080: How losing everything turned us into $200 million company
$200,000,000. That’s a whole lot of money. 🤑🤑
That’s how much assets under management we acquired in the last 4 years. That’s a lot for two girls who had no real estate background. How did losing everything turn us into a $200,000,000 company?
Let’s get started…
Four years ago, at a seeming snap of a finger, our high 7-figure fashion business was reduced to rubbles. Overnight our income dropped by 95% because our biggest client was shutting down all their department stores. 😞 At that time, we thought seeing the digits grow in our bank meant that we were successful, that we’ve made it.
What we didn’t realize at the time was that while we were making a lot of money, we were not building true wealth. You see money comes and goes and requires doing the thing, putting in the time, the grind, that hustle life. When you stop, it stops. When you are truly able to build wealth you are able to disconnect income generation from your time, and the flow of your income keeps growing 24/7 without your input.
Fast forward four years later zero to over $200 million in multifamily apartment assets. All this was possible because we discovered the five levels of leverage.Let’s take a look at all five levels that are working for us that we leverage to grow our company.
So what is leverage? 🤔
Before we get to the five levels of leverage, let’s first define what leverage is. Essentially, leverage means exerting small input and getting larger output. It helps you gain disproportionate strength or output for minimum input. When you lift a fridge, one person probably won’t be able to do it easily; however, if you use a dolly as a lever, one person can easily move the fridge with less effort. It’s science!
Leverage is natural law, it exists and is applicable to all things, from moving heavy objects to growing our wealth. While we all easily accept the concept of using leverage to move physical objects, for some reason when we are told we can grow our wealth using it as well people become weary and doubtful.
Why is that? 🤔
Sadly, most people have been misguided into believing that if you want more you have to do more. We all have 24 hours in a day, but some people seem to be moving further ahead with less effort. So let’s stop and ask ourselves what they are doing that we aren’t. Most people think they have to do the “right thing” so that they can get more money – think doctors, lawyers, and dentists. The reality is they will never become uber rich unless they transition to owning the right assets.
5 Levels of Leverage
So, what are the five levels of leverage? 🤔🤔
We like to think of these levels as ascending steps. Wealthy people will be effectively using multiple types of leverages at the same time. Think about multitasking at its finest.
1️⃣ The lowest level of leverage is labor.
This is having other people do the thing for you. This level requires you to grow your team as your company grows because it strictly utilizes the labor leverage. Think about when you first started your company, perhaps like Palm and I were a one-man or two-woman show. You did everything until you felt the need to hire help. This is easy leverage you will utilize. ✨✨
In our business of apartment syndication, operating massive multiple million dollar complexes can not be done by one or even two-person teams. We have a large professional team that supports all functions from acquisition to operations.
Have you ever heard of the CIA? No, not the intelligence agency. We are talking about those who belong to Control Issue Anonymous who think they have to go out and buy an apartment on their own because they need to control everything.
We love being in control. It’s a feeling of safety and security. 🥰 So while we wouldn’t agree with that path, we understand all the nuisances that are required for an apartment deal to perform at its peak. There is no way that one person can do this as a gig or a side hustle. Think about how as you scale and grow, there is so much you by yourself that you can do. If the two Steves took this route, the iPhone would never be so ubiquitous since the Woz would probably be still making each computer by hand in their garage, cracking out a few dozen per year.
2️⃣ On the next rung of the ladder, right above labor, is systems and tools.
This will help you resolve the need to add new employees as your business grows. At this point, you’ll introduce systems and tools that can reduce the manual workload. Nobody likes to do extra work, so get the right systems in place. 🙏🙏
But what kinds of systems are there? Systems can be management software that helps reduce redundancy and friction in business activities and functions. They can also help you measure KPIs or Key Performance Indicators for all aspects of the business that must be reviewed on a regular basis and presented to key stakeholders.
As asset managers in multifamily apartments, we constantly review KPIs like occupancy, budget vs actual vs variance, income and delinquency trends, etc. For our investors, we also utilize the most state-of-the-art investor portal so that their experience with our investments becomes the most seamless and intuitive as possible.
3️⃣ The next level of leverage that will help you grow your wealth is debt.
Yes, that’s correct – the four letter word that to the uninformed should never be uttered. But as we’ve mentioned many times before, there are two types of debt, bad debt which you consume, and good debt, which produces income. 😇😇
Leveraging good debt helps you juice up your return on investment. Think of it like a boost to your immune system.
Let’s say you want to buy a $10 million rental property – the property produces $1 million income per year. If you purchased this property all cash, your return would be 10% annual. Now if you took on good debt and you were able to borrow 80% and only fork out 20% of the purchase price, this means that you only invested $2 million, but you gain control over the $10 million assets. The asset still produces $1 million income per year, but since you only invested $2 million dollars, your return is now 50%. That’s a lot of math, but hang tight.
