The Banker's Code: The Most Powerful Wealth-Building Strategies Finally Revealed -

Antone, George (Highlight: 89; Note: 0)

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▪ If you adopt the mindset, the rules, and the strategies of a banker, you can have
a much better life financially. Just don’t let the power get to you. Always follow
the banker’s rules. And don’t forget... bankers make more money than investors,
with a lot less risk.”
▪ Investors play by the banker’s rules. The bankers play by their own rules. The
investor’s rules are stacked to the banker’s advantage.
Of the average American’s income, 34.5% goes towards paying interest alone; 30%
goes towards taxes. That’s an indication that the average American is working two-
thirds of his time for bankers and the government.
Open your eyes to the possibilities!
▪ Bankers – and other wealthy people – realize that it’s about cash flow first.
▪ To create an arbitrage opportunity, you need to have the following criteria (a
simplified formula for passive income) in place:
1. An income-producing asset (such as an apartment building, rental property,
insurance policy, business, bonds)
2. A lender that is willing to lend against the asset as collateral (obtain
leverage)
▪ Investors have to buy physical structures, such as properties or businesses, to
use as collateral to get leverage (borrowed money) so they can generate cash flow.
Then they are forced to deal with the aggravations of these assets, such as tenant
problems, overflowing toilets, employee hassles, inevitable lawsuits, and a myriad
of other nightmare scenarios.
Bankers simply print a piece of paper – a mortgage – and as long as someone is
willing to sign it as a borrower, it serves as the collateral for borrowed money.
This is known as hypothecation. The end result is the same. Cash flow.
▪ Bankers create collateral out of paper, borrow against it, and create an
arbitrage opportunity immediately. This is power!

▪ Generating cash flow boils down to following a specific “formula,” outlined in

The Wealthy Code.
At a basic level, generating cash flow requires two things: an income producing
asset and the leverage (borrowed money) to buy this asset.
For business owners and investors, the income-producing asset typically turns out
to be a physical structure with many aggravations. For bankers, the income-
producing asset becomes a piece of paper they print and the borrower signs.
Business owners or investors think they are in the business of doing what the
structures they bought do, but the reality is, they are in the business of
generating a spread in the business of financing.
That’s what the banker recognizes.
▪ The world is divided into three teams: Consumers, Producers, and Bankers.
▪ Bankers make the most money. They use borrowed money to lend out and tie up the
borrowers’ collateral. They cover their downside and let the upside take care of
itself. They are masters of shifting risk to the borrowers. If borrowers fail to
pay, they lose all the collateral to the bankers. The bank ties up enough
collateral to make sure they make enough money. However, if the borrower is
successful in paying back the banker, the banker makes money.
Either way, the banker wins. The best part of being the banker is that they
recognize they don’t need to have money to lend out. Through a combination of using
borrowed money and “printing” money, they can make money, and lots of it.
▪ The banker (the money person) on the right just needs to learn how to borrow
money to lend out and how to make their position safer by shifting the risk to the
borrower.
▪ The world is divided into three teams: Consumers, Producers, and Bankers.
The Consumer is conditioned to spend.
The Banker finances the producer and the consumer.
Producers leverage people’s time, skills, and efforts to make money.
Producers (business owners and investors) need Bankers.
Bankers leverage money to make more money.
▪ Banks create new money with interest. Someone has to borrow more money or work to
pay this off.
▪ Every time you charge interest as a private lender, you “create new money” that
did not exist before, and someone has to pay it off by either borrowing more money
or by working for it.
▪ Money is debt!
Being a Private Lender Imagine being in this business. Your company:
 Takes little risk and shifts it to others
 Makes more money with less work than most other companies
 Always gets paid first
 Needs no money of its own
 Borrows all the money it needs at very little cost
 Lends out the money and shifts the risk to the borrowers
 Has consumers fighting to lend you money at 1% or less when inflation is five
times that  Offers only the belief that the money is safe
▪ Hypothecation takes place when a borrower pledges collateral to secure a debt.
When a property owner pledges property as collateral for a mortgage, that’s
hypothecation.
▪ The most important word in banking is “hypothecation.”
From that comes another word bankers use: “re-hypothecation.”
▪ Three Things Bankers Do

Bankers have to do three things. They cannot skip any of these steps, because that
could negatively affect their business. The steps are:
 Use leverage (OPM – other people’s money).
 Find borrowers. Without borrowers, they can’t make money.
 Do relatively safe loans secured by assets.
Bankers are always about safety; they’re not in the business of taking risks.
As a private lender, these things can be automated. But it’s important that you
never miss any of those steps.
The three things lenders do are:
(1) find borrowers
(2) find money to lend out
(3) structure safer and profitable loans then do safer and more profitable loans
▪ Banks create new money with interest. Someone has to borrow more money or work to
pay this off.
▪ Private lenders are individuals that can make money just like the bank.
It’s important to understand and speak the language of bankers. In this chapter,
we’ll cover these important terms:
Collateral
Loan to Value (LTV), Combined Loan to Value (CLTV), and Protective Equity
Promissory Note
Secured and Unsecured Loans
Security Instruments
Foreclosure
Leverage
Arbitrage
Velocity of Money

Asset-Based Lender
▪ The maximum LTV on a single-family home or residential property (1 to 4 units),
should be no more than 65% in most areas and situations.
▪ In asset-based lending, the two most important numbers are the LTV and the value
of the asset. This is in addition to a good underwriting criteria.
▪ Make sure you know the basic terms of lending.
▪ Let’s start with this. For every dollar you have, you can earn interest on it, or
you can give up the
interest you would have earned on it (if, for instance, you spent it or put it
under a mattress).
▪ banker always looks at the interest everything can make them. That’s it.
▪ Bankers also know that they need to keep the money moving. They use the velocity
of money to make even more. They recommend that we save our money in their savings
accounts, CDs, etc., all of which is dead money, money that’s not moving. But for
the bankers, it’s money they can move – or velocitize.
▪ Bankers want their money to be moving constantly; i.e., out in loans. However,
they want to make sure depositors don’t move their money on them, so they ask the
depositors to keep their money idle in the savings accounts or Certificates of
Deposit. This allows the bankers to move that “dead” money and make more money with
it.
▪ Bankers are masters in shifting much of the risk to the borrower.
There is always a risk relationship between the borrower and the lender. One of the
ways a lender shifts more of the risk to the borrower is by lowering the LTV.
▪ Bankers want to shift as much risk to the investor as possible. Investors want to
borrow money for their deals and are willing to give up a lot for that. Bankers
ultimately make the rules – they tie up all the

collateral – and end up making a lot more money than the investor, and with peace
of mind. The investors’ stress levels go up significantly for the duration of their
projects because they have a lot to lose for the potential money they could make.
▪ Banking is About Safety
▪ The Number 1 rule of banking is safety. They shift the risk to the borrower. They
are in the financing game, not the investing game. They dislike risks. And what’s
interesting is that they end up making more money than the investors they finance.
They finance the risks of others. They allow investors to take the risks while the
bankers tie up all the collateral and take a safer position.
▪ Bankers are masters in shifting risk to borrowers.
Bankers focus on covering the downside and letting the upside take care of itself.
A down payment on a property is in a higher risk position than a lender’s money.
For every dollar you have, you can earn interest on it, or you can give up the
interest you would have earned on it.
Bankers see every dollar as a little salesperson making them money (interest).
Bankers make the rules.
▪ Banking has been around for a long time for a good reason – the business model
works!
Borrowers are willing to pay more to access money quickly without going through the
traditional banks. To them, it’s not about the cost of money as much as the speed
and ease of getting the money because of access to opportunities.
▪ The spread between the cost of borrowed money, i.e., the cost of money, and the
return, is typically a small percentage. For example, if you bor rowed money at 6%
and loaned it out at 9%, you would make 3%. However, using some creative finance,
it’s possible to increase that.
▪ Velocity of money increases your returns.

▪ Lenders can lower their effective interest rate from borrowed money by using a
line of credit in a certain way instead of placing their money in a checking
account.
▪ By lending money and keeping it turning (using velocity of money), we can
increase the yield. Even though our borrower is paying us a specific interest rate,
we are receiving a higher return due to velocity of money. And by parking the money
in a line of credit at your local bank, you are lowering the effective interest
rate. And even though our money source might be charging us a certain interest
rate, we are paying them a lower effective interest rate. All this results in a
wider spread and more money in your pocket!
▪ Lenders have access to some powerful financial strategies to boost more profit
from a deal. One such strategy involves the use of velocity of money, which
increases the return by “turning” money as it comes in.
Lenders can lower their effective interest rate from borrowed money by using a line
of credit in a certain way instead of placing their money in a checking account.
As private lenders become more experienced, there are other financial strategies
that can help them boost profit from a deal without charging the borrower more
interest.
▪ “Have you heard of BOLIs?”
“It stands for Bank Owned Life Insurance, and all banks have them. These are a
form of life insurance purchased by banks where the bank is the beneficiary and/or
the owner.
▪ Banking consists of four parts: vehicle, banking, borrower, and depositor.
Vehicle: the location of the money (the vault) where the money resides. It’s where
you put your money while it sits in your “banking system.” You can have your money
in a tin can, in a checking account, in a CD (Certificate of Deposit); wherever you
decide to place your money for lending is your vehicle.
Banking: the process – how we lend the money and the methods (the advanced
financial strategies) we use to make more money.
Borrower: the person or entity to whom we lend the money.

Depositor: the person (or entity) who saves their money in the bank. This is just
one source of money for the bank.
▪ We lend money to anyone we believe is a low risk.
▪ Deposits in traditional banks are nothing more than loans to the banks. When
banks pay depositors 1%, they’re really borrowing that money from them at 1%.
So when talking about depositors, you have to think of them as sources of money and
that you are truly borrowing money from them. This means you must comply with all
Security and Exchange Commission (SEC) regulations. The SEC is a government agency
that protects investors; maintains fair, orderly, and efficient markets; and
facilitates capital formation. Whenever you are dealing with raising private money,
you have to comply with federal and state securities regulations. Make sure you
consult with the right attorney in these matters.
When working with other people’s money, always work with the appropriate attorneys.
You must comply with all federal and state securities regulations.
▪ A “tax-advantaged” environment is something either tax-free or tax-deferred.
▪ You could use some of the most advanced strategies in banking to make your money
grow for you, but placed in the wrong tax environment, growth will be hindered
significantly.
▪ It turns out there are a number of vehicles we can use. Which you select is a
matter of individual preference. One of the more interesting vehicles turns out to
be a certain life insurance, of all things!
Banks use BOLI for a reason (BOLI), so what’s so compelling about it? The answer is
pretty simple. There are two components to permanent life insurance (whole or
universal life): the death value and the cash value. As we go through life, we’re
told that if someone is trying to sell us whole or universal life insurance, we
should run away as fast as possible. We’ve always been told to buy term life
insurance and invest the rest. The life insurance companies try to get the death
value up and the cash value down.
However, it turns out that the cash value of both whole and universal life has some
interesting advantages. If you minimize the death benefit and maximize the cash
value, you can tap into these advantages:
It’s a tax-advantaged environment.

Whole life pays dividends every year, allowing us to build cash value quickly;
universal life has something similar. Both pay interest every year.
In some states, the cash value is not accessible to creditors.
This insurance is structured differently than a regular life insurance agent would
do. Insurance agents want to market insurance based on the death benefit. Having a
trusted, ethical life insurance agent structure this for you is key.
Other vehicles exist for Qualified Retirement Accounts, as well.
Many investors are aware they can do lending in their IRAs, but even better is to
invest inside of a Qualified Retirement Plan
▪ Four-Part Harmony
If you create the perfect vehicle but never lend out the money, you’ve missed the
boat. If you do everything else right but place your money in the wrong vehicle,
you’ve missed the boat, as well. You must have all four components working ideally
together. The four components together – Vehicle (where the liquid cash for lending
resides), Depositor, Borrower, and Banking process – are what makes this waltz
flow. The ideal situation will make double-digit returns in a tax-advantaged
environment grow in a compounding manner!
Let’s Talk Next About the Process
This is the core of a banking system, and it involves three activities. All three
activities must be done on an ongoing basis, otherwise the banking system fails.
These three activities are:
1. Finding borrowers. Without a borrower, you have no business. 2. Finding money to
lend. Without a depositor, you cannot lend. 3. Structuring safer and more-
profitable deals.

▪ Banking consists of four parts: Vehicle, Banking, Borrower, and Depositor.

