You’ll never go wrong if you live by the Golden Rule: “Do unto others as you would have them do unto you.” Today, Michael Bowman of Anderson Business Advisors and Bowman’s Business Brief talks to George Antone, a financier and industry thought leader. George has the ability to take complex topics and make them easy to understand. He can change your perspective on financial life and teach you how to hack finances. His goal is to leave the world a better place by being in it.
- Is there an overarching premise that George uses? Go straight to numbers; look at everything and ask, “How does this work, if it does work?”
- When talking about investing and real estate, does George view leverage as good or bad? People need to understand and measure leverage; it can work for or against you
- What is financial leverage? Borrow as much as possible vs. don’t use debt for anything; find right amount of debt, not too much or too little
- Is there good and bad debt? Good and bad debt exists; build wealth by focusing on using and measuring right debt and financial leverage
- How much debt should you have? Determine debt-to-asset ratio as metric, depending on stage of life; most investors’ debt-to-asset ratio is too high (80-90%)
- What is a loan constant? Measure of flexibility and risk for loan; monthly principal and interest (P&I) payment, multiplied by 12, and divided by loan amount to get percentage
- What should you consider when buying property? Know what to do when market goes down and be ready for it
- Are reserves necessary when using debt? Anytime you use debt, you must have reserves; money in the bank gives you peace of mind when using leverage
- What’s the difference between delayed vs. instant gratification? Be safe, especially when market goes down, reserves become allies
- How George sets up his reserves? Create two types of reserves, primary and secondary
- Should you use reserves to bring a loan down? Refinance to lower payments; never use debt for reserves
- What /when to measure? Make sure every investment and entity line up each quarter
- Where’s the Finish Line when it comes to finances? Move faster, not backwards; generate a certain amount of money every year to maintain your purchasing power
- What are banker’s rules? Play the spread game and pass all the negative impact of inflation to their depositors by being honest, ethical, and disciplined money manager
- How to build wealth with fewer doors? Use new metrics and definition of success; start with good books and invest in knowledge
- What are three metrics George recommends tracking? Debt-to-asset ratio, assets under management (AUM), maintain your reserves, and use right type of debt
Full Episode Transcript
Michael: Hey, welcome to the Bowman’s Business Brief, a subsection of Anderson Business Advisors Podcast. Today, I’m very excited to welcome George Antone to the show and I’ll be trying to get him on this podcast for a little bit. We’re both very busy and finally, we got together and got a small schedule at the same time.... Read Full Transcript
To give you a little background on George, I’ve always looked up to him as one of the most brilliant financiers and thought leaders in the industry. One of the things I appreciate about George is he takes these complex information topics and presents them in a sincere way that’s easy to understand.
What I found out about George and the people that he’s worked with, his reputation in the industry is he changes your perspective and your mental paradigm, and really teaches you about financial life. He’s written many books and has really, truly taught me a lot. Also, I’ve worked with many of his students and I have seen the growth that they’ve undertaken. So, I would like to welcome on the show, George Antone.
George: Hey, Michael. Thank you so much for having me, I really appreciate it. I have to tell you, I’m so excited because I really admire you a lot, the work you do and all the success, and all the things you helped people with. It’s truly an honor to be on the call.
Michael: Ditto. George is one of those people that, if I ever see him from across a room, immediately, I feel happy. I don’t know what it is about his personality, but George, you’re one in a million.
George: Thanks, man. Thanks for this.
Michael: I don’t want you to start blushing. I know we’re on a podcast, people won’t be able to see it, but the thing about reading your material, reading your information, and your education, something that stuck out to me is that you have the goal of leaving the world in a better place because you were in it. I think you continually achieved that goal on a daily basis.
George: Well, thank you so much. I have to tell you, when we’re growing up, we have certain goals. We all have different goals, but then you get to that point where you realized that significance is more important than all the financial, all the money, and all the stuff. Giving back is so much more fulfilling than you realized.
I’m a big advocate of giving back because for anything, for selfish reasons, because you realize how fulfilling it is to help other people and make a difference in their communities and the world.
Michael: One of the things I grew, that completely, I think with the old saying is, those who have much has been given, much as required, and you have an obligation to give back and help people, and do the golden rule, “do unto others as you would have them do unto you.” I think is something to live by and if you do that, you’ll never go wrong.
George, you’ve taught thousands of people on ways to hack finances. Is there an overarching premise that you go by, where two systems maybe? Give me your thoughts on that.
George: I have to tell you a little of my background, I’m very skeptical person. I tend to go straight to numbers. Whenever anyone talks about anything—I don’t want to sound negative but it is how I am—I start with the intention of proving that it doesn’t work because for the one in a million or one hundred work, they’re fascinating. So, what I do is I tend to look at everything and asked myself, “How does this work if it does work?”
