Case Study #1: Billy’s Story
In the first case study, let’s call the guy Billy. He’s a lawyer, and he graduated top of his class. He’s now stepped out to set up his law firm. His life is busy, and the money rolls in freely for him.
But his overheads are very high, and keeping staff is really challenging. He sees that the best way to compete is just to pay people top dollar. The finances of the business are watched carefully by his accountants. This guy spends very little time on his own personal finances.
He is ambitious and he wants to be wealthy. He doesn’t actually know what that means but he takes home about $350,000 per annum as the managing partner. His wife is a teacher and earns roughly $50,000.
He has a 4-million-dollar mortgage. He has car leases of about $5,000 a month and sends three young children to private schools. So effectively if we carve up how he spends his money, the interest on his mortgage is about $120,000, car leases are about $16,000, and school fees are about $100,000. So that leaves him about $120,000 to pay bills, groceries, and entertainment and he uses all of it.
He also gets a bi-annual dividend out of the business, which is another $120,000 and what he does is he uses that to pay off credit card debt which leaves him about $80,000 after tax to invest.
Billy’s Investing Rules
So if I were to describe what Billy does in terms of investing rules, they would be:
Number one: He buys assets and he waits. He buys assets but he never sells and he is certain that the highest net worth wins. He’s told that the game plan is to invest and keep growing his net worth until he gets a trickle of income. He’s also told to set and forget, buy investments and get on with life.
Number two: He’s not interested in investing in it himself, so he outsources all his decision making. He believes the highest return is in his business or in his work. He asks his doctor clients who he should work with and he finds a well-dressed financial planner to handle his investment decision-making for him.
Number three: He grows his lifestyle with income. He likes looking wealthy, he also likes the finer things in life, he turns over his cars every two years, and he has to have the latest and greatest of everything. His neighbours are bankers and business owners, and they all seem to be a little bit more successful than he is so he just wants to fit in.
Number four: He invests only in traditional investments. His adviser tells him about the 4% rule for retirement which is that if you spend about 4% of your retirement capital, it should grow faster and you should stay ahead. He gets encouraged to invest in traditional investments which will give him the capital.
Number five: He pushes to grow his income. In quieter moments, Billy wonders if his net worth should have been higher by now, but he dismisses it and decides that the best solution is really just to focus on growing his income. Surely, if his income keeps going up, then the wealth will follow. “There’s more time to invest later,” is the thinking rule.
Number six: He strives for the highest returns. Billy goes out and he engages a buyer’s agent. He sees the point of using the buyer’s agent as a tool to find the best deals. The buyer’s agent keeps on putting deals in front of him that seem mediocre so he passes on those. What he wants to find is a bargain and he only wants to invest in properties that he can buy at below market value. So he sees that as the home run. His mindset is to strive for the highest returns.
Number seven: He watches the profit and loss of his business like a hawk, but he pays no attention at all to his personal balance sheet or the profit and loss from his personal passive income. He doesn’t look at anything other than the bottom line on his tax return. He has no idea which assets are performing and which ones aren’t. Growth is slow. The highest return on investment is in his business so he just doesn’t care about anything else.
Number eight: He’s carrying lemons. He’s bought a few houses and by this point, the banks are happy to keep lending him the money. Most of the properties that he’s bought haven’t been part of any plan but they’ve been random purchases based on glossy brochures or random advice from well-intentioned friends. And because he hasn’t had much in the way of funds to contribute to each property, he’s been restricted to buying in high-density areas. He predominantly bought units off the plan. Some of those have had little to no growth, even after years of holding them. The maintenance is starting to kick in and he’s been holding for so long now that he worries that he might miss the growth if he sells. Even if he freed up the capital, he wouldn’t actually know what to do next.
Number nine: He doesn’t know who to trust. As time passes, he becomes more and more sceptical about his financial planner and he realises that he’s getting pushed into products that reward his financial planner that doesn’t necessarily align with his best interests. Recent market turbulence has wiped out a lot of the profit that he made in recent years and he’s starting to get anxious now about the gap between what he’s actually got and where he thought he’d be by now. He knows if he’s honest, his wealth knowledge is poor, but he just doesn’t know who to trust, he has no investing rules, and he doesn’t know how to ask the right questions.