Vehicle: Where money physically resides while waiting to be lent out Banking: The
process of lending money
Borrower: The person or entity to whom you lend money
Depositor: The person or entity that deposits their money in a bank Use a tax-
advantaged environment for your money.
The three activities private lenders do are:
Find borrowers
Find money to lend
Structure safer and profitable deals
▪ To become a private lender, there are two phases.
Phase 1 - Is the one-time setup of the foundation.
Phase 2 - Includes the ongoing activities. This is similar to any investment.
For example, during Phase 1, when investing in stocks, you have to find a financial
institution (such as Charles Schwab), open a brokerage account, and learn how to
effectively invest in stocks.
In Phase 2, you start buying and selling stocks, monitoring certain metrics, and
making decisions to maximize your portfolio while minimizing risk.
So let’s do just that for private lending.
Phase 1
In Phase 1, you set up the foundation to be able to start lending. Here are the
non-recurring steps to building the foundation to being a private lender:
 Understand private lending, including pertinent laws and regulations
 Build your underwriting criteria, your policies, etc.
 Build your team
 Get the right training
Phase 2

In Phase 2, you start lending. Here are the recurring steps in being a private
lender:
 Find borrowers
 Find sources for other people’s money (OPM)
 Structure your deals for safety and profitability
Let’s take a closer look at each of these.
▪ Having a team that understands all these laws and regulations is very important,
and in fact, required.
▪ They are licensed mortgage brokers that focus on brokering private funds as
opposed to institutional funds (like most mortgage brokers). They are known in the
industry as “hard-money brokers” or “hard- money lenders.” Most of them have a team
of attorneys, title companies and appraisers that handle the majority of the work
for them. Because of the negativity associated with the term “hard money,” most
simply refer to themselves as “private money lenders.” They are licensed (in most
states) to broker private funds.
However, individuals who want to become lenders are also known as private money
lenders. So it’s important to distinguish between a broker and the money person
(us). Brokers often refer to us as “trust deed investors” or “private mortgage
investors.”
▪ There are many differences. These brokers are, typically, licensed and we are
not. They make their money by charging the borrower points. We make money on
spreads.
▪ introduce yourself as a trust deed investor or a private mortgage investor;
otherwise, if you call yourself a private lender, the Hard Money Lender may think
you are a competitor.
▪ If a borrower stops paying you the way to mitigate that risk is to make sure that
you lend them a low LTV (perhaps 65% LTV) in the first place, which means the
borrower has a lot of equity to lose. Also, make sure the borrower has money in the
deal, which would make them think long and hard about walking away. The contingency
plan is to call a foreclosure company and initiate foreclosure if that risk becomes
reality.
Building Your Underwriting Criteria, Policies, Risk Management, and More

Underwriting criteria are the conditions and standards or benchmarks you create
that all your borrowers must meet and that will help minimize risk. These
parameters are set by the lender (us) and are designed to filter the type of
borrowers we are prepared to accept. For example, the parameters might include the
types of properties you lend against (such as single-family residences and
duplexes), the location of the property, whether it is owner-occupied or not, the
credit requirements for the borrowers, the maximum loan to value (LTV), the down-
payment requirements, the borrower’s income, and more.
In addition to that, the policies document contains the rules you set for yourself.
For example, always requesting an appraisal of the property could be included in
your policies. Another policy could be that you always wire money to an escrow
company and never to the borrower directly. Or you always get lender’s title
insurance (which the borrower pays for), and perhaps you should always be on the
borrower’s hazard insurance. Another could be that you never use the borrower’s
appraisal. The policies you establish should follow what are considered best
practices in the industry.
The other document you need to consider having is a risk management table. This is
typically a threecolumn document (in its simplest form) similar to the one shown
below. List all risks in the “Risk” column. Under “Mitigation Plan,” list ways to
minimize or eliminate that risk.
In the “Contingency Plan” column, identify what to do if a “risk” becomes a
“reality”!
Once you’ve created the first draft of these documents, you’re ready to build your
team. Team members will also help you update these documents.
Your team consists of:
 You
 Your mortgage broker (private money lenders or hard-money brokers), who
specializes in
brokering private funds
 Your bookkeeper
 Your accountant
Your mortgage broker obtains the remaining team members, including a real estate
attorney that specializes in private lending, a servicing company (normally the
broker), an appraiser, and others.
Finally, the right training will get you ready to excel in this arena without
making too many costly mistakes; this is arguably the most important step in the
whole process. As a private lender, you are the leader of your team. Not knowing
how to play the game would be disastrous.

▪ Lending in every state is slightly different. That is an advantage in disguise.

Only the ones committed to taking the time to learn are successful; the ones that
expect everything handed to them on a silver platter will surely fail. I,
personally, am glad that each state is a little different. It filters out 95% of
the individuals not willing to spend a few weeks to learn their state
requirements.”
▪ Becoming a private lender consists of two phases.
Phase One: one-time setup of the foundation
– Understand private lending, including pertinent laws and regulations – Build your
underwriting criteria, your policies, etc.
– Build your team
– Get the right training
Phase Two: ongoing activities
– Find borrowers
– Find sources for other people’s money (OPM)
– Structure your deals for safety and profitability
▪ Every game has rules. Banking has its own rules.
The biggest challenge to becoming a successful private lender is the human factor,
so we need the Banker’s Rules, and we need to make sure that we follow the rules.
The difference between the Banker’s Rules and all other rules is that almost all
other rules are written by a third party to limit the benefits of the players in
that game. For example, in the board game of Monopoly, the rules were written to
limit the benefits of the players (investors). However, bankers wrote the Banker’s
Rules not to limit their benefits, but rather to maximize their own benefits,
safely – an advantage and disadvantage at the same time. It is an advantage because
you have the power to write your own rules and make money at it. And it is a
disadvantage because there is no one to stop you from breaking your own rules, and
that’s a problem. That’s when lenders start losing money.
Look at what happened to all the banks that started writing 100% LTV and 125% LTV
loans. They got too greedy and broke their own rules, and rewrote new ones that
shifted the risk to themselves. (In reality, they shifted the risk to the ultimate
buyers of the notes – but that’s a different story.)
So it’s in your best interest to follow the rules you write to maximize wealth and
to minimize risk and headaches! Heed them, and you prosper. Disregard them, and you
pay the consequences.

Banking gives you a lot of power, but be careful. Power can backfire if you misuse
it. So manage the power, but don’t let it overpower you. Stay in control.
▪ Rule No. 1: Banking is about safety. Shift the risk to the borrowers.
Read that again!
As a private lender, you learn to shift the risk to borrowers and take less risk
when possible.
Bankers make more money while taking on the safer position in a deal. Consider
this. Many of the biggest buildings in cities across the globe have bank names
plastered on the very top for a good reason – more profits with less risk. Lenders
just do not like risk. They make money on the financing strategies of safer loans.
Never forget Rule no. 1!
Rule No. 2: Banking is about financing, not about investing.
We do not invest to make money; we make money by lending. It’s a financing game.
You’ll hear this statement: “We finance the risks of others.” Consider this
sentence for a moment. Simply put, it means that we finance our borrowers’ risks by
tying up all their collateral and taking on the more secure position. We do not
absorb their risk. Investors (borrowers) are welcome to take as much risk as they
like, but we want to be in a safer position. We do so by tying up any and all
collateral we can get our hands on. We should have at least 150% of collateral tied
up, as we shall find out later. That means for every $1,000 of money we lend, we
need to tie up at least $1,500 of collateral.
Let me say it again: We finance; we do not invest. Rule No. 3: Be a disciplined
money manager.
Have control over spending habits. The power you get as a banker is the same power
you can abuse. Because as a banker you have access to money, you can be tempted to
spend it on items like a new car and new clothes. Always remember: You are not the
consumer or the producer. In this equation you are the banker.
I’m not suggesting you shouldn’t buy these things, but your “bank” should not buy
them for you. Your bank should lend the money to you to buy them, and then you are
obligated to pay back your own bank. (Family Bank)
So, as a disciplined money manager (i.e., banker), you always want your money to be
lent out, and you want to be receiving timely payments. Avoid the temptation to use
the money for other activities or “toys.”

Remember: Every dollar can either make you interest (work for you) or you can spend
it and give up the interest you make on it. Said another way, the real cost of
anything includes the interest you paid and the opportunity cost of not having that
money working for you!
This is, by far, the biggest downfall of a banker. You’ve been warned. Rule No. 4:
Be an honest banker.
When you lend money to yourself to buy something, pay it back exactly the same way
– at the same rate of interest – as if you had borrowed it from another lending
institution! If you miss a payment back to your bank, make up that late payment as
soon as possible!
This is a rule that bankers commonly break – because they have the power not to pay
themselves.
However, this is the first step to the demise of your bank! This rule cannot be
overstated. You have to always pay back your bank.
Think of your bank as a separate entity. When you borrow money from it, treat it as
you would any other lender or bank. Pay on time. If you’re late, ask for an
extension. Be “formal” with yourself.
Recognize that there are two sides to banking. You have the consumer on one side
and the banker on the other. The consumer is the wealth spender. The banker is the
wealth builder. We lend money to consumers to have them do all the work and pay us
on time. We make the money.
The minute we start thinking like a consumer, we lose the game. Act like a wealth
builder (banker) and become an honest banker.
Rule No. 5: Remember The Golden Rule of banking: “Whoever has the gold makes the
rules!”
Consumers do not save money. As a result, someone else must provide the capital
necessary to sustain their way of life. This comes at a high cost. As a banker,
with access to cash, you dictate the rules and the terms. In addition, all sorts of
good opportunities will appear, and you can also negotiate favorable purchase
prices.
So overcome the temptation to buy that new luxury car. Overcome the temptation to
buy that mansion. Live within your means, and let your money work for you as you
dictate the rules and the terms by which the borrowers buying these toys have to
follow. They will make you wealthier while they work harder and harder.
Cash flow is everything! Access to capital is king. Control is everything. Rule No.
6: Adopt the banker’s habits.
Most people get into a comfort zone that causes them to lapse into their old way of
doing things – a lifetime of conditioning that determines how one conducts oneself.

There’s nothing worse than getting trapped in the comfort zone. Most people are
stuck there and never get out. You must learn to develop new habits. Becoming a
banker must become a way of life. You must use it or lose it! Ingrained habits are
like muscle memory – you will have challenges in making these new habits work for
you. Develop and adopt the banker’s habits.
Rule No. 7: Follow the rules!
The biggest challenge to having a successful “banking system” is the human problem,
so we need the
Banker’s Rules. And we need to make sure that we follow the rules.
The only thing holding anyone back from being able to develop this new banker
mindset is overcoming human behavior. If you can control these, you can build
wealth. But if you break any rule, you lose!
▪ The power of controlling money is a double-edged sword. It can make you wealthy,
and it can also get you into trouble. It might seem easy now, but when you start
controlling money, and especially lending it to yourself, you will understand. If
you break any rule, you lose! These rules are thousands of years old. They have
been proven by the test of time! They have created dynasties!”
Banking has existed from the beginning of time. The wisdom of the ages is now being
passed to me!
▪ Every game has its rules. Banking has its own rules, too.
Rule no. 1: Banking is about safety. Shift the risk to the borrowers Rule no. 2:
Banking is about financing, not investing
Rule no. 3: Be a disciplined money manager
Rule no. 4: Be an honest banker
Rule no. 5: The Golden Rule
Rule no. 6: Adopt the banker’s habits Rule no. 7: Follow the rules!
▪ All monies you lend to yourself must be your money and not other

people’s money.
▪ What is a Financing System?
Let’s say you decide you want to buy a car. You walk into a dealership and pick the
car you like, with the shiny rims and the best stereo system available.
There are three ways you can finance that purchase:
 Leasing
 Borrowing the money from a third-party lender, such as a bank or credit union
 Paying cash
With all three of these methods, you lose money. When leasing and borrowing from a
traditional bank, you lose money (interest) to the third-party source. In the third
traditional way to purchase a car – paying cash – you lose your opportunity to use
that money for investing in something or buying something else. This is called the
“opportunity cost.” So, in each of the traditional ways of buying/owning a car, you
lose money each month to a third party, or you lose money you could have used in
some other way.
A fourth method – another way of financing – is referred to as a “banking system.”
This requires a major shift in mindset. The problem most people have in
understanding this is in trying to associate this fourth method with one of the
other three traditional methods and not recognizing this as an alternative to the
other three. Don’t confuse this method with the others.
Assume you own a bank. Your bank lends you the money like any other bank. You buy
the car, and you start making the loan payments to the bank. This is like any other
loan; the difference now is that you own the bank. So essentially, you’re taking
money from one pocket to pay another. It’s your bank, after all.

