How an Average Business Owner Created an Extraordinary Investing Result

Real Client Story: George & Mildred

So I want to actually talk to you about a real-world client of mine. I’ve been working with this couple for just under two years now and I want to go through how we went from taking them from a pretty shaky financial situation to an extraordinary investing result in the time that we’ve worked together without having to take on any hair raising risks and preserving the vast majority of investments that they already had in play. 

I’m going to call these couple George and Mildred for those of you who like old British sitcoms.

George and Mildred were average business owners running a fairly modest business. They were generating enough to sustain their lifestyle in terms of profits. 

So in other words, they were paying themselves a salary, a little bit of extra money in terms of dividends, but they were really having to hustle pretty hard to set aside extra money to put into any form of investing. 

In spite of that, they had done a pretty good job and their financial situation when I met them was they had about three-quarters of a million dollars in a shared portfolio. 

They had one commercial property which wasn’t giving them a huge amount of cash flow but was cash flow positive. They had another portfolio of shares outside of their super and they were in a situation where the work that George was doing was incredibly physically taxing. 

He came from the property and construction industry and he was in a situation where the runway to retirement was clearly starting to get very short.

They’d been working for a long time with a financial planner and had effectively put themselves in a situation where they’d hustled and redlined and optimised as much as they could but there wasn’t going to be any strategy for them on the horizon that was going to give them the sort of income that they needed in retirement.

The best cash flow income stream that they were able to achieve was going to be somewhere around the 3-4% and that just wasn’t going to cut it in terms of maintaining and giving them the lifestyle they wanted. 

Frankly, like a lot of people that work very hard in business, you don’t do all that extra work to find yourself in a situation where you can’t maintain your lifestyle but unfortunately, that seems to be the norm. 

So these guys had, fortunately, put themselves in a situation where they had their house completely paid off, and mortgage-free. They had a couple of investment loans that related to Baji investments that they had done in the past. 

Unfortunately, they were now still just paying down those loans and I’m going to say those loans were maybe $200,000 to $300,000 when we started.
 

Exploring Different Debt Reduction Strategies

So, looking at their situation holistically, what we were able to do is look at each aspect in terms of what was their debt position, what was their asset position, what was performing and what wasn’t performing, where were the opportunities to optimise, how was cash being managed in the business, was there any way to maybe structure for better flow of money, and what sort of stewardship or discipline could be implemented, to just squeeze a tiny bit more out of what they were already doing. 

For example, they were focused very heavily on trying to eliminate that investment debt which totally makes sense and that was certainly one scenario that they could continue with.

But what we decided to do was start to play with some other scenarios and my view of what you should be doing as a mentor in the wealth space is talking to people about what their options are and not being prescriptive. 

I think a much more effective way of supporting people is helping them understand the implications of different decisions because frankly if someone could say to you, “Look, there’s this asset or investment here. If you buy it, the implications in 5-10 years are this. If you don’t buy it, the implications in 5-10 years is this.” And same with every other thing. 

Like I know for example, that the game plan is to accumulate a couple of investment properties and then just focus wholeheartedly on debt reduction and that’s the strategy that is probably relatively conservative. 

And for many people, yes, it gets you to the situation where for example, you have one or two investment properties unencumbered, meaning no debt, but when the average investment income stream that you can earn from those assets is somewhere around 1 to maybe 2.5% even with no debt, it starts to make you realise that unless you like the idea of holding big, fat, lazy pandas, meaning assets that you’ve really got to feed and they don’t necessarily give you much income or much juice, you start to see that maybe there are some flaws in the wealth-building model. 

So my job with George and Mildred, was really to say, “Look guys, you could continue down the path of focusing heavily on debt reduction and the likely implications,” and really, we’re talking about modelling here, I suppose. 

What I’m trying to suggest is that there’s no crystal ball but you can certainly forecast given the current environment where something is likely to land and that’s all it is. It’s just a flavour of what’s possible. 

I’m very careful about explaining that to people like it is not a crystal ball, this is not set in stone. Obviously, things can change and we’re in a very fast pace of change in our world right now.

But at least give you a flavour of, “Well, if you continue down that pathway of reducing debt, where will that take you?” and then we can go with, “Okay, what’s more middle of the road option for you guys?” and what that involves is looking at the cash reserves that they had which at that time, I think was around $300,000 to $400,000. 

Taking that, just messing around on the fringes with what they already had in play, but leaving the bulk of their shared portfolio completely intact, like not messing with that at all.

That is like the middle of the road if you were to take a portion of the cash that you have and you take a little bit of your shared portfolio, what could you achieve over say 3-5 years.

The other scenario was, let’s say, you got very confident with this stuff and gradually over time, you wanted to take maybe a little more of your portfolio. 

And when I say a little, I’m talking somewhere around 15% to 30% of your capital and allocating it towards alternative investments. Where would that make you land?

