Dental Real Estate Partners

The Fed's Money Waterfall: How the Wealthy Use Debt to Grow Richer

• Josh Cochran

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0:00 | 51:14

In this episode of Wealth Strategy Session, Josh and Reed pull back the curtain on the flow of money in the modern economy and how you can strategically position yourself to benefit from it. They break down the "trickle-down" effect of Federal Reserve money creation—from big banks to large corporations—and explain how savvy investors can use this knowledge to grow their wealth. The duo explores the power of leveraging debt, the necessity of having multiple layers of liquidity, and practical ways to access capital quickly by borrowing against your existing assets. From navigating current legislation on commercial-to-residential conversions to locking up properties under contract, Josh and Reed provide the roadmap you need to stay agile and ready to act when market conditions are in your favor.

Key Takeaways:
✔️ The Flow of Money: Understand how the Federal Reserve creates money and its journey through the economy to the consumer. 
✔️ Strategic Leverage & Liquidity: Why having multiple layers of liquidity is your best defense and your greatest offense in a shifting market. 
✔️ Accessing Fast Capital: How to borrow against your own assets, like real estate and stock portfolios, to fund new opportunities. 
✔️ Commercial-to-Residential Shifts: Insights into new legislation, tax benefits, and grants for converting commercial buildings into housing. 
✔️ Securing the Future: Practical advice on locking up properties under contract to secure a favorable position for future development.

🎧 Tune in for a deeper understanding of real estate investing strategies and how they can unlock your financial future! 

🔔 Subscribe for more on how smart investing and wealth-building strategies can shape your financial journey.

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SPEAKER_03

You know, same with like uh the SBA or whatnot, right? Like like the the government's like guaranteeing certain things, right? Creating like a pool of money and saying, Hey, we'll guarantee this stuff, but you go lend on it. Uh right?

SPEAKER_01

Interest rates so much, right? Because interest rates debt fuel our economy. The fuel the world's economy, really. But I mean the United States is is very good at using debt to grow. There's a big reason why the United States has grown so much.

SPEAKER_03

What's great about apartment buildings is you get 30-year fixed debt, right? Which is fantastic. You lock in that 30-year fixed debt at 4.5%, and real inflation, let's say, is like 5, 6, 7%, right?

SPEAKER_01

The big players understand debt, right? And if you know what the most sophisticated people are doing, there's a reason why they're doing it. Because they understand the tool that debt is and how to wield it, right? Welcome to the wealth strategy session. This is where we unpack one key wealth building strategy at a time and show you how to apply it.

SPEAKER_03

We have a great wealth strategy session today on who gets money first. With me today is the Sultan of Smart Money, Dr. Reed Faudet. Reed. How are we doing this Friday?

SPEAKER_01

We're doing good. We're doing good. We just I just got noticed that we closed on our our 40 unit, so got that done. So that'll be exciting. We can maybe talk about that on another show. But I thought maybe we could sometime dig into the numbers and underwriting, and you can give your assessment. You'll have to be nice because we closed on it, so you have to keep that in mind. You're not trying to talk me out of the deal that we already closed.

SPEAKER_03

Oh my gosh, I can't believe you bought this. You are an idiot. No, no, that'll be super fun, man. I love to do that. Uh, we are up at the ski condo uh today. There's not been a lot of snow in the western U.S. this year. It's it's been fine. We've been making it work, but uh we are getting dumped on this weekend. So super excited to take the kids out after this and and uh hit some fresh powder. So it'll be fun. Um, okay, Reed. Uh, with our topic, very cool topic. Who gets money first? Who are we trying to help today and what what problem are we trying to solve?

SPEAKER_01

Yeah, I think we're always trying to look at, or you and I often look at the macro and then see if if we can apply it to the micro. Like it's interesting to listen to politics, geopolitics, and economic forecasting and kind of see where we are in cycles. But more importantly, how do we like take that information and possibly apply it or put us in a strategic position that we can benefit from it? So I think that's kind of how we look at this. And I was listening to a podcast where this kind of came up, and I was like, we should do a show on this because it's it's fascinating to me. And I think we are both poised to take advantage of this, but also maybe help other people think how we're how we're kind of strategizing right now. So yep, yep. Can you see?

SPEAKER_03

Well, those of you watching on YouTube, be able to see this. Those of you listening, uh, we will briefly describe it. But Reed has a diagram here entitled uh Who Gets Money First? And it talks about when the Fed creates money, what is the waterfall system through which that money falls, right? And so, Reed, you want to kind of walk people through the levels for the listeners who can't see the diagram? Um just kind of overview it real quick.