By using good debt, you are now able to invest the rest of your $10 million into additional assets. And assuming the other assets produce $1 million, you’ve now net $5 million dollars per year instead of $1 million. Sounds like a pretty good deal to me. 🤓🤓
Another side bonus of borrowing good debt is that when inflation is higher than the interest rate you are paying you are essentially getting free money. Who doesn’t like free money?
4️⃣ So far, the leverage we have talked about has helped you increase your income but let’s talk taxes.
We can be certain that Uncle Sam won’t let you walk away without you handing over a huge chunk to fill the government’s coffer. You simply have to leverage taxes!
As you grow your wealth, the trajectory will be choppy, because you are going to end up paying 30% to 40% to the IRS. This is unless you are able to leverage the IRS to pay fewer taxes. And who doesn’t want to pay less taxes?
We’ve all heard the famous phrase coined by Benjamin Franklin, “nothing is certain except death and taxes.” Well, we the Kitti Sisters say, “nothing is certain except tax benefits from apartment investing.” You can thank us later.
For the time being, we are able to get 60%, 70%, 80%, or even 100% tax benefits that offset any capital gains we get from our investment opportunities. There’s no other asset class that has such a great risk-adjusted profile while also providing this type of tax benefits. 🤩🤩
As a disclaimer, we are not CPAs and you must always consult with your tax and legal professionals for your specific financial and investment scenario.
Here’s a common example that we see happen time and time again.
An investor puts $100,000 into multifamily apartment syndication; the property in turn generates a $100,000 in depreciation loss reflected on the K-1 statement. Once the property is sold and returns 100% profit, instead of paying 20 to 30% to the IRS, the investor is able to use their paper loss to offset, in this case, all of their gains.
We want to share a simple example of how big of a difference your compounded gains can be with and without tax.
Imagine a scenario where your money doubles every day, starting with $1, the next day doubling to $2, then $4, etc. I know that personally, I love this fictional scenario! Through the magic of compounding, after two years, your money will turn into $1,048,576. That’s not bad, right? Well, what happens if the tax man gets his hands on 33% of it? That nice 7-figure windfall will turn into a whopping $28,000!!! That’s over a million dollar difference.
So when we say you must understand how to leverage the IRS to pay fewer taxes, the implication isn’t a few dollars, it can mean hundreds of thousands if not millions of dollars over a lifetime of investing. Think about it! 😉😉
5️⃣ Finally, the highest level of leverage is time.
We’ve said it often: time is our number one non-renewable resource. Once you get to the point where you can disconnect your income generation time, that is when you are truly wealthy.
So, what are some of the ways you can leverage time?
The first is to leverage other people’s time. 😘 In this case, we are talking about the 10,000+ hours general partners have spent to become experts in their field.
There is no more quintessential investment strategy that allows you to separate your time from your income generation than being a passive investor.
Passive investing as the name already states is passive. This means the investment’s performance is 100% not based on your efforts, in the acquisition, operation, or disposition. What asset class allows you to do 1% or less work on it but allows you to reap 80% of the net profit on your investment?
Imagine a typical scenario, where a passive investor spends 30 mins. on a discovery call, attending live masterclass, and/or grab starbucks coffee with a general partner and that’s another 1 hour or so. From there she spends another 1.5 hours watching an investment opportunity webinar, from there probably takes another 1 hours to review the numbers, complete the investment (aka subscription) docs, and wire the funds. In total that may take the investor 4 hours or so.
What other income source can you think of where 5 hours will net the same return? Certainly not 5 hours watching Netflix. 😅
If this property returns 100% on the investor’s $100,000, after 5 years the investors will receive $100,000 in return on their original principal plus $100,000 in profits. Guys, if done right their return is also tax free because they already leverage Uncle Sam to maximize their tax efficiency. What do you think the investor’s hourly rate is based on this investment? Let me help you – it’s a cool $20,000/ hour!
The entire time, they never had to lift a finger, talk to tenants, fix toilets, throw out trash or deal with termites. In many cases, they probably have never even been to the property at all. That’s the beauty of passive investing, where you gain the leverage of someone’s time and gain an outsized return in the process. 🤩🤩
Now sit back and imagine what would you do with the insane amount of hours you’d be able to reclaim. Use all five of your senses. What will you be doing? Where will you be? What sounds will you hear? What smells? And what tastes?
Guys, remember “No one ever looks back on their life wishing they had worked more, they wish they would have lived more.” 😉😉
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