One of the things I realized is, with a lot of people out there talking about in terms of investing and real estate, and all that stuff, they talk about leverage. They talked about, “Leverage is good.” Some people say, “Leverage is bad,” and all that stuff. I have to tell you, I think people need to understand and measure leverage. That is so critical because it can work against you but it can work for you.
Whenever I’m looking at anything out there, I’m trying to figure out and see how can you use leverage in that system or whether it really says whatever it is, and how can you measure and how can you control it because leverage can come back and bite you if you have too much leverage in anything. So, finding a balance.
Michael: When we have all levels of education regarding finances on this show, to break down, what is leverage when you’re talking about leverage?
George: Excellent. This folks on one type of leverage which is financial leverage or that’s debt. Whenever people are talking about debt, we have folks on this financial leverage. A lot of people out there are talking about borrow as much as possible. On the other hand, people are saying, “Don’t use debt for anything.”
What I found is that you have to find the right amount of debt, not too much and not too little. In fact, either one can really hurt you. I know how that sounds crazy but I’ll give you some metrics on the call to have your listeners start measuring this. You have to measure it, you have to control it because it can come back and bite you. I am not a big proponent of too much leverage or too little leverage but in the middle, and measuring it.
Michael: Yeah. Student loans. Everyone was telling me, “Hey, that’s good debt.” And I looked at my student loans as if, “What do you mean good debt? That’s horrible debt.” That’s perspective though, right? It’s always perspective. When I had them, it doesn’t seem like good debt to me.
George: That’s exactly correct. I really think people that are looking to build wealth should really focus on using their right debt and financial leverage to go build their wealth and make sure you measure it. I’ll give you some metrics on how to measure it because just like anything, Michael, there could be good debt and bad debt but even in good debt, people can destroy themselves.
Michael: Also, my parents generation, my grandparents generations, their goals were, “Hey, pay off for house, pay off everything.” They have no debt, whatsoever. It’s almost a taboo, that you don’t want any sort of debt. I called the kind of them, simpleton mentality is if you don’t have it, you can’t use it.
George: That’s exactly correct, the problem with having no debt. If you think about our journey in life as driving on the freeway, for example, if you think about starting out in terms of building wealth and you’re driving on the side streets, and then, you’re getting on the ramp to unramp to the freeway and then, you get to the freeway and now you’re driving at 65 miles per hour, for example. Then, when you are close to your destination, you’re retirement, you take the off ramp which means you are going to slow down. All of these, actually, translate to how much debt you should have.
There’s a metric called debt-to-asset ratio. Essentially, that is your speed, if you will, debt to asset ratio. If there’s nothing more than all your debt on top divided by all your assets in the bottom, including cash and everything. What I tell people is, “You want to translate that to this speed limit. When you are building wealth, meaning you’re in the freeway, you want to be no more than 65% debt-to-asset ratio which translates to 65 miles per hour.” What happens is that’s the maximum, you don’t want to go above that.
The problem is, most investors out there, their debt-to-asset ratio is way too high. It is 80-90% and so, they need to lower that. And that is assuming you’re using the right debt, not just any debt but a very specific debt which you can talk about here in a minute. Then, when you are retiring and you get to a certain age, you want to lower that down to somewhere between 15% and 35% when you are retired. You’ll always have some debt, but you have to ask yourself, where are you in your journey? All the people might tell you, “Have no debt,” but they are coming from a different place than someone who is in their 30s or 40s, try to build and maximize their wealth.
It truly depends on where they are in their journey and what is the right numbers. I really recommend, for all your listeners, to start by measuring your debt-to-asset ratio and that is, essentially, how fast you are driving. If you’re in your 30s or your 40s, for example, and your debt-to-asset ratio is over 65, you’re driving way too fast. But if it’s 15% or 20%, you’re driving way too slow on the freeway. They need to know how much to my recommendation is 45 to 55 for someone at that age would be ideal.
Michael: What’s incredible is that I called them golden nuggets and within the first few minutes, you’ve already gave our listeners a major golden nugget. This is exactly why I wanted you on the show. Absolutely. Thank you, George. This is fantastic.
George: Thank you. I’m all about numbers. That’s why I go straight to the numbers because it’s important to me to be able to measure everything.
Michael: Sure. I think that’s one thing. When you deal with investors, that’s one thing, I think, they lack. They lack the research and also, they’re quantifying things and measuring in the metrics. They go by feeling as opposed to really looking into hard numbers. I see with my real estate investors, when they’re in emotionally attached, or property, or investment, and they make poor financial decisions. Same thing with the leverage here.