Are you really losing this money? The answer is yes, partially, but the entity
gaining the payments is your entity. So the money you would have paid another bank
is now going into your bank.
Obviously, this bank does not exist. But anyone can use the concept of borrowing
money from an entity they control to do this. It’s not a true bank, but it serves
like a privatized bank. Let’s call this your “banking system.”
The banking system method allows you to recapture your interest.
The other three methods – leasing, borrowing, or paying cash – cause you to lose
money!
With this new method, you build wealth!
By simply using this financing system, you’re building wealth automatically. This
will become more and more obvious.
▪ The banking system method allows you to recapture your interest.
By simply using your banking system, you’re building wealth automatically.
▪ Believe it or not, 34.5% of the average American’s income goes towards paying
interest alone. This could include interest on mortgage payments, car payments,
credit cards, etc. Assume in your case that $1,700 per month of your $5,000 goes
towards paying interest alone. The average American saves very little at the end of
the month, but let’s suppose you’re extremely diligent and that you save 5%. So, if
you’re lucky you’re left with $250 in your pocket.
Recognize that, as you read this, that money is currently going out of your pocket
to financial institutions.
The average individual is losing money every month in interest to third-party
financial institutions!
Utilizing a banking system allows you to recover at least some of that money. The
cost of not doing this equals the monies paid and lost now and in the future for as
long as you don’t have a banking system in place.
▪ Your goal should be to redirect, as quickly as possible, most of that 34.5% into
your banking system. ▪ Money Growth in Your Banking System
The money that resides in the banking system can grow in interesting ways.
1. It has to be growing in a tax-advantaged environment.
2. By using the power of velocity of money, we start making money work for us and
get higher returns.
3. We gain the opportunity to invest our personal cash (i.e., the cash we have, not
cash already in the banking system) that we normally would have used to buy stuff.
That cash can now be invested.

4. The money residing in the banking system should be earning money while sitting
there.
5. Depending on the vehicle, you should be able to make a small spread on that
money in the banking system.
▪ Setting up Your Banking System
Like any small business, your banking system will need to be self-funded. Remember,
it’s your personal
financing source. The money doesn’t magically appear there. You have to fund it
with your money.
So where does your money come from? There are several sources. Many people have
money lying
around earning next to nothing, such as a retirement account, savings accounts,
CDs, stocks, bonds, etc.
“But I need to invest my money to make money!” you say. The obvious rejoinder is:
Would you pay
someone 6% when you’re making only 1% on the same amount of money?
Take a look at this example.
Assume Bob (with the help of his wife, Julia) makes $100,000 in income per year. As
an average
American, $34,500 of that is going towards paying interest. Bob might save as much
as $5,000 by the end
of the year.
Most people end up placing that $5,000 in a savings account or CD at their local
bank. Bob does the
same and gets paid very little in interest. Meanwhile, Bob (like most people) is
paying 10% or more on
his other loans. So, instead of saving money or investing that $5,000, Bob can use
it to “buy” some of the
$34,500 – an income stream.
He does that by placing the $5,000 in his banking system, then using part of that
to pay off existing
loans, which effectively transfers the loan from a third-party financial
institution to his banking system.
Bob continues to make payments on the loans, but the payments – part of his $34,500
worth of interest
payments – are now going into his banking system. It’s important to recognize that
Bob is not paying off
his loan with that $5,000; he’s essentially having his banking system buy the loan
from the other financial
institution while continuing to receive the payments from the borrower (himself).

Now, instead of earning a small return from a CD or savings account, Bob’s banking
system is
earning the same interest rate he was paying the other financial institution! If he
had been paying 8% on the loan, then Bob’s banking system would receive that 8%.
So, here’s what happens (refer to the three diagrams below). A portion of that
$34,500 in interest
paid per year will start getting redirected to Bob’s banking system. Notice how,
over time, the amount going to the Third-Party Lender gets lower as the amount
going to Bob’s banking system gets higher.
▪ What Vehicle Should One Use for Their Banking System?
The vehicle (refer to Chapter 9) has to have certain characteristics, the most
important of which is the tax-
advantaged environment. Let me expand on that again. You can run your banking
system from a tin can, a
checking account, or any one of many vehicles. However, it turns out that one of
the ideal vehicles is
permanent insurance. Now, we’ve been conditioned to stay away from certain life
insurance; however,
this is very different.
With permanent insurance, you have basically two options: Whole Life and Universal
Life. Both of
these have two components, called the “death benefit” and the “cash value (or “cash
surrender value”).
You can think of the death benefit as going towards maximizing your death payout
when you die. Think of
the cash value as somewhat like a savings account. When you buy permanent
insurance, the life insurance
agent sets it up so that most of the money you pay goes towards the death benefit
and less to the cash value.
▪ The “typical” setup is to maximize the death benefit and minimize the cash value.
However, for our banking system, we want it the other way around. We like the
characteristics of the cash value, which

would work ideally for our banking system. So we actually want to maximize the
amount of money in the
cash value and minimize the death benefit.
The diagram below shows the allocated percentage of the premium payment. In the
“typical” setup, a
higher percentage of the payment goes towards the death benefit and a smaller
percentage towards the
cash value. With the banking system, it’s the other way. A higher percentage of the
premium payment goes
towards the cash value and a smaller percentage towards the death benefit.
The problem is that most insurance agents are not familiar with how to set up
everything correctly; there’s
a lot to know and a lot more to it. Make sure you find a competent insurance agent
who can support your
plans correctly. For a list of potential insurance agents, please refer to the
Resources page at the back of this book.
▪ Find the right insurance agent to set up your insurance for you. The wrong agent
can cost you a lot!
▪ Warning!
Your own banking system is a great way to build wealth. However, be aware that
getting this structured
correctly is very important. Also, be aware of the importance of the insurance
agent you select. I’ve not
had good experience with insurance agents. Many of them seem honest enough, but I
still have had bad
experiences. I can’t warn you enough against working with the wrong individual.
Many agents position
themselves as experts with banking systems, but please be careful. For example, I
worked with a couple
of men from Utah that presented themselves as experts with banking systems.
Unfortunately, they proved
to be dishonest and the worst kind of individuals anyone could work with. Please,
do your due diligence.

Some “experts” are extreme advocates of using the banking system for any and every
loan. I
disagree. For example, if you can get an auto loan for 0% to buy a car, why would
you use your banking system to do that? Use the third-party financial institution.
Some of these “experts” insist on using your banking system to buy the car loan and
charging yourself a higher interest! They’re not considering the opportunity cost.
Just use common sense and ask a lot of questions!
Your banking system can truly be a great wealth builder. Use it.
▪ The key to remember is that you want to place your own money in the banking
system, not borrowed money. When you end up lending money to yourself, it comes
from your banking system. When you lend money to others, it could come from one of
three sources: your banking system, your personal cash (not in the banking system),
and other people’s money.”
I was starting to get it.
▪ At the basic level, the banking system will recapture all of your interest
payments! You then grow your money in your “bank” using velocity and compounding in
a tax-advantaged environment. Banking system is a method of finance.
Traditional financing methods are:
Leasing
Borrowing
Paying Cash
Banking system is a fourth method.
In the first three methods, you either lose money to the finance source, or you
lose the opportunity cost.
▪ Life is more than just money. It’s about enjoying an incredible journey

through life. It’s about giving back, learning, and enjoying it. The income from
lending buys me the time to do so. It buys me freedom of time to do whatever I want
in my life. I know that some people to whom I’ve passed this information used their
time to become teachers, to build businesses, or to run charities. When you have
enough money to live on, then you need to live! You need to recognize that life is
not about being a lender or being a business person, life is about the journey.
“So, to answer your question, I’m not a banker or a full-time private lender. I do
not own banks, either. I simply make money like a bank. I use the same strategies
to generate passive income while I give back to the world in my own way,” he said
with a smile, waiting for a reaction from me.
▪ Over time, private lenders start thinking very differently from consumers or
savers.
▪ Private lenders and real estate investors need each other.
In terms of returns and cash flow, income properties and private lending are
similar. In fact, private lending can be more profitable.
In terms of safety, private lending is safer than property ownership.
In terms of liquidity, private lending can be more liquid than the downpayment for
property ownership.
A combination of private lending and owning properties is ideal.
Advanced private lenders often own several homes, all paid off by borrowers from
the private- money loans.
▪ How many types of banks are there?” I asked curiously.
“Well, there are three types of banks. There’s the corner bank, which is the
neighborhood bank
most people go to for their weekly deposits and withdrawals. This is the bank we
all think about when we hear the word ‘bank.’ But there are two other types, as
well. The first, a shadow bank, doesn’t take

direct deposits like your corner bank. Instead, they run hedge funds, money market
funds, and structured investment vehicles. Many of the exotic investment vehicles
you hear about in the news, such as mortgage-backed securities, happen within
shadow banks. The third type is the central bank, which is the banks’ bank. For
example, the Federal Reserve of the United States is a central bank. They manage
the creation of a nation’s money supply and lend money to banks and other financial
institutions. Many think of central banks as government agencies. They’re not.
They’re controlled by the richest families in the world. They are powerful
bankers.”
▪ The stock market is a minus-sum game.
You’re competing with the best of the best and with very fast computers.
The stock market doesn’t create wealth; it simply transfers wealth from one to
another.
The way returns are calculated in the stock market is not what you would expect and
is not dependable.
Financial institutions that are involved in the stock market shift risk to the
people. These same financial institutions are known as shadow banks. They profit
from our risks.
If you’re going to trade stocks, it’s important to spend time educating yourself
how to do it right.
▪ Find five, active real estate investors in the area.
Find an expert in raising capital and have them teach you how to do it. Find three
hard-money brokers.
Find an escrow company.
▪ Find a great coach.
Finally, make sure to get the right training.
▪ Banking is much more than making money. It’s a major shift in mindset. Bankers
just think

differently.
It’s about making money in a safer position, using finance strategies to increase
yields (return),
and simply thinking differently. It’s about adopting the mindset and the rules of
the banker. I
recognized that becoming the banker wouldn’t be easy, but I knew that the
persistent ones are the ones earning their stripes.
▪ Consider how financially important it is that you teach your children to think
like bankers. Begin by lending them money that will ultimately belong to them. You
will be leaving them with money and a lifetime of lessons that they too can pass
along.
The Debt Millionaire - George Antone (Highlight: 77; Note: 0) ───────────────
▪ Chapter Summary

· The ultra-wealthy see wealth building in a very different way than everyone else.
· This book will introduce you to what the ultra-wealthy know and use a method
called “The WealthQ Method” and it is based on “The Wealth Equation.”
· You have to have an open mind when reading this book because it will challenge
many things you believe to be true, no matter how many years of experience you have
in investing.
· Read this book more than once.
▪ Understanding the Wealth Equation, known simply as WealthQ is the first step to
building your wealth on auto-pilot.
· The second step is to understand that you need to move over to the “Receiving”
side of the WealthQ.
· By moving over, you allow the four main forces of inflation, interest, taxes and
opportunity cost to work for you instead of against you. There are actually more
forces, but we only focus on these four in this book.
· The WealthQ Method is not about increasing returns or buying bigger assets, it is
about a complete change in perspective on wealth building. It is about making the
financial system work for you.
▪ , THE TRUTH: there is no way to build real wealth except to use
▪ LEVERAGE. Without leverage, it is virtually impossible to build wealth. Most
“experts” on TV tell you not to use leverage, yet the affluent tell us they cannot
do without it. You can see they are right. Their numbers prove it—and their wealth
proves it as well.
Financial leverage can be good or it can be bad. It can work for you or it can
destroy

you financially.
However, once you know how to use it properly and manage the risk, it can MOVE you
to the right side of the WealthQ.
The secret to moving to the “Receiving” side of the WealthQ is well-structured
leverage!
What does leverage do?
Used right, leverage can move you to the right side of the Wealth Equation.
Leverage allows you to position yourself on the receiving end of inflation. That
means as inflation rises, you benefit. And, as you will find out leverage also
positions you on the receiving end of interest and opportunity cost as well.
Leverage is to the wealthy as candy is to kids.
▪ This is not just any leverage. The key with this leverage is that it is correctly
structured leverage. “Correctly structured” includes both the terms and the amount
of leverage.
▪ We started with $10,000 cash. Now (using leverage) we will replicate it several
times. So we have expanded the $10,000 to $50,000 instantly in this example. No
waiting for a gazillion years! We now place each $10,000 into a compounding
environment. We then make sure we place each of those five $10,000 sets in a tax
advantaged environment. We make sure we minimize or eliminate fees. Then, because
we are using leverage, inflation works to our advantage, as we will discover later
in the book. Each $10,000 can return less than the 16.67% return we calculated
earlier as “necessary”, but the sum of
▪ A “Debt Millionaire”...

