After spending years in the industry as financier working for one of the major four, then setting up a mortgage broking company consisting of 15 mortgage brokers, and finally achieving substantial personal wealth via property investing, here is what I deem to be the essential wealth formula when it comes to building large property portfolios and attaining ‘financial independence’:
[Investor Psychology (80%) X Specialised Knowledge (20%)] Mastermind Group
Permit me to break down this wealth formula into its essential components which will be tackled individually, then reassembled into one formula…with some practical applications.
INVESTOR PSYCHOLOGY Multiplied by SPECIALISED KNOWLEDGE.
The first part of this formula is based on the Pareto Principle.
When it comes to property investing, 80 per cent of the formula can be attributed to having cultivated the correct mindset, or ‘Investor Psychology’ and the other 20 per cent can be attributed to what I refer to as ‘Specialised Knowledge’.
The Pareto Principle, also referred to as ‘The 80-20 Rule’, ‘The Law of the Vital Few’, and ‘The Principle of Factor Sparsity’, states that roughly 80% of the effects come from only 20% of the causes. Business management thinker, Joseph M. Juran, suggested the principle and named it after Italian economist Vilfredo Pareto, who observed in 1906 that 80% of the land in Italy was owned by 20% of the population.
The original observation was in connection with income and wealth, and since, various surveys carried out in a variety of other countries have found that a similar distribution of wealth applied, not only in terms of wealth distribution, but the relationship applied also to subsets of the income ranges amongst the rich. For example, if you take the ten wealthiest individuals in the world, we see that the top three (Warren Buffett, Carlos Slim Helú, and Bill Gates) own as much as the next seven put together.
Let’s examine the first component of the formula, ‘Investor Psychology’, which is perhaps the most important component of the ‘wealth formula’.
‘Investor Psychology’ will mean different things to different people, especially when it comes to the world of property investing, given that there are so many approaches and strategies that exist in this realm of investing. For example, there are buy and hold investors buying ‘growth’ properties, investors interested in cash flow positive properties, investors who renovate properties and manufacture capital growth, investors who secure properties via option contracts and on-sell them, and investors who buy property for the purpose of re-development, subdivisions, re-zoning…the list is endless.
Ultimately, there are some commonalities linking all these investors, and their approach to property investing, and it has more to do with what ‘belief systems’ they adhere to and how they do things. As Wallace D Wattles put it in his famous book ‘The Science of Getting Rich’, the rich get rich by “doing things in a certain way” not by doing ‘certain things’. In other words, it’s not what you do, it’s the way that you do it, and that’s what gets results.
So, if that is as ‘clear as mud’ to you, let me get into specifics here, especially when it comes to property investing, and building large property portfolios. Investors with the right psychology tend to use an ‘Optimised Loan Structure’, which is one that allows the property investor to have maximum flexibility and control over every single property that they control or own, either via direct ownership or via a trust/company structure. So each property is set up as a ‘Stand Alone’ facility, that is, only one loan is taken against one property, and hence none of the properties are cross collateralised, all consisting of a variable ‘true’ Line of Credit, with no mandatory repayments, and a self-capitalising component built in with the loan, preferably with separate lenders. To add to this structure, the Line of Credit facility (LOC) will have an offset facility attached to it, allowing the investor, and their partner to directly credit their salaries and rental incomes into their LOC, which in turn offsets the amount of interest that they pay on their Primary Place of Residence (PPR) if they have one.
Furthermore, investors with the right ‘Investor Psychology’ tend to use other people’s money, or ‘OPM’, that is, they use the maximum Loan to Value Ratio, say 95% and are comfortable paying Lenders Mortgage Insurance (LMI) as they know that the most important aspect of investing is in assessing the Return on Equity (ROE) not Return on Asset (ROA). They also do not own any assets in their own name, that is, they use Trusts and Corporate Trustees to ‘Control Assets’ rather than to ‘Own Assets’. And the rich NEVER risk their homes. They pay for advice, surrounding themselves with successful advisors, and are themselves ‘Financially Literate’. They focus all their efforts on accumulating ‘Growth Assets’, using ‘Good Debts’, or tax deductable debts, while avoiding taking on ‘Bad Debts’ or consumer credit, which has no tax advantages to secure assets that devalue over time.
Finally, Investors with the right ‘Investor Psychology’ invest in their personal development and network with like-minded individuals, who support their investing endeavours. They understand that the only risk in investing is ‘them’, not the market, and that the market, whether it’s the property market or stock market, is simply a vehicle that transfers wealth from the uneducated to the educated. They also understand that time is the most precious commodity, and they know that investing in property is simply ‘buying time’ in a market that has a proven history of growth with certain properties.
The ‘Specialised Knowledge’ section of the ‘wealth equation’ refers to the actual strategies which will allow you to secure properties, or build wealth through property. More specifically, it refers to the investor’s depth of knowledge of their chosen area of property investing. Whether it’s property options, property development, subdivisions, buy and hold, flipping or renovations, the ultimate success will lie in the investors ‘grasp’ of the technical aspects of their strategy, in a given area of property, together with their detail and due-diligence or feasibility studies leading up to the deal.
The important aspect to appreciate here is that there is an immeasurable difference between ‘knowing the talk’, and ‘walking the talk’. There are literally thousands of ‘academics’ and ‘theorists’ out there who possess the basic knowledge of ‘the how’ to structure and execute ‘the deal’, but very few who actually implement the strategies. The difference lies in their lack of ‘Investors Psychology’ – that crucial element of the ‘equation’ that actually makes the investor take action. Without ‘the why’, ‘the how’ is irrelevant, as there is no execution, hence the investor doesn’t make any money.
