatile. Understanding

these factors becomes very important. Here are a few tips to keep the

cap rate stable:

– The more units, the better. For example, in a single-family home,

if a tenant moves out you have 100% vacancy and no income.

That makes your cap rate drop! In a 100-unit building, if 1 person

leaves, you have 99 other occupied units. So the more units there

are, the more stable the cap rate.

– A bigger spread is better than a smaller spread. That gives you more

“cushion” to absorb greater volatility. The wider the spread, the

higher the cash-on-cash return and the better able you are to

absorb the volatility. The smaller the spread, the lower the cash-
on-cash return and the less able you are to absorb the volatility.

– Make a larger down payment (which affects returns negatively but

which gives you a more stable building). A bigger down payment

means less leverage.

– Good management keeps vacancy low and a stable cap rate.

– Buy in a stable area and job market with diverse industries, along

with a larger population.

– For others assets, a stable history of performance (for the past 25 yrs.).

– Structuring better OPM. Should you borrow the down payment

or invite people to be equity partners? How does this affect risk?

I’ll explain this in more detail in the next chapter.

▪ sically, anytime you can get a fixed-interest-rate loan, get it. If you

can only get a variable-interest loan, get one that adjusts less frequently

(maybe once a year) and is based on a stable, minimal-fluctuation

index. This allows you to control one end of the spread.

• To control the other end, the cap rate, make sure the asset you’re buy-

ing is also stable or has minimal volatility. I pointed out earlier that

real estate is not a volatile asset. However, even within real estate,

there are factors that can make it more or less volatile. Understanding

these factors becomes very important. Here are a few tips to keep the

cap rate stable:

– The more units, the better. For example, in a single-family home,

if a tenant moves out you have 100% vacancy and no income.

That makes your cap rate drop! In a 100-unit building, if 1 person

leaves, you have 99 other occupied units. So the more units there

are, the more stable the cap rate.

– A bigger spread is better than a smaller spread. That gives you more

“cushion” to absorb greater volatility. The wider the spread, the

higher the cash-on-cash return and the better able you are to

absorb the volatility. The smaller the spread, the lower the cash-

on-cash return and the less able you are to absorb the volatility.

– Make a larger down payment (which affects returns negatively but

which gives you a more stable building). A bigger down payment

means less leverage.

– Good management keeps vacancy low and a stable cap rate.

– Buy in a stable area and job market with diverse industries, along

with a larger population.

– For others assets, a stable history of performance (for the past 25 yrs.).

– Structuring better OPM. Should you borrow the down payment

or invite people to be equity partners? How does this affect risk?

I’ll explain this in more detail in the next chapter.

▪ The spread I’ve been mentioning so far is the cap rate and the loan con-

stant. There is another corresponding spread: the difference between

the net operating income (NOI) and the annual debt service (the annual

loan payment).

▪ What does the 1.50 mean? Let’s start with the term “cushion.” The

correct term is Debt Coverage Ratio (DCR). So let’s figure out what
this number means.

Refer to the diagram above. The 1 in the 1.50 is the money that goes

to the lender. This is the mortgage payment. Any number higher than

1 is the portion that goes into your pocket and is a measure of how

much more money you’re keeping than what you’re paying the lender.

So, in our example, the 50 in 1.50 means we’re making 50% more

money than what we’re paying the lender.

The DCR must exceed 1.0 for the asset to make the mortgage payment.

A DCR of 1.20 means we’re making 20% more than what we’re pay-

ing the lender. This corresponds to the spread between cap rate and the

loan constant but isn’t the same.

A DCR of 0.75 means we’re losing money. The asset isn’t generating

enough money to make the mortgage payment. The asset is covering

only 75% of the mortgage payment. We have to come out of pocket

(the remaining 25%) to cover the mortgage payment.

So, essentially, when we talk about a wider spread, we’re talking about

the DCR being a higher number.

The higher the DCR, the higher the spread and the more volatility

we can absorb. A DCR of 1.40 is better than 1.10. This tells us there’s

a 40% cushion and a wider spread; 1.10 tells us there’s a 10% spread

(or cushion).

A comfortable DCR we should aim for varies with the volatility of

the asset. A highly volatile investment requires a higher DCR.

▪ You might wonder if the spread between the NOI and the mortgage pay-
ments replaces the previous spread of the cap rate and the loan constant.

It does not. The cap rate and the loan constant spread tell us if something

is positive, neutral, or negative leverage. The NOI and the mortgage pay-

ments spread tell us if we have positive or negative cash flow. There is a

big difference. This is where more than 95% of investors fail!