· Is someone who knows how to MANAGE debt to move themselves closer to their
financial goals
· Uses debt STRATEGICALLY to build wealth
· Is one of the most sophisticated investors on the planet
· Is someone that understands that debt can destroy them if they don’t manage it
well
“Debt Millionaires” are the investors who know how to use debt strategically to
move to the “Receiving” side of the WealthQ. They understand “The WealthQ Method”
of investing.
▪ Chapter Summary
When investing there are multiple factors, variables, influences, and
▪ alternatives to be considered. We looked at and discussed:
· 1: We started with some cash, then
· 2: We put it into a compounding environment, then
· 3: We made sure we placed everything in a tax-advantaged environment, then · 4:
We made sure we minimized or eliminated fees, then
· 5: We considered how inflation affects our investments, then
· 6: We made sure we considered the opportunity cost, then
· 7: We calculated the actual “Break Even Return” we need before taxes and
inflation, and after fees. The break-even return needed just to break even and not
even build wealth was high!, then
· 8: We added “balanced” portfolio. That translated to our having to invest in much
higher risk assets just to break even!, then

· 9: We learned how financial leverage will allow us to replicate the above several
times to speed up our wealth, and in fact allow us to BECOME wealthy.
· The traditional method of investing doesn’t work!
· “Debt Millionaires” are the ones who know how to use debt strategically to move
to the “Receiving” side of WealthQ. They understand “The WealthQ Method” of
investing. · Use leverage properly and you can become a “Debt Millionaire.”
▪ To “hack the game of finance”, you need three steps:
1. You need to understand who created the system, because there-in lies the biggest
clues. “They” have built the system to work for them. In this book the “They” we
are talking about are the global bankers.
2. You need to understand how the system works. We will not be doing that in this
book, but rather we will be giving you an indication of how the WealthQ was
discovered and why “The WealthQ Method” is so effective.
3. You need to recognize that many of our beliefs about money, investing and the
financial system were actually initiated by the ones that created the financial
system. They did this in order to make us function better inside their system.
Instructions and beliefs like “pick a 15-year mortgage over a 30-year mortgage”
actually benefit them and not us (refer to my book The Wealthy Code). It is
important that you question all your financial beliefs and what were the true
intentions behind those beliefs.
Once you have addressed and worked through these three steps, then the fun starts.
Remember, it’s a game that you play. With your new understanding of the answers to
the three steps many things are possible including playing the game to win.

▪ You know that the bankers have their system set up for you to use but to make
them richer, not you. One of the ways they squeeze money out of you is with
inflation among other things. One “hack” we use is debt as was mentioned before to
counter these “forces” that were created. Debt is actually more than just a hack,
it is a weapon. Debt as a hack works because of the way the base plate, the
(monetary system) was built.
Before we dive into debt, first let’s talk about what is “good debt” and what is
“bad debt.” “Good debt” is debt that we use to purchase assets that appreciate or
pay us regularly, or both. “Bad debt” is consumer debt that takes money from our
pocket, such
▪ as credit cards, auto loans, etc. In this book, all debt we talk about is good
debt, but more importantly, good debt that is structured correctly, because “good
debt” can hurt us if structured incorrectly. Currently, most investors seem to
structure their so-called “good debt” incorrectly.
▪ Let’s say you purchased a $100k asset with 6%-interest debt, and let’s assume you
decided to pay the debt down with the $200 per month you were going to “save” up.
You don’t do this for the sake of buying an asset, but rather to get into well-
structured debt. This statement will become obvious later. For now, notice how I
said that. You buy the asset to get into debt, not the other way around. I will
expand on that later.
So here are some of the characteristics of your loan:
· By using the $200 per month to pay against the loan, you are essentially “saving”
6% (in this example), which is similar to making 6% tax-free. So taxes work to
our advantage—i.e. we are not paying taxes on “saved” money. As a
reminder, previously, you were depositing the $200 into an account, being paid a
lot less than 6%, and paying taxes on that measly interest rate.

· By using debt, you are using other people’s money to buy the asset, and not our
money. That means you are not losing the opportunity of buying the asset in the
future for all cash, you are buying it today. So you are gaining the advantage of
the opportunity, and that works to your advantage.
· Since you are using debt to buy the asset today, and you are paying for it over
time, you are using the “time value of money” to your advantage. That essentially
means you are paying for it with future money. The $200 payments are spread out
over many years which means it is “cheaper” money. This allows you to use inflation
to your advantage. In other words, inflation works to your advantage! More on
this later.
We use our understanding of the financial system to turn things around. By using
this understanding we are not playing against the creators of the financial system.
Using the right tools, you are now aligned with the creators of the financial
system and the system now works for you, not against you. You are not “partnering”
with them, you are simply hacking the game of finance that they created to improve
your lifestyle. The result is that your net-worth skyrockets over time from the
simple example above—automatically. That is how you play the game.
That is how WealthQ was discovered.
▪ Chapter Summary
· We are all players in the game of finance. To play the game better, it’s
important to understand WHO created the game (the financial system), and then HOW
the system works, which includes the monetary system etc. Finally we must question
everything we have been told about money and investing because these beliefs were
spread to serve the creators of the system.

· The secret to moving from the “Paying” side to the “Receiving” side of the
WealthQ is DEBT. It has to be the right type of correctly structured debt.
· The three new terms we have introduced are:
o The Wealth Equation (aka. WealthQ) which has 2 sides in the equation; the
“Paying” side and the “Receiving” side.
o The WealthQ Method is the method of investing that focuses on moving the investor
to the right side of the WealthQ.
▪ o The Debt Millionaires are those investors who have implemented “The WealthQ
Method” and have mastered the use of debt to move to the right side of the WealthQ.
▪ Lenders create new money that doesn’t exist with interest. Someone has to borrow
more money or work to pay the interest off.
▪ Lenders create new money that doesn’t exist with interest. Someon
▪ To be on the “Receiving” side of interest, you can be either the banker or the
producer. You can either create interest or pass it on and make money off of it.
This will be explained in more detail a little later.
To be on the “Receiving” side of interest in the WealthQ, you can either
CREATE interest or PASS it on to the others.
▪ The world is divided into three teams: the consumer, the producer and the banker.

Bankers and producers are also consumers, but they are bankers or producers first;
consumers second.
Every person on this planet is in one of these three teams. There is no other
choice. By default, people start as consumers. The rich are producers and bankers.
What most people don’t realize is they can also be on the “bankers” team, as
explained in my previous book The Banker’s Code.
▪ So how does one move to the “Receiving” side of interest without giving up the
inflation position?
There are several ways:
1. Lend money at an interest rate that is higher than the inflation rate after
taxes, especially if the loans are short term loans, 12 months or less for example.
2. Borrow money at a lower rate and lend it out or invest it at a higher rate.
3. Use the “velocity of money” to turn money around as it comes in to increase your
overall yield.
▪ Passing Interest
When passing interest to a consumer or another person, it is important that you do
it right.
Again, let’s look at various examples of passing interest. You are borrowing money,
paying interest to the lender, and somehow making more money on the borrowed money.
There are various metrics to look at when doing so. I cover that in more detail in
my book The Wealthy Code. Here are the highlights from the book:
· The capitalization rate on the income stream (from the asset) should be larger
than

the annual loan constant and the interest rate on the loan, or more appropriately
the cost of money (Refer to the chapter Debt Metrics).
· Match the loan period of the underlying loan with the exit strategy on the income
stream. For example, if you are buying an income producing asset for ten years,
make sure the underlying loan used to purchase the asset is a ten year or longer
loan.
▪ these are some important lessons you can use immediately from this
chapter:
· Be a producer, investor or banker. Learn how to pass interest or create interest.
· Pay off all your high-interest consumer debt, especially credit cards. This
allows you to move to the right side of interest.
· If you decide to “pass” interest, learn how to use debt effectively. Knowledge is
the key.
· Consider building a Family Bank for your family. This is covered in chapter
twelve.
· Be aware of the annual loan constant; the interest rate compared to the
capitalization rate as mentioned in the previous section and in my book The
Wealthy Code.
· Do not pay off your other low interest consumer loans (such as car loans) yet.
Not until you have read chapter six on Opportunity Cost.
▪ Chapter Summary
· You are either paying interest, creating interest or passing interest. You want
to be on the side of the latter two.
· One of the ways to recapture the interest you are paying out is to start your own

financing entity called a family bank. That is covered in chapter 12.

· Examples include buying commercial properties, becoming a private money lender,
and using your family bank.
· Redirect most consumer debts for now into your family bank, or pay them off,
▪ especially credit cards.
· When structuring deals to pass interest from lender to someone else, be aware of
certain metrics such as period of loan, exit strategy, annual loan constant,
interest rate, cost of money and capitalization rate. Refer to the appendix on debt
metrics. · Read the book The Wealthy Code on structuring debt.
▪ First, let’s understand what opportunity cost means.
Every financial decision you make has missed opportunity potential. For example, if
you made the decision to invest $20,000 into buying a car and not buying a stock,
that is a missed opportunity. In fact, the cost of missed financial opportunities
can be calculated. For example, imagine that buying the car in the above example
allowed you to own
the car free and clear but the stock ended up being $45,000 in five years. You
obviously missed out on that opportunity. You could have used a low-interest car
loan to buy the car and invested your capital in buying the stock.
▪ It is believed that the biggest cost to the average American, more than taxes and
inflation, is opportunity cost.
▪ Opportunity cost is the cost we pay when we give up something to obtain something
else.

▪ As investors, you have to understand opportunity cost, and recognize ways to

choose the right financing option for the right acquisitions.
▪ When you invest
your money, you are looking for a “return,” but you lock up your money and lose the
opportunity to make more money with it. Looking for a “spread” allows you to make
more money using other people’s money and you also have the ability to do many of
them.
▪ How much more valuable is having cash than spending it? Another way of thinking
about it is how much additional borrowed money can we access by having the cash?
▪ There is also the option of structuring the deal as a combination of the above.
Furthermore, each of the above has various options to consider. For example, with
debt, we have various types of debt including:
· Installment loans
· HELOC
· Mortgage
· Credit cards
Let’s consider some specific examples to illustrate the above.
1. Instead of using your money for down payment on an asset, consider finding
someone as an equity partner. An equity partner is someone that invests money in
exchange for a percentage of the profit. The equity partner invests the down
payment in exchange for piece of the profit. You could be on the loan and you keep

your cash for liquidity.

2. Many investors that do short term deals (one year or less) tend to refinance to
pull money out for these short term loans. It’s actually better to have a HELOC
instead
of refinancing if the money is for funding these short term purchases.
3. Always keep your financials looking strong to be able to obtain financing for
▪ purchases. This includes your credit score, your debt-to-income ratio, liquidity,
etc. 4. Consider having certain loans in your name and others under your partners’
or spouses’ name. Avoid both of you being on the loan because it impacts your
borrowing capacity.
5. Use 30-year mortgages over 15-year mortgages.
6. Find the lowest annual loan constant for all your loans for as long as possible.
Refer to the book The Wealthy Code for more information.
7. Instead of using your credit card for large purchases, consider using your
family bank. This is discussed later in the book. By doing this, you are
recapturing higher interest payments and directing them into your pocket.
▪ When we decide to use other people’s money, we have to know how to structure the
deal.
▪ Chapter Summary
· Opportunity cost is the biggest cost for most people.
· Debt allows you to move to the “Receiving” side of opportunity cost.
· The use of the correct debt can help you tap into more opportunities, which can
result in significant wealth for you and your family.

· It is important for you to understand and be able to measure opportunity cost.

· When you purchase something, you typically have 2 main options, buy with cash and
give up the interest you would have earned on that money, or borrow money to make
your purchase, which means you pay a 3rd party interest. However, you can give
yourself a 3rd choice by building your own family bank and using it to finance the
purchase, and then you pay the purchase interest to your own family bank instead of
a 3rd party financial institution.
· It is important to have guidelines for when to use what type and source of
capital. An example was given in this chapter. Being able to match the right
capital source to the right investment and scenario is critical. I believe everyone
should have a diagram that summarizes their capital usage guidelines. It will prove
very effective.
▪ “Real dollars” means TODAY’s dollars. “Nominal dollars” are FUTURE or PAST
dollars without consideration for inflation.
▪ Real dollars = Purchasing power Nominal dollars = Countable dollars
▪ Inflation makes wealth flow from the left side to the right side of the Wealth
Equation.
▪ People on the left side of the Wealth Equation think in terms of nominal dollars,
while people on the right think mainly in terms of real dollars.
▪ Most people think of inflation as an increase in price levels. That’s not totally
accurate.

Inflation is actually a decrease in what our money can buy us.

▪ The asset just keeps up with inflation; the loan is the secret sauce to profiting
from inflation!
▪ When you buy an asset today using well-structured debt, you are buying it with
real dollars today, but paying for it in nominal dollars in the future!
▪ Who Are The Losers From Inflation?
In an economy where inflation is rising quickly, there are many losers. Everyone on
the left side of the WealthQ is losing.
Here is a list of people losing the most:
Savers: People savings money in checking accounts, savings accounts, certificates
of deposits, etc. The interest rates do not keep up with inflation.
Retirees: Many retirees have their fixed income payments coming in from their “nest
egg” and their “safer” portfolio. Inflation erodes the value of both their “nest
egg” savings and their “safer” portfolio.
Credit card debt holders: Most credit cards have a variable interest rate tied to a
major index such as the prime rate. This affects them negatively. Credit card
holders end up experiencing quickly climbing rates and higher payments.
▪ Consumers: Consumers on a set salary will feel the crunch right away from
dramatically higher inflation.
Investors: Investors in long-term bonds. In a high-inflation environment, bonds
work against you.