George: Absolutely, 100%.
Michael: All right. We’re going to more good leverage and bad leverage.
George: That’s a great question. Many listeners know that Robert Kiyosaki wrote a great book, Rich Dad Poor Dad, and he talked about good and bad debt or good and bad leverage. That’s really good in terms of high level. He said, “Anything that puts money into your pocket. If you bought something with leverage and it’s putting money into your pocket like real estate or rental property, that’s good debt.”
The problem with that is, that’s good for thinking high level but even with a good leverage or good debt, you can destroy yourself. Look at 2008, for example. People use way too much debt and the wrong debt, and they completely got screwed up because they need to know what happens when the market goes on. You see, debt works great when the market’s going up, but it becomes your worst enemy when it’s coming down.
Think of a circle. Robert Kiyosaki’s talking about good debts. Within that, a subset of that, you actually have good leverage because even within the good debt, there’s bad debt leverage. Let me give you the definition of good leverage, in my opinion, within the good debt that he’s talking about. That is, you want to have, as much as possible, fixed interest rate […] unless you want to work through your mortgage broker, for long-term buy and hold. You want to have fixed interest rate, you want to have the right amount or percentage of debt. There’s a way to calculate how much every asset can handle. Typically, when people say, “80%,” typically, that’s roughly the right number. We’ll talk about how you can have the remaining money at downpayment if you don’t have the money for it.
You want to make sure you have the right percentage of debt against the asset. You want to look at your debt-to-asset ratio for your whole portfolio. There’s a number of other things but one of the most important metrics to look at that most people don’t look at is something called the loan constant. What most inventors do is they say, “I want the lowest interest rate loan.” That is one of the worst things you can do by using them as your primary metrics.
Here’s what you have to do. Take your monthly payment—I’m talking about the principal and interest, not the ITI but the principal and interest—multiplied by 12, and divided by the loan amount. Not the loan balance, but the loan amount. That’s going to give you the percentage. That’s called the loan constant.
I’m going to repeat that really quickly. Your monthly P&I times 12 gives you your annual payment against that loan in terms of principal and interest. And then, you divide by the loan amount. That gives you a number called the loan constant. The loan constant is a measure of flexibility and a measure of risk for the loan.
Here’s what happens. I’ll give you an example. Most lenders will tell you, “Get a 15-year loan because it is a lower interest rate than a 30-year loan and you’ll be debt-free in 15 years.” We’ve all heard that.
Michael: I’ve heard that many times. Actually, in fact, I just heard that this morning. I kid you not.
George: The problem with that is if you measure the loan constant on that—I wish I could demonstrate how far for the loan constant is—think again the monthly payment, P&I multiply by 12, divided by loan amount, it gives you a very high number. What that tells you is that (and most people don’t realize) the lenders use that to shift the risk to the borrower.
On the other hand, if you want a 30 year loan with slightly higher interest rate, the loan constant is actually lower. What that tells you is this, if you have a 30 year loan, you can always pay it off in 15 years and you can always make the same payments as a 15 year mortgage payments. It might be a little bit more than 15 years, but at least you know, if you have a bad year or two, you can always go down to the lower payment.
With a 15 year loan, your loan constant is so high and if you have a bad year or two, you’re probably going to lose your asset. What I tell people is, the ideal debt is fixed interest rate, get it as long as possible, meaning 30 year, I’ve match the exit strategy to the period of the loan and get the lowest long concert. Now, there are some other things you want to look at, but I highly recommend that everyone calculate the loan constant, it has to be the lower the lower the better. You’ll realize that a 30 year loan, even sometimes interest-only, depending on the loan, might be better for you in terms of flexibility, than a 15 year loan or any other loan.
Michael: Can you imagine like most of the people back in 2008–2012 if they would have listened to your advice, how many homes would have been saved?
George: You know what? You’re absolutely right. So many people in 2008, the reason they lost their properties is everyone keeps blaming the down market. Here’s the problem with the real estate. It’s cyclical and there will always be a down market, so you have to know what to do in terms of debt. You have to know how deleverage, leverage up all of that stuff, depending on what’s happening in the market because leverage comes with the territory and the cycles come with the investments. When you’re buying property, you have to know what to do when the market goes down and be ready for it.
One other thing I forgot to mention with that, is anytime you use debt, you have to have reserves. You have to have reserves, I can’t stress that. In fact, the worst advice I’ve heard out there is some people have money in the bank and someone says that money is sitting there doing nothing. Well, hold on a second, that’s what gives you peace of mind when you’re using leverage.