The Missing Piece of the Wealth Industry

Just to recap, the starting point is always like, “Okay, here’s a really conservative strategy,” and maybe it’s the one that you’re already on in terms of the pathway. “Here’s a middle of the road and here’s a more aggressive one.” And when you have options in front of you and this is the missing piece, as far as I’m concerned for the wealth industry at large, is the way that other professionals give advice is they’re really prescriptive. 

I definitely think as a society, we want to pull back from that. We want to recalibrate and actually say, “Look, I don’t need you to tell me where to put my money. What I need is for you to help me understand the implications of various decisions so that I, as an intelligent human being can contrast those things for myself.”

George & Mildred’s Gameplan

So when we went through some scenarios where George and Mildred landed was more towards the conservative but closer to the middle of the road type strategy. 

The next stage after identifying that “Okay, that’s the broad strokes of the strategy that sits well with you. Now, let’s get into the weeds about gameplan.” 

And for these guys, it was about, as I said, going through how they were going to access the capital and then creating a cadence around which it was going to be invested or deployed, and then really looking incrementally how that was going to impact their passive income.

So as I mentioned, they had one commercial property that was maybe giving them let’s say, I think it was like less than $20,000 and so that was sort of sitting off to the side and no one was going to mess with that. 

That was probably going to be a reasonably good asset over the long term. Then the process was, “Okay, well, let’s actually start to look at alternative investments and what’s in scope and what’s not in scope.” 

For those of you who know, the place that I want to play is only those alternative investments that are backed by real property, because those of us that have been investors for a long time recognise that assets such as property are much more stable than some of the other markets. For example, Wall Street and the stock market and crypto and all those other things which, to some degree, I feel there’s a much higher exposure to volatility and sentiment which I don’t like.

That’s not to say property markets can’t claw back and fall. As has been happening in many countries on and off over the last few decades.

But generally speaking, assets, particularly property in the markets that I focus on, are really dull.

They neither set the world on fire because they have runaway capital growth. But certainly, in economic down markets, they don’t fall like a rock either and most importantly, they still continue to deliver really epic cash flow which is what makes them so exciting. 

First of all, let’s wrap our heads around what is in scope. So all of those things down one end of the spectrum like the hedge funds and all that hair raising venture capital, crypto, all those things that fit into alternative, but down one end in terms of the risk picks from, we’re just going to disregard those. 

Let’s just focus up this end of the spectrum on assets and investments where you get high predictability around the income stream. They’re not volatile. They succeed regardless of what direction the market moves in. Once they were educated on, “Okay, well, we understand the five buckets of strategies that fit into that category.” 

And just for those of you who aren’t familiar, they are things like lending opportunities where you get to be the bank, more private funds, syndications, joint ventures, and then there are some turnkey direct property options. 

So please go back and listen to other podcasts if you want to learn more about them. 

But the essence is you understand the strategies, you identify amongst those strategies. Which ones do you feel in alignment with? 

Now, this is the tricky part because frankly, you can look across all five of those buckets and say deals in buckets one and four and two and three and five, they all give you a similar rate of return.

Typically, I’m looking for returns of a net return after all my expenses of 8% to 15%. That’s the sweet spot. 

So if they all roughly give you the same level of return, the question then becomes, “Well, which ones do you pick?” So part of the journey is them identifying which strategies feel good to them, like which ones feel comfortable. 

As it turns out, George and Mildred did actually like some direct property. They also liked private funds and they also liked syndications. Actually, they also like joint ventures. So they went, “Okay, they’re four buckets that we really like.”

Identifying the Opportunities That Align with the Client’s Investing Rules

So then the next stage for them was to really identify the opportunities that not only aligned from a strategy point of view but met their investing rules or their due diligence rules.

So part of the journey up until this point had been them understanding what the strategies were and then the next piece which I think is really, really important, and please go back and watch or listen to the podcasts that I’ve created about how to do great due diligence, how to set up your investing rules because too many people skip over that.

I know for sure, that if you have clarity about what your investing rules are and you run every investment that you undertake, whether it’s $1,000 or $100,000 through those investment rules, you are giving yourself a much higher probability of success. 

With investing, if it were a sure thing, everyone would be doing it. So the real game is how do you stack the odds in your favour. Helping these guys develop what are their investing rules and then what they were able to do, is have conversations with people in the trusted advisor network about how their investment aligns with their investment goals and when they start to see that, some will be a perfect fit. 

It’s like putting on a glove and it’s like, “Perfect, that is completely in alignment with what I’m trying to achieve being my goals, the strategies that I like, and it also is a fit for my investing rules, then that’s the trifecta.”

I mean, that’s really ultimately what you want as an investor. Again, what I encouraged these guys to do is not to take all of their capital and throw it into the market all in one go. 

They had about, I’m going to say half a million dollars, that they wanted to invest overall and what I encourage them to do is start to think in terms of what annual goal they want to achieve, but act in quarters. 

