Episode 19:Double The Return On Your Investments & Increase Your Tax Benefits


Professional investors enjoy higher returns and better tax benefits than amateur investors. In this episode, Tom discusses how certain investors make more money and qualify for better tax benefits based on how they invest.


04:33 –  How Do Amateurs Invest?

07:23 – What Are Wholesale Investments?

12:25 – What Are The Risks & Benefits Of Wholesale Investing?

14:46 – What Is An Accredited Investor?

15:34 – What Are The Risks & Benefits Of Direct Investing?

18:44 – What Are The Tax Benefits Of Wholesale Investing?

Speaker 1: This is The WealthAbility™ Show with Tom Wheelwright. Way more money, way less taxes.

Tom Wheelwright: Welcome to The WealthAbility™ Show where we're always learning how to make way more money and pay way less taxes. Hi, this is Tom Wheelwright, your host, founder and CEO of WealthAbility™. How would you like to double the return on your investments and at the same time increase your tax benefits? Today you're going to discover how to invest at wholesale prices instead of retail prices. When you think about investing, okay, you can think about it in a number of ways. We can think about investing as investing in the stock market, what kind of asset class?

We can think, are we an amateur investor? Are we a professional investor? What is it that constitutes our investing? Well, if you look at the life cycle of an investor, typically, we start out, right, we go to school and we get a job. In the job, we're learning skills, we're learning professional skills, right. We're typically not learning financial skills. We're not learning money skills. We're learning professional skills, which then frequently then we will take and we will then create a situation or buy into a situation where we're an owner of that business where we use our skillset. That's called an entrepreneur, right? Instead of being an employee, now we're not just an employee, but we actually run the business, that's ownership. Then as we get going, we get successful, we start expanding it. Well, there comes a time when we're looking at, okay, we're doing great in our business or we're doing great in our job.

What are we going to do with the money? How are we going to prepare for the rest of our life? How are we going to make sure that we have the financial resources available to us to reach whatever our dream is? All right. If that dream is simply, boy, you know, when I'm 60 or 50 or 40, I want to hang it up and I want to be able to retire and spend time with my kids or my grandkids. That's great. If that's your dream, if your dream is, look, I want to travel the world, or I want to create a charity that … Actually, I had a student once, one of our participants in one of our tax programs that said, you know what she really want to do was save the bats because bats apparently are very important pollinators. People concentrate on bees. She wants to save the bats. I thought that was a terrific dream that she had. Well, the reality is if we're going to accomplish our dream, it's going to take money.

We could in our business just reinvest all the money in our business. A lot of times that's what we should be doing. Okay. A lot of times we should be reinvesting in our business. What happens though when we decide, look, I've invested in my business as much as I can or as much as I want to, or have invested in my job as much as I can or as much as I want to. Now what I'd really like to do is I would like some real investments. As an employee, typically what we're taught is, well just put your money in the stock market, do a 401(k) and IRA, and there's nothing wrong with putting your money in the stock market per se. The only challenge is that your tax benefits are limited. Well, there is a tax benefit. I get a deduction for it, right? True. However, down the road you're going to pay tax on it, right, and you're not going to pay tax at capital gains rates or dividend rates or any kind of special rates.

You're going to pay tax at ordinary income rates and unless you're planning to retire poor, you're going to end up in a higher tax bracket through that IRA or 401(k) or pension plan or profit sharing plan then you would, if you're not in that IRA or 401(k) or pension plan. For example, you invest in the stock market outside of an IRA, you're going to pay tax at capital gains rates, which are typically half in every country they're typically half, okay? If you invest instead through an IRA or 401(k), you're going to pay at ordinary income rates. Assuming that you want to make as much money when you retire as you do while you're working, that may not be the best solution for you. Then you're going, okay, if I'm not going to invest in the stock market through an IRA, 401(k) and what I call traditional amateur retail investing, okay? Traditional amateur retail investing is investing in a mutual fund.