In essence, ‘knowledge’ is not power, as ‘knowledge’ without ‘action’ does not equate to tangible results and money. The final component of the ‘wealth equation’ is the reliance by the investor on his or her Mastermind Group.
To the Power of THE MASTERMIND TEAM
Behind every self made millionaire there is a team of ‘Experts’ that have been that person’s catalysts of success. Put simply, all the ‘Psychology’, and ‘Specialised Knowledge’ in the world will not translate to ‘actual results’. One needs a solicitor to settle the property, one needs a real estate agent to sell the property, one needs a mortgage broker to submit the loan to the bank…you get the idea.
The ‘Mastermind Group’ concept was formally introduced in Napoleon Hill’s timeless classic, “Think And Grow Rich” where he described the principle as:
“The coordination of knowledge and effort of two or more people, who work toward a definite purpose, in the spirit of harmony.”
He continued on to say:
“No two minds ever come together without thereby creating a third, invisible intangible force, which may be likened to a third mind.”
From my observations and interactions with successful property investors and developers over the last decade I have come to the conclusion that most successful property investors are themselves not ‘experts’ in every single field of property investing, rather they become ‘generalists’, relying on their ‘Mastermind Team of Experts’ that they in turn leverage from for their expertise and knowledge. These include, but are not limited to the following:
The key to your success, is to develop your level of ‘Specialised Knowledge’ to such an extent, that you can:
The difficulty with accurately identifying and pre-qualifying the relevant ‘Experts’ which will ultimately form part of your Mastermind Team lies with the ‘Investors’ level of ‘Specialised Knowledge’ in that particular field, and their ability to ask the right questions in order to pre-qualify and short list them.
Specifically, your accountant should be very familiar with setting up various types of trusts, (Hybrid, Unit, Family, etc) and have fist hand experience with property settlements utilising those structures, not to mention lending. Your Mortgage Broker of banker should also be conformable with setting up loans via Trusts and Company Trustees, and understand the various credit policy restrictions that apply to buying properties via these. Your solicitor should specialise in Property Law in your particular state, and be well versed in the latest legislation, sale of land act, etc.
Ideally, your Solicitor, Mortgage Broker, and specifically Accountant should all specialise in ‘Property Law’ and they should be positioned as ‘niche’ operators in that industry, resulting in majority of their client base being ‘property focused’ or working in property related industries. To illustrate this example, my accountant is a Property Accountant, My Solicitor specialised only in Property Law, my Mortgage Broker ONLY looks after investors. How about your ‘Mastermind Team’?
To emphasise the importance of the ‘Mastermind Team’ in the ‘Wealth Equation’, this is literally the catalyst of your success! Hence the equation is incomplete with this essential element of an investor’s journey to financial independence. To further re-emphasise this point, I cannot tell you how many clients I have come across (both during my days working for a bank as a financier, and managing a mortgage broking company) who have been given average advice, by accountants, financial planners, and bank managers, and hence have resulted in achieving average results, or in many examples with financial planners, losing substantial amounts of money both in their superfund, and in personal wealth. The problem was, in virtually all cases, that the client failed to correctly identify and assess their consultant’s credentials and accurately assess their ability to give them the correct advice and guidance. The credentials that I am referring to here have nothing to do with the consultants formal qualifications; they are a given, based on current legislation in financial planning, mortgage broking and banking. The lacking credentials that are essentially missing in all cases was that the financial planner, accountant, and mortgage broker were themselves not wealthy individuals, rather, they were selling their time, advice and services, or receiving a commission for the client taking up a recommended product. Looking back now over the years, the most obvious commonality between all the successful clients that I have worked with was that their ‘consultants’ were themselves investors and wealthy individuals in their own right.
So, let me save you years of trial and error, and in the process millions of dollars of potential losses or unrealised profits, by demonstrating to you the most essential pre-qualifying question that you need to ask your Financial Planner, Accountant, Mortgage Broker…
‘How many investment properties do YOU personally own or control?’ Or
‘How much money have YOU personally made from this recommendation?’
And if the answer is none, then walk away! The company’s brand, the company’s reputation, time in the industry or letters after your ‘consultants’ name are all irrelevant – all that matters is their bank account and real results. As harsh as that sounds, what I am giving you is what the 2 per cent who control the other 98 per cent of the world’s money understand. My accountant has $19,000,000 in residential and commercial property, and my mortgage broker has over 21 investment properties. How many properties does your Account, Financial Planner, or Mortgage Broker have?
In summary, assembling your ‘Mastermind Team’ or group of experts will take a long time, due to the scarcity of ‘consultants’ in the various industries who not only hold the correct formal qualifications, e.g. Advanced Diploma of Financial Services (Financial Planning), or being a Charted Practicing Accountant, but also have a PHD in results. The key in finding them lies in your ability to access other successful investors, industry networks, and getting referrals from industry leaders. If you do assemble a ‘Mastermind Team’ of experts who themselves are success stories, your wealth will skyrocket exponentially! Hence the formula for Wealth is ‘Investor’s Psychology, multiplied by ‘Specialised Knowledge’, to the power of (Your) ‘Mastermind Team’.
To Your Success!