SPEAKER_01

Yeah, so just kind of starting at the beginning, think about it as, and let me pull this up too, so I have this kind of in the background, so I have my notes if I need them. But but basically, anytime we often talk about interest rates so much, right? Because interest rates and debt fuel our economy. They fuel the world's economy, really. But I mean, the United States is is very good at using debt to grow, and there's a big reason why the United States has grown so much. Our whole economy is propped up by debt. So when we talk about interest rates, that's such an important part to everyone's life. Whether you're an investor, whether you're a consumer, it doesn't matter. It affects you. So when we're looking at this and we're talking about who gets the money first, we're referring to when the Fed creates money and how it flows into the system, how it goes all the way through from the top to the bottom. And so, simply put, you know, I'll kind of outline this. We can we can talk a little bit about how this specifically happens, but essentially when the Fed uh prints money, they're they're saying that now we have this much money on our balance sheet. So that shows up as a big number in the Fed Reserve. From there, a simple way this gets into the system is it basically allows banks to borrow from that. So now banks have more money or more liquidity to lend into the system. And so this is showing how it starts there, right? Banks and financial institutions, that's where the money typically goes first. Then from there, it's typically large corporations and government contractors. And this this is in large part just due to access. I mean, they're whoever the biggest consumer is typically gets access to whatever that thing is first, right? And so large corporations, government contractors are massive consumers of debt, right? And so they're often gonna get it first. Corporate bonds, yeah, go ahead. Yep.

SPEAKER_03

Yeah, they're the first layer, right? Like if I'm even if I'm borrowing um, you know, from let's say, like at the consumer level, we don't get a borrow directly from the Fed, right? We don't borrow directly. The um when I go to a bank uh to get a commercial loan, right? They they're borrowing from the Fed, like the the FHLB, right? They're they're they're looking at these numbers and they're saying, okay, we can borrow at this, Josh. We're gonna add our spread to that and and lend to you, right? So they're the ones borrowing directly. Um you know, same with like uh the SBA or whatnot, right? Like like the the governments like guaranteeing certain things, right? Creating like a pool of money and saying, hey, we'll guarantee this stuff, but you go lend on it. Uh right. And so um, yeah, we are we're not first in line uh to the uh the the food line, right? Yeah, we we uh there's a middleman uh kind of and so what you're saying on level one, level two, these are like the people who are first in line, and then they allocate those funds uh to to to others.

SPEAKER_01

And if we think about a few weeks ago, we were talking about um I think Trump's Trump's mandate to try to help with housing and um Freddy Fanny agency. They were talking about the Fed person, I think they're talking about the Fed purchasing security-backed mortgages, right? So that that would help with liquidity that would then help be lent out, which could help make more competitive um lending environment, right? And maybe drive interest rates down. I I mean I the mechanism a little bit eludes me, but I think that was a conversation a few weeks ago.

SPEAKER_03

I don't know if that happened at all, but yeah, I haven't seen the follow-up on that either, but but yes, it it's it's yeah. So these first level one banks and financial institutions, they get the access to capital and then they lend it to to others, and then large corporations, government, they have that, they get access to this capital. Uh, second, and you know, when these two levels go out and start buying things, right? Uh demand goes up, prices go up, right? And I I think the real key point here is just our the way our system is built with how the government um this this is the pure structure. If prices go up and we as consumers haven't seen the money yet, we're second, we're second to the table, right? We're not buying at the the lowest price. Someone else had a chance with all this fresh new money to go buy first, and then we're then we have the opportunity to get money second, but prices have already gone up. So do you want to flush that out a little more?

SPEAKER_01

Yeah, yeah. I think you could again, you can think about this like um, well, it's one way to think about it is if you there's buying power, right? Anytime, again, consuming more, you have buying power. So even think of like a large DSO and what they can negotiate with uh suppliers, right? And equipment companies versus like the single dental owner operator, right? There's just when you have that, you have quick access to those things, you can get them at at lower prices. So not only do they get access to the debt first, but they also get access to usually better debt with lower, lower rates, which again allows them to enter the market and be more aggressive on um whatever it is they're buying.

SPEAKER_03

So I I like that analogy, yeah. So the the DSO is gonna go buy a you know um 10,000 units of this cement, right? Uh with this fresh debt. And then after those 10,000, the order has been put in, the manufacturer's like, wow, these guys are buying 10,000. You know, we don't have any extra inventory, so we don't need to lower our prices, right? We can probably raise our prices a little bit because we don't have any inventory sitting around. And now we come to them and say, Hey, we'd like to buy some cement, and uh we're not getting a deal, right? They're not getting a deal. So um, yeah.

SPEAKER_01

Yeah, that's that's a good way to think about it. So basically, how in this bull of money do you poise and position yourself to take advantage when interest rates go down? That's something we want to talk about. But do you want to talk about something else first?