Typically, we do it through IRAs or 401(k)s. We may do it outside too because we want to invest more than what our 401(k) or IRA allows us to invest. You want to invest other than what I call typical retail investing, you think about retail investing, think about retail shopping, okay? When you are shopping retail, you're paying full price. If you buy a stock on the stock exchange, you buy a stock on stock market, you're paying full price, right? You are investing at retail. If you ever sit down with a financial planner, by law, they are not allowed to suggest that you could do more than 10% return on your investment. Now, 10% is actually pretty heady. Okay. Some people, you know, over the last few years, some people have done that well in the stock market, some people not. Some people have just put the money in, taking it out at the wrong times.

That's pretty much the most. 10% is really the most you're ever going to realistically expect over the long term in stock market. You're going, well that's great because the average investor is only getting 3% so 10% would be awesome. Well, what if you could do better than that? What if you could actually invest at wholesale prices? My wife has this great view. She goes, the most important thing when I buy clothing she says, is that I get my cost per use down. Well, there are a couple of ways to get the cost per use down. One is to wear those pair of shoes or wear that dress, that suit, wear it over and over and over again. That will get the cost per use down. Another way is to buy it at a bargain price, right? That would be buying at wholesale and we all know that if we can buy something at wholesale, that's the reason places like Costco and Sam's Club are so popular is because we think we're getting a discount. We're paying a lower price than we would if we went to the grocery store. That's why we want to shop there. Right.

That's really the reason is that we're looking at can we get a better price. Well, you can do the same thing with investing. I mean, if we could always shop wholesale, we would always shop wholesale. Even better than that is if we could always buy factory direct. Down the street from my house and my office is a shopping mall that's all factory outlet stores, right? We are at that point your factory outlet. You're paying direct. In some cases even paying less than wholesale prices, right? Less than wholesale price. Those factory outlet stores are always packed and now the challenge is that you tend to get seconds and you tend to get last year's model and so forth. You go, well, what if I don't want last year's model? What if I want what's available right now? Well, with investing, you actually can do that. You can actually buy at wholesale or direct, get much higher returns and at the same time, lower your risk and increase your tax benefits. Here's why.

Remember, let's say we're at retail. We're going to be somewhere at best between seven and 10%. Well, if we're buying clothes at retail, why are we paying so much? Well, the reason is because we're paying a couple of middlemen, right? Actually, the wholesaler is making money. They're actually doubling their price when they sell it to the retailer, and the retailer has to double their price when they sell to us. We're actually paying four times the price of factory direct when we buy retail. That makes sense, doesn't it? On the other hand, we seem to be very comfortable paying retail for our investments. What if instead we bought factory direct? What would happen to our returns? Well, okay. The same thing is going to happen that happens with our shopping because when you buy a retail stock, a stock at retail, you're paying … Okay, there's somebody like a Goldman Sachs that's making money on that.

Then there's the actual business owner that's making even more money on that. Right? You have the business owner and then you got the brokerage that's selling it, and then you've got retail and that's basically how it works. Instead, what if we could buy at wholesale or we could actually buy direct. Let me give you an example. If you were to buy real estate at retail, we would call that a real estate investment trust or a REIT. That would be buying it at retail. Now, just like stock market, you should expect somewhere between five and 10% return on investment in a REIT. Well, what if instead of … Now, REIT is really just a mutual fund to real estate. It's a bunch of different projects that have been brought together. Okay. The wholesaler brings them together, sells them to the retailer and then the retailer sells them to us. Instead, what if we bought at the wholesale level?

In other words, we actually went direct to that person who's putting together the deal and we invested with them. Now we call that a private offering or in the business, it's called private equity. When we can invest at that level. We go and invest in an apartment building. We're not running it. Okay, we got somebody else who's running it, that's the wholesale part of that, or we're going to invest in a business, but it's private equity deal. You know, it's not public. It's not out there to the public, only for private. What we get is we actually get to double our return. Instead of that five to 10%, we're going to do 10 to 20%. Okay, because we don't have that extra middleman, that's what we don't have. We don't have the extra middleman. Now, what do we give up? We give up liquidity, so it's not easy to sell, right? We have to do our due diligence.

