Transcription
[Applause] [Music]
What I, what I learned really, really, really quickly is that the system is set up, actually, it's kind of the same everywhere we go, is that, you know, people make a paycheck and then they put it in this, you know, and into this thing called a bank, let's say. And, um, that's pretty much the way the system is. So, and they also take your money through insurance products or, you know, pensions or whatever you want to call it. It doesn't really matter what word you use, it's your money, it's everyone's money getting put into some kind of financial system. It could be a pension, it could be insurance, it doesn't really matter.
But then what happens is all these people, the bankers, the wealth managers, the pension funds, the, all their, uh, the, uh, all the securities that are all over here that are basically taking the money from the masses, they need people to invest it. That's how the system works. So that little quarterly statement that you guys get, you know, that maybe you open, maybe you don't open, so it's invested somewhere. Somebody, somewhere, is investing that money.
So the same thing with a bank now. So what, what traditionally, what the bank calls it is debt, of course, or a mortgage, or, you know, whatever you want to call it. It doesn't really matter. It could be credit card debt, it could be an auto debt, it could be debt for your home, it could be debt for investment, it can be debt for an airplane. It doesn't really matter, it's just debt. But it comes from you.
So what happens is they, they give you, the bank gives you, you know, let's just be generous and say one percent, which is actually less than that, as you guys know. But then what they do is the bank, then I go to the bank with my property here, let's say, and I need debt. So then they go, "We're going to give you this debt, which is actually your money." So this is why, this is why we call it OPM, other people's money. But what they do is that they charge me, let's say, four percent. So now the bank is making, let's say, three percent on your money. So they see, when you give money to a bank, it's a liability to the bank. It is, they, you're looking for interest on that money. They're housing your money for you. And then their job is to lend it out. So they give it to guys for businesses, for all kind, for autos, all that. That's how the whole system works. And so that's why when you drive down the road, you see the banks have all their names on all these big buildings. Be, this is it. This is how the system works. In fact, showing pictures. Yep.
So, so you make some money here, you pay your taxes, and let's say you put a hundred dollars here. It's the bank's liability, but on your balance sheet, it's an asset. It always has to balance. That's why balance sheets are everything. So they, they have, let's say, one of your dollars here, and the fractional reserve system, they can ramp it up ten times, let's say. So your one dollar becomes ten dollars. And then Kenny walks in and borrows it. So they now have an asset called Kenny's debt loan. So it always has to balance. In scientific terms, it's called counterparty. Who's at risk here? So Kenny, they need Kenny to come in and borrow that money. Then, well, yeah, they need you too. That's the whole, that's the way the whole system is.
So the entire system is predicated, and by the way, uh, you know, I'm borrowing from insurance companies, I'm borrowing from pension groups. I'm, you know, like the retired teachers or firemen or police, they all put their money into pensions, and then those pensions, it's just they lend it out again. So what they're always looking for is, they're always looking for people to put the money into the system. And then, then the financial planners, the, the wealth managers, the money managers, whatever you want to call them, their job is to actually go out and find people like you to lend it for, to open businesses, to, to put up a, a beauty salon, or a, you know, a stylish shop, or an esthetician business. And that is how the system works. So the, the money is sitting here, it's, it's OPM, or other people's money, and it needs to be lent out.
Now, the issue that they have, of course, is, do you have the financial capability to pay it back? And that's what Rich Dad really stands for. Is, you know, so this, this system exists whether you do it or not. It doesn't matter to them. So what they're trying to do is take a look at, you know, are you an asset or are you a liability? So when you go into the bank and you can't get a loan, which happens to all of us, for some reason, there is a reason. There is a reason. And typically, that reason is me or you.
And so, uh, what I had to do is I had to learn how to borrow this kind of money and, and to raise this kind of money to be able to invest it into these things, which are now, for me, apartment houses. And so I was just telling Robert, um, I don't think I told Tom yet. So we're right now, we have, let's see, six, about 300 million in construction in Arizona. And so we need both debt and equity to do that because obviously, my partner and I, we don't have that sitting in a checking account. No one does. Okay? No one.
So, you know, so the strategy of being able to go out and find land, buy a master plan, create a master plan, or find some kind of a deal and put it together, this is what the system wants. They want it. They need it. They need to deploy that money. Now, the problem is, is that as it starts to get returned back, so as I pay back the debt and as it goes back to here, there's all kinds of fees. So this is why some of you might have quarterly statements that aren't really changing very much because it might be making a little bit of money, but you got to pay attention to who, how it's being allocated and the fees. Because what happens is if it starts at the bank, it goes through a various stages of money management before it actually makes its way down to here.