You can have positive cash flow with negative leverage (due to a big

down payment). And you can have neutral leverage and still have pos-

itive cash flow. You really need to consider both spreads.

▪ Debt Coverage Ratio is a measure of

the spread between NOI and debt service

(loan payments). It tells us how much more

money we keep than we pay the lender.

We refer to it as the “cushion.”

DCR = NOI/Loan payments

▪ The Simple Leverage Loan Calculator

calculates the DCR for you.

▪ CHAPTER summary

• Risk is tied to volatility. The higher the volatility, the higher the risk. The

lower the volatility, the lower the risk.

• In many cases, the standard deviation is used to define volatility. So, once

again, the higher the standard deviation, the higher the risk, and vice

versa.
• Leverage increases potential returns, but it also increases volatility, which

in turn increases risk.

• Leverage also increases potential losses because of the same increase in

volatility and risk.

• An investment being risky is not the same as managing the risk of an

investment. Savvy wealth builders manage risk, but they are not being

risky.

• Debt Coverage Ratio (DCR) is a measure of the spread between NOI and

debt service (loan payments). The DCR tells us how much more money

we keep than we pay the lender. We refer to it as the cushion.

• With a DCR of 1.30, for instance, the 1 in 1.30 is the money that goes

to the lender; the .30 is the 30% more that goes into our pocket than

what we pay the lender.

• A “comfortable” DCR we should aim for varies depending on the volatility

of the asset. A minimum DCR to aim for in real estate is 1.20.

▪ There are three basic possibilities for structuring OPM:

• Debt financing

• Equity financing

• Combination

▪ Safer Structure

In general, whenever you’re raising capital for new projects, offering equity

rather than debt financing is safer for you. The investor putting up the

capital shares in the upside — and the downside — of the project.

▪ , the more leverage you have,

the more volatility you incur and, as a result, the more risk. So by using

debt financing for the down payment, you’re increasing volatility and,

therefore, risk.

So choose equity financing for a less volatile and, therefore, safer deal.

▪ If you use debt financing for the down

payment, you increase volatility and risk.

If you use equity financing for the

down payment, you choose the safer

and more stable route.

▪ Savvy investors cover the downside and let the upside take care of

itself. With that in mind, savvy wealth builders raise capital by offering

equity in the deal. This allows for a much more stable asset while cov-

ering the downside. The upside will take care of itself.

▪ To summarize, when raising capital for down payment, remember

this: Getting equity partners allows for a more stable building. You keep

the volatility under control. Your equity partners act as the cushion.

And borrowing the down payment adds more volatility to the deal.

▪ CHAPTER summary

• Step 1: Calculate your cash-on-cash return for the down payment.

• Step 2: For equity financing, give 50% or less.

• Step 3: For debt financing, borrow money at a lower rate than the cash-

on-cash return.

• For down payment, always go with equity financing, not debt financing.

• Get comfortable calculating your — and the investors’ — portion of the

cash flow when raising debt or equity financing.

▪ he “Best” Leverage

▪ Equity in a house is a bad investment.

It sits there and does nothing for you.

▪ Lesson 1:

There is a risk relationship between the

borrower and the lender.

Lesson 2:

Paying down your mortgage shifts risk

to the homeowner and away from the

lender, and your return on that additional

payment is 0%.

▪ Lesson 3:

The best use of your money is

to not pay down your mortgage with

additional payments; rather, invest that

money into acquiring more assets!

▪ Lesson 4:

A 15-year amortized loan is

built into a 30-year amortized loan.

A 30-year amortized loan is built into a

40-year amortized loan. All of those in turn

are built into an interest-only loan!

▪ A 15-year amortized loan is

built into a 30-year amortized loan.

A 30-year amortized loan is built into a

40-year amortized loan. All of those in turn

are built into an interest-only loan!

▪ Lesson 5:

In most cases, the best mortgage

for investors is a loan with the

lowest loan constant.

Lesson 6:

To pick the right loan, you need to

identify the lowest cost of money

for you over the years.

▪ Sometimes it makes sense to pay the buy-down points because, in

the long run, it ends up costing you less — much less. The key is to ask

yourself this: What is my exit strategy, my plan for the property? Do I

want to sell it in 5 years? Do I want to hold on to it for 20 years as a

rental property? Is this for cash flow? Do I want the least costly loan?