▪ . “The people on the “Paying” side of the WealthQ borrow money to buy
assets, or buy these assets with all cash and no debt, but the people on the
“Receiving” side of the WealthQ create the right debt by finding the right assets
to encumber them.” It was a complete switch. The left side buys assets thinking it
is the assets that make them rich. The right side creates debt with the right
assets because they know it is the debt that makes them wealthy.
▪ Chapter Summary
· It’s really important to understand “nominal” dollars versus “real” dollars
before trying to understand inflation.
· Real dollars means in TODAY’s dollars. Nominal dollars means FUTURE or PAST
dollars without consideration to inflation.
· Think of “Real dollars” as “Purchasing power” and “Nominal dollars” as “Countable
dollars.” One tells you what you can purchase in today’s money, while the other
tells you how many dollars you have in the future or in the past without
consideration to
▪ what you can purchase with it.
· Real dollars are also called inflation-adjusted dollars.
· Inflation makes wealth flow from the left side to the right side of the Wealth
Equation. · People on the left side of the Wealth Equation think in terms of
nominal dollars, but people on the right think in real dollars mainly.
· Well-structured debt is the key to moving to the right side of the Wealth
Equation.
· When you buy an asset today using well-structured debt, you are buying it in real
dollars today, but paying for it in nominal dollars in the future!

· Well-structured debt for inflation should be at a fixed interest rate for as long
a period as possible. Aim for the lowest loan constant you can get
▪ The strategic use of debt may have tax benefits. Work with your tax professional.
▪ surprised to receive a box of Emile’s documented systems. This box
included his “Tax Management System”, “Debt Management System”, “Credit Management
System”, “Inflation Management System”, and “Family Bank System
▪ Chapter Summary
· Taxes can have a devastating impact on our wealth
· The affluent on the right side of the Wealth Equation know that and therefore
plan for it. They do so by doing the following:
o Build the right team
o Use a system to manage their taxes
o Use debt strategically
o Place their investments in tax-advantaged environments
o Educate themselves
o They know that it is important to reinvest their tax savings and not just spend
them carelessly.
▪ So the problem isn’t debt itself, but rather HOW to use debt.
▪ My mentor went on to fill in the gaps in my understanding of what we had covered
that

day. He explained that most people who mastered debt in conjunction with The
WealthQ Method could reach financial freedom much faster than those without that
mastery.
He explained that most people think it’s the ASSET that they purchase that makes
the difference. But the reality is different. The asset and the debt both fit into
the bigger game of FINANCE. It’s a financing game, and the game pieces (think of
Lego) such as assets and debts have to fit together to fit your financial goals.
The WealthQ Method was a holistic method, taking into consideration how the finance
game worked, and built to make the system work for you the investor.
The mindset for most people is to borrow money (debt) to be able to buy an asset.
▪ That’s the wrong approach. The more effective way is to establish the correct
type and amount of debt and equity against a stable asset to help generate a
specific goal.
▪ The wealthy use debt strategically. They obtain the debt against low risk and
stable assets.
The rest of us use it as a necessary evil to buy assets, typically assets with a
lot of volatility (higher risk).
▪ Chapter Summary
· Debt can be used to make you rich or destroy you. Not knowing how to use debt
could really harm you.
· The problem isn’t debt itself, but rather HOW it is used.
· People think it’s the ASSET that they purchase that makes them rich. It’s not.
It’s much more than that. It is the asset, the debt and the way they are put
together, among other things in the bigger game of FINANCE. It’s ALL these
components together that

can make you rich.

· “Debt Millionaires” are the investors that understand how to use debt
strategically to build wealth.
▪ For “Capital Gains,” you will need an “Equity Pair Framework.” For “Cash Flow”,
you will need a “Wealth Pair Framework.”
▪ · How much debt versus equity should we have on the capital side?
· How much can we afford to pay for each debt and for equity, and what are the
exact terms of each.
· What are the characteristics of the asset we are looking for on the asset side?
I normally draw a triangle to represent this. Remember, here we are just focused on
building step 2 to accomplish our result from step 1.
Figure 36: Three Sides to an Investment
▪ The three sides to any investment: Capital, Asset and Capital Structure,
sometimes referred to as “Deal Structure.”
Capital Structure is simply how an asset is financed. In simple terms, this
includes how much of the capital is debt and equity.
▪ Structuring Equity Pairs:
So how do you go about building the framework for Equity Pairs? Here’s a simplified
framework. Let’s discuss each side; the asset side and the capital side separately:
1. Asset Side: Your asset needs to have the following characteristics:
a. You should be able to obtain a loan against it (preferably you should be able to

“encumber it” with a loan). There are ways around it, but this would simplify it.
In simple terms, this means you should be able to find a lender that will lend to
you against this asset. You are not able to “encumber” all assets.
b. The asset must appreciate in value over time. It would be great if it kept up
with inflation, but that is NOT required, since the profit is made on the debt
side, as discussed earlier.
c. The asset must have low volatility in value. You don’t want something that
fluctuates wildly like the stock market. You are looking for assets that are
relatively stable such as real estate.
d. The asset should be income-producing to pay for the debt, even if it’s breakeven
▪ (income covers expenses and loan payments). Being income-producing is highly
recommended, but not required, however it makes things so much easier if it is. e.
The asset must allow for long term hold, ten years or more if need be.
2. Capital Side: This money needs to have the following:
a. The money side might have to be divided into debt and equity.
b. The debt must be long term and match with your holding period. If you want to
hold the asset for 20 years, the loan must be a 20-year loan or longer.
c. The debt must have the lowest annual loan constant possible. Refer to my book
The Wealthy Code for an explanation. This is a requirement.
d. The debt must be (preferably) a fixed interest rate for duration of the loan, or
at least for the duration you plan on holding the asset.
e. It is preferred (but not required) that the interest rate on the loan be lower
or equal to the projected appreciation rate of the asset.
f. The amount of debt (loan to value) should be set no higher than an amount

where there is enough cushion to cover any fluctuation in the income. There are
several metrics for this. For advanced investors, mainly, the debt-coverage ratio
should correspond to the standard deviation of the income from the asset. This is
beyond the scope of this book, but the main point of this is that the amount of
debt should be capped so that the risk is manageable.
g. Make sure not to have too much debt against the asset. The remaining capital
should be structured as equity financing. Refer to The Wealthy Code for more
information.
This is your simplest framework for Equity Pairs. This pairing of the financing and
the asset allows you to start automatically moving to the other side of the
WealthQ. Where’s the capital structure “glue” in the above framework? It is in the
details, the questions. For example, when we say “The debt must be long term and
match with your holding period” and “The debt must have the lowest annual loan
constant possible” etc. That’s the glue. That’s the capital structure. It’s
embedded in the details of the capital and the asset side
▪ When looking at any investment and putting the capital structure together, there
are 3 layers of things to consider.
1. ASSET LEVEL: How does the capital structure affect the risk and return from the
asset? This is the topic of my previous book The Wealthy Code.
2. PORTFOLIO LEVEL: How does the capital structure affect my whole portfolio? For
example, do I have too much debt (debt-to-asset ratio, debt to income ratio, etc.)?
3. ECONOMY LEVEL: How does the capital structure on this one investment move me to
the “Receiving” side of the “Financial System” and how will it be affected by
what’s going on in the economy?

As you can see, every investment plays an important role in all 3 layers. The
capital structure has to take all 3 layers into consideration. The beauty of this
is that once the framework is built, all of these are built into it automatically.
One of the principles of The WealthQ Method is that for every investment (and
its structure) you consider, you should also consider how it affects the 3 layers:
(1) Asset Level
(2) Portfolio Level
(3) Economy Level
▪ Chapter Summary
· Most people approach investing by picking some investing vehicle first. That’s
the wrong approach. There’s a more systematic way to approach investing.
· Every portfolio must have “income” and “growth” (“cash flow” and “capital
gains”). That is the result you are attaining and considered step 1. In step 2,
build a framework of characteristics you need to accomplish these goals in step 1.
The framework to accomplish “Cash Flow” is called a “Wealth Pair”, and the
framework to accomplish “Capital Gains” is called an “Equity Pair”. These
frameworks must also move you to the “Receiving” side of the WealthQ. Once you have
these frameworks, you can filter which assets (step 3) will help you accomplish the
goals. Notice that we worked backwards into the assets (or vehicles) to help us
accomplish your financial goals as opposed to how most people pick assets,
randomly.
· When you combine the information you are learning in this book about the WealthQ
table and the idea of moving to the “Receiving” side, and in combination with this
3- step approach to building your portfolio, you will start to realize how powerful
this can

▪ The most important leverage of them all is KNOWLEDGE.

▪ You are the GREATEST Asset. Invest in yourself. Invest in gaining the knowledge
that will help you, your greatest asset, generate the wealth YOU need.
▪ Chapter Summary
· The most important leverage of them all is KNOWLEDGE.
· Financial literacy is critical to your success
· Financial literacy allows you to be a better hacker of the game of finance in
order to improve your lifestyle.
· We have built a community of people that have the same goal—better lifestyle and
less greed. Collaboration versus competition. Enjoying life versus accumulation of
money.
· Always be working on improving your thinking capabilities.
▪ You never TAKE money out of your family bank, you simply BORROW it and pay it
back with interest
▪ a family member, instead of you being the only one making the decision on what to
fund, the whole family, or a committee made up of family members makes that
decision. After all, it is a family bank.
I’m simply trying to paint a very simplistic picture here to start. As you will
see, it
becomes a lot more interesting.
When you borrow money from your vault (checking account in this case) and pay it

back with interest, your vault starts accumulating money. Now you have a little
more money in your vault to re-lend out (money from the pay back of the loan and
the interest earned from the loan).
That in a nutshell is a family bank.
As you build this bank’s vault (again, checking account in this example), you start
establishing some “family bank” rules for the family to follow.
▪ Benefits of a Family Bank:
There are many benefits to the family bank. Here are a few.
Part of the family bank is having these regular “family meetings” mentioned above.
These are where the family meets to discuss loans to fund or not for family
members. These meetings include everyone, but typically the younger family members
(under age of 16) cannot vote. By having all the family members participate in
these meetings the family bank and the financial knowledge acquired by the family
is shared within the family and passed on from generation to generation.
The Rothschild’s (Mayer Rothschild) started this concept in the late 1700s. This is
how their wealth has been passed from generation to generation, not only their
financial
▪ wealth, but also their intellectual wealth.
Through these meetings, the family members come together often (at least once a
month), and the extended family at least once a year or more. This brings the
family closer and builds a stronger family unit.
Another huge benefit of the family bank is access to and control of money. The ever
growing amount of money in the family bank gives the family peace of mind knowing
they have financial security in the event of an emergency. Beyond that as well, it
gives

the family access to money for major discounts and good deals, and access to such
money quickly.
Additionally, by using specific vaults, some of the money can be used to grow in a
tax- advantaged environment earning 4% to 8% which the family can borrow against
while the money keeps growing. Talk about using money efficiently. The average
American with a college degree makes $2.1 million over their career. Approximately
25% of that amount goes towards interest alone, not principal and interest but
interest alone.
By having the family bank, that interest can be recaptured into the family bank and
not paid to some third party financial institution. Every family member, including
you, each child, each sibling, and your parents can have their interest over their
lifetime recaptured into one place. The amount of interest that is being paid out
to third party lenders that can be recaptured into the family bank is massive.
The family bank also has some pretty advanced features which make sure the amount
of money in it keeps growing with every generation, beyond what we have discussed
here. This is beyond the scope of this book.
▪ Velocity of money increases your returns and allows your money to grow
exponentially.
▪ Where to Start?
This book’s objective was to introduce you to a new method of investing. It can be
overwhelming since a lot of it goes completely against what we have been taught. So
the question is where to start?
The best first three things to do are the following:
1. Start and build your family bank. Keep it simple. Don’t complicate it.