SPEAKER_03

I I just like to talk about the same example with like real estate, right? So, you know, when all this money comes out, uh, we know that asset prices have dropped in in many asset classes, especially office, right? But even if they haven't dropped, when you stay steady for two years, but inflation's gone up, you know, let's say five, seven percent a year, then you know, relative to inflation, the prices have actually dropped, even if the price is the same it was two years ago, right? So these corporate, you know, these real estate investment trusts, the REITs, the hedge funds, they understand that, right? They understand that prices are 14% down, even if they don't look like they're down, right? Or in the asset classes, but they are down, you know, 15, 20. They're like, wow, they're actually down 25, right? And so they get this flesh slug of of debt from the government, they're gonna go make offers on these these large apartment buildings, these these um shopping centers, they're gonna go make offers and try to buy this stuff, right? And and when they do that, uh when you and me, like it trickles down from these big institutions, and then now my local bank has a little bit more money to lend, and they're you know, I'm talking to my banker and they're like, Yeah, we're we're our allocations are full this year, right? Oh, we're not really lending much, and but now like it's 2026, and they're like, Hey, yeah, you know, the bank's wanting to lend a little more this year, we've got some allocation available. You know, I go and and look for shopping centers, and now I'm dealing with these uh these institutions that already have been like, you know, bidding and putting these things under contract for three months, right? And so I'm I'm second to the table, and uh I'm not getting my debt at the same price that these guys are getting their debt, right? So A, they're first movers, B, their cost of capital is lower than mine. I'm just not gonna be competitive, right? And so it's just we want people to understand that like when you're looking online for deals, uh, it's super hard to find. Because anything that you know these larger institutions are are looking at, they have that first mover advantage and they have a lower cost of capital advantage, right? So that's why it's a challenge. So that's why you know we source deals typically through our network, we source deals, you know, offline, like like because then we're not having competition, right? Or we're in asset classes where the big people don't play, right? If all the big players are playing at 50 million and up projects, right? Um, I'm not trying to buy a 50 million dollar project because I'm competing against them, but I might sell, I might build a 50 million dollar project because I know there's a ton of like institutional capital out there looking for 50 million dollar projects, right? So so the key is here is don't try to compete with these big guys, right? Find out what they're not interested in right now. Um, we had an office complex, a government-occupied office complex that I've mentioned, you know, a year and a half ago that looked super attractive because it was like 50 million bucks, and nobody was buying office at 50 million bucks, especially in a it was a tier three market, like a smaller market, right? This one was near Hanford. Um and so we didn't have any competition, so we were really setting the price. It was a really good deal. Uh you know, um, so yeah, I I think that's the key point here, um for people to understand. And then also as a consumer, the other thing to understand is um just general goods, right? Like gasoline. Like these guys are buying their gasoline with this debt, and then we're buying the gasoline at the pump a couple months later, right? And and so, unless there's a large supply of gasoline at that time, we might be paying higher prices than these guys, like I'm sure we are, right? So just just understand that this is how things are are set up, but then the key piece here, we always want to talk about okay, here's the macro trend. How do we leverage this trend for ourselves personally? So you want to go to the next slide, Reed, and we kind of touch on that.

SPEAKER_01

Yeah, yeah, I will. And I just wanted to wrap one point that you said because I the the whole yes, you don't have a competitive advantage against these large institutions with a lot more money because their cost of capital is lower, their access to resources is greater, etc. But one thing you can exploit is like you said, Josh, is if you know that you can sell or you can develop something that they'll want to buy later, then you have a cap rate arbitrage potentially. Like anytime you can create value or even aggregate assets where it's attractive to the institutional buyer, then typically you can you can shift your cap rate lower and get a better return. And this is what people do with roll-ups all the time. So, not to say that like the average dentist is going to do this, unless if they're building a DSO or something like that, and then they're gonna sell it to somebody else. But um, I've seen this with with with different operators I know that do different asset classes is they're like, we're just gonna get to that point where we roll up to the next level and then we can sell to a REIT or sell to the next big buyer.

SPEAKER_03

And this typically works with class A assets, maybe class B, right? Just in general, like you're you're topping a strip center, right? Like these big guys want to buy bigger, larger class A strip centers typically, right? Apartments, bigger, larger uh class A apartments, like 75 million and up, right? That's it's return on time for them, right? They don't want to buy the small stuff. And so when you choose your strategy for investing, you know, if you're choosing like a uh an equity growth, a net worth growth strategy, these class A assets selling to these guys totally works, right? If you're choosing like a cash flow strategy, typically you're playing in like the B2C pool uh on assets, right? Because these guys aren't playing there. There's more opportunity, there's more hair on deals, problems that you gotta solve, right? There's less uh the uh the coupon clipper 1031 buyers are typically not buying the BCs as well, right? They want that that that you know Chipotle uh credit union type tenant, large medical type tenant, right, to lower their risk. So there's so it's just really like what strategy are you trying to to to utilize, right? Develop and sell to institutions, make a lot of money on the the arbitrage of the price, or solve problems in the B2C range, cash flow, harvest as you go. Two great strategies.