So, um, so the, the deals that, that, that we're doing in Arizona right now, and we're, we are pretty much, uh, Texas, Oklahoma, Nevada, Oregon, Washington, and Arizona, primarily. Arizona and Texas, primarily. So I be, I buy existing properties in, um, Texas. So we own, uh, quite a few there. We just, this year, we bought 1200 units in Austin and Houston. And, and, um, using this exact same model. But with new construction, it's very different. Different team, different set of education, it's very different. So I have two different buckets of debt. So I have the bank debt for the new construction. But we have more sophisticated institutional or even Fannie or Freddie Mac that for our existing properties. So what you find is that the debt gets categorized by risk as well. Because building something new is a lot riskier for the debt for the bank, as they represent you, than buying an existing building that already has a tenant in it. So it's, uh, so you just got to take a look at how debt and equity are priced. And, and once you start to understand that and learn it, then you can talk the language. But it's honestly, it's just like riding a bike. Once you, once you understand it, it does not change. Literally, it doesn't matter who the banker is, who the money manager is, it all is exactly the same. So the, while the deals might change, the language around debt and equity and this here is exactly the same from country to country, from, uh, from state to state, from city to city.
And so the game is all about using debt. Here's the cool part. As, as, as Tom knows, my partner and I, we haven't paid tax in, I don't exactly know, at least 10 years. And the reason is because what the, what you get when you buy housing is you get what's called depreciation. And so, so what they allow is they allow 27 and a half years of depreciation on this apartment house. So as an example, let's say this apartment house was 30 million dollars, and two and a half of it was land. So you have to take the land out because they don't allow you to depreciate land. But the 27 and a half million that's left, they allow you to depreciate one million dollars a year. And why is that important? It's important because this apartment house is producing five, six, seven hundred thousand dollars in cash flow, but you have a million dollars of depreciation. So you report a loss. So that's how it works. So this, obviously, you were trying to buy properties at cash flow. So if the property produces, let's say, seven hundred thousand dollars a year, and you have a million dollars of depreciation, you actually report legally a three hundred thousand dollar loss as the partnership. So you've got 700,000 in your pocket, but you report a 300,000 loss.
And the reason that they do that is because the government needs housing. They're not good at housing. You guys can just, we just can tell you, as they've tried it before in all kinds of cities and all over the country, and they're just not good at it. Even other countries have tried it, and they're not good at it. So the, the housing, at the moment, at least, is all, um, done at the private level. So, so this is why we teach what we teach on the real estate side because there's a massive need for real estate, um, housing. And, you know, we're heading into a very, very, very difficult time for renters. And, you know, next year, we're projected seven percent rent growth. I think the year after that is going to be at least that. So this is not good. This is out of balance. What's supposed to be, what's supposed to, uh, what's supposed to happen is they're supposed to be the right amount of housing for the right amount of people. That's how it's supposed to work. And when that's in balance, it's healthy for everyone.
When the government gets involved, that second tier, and they start to, they start to reduce the, the, they start to put regulations and things on the housing, and I'm not saying some of those aren't needed, but when it gets so bad that you can't build, like we're seeing in LA County, as an example, and that you see the homelessness go up because of density or whatever else, and we can go down the road on this, but the point is, is that when they start to get involved, the bureaucrats, it drives the price of housing up, which only can drive rent up. And so right now, we're in a situation where we have high land costs, high supply chain issues, high construction costs, and high rent and scarcity. So we have a lot more renters because of the pandemic, and, you know, all the things that are happening around that. And if we're having a massive affordability, not to mention inflation. So all of those things are happening right now. But we're, we're in, honestly, we're in the first quarter. Um, we're at the very, very, very beginning of this. So we're going to start to see some massive affordable issues. We're already seeing them. People are going to start, next year, people are going to start to move to affordability and pro, you know, they're going to, they're going to look for the governors, the governors are going to, you know, how the states are run, are going to be a very, very big, um, piece of where people are going to go. That's why Texas and Arizona are growing right now. And, um, and Florida and Idaho, specifically.
So, um, so all that's happening right now. So the point is, it's a lot of information. There's a massive need for housing. There's, we're going to be in a big affordable issue. This is not rocket science. Once you learn it, it really is not. It's needed, and you can do very, very well. You can get lots of cash flow, and you literally can defer your tax if you hold it for a long, long time. Part of the reason why I don't sell is because I'll have a depreciation recapture, capital gain, and all that kind of stuff. So we're a very much a buy and hold company. And so everything we've done has been buy and hold. Tommy, add anything?