The answers to all these questions will help you decide whether or not

to purchase buy-down points.

Remember, as a savvy wealth builder, you should use leverage to build

wealth, and you need to become efficient in using leverage.

▪ paying down your mortgage is shifting risk

away from the lender and towards yourself.

▪ Lesson 7:

Buy-down points might benefit you.

Analyze the numbers and find out.

▪ Lesson 8:

To pay off your mortgage fast,

use the Debt Management System.

▪ The Golden Rule:

Those who have the gold make the rules.

▪ Here are some related “truths”:

• Americans don’t save money.

• We’re used to spending everything.

• As a result, someone else must provide the capital necessary to sustain

our way of life. This strategy carries with it a very high cost, because

those with the capital make the rules, and we all suffer the conse-

quences! Look around you. Who has the money? They are the ones

making the rules we have to live by.

• When someone has a large amount of cash on hand, all sorts of good

opportunities appear, and very favorable purchase prices can be nego-

tiated. When you are the one who holds the cash, you are the one

who can make the rules.

• Equity can be lost (as many are finding out). Equity means nothing

until it is converted to cash or cash flow.

▪ Capital is King!

It’s about Control!

Don’t forget “The Golden Rule.”

When you have a chance to hold cash

versus equity, cash is always King!

▪ HELOC is best used for:

• Short-time deals (less than a year).

• Arbitrage (short-term; e.g., lending).

• Turning money fast (the “velocity of money”) for buying a property at

under market value, refinancing, and then paying back the HELOC.

• Buying undervalued assets for quick turns when you’re not going to
hold onto it. Do not use a HELOC for a down payment, because

HELOCs have an adjustable interest rate, and the investment has a

fixed capitalization rate, as explained in previous chapters. HELOCs

translate to variable loan constants. We need to manage risk — also

explained in previous chapters.

Mortgage is best used:

• To fix the cost of money and loan constant

• For down payment on other positive-leveraged assets

• For appreciating assets

• For long-term arbitrage

• For “buy and hold” strategy

▪ Lesson 9:

One of the fastest ways to a high net worth

is through the use of the right leverage

and by using the “power of finance”

to pay it off!

Lesson 10:

Match the investment to the type of vehicle

you will use to extract your money from

the equity (HELOC or mortgage).

▪ The Mortgage Team

• You need to have a good mortgage broker on your team.

• The broker needs to understand your goals.

• The broker needs to understand everything in this book.

• Brokers will resist, but you need to share your knowledge by exposing

them to this book.

• Your broker probably will dismiss this information to justify their

position! It usually takes me three times longer to get through to bro-

kers because of their resistance to listening! And they need to know

this stuff. I estimate that 99% of investors and mortgage brokers have

not heard of a loan constant.

▪ One simple decision affects your

economic future. Choose the right broker.

▪ CHAPTER summary

• Lesson 1: Understand there is risk relationship between the borrower and

the lender.

• Lesson 2: Paying down your mortgage shifts more risk to the homeowner

and away from the lender, and your return on that additional payment is 0%.

• Lesson 3: The best use of your money is to not pay down your mortgage

with additional payments; rather, invest that money into acquiring more

assets!

• Lesson 4: Recognize that a 15-year amortized loan is built into a 30-year

amortized loan, which is built into an interest-only loan!

• Lesson 5: In most cases, the best mortgage for investors (for cash flow)

is a loan with the lowest loan constant.

• Lesson 6: When you pick the right loan, you need to identify the lowest
cost of money for you over the years.

• Lesson 7: Buy-down points might benefit you. Analyze the numbers and

find out.

• Lesson 8: To pay off your mortgage fast, use the Debt Management System.

• Lesson 9: One of the fastest ways to a high net worth is to select the right

leverage and use “the power of finance” to pay it off!

• Lesson 10: Match the investment to the type of vehicle you will use to

extract your money from the equity (HELOC or mortgage).

• Pick a mortgage team that understands the concepts in this book.

• The type of loan you want has the lowest:

1. Loan constant

2. Risk

3. Interest rate

▪ What do you think is the fastest way to make $1,000,000?”

I knew the answer to that, but I went for the joke instead.

“Marry a rich woman?” I said with a straight face. “Rob a bank?

Borrow enough money to make it?”

“Bingo! The fastest way to make $1,000,000 is to use leverage to

buy assets worth 10 to 20 times the money you want to have,” he

laughed. “Problem is, most people are uncomfortable getting into that

much debt. But that’s the way I became wealthy. And you can, too.