SPEAKER_01

Yep, cool. Okay. So moving on to this. So we were talking about the Fed printing money and and trying to make money cheaper, right? So just think of if you think of money as like a consumer good, typically consumption goes up when prices go down, right? That's kind of how you think about it. Debt is really that's what it is. The lower the cost of of uh the interest rates, the lower the cost of the money or the cost to borrow. And obviously there's gonna be more demand for it. So again, you know, more people borrow money, so because excuse me, rates lower, debt gets cheaper, right? So more people borrow money, and therefore asset prices go higher because there's more demand for those assets. Now, the the the interest we already were kind of talking about that in the in the prior steps, but the interesting thing to think about here is that inflation destroys debt over time. And so I think this is kind of a fascinating topic. And I've it took me, it was actually my early investing days that somebody had explained this to me and it made sense. So I'll I'll I'll try to explain it now. But basically, if if the interest rates are three or four percent, we'll just say even five percent, but inflation is seven percent, eight percent, nine percent, right? Essentially the cost of capital is negative because you're almost like you're getting paid to borrow money, because you're borrowing something at today's dollars and paying it back at tomorrow's dollars, right? So if you can fix your debt today, or even have for the next five years where inflation is seven, nine percent, but you're playing three or four percent, right? There's an arbitrage there to be had.

SPEAKER_03

So a hundred percent. And I think the classic example that I always think of that almost nobody has this, but let's say you're a trust fund baby, right? And you're gonna get ten million dollars every five years, okay, for the next 15 years. So three slugs of ten million dollars. The always way I think about that is you know, take that ten million dollars, buy uh, you know, newer apartment buildings, right? What's great about apartment buildings is you get 30-year fixed debt, right? Which is fantastic. You lock in that 30-year fixed debt at four and a half percent, and real inflation, let's say, is like five, six, seven percent, right? So on top of all the returns you're getting, disinflation uh and and debt difference like you're talking about, is just paying you money, right? And the hard part is most people, you know, they need to make money as they go, right? And so you typically don't see this like long-term patient, patient strategy. But if you have huge slugs of money, I mean you just run the math on this and and you make a ton of money with your your 10 million bucks, right? Um, it's just a great long-term patient strategy as long and it works as long as you know populations stay stable in that area, right? So your rents slowly increase or population grows a little bit, and two, inflation occurs, right? And if you look at the history of the world, you know, populations go up and inflation is is predictable, right? So it's a great long-term strategy to grow wealth, um, if you can do it.

SPEAKER_01

And the risk, the risk of inflation on that, like if if you're owning that asset and there's inflation, right? Again, you're getting help on the debt side because you fixed it, you fix rate debt for a long period of time. But two, if even if your expenses are going up with inflation, your rents are going up as well, or maybe even disproportionately so.

SPEAKER_03

So you have such a good more. Typically double, right? Your rents are going your revenue is typically two-thirds, and your debts typically one-third or one quarter, right? Or one fifth. So yeah, like if you have fixed debt in and rents go up with inflation, right? They're not like fixed uh artificial control. Uh yeah, then it's just great. It's just yeah, autopilot.

SPEAKER_01

So yeah, so that'll be kind of this next part we'll talk about a little bit. Is I think what we're trying to get at here is is the big players understand debt, right? And if you know what the most sophisticated people are doing, there's a reason why they're doing it because they understand the tool that debt is and how to wield it, right? And so when when debt, when you first learn about debt, everyone gets kind of scared by it. And you should, to a certain extent, be scared of debt, because when it's used incorrectly, right, you can go, you can go bankrupt, right? It can Can cause lots of problems, especially on the consumer side. But when you look at it as a tool to get better yield, right, and to build your wealth, like then you start thinking about it differently. So if if we if we have if we're making a case that debt when used well, right, is such a powerful thing and all the big players use it, then how do we mitigate the risk associated with debt? That's kind of what this next part is talking about. So so so basically, if you know whatever you're you're borrowing, if you know that there's an asset that you're buying, it's it's producing a certain amount of cash flow to service the debt, the biggest risk is that cash flow goes negative and that you have a debt service payment that you have to cover. So right? So one, you mitigate that by buying right, operating right, having control, etc. But just think of it as a personal layer, you know, we do this when we look at this different layers here, it's going to represent different layers of liquidity, right? Access to capital. So you can do this. Sometimes we silo this in specific deals, right? I think about this as a specific deal. Sometimes I think of it as like my global like financial picture, you know, across all my assets. And sometimes I think about just within my dental offices as well. So you can you can silo this or you can think about it globally, but here how here's how we think about it. Layer one of liquidity is an operating buffer. So this means money that you can access today, right? This is usually cash in the bank. So usually you need one to three months, uh, whether it's in a property, whether it's in your operating business, whether it's in your personal life. That's kind of a good rule of thumb. Any pushback on that, Josh? Or do you want to you want me to go through it all and then you can go through it all? Yep.

SPEAKER_03

I don't want to interrupt you.