2. Practice by analyzing portfolios and identifying what can be done to move to the
“Receiving” side of the WealthQ.
3. Read this book again.
▪ Chapter Summary
▪ Move to the right side of the Wealth Equation
· The four forces we discussed in the book are Inflation, Interest, Taxes and
Opportunity Cost. Make them work for you.
· Become educated on how to use debt correctly. Become a “Debt Millionaire.”
▪ When writing the story of your life, don’t let anyone else hold the pen.” ▪ Don’t
make money the measure of your success.
▪ A Few Debt Metrics
In this chapter, we will briefly discuss a few metrics related to debt. These
metrics will allow you to start to learn how to measure debt. Before learning to
control and make debt work for you, you need to understand and measure it.
Interest Rate
According to InvestorWords.com:
“A rate which is charged or paid for the use of money. An interest rate is often
expressed as an annual percentage of the principal. It is calculated by dividing
the amount of interest by the amount of principal.”
When buying for appreciation, consider keeping the interest rate on the debt lower

than the projected appreciation rate on the asset. This is not required, but it is
recommended.
Cost of Debt
According to Investopedia.com:
“The typical metric to measure “cost of debt” is the interest on the debt. For
example, a 5% interest loan means the cost of the debt is 5%. However, one should
also consider any tax implications.
To obtain the after-tax rate, you simply multiply the before-tax rate by one minus
the marginal tax rate (before-tax rate x (1-marginal tax)).”
Loan Constant:
According to Investopedia.com:
“An interest factor used to calculate the debt service of a loan. The loan
constant, when multiplied by the original loan principal, gives the dollar amount
of the periodic payment.”
The annual loan constant is used when using debt to buy income-producing assets.
The income coming in from the asset (measured as the capitalization rate) is
compared with the loan constant and the difference is what generates “passive
income.”
Also, the loan constant is a measure of risk. A lower loan constant represents a
lower risk since it offers more flexibility. A higher loan constant is an
indication of higher obligation for the investor, which results in a higher risk
loan.
Loan Term:
This is the time period over which a loan agreement is in force. Before or at the
end of
▪ the period the loan should either be repaid or renegotiated for another term.
You should match your loan terms to your exit strategy. For example, if you want to

buy an asset, hold it for ten years and sell at the end, then your loan term should
be ten years or longer.
Amortized Loan:
A loan with scheduled periodic payments that include both principal and interest.
For amortized loans, in general, you want to have them amortized for as long as
possible. A 30-year amortized loan is much better than a 15-year amortized loan in
many ways. Interest-Only Loan:
A type of loan in which the borrower is only required to pay off the interest that
arises from the principal that is borrowed. Because only the interest is being paid
off, the interest payments remain fairly constant throughout the term of the loan.
However, interest-only loans do not last indefinitely, meaning that the borrower
will have to pay off the principal of the loan eventually. Interest-only loans
typically have the lowest loan constants.
Points:
Points mainly come in two varieties: origination points and discount points. In
both cases, a point is equal to 1% of the total amount mortgaged. For example, on a
$100,000 loan, one point is equal to $1,000. Origination points are used to
compensate loan officers. Discount points are similar, but are there to compensate
the lender as prepaid interest.
Fixed-Interest Rate:
An interest rate on a loan, that remains fixed either for the entire term of the
loan or
for part of this term. Fixed-interest rate are usually better than adjustable rates
due to the uncertainty with adjustable rates. Furthermore, fixed-interest rates are
a better hedge for inflation as mentioned in this book.
Adjustable Rate Mortgage (ARM):

A type of loan in which the interest rate paid on the outstanding balance varies
according to a specific benchmark. The initial interest rate is normally fixed for
a period of time after which it is reset periodically, often every month. The
interest rate paid by the borrower will be based on a benchmark plus an additional
spread, called an ARM margin. An adjustable rate mortgage is also known as a
“variable-rate mortgage” or a “floating- rate mortgage”.
The Wave Machine: Debt magnifies returns and risk
▪ the period the loan should either be repaid or renegotiated for another term.
You should match your loan terms to your exit strategy. For example, if you want to
buy an asset, hold it for ten years and sell at the end, then your loan term should
be ten years or longer.
Amortized Loan:
A loan with scheduled periodic payments that include both principal and interest.
For amortized loans, in general, you want to have them amortized for as long as
possible. A 30-year amortized loan is much better than a 15-year amortized loan in
many ways. Interest-Only Loan:
A type of loan in which the borrower is only required to pay off the interest that
arises from the principal that is borrowed. Because only the interest is being paid
off, the interest payments remain fairly constant throughout the term of the loan.
However, interest-only loans do not last indefinitely, meaning that the borrower
will have to pay off the principal of the loan eventually. Interest-only loans
typically have the lowest loan constants.
Points:
Points mainly come in two varieties: origination points and discount points. In
both

cases, a point is equal to 1% of the total amount mortgaged. For example, on a

$100,000 loan, one point is equal to $1,000. Origination points are used to
compensate loan officers. Discount points are similar, but are there to compensate
the lender as prepaid interest.
Fixed-Interest Rate:
An interest rate on a loan, that remains fixed either for the entire term of the
loan or
for part of this term. Fixed-interest rate are usually better than adjustable rates
due to the uncertainty with adjustable rates. Furthermore, fixed-interest rates are
a better hedge for inflation as mentioned in this book.
Adjustable Rate Mortgage (ARM):
A type of loan in which the interest rate paid on the outstanding balance varies
according to a specific benchmark. The initial interest rate is normally fixed for
a period of time after which it is reset periodically, often every month. The
interest rate paid by the borrower will be based on a benchmark plus an additional
spread, called an ARM margin. An adjustable rate mortgage is also known as a
“variable-rate mortgage” or a “floating- rate mortgage”.

Wealthy Code (Highlight: 103; Note: 0) ───────────────

▪ CHAPTER 1 - Summary
• Have enough passive income to pay for your expenses.
• You need to understand how to control, measure, and build wealth.
• Aim to become wealthy before worrying about being rich.
• Read Robert Kiyosaki’s book, Rich Dad Poor Dad.
• Focus on how to build wealth without using any specific investment vehicle.
▪ Remember:
Wealthy = enough passive income to cover all living expenses and losses incurred by
negative cash flow from assets in the Appreciation column.
▪ CHAPTER 2 - Summary
Understand the “Big Picture of The Wealthy.”
• Which column are you playing in today?
• Focus on the Cash Flow and Appreciation columns.
• Don’t get stuck in the Cash Influx column.
• Replace the “job” in the Cash Influx column with one or more of three things:
1. Keep your daytime job.
2. Systemize one of the strategies under the Cash Influx column and turn it into a
business that does not depend on you being there every day.
3. Learn to raise OPM (Other People’s Money).

• Understand that wealth comes from cash flow. Cash flow comes from arbitrage (or
spreads). Arbitrage comes from leverage.
▪ Financial leverage is what we use to control an entire asset using a small amount
of money.
▪ CHAPTER 3 - Summary
• Financial leverage = Use of borrowed money.
• No leverage = Use of all cash; no borrowed money.
• Positive leverage = Leverage is positive if the investment return increases with
the use of borrowed money compared to the return without the borrowed money.
• Neutral leverage = Leverage is neutral if the investment return does not change
with the use of borrowed money compared to the return without the borrowed money.
• Negative leverage = Leverage is negative if the investment return decreases with
the use of borrowed money compared to the return without the borrowed money.
• As wealth builders, we want to use positive leverage in our investments.
• The key is to understand that positive leverage applies to assets you are buying
for the Cash Flow column and that long-term holds for the Appreciation column.
▪ Measuring Leverage
Compare all-cash return (x%) with financed return (y%).
▪ NOI = Income – Expenses
▪ CHAPTER 4 - Summary
• To measure leverage, you must measure returns.
• Cash-on-cash return = annual cash flow/money invested.

• Leverage has an effect on the return of an investment.

• The return of an unleveraged investment must be compared to the return of various
leveraged scenarios to determine which one to use.
▪ What you want each and every purchase to do for you. Borrow money at a lower
rate, and get a spread (or arbitrage) that will provide you with passive income.
▪ To reiterate, when you make any purchase, you need to measure the cap rate and
the loan constant to get the best spread. That is the essence of an income property
or business.
▪ To maximize cash flow, and ultimately wealth, you need to be able to measure the
cap rate of an asset (property) and the loan constant of the leverage. This allows
you to calculate your spread.
▪ Your loan constant is a measure of your annual cash outflow.
▪ loan constant is the annual cash going out of your pocket, regardless of how much
principal or interest, divided by the loan amount.
▪ Loan constant = Annual loan payment/Loan amount
▪ Anytime you are dealing with borrowed money that is being used to buy an asset
that generates cash flow, always calculate the loan constant.
▪ Anytime you’re buying for cash flow (for a spread) you need to look at the cap
rate of the asset you are buying and the loan constant of the leverage you are
using.
▪ Assets are to cap rates as leverage is to loan constants.

▪ The property price and the NOI

(Net Operating Income) are very important in determining the cap rate.
Cap rate = NOI/Price
▪ The greater the spread, the greater the cash flow, and the greater the return.
▪ Compare the cap rate of the asset with the loan constant of the borrowed money
(leverage). The loan constant must be lower than the cap rate, and then you can
look for the best (highest) spread in order to maximize cash flow.
▪ Remember this: No matter what building you are buying, if your primary objective
is to develop cash flow, you have to look at both cap rate and loan constant.
Forget what the real estate agent might tell you about not using cap rates.
This is how cash flow is generated!
▪ CHAPTER 5 Summary
• Leverage affects four components:
1. Cash Flow
2. Equity buildup
3. Tax
4. Appreciation
• We focused on the effects of leverage on cash flow alone.
• You can use leverage to create a nice cash flow stream.
• To use positive leverage, make sure the cap rate of the asset is higher than the
loan constant of the leverage.
• The higher the spread, the more passive cash flow you can put in your pocket.

• The result of this positive leverage allows for higher cash-on-cash return and
passive income. • The larger the spread, the higher the cash-on-cash return.
▪ To maximize our return from appreciation, interest rate on the leverage should be
less than or equal to the projected appreciation rate.
▪ In summary, to maximize building equity, use leverage. Buy in traditionally
appreciating areas. Also buy the right property types, such as single-family homes.
Try to use an interest rate that is the same or lower than the projected
appreciation rate. Be careful to keep an eye on the loan constant, because a higher
loan constant is a higher-risk loan.
The Wealthy Code
Loan constant is less than cap rate. Interest rate is less than appreciation rate
▪ Loan constant is less than cap rate. Interest rate is less than appreciation
rate.
▪ CHAPTER 6 - Summary
• Appreciation compounds. This is a very important point.
• Compounding appreciation allows us to buy a property using leverage with fixed
payments while the asset (property) grows in a compounding manner.
• Use the Simple Leverage Loan Calculator to figure out the numbers.
• It’s ideal to borrow money at an interest rate less than or equal to the
projected appreciation rate.
• You can still borrow money at an interest rate that’s higher than the projected
appreciation rate, but it will take a number of years to break even.
Beyond that, though, it starts working for you.

• To maximize your appreciation return, buy in traditionally appreciating markets.

Buy property types that have better appreciation, such as single-family homes.
Condominiums and high-end homes do not perform as well, depending on the market.
▪ You want the loan constant to be less than the cap rate and the interest rate to
be less than the projected appreciation rate. This is what every savvy investor
strives for. Yet, most investors I speak to these days have no clue what I’m
talking about when I use these terms or talk about these concepts. It’s extremely
important that you know what you’re looking for and that you start using leverage
in the right way.
▪ leverage is less than property Loan Constant Rate
Interest Rate
Interest Rate
Capitalization Rate Capitalization Rate Projected Appreciation Rate
▪ CHAPTER summary
• Make sure that deals fit your criteria, and match the leverage effects on the
profit centers to your goals.
• You can choose leverage that maximizes cash flow over appreciation; you can also
choose the opposite. And, with the right kind of leverage, you
can maximize both cash flow and appreciation.
• If you’re not sure where to begin, start with cash flow. Savvy investors start by
generating cash flow first.

• The perfect leverage is when the loan constant is less than the cap rate and the
interest rate is less than the projected appreciation rate.
▪ “Cover the downside and let the upside take care of itself.”
▪ For the savvy, building wealth is not risky. It’s not risky because they invest
and manage risk.
▪ The greater change there is (up and down on the chart) the greater the risk.
“Volatility” refers to the amount of
uncertainty or risk about the size of
changes in a security’s value.
– INVESTOPEDIA.COM
v
More leverage can lead to higher returns (if positive leverage).
More leverage also leads to more volatility. More volatility leads to more risk.
More volatility also leads to more fluctuation in cash flow.
More fluctuation in cash flow leads to more fluctuation in returns.