Anybody can.”

▪ I finally “got it”! And I can explain what “it”

is using these statements:

• The fastest way to get out of the rat race is to use leverage — the

right kind of leverage.

• Wealth comes from creating safe spreads that generate nice cash flow

monthly.

▪ • Leverage can make you wealthy if you know how to use it, measure

it, and manage it. Leverage can be positive, neutral, and negative.

The wealthy use positive leverage to become wealthy.

• The wealthy understand how to manage risk and never do risky

things. They also know when to use debt financing and when to

use equity financing. They understand risk and how to share it and

shift it.

▪ Remember TIMMUR? Taxes, insurance, manage-

ment, maintenance, utilities, and repair.

▪ Interest-only mortgages are good because they have the lowest loan con-

stants. The lowest loan constants result in the biggest spread, which

means the best cash flow. What people need to realize is that loans with

low loan constants are the least risky loans. The loans with the highest

loan constants are the highest risk to the homeowner. With interest-

only loans, you minimize risk and maximize cash flow and appreciation.

You’re still building appreciation while minimizing risk!

▪ CHAPTER summary

• Understand leverage and use it. You’ll be on your way to joining the

wealthy.

• Ignore ignorant statements in the media. Becoming wealthy is more pos-

sible than ever. It’s been proven throughout history. It boils down to

understanding The Wealthy Code.

▪ Cash flow comes from arbitrage (the spread between inflow of cash

and outflow of cash). There are three kinds of arbitrage:

• Pure (or true)

• Near

• Speculative

The first of these three is the pure, “riskless,” version (according to

the definition of “arbitrage” at investopedia.com). The second kind, or

“near arbitrage,” is almost risk-free, but the risk is manageable. The third

▪ kind is “speculative arbitrage,” or more-risky arbitrage.

▪ For example, buy a building for $2 million using leverage where the

loan constant is lower than the cap rate or when the building is paying

you more than what you are paying the lender. Perhaps the building pays

you 9% annually, you pay the bank 7%, and you make a 2% spread.

You keep the spread (the arbitrage). That gives you the cash flow.

Here’s another example. To get an apartment building you decide to

borrow 75% from the bank (at the rate of 7.5%) with a 10% loan from
the seller at 7% (also known as “seller financing”), and the property has

a 9% cap rate. You created positive leverage off both the lender’s and

the seller’s money.

▪ NOI = Net Operating Income

NOI = Income – Expenses

Cap Rate = NOI/Building price

▪ Wealth is nothing more

than a financing game!

It’s not about the real estate. It’s about the

ability to use the real estate as collateral to

generate financing — and a spread.

▪ As a wealth builder, you will need

to answer these questions:

• Where can I get financing?

• What collateral do they want?

• Is this collateral (or asset) going to

pay more than the bank financing?

• Can I manage the risk associated

with this spread?

That’s what building wealth is all about!

It’s just a financing game.

▪ The Three-Step Process to a Six-Figure Income

1. The bank finances your life insurance policy with little money out

of your pocket. They will need some additional collateral in the

first several years.

2. The policy pays the bank at the end of the 10 years or according

to how and when the initial set-up structure was designed to pay

back from the accrued interest and principal — all without you

making monthly payments.

3. You receive annual six-figure payments for the rest of your life,

until the ripe old age of 120 years.

When I plugged in the numbers and ran this scenario for a 40-year-old

man, after 10 years his income ran about $400,000 per year for the rest

of his life!

Here’s another dramatic example of this type of funding vehicle. A

27-year-old professional ball player, who could afford to self-fund with

$200,000 for 5 years, is projected to consistently receive some $155,000

per year, tax-free, starting at age 40 until age 120, at which point he

would have more than $166,000,000 in cash left over! Yes, it’s true.

Read that number again: $166 million after receiving $155,000 per

year, tax-free, for 80 years!

▪ The key to recognize here is that there

are many ways to build wealth.

You have a choice. Get educated and do it!

▪ The main lesson of this book is that wealth

is nothing but a financing game!

▪ “This is amazing! I didn’t realize you could create arbitrage from so

many things! Which one do you prefer?” I asked my mentor.

“It depends what you focus on. You can become an expert with one

vehicle. You can expand to more. I use income properties and insurance

arbitrage. Some of my wealthy friends use businesses. Others use private

lending. They’re all wealthy. It depends on your interests. But keep in

mind that the vehicle doesn’t matter much, as long as you understand

that it’s a financing game. The reason you focus on one or two vehicles,”

he continued, “is so that you can then manage the risk better by under-

standing the risk factors.”