Michael: And sleep at night also.
George: That’s exactly correct, sleep at night.
Michael: I think you’re up to 4-5 golden nuggets already buddy. This is fantastic. I work with a ton of real estate, stock investors, and just small business owners, and there are things that I see constantly, when people get themselves in trouble, they’re not adhering to any of these rules you’ve just given.
George: Yeah and that’s what’s sad is that, they’re doing all the right things with everything else except for one thing which is managing and controlling debt. That’s what comes back and bites them, but we need to use that strategically to build our wealth. It’s a double-edged sword, but that’s why I’m excited about sharing this information with everyone because you have to measure and control and manage debt. I can’t stress that enough and hopefully this is helpful for everyone.
Michael: Oh my gosh. I already know it is in just the short time we’ve been talking, absolutely. All right, so give us more nuggets.
George: Where are we now?
Michael: By the way, I’m writing all the stuff down, this is fantastic.
George: Let me talk about reserves for a second here because I want to explain to people why reserves are so important. The amount I always talk about is imagine building 100 storey building, the first thing you do is you start with a very strong foundation and then you start building the building. Most people don’t see the foundation, they see what’s above ground. Imagine building 100 storey building and then when you’re done, you go back and you say, “You know what, this foundation is just underground, no one can see it and it’s just sitting there doing nothing. Let’s take it out and build the next building.”
Obviously, that’s a crazy idea, but leverage is essentially building. You have 100 storey, building or an 80-storey building, whatever it is. It comes with the territory. You have to have reserves because that’s what holds the building. That’s what holds your investment, you’re leverage. Typically for reserves, you want to have your debt service. That’s your mortgage payment, plus your operating expenses for the building or for the property or whatever the asset is, add these up and then multiply by three, at least. You have three months worth of reserves, debt service and operating expenses.
Then what happens is you want to grow it to six months. One of the things I do with my ideals is I say to my partner, to my investors, “Let’s take the cash flow that’s coming from the building, put it into reserves. Once it hits a certain dollar amount, meaning six months for example, then we can start distributing the profit or whatever. The big thing is, the last thing I want to do is have my investors concerned or can’t sleep at night. They have to understand that this is more about our safety, especially when the market starts going down, reserve becomes your biggest ally.
Michael: Delayed gratifications as opposed to instant gratification, it’s a weird concept nowadays for people.
George: That’s exactly correct. The reserves are so critical and anyone that tells you, “It’s sitting there, doing nothing,” is nuts. I think the big thing is, just like you’re mentioning Michael, when people are having a problem, they can’t sleep and that’s when they start appreciating more sleep. I’ll tell you that everyone […] talk to someone that’s lost a property and they’ll tell you how important reserves are. Just be careful about not having reserves.
Michael: Absolutely. In life, too. You always need a little back up. Sometimes it’s tough because we want, want, and want. Even in investing, we want to get the next property or get the next investment going, but hold on, build that great foundation. Excellent point there. All right, next. I’m chomping at the bit, this is great.
George: Okay, anything specific you want to cover within leverage?
Michael: No, just give us more.
George: I’ll just tell you how I set up my reserves, just to expand on that. I have two types of reserves. I have what’s called primary reserves and I have a secondary reserves. The way it works is that every deal (and I’ll talk about what deal means in a minute) has its own reserve and that’s primary reserves. The primary reserve for a listed property, […] or it could be, let’s just say, “Michael, you and I have two properties within an entity, then we would have its own reserves.” That’s primary reserves.
However, I personally would have one global secondary reserves that backs all these primary reserves. My money typically sits in the secondary reserves and if I have deals listed together or whatever, we have primary reserve as well. I end up with a whole bunch of primary reserves, one per deal. A deal could be one LLC with multiple properties or it could be dedicated one for each property. What happens then is then I have my secondary reserves, which backs all this stuff up. When people talk about I have so much money in reserves, what it’s doing is it’s holding your whole portfolio, if you will, because you’re using so much debt.
What happens is, at all times, you’re measuring your debt-to-asset ratio at every point. Every quarter look at your debt-to-asset ratio. Again, all your debt on top divided by all your assets in the bottom. Assets includes cash, so that’s the cash in the reserves. What happens is, at all times, think of it as driving. Every time you buy a property or you change anything in your portfolio, you’re always tracking your debt-to-assets. What might happen is you might get to a point where your debt-to-asset is too high, at 65% or it’s getting higher. You want to lower that or what’s called deleverage. Then, when the market starts going down, like everyone is expecting, you have to know how to deleverage, which means simply lower your debt-to-asset ratio down from 65%, down to whatever it is. That’s why I have my students always focus on maintaining between 45% to 55%. One of the key things is always matching your debt-to-asset ratio with what’s going on in the market.