Number ten: As Billy approaches retirement, he starts to realise that the capital base he has isn’t going to create the income that he needs to support his retirement, so he starts looking for investment opportunities that will grow his wealth quickly and he starts thinking about taking on big risks at the wrong time. Things he would never have considered before suddenly seemed like his only option. He’s got some friends who are looking for seed capital in their business ventures and he just needs some quick wins. Finances are not discussed between him and his wife so she assumes that money is plentiful and that retirement plans are all set.
Summary of Billy’s Wealth Journey
In summary, Billy has spent most of his life appearing wealthy. He has a high net worth on paper, but he still only has one source of income. He feels like a fraud and he knows deep down he could have done things differently. He regrets his investing decisions, that he didn’t take, and he tries to console himself that his lifestyle was worth it. He tells everyone around him that he’s happy to keep working but he’s tired.
Case Study #2: Tom’s Story
Another case study that we’ve got is Tom’s story. Tom didn’t go to university. He decided instead to start working in a cafe and eventually became a chef. He was 27 when he started his first cafe and he built most of the furniture by himself. He took minimum wages for a couple of years. By the time he was 32, he’d opened another four cafes and was consistently generating profits after tax of about $450,000, pretty similar to our friend Billy.
His wife worked with him in the cafe and managed the books, and he paid them a combined wage of about $150,000 and then allocated all of the balance to investing. They had a modest home with a mortgage of about half a million and they saved most of the dividends that he was paid. He drove a late model Japanese car and he sent his three kids to the local public school.
Tom’s Mindset and Rules for Investing
So now, let’s talk about Tom’s mindset and rules for investing:
Number one: He tracks the right measures. Tom was always really clear that he wanted a passive income that would cover his living expenses and he estimated that to be about $150,000. He describes that as life-altering wealth. He and his wife agreed that if they could build a passive income to that figure, then they would retire and focus on artistic pursuits. He hopes that he can sell his cafes in the future but he actually doesn’t want to rely on that to reach financial freedom. Tom had been an active investor since he was a teenager and he realised very early on that building net worth by itself wasn’t enough. So to reach his goal, he has to watch his numbers and track his personal wealth. Tracking the right measures was very important to him.
Number two: He started thinking in terms of minimum viable capital. Tom is not at all fazed about looking wealthy. He thinks in terms of, “What is the minimum amount of capital he needs to accumulate to generate the kinds of returns that will give him that income that he wants?”
He regards anything above that number as a total bonus.
Number three: He recognises that it’s important to build a pipeline of deal flow. At the beginning of his investing journey, Tom’s figuring out everything on his own. He’s basically a lone wolf. It’s really slow and it feels like hard work, but then he spends all his time talking to other investors, studying the internet, and trying to figure out what are his options. And as his income starts to rise, he starts levelling up and taking on advisers and mentors to speed things out, but he never ever lets anyone else make decisions about his money.
He knows that everybody means well, but they will never care about his money as much as he does so he learns to ask pointed questions to make sure that all the people that he relies on, not only know their stuff but walk their talk. He wants to follow the recipes of master chefs and not self-proclaimed gurus. He starts to meet some good people along the way who can connect him to the kinds of investment opportunities he needs and he realises that those people become his most prized resource.
He’s busy and work is very intense. He wants a network of great investors that can help him build a pipeline of deals that he can just tap into whenever he’s got the money. He does hear about investors making crazy returns on exceptional opportunities and he’s tempted, but he decides to focus on consistent deals that are easily replicable.
Number four: Wealth is a three-part game. Tom figures out that there are three parts to the wealth game. The first part requires him to find investments that grow his capital. The second part is about finding opportunities that increase his passive income and reduce his timeline to freedom. And then the final part is about structuring all of his investments so that they form a predictable sustainable income into the future.
He likes alternative investments that are backed by real property, to really push up his passive income because he sees that if he chooses those well, they don’t require a rising market and they offer that sustainable, predictable income. He sees that the reason that the returns in the alternative space completely outperform traditional is that the market’s really inefficient, and so it just provides more opportunities for big gains.
Number five: He learns that he’s got to keep identifying his blind spots. How to grow his stewardship, how he cares for money, how well he chooses his investments, his knowledge, and his education as well as his mindset. He never assumes he has it all figured out. He’s always thinking about how he can up his game.
Number six: He learns to allocate capital like a fund manager. Tom gets to know successful investors along the way and he starts to think like a fund manager. He knows when he’s speculating, he knows how to protect against the downside, he thinks about risk-adjusted returns, and he chooses carefully between cash flow opportunities and growth opportunities.