▪ I hope you recognize how much you

have learned already. The right education

is the key to building wealth!

▪ CHAPTER summary

• Here are a few vehicles we discussed:

Vehicle One — Income Properties

Vehicle Two — Private Lending

Vehicle Three — Insurance Arbitrage

Vehicle Four — Low-Tech Businesses

• The key to recognize here is that there are many ways to build wealth.
You have a choice. Get educated and do it!

• It’s not about real estate. It’s not about private lending. It’s not about

life insurance policies. It’s not about businesses. It’s about financing.

• I hope you recognize how much you have learned already.

The right education is the key to building wealth!

▪ Now, remember that equity, in and of itself, does nothing for you. You

can’t eat it. You can’t buy food with it. It only makes your net worth

look good on paper. You “grow” this equity to either swap into cash or

to move into the Cash Flow column.

▪ Building Equity Fast

Most people think that building equity takes a long time. You have to

buy an asset and wait for its value to appreciate over time, which could

take forever. However, there are strategies for wealth builders to choose

that will speed up the process.

• Build immediate equity by buying assets under market value. For

example, buying a $400,000 single-family residence for $320,000,

earns — immediately — $80,000 in equity. Then turn the equity

into cash flow.

▪ • Pay down the mortgage on investment properties, but without addi-

tional payments. Use leverage and the Debt Management System

(see Resources section for more information). You can pay down the

mortgage in one-half to one-third the time without making addi-

tional interest payments. Everyone should be doing this!

• Time the market. Buy when everyone else is selling. This is probably

the best time to buy, but the hardest for people to do. The richest

investors “buy when there is blood on the streets.” They are known

as contrarian investors.

• Use leverage to maximize equity. We covered this in detail in Chapter 6.

• Buy the right property type. Single-family residences appreciate faster

and better than condos. Condos appreciate last in a good market and

drop first in a bad market. Also, avoid high-end homes. Stick to sin-

gle-family homes in good neighborhoods for best appreciation.

• Buy in traditionally appreciating markets. In California appreciation

over the past 25 years has maintained a steady 8%; nationwide, aver-

age appreciation for single-family residences is just under 6%. In

California, $10,000,000 worth of single-family residences will aver-

age $800k in equity per year.

Following are some more-advanced methods for experienced investors.

Some of these are covered in more detail in The Wealthy Code Inner Cir-

cle. (Refer to the Resources section.)

• Buy with seller financing. This is best for building appreciation with

0% or low-interest financing. Some 30% of America has fully paid

homes. This allows for seller financing.

• Equity Share. This is an advanced strategy. Buy a portion of a prop-

erty. Be the down payment partner, and let your partner carry the

mortgage, or vice versa.

• Straight options. Real estate options are the fastest way to build
equity and cover the downside; option a property and “1031” the

option without “owning” the building. This method makes it possi-

ble to build six-figure equity fast; however, it is an advanced strategy.

▪ • Lease options. Lease option the property by tying it up at today’s

price and for an extended time frame. Use future equity to buy cash

flow properties.

▪ It’s interesting that you say to use single-family homes for building

equity fast and not for cash flow. Many experts out there talk about

buying them for rental properties. You say not to use single-family homes

for cash flow, but more for building equity. You then use that equity to

buy income properties such as apartment buildings,” I observed.

“Well, single-family homes might provide cash flow in certain

areas,” my mentor acknowledged, “but they are actually bad cash flow

vehicles. If they do provide cash flow, that’s fine, but you should buy

them as an equity-building strategy. Do you have any rental properties

for cash flow now?”

“Yes, quite a few,” I boasted. “In fact, I have them all over the United

States. I just bought some in Rochester, New York, for cash.…”

“Sell them,” he interrupted. “Sell them.”

“Why? They’re cash-flowing $400 per month per duplex!”

“Sell them” he interrupted again, laughing. “Donald Trump says,

‘If you’re going to think, you might as well think big!’ Sell them.”
▪ I didn’t. I kept them. Eighteen months later, I learned my lesson.

He was right. I ended up selling them.

▪ CHAPTER summary

• Appreciation column is to grow equity and turn it into cash or cash flow.

• To turn equity into cash flow, move the equity from the Appreciation col-

umn to the Cash Flow column. Typically, you do this through the sale of

the asset and the use of 1031 exchange into the purchase of another

asset in the middle column.