▪ “Volatility” refers to the amount of uncertainty or risk about the size of

changes in a security’s value.
– INVESTOPEDIA.COM
▪ So in summary, leverage magnifies returns, which in turn magnifies volatility.
That in turn reflects an increase in risk. The goal is to find a stable asset that
appreciates steadily over time with little volatility and that has consistent
income stream.
▪ Spread Risk
Remember that cash flow comes from spreads, or arbitrage, and arbi- trage is a
leveraged strategy. Anytime you talk about spreads, especially when you have small
spreads, make sure you control both ends of the spread: the loan constant and the
performance of the asset (the cap rate).
▪ Controlling both ends of the spread becomes important, and both
ends of the spread are important risks to control. Here is a simple way
to control the risk. Make sure you minimize volatility on both ends.
That means you want to have little or no fluctuation on either end.
In a perfect world, both the loan constant and the cap rate will be
fixed for 30 years. This guarantees your spread for 30 years. But, alas, not
everything is that perfect.
So what do you do? Here are a few things to consider.
• Make sure the loan constant is either fixed (by getting a fixed-rate loan)

or based on a stable index, such as the London Interbank Offered Rate – LIBOR. The
LIBOR is a daily reference rate based on the interest rates at which banks borrow
unsecured funds from other banks in the London wholesale money market. This is
important because it is also the rate upon which rates for many other borrowers are
based.
▪ Basically, anytime you can get a fixed-interest-rate loan, get it. If you can
only get a variable-interest loan, get one that adjusts less frequently (maybe once
a year) and is based on a stable, minimal-fluctuation
index. This allows you to control one end of the spread.
• To control the other end, the cap rate, make sure the asset you’re buy- ing is
also stable or has minimal volatility. I pointed out earlier that
real estate is not a volatile asset. However, even within real estate, there are
factors that can make it more or less volatile. Understanding these factors becomes
very important. Here are a few tips to keep the cap rate stable:
– The more units, the better. For example, in a single-family home,
if a tenant moves out you have 100% vacancy and no income.
That makes your cap rate drop! In a 100-unit building, if 1 person
leaves, you have 99 other occupied units. So the more units there
are, the more stable the cap rate.
– A bigger spread is better than a smaller spread. That gives you more “cushion” to
absorb greater volatility. The wider the spread, the
higher the cash-on-cash return and the better able you are to
absorb the volatility. The smaller the spread, the lower the cash-

on-cash return and the less able you are to absorb the volatility.
– Make a larger down payment (which affects returns negatively but which gives you
a more stable building). A bigger down payment
means less leverage.
– Good management keeps vacancy low and a stable cap rate.
– Buy in a stable area and job market with diverse industries, along
with a larger population.
– For others assets, a stable history of performance (for the past 25 yrs.). –
Structuring better OPM. Should you borrow the down payment
or invite people to be equity partners? How does this affect risk?
I’ll explain this in more detail in the next chapter.
▪ sically, anytime you can get a fixed-interest-rate loan, get it. If you
can only get a variable-interest loan, get one that adjusts less frequently (maybe
once a year) and is based on a stable, minimal-fluctuation
index. This allows you to control one end of the spread.
• To control the other end, the cap rate, make sure the asset you’re buy- ing is
also stable or has minimal volatility. I pointed out earlier that
real estate is not a volatile asset. However, even within real estate, there are
factors that can make it more or less volatile. Understanding these factors becomes
very important. Here are a few tips to keep the cap rate stable:
– The more units, the better. For example, in a single-family home,
if a tenant moves out you have 100% vacancy and no income.
That makes your cap rate drop! In a 100-unit building, if 1 person

leaves, you have 99 other occupied units. So the more units there
are, the more stable the cap rate.
– A bigger spread is better than a smaller spread. That gives you more “cushion” to
absorb greater volatility. The wider the spread, the
higher the cash-on-cash return and the better able you are to
absorb the volatility. The smaller the spread, the lower the cash- on-cash return
and the less able you are to absorb the volatility.
– Make a larger down payment (which affects returns negatively but which gives you
a more stable building). A bigger down payment
means less leverage.
– Good management keeps vacancy low and a stable cap rate.
– Buy in a stable area and job market with diverse industries, along
with a larger population.
– For others assets, a stable history of performance (for the past 25 yrs.). –
Structuring better OPM. Should you borrow the down payment
or invite people to be equity partners? How does this affect risk?
I’ll explain this in more detail in the next chapter.
▪ The spread I’ve been mentioning so far is the cap rate and the loan con- stant.
There is another corresponding spread: the difference between the net operating
income (NOI) and the annual debt service (the annual loan payment).
▪ What does the 1.50 mean? Let’s start with the term “cushion.” The correct term is
Debt Coverage Ratio (DCR). So let’s figure out what

this number means.

Refer to the diagram above. The 1 in the 1.50 is the money that goes
to the lender. This is the mortgage payment. Any number higher than
1 is the portion that goes into your pocket and is a measure of how much more money
you’re keeping than what you’re paying the lender. So, in our example, the 50 in
1.50 means we’re making 50% more money than what we’re paying the lender.
The DCR must exceed 1.0 for the asset to make the mortgage payment. A DCR of 1.20
means we’re making 20% more than what we’re pay-
ing the lender. This corresponds to the spread between cap rate and the loan
constant but isn’t the same.
A DCR of 0.75 means we’re losing money. The asset isn’t generating enough money to
make the mortgage payment. The asset is covering only 75% of the mortgage payment.
We have to come out of pocket (the remaining 25%) to cover the mortgage payment.
So, essentially, when we talk about a wider spread, we’re talking about the DCR
being a higher number.
The higher the DCR, the higher the spread and the more volatility
we can absorb. A DCR of 1.40 is better than 1.10. This tells us there’s
a 40% cushion and a wider spread; 1.10 tells us there’s a 10% spread
(or cushion).
A comfortable DCR we should aim for varies with the volatility of
the asset. A highly volatile investment requires a higher DCR.
▪ You might wonder if the spread between the NOI and the mortgage pay-

ments replaces the previous spread of the cap rate and the loan constant. It does
not. The cap rate and the loan constant spread tell us if something is positive,
neutral, or negative leverage. The NOI and the mortgage pay- ments spread tell us
if we have positive or negative cash flow. There is a big difference. This is where
more than 95% of investors fail!
You can have positive cash flow with negative leverage (due to a big down payment).
And you can have neutral leverage and still have pos- itive cash flow. You really
need to consider both spreads.
▪ Debt Coverage Ratio is a measure of
the spread between NOI and debt service (loan payments). It tells us how much more
money we keep than we pay the lender. We refer to it as the “cushion.”
DCR = NOI/Loan payments
▪ The Simple Leverage Loan Calculator calculates the DCR for you.
▪ CHAPTER summary
• Risk is tied to volatility. The higher the volatility, the higher the risk. The
lower the volatility, the lower the risk.
• In many cases, the standard deviation is used to define volatility. So, once
again, the higher the standard deviation, the higher the risk, and vice versa.

• Leverage increases potential returns, but it also increases volatility, which in

turn increases risk.
• Leverage also increases potential losses because of the same increase in
volatility and risk.
• An investment being risky is not the same as managing the risk of an investment.
Savvy wealth builders manage risk, but they are not being risky.
• Debt Coverage Ratio (DCR) is a measure of the spread between NOI and debt service
(loan payments). The DCR tells us how much more money we keep than we pay the
lender. We refer to it as the cushion.
• With a DCR of 1.30, for instance, the 1 in 1.30 is the money that goes
to the lender; the .30 is the 30% more that goes into our pocket than
what we pay the lender.
• A “comfortable” DCR we should aim for varies depending on the volatility of the
asset. A minimum DCR to aim for in real estate is 1.20.
▪ There are three basic possibilities for structuring OPM: • Debt financing
• Equity financing
• Combination
▪ Safer Structure
In general, whenever you’re raising capital for new projects, offering equity
rather than debt financing is safer for you. The investor putting up the capital
shares in the upside — and the downside — of the project.

▪ , the more leverage you have,

the more volatility you incur and, as a result, the more risk. So by using debt
financing for the down payment, you’re increasing volatility and, therefore, risk.
So choose equity financing for a less volatile and, therefore, safer deal.
▪ If you use debt financing for the down payment, you increase volatility and risk.
If you use equity financing for the
down payment, you choose the safer and more stable route.
▪ Savvy investors cover the downside and let the upside take care of itself. With
that in mind, savvy wealth builders raise capital by offering equity in the deal.
This allows for a much more stable asset while cov- ering the downside. The upside
will take care of itself.
▪ To summarize, when raising capital for down payment, remember this: Getting
equity partners allows for a more stable building. You keep the volatility under
control. Your equity partners act as the cushion. And borrowing the down payment
adds more volatility to the deal.
▪ CHAPTER summary
• Step 1: Calculate your cash-on-cash return for the down payment.

• Step 2: For equity financing, give 50% or less.

• Step 3: For debt financing, borrow money at a lower rate than the cash- on-cash
return.
• For down payment, always go with equity financing, not debt financing. • Get
comfortable calculating your — and the investors’ — portion of the cash flow when
raising debt or equity financing.
▪ he “Best” Leverage
▪ Equity in a house is a bad investment. It sits there and does nothing for you.
▪ Lesson 1:
There is a risk relationship between the borrower and the lender.
Lesson 2:
Paying down your mortgage shifts risk
to the homeowner and away from the lender, and your return on that additional
payment is 0%.
▪ Lesson 3:
The best use of your money is
to not pay down your mortgage with additional payments; rather, invest that

money into acquiring more assets!

▪ Lesson 4:
A 15-year amortized loan is
built into a 30-year amortized loan.
A 30-year amortized loan is built into a 40-year amortized loan. All of those in
turn are built into an interest-only loan!
▪ A 15-year amortized loan is
built into a 30-year amortized loan.
A 30-year amortized loan is built into a 40-year amortized loan. All of those in
turn are built into an interest-only loan!
▪ Lesson 5:
In most cases, the best mortgage for investors is a loan with the lowest loan
constant.
Lesson 6:
To pick the right loan, you need to identify the lowest cost of money for you over
the years.
▪ Sometimes it makes sense to pay the buy-down points because, in

the long run, it ends up costing you less — much less. The key is to ask yourself
this: What is my exit strategy, my plan for the property? Do I want to sell it in 5
years? Do I want to hold on to it for 20 years as a rental property? Is this for
cash flow? Do I want the least costly loan? The answers to all these questions will
help you decide whether or not to purchase buy-down points.
Remember, as a savvy wealth builder, you should use leverage to build wealth, and
you need to become efficient in using leverage.
▪ paying down your mortgage is shifting risk away from the lender and towards
yourself.
▪ Lesson 7:
Buy-down points might benefit you. Analyze the numbers and find out.
▪ Lesson 8:
To pay off your mortgage fast,
use the Debt Management System.
▪ The Golden Rule:
Those who have the gold make the rules.
▪ Here are some related “truths”: • Americans don’t save money.

• We’re used to spending everything.

• As a result, someone else must provide the capital necessary to sustain our way
of life. This strategy carries with it a very high cost, because those with the
capital make the rules, and we all suffer the conse- quences! Look around you. Who
has the money? They are the ones making the rules we have to live by.
• When someone has a large amount of cash on hand, all sorts of good opportunities
appear, and very favorable purchase prices can be nego- tiated. When you are the
one who holds the cash, you are the one
who can make the rules.
• Equity can be lost (as many are finding out). Equity means nothing until it is
converted to cash or cash flow.
▪ Capital is King!
It’s about Control!
Don’t forget “The Golden Rule.” When you have a chance to hold cash versus equity,
cash is always King!
▪ HELOC is best used for:
• Short-time deals (less than a year).
• Arbitrage (short-term; e.g., lending).
• Turning money fast (the “velocity of money”) for buying a property at under
market value, refinancing, and then paying back the HELOC.
• Buying undervalued assets for quick turns when you’re not going to

hold onto it. Do not use a HELOC for a down payment, because HELOCs have an
adjustable interest rate, and the investment has a fixed capitalization rate, as
explained in previous chapters. HELOCs translate to variable loan constants. We
need to manage risk — also explained in previous chapters.
Mortgage is best used:
• To fix the cost of money and loan constant
• For down payment on other positive-leveraged assets • For appreciating assets
• For long-term arbitrage
• For “buy and hold” strategy
▪ Lesson 9:
One of the fastest ways to a high net worth is through the use of the right
leverage
and by using the “power of finance”
to pay it off!
Lesson 10:
Match the investment to the type of vehicle you will use to extract your money from
the equity (HELOC or mortgage).
▪ The Mortgage Team
• You need to have a good mortgage broker on your team. • The broker needs to
understand your goals.

• The broker needs to understand everything in this book.

• Brokers will resist, but you need to share your knowledge by exposing them to
this book.
• Your broker probably will dismiss this information to justify their position! It
usually takes me three times longer to get through to bro- kers because of their
resistance to listening! And they need to know this stuff. I estimate that 99% of
investors and mortgage brokers have not heard of a loan constant.
▪ One simple decision affects your economic future. Choose the right broker.
▪ CHAPTER summary
• Lesson 1: Understand there is risk relationship between the borrower and the
lender.
• Lesson 2: Paying down your mortgage shifts more risk to the homeowner and away
from the lender, and your return on that additional payment is 0%. • Lesson 3: The
best use of your money is to not pay down your mortgage with additional payments;
rather, invest that money into acquiring more assets!
• Lesson 4: Recognize that a 15-year amortized loan is built into a 30-year
amortized loan, which is built into an interest-only loan!
• Lesson 5: In most cases, the best mortgage for investors (for cash flow)
is a loan with the lowest loan constant.
• Lesson 6: When you pick the right loan, you need to identify the lowest

cost of money for you over the years.