This is why you are not allowed to buy wholesale unless you're an accredited investor. An accredited investor in the U.S. is a couple that has more than a million dollars in net assets outside of their house, or $300,000 a year in income. Where you're going, well, I could never invest, you know, I'm not there yet. I'm not an accredited investor, but that's why because it's not liquid so it's not easy to get in and out of it. You have to be willing to be able to say, well, look, if I'm stuck, I'm stuck and I could lose my money and you have to be able to handle that loss. The government's, most countries by the way have this rule. The governments do not allow the average investor to get into these wholesale opportunities like a private placement or a private equity. Plus they require a fairly substantial investment. I mean, a typical private placement is going to require at least $100,000 investment.

You can't invest $5,000. You can't invest $10,000. All right. You got to be able to hold on there for the long term and understand. You really have to have some good understanding of what you're doing if you're getting into a private placement. What about buying direct? If I take that same real estate, so let's say as a REIT, I would have several apartment buildings that are put together and they're marketed at retail, right? Then at wholesale, I've got a private offering with a single apartment complex with a single developer, and I'm investing with that single developer. Okay. My friend that I've had on the podcast before, I've had a couple of guys that do this. They're called syndications. Brad Sumrok was on, not too long ago. We've had JP Newman on and they're syndicators. My buddy Ken McElroy, he's a syndicator. These are the people who put together these deals and they look for wholesale investors, accredited investors.

The direct investors, what's interesting is the government prevents you from being a wholesale investor unless you're accredited. They don't prevent you from being retail investor, but they also don't prevent you from being a direct investor. Think about the real estate. You're allowed as an individual to go out and buy your own multifamily housing. You can do that and if you do that, what happens? Well now you're not paying a developer because you are the developer and now your return on investment actually goes up and doubles again. If you were at 10 to 20% in wholesale, you should be at 20 to 40% if you're investing directly. Now, what's the catch? The catch is that you take all the risk, however, you've actually reduced your risk. You take all the risk from the standpoint that if this goes south, it's your money, right? It's nobody else's money. It's just your own money. On the other hand, you have complete control.

One of the principles that we teach at WealthAbility™ is that the more education you have and the more control you have, the lower your risk. This is your ability to create wealth, so the more you understand and get educated and have control over your investment, remember at retail level, you have no control. Your control is getting in and out, right? It's easy to get in and out. Your control is liquidity. At the wholesale level, you're basically giving up control, right? You have a little more control because you know exactly what you're investing. You're not saying, well, it's 20 apartment complexes. It's a single apartment complex. You absolutely, you're going to do your homework and your research. You're going to make sure that you understand the deal. The developer, okay, whoever the syndicator, they are responsible to you. Okay. They're going to feel that responsibility because they're not going to have that many investors in the first place, right?

You have a lot more say in that than you would at a retail level like in a REIT. Now, let's take the direct though. Now you have complete say. You get to choose what happens to the property. You get to choose what rent you charge, you get to choose how you market it. You get to choose what bank you go to. You get to choose your loan to value, how much leverage you have. You get to choose all of those things. With all that control, with the right education and experience, you actually have lowered your risk substantially from either retail or wholesale. Now you still don't have liquidity, right? Because you can't just get out of it, which is why cash flow is such a critical part of direct investing. If you're an indirect investor, you get in, you get out. In other words, if you're a retail investor, you get in, you get out. That's where the risk goes down a little bit.

On the other hand, you have no control over the property itself. You can control how do you treat the tenants. Okay, what does the property look like? How do you market this? This is what makes a professional investor. Here's the great thing. On top of increasing your returns because now all of the returns go to you. You're giving the bank a little tiny piece that's their interest rate, but you're getting all of the other returns. If you were developing it and you went and got investors, you would get about half the returns, right? Then if you go in and buy in at retail, you're going to get maybe a fourth of the returns. What I think is cool about this is you also get better tax benefits. The closer you can control this property, the more tax benefits you get. The best tax benefits really about the most you can get if you're investing at retail is doing it through an IRA or 401(k) then you defer the tax. Okay.