SPEAKER_01

Yeah, layer two is emergency reserves. So this is three to 12 months of reserves for, again, either personal or for the specific business or property. Um, now this you could probably to a certain degree have in more like CDs, money market accounts, high yields, things that are maybe not as easily accessible, but you can get to the money within, call it a week or so, right? If you need to. Um, layer three is asset back liquidity. So this is borrowing capacity against assets. So this is, let's say I have a million dollar stock portfolio and I have a securities back line of credit that I can draw from. So basically the stock is the collateral, the liquidity comes from borrowing against it, or a HELOC on your home, right? So your asset, your home, right, is the collateral, but I can borrow against it if I need to. Right. So that's that's another form of liquidity from that asset, or it could be from your dental practice, or it could be from a property that you have a lot of equity in. So basically it's creating liquidity by possibly borrowing against the asset. So that's kind of layer three if you really need it. So how you think about it is I have a problem, right, that money can solve. Hopefully, layer one takes care of it. Maybe you have to go to layer two, but if you need to go to layer three, you have that available. So I have a line of credit against my dental office, my home, but I don't draw on them unless I absolutely need them. But they're there and available. And then layer four is really just this is basically like the majority of your net worth is going to be in these assets, right? Whatever real estate, stocks, whatever you choose, Bitcoin. And so basically the goal is to have enough that you can borrow against if you need to, and that you never have to liquidate, unless if you want to, but you never want to be forced to liquidate.

SPEAKER_03

This is a really good slide. Um, what my mind goes to immediately here is you think about all like the wealthy guys, you know, buying places in Florida right now, right? Because they're moving out of California to the wealth tax, right? The billionaire tax. They're like, yeah, I'm out, so we're moving to Florida. Um, you know, those guys are buying like 50 to 100 million dollar properties, right? And these guys are billionaires, so they could pay for pay them in cash, but most don't, right? Most instead get get loans on it because the math just makes sense, right? That's one. But two, they have these buffers in place, and so it's not stressful for them, right? You hear a lot of dentists say, Hey, I just like to pay for everything in cash, right? Like, why do they say that? The math doesn't say that, right? They just don't want to get themselves in trouble, right? They don't want to get in a situation when they're in trouble. It stresses them, it's like having a monkey on their back, right? This debt. Um, and so they want that feeling of freedom, but like the math says, don't do that, but but they do it, right? So when you think about if dentists are going in cash, some of them, let's say half of them just like to operate in cash, not have debt. Um, but the really wealthy and smart guys are doing debt, it's like, what's the difference? Well, the difference is here in this thing. So, you know, dentists will typically have an offer operating buffer, right, in their business. Um, so well, these entrepreneurs, right, with these large tech companies, um emergency reserves, they may have those, the the tech guys, but what the tech guys, you know, always have is this stock, right? They own a large share of this company of theirs, right? And they can borrow against that. So, you know, that is their buffer that makes them feel comfortable, right? They may not keep a lot of liquid liquidity, um, but they know they can borrow against their their stock and their business, and so they can bail themselves out if they get into trouble on something. Um, so I think that's like the big piece here. Um and you know, getting like reality, like emotion is like a big reality here for for folks, and it is for me too. So I just want people to understand like it's normal to have a lot of emotions about this, and you have to balance like the numbers in your plan with like the emotion and the and the stress that causes you to have debt, right? And and these are the tools Reed and I use to like mitigate that stress so we can sleep at night, right? There is an operating buffer every year that's different that I just feel comfortable with, right? Let's say how much money I like to have in my you know personal bank accounts, how much money I like to have in my business bank accounts. And you know, if I don't have enough, I stress. Um and two, it's harder for me to get bank loans, right? Because I don't have cash. And if I have too much, I stress just because of inflation. It drives me bananas to see a bunch of cash sitting in there that's not invested, right? So there's this sweet spot where you know the pain of not having your money invested and earning a return and having inflation burn it away versus the pain of like, oh, what if I don't have enough cash, right? You you you those two pieces of pain have a middle point, right? So you try to find that middle point for yourself. And so when people ask how much cash should I have, right? That is the answer. Find the pain between those two points and find the middle where where each of those pain is is minimized. Um, read I know I didn't say that the most concisely, but um that's how I look at it. How do you look at um look at it?

SPEAKER_01

Yeah, so I think this just this pyramid here, what it's showing too, is if you know whatever you need for liquidity, right, to feel good, the the the balance there is having again different layers of liquidity. So like your top layer of reserves is not going to earn any yield for you, and you have to just be okay with that, right? And that's that's we we find what that number is, right? And then layer two is is the next part of that where you're going to get a yield on your liquidity, right? But you don't have quite as much access to it. But that's okay, but you're still having this like blended yield on your liquidity, like then I consider my stock portfolio a lot of my liquidity because I want to get a decent yield on it, but I don't need it in short term, right? So that's I I think I've really it's really I've really evolved like my views on liquidity because as the portfolio has grown, right? As the debt has grown, I've just rationed up my liquidity because it again, uh for peace of mind, because that's more important, but then I think more strategically on how I utilize that liquidity to still get some yield. So I've just spent more time thinking about that over the last couple of years.