Michael: Are you saying that you would take some of your reserves and bring the loan down? What are you measuring? Is it in a quarterly basis you’re looking at that? Which coincides with what I preach, too, is you taking a look at each of your investment, each of your entities, making sure that they’re all tidied up at least once a quarter, do a business meeting and go over because related to this would be you never know if you have a dog of a property that you get rid of, because not performing and get into a higher performing asset.
George: Exactly. You and I create so many things the same. I’ve had a lot of your students tell me how much we believe in the same things. Going back to your question, that’s an excellent question. That’s one of the issues with most people, is they’re not sure how to deleverage. If you go back to that formula, total debt divided by total assets, here’s how you “deleverage.” I’m not saying take money from reserves and pay down the loan. That actually wouldn’t work. Let me take that back, it would work if you refinance, because you want to lower your payments.
However, a better way to do it is to simply increase your assets and lower your overall debt-to-asset. Here’s what I mean by that. Let’s just say you’re at 65% or 67% debt-to-asset ratio. One thing you could do is buy another property, as much as possible with cash or with as little debt as possible and make sure it’s income-producing. This way, it has more money coming in your reserves. When you look at that, it lowers your overall debt-to-asset. The other thing you could do is to just simply add more reserves.
Now, one of the things that people still is like, “Hold on a second, you’re telling me to buy all with cash. That doesn’t make sense.” I’m not saying necessarily your cash. I’m saying equity financing, not debt financing. Let’s go back to equity financing. Equity financing simply means you find someone that will invest with you and you’ll give them a percentage of the profits.
What happens is, they might be the ones buying that, so your debt-to-asset is your overall portfolio, but many of them could be equity financing not debt financing. Equity financing simply means giving them a percentage of the profit and in a down market, it’s better to have income-producing assets with less debt.
What happens when the market starts going back up, you leverage up, you refinance, give them part of the principal back or all of it if possible and maintain that. You’re always looking at both sides, if that makes any sense.
Michael: Absolutely, joint ventures and bringing in money partners, absolutely. I’m a big fan.
George: That’s exactly correct. That allows you to deleverage and also leverage up. One other nugget that most people always get drawn is don’t ever use debt for your reserves. I’m going to say that again. Don’t ever use debt for your reserves. Don’t borrow money out of HELOC and put in a reserve. Don’t borrow money from someone—borrow meaning debt financing—to put in reserves. It should be either your cash or equity financing or cash flow coming from the asset that goes into your reserves. Don’t ever borrow money, don’t ever use a line of credit as reserves. It just doesn’t work this way.
Michael: I feel like you’re a parent to everybody here, keeping everybody out of trouble, absolutely. Now, I get what you meant by you’re a big fan of “hacking the game of finances are all good hacks.”
George: Yeah, for people that totally understand how financing work, how the world of financing works, there are some really fascinating things you can do every day that will elevate your wealth without taking a lot of risk, but you have to know how to make it work for you. The problem with most people out there is that they’re just randomly doing things, “Just give me a loan,” or, “Give me this,” or, “Use this,” or, “Do this,” but once you understand how to measure all these stuff, you can do some fascinating things, without a lot of risk, as long as you understand how to manage and control all this stuff.
Michael: What’s funny is I’m kind of reconciling my mind. I know you just released a book, The Debt Millionaire, now all of a sudden, you’re talking about, “Don’t use debt,” but then to understand debt, use it here and use it here,” you’re blowing me away right now.
George: Well, I’ll tell you, like I said, I’m always challenging my personal beliefs because I grew up the same way thinking debt is bad and thinking you should have no debts whatsoever. Pay off all your debt as fast as possible. When I work on these numbers and I look at the spread sheets and all that stuff, it just tells a whole different story. I’m right there with you, thinking this goes against my beliefs against debt, but the numbers don’t lie. It’s fascinating stuff.
Michael: Perfect, what other golden nuggets you got for us?
George: Well, I got to ask you, every time we work together, I learned so much from you, so I would love to hear something from you, related to some of the stuff.
Michael: Well, you know as we’ve known each other, I’ve seen my own mental paradigm shift back in, I think it’s been about eight to nine years we’ve known each other, but just even the difference of looking at it as a consumer versus a producer or a banker verses a lender, I think the book that taught me a lot about what you’re talking about now was, The Bankers Code. How many books have you written?
George: I’ve written three of them, The Wealthy Code, The Bankers Code, and The Debt Millionaire. It’s funny because most people like them all but especially The Bankers Code. That seems to be a very popular book.