Sure. So, um, this is, this is worst case. I mean, one thing you haven't shown Ken is, is how the, the bank's making four percent, but how much are you making? Yeah. Right. Right. So, so Ken's got to make more than four percent, otherwise you're screwed, right? So you've got to make more than four percent. But, but the thing is, is that you get the depreciation even if the property goes up in value. Wow. Even if the property goes up in value, you still get depreciation because depreciation is wear and tear. That's what it's meant to be. It's meant to recapture the wear and tear on the building. It's basically, if you actually did it the way it's intended, Kenny would take that one million dollars of depreciation every year, he'd put it into a fund, and that fund then, 27.5 years later, would redo the building, right? Or, or, or buy the building. That's the idea. That's the economic idea behind depreciation. The government's idea is, and this started with Ronald Reagan, the government's idea behind depreciation is, let's use this as an incentive to build the housing that needs to be built. Yeah.
One more thing. Kennedy operates in the tens of millions. Can it work with a single unit? It, it can. We see, we see people who are doing it with ten thousand dollars down, forty thousand dollars of debt, and buying a fifty thousand dollar house in Indiana. Yeah. All the time. So it's not the size. It's appreciation, depreciation, amortization, debt management. Okay. Then the next piece is the refinance piece, which is actually the most fun.
So, um, so I'll just give you a quick scenario. I'm going off of memory here. So, um, so I bought a building for 19 million. Um, we got 15 million in debt, and we had 4 million in equity, let's say. Now, the bank, what they do is they give you a loan based on the net operating income, or the income minus expenses. So the net operating income when we bought it was about 700k. And so the bank said, "Okay, we'll give you 400 grand in debt." Now, this is the payment. And so this property made about 300k annually. This, yeah, income. So there's a lot behind this, and I'm doing this really quick. But the point is this, this 400k was the payment on the 15 million. That's essentially what it is. This 4 million is equity. That's money that I raised from other people. This, this 300,000 is the return on the 4 million. So what is that? About an eight or nine percent return. Okay. Pretty simple, pretty straightforward. But what I had on this property, uh, we also had a depreciation of about 500 grand, which showed our on our loss of 200. So we had 300k of income, 200k of loss. So the partners showed a 200,000 loss, but we were distributing 300k. But the, what we were really trying to do was fix the property up.
So we bought, like I just bought a property in Austin. The owner had it for 17 years. So I'm sure for the first hour long it was in, in good condition. But when I, when we bought it, it was not in good condition. So same thing here. This property is in Flagstaff that I still own today. It's about, not quite 300 units. So I'm like, "Okay, so when you buy a property that hasn't been well maintained, there are opportunities in there. There are rent lift opportunities. All you got to do is, you know, clean it up a little bit, put some love back into it, and the inside, on the outside, whatever it is. Sometimes we do gates on the outside because there's security issues. Maybe sometimes we do a lot of landscaping, we put dog parks in. We just, you know, we put new appliances and new flooring and all that kind of stuff. And that all equates to a number, whatever the number is, but only what the market will support. So you would never over-improve a property.
So this property, it had a washer and dryer opportunity. In other words, it had, it had hookups and an actual room, but no machines. So, so the residents were going down and using the laundry room. So we're like, "Well, if we buy washers and dryers and stick them in the units, then we're going to be able to, we're going to be able to charge a little bit more, and it's a convenience for for the renter." And so we did that, and we got about 40 bucks there per unit. It took a while because you put them in, and it takes about a year, year and a half before you get them all in. And then we upgraded the vacants as they turned. And what that did is it raised our net operating income to 1 million. So now, that sounds like a lot, but on 200 units, a hundred dollars a month with all that stuff, the washers and dryers and the upgrades, is not that much. But times 200 times 12, you can see how the math works. So we're pretty darn close to that. Plus, this was about three years later. It all took a while. But this is a slow project that you just, that you just methodically move along and manage.
So then we go back to the bank, and I said, "Okay, I'm, I'm now cash flowing obviously a lot, 600,000, right? But I go back to the bank and I say, 'Hey, I got a million bucks now of NOI because the bank, this is what they lend off of. They say, what's the property producing? What's your business producing? You know, how many, how many, uh, sandwiches versus your overhead? What's your net? This is the net, okay?' So the bank says, 'We can give you, we think the value of the property is 25 million now because I was able to grow that. And we're going to give you 20 million in debt.' So this is how the game works. So this is what we call a value-add opportunity. Can we add something though? Is, as an investor, I, he does that, I get all my money back. Yeah. So that's, so that's what I want to show you now. So this 20 million pays back the 15 million, obviously, that's out. Pays back, pays back the investors, their 4 million, and I still have an extra million. This is a cash-out refi. That's all it is. So I was able to do it through breathing, you know, through a strategic program of increasing the value of the property through rent growth, through spending some money. Now I have no equity at all. So I don't owe investors anything at this point. So I borrowed the 4 million, I paid it back at the end of three years, I think it was in the fourth year. Okay. And I still own this building, by the way. So, but the investors still own it too. The investors still own it too, of course. Yeah.