Number seven: Stewardship before earnings. Tom’s friends try to tell him to go and start more cafes and he loves the idea of earning more income, but he knows that that would come at a price and he’s just not prepared to pay it. He values his time above more money. He sees the immaculately groomed lawyers driving European cars that come in to buy coffee, looking harried and stressed out and he assumes they must be mega-wealthy.
Number eight: Bring velocity to money. Tom realises that the faster he can move his money and reinvest, the more inflated his returns. He keeps good cash reserves but he’s constantly monitoring when his investments can be redeployed and when he can continue to grow his capital.
Number nine: Measuring opportunity cost. As Tom starts to transition his investments to more cash flow opportunities, he’s evaluating, “How does one investment marry up against another?”
He knows that by buying more property, he can keep growing his net worth and he’s always weighing that up against investing in cash-flowing assets. His timeline now to financial freedom is approaching three years off and he’s crystal clear on what decisions he now needs to make.
Number ten: Be sceptical of common wisdom. Over his life, Tom sees that common wisdom is starting to fail things like the 4% rule in retirement just isn’t working anymore. He starts to say, “Look, I’ve seen that there are people around me losing money and I know that we’re moving into a time of high volatility and uncertainty.”
He’s very careful about where he takes advice from. He’s quite young and he has spent most of his life appearing average. He has a reasonably high net worth on paper with multiple sources of income including his business. He doesn’t worry about money at all and he isn’t even sure how his success might compare to somebody else’s.
The Contrast Between Billy & Tom’s ‘Investing Rules
The contrast is that Billy has been most of his life appearing wealthy with one source of income and he had a lot of setbacks. He and Tom really started out with very similar incomes but have ended up in wildly different places because they’re thinking and actions are very different.
The Idea Behind The Ten Rules
Everything that I’ve learned over 25 years I was trying to summarise in those two case studies, but it’s something I keep seeing over and over and over. I should put a big caption that there’s no judgment in either of those. It’s really easy to look at someone who lives in a great house, drives a great car and assume they must be killing it. Then the other extreme which is people wearing jeans and T-shirts aren’t killing it.
Where did I come with those? It’s through speaking to the same types of people and gleaning that there was ‘a thinking’ and a framework that was being adopted that either worked or didn’t work. For me, the cafe owner fellow who maybe just cares more about who’s got clarity on what he wants has probably a higher probability of reaching those goals quickly.
Adapting the Way You Think As an Investor
People look at the stories of Tom and Billy and they might seem exaggerated. But I’ve peeked behind the curtain of hundreds of investors and the stories are much more common than you might think. Obviously, they might not be lawyers and cafe owners. But I think fundamentally, the way that you need to be thinking as an investor for the next 30 to 50 years is completely different to what might have been accepted as conventional wisdom for the last 30 to 50 years.
I think your ability to adapt, change, and articulate what your investing rules are, is really what’s going to set you apart from other investors. Instead of just accepting things that have always been done and doing that, the biggest tip I give people is to go out there and find other people who have the results that you want.
Find out, “How did they do it? What worked? What didn’t? Does it still work?” Because there are investors who’ve made millions and millions of dollars with one particular strategy over the last 30 years, so it can be easy to say that that’s the strategy you need to adopt. But if you ask them, does that strategy actually still work today? They’ll say “No, that doesn’t work anymore.” and that’s a missing piece that sometimes people overlook.
The Reality Most Investors Face Today
I think the reality that most budding property investors have to face today is that you can only borrow so much money, and that’s one of the things I encourage people to get clarity on. If you know that you can only borrow X amount of money for the income level that you have, choose your investments carefully.
Someone that Tyrone and I both admire is Steve McKnight. He’s written a couple of amazing books on building a portfolio in excess of 100 properties but we know that’s really hard to do today. Back in that time, the banks cared less about your income so you could just keep going and going. Whereas now, if you know that there’s a limit, the question then becomes, “Well, if I can only buy so many traditional properties, what else am I going to do?”
Final Thoughts
I think today was really just trying to bring together a lot of different ideas and different philosophies for how you can approach wealth building. As I’ve said, there’s no right or wrong. It’s just really interesting to see that it’s time for conventional wisdom to be challenged.
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!