• Lesson 7: Buy-down points might benefit you. Analyze the numbers and find out.
• Lesson 8: To pay off your mortgage fast, use the Debt Management System. • Lesson
9: One of the fastest ways to a high net worth is to select the right leverage and
use “the power of finance” to pay it off!
• Lesson 10: Match the investment to the type of vehicle you will use to extract
your money from the equity (HELOC or mortgage).
• Pick a mortgage team that understands the concepts in this book.
• The type of loan you want has the lowest:
1. Loan constant
2. Risk
3. Interest rate
▪ What do you think is the fastest way to make $1,000,000?”
I knew the answer to that, but I went for the joke instead. “Marry a rich woman?” I
said with a straight face. “Rob a bank? Borrow enough money to make it?”
“Bingo! The fastest way to make $1,000,000 is to use leverage to
buy assets worth 10 to 20 times the money you want to have,” he laughed. “Problem
is, most people are uncomfortable getting into that much debt. But that’s the way I
became wealthy. And you can, too. Anybody can.”
▪ I finally “got it”! And I can explain what “it”

is using these statements:

• The fastest way to get out of the rat race is to use leverage — the right kind of
leverage.
• Wealth comes from creating safe spreads that generate nice cash flow monthly.
▪ • Leverage can make you wealthy if you know how to use it, measure it, and manage
it. Leverage can be positive, neutral, and negative.
The wealthy use positive leverage to become wealthy.
• The wealthy understand how to manage risk and never do risky things. They also
know when to use debt financing and when to
use equity financing. They understand risk and how to share it and shift it.
▪ Remember TIMMUR? Taxes, insurance, manage- ment, maintenance, utilities, and
repair.
▪ Interest-only mortgages are good because they have the lowest loan con- stants.
The lowest loan constants result in the biggest spread, which means the best cash
flow. What people need to realize is that loans with low loan constants are the
least risky loans. The loans with the highest loan constants are the highest risk
to the homeowner. With interest-
only loans, you minimize risk and maximize cash flow and appreciation. You’re still
building appreciation while minimizing risk!

▪ CHAPTER summary
• Understand leverage and use it. You’ll be on your way to joining the wealthy.
• Ignore ignorant statements in the media. Becoming wealthy is more pos- sible than
ever. It’s been proven throughout history. It boils down to understanding The
Wealthy Code.
▪ Cash flow comes from arbitrage (the spread between inflow of cash and outflow of
cash). There are three kinds of arbitrage:
• Pure (or true)
• Near
• Speculative
The first of these three is the pure, “riskless,” version (according to
the definition of “arbitrage” at investopedia.com). The second kind, or “near
arbitrage,” is almost risk-free, but the risk is manageable. The third
▪ kind is “speculative arbitrage,” or more-risky arbitrage.
▪ For example, buy a building for $2 million using leverage where the loan constant
is lower than the cap rate or when the building is paying you more than what you
are paying the lender. Perhaps the building pays you 9% annually, you pay the bank
7%, and you make a 2% spread.
You keep the spread (the arbitrage). That gives you the cash flow.
Here’s another example. To get an apartment building you decide to borrow 75% from
the bank (at the rate of 7.5%) with a 10% loan from

the seller at 7% (also known as “seller financing”), and the property has a 9% cap
rate. You created positive leverage off both the lender’s and the seller’s money.
▪ NOI = Net Operating Income NOI = Income – Expenses
Cap Rate = NOI/Building price
▪ Wealth is nothing more
than a financing game!
It’s not about the real estate. It’s about the ability to use the real estate as
collateral to generate financing — and a spread.
▪ As a wealth builder, you will need to answer these questions:
• Where can I get financing?
• What collateral do they want?
• Is this collateral (or asset) going to pay more than the bank financing? • Can I
manage the risk associated with this spread?
That’s what building wealth is all about! It’s just a financing game.

▪ The Three-Step Process to a Six-Figure Income

1. The bank finances your life insurance policy with little money out
of your pocket. They will need some additional collateral in the
first several years.
2. The policy pays the bank at the end of the 10 years or according
to how and when the initial set-up structure was designed to pay
back from the accrued interest and principal — all without you
making monthly payments.
3. You receive annual six-figure payments for the rest of your life,
until the ripe old age of 120 years.
When I plugged in the numbers and ran this scenario for a 40-year-old man, after 10
years his income ran about $400,000 per year for the rest of his life!
Here’s another dramatic example of this type of funding vehicle. A 27-year-old
professional ball player, who could afford to self-fund with $200,000 for 5 years,
is projected to consistently receive some $155,000 per year, tax-free, starting at
age 40 until age 120, at which point he would have more than $166,000,000 in cash
left over! Yes, it’s true. Read that number again: $166 million after receiving
$155,000 per
year, tax-free, for 80 years!
▪ The key to recognize here is that there are many ways to build wealth.
You have a choice. Get educated and do it!

▪ The main lesson of this book is that wealth is nothing but a financing game!
▪ “This is amazing! I didn’t realize you could create arbitrage from so many
things! Which one do you prefer?” I asked my mentor.
“It depends what you focus on. You can become an expert with one vehicle. You can
expand to more. I use income properties and insurance arbitrage. Some of my wealthy
friends use businesses. Others use private lending. They’re all wealthy. It depends
on your interests. But keep in mind that the vehicle doesn’t matter much, as long
as you understand that it’s a financing game. The reason you focus on one or two
vehicles,” he continued, “is so that you can then manage the risk better by under-
standing the risk factors.”
▪ I hope you recognize how much you have learned already. The right education is
the key to building wealth!
▪ CHAPTER summary
• Here are a few vehicles we discussed:
Vehicle One — Income Properties
Vehicle Two — Private Lending
Vehicle Three — Insurance Arbitrage
Vehicle Four — Low-Tech Businesses
• The key to recognize here is that there are many ways to build wealth.

You have a choice. Get educated and do it!

• It’s not about real estate. It’s not about private lending. It’s not about life
insurance policies. It’s not about businesses. It’s about financing.
• I hope you recognize how much you have learned already.
The right education is the key to building wealth!
▪ Now, remember that equity, in and of itself, does nothing for you. You can’t eat
it. You can’t buy food with it. It only makes your net worth look good on paper.
You “grow” this equity to either swap into cash or to move into the Cash Flow
column.
▪ Building Equity Fast
Most people think that building equity takes a long time. You have to buy an asset
and wait for its value to appreciate over time, which could take forever. However,
there are strategies for wealth builders to choose that will speed up the process.
• Build immediate equity by buying assets under market value. For example, buying a
$400,000 single-family residence for $320,000,
earns — immediately — $80,000 in equity. Then turn the equity
into cash flow.
▪ • Pay down the mortgage on investment properties, but without addi- tional
payments. Use leverage and the Debt Management System
(see Resources section for more information). You can pay down the mortgage in one-
half to one-third the time without making addi-

tional interest payments. Everyone should be doing this!

• Time the market. Buy when everyone else is selling. This is probably
the best time to buy, but the hardest for people to do. The richest investors “buy
when there is blood on the streets.” They are known
as contrarian investors.
• Use leverage to maximize equity. We covered this in detail in Chapter 6. • Buy
the right property type. Single-family residences appreciate faster and better than
condos. Condos appreciate last in a good market and drop first in a bad market.
Also, avoid high-end homes. Stick to sin- gle-family homes in good neighborhoods
for best appreciation.
• Buy in traditionally appreciating markets. In California appreciation over the
past 25 years has maintained a steady 8%; nationwide, aver-
age appreciation for single-family residences is just under 6%. In California,
$10,000,000 worth of single-family residences will aver-
age $800k in equity per year.
Following are some more-advanced methods for experienced investors. Some of these
are covered in more detail in The Wealthy Code Inner Cir- cle. (Refer to the
Resources section.)
• Buy with seller financing. This is best for building appreciation with
0% or low-interest financing. Some 30% of America has fully paid
homes. This allows for seller financing.
• Equity Share. This is an advanced strategy. Buy a portion of a prop- erty. Be the
down payment partner, and let your partner carry the mortgage, or vice versa.
• Straight options. Real estate options are the fastest way to build

equity and cover the downside; option a property and “1031” the option without
“owning” the building. This method makes it possi- ble to build six-figure equity
fast; however, it is an advanced strategy.
▪ • Lease options. Lease option the property by tying it up at today’s price and
for an extended time frame. Use future equity to buy cash flow properties.
▪ It’s interesting that you say to use single-family homes for building equity fast
and not for cash flow. Many experts out there talk about buying them for rental
properties. You say not to use single-family homes for cash flow, but more for
building equity. You then use that equity to buy income properties such as
apartment buildings,” I observed.
“Well, single-family homes might provide cash flow in certain
areas,” my mentor acknowledged, “but they are actually bad cash flow vehicles. If
they do provide cash flow, that’s fine, but you should buy them as an equity-
building strategy. Do you have any rental properties for cash flow now?”
“Yes, quite a few,” I boasted. “In fact, I have them all over the United States. I
just bought some in Rochester, New York, for cash....”
“Sell them,” he interrupted. “Sell them.”
“Why? They’re cash-flowing $400 per month per duplex!”
“Sell them” he interrupted again, laughing. “Donald Trump says,
‘If you’re going to think, you might as well think big!’ Sell them.”

▪ I didn’t. I kept them. Eighteen months later, I learned my lesson. He was right.
I ended up selling them.
▪ CHAPTER summary
• Appreciation column is to grow equity and turn it into cash or cash flow. • To
turn equity into cash flow, move the equity from the Appreciation col- umn to the
Cash Flow column. Typically, you do this through the sale of the asset and the use
of 1031 exchange into the purchase of another
asset in the middle column.
• There are strategies that allow you to build equity fast. You don’t have to wait
for appreciation alone.
▪ Wealth pairs generate cash flow; equity pairs generate equity.
Each wealth pair consists of two things: leverage and the income- producing asset,
where the asset generates more than the financing costs — i.e., positive leverage.
▪ wealth pair could be an apartment building and the leverage that goes along with
it to create a spread, generating cash flow into your pocket. Below is an expanded
view of what you would find in a wealth pair.
A wealth pair could also be a private lending deal and the leverage that goes with
it to put that income stream from the spread into your pocket. It could be the
insurance arbitrage (future income) I described earlier, using an asset to put the
money into your pocket in the future. It could be any of those.

Ultimately, you will end up with many wealth pairs.

▪ Each pair gen-
erates an income stream. For some, the income stream will be consistent, others
will increase over time, while still others will diminish over time. As a wealth
farmer you have to keep growing those wealth pairs.
▪ As a wealth farmer,
you grow wealth pairs and equity pairs. Wealth pairs generate cash flow
from the spreads.
Equity pairs generate equity to purchase wealth pairs in the future.
▪ CHAPTER summary
• As a wealth farmer, you grow wealth pairs and equity pairs.
• Wealth pairs generate cash flow from the spreads.
• Equity pairs generate equity to purchase wealth pairs in the future.
• As a wealth farmer, you’re always looking at your portfolio of crops — both
wealth pairs and equity pairs.
▪ “Wow! This is a lot of information!”
“Before long it will be second nature to you!” my mentor assured me. “It’s like
riding a bicycle. Before long, you don’t even have to think about it. The
unfortunate thing is that many people don’t know that this

information is the foundation to wealth. There’s a lot more, of course, but every
investor needs to know this much before doing anything.”
▪ The Wealthy Code boils down to a financing game. It’s not about real estate. It’s
not about the stock market. It’s none of that. It’s purely a financing game. Find
an asset that generates cash flow; find a way to borrow against it using positive
leverage; identify the volatility of the income and manage that risk; and, finally,
structure the right down pay- ment. Then move on to the next deal.

Pop Quiz
¢ Who holds the Promissory Note?
* Who holds the Security Instrument?
¢ What are the two types of Security Instruments in private lending?
¢ Which document gets notarized?
¢ When have you seen buyers and sellers fill out escrow instructions?
¢ Describe the role of an escrow company
* Describe the role of a title company
* How does a servicing company makes money?
¢ At close of escrow (COE), what do the different parties get and what do they give
up? — Borrower
— Lender
Calculate The LTV
* Value = $100,000
¢ Loan 1 = $35,000
¢ Loan 2 = $15,000
* Borrower asking for new 2" loan for $20,000
¢ Q: What is new CLTV?
¢ In LTV, which do banks use for value (Appraisal or Purchase Price)? ¢ In LTV,
which do you use for value (Appraisal or Purchase Price)?
¢ Why is lending the down payment to a retail borrower a risky investment?

¢ Why is lending up to 65% of the value of the property in first position safer
than the above scenario? ¢ Whatis the difference between a “deed” and a “deed of
trust” or “mortgage”?
* Someone wants to walk away from their property and wants to give it to you. How
can they do that?
* How does hard money broker make money on private loans?
* How does private lender make money?
* How does private lender make sure loan is secure?
¢ What are the basic documents private lenders are looking for?
* Why do private lenders not care about borrowers credit as much?
* Is the deed of trust or mortgage recorded in any County Recorder's Office?

Underwriting Criteria

My Policies
The following will help mitigate many risks:
* Do mostly short term loans (1 year or less)
* Do NOO loans
* Do many small loans across many deals as opposed to larger loans across fewer
deals
¢ Make sure property always insured
* Stick to your LTV limit
¢ NEVER ever give borrower money directly!
¢ NEVER ever loan money without asking for appraisal & prelim
* If possible, drive by the house or get pictures from appraisal
¢ ALWAYS use an escrow/title company
¢ ALWAYS get lender's title insurance (borrower pays for this)
* Money should always go through escrow company
* ALWAYS be on borrower’s hazard insurance as loss payee
¢ ALWAYS know which lien position you are
* Use attorneys to draw up your forms, especially if “non-standard” terms
* Make sure loan broker hands you all signed disclosures for your record
¢ Usury laws change more often than we like, always be aware of new changes — use
an attorney that knows the usury laws
« Add your own policies
* Add your own policies to manage risk