SPEAKER_03

So the way I look at this too, and I'll like personally how I build it. I mean, we talked about like the cash flow accounts you mentioned maybe two months ago, kind of how you structure it. Kind of how I structure this is like operational buffer. You know, I have a bunch of LLCs for like a real estate LLC or something, right? I don't keep a ton in there because there's only like you know, one check going in and one check going out a month on average, right? It's not a ton, right? So maybe I'll keep like 10, 20k in there, so I just never have to look at it, right? I don't have to worry that we're gonna overdraw or something. So a bunch of those accounts, but then I have like two um, but then I have like a large personal account because you don't want to co-mingle between businesses, you know, real estate entities, businesses. So I have like a large personal account um that I get money from my businesses go into, right? And then I also spend money, right? Like if I want to contribute capital to a new real estate investment, right? Or pay for development costs, I either I contribute or lend capital to these different LLCs, right? So I have one account, and the key things for me that with that account are two things. One is a little higher rate of return, right? So that's like the 3% or something, 3.5%. I want that out of that account, and then I want to be able to send super easy wires, right? In ACH transfers, right? I don't want to be on the phone with the bank for a half an hour every time I need to send a wire, right? That's super annoying and a waste of my time. So so I have this large cash account.

SPEAKER_01

Do you see my did my money flow diagram? Can you see it?

SPEAKER_03

Yep, yep. Okay, so this is the one we were talking about before. So this is your personal high yield savings, right? Uh that's probably the equivalent that I have. So the best one I found for this is it's called a Fidelity uh cash management account, Fidelity CMA. And what I like about that is like the wires are free, I can do them online, and I'm earning whatever three, three and a half percent, right? Um I just couldn't find other personal business. Yes, there's lots of business options that do that, but when I say a lot, maybe like five, but um on personal, it's you I just almost never see that. So I use um Fidelity for that, and then for my business stuff, same thing. I have all my business accounts with meow.com. It's just super easy to transfer money and it's super clean. Their software is great, so I can wire money, I can ACH money, just like liquidy split, and then they also have these um different like yield options, you know, three and a half, four percent. You just push a button, the money gets transferred to a CD, right? If I want the money back, it takes like a week, right? But it's just click of button ease.

SPEAKER_01

Um, and um ease of use is so important when you're doing this all the time. I mean, if you have any resistance, right, or barrier that just it just wears you out. So even I'll take a little bit lower yield if everything is really easy.

SPEAKER_03

Um yeah, absolutely, absolutely. So um I think you're looking at your model here, for instance. We're talking about like I'll just from my perspective, but like real estate aggregate account 50k, right? It's the same thing. You don't have a lot of things happening there, right? You have debt coming out every your debt payment coming out, and you have your rent payments coming in, right? And you know, every once in a while there's a little extra from something, right? Um, but it it's pretty predictable, right? There's not um major swings that happen here, so you don't need to keep a lot of cash in there, right? Um, same thing with your uh primary operations of the dental business, right? You you're gonna have little swings a month, one month's better than another, but it's not just a little buffer and you're good, right? Um and then if you ever need to buy more equipment for your office, you can either do it in cash and let that number build up a little bit, right? Not distribute it to your personal checking, like in this diagram, or you can just lend, right? You can uh buy it on margin with debt, and you don't really need to pool up more money in your account, right, for your business. Um so I think people just I mean, this is how we do it, right? Now, you know, I'm earning three and a half percent on that money that's in these, like in this personal account, and I need that personal account because you know you and I are buying properties, right? And so A, we need to have money in that account to buy properties, attractive ones, when we find them, right? We need to put the money in. Um, and then two, the the banks, and we're getting loans to these properties, right? They need to see that cash in an account that's accessible. The one thing that I have not done in the last three years that when I look at these diagrams and I think, okay, what would my ideal um piece be here? You know, it's not bad to have a good chunk in equities, right? And but not tax protective equities, right? Not your 401ks, not your IRAs. Those are good for other reasons. But when you're talking about liquidity, right, there's large penalties when you remove money from those, right? So having an equity account that's building value over time that's taxable when you sell, but but having that equity account, it does two things. One is it, like I said, you're you're as a guarantor on loans, you can use that account, right? Because it's not tax protected, your your equity account, like you know, two million in stock or whatever in index funds. The bank will count that as liquidity. So that's one nice thing when you're applying for loans. But then, you know, two, it provides that buffer of, you know, like you said, you can take a line of credit against that if you ever really needed cash, right? If something bad happened or you wanted to invest it, right? You could borrow off of that. And and two, it's earning uh you know, long-term returns on stock markets like 8%, right? So it's earning higher than the 3%, right? And it adds diversity to your overall portfolio. Um, so I do think that's a nice thing to have as well.

SPEAKER_01

So, because then you're you basically think if your liquidity is 20, 30 percent of your portfolio, whatever it needs to be for you individually, you might have a blended return of six or seven percent. You know, if if you have two million stock, a million cash, but it's in high yields and CDs, maybe that blended rate is six, seven percent, right? So that's the goal is is if you don't want to keep it all in cash, you don't want to keep it all in the stock market, right? Because that's that's a pain in the butt if you're always buying, selling. So that's how you get there. And I was just gonna say on this, so you know what when you start thinking about this framework, basically you can put a line of credit against your practices here, which I have, right? And I just I just talked to a dentist in our Facebook group, and he was just telling me that they'll loan up to like 80% right now. Like he could do like a cash out refi on his practice at 80% of his collections. And I was like, that's crazy.

