Joe Withrow, Author at Zenconomics

How I Came to Love Debt and Taxes: Part IX

This post is part of a series:

Part I Part II Part III Part IV Part V Part VI Part VII Part VIII Part IX

When we left off yesterday, we were talking about how to find properties that match our investment criteria. And we discussed the need to plug into an established investment network.

Here’s why…

The network’s job is to bring vetted properties to us. Vetted being the key word.

That means we have all the pictures and financial projections for each property. This includes market rents, estimated principal and interest payments based on current interest rates, estimated taxes and insurance, as well as property management fees.

These numbers demonstrate very quickly whether a property is likely to match our criteria or not. Then we need to do our own due diligence to verify the numbers. That’s the only way we can know for sure.

In addition, we’ll have a single point of contact in the network. That person can answer any questions we may have about any property available.

To paint you a picture of what this looks like, our network down in Dallas operates via email and phone calls.

When we get allocation to a new construction development, our contact emails us all the information on the properties that will be available. Then we do our individual due diligence and determine if we would like to reserve one or more of the properties under construction.

It may be simple. But this approach works just fine when you work with professionals you can trust.

I also invest through a larger network. It has a presence in more than a handful of major cities.

This network maintains an online investment portal for investment properties. We can simply hop online any time to see what properties are available. And we have all the financials and the pictures right there to go through.

So what we’re talking about here is really deal flow. We want the deals coming to us.

But it doesn’t stop there.

How I Came to Love Debt and Taxes: Part VIII

This post is part of a series:

Part I Part II Part III Part IV Part V Part VI Part VII Part VIII Part IX

Yesterday we talked about our why.

Today we are going to talk about the how. How do we become financially independent as quickly as possible?

It all starts with having a wealth strategy and specific investment criteria in place.

Think about horse racing for a minute here. I’m not big on the sport, but my old man was. I only know enough to know that when people race horses, they put blinders on them.

The blinders restrict the horses’ vision so they can only see what’s in front of them. What’s in their lane.

You know why they do that?

Because if the horse has full range of vision, it might start paying attention to what the horse in the next lane is doing. And if it does that, it runs the risk of drifting. It might even wipe out, taking a bunch of other horses down with it.

Our wealth strategy and our investment criteria do the exact same thing. They keep us focused on our own plan.

How I Came to Love Debt and Taxes: Part VII

This post is part of a series:

Part I Part II Part III Part IV Part V Part VI Part VII Part VIII Part IX

When we left off yesterday, we closed the loop on how debt and taxes are the key to financial freedom.

It’s all about monthly cash flow and creating a “snowball” effect. That is, we need our income to far outrun our expenses.

At the same time, this approach requires us to handle quite a few moving pieces. That’s not difficult to do. But it requires a little extra time and thought. Nothing happens without effort.

So today, let’s talk about why any of this is worth doing. Why should we strive for financial independence?

Well, the answer is easy if we are stuck working a job we hate.

I’ve been in that position. I started out in the corporate banking arena. It was soul-crushing. I just wanted out. I thought about that every day.

I am sure most people have been in that position at some point. But if we need the paycheck to pay the bills, what options do we have?

Well, not many.

But if we can start generating income from other sources, our options increase rapidly. We need the paycheck less and less as our monthly cash flow goes up.

And with the right system in place, it doesn’t take very long to build substantial cash flow. Not if our focus is on a tried and true asset like rental real estate.

Think about it this way…

How I Came to Love Debt and Taxes: Part VI

This post is part of a series:

Part I Part II Part III Part IV Part V Part VI Part VII Part VIII Part IX

When we left off yesterday, we had determined that we could use debt to acquire new assets in a tax-advantaged way.

And if those assets are rental real estate, they will produce monthly cash flow to pay off our debt. Plus, the real estate will provide even greater tax benefits for us.

This is why “getting into debt” is actually a solution… presuming the debt is used to buy assets that throw off cash flow.

Today we have to talk about the final nuance. Using debt to acquire cash flowing assets is just half the story.

Debt also puts the power of inflation to work for us, rather than against us. Never before in modern history has this been so important.

The term “inflation” is thrown around quite a bit today.

If you ask somebody what it means, they will probably tell you rising prices. But if you ask them what causes inflation, can they give you a meaningful answer? I’m not so sure.

I am sympathetic to the definition put forth by the Austrian School of Economics. Inflation is the expansion of the money supply. It is the act of creating new money and injecting it into the economy.

If we speak from a dollar-centric point of view, inflation occurs when the Federal Reserve (the Fed) and the U.S. Treasury pump new dollars into the system.

These dollars have to go somewhere. And wherever they go, we are likely to see rising prices follow. It’s just supply and demand economics.

How I Came to Love Debt and Taxes: Part V

This post is part of a series:

Part I Part II Part III Part IV Part V Part VI Part VII Part VIII Part IX

When we left off yesterday, we were borrowing dollars against our Bitcoin to buy real estate.

By doing this, we didn’t have to pay taxes on our capital gains. We could leverage their entire value into acquiring assets that produce monthly cash flow.

That’s the key. The cash flow has to pay off the debt.

This is just one way in which debt and taxes go hand-in-hand. And as I mentioned yesterday, real estate is an incredibly tax-advantaged asset.

The way the tax code is structured, we should never have to pay taxes on our rental income. No kidding.

What’s more, there’s a way to generate massive paper losses for tax purposes using rental real estate. By paper losses, I mean non-cash losses. They go on the tax return, but you didn’t actually lose money. In fact, you made money.

Think about what that could look like…

Imagine writing off $100,000 against your active income. That means whatever the gross income number at the top of your tax return is, you subtract $100k from it. Then you pay taxes on whatever’s left.

