In my previous position working for a luxury real estate auction house, I had phenomenal opportunities to interact and learn from wealthy individuals whose net worth often exceeded $10 million.
As many would expect, these ultra-high-net-worth individuals are quite different from the average person in how they think and work. When you spend so much time in the industry, you forget there is a difference.
I was reminded of the difference recently when talking to another about how a deal to buy a badminton center was falling apart. It was a money issue, with the landlord wanting a much larger security deposit due to the buyer’s limited business history.
I was surprised when my friend told me they were short $250k. Everyone had told me that the buyer was rich, and to me, rich was a net worth above $5 million. When I was working in luxury real estate, if someone really wanted to get the deal done, $250k wasn’t a big issue. People frequently jumped millions of dollars up from their original bids.
It made me think more about the people I’ve met while working in luxury real estate and the things they did to make them different from the average person.
And there were a lot of differences. A revelation, however, was that these differences were rarely exclusive to anyone. Ordinary people could implement the same things wealthy people do and benefit.
Thus, I decided to write this article. From my experience in luxury real estate working with high-net-worth individuals, here are five things wealthy people do with their investments that you can do, too.
Offsetting Your Taxes With Losses
One of the first things that came to my mind was offsetting tax by purposely “taking losses.” This is the first thing that popped into my head because it seems absurd.
Why would someone purposely lose money?
Well, the secret is that wealthy individuals don’t actually lose money. They take “paper losses” to lower the amount of tax they pay and further increase the amount of capital they have for growth.
This is why many publicly traded growth companies are not profitable despite being so popular. They’re constantly reinvesting their profits into marketing, R&D, and other expenses that pay off over the long run. In the short term, they don’t pay/pay lower taxes and will become much more profitable in the future.
You can do the same by taking some loss that is necessary or beneficial over the long run to defer your taxes and increase the amount of capital you have to invest. For example, if you own a business or are self-employed, ensure you take advantage of depreciation rules for things like vehicles.
Along the same lines, also look for various rules in the tax code that allow you to defer capital gains.
When I was working in real estate, many investors in the United States used the 1031 Exchange, which allowed them to sell a property held for business or investment purposes and swap it for a new one purchased for the same purpose without paying capital gains taxes.
The extra money you have from paying lower taxes will go a long way if you reinvest it.
Use Corporations and Other Entities To Reduce Tax
Offsetting your taxes with losses isn’t the only way to reduce your taxes. You can do many other things if you have a corporation or other entities to your name.
One of the most significant benefits of a corporation or being self-employed is your ability to write off costs necessary for your business and personal life. Consider expenses such as food, vehicle-related fees, computers, phone plans, etc.
A typical person pays expenses using after-tax income. Someone self-employed and/or has a corporation will get taxed after spending most of their costs.
For example, let’s say you make $60k a year and have $30k in expenses. A corporation pays tax on $30k ($60k-$30k), while an average person pays tax on $60k before they pay any of their own expenses.
Corporations and many other entities also have particular tax efficiencies that make sense in many situations. In Canada, for example, if you make over a certain amount, your corporate tax rate is lower than your personal income tax so it makes sense to keep more money in your corporation if you don’t need it.
You can also pay yourself differently depending on what you need. Last year, my accountant opted for a method where I paid myself using a shareholder loan, which allowed me to pay zero taxes while increasing my capital loss to lower my taxes for future years.
And the best thing is you don’t have to be doing business full-time to open a corporation. Just start a small side hustle like writing on Medium.
You can also research other entities and accounts to reduce your taxes. For example, if you’re not already using Roth IRAs or your country’s equivalent, do that. But there are a lot more interesting ones if you dig deep enough.
As an athlete, I came across the Amateur Athlete Trust a while ago, which I could take advantage of. Per John Hastings at RBC Wealth Management:
“Qualifying income contributed to an AAT is excluded from the income of the amateur athlete. No tax is payable by the trust, including on investment income earned by the trust. Only when money comes out of the AAT will it be included in the athlete’s income, or, at the latest, eight years after the last year in which the individual competed as a Canadian national team member.”
This isn’t the only entity that exists, though. Dig deep enough, and you’ll find more that suit your situation.
There’s Always a Way To Get a Deal Done
What truly impressed me when working with wealthy individuals was their ability to get deals done. If they genuinely wanted something, there was a way to get it.
Let’s look at buying a home, for example. An average person will put an offer based on how much the bank is willing to lend them, and if the number is above and the bank isn’t willing to lend more, then the deal’s over.
Wealthy individuals, however, have options. If the banks don’t lend them money, they start looking at B and C-tier lenders, margining their stock holdings, or even exploring paths like vendor take-back mortgages.
And it’s not just money that gives wealthy people options. It’s knowledge.
Take a look at this video from BiggerPockets:
As you can see from the thumbnail, Cody Davis acquired 81 rental units at 21 years old using seller financing, and it’s not like he had a couple of million bucks donated to him by his parents.
What he does have, however, is knowledge. He spent a significant amount of time learning the ins and outs of finance, and it’s paid off for him.
Many wealthy people are the same. Most people I’ve worked with didn’t inherit all their money. They learned a significant amount about finance and used that knowledge to keep and grow their wealth.
Don’t Just Hold Cash, Hold Cash Equivalents
Another common characteristic of wealthy individuals is that they’re opportunistic. When they see a good opportunity, they jump in immediately.
To be a good opportunist, though, you have to be ready. If a good deal pops up tomorrow, you have to be in the position to jump in. This is why you see articles on how Warren Buffett currently holds a ton of cash.
Berkshire Hathaway’s cash pile nears all-time high at $147bn
One misconception many people have is that when wealthy individuals are “hoarding” cash, they’re literally holding cash. While everyone will have some money, most of these stacks that rich people have are in T-Bills and other cash equivalents that allow them to earn interest and still have the flexibility to cash out when needed.
This is something you can consider, too. If you know you’ll make a big purchase soon, and you’re saving cash, learn more about short-term treasuries and other securities to put your money to work.
The Formula For Becoming Rich
At the end of the day, the formula for becoming wealthy is straightforward. There are only two rules you need to follow.
- Make more than you spend.
- Buy things that make you more money and use that money to buy even more assets.
That’s how becoming wealthy works at its most simple core. Of course, there are details on different ways to execute rules one and two but try not to get caught up in them because there are millions of ways to achieve financial independence.
I’ve met car dealers, dentists, bank executives, farmers, real estate developers, engineers, and more. You can become financially free working in almost any industry if you make more than you spend and buy assets.
Financial Disclaimer: The views in this article are the author’s personal views. This commentary is provided for general informational purposes only. It does not constitute financial, investment, tax, legal, or accounting advice, nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this article should consult with their advisor. The information provided in this article has been obtained from sources believed to be reliable and is believed to be accurate at the time of publishing, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Investing in stocks, bonds, exchange-traded funds, mutual funds, and money market funds involves the risk of loss. Their values change frequently, and past performance may not be repeated.
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