SPEAKER_03

So he has no loan on his practice.

SPEAKER_01

I don't I don't know. I'd have to ask more details on that.

SPEAKER_03

It must be debt-free. Um, I would imagine. Did he say what bank?

SPEAKER_01

Through a bank, and he I think it was no, was it was it provide? I can't remember who he said it was, but uh he's got very profitable practices. Um, so but it was just so to tie back that point is you have a line of credit that you have available. Like you don't need to draw on it, just apply and then renew it every year so you have it is kind of what my my strategy or advice would be. Because it costs you like 600 bucks a year to have that line of credit, even if you don't use it. So I I have it on my practices, right? You can get it, you can do it on your home. This after-tax brokerage account right here, right? If if I can get 30% on whatever the total value is in there. So at Josh's point, if you have $2 million in a brokerage account and index funds, you could probably get a $600,000 loan against it if you want. Not saying you should do it, but you probably can.

SPEAKER_03

Yeah, no, I mean, usually for index, if it's index funds, it's not individual stocks, right? Index funds, like broad index funds, I guess, you know, like a total market one. Yeah, no, I usually see like 70% um uh is the is the amount that you could borrow against.

SPEAKER_01

So um you can go up that high, they just say, right, that the risk when you start going above 30-40 percent is there's a good chance at some point there's a market correction of 30% or more, but there's rules on that, I guess. So right, right, right, right, right.

SPEAKER_03

Yeah, yeah, totally.

SPEAKER_01

I uh uh uh you don't want to expose yourself, but um but here here's one thing I wanted to say on that though, too, is when I've looked at margin for the stock market, when I've looked at securities back line of credit, they still don't have as favorable loan terms as real estate does, and what I've seen typically. And the other side of that is that typically stocks, even if you have the SP 500 or whatever, usually only have like a 2% dividend. So cash flow off of stocks is pretty low if you ever wanted that to service your debt versus like real estate has higher cash flow. So you're easy, it's more easy to service the debt. So if I have to choose between having a $10 million portfolio of stocks versus $10 million of paid for real estate and you want to borrow against it, real estate loan products, LTVs, cash flow, it tends to make more sense when I just think about it from that structure.

SPEAKER_03

Yeah, I mean, I hear you, those are valid points. What I've seen back in the days before before interest rates started going up, let's talk like 2018. Okay. 2018, you could log into like your Fidelity account, your Charles Schwab account, you could borrow money with a click of a button at like two and a half percent. If you had a big enough like stock account, let's say I forget the number was like three million or five million or more, you could literally just click of a button, borrow at two and a half percent from that stock portfolio, like so easy. Yeah, um, so yeah, right now it's it's not like that, it's different. Uh, but the rates are actually quite competitive, uh especially IBKR, right? I mentioned that before. They're they're they're usually the lowest rates, so that's like uh that's like investing for professionals. Picture like Fidelity or Charles Wild for professionals is IBKR uh dot com.

SPEAKER_01

So um maybe you should get some sponsorship with all these these uh name drops. You've yeah, fidelity.

SPEAKER_03

Well, I just like you know how it takes like you know, it takes 10 hours to figure all this out or three hours or something. So if we can save people the time. Um so yeah, I think we've covered it. I think we've covered uh our our our goals a day. Reed, you want to go back and just kind of summarize the the the main points here?

SPEAKER_01

Yeah, I think it's it's basically in the macro picture, we believe interest rates are gonna be coming down. And when they do, liquidity is gonna flood the market and asset prices are gonna go up, right? And right now, basically, our strategy is be ready with access to capital to jump on deals when we can. And that doesn't even mean have just access to capital, but also means have access to deals for us. That's real estate, right? So you don't want to be waiting until interest rates have dropped to now try to go find someone who has a deal or find a deal yourself. Like you have to live in that space and know who those people are, right? Either do it yourself, the three legs of the real estate stool, right? It's you have to be able to buy it, fund it, and operate it, right? And if you can do all three, great, you can do it yourself. If not, you need to find a strategic partner so that you're ready to pounce when when things happen, when rates drop.