That’s the power of rental real estate, if done correctly.

How I Came to Love Debt and Taxes: Part IV

This post is part of a series:

Part I Part II Part III Part IV Part V Part VI Part VII Part VIII Part IX

When we left off yesterday, we came to the realization that the “nest egg” approach to retirement was a scam. That’s because it puts us in a fragile situation unnecessarily.

Plus, it takes a really long time… with no guarantees.

Fortunately, there is a better way. It’s an approach that puts us in a much stronger financial position. And it does so in a far shorter period of time.

It’s the monthly cash flow approach. Instead of focusing on capital gains, we focus on building monthly income streams.

But wait a minute.

Readers may be wondering, what does any of this have to do with debt and taxes? Isn’t that what we are supposed to be talking about?

Well, dear reader. Stay with me. We’re building up to that crescendo right now.

If you recall from Part I, I learned a single overarching principle from my experiences as an investor. Focusing on monthly cash flow is part of it. But only part.

The secret is much more nuanced. I’ll explain by getting back to my Bitcoin conundrum.

So I’m sitting there looking at my Bitcoin stash, and it’s a large number. At least large for me.

And my problem was – how do I access this value without getting hammered in taxes? It’s a big number now, but after taxes it will be substantially smaller.

Then I discovered the solution. It was debt.

How I Came to Love Debt and Taxes: Part III

This post is part of a series:

Part I Part II Part III Part IV Part V Part VI Part VII Part VIII Part IX

When we left off yesterday, we were pondering a conundrum. What do you do when you have large investment gains on paper, but you know that you’ll have to pay a massive tax on them if you sell?

After all, the whole point of investing is to become financially independent. But if you constantly lose 15-30% of everything you make to taxes, it’s very hard to break out. You lose the power of uninterrupted compounding.

In my case, I had some large gains in Bitcoin. And as I watched my Bitcoin holdings appreciate in value, I started to realize that we had been going about it all wrong.

We have been conditioned to think that the key to getting out of the rat race lies in building a big “nest egg”. That’s been financial planning 101 for decades now.

As such, we are taught to chase capital gains. That’s why investors obsess over portfolio returns.

It’s dated now, but I remember Dave Ramsey telling people to slog their money away in mutual funds that would grow their wealth 7-8% a year. That’s the nest egg mindset.

Then you get things like the “Rule of 72” and other slogans that further pushed the capital gains approach. It’s all been a scam. I’m not mincing my words on that.

How I Came to Love Debt and Taxes: Part II

This post is part of a series:

Part I Part II Part III Part IV Part V Part VI Part VII Part VIII Part IX

When we left off yesterday, I had just been burned by my first investment strategy – buy the stocks Merrill Lynch says to buy.

In fact, one of those stocks went bankrupt not long after Merrill touted it. That was my wake up call.

After reflecting upon this, I pivoted to a “hard assets only” strategy. This entailed making some big changes I had been wanting to make anyway.

First, I bought a five acre property way up in the mountains. And then I bought a bunch of gold, tools, provisions, and stored food. The idea was to become as self-sufficient as possible.

This one was hard to explain at the time. But it sure came in handy when the Covid regime launched its attack on us in 2020.

And our provisions remain an asset today. They will come in handy with supply chain disruptions and the manufactured food shortage potentially heading our way in the coming months.

But the problem with the hard assets only approach is that it only goes so far. You only need so many tools and provisions. Then what?

For me, the answer was Bitcoin.

How I Came to Love Debt and Taxes: Part I

This post is part of a series:

Part I Part II Part III Part IV Part V Part VI Part VII Part VIII Part IX

I’ve experimented with four distinct investment strategies over the last fourteen years. And as one would expect, I learned a few valuable lessons from each strategy. That’s always nice.

But far more importantly, I learned one single overarching principle. Perhaps secret is a better term.

What I stumbled upon is something the financial press desperately doesn’t want us to know. CNBC would go the way of CNN+ tomorrow if this got out.

The more I think about it, the more I think we’ve been spinning our wheels unnecessarily. As a society and as individuals.

Simply put, the way we’ve been told to go about things is wrong. If our goal is financial independence – financial freedom – there’s a better way.

I’ll explain with a little context. It starts at the beginning of my financial journey…

My first investment strategy was simple. I bought whatever stock Merrill Lynch’s free research reports said to buy.

The beauty of this approach was in its simplicity. Every time my paycheck hit, I went online to find out what Merrill was touting to its low-dollar clientele. Then I punched in the ticker and pressed buy.

This is how I found the most valuable investment I ever made. The company was called A123 Systems. It was developing lithium-ion batteries for hybrid electric vehicles.

Where I Went Wrong

I have had something of a revelation over the last year or so.

Many of us have seen the decline of civil society in America coming for years now. In fact, this is something I’ve been concerned about for nearly a decade.

Of course, this view didn’t win us any friends at backyard barbeques. At best we were labeled unpatriotic. At worst, conspiracy theorists.

Fast forward to today and the decline is evident to anybody who is even half paying attention.

Even those who enthusiastically supported the Covid regime at first – the masks, the lockdowns, the experimental injections – many of those people are starting to wake up. They have seen things that they can’t unsee.

In many ways this is validation for the concerns I’ve had for years. But I’ve also realized that I got something very important wrong.

Simply insulating yourself from the decay isn’t a solution. And thinking that somehow a better society will blossom from the rubble by itself is likely a fantasy. The late Gary North’s words ring in my ears here:

You can’t replace something with nothing.

That’s where I went wrong. I thought the game was simply to ride out the storm from safety and isolation. But that’s not living.

Have you noticed that society is rapidly self-segmenting, right before our eyes?