If you're in a Roth 401(k) in the U.S. then you can eliminate the tax, but you can never have a tax benefit that offsets other tax liabilities like from your wages or your regular business. You're very limited in your tax benefits. If you use an IRA, then you're obviously being controlled by the government. That's the definition of a qualified plan. It's a government controlled plan. You invest at the wholesale level, you're going to get more of those benefits, but you are considered a passive investor. You must have passive income to us that the losses from that passive investment. Well, so you get some benefits. Your benefits are not unlimited. When you invest at the direct level, okay, where you're actually developing the project or you're actually buying the rental property or you're investing directly in the agriculture for example. Okay, or it's your business, right?

It doesn't matter what asset class, you're the one that's directly investing, you have control, but also you get all of the tax benefits because the rule is, is that if you're actively involved, you are no longer limited on your tax benefits. All of the depreciation, all of the write offs, all of the tax credits let’s say for low income housing or historical or the new opportunities, all of these are available to you. Why are they available to you? Because you're taking on the project. You are now becoming a professional investor. Let me define real quickly the difference between an amateur and professional investor. An amateur investor makes a new decision every time they invest. A professional investor comes up with their strategy, their plan of action for investing, and they come up with a set of criteria for investing.

Imagine, you're going to go invest in apartment buildings. Well, how big of an apartment building? You can do a four-plex or you can do a 200 unit apartment building. They're very different animals. Are you investing class C, which is just above slum? Are you investing class B which is kind of middle of the road? Are you investing class A, brand new projects? Are you going to invest in big cities or small cities or tier two cities, in between? Like San Antonio for example. Where are you going to invest? All of these are criteria and as a direct investor, you really have to become that professional investor. It's the professional investor that gets all the tax benefits, and the same time it's the professional investor that gets all of the returns. That gets huge returns, and it's the professional investor who gets less risk because they have control over the project.

If you're going, well, wait a minute, I don't have time for that, I don't have time. Well that's great. Then you move up the scale, right? If you don't have time because you're a doctor or a lawyer, you have the money, you just don't have the time. That's when you invest at wholesale. Okay? Then you sit down with a tax advisor, say, how do I take advantage of these losses that real estate, oil and gas, whatever agriculture is throwing off or that business is throwing off. How do I take advantage of that? That's what your tax advisor is for. It's a little more difficult. You can still do it. If you have no time at all and no interest in education, then you ought to be investing in retail. These are the three levels of investing, retail, wholesale and direct. You want to make the most amount of money possible and pay the least amount of taxes, that would be direct.

Next would be wholesale, and of course retail. It is what it is. It's just easy to get in and out of. I love the idea of being a direct investor and I love the idea of being a wholesale investor. What I don't have an interest in is being a retail investor. Why would I buy something retail if I could buy it wholesale or buy it direct? While governments prevent some people from investing wholesale because they have not gotten out of the rat race. Okay, they're not at that level where they're an accredited investor. Everybody, everybody is allowed to be a direct investor and that's where the returns are. That's where the control is, and that's where the tax benefits are. Just feel free to think about this and listen to this podcast over and over again because if you can learn how to become that professional investor where you're at the direct investment level or you can learn how to become …

You have the money and the financial wherewithal that you can be a wholesale investor, that is both of those are so much better and so much more successful. They'll be so much more successful in building your wealth and reaching your dream than settling for what everybody else does, which is buying at retail and buying or investing at retail. Thank you for listening. Remember, when you're a direct investor, you're going to make way more money and pay way less taxes. See you next time.

Speaker 1: You've been listening to The WealthAbility™ Show with Tom Wheelwright, way more money, way less taxes. To learn more, go to wealthability.com.