EP195: Buy, Borrow, Die: Creates A Lasting Legacy

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Question for you!

Whaaat do generational wealth and avocados have in common? 🥑💵

Besides the obvious… that both of them definitely make life better. 

The answer is that the Hass Avocado origin story is actually a great example of how to build a lasting legacy that spans generations! 

Now, let’s be clear. 

As amaaaazing as avocados are on toast, the real star topic of today is how to build a lasting legacy of generational wealth with the Buy, Borrow, Die strategy! 

And no, this strategy isn’t as morbid as it sounds. 😂

Buy, Borrow, Die is just a financial formula for multiplying value over time, that turns into generational wealth. 

Have you ever noticed how the wealthy keep getting wealthier without constantly selling off their assets? It’s not magic, but the result sure makes us feel like they are working with some hocus pocus.

But here’s the thing, what they are doing can be summed up in three simple words: Buy, Borrow, Die. 💋

In today’s episode, we will explain what is Buy, Borrow, Die, how it works, and how to apply it to your situation, by the end we will throw in some cautionary tales to make sure you walk into this strategy with your eyes wide open.

In order to do this, let’s talk about the Hass avocado.  🥑

Ah yes, this fruit of the gods, not only is rich in nutrients, but interestingly all trees alive today originate from a single tree planted by a mail carrier named Rudolph Hass in La Habra Heights, California, in the 1920s. He patented the tree in 1935, and since then, the Hass avocado accounts for approximately 80% of all avocados consumed worldwide.

Just like every Hass avocado tree is a clone, grafted from its original, never grown from a seed, the buy, borrow, and die strategy lets wealth grow without selling the original investment. 

It’s like the first avocado tree’s legacy keeps growing through its clones, and the initial investment’s value keeps expanding without ever selling it. Ensuring the original’s value spreads and lasts for generations.

 

Source:  The Kitti Sisters TV

What is the Essence of Buy, Borrow, and Die?

This strategy revolves around the American tax system and its magic lies in its simplicity. It’s been around for over two decades, thanks to Professor Ed McCaffrey, who ingeniously summarized the complexities of the American tax system in this three-word phrase.

So Let’s unpack the Buy, Borrow, Die Strategy, shall we?

Whether you build generational wealth or not boils down to these three things:

1️⃣ What you buy

2️⃣ What you do with it

3️⃣ What happens to it when you die

The answer to these three points is the building block for generational wealth.

Buy

Buy/ Invest in assets that appreciate in value over time, such as:

• Stocks
• Real estate
• Art
• Fine wines
• Collectibles

While we give you a few examples here, the truth is there’s only one asset amongst these that truly fits this strategy like a glove and that is income-producing real estate.

One of the most important requirements for this strategy to work optimally is for the investment to check off these 5 boxes. 📦

And this isn’t some ivory tower theory either, we are actually using this exact strategy to build our generational wealth as well as the wealth for thousands of our investors.

One of the primary reasons we’ve managed to amass over $300 million in assets within a brief span of 5 years is due to our focus on income-producing real estate that checks off these five boxes.

Income Producing Real Estate

• Steady Cash Flow
• Appreciation Potential
• Tax Benefits
• Tangible Collateral
• Inflation Hedge

Borrow

If you need money, you never sell an asset! You borrow against it!

Stepping into the “borrow” phase, the strategy pivots away from liquidating assets. Instead, we use them as leverage to gain tax-free wealth. The remarkable aspect of employing this strategy with multifamily apartments is twofold: residents always cover the loan, and because of the increasing value bolstered by net operating income and inflation, this can be repeated multiple times.

Consider, for instance, our A class 🏢 apartment complex in Houston, Texas ⏬

Here’s our original loan terms breakdown:

We acquired this property in July 2022 for $68 million. The primary loan amounted to $45 million, leading to a leverage of roughly 64%. The property’s cash flow enough to cover all expenses, including the mortgage. As revenues grow and expenses diminish, the net cash flow predictably escalates.

Exit Strategy?

While we possess various exit strategies, our inclination is to retain high-quality assets like this one beyond the usual 3-5 year hold period. However, we’re also attuned to our investors’ aspirations for a return on their investment.

A win-win for both us and our investors would be to opt for a refinance or borrow against the property once more. This maneuver maintains the property’s inherent value, allowing us to avoid potential capital gains taxes.

In its third year, we might decide on a refinance. In this situation, two outcomes are likely: a higher mortgage due to an increased loan balance, which will be covered by our rental income from our residents.

Simultaneously, our investors would receive a significant portion of their initial principal during this refinance around 30%, which would be categorized as debt. This means they won’t be taxed on this income.

Given that this property is relatively new, with a trajectory of income and value growth, we can replicate this process multiple times.

Upon repeating this once or twice, there’s a possibility that our investors might have fully recouped their principal while retaining equity percentage.

Consequently, their investment would yield infinite returns. And they would have done so without incurring any capital gain taxes on the multiple refinancing.

Brilliant, isn’t it.

Die… and Pass on the Wealth:

Though Die may sound morbid, it’s something that will happen to 100% of us and thus, for those who want to leave all this wealth to your kids, grandkids, or great grand kids and build a lasting legacy, perhaps a 100 year legacy, it’s essential to plan this out correctly from the beginning.

We tie it all together like a pretty bow in this step. Setting up property Estate planning including a Family Trust is a crucial step here.

Family Trusts can play an integral role in a long-term wealth preservation strategy.

Here’s how ⏬

• Bypass Probate
• Control Distributions
• Avoid Inheritance Tax
• Provides Asset Protection
• Sustain Continuous Management
• Ensures a Step-up in Basis Advantage

The Fine Print

Now, let’s go over some 🖼️  “fine print” sorta speak.

We went over a few types of assets that may potentially work for this strategy and we’ve already gone over why multifamily apartments are the best one to maximize the buy, borrow, die system.

Let’s go over some of the major pitfalls to avoid.

Whatever asset you choose, make sure that it has a net positive cash flow beyond its expenses including the mortgage.

For example, you can create a margin call on your stock holdings, and in this you will have very fast access to the stock’s value. Sounds nice right? But it can become very combustible if the stock market is tanking. When you use your stock as collateral, if the share price drops, you may be forced to sell your underlying stock or fork over some cash to cover the loss.

So while it may be one of the easiest ways to extra value without selling off the asset aka stocks, that dynamic can also lead to huge losses.

Asset class stability and growth is key to making the refinancing work, thus if the underlying asset tends to not appreciate in value, then it’s probably not an ideal candidate.

Thanks for tuning in today. 

Until next time, dream big, and keep making those dreams a reality!  🌈