SPEAKER_03

And sometimes people are like, well, I don't have money now. Well, you put this put something under contract, right? Especially the land. You can tie up land for like 18 months under contract with extensions, right? So like there's so much land in my area now where you know hobbyist investors bought the land, got it through permitting, have it all designed, but then like the numbers didn't make sense to pull the trigger, right? And so they're just like trying to sell this stuff because they decide they don't want to be a hobbyist real estate person anymore. And you know, I put this stuff under contract. And I'm like, hey, this is a good price. I don't have to pay for architecture. I don't have to pay for engineering. Permits are there. I don't have to pay for that. It's like everything's just like right there for me. And sometimes I'm like, well, A and B need to happen before I can actually like make this a very profitable uh development, right? But if I put that stuff under contract, like now I hold it, I'm in control of it. And when these other things happen, now like we're good to go. And let me be more specific. I hate when people are esoteric. Like I'll put these things under contract. I'm thinking about two pieces of land right now. Here are like the current like legislation items that are likely to pass. Okay. One in my area, we have something called parking to people, where if you if something's a parking lot and you build on it, turn it into housing, you don't need to pay sales tax. Okay, that's 9.1% in my area, right? 9.1% is a good profit margin, right? So just that alone is helpful. But what they what they've been discussing doing, and they'll probably do it, just this is how my state works. They discuss it, they release like initial bills, request feedback, and then they go to like vote on the final bill. It's like um they're changing parking to people to like like other buildings that are just not used anymore. If a building hasn't been used for two years, right? You can uh turn that into housing and not pay sales tax, right? Um, another one is like you can change things that are zoned for like office or commercial and use them for residential as well. You don't have to request a change in zoning. This the state is saying they can get zoned. So in my brain, I'm looking at all these properties that are in great locations that can be turned into housing, right? That fit these bills before these bills are passed, right? And I'm saying, I just lock these places up, right? Same with interest rates, like we talked about. Interest rates will probably go down. Uh, on some of these, I'm applying for grants, whatnot. So basically, lock it up, a low price. Then the then the things happen that would make this a no-brainer from anybody, but no one else can do it because you already have the land locked up, right? Now you can close on it and execute your plan.

SPEAKER_01

Yeah, I think people don't understand that. And really, you're controlling the land with refundable earnest money down, right? You you gotta put some earnest money down, but it's not like you're you're getting a loan on this property, and so it's it's a it's a cheap way.

SPEAKER_03

Yeah, some people will you yeah, six months, the money comes back to me, like my down payment, right? If I don't close on in six months after six months, maybe that money goes hard, which means I'd have to pay it to them, but I can do like another three months extension for a little bit more money, right? Another three months extension. So it's like you just mitigate your risk, you control the properties that you think are really good uh before these legislations come out. The last one I want to mention is the current bill going through the government right now. We'll talk, probably do a show on this pretty soon. The 21st Century Road to Housing Act. Most of the headlines were like, hey, you know, institutionals can't own more than 350 properties, right? That's the headline you're seeing, right? Uh institutionals have been bidding up home prices. No longer can you own more than 350 properties. Like, that's the headline you see. But there's a lot of other things in this bill that are really going to help us. So I talked about not paying sales tax when I convert uh commercial buildings or parking lots into housing. What's in the bill right now is grants, so federal grants per unit, 20 to 80,000. Right? So now I'm taking, and this is in this is a bill that has been passed by one of the guys. Let's see here. It's been passed by the Senate. Okay, now it needs to go to the House. Okay. So when I'm looking at like an empty building that can be converted into housing, right? In Washington state, I think I'm probably not gonna have to pay sales tax, 9.1% return, right? Now I'm getting a let's say it's not 20, let's say it's not 80, let's say it's somewhere in the middle, like a 50k per unit, right? Well, 50k per unit on my construction apartments usually is about a 20% of my project, right? So between these two items alone, I have a 29% profit margin. Right? And how do I protect that 29% profit margin? I go put stuff under contract, right? So when these things come to fruition this year, which it looks like they're going to come to fruition by before the end of the summer, I already have built-in 29% profit margins. That doesn't even count like normal profit margins as a competitive business, right? This is just government incentive, like guaranteed profit margins.

SPEAKER_01

That's not land basis, it's not operational efficiencies, it's not cap rate arbitrary, it's it's just yeah.

SPEAKER_03

Everyone else is running numbers that like, oh, I'm trying to get a 5% cash on cash return or uh, you know, uh an IRR of this or a rate of return on this. I'm like, yeah, take that and then add 29%, right? Like lock up this land.

SPEAKER_01

Yeah, basically, be ready. Always let's say we're always buying. Be ready. We're always buying, even if it doesn't seem like a good time to buy, because then when things turn, you're poised to buy.

SPEAKER_03

I mean, you're ready to go. You're ready to use this. This is the time. Yeah. So, all right. So that was a great show uh today, Reed. We really gave like we went from macro, like fundamental concepts, models that you can see that you can keep in your brain, right? These are the core things that guide us. And then we talked about real actional steps, both on liquidity and on the investment side, um, how we're like in real time using this information to create uh net worth and cash flow for ourselves and a sense of security, no stress. Life's too short for that. So good. I'm good, have a good weekend. Have a good weekend. Thanks, Reed.

SPEAKER_01

Thanks for joining us today. If you want to connect with us directly and keep the conversation going, join our private Facebook group. We'd love to have you in the discussion. If you want to see or listen to any of our other shows, you can find them on our YouTube channel by searching Dental Real Estate Partners. Or if you prefer to listen in podcast format, look for us on your favorite podcast app or streaming platform.

SPEAKER_02

Content from Dental Real Estate Partners is for informational purposes only and should not be considered financial, legal, or investment advice. All investments carry risk. Past performance does not guarantee future results. Always consult a qualified professional. Dental real estate partners is not responsible for outcomes from actions taken based on this content.