Michael: Well, you’re asking for a nugget. It’s about compounding and creating spreads, too. It’s always stuck with me, “Hey, if I can borrow this and lend this, yeah, I’m borrowing it, but I’m also leveraging it out and making more money on it,” as opposed to looking at it just like a straight debt and maybe a solid or a constant, it can be more fluid.
George: Yeah. I got to tell you, this whole game of spreads is fascinating and harsh, what I talk about in the book, The Debt Millionaire. The Bankers Code is my second book and I talked about lending and being the banker and thinking like the banker. Then, in my third book, The Debt Millionaire, I expand on why that’s the case. One of the things that people don’t realize is if you know how to use spreads effectively, you can make the whole system work for you. Let me expand on what I’m saying here.
Michael: Absolutely, because I’m kind of interested in this when we’re looking at it. You’re very safe and you keep your students safe, doing all the metrics and then, now you’re going to be expanding on it. I’m interested on how you’re going to get there.
George: What I tell people is, imagine you’re in a race. You start running and as you’re running, you’re looking around and you see other people running. You’re running and you’re trying to obviously beat them. What you realize when you look up, you see the finish line moving away from you at a faster rate than you’re moving towards it. Now, even though you’re running forward, you’re actually running backwards relative to the finish line. One of the first things people have to understand is what is this finished line and why am I moving backwards? How do I actually run faster than the finish line that is moving away from me?
Here’s what’s happening, when you look at inflation and taxes, there’s a formula that ties them together so that you have to generate a certain amount of money on your whole portfolio every year, just to maintain what’s called your purchasing power.
Michael: I bet a lot of light bulbs are going on. I always hear, “How much profit are you making on the deal?” and they give me the gross, not the net and then we start going through it and then forget all the taxes, the insurance, all this stuff on some of these things that are […] scratch my head. This is great you’re pointing it out. I feel like I got an ally in my fight to help other people.
George: What happens is just like you’re saying, so when you look at your whole portfolio, let’s just say it’s X dollars, and you have to generate (I’m going to make up a number right now) 8% on that portfolio, without if you have no debt, 8%, just to maintain your purchasing power when you consider taxes and inflation. Now, what happens is most people are happy making 4%, 5%, 6%, but they don’t realize if your break even is 8%, that means anything less than 8%, you’re moving backwards in terms of what you can buy.
The problem with that is people don’t realize it until they retire. At retirement age, they start realizing all this money I made, I can’t even buy the same stuff I used to buy 20 years ago. What happens is they have to understand that you have to beat the system, meaning inflation and taxes. I’m just going to sound crazy right now, but I’m going to just say it. If you use spreads correctly—this doesn’t have to be lending, it could be anything, where you’re buying money at lower rate, I’m making a higher rate for example, rental properties and stuff—it turns out that you are passing the negative effects of inflation to the lender and it is not working on you. In other words—this is crazy, this is so powerful—if you are using spreads correctly, it’s almost like you’re putting a shield around you that says, “Inflation doesn’t affect me and passing it on to the lender.” The lender, if it’s a bank is doing the same thing and passing it over the depositor, right?
Michael: Yeah. Get into this because that was another thing I got […] of your new books is this whole shifting and there the table that pointed this out well in one of your books. Get into this, this is very interesting.
George: If people understand how the banker thinks and works, they’re playing the best game in the world. They play the spread game and they pass all the negative impact of inflation to their depositors or whoever their getting the money from. They understand the game and the minute investors start thinking like bankers and adopt what we call banker’s rules—
Michael: As opposed to being a lender, right?
George: Yes, you’re touching all the right things, Michael, you’re like way ahead of me. You’re touching all the right stuff there.
Michael: I just remembered it, certain aspects of your book that changed the way I thought about all these stuff. Again, when you’re […] wealth, you can start lending out and you call yourself a lender. Then all of a sudden you say, “You know what George? Wait. I don’t want to be a banker.” I don’t mean to keep pushing you, but you got the banker’s rules that you just mentioned then I’m not so sure that everybody knows what the banker’s rules are. I know that one that stuck out to me was being an honest banker, which goes with my code of ethics that I go by.
George: Bankers have their own rules that they live by and when someone, even an investor starts adopting those rules and understanding how the game works (when I say game, I’m talking about how the system works) they can use it to their advantage without doing anything unethical.
Some of the banker’s rules that you’re referring to banking is really about safety first. You never want to put your money or other people’s money at high risk. What you want to do is you want to look at the big picture and actually measure risk, as we talked about in our training how to measure risk. Then, realize that it’s not about the assets. Most investors are so excited, they buy a property, they drive by it, and they’re looking at the actual asset. They look at the paint, they look at the roof, but they don’t realize that it’s a financing game.