• There are strategies that allow you to build equity fast. You don’t have to

wait for appreciation alone.

▪ Wealth pairs generate cash flow; equity pairs generate equity.

Each wealth pair consists of two things: leverage and the income-

producing asset, where the asset generates more than the financing costs

— i.e., positive leverage.

▪ wealth pair could be an apartment building and the leverage that goes

along with it to create a spread, generating cash flow into your pocket.

Below is an expanded view of what you would find in a wealth pair.

A wealth pair could also be a private lending deal and the leverage that

goes with it to put that income stream from the spread into your pocket.

It could be the insurance arbitrage (future income) I described earlier,

using an asset to put the money into your pocket in the future. It could

be any of those.
Ultimately, you will end up with many wealth pairs.

▪ Each pair gen-

erates an income stream. For some, the income stream will be consistent,

others will increase over time, while still others will diminish over time.

As a wealth farmer you have to keep growing those wealth pairs.

▪ As a wealth farmer,

you grow wealth pairs and equity pairs.

Wealth pairs generate cash flow

from the spreads.

Equity pairs generate equity to

purchase wealth pairs in the future.

▪ CHAPTER summary

• As a wealth farmer, you grow wealth pairs and equity pairs.

• Wealth pairs generate cash flow from the spreads.

• Equity pairs generate equity to purchase wealth pairs in the future.

• As a wealth farmer, you’re always looking at your portfolio of crops —

both wealth pairs and equity pairs.

▪ “Wow! This is a lot of information!”

“Before long it will be second nature to you!” my mentor assured me.

“It’s like riding a bicycle. Before long, you don’t even have to think about

it. The unfortunate thing is that many people don’t know that this
information is the foundation to wealth. There’s a lot more, of course,

but every investor needs to know this much before doing anything.”

▪ The Wealthy Code boils down to a financing game. It’s not about real

estate. It’s not about the stock market. It’s none of that. It’s purely a

financing game. Find an asset that generates cash flow; find a way to

borrow against it using positive leverage; identify the volatility of the

income and manage that risk; and, finally, structure the right down pay-

ment. Then move on to the next deal.

Pop Quiz

¢ Who holds the Promissory Note?

* Who holds the Security Instrument?

¢ What are the two types of Security Instruments in private lending?

¢ Which document gets notarized?

¢ When have you seen buyers and sellers fill out escrow instructions?

¢ Describe the role of an escrow company

* Describe the role of a title company

* How does a servicing company makes money?

¢ At close of escrow (COE), what do the different parties get and what do they give up?

— Borrower

— Lender

Calculate The LTV

* Value = $100,000

¢ Loan 1 = $35,000

¢ Loan 2 = $15,000

* Borrower asking for new 2" loan for $20,000

¢ Q: What is new CLTV?

¢ In LTV, which do banks use for value (Appraisal or Purchase Price)?

¢ In LTV, which do you use for value (Appraisal or Purchase Price)?

¢ Why is lending the down payment to a retail borrower a risky investment?

¢ Why is lending up to 65% of the value of the property in first position safer than the above scenario?

¢ Whatis the difference between a “deed” and a “deed of trust” or “mortgage”?

* Someone wants to walk away from their property and wants to give it to you. How can they do that?

* How does hard money broker make money on private loans?

* How does private lender make money?

* How does private lender make sure loan is secure?

¢ What are the basic documents private lenders are looking for?

* Why do private lenders not care about borrowers credit as much?

* Is the deed of trust or mortgage recorded in any County Recorder's Office?

Underwriting Criteria
My Policies

The following will help mitigate many risks:

* Do mostly short term loans (1 year or less)

* Do NOO loans

* Do many small loans across many deals as opposed to larger loans across fewer deals

¢ Make sure property always insured

* Stick to your LTV limit

¢ NEVER ever give borrower money directly!

¢ NEVER ever loan money without asking for appraisal & prelim

* If possible, drive by the house or get pictures from appraisal

¢ ALWAYS use an escrow/title company

¢ ALWAYS get lender's title insurance (borrower pays for this)

* Money should always go through escrow company

* ALWAYS be on borrower’s hazard insurance as loss payee

¢ ALWAYS know which lien position you are

* Use attorneys to draw up your forms, especially if “non-standard” terms

* Make sure loan broker hands you all signed disclosures for your record

¢ Usury laws change more often than we like, always be aware of new changes — use an attorney that
knows the usury laws

« Add your own policies

* Add your own policies to manage risk