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The Really Rich Journal

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The Weekly Tone

The gyms are booming and the White Wine Holiday Express has officially suspended regular service for the devout observers of Dry January (I did a dry December and lived to tell the tale). 'Tis the dawn of a New Year, folks! With one week under our belts, you should already have a pretty good idea of where you're headed. I trust that it's somewhere pretty damn good.

For me, it's about building stronger systems (and standard operating procedures) and allowing the people I've hired to perform their jobs without me getting in the way as a human bottleneck. I'm going to do a lot more big-picture thinking and a lot less sweating the minutiae (outside the gym, of course).

For this issue, I want to hand you the mic. Respond to this email (after you read it, of course), and let me know what you want to read about in 2023, whether it's weekly snippets on a topic or full articles.

R/RR

RICH: It has to be perfect before anyone sees it.

REALLY RICH: It will never be perfect, so just get it out the door, and we'll make it better over time.

This week I'm taking meetings in Miami, FL.

Fundrise's Perspective: Rental Resilience

Certain asset classes are more resistant to repricing during an economic downturn. I include an anecdote about rental income strength in a downturn, from Fundrise's (their portfolio contains a large number of residential rental properties) year-end review that explains this phenomenon well:

"Not every sector sees their economic fortunes fall in a downturn. Resilient assets are called value investments. Consumer staples, like eggs, grocery stores, and other basic necessities tend to hold durable value during recessions.

Rental housing is another such example: in addition to the obvious characteristic that housing is essential to living, many consumers will actually spend more on it when the economy is difficult. Just as consumers will stay home and cook for themselves (i.e., buy groceries) instead of going to a restaurant, during a downturn fewer people buy new homes and will instead opt to rent."

The Fundrise team expects their portfolio to perform well in this next phase of the cycle precisely because of their large rental holdings.

They add, "Moreover, unemployment remains low, surprising virtually every economist nationwide, which should mean more good things for rental residential."

* In partnership with Fundrise. This isn't financial advice.

Assets: Magnifying Your Reach

by Wil D., Investment Analyst

Summary: What deploying leverage could look like for you.

The only commonality between every wealthy person to have walked the earth is leverage. Leveraging your time, relationships, money, power, and on and on. Financial leverage can come in many different forms: credit, debt, borrow, lend, etc.; but the foundation of all financial leverage is a multiplier of effectiveness.

Leverage can be daunting as a new or even intermediate investor; too frequently people see the word “leverage” and think - take a second mortgage and bet it all on red. Yes, that is leverage and yes, leverage impacts risk in different ways depending on the situation.

However, no, we're not here to talk about the scheme that a dude in a backwards cap pitches you in the bar of the Bellagio at 2am. We’re here to understand measured, well-thought-out ways an investor can create financial leverage.

Two points you need to know:

• Every financial institution and public company in the world uses leverage to improve their business. Thoughtfully deployed, leverage can have a meaningful impact on a person’s finances.

• The buy, borrow, die strategy and 1031 exchange cycling are two of the largest strategies used by the wealthy to maintain, generate, and pass down money. Both strategies, born purely out of leverage.

In a strictly financial setting, leverage means borrowing money (taking on debt) backed by your assets or someone’s signature, then deploying that money in an investment vehicle. This kind of leverage increases the amount of risk an investor is facing.

Buy, Borrow, Die (BBD):

BBD is a strategy where an investor buys an asset - stocks, real estate, vintage cars, fine wine, you name it. They borrow money secured by the value of their asset, live their life, then die. The effect is two fold: reducing taxes in their life and their beneficiaries life; both increase the value of the investment. Due to the step-up basis (a tax loophole that sets the cost basis = to the value when inherited) and proper estate planning, the beneficiary(ies) receives a significant decrease in tax cost.

A more abstract way to define financial leverage would be: when an investor multiplies the effectiveness of an asset with the goal of generating more time, money, productivity, etc.

Examples: paying an employee to do your work thus freeing up your time, taking out 5% of your portfolio as debt instead of selling your stock to invest in a private company, or churning credit cards to gain access to greater rewards.

1031 Exchange:

1031 exchange refers to a section of the tax code that allows investors or business owners to defer capital gains tax if they transfer the proceeds of the sale of a property into a similar asset, within a certain time period. It is most common for investors in commercial and triple net (investor owned property where the tenant pays for the insurance, maintenance, and property tax) properties.

Leverage is one of the most powerful tools in an investor’s toolbelt. Use it well and multiply the number of high-quality assets you own. Use it poorly and, well, you don't really want to know what happens then.

*This isn't investment advice.

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