The reason we buy real estate is because we’re able to borrow money at a lower rate and make more money with it. We are creating, we’re playing the spread game again right there. When you play the spread game, you realize that there’s a bigger game that bankers understand. Investors have to understand that.
Then the other part about banker’s rules is that you have to be a discipline money manager. Again, I’m going back to when I see a lot of investors running around just buying things and not sure, there is no plan and they’re not managing their finances or the money correctly. You have to as what I called banker’s rule, you have to be a disciplined money manager and track all this stuff.
I gave you some metrics right now for everyone to use, debt-to-asset ratio, loan constants, also reserves, but you have to look at your whole portfolio and measure these things. You can’t just be a willy-nilly (whatever that term is) buying stuff. It’s not about the number of properties. I have a lot of investors that are running—
Michael: It’s a badge of honor, right? “Hey, I got 120 doors.” It’s a badge of honor, but they’re ignoring the number one rule, banking is about safety.
George: Exactly. Here’s what happens; this is I how I started. I started by measuring how many doors I had and what I realized is anyone that gets over 20 properties will tell you, it is a nightmare to manage all these properties. Even with property managers, there’s always something happening. I know people over 100 properties and it is so stressful. I tell people, “If your measure of success is how many doors you have, you’re about to be very stressed out and you going to hate real estate.”
The question is how can you build your wealth with fewer doors and there is a way and you have to use new metrics and new definition of success. We’re covering so many things here, Michael, we’re literally covering topics of days and days and days in this call.
Michael: I was going to ask you about that, because even as long as I’ve known, you keep on bringing up these golden nuggets as I call them. How do you take somebody who is financially literate or once have proven themselves or start using your techniques and bring them to a point where they can actually implement what you’re talking about? I mean how many days do that take? How many hours?
George: Well, I got to tell you, it took me a long time, but I’ll tell people start with good books and just realize that investing in knowledge is so critical and having the right team like Michael on your team and having the whole Anderson company behind you is so critical and you want to have the right people on your team and you can’t just learn everything. I find people trying to figure out all this legal stuff. You’re not going to have as much experience as Michael on your team. You might as well have people that are experts within their domains and focus on the big picture so that they can be there to help and move you and lift you up. You can do everything. I tell people, start with good books, invest in knowledge.
Michael: Invest in knowledge is something that I think I jinxed myself, because when I was a younger kid, I think it was my mom or my dad, I said, “I can’t wait to get out of school,” and actually, I think both of them looked at me and said, “You will always be learning and you always want to have the mentality of always be learning.” I’m a big proponent of education. I’d much rather get the education than go through the school of hard knocks. I think there’s a value of the hard knocks, but getting an education, going to classes, learning from other people, learning from their mistakes, you don’t make your own
Every time I spend money on attending a class, I’m grateful later on. It may not be tomorrow, but later on I realized, “Hey, it saved me from making a big mistake,” so I’m a big proponent of education.
George: Absolutely. I am too. What you said about you’re going to be learning for the rest of your life is so true. Honestly, I personally love it. I love learning because when you surround yourself with other people that are on the same journey, it’s fascinating to meet other people and you have so much in common, because otherwise this can be lonely for many people. If they don’t surround themselves with people that think alike and can help each other, in terms of what you’ve learned and all that stuff.
Michael: It’s lonely and then I also realize that if I’m not surrounding myself with like-minded people, I surround myself with other people who try to bring me down. There’s always that crab pot. I’m talking about crabs going to pot, they don’t have to put a lid on it because other crabs will pull them back down, back into it. Again, surround yourself with good people, a great team people who appreciate knowledge and that are go-getters.
Coming to Vegas, I’ll be speaking at a conference, and I’ll say you guys are so different because you guys have chosen to go ahead, learn, and better yourselves for a better future as opposed to the rest of people in Las Vegas that are down on the strip, gambling, drinking and everything else like that.
George: You’re absolutely right. It’s so much more fun being able to share the knowledge with people that are there to learn it, versus someone who’s being forced to sit there. You’re right. I think that’s one of the things you and I have talked about, how much we enjoy sharing this knowledge and helping people. It’s just people on the same journey. We’re just a few steps ahead of them and being able to look them up and show them, “Here’s what we’ve learned and it is one way to handle this handle that.” It’s a great feeling.
Michael: Any other metrics that investors are not tracking that they should be?