So now, but of course, the payment goes up. And I think it went up to about 700 or something. I, I can't remember. I'm going off a memory. You know, because you, if you borrow more money, your payment goes up. Okay. So now my cash flow is still 300, and my depreciation is still 500, and I still, and so on. And so at this point, we have what we call an infinite return. Surfinito. That's what that means. So then fast forward, this market, you know, we got life back in the market. I bought this in 2005. So I've owned this a long time. So I've actually refinanced this three times. So, um, so we were now, through rent growth, we brought it up to 1.2, and then the 1.5. Okay. So all we do, the bank just says, "Okay, now it's worth 30. Now it's worth 35 based on this and a Y growth." And this, some of this is luck. Some of this is buying in the market at the right time. And, and, uh, and this is kind of the point of where, where the renters are heading right now. So this is why I'm aggressively, aggressively buying right now.
And so what happens is when you start to put another 25 million on here, or let's say 27 million, um, that's, this is all just extra, extra cash. All tax-free. Yeah. Let me explain that just for a second. Why that's tax-free. It's debt. So you owe the money back. You don't get that money forever. You owe the money to the bank. And because you owe the money back, that's not taxable to you. Okay? If the bank forgave it, you don't tax on it. But as long as you owe the money, then there's, there's no tax. So all of these times, he took out five million dollars, and then another five million dollars, and then another two million dollars, all of that was just debt. Okay? But that money came out tax-free because you do owe that money back at some point. So this is why investors want to, if you guys can figure this out, and you can trust me, this is how you raise capital. I already had this planned while I was raising the money. I didn't just think it was going to go up. I knew that the property had been under-managed. I knew that I was going to be able to grow my net operating income a million bucks. I knew it was going to take two to three years. And part of that is because I'm in the game. So I, you know, when I went and pitched the four million dollars to, you know, the various, uh, investors that we have, because we now have close to 3,000 investors, um, they, um, you know, they, they put the money in quickly. And then because they know they're going to get it back within a certain period of time. So this is, this is how, this is how I continue to use debt. I borrow this, and this, and this, and this, and this, and we pay, um, little to no tax. And we've pulled out, um, this is original equity, so it's not profit. So we had one million plus, uh, maybe, and we pulled out another eight million in tax-free income. And that goes, you share with the investors also. Yeah. Yeah. We, we, we distribute that out.
So I understand because I never get my money back. You're going to refi, I'm going to get more money and pay no tax. People line up to give them money. Yeah. So Ken and I have a standing order. He just calls, "I need this." It's called Tom, boom, done. Because that's how we get richer and richer and richer with debt, right? And so all we, all we simply have to do is, is, um, set our investors down and say, "Would you rather do the deal we just did, or would you just rather put your money in the bank?" And that's it. Because the people that are seeing with their money in the bank right now are afraid of inflation. And so they stick it in the bank, and you get less than one percent. Well, anything worse than that. What is, what is the tax on interest? Oh, it's, it's your regular tax rate. So if you're in a 35 tax rate, it's 35 percent. So that's why in Rich Dad, and Rich Dad Poor Dad, I said savers are losers. They teach you in school to save money. Why would you do that? Right? Right. Makes no sense.
The people who are most at risk are actually the banks right now because they're, they're lending you money. Hopefully, you guys are doing fixed-rate debt, and inflation's running higher. So they're actually, um, what they would rather have you do is do a variable rate debt because variable rate will will go with with the market. What you want to do is you want to do fixed rate debt. So you want to, you want to fix your debt, you want to hedge your number now, so that you know what the payment is, especially with with inflation at five, six percent. So, so the, the Fed, transitory means just like what you would think it means. It's temporary. So they were at two a year ago, right? Two percent inflation. Now they're up over five, six. And, and so that is their narrative. They're saying that there was an article that came out last week that said inflation is good for the middle class. I haven't figured that one out yet. But, um, it doesn't, uh, again, you got to be careful of the spin, the media spin on, you know, all this stuff. The Fed, as we know, is the third central bank. It is not us. It is not federal. It has no reserves. There's nothing. It is a cartel owned by the Rothschilds. So if you understand that, and you understand why guys like Ron Paul say, "End the Fed," and all this. But the other part about it is, so what happened in 1913? The Fed was created, and the 16th Amendment was passed because money had to come in through taxation. So when they print money, the only way to get it back is via taxes, which is why time is here.
So here's our four quadrants. How much tax you pay depends heavily on which quadrant you're in. So if you're an employee and you make a good salary, you're probably going to pay about 40 percent. This is worldwide too. It is. It's really interesting. We, we travel all over the world, and we, I always get to look at the tax law