A minister once gave a lecture titled “Acres of Diamonds.” He related the story of an Arab man who wanted to become rich. Informed by an old priest that he would find diamonds in “a river that runs through white sands, between high mountains,” the man sold his farm and set off on his quest to find diamonds.
Years later, having found no diamonds, his money spent, and his spirit defeated, he drowned himself in the sea. Soon after, the man to whom he had sold his farm found “the most magnificent diamond mine in all the history of mankind.”
Investing for most Americans is similar. We want money so badly that we search high and low for people, resources, knowledge, strategies, and schemes. More often than not, we get burned. What few people realize is how many assets are readily available to them. These assets are hidden because of how we’ve been trained through media and culture.
Successful investors understand how to shift, position, and leverage assets that are hidden from, or are underutilized by most individuals. They realize that economic success comes from producing higher yields from existing resources. As the economist Jean-Baptiste Say wrote in A Treatise on Political Economy, “Creating wealth is a function of moving assets from areas of low yield to areas of high yield.”
This sounds simple conceptually, but applying it practically requires a paradigm shift for most people. Why? Because their low-yield assets, including home equity and 401(k), IRA, and other qualified-plan money, are the “sacred cows” of traditional retirement planning. We strongly recommend that our clients shift these low yield assets to areas of high yield, namely real estate investing.
When I first met Dave, he had a lot of equity in his home but not a lot of expendable income. He had a goal to pay off his home, so we helped him put that goal on steroids. Using his home equity, we bought five investment properties, which have put him on track to create $500,000 in net profit in the next few years. He’ll be able to pay off his home and still have more than $400,000 left to continue investing. These are the kinds of possibilities that open up when we shift assets from low-yield areas to areas of high yield.
401(k)s and IRAs are similar. In a thirty-year time frame, you’re lucky to receive an 8 to 10 percent average rate of return. Doesn’t 50 percent or more sound better? My friend and client Mark was able to liquidate and leverage his 401(k) successfully. When we were creating his portfolio game plan, we were torn between using his home equity or his 401(k). We decided to use his 401(k) because he was living month-to-month, and refinancing his mortgage would have increased the monthly payment by several hundred dollars. Even though we knew that his new investment cash flow would offset that payment increase, we wanted to make sure he would be safe. He liquidated his 401(k) and bought two investment properties that together generate $650 per month of positive cash flow. Furthermore, those properties will most likely yield him $225,000 net profit within four years.
“But what about taxes and penalties?” you may be thinking. My perspective is that this is just the cost of doing business, not to mention the lost opportunity costs that must be factored in. It simply comes down to doing the math. I don’t hesitate to pay relatively minor penalties and taxes when I know I can generate much higher and safer returns through real estate. Understand that I am not being flippant about your hard-earned money. I don’t take financial losses lightly; in fact, this is precisely why I teach people to liquidate home equity and qualified plans as quickly as possible. I just know that there is a far better system than the 30-plus-year “you're in it for the long haul” mind-set. Furthermore, there are ways to defer penalties and taxes on qualified accounts through real estate anyway.
This is a perfect example of why developing the investor mind-set is fundamental. It requires a recognition that traditional retirement advice is flawed and obsolete, a belief that there are better options, and the knowledge to apply those options safely and sustainably.
I don’t want you to increase your risk — I want to help you decrease your risk. I want you to pay off your home. I don’t want you to put your hard-earned retirement funds in danger — I want you to maximize their returns. Wealth is created when we shift assets to increase their productivity. Home equity and qualified-plan funds are low-yield assets that can be leveraged to generate abundant wealth.
I urge you to think hard about the inherent risks of the traditional mind-set — your financial future depends on it. Even if you enjoy relative success with the traditional route, it’s rarely enough to give you a secure and comfortable retirement. Those who pay off their house and have a little left in qualified plans are often eventually forced to sell their home or use a reverse mortgage to prolong their retirement. That’s just one risk, and overwhelming risk is the reality of the traditional investment mind-set.