George: Let me give you the third one and I’ll combine all of them. Here are the three metrics I would recommend every person out there track. Actually, I gave you earlier; I’ll combine all of them. I started by talking about debt-to-asset ratio and think of this as essentially how fast you’re driving. Debt-to-asset ratio is nothing more than a percentage. The equivalent metric that goes with that is your assets under management (AUM) which is nothing more than your total assets.
If you look at your debt-to-asset ratio and the denominator, meaning in the bottom part, it’s the total assets, take that. Now, you have, let’s just say, 55% debt-to-asset ratio and, let’s just say, $5 million worth of assets under management. What happens then is you are looking at those two metrics at all times. One as a dollar and one is a percentage of that dollar. What happens is, as you increase your assets, as you’re buying more assets, you are maintaining your debt-to-asset ratio, between, let’s just say, 45% to 55%, no more than 65% at all times. You’re buying more things and that’s your assets on the right side, if you will, assets under management.
When I talked about this, you always want to maintain your reserves. I gave you the metrics earlier for that and always use the right type of debt, what I called a very specific debt, which is what I gave you earlier with the loan constants, the fixed interest rates, all that stuff. If you track your whole portfolio this way (and I just gave you four metrics here) that would allow you to grow while maintaining your downside.
Always keep track of those numbers. For beginners, they are setting out, I would say, you want to get your assets under management to somewhere between $8 million and $10 million. At that point, your numbers look incredible and you’re able to hit some amazing numbers. To get there, I tell people start with $1 million as of goal for assets under management, not equity, total assets.
Michael: I’m so glad you didn’t say start with $8 million as your goal.
George: Then you go up to $5 million and then you want to cross the $8 million, on your way to $10 million. What happens is that your total assets and on the other side of that, your debt-to-asset should always, always be the numbers I just told you. Again maintain your reserves, make sure you have the right debt and I can’t tell you what’s going to happen. I get my students doing that and when they cross that $8 million, there literally making six figures in passive income but also…
Michael: Mailbox money.
George: Yeah. They’re increasing their net worth so much. Then, depending on their goals, I have them deleverage, meaning lower debt-to-asset down to when they “want to retire” and they actually end up making more money. I’m able to get them there without having to buy a gazillion properties. Remember, assets under management doesn’t care how many properties. It could be 5 properties, it could be 10 properties, it could be 100 properties. It doesn’t matter the number of doors.
When people tell me they’re buying properties for $15,000 each, I don’t care. I don’t care how many properties you have. A property with $15000, I don’t care what your return is. It’s still $2 or $3 or $5. It’s not going to buy you more food. It’s still just a little money. You might as well understand that the assets under management is a better metric than how many properties you have.
Michael: I love that. I don’t want to keep you any longer than I have to, but I kind of feel like my listeners here are wanting more. Tell me about your system, your classes, your company, give me and give our listeners the overview.
George: I tell people if they’re interested in some of this information, they can always go to Amazon and buy one of my three books, The Wealthy Code is the first one I wrote, then The Bankers Code is the second one, and The Debt Millionaire is the third one. Otherwise, if they’re interested in more training, there’s my company’s called fynanc.com.
Michael: I’m going to put a link on the podcast page, so they have the ability to access it directly
George: Awesome. That would be great. I tell people one of the things we talk about is hacking finance and the reason I start with that because I realize a lot of people are jumping into more advanced stuff and they’re not sure how to manage their money. What we put together is a training where it gets people understanding how the system works, how to use inflation to their advantage, how to do all of that stuff, how to use leverage strategically, how to do all of that stuff and start very small simple steps. Start building on that foundation and getting to more advanced stuff. I think it’s really important for people to build a very strong foundation. That’s what we do in the first training at fynanc.com. Then from there, we have a more advanced training.
Michael: Cool. Then, one thing I know about your organization, you guys become a community and everyone looks out for each other and support each other and help each other. Fantastic. I’m going to call you Saint George from now on.
George: I have to say, I have learned so much from you guys and your friendship means the world to me because every time I sit with you, it’s so much fun and I’m constantly, constantly learning from. In fact, I have to say this to everyone, every now and then I come in and I sit in Michael’s class and I’m sitting in the back and I always think I’ve learned everything Michael knows and next thing you know, I put up my notebook and I’m taking notes like crazy. People ask, “Haven’t you been here before?” […] $500,000, but I’m always learning from Michael, I’m really honored to be on the call here.
Michael: We make a great team, George, absolutely. Again, I’m going to put your information on the main page for these podcasts. It’s been a pleasure. We will definitely keep in touch. Hey, everybody out there, best of success in your lives and in your investing. Thanks guys.
George: Thanks Michael.
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