If you’ve ever driven a “stickshift” manual transmission car you’ll quickly understand how gears impact speed.
The same concept can apply to building wealth.
To increase the gear ratio, you increase the number or scale of performing growth assets.
The best way to do this is through a process I call “Equity Shifting”.
First gear is owning one growth asset, most typically, your house, though it also applies to a business you own.
I know the Rich Dad philosophy is that a house is a “doo-dad”, an expense, and not an asset, but I disagree. You need to live somewhere, and if you don’t own your primary residence, then you’re probably paying to rent it. If you’re going to pay, then using leverage (a mortgage) to buy a growth asset (a home) that provides you shelter and comfort to be at your best performance and earn income is a dependable way to grow wealth.
First gear is slow. It’s designed to get you moving and not much else. Like driving a car, it’s absolutely necessary to get things rolling.
As soon as you have some equity, I believe you would do well* to shift that equity into second gear: your next performing-asset cash-flowing asset.
What asset you prefer is up to you, though leveraged is better in most cases. What type of investment is up to you, your skills, your portfolio, but ideal for this strategy is something easy to get financing on in the future such as real estate (any type / strategy), business (using any type of business financing), or stock (using margin).
As second gear ramps up, and is reliably creating cash flow and also has some equity, it’s time to shift gears again into third.
This means rebalancing equity from assets one or two to purchase asset #3.
When you shift equity from one asset to another, you’re not “losing ground” – you’re expanding your total portfolio balance sheet.
How this happens is anything that frees up the equity – cash-out refinancing, HELOC, 2nd mortgage, or our “equity shifting” product. If you have a business, there are dozens of types – SBA loans, equipment funding, “MCA” (Merchant Cash Advance), etc.
The upside to any kind of debt is that you retain all the upside in equity, but the downside to debt is it requires payment in most cases**.
Recently we added an “Equity Shifting” product by which an investor will buy up to 17% of your home, with no monthly payments, no interest charges, virtually no credit score requirements, and no liquid asset requirements (i.e. reserves, cash in the bank). There’s also no prepayment penalty.
Here’s the kicker: You keep 100% of the utility, meaning, no roommate is going to move in with you. They’re large pension funds simply banking on long-term slow-growth of value as an inflation hedge.
Emotionally, people don’t want to sell part of their home. I get it, we all want a place we feel we own.
But why? If you get 100% of the utility, do you really care that you don’t have 100% of the equity? Well, yes – unless you trade that equity for another asset.
For example, if you have a home worth $400,000 and sell 17% of it, you free up $68,000. If you then buy a business for $600,000 and put down 10% ($60k) you now actually control $1,000,000 in assets ($400k house + $600k business), less the % you sold ($68,000). You’ve shifted some of your equity into a new asset.
You can also do this via cash-out refinancing, a home equity loan, or 2nd mortgage, but these are all debt instruments and thus carry monthly payments, impacting your cash flow. Whether that’s a better move than selling a percentage of your home is a personal choice based on your own needs and free cash flow, and other factors like debt-to-income qualification or credit score.
Whatever path you choose, “Equity Shifting” can help you expand your balance sheet with leverage, and while the traditional path of working to pay off a mortgage might sound appealing, it de-leverages your overall portfolio.
To learn more about what strategies might help you reach your goals, contact us. We carry, broker, or refer out dozens of products and systems to help.
*Legal notice: This is not formal or legal advice, but the opinion of the writer.
** Balloon products, reverse mortgages, bridge funding etc. may be available, but these are less common. Most debt carries a monthly negative impact to cash flow.