Whenever you’re investing in a new asset class or a new market, particularly when you don’t have to commit huge amounts of capital to borrow and buy million-dollar assets and all that we’re quite familiar with in Australia, is that you need to build confidence and you need to feel momentum before you can start to ramp up. 

So I encourage people to start with small bites with a few cherries and then just continue to take more bites of more cherries and eventually, you start to get confidence. 

You start to feel alignment with certain investment opportunities with particular advisors. You start to hear information from them about how to create an edge and I call this lovingly, insider trading. 

As you go along, you might start very small and then the case with these guys, they were able to start accumulating more quickly in the last stages of their journey.

Where are George & Mildred on Their Investment Journey Now?

Just to give you a sense of where these guys are now, unfortunately, COVID has not been kind to the industry that they are part of for various reasons. Their business is in a situation that is very fragile right now. Potentially, there’s a lot of work coming through. 

But on the flip side, there are supply chain issues and for those of you who are following the news, you may have heard that there are a lot of large scale builders who are starting to go bust, partly because they have committed to building all construction contracts at a time when the price of materials was a lot less than now. They’re facing much higher build costs and so they can’t sustain that.

So all of those things have created a cocktail, which is a great cause for concern. Now, George, in terms of his vision for his business, when we started working together a couple of years ago was, “I don’t think I can sell my business. My goal is to create a financial situation, which is going to create a safety net for myself or a plan B.” Even back then he probably saw himself as having maybe another three years of wanting to run the business actively, and then if at that point, he couldn’t sell, he would shut the door and just walk away. 

Now, unfortunately, from his perspective, that plan has been cut short a year. But we went through a bit of a review of where are they at and what are the implications of all of this in terms of the goals that they’d set out to achieve. 

In terms of the passive income that they’ve generated, they’ve hit the goal that they had. They had a goal of replacing lifestyle costs with the income that came from alternative investments and they’ve done that.

The second part of the game that they’re now evaluating, is they’ve still got that massive shared portfolio. 

Now, there’s no question that they could convert that into shares that focus predominantly on paying reasonably good dividends and they know that they’ll get somewhere around the 4% mark for that. 

So that becomes cream for them. But they’re, frankly, in a situation where they’ve had so much fun with accumulating the suite of alternative investments, that they’re now at a crossroads where they’re saying, “Well, yes, we still want to keep some wealth in an exposure to that share market.” But maybe the percentage of exposure that they have there is more than they would like now. 

So they’re actually from an informed platform trying to make decisions to tweak the allocation of assets to shares and property and alternative now. 

It’s a super exciting outcome for them, when we sat down, and we added up the income that they were getting from the commercial property, the income they’re getting from the alternatives and the income that they may develop out of shares, they realised that they could actually breathe out in spite of the fact that the timeline to do all of this may be cut short or maybe not. 

We’re in a bit of a knife’s edge right now but they recognise that they’re actually going to be okay.

Final Thoughts

The reason I decided that this would be a great case study to share with people today is I think there’s a significant amount of financial pain and economic pain that is yet to come into our market. 

I honestly, hand on heart, cannot believe that something as significant as COVID could rip the guts out of many businesses for the last two years and for there not to be ripple effects. 

I certainly am not saying this to be a scaremonger. In fact, quite the opposite. What I’m saying is if you are relying on one source of income, there is no question that no matter how lucrative that is, you are exposed to a level of vulnerability around that reliance.

The act of investing, the idea of creating a parallel stream of income is one of creating a safety net and creating a plan B. It doesn’t mean you’ll necessarily need it and for many business owners who are worth significantly more than George and Mildred, but don’t have that ability to create that or don’t have the awareness of the importance of plan B. They’re the ones that come on down.

So look guys, I know I’ve sort of meandered into a whole lot of different threads today. But the really big takeaway that I hope that you have from this is that you do not need to be a multibillionaire to create an extraordinary investing result in a very short space of time.

You need to be aware of what your choices are, you need to be aware of how to access a better quality of investment deals, and you need to be someone who actually really wants it. You have to be hungry for it. 

If you are someone who thinks of investing as irritation or something like watching paint dry then alternative investments are certainly a contrast to that. 

But what I would say is that the desire and the understanding that that safety net is really important, whether it’s to protect against diabolical economic volatility or uncertainty or whether you simply just want to be that person who creates an early retirement or has that choice, that freedom of choice to choose whether or not your work then you really, really need to go back and listen to some past podcasts to understand why in my world, alternative investments are changing the landscape of investing, particularly in my country, but all over the world.

If you’re a business owner feeling frustrated that despite doing everything right in the property investing playbook and you’re no closer to financial freedom, then head over to www.inkosiwealth.com to learn more about how you can use alternative investments to catapult your investing income and blend strategies to shave decades off your timeline to financial freedom.

If you’re interested in understanding how to create wealth through alternative strategies, please check out my programs, where I help you catapult your investment income and blend strategies to shave decades off your timeline to financial freedom.

Or, you’re welcome to get in touch today, book a call with me, and I would be happy to talk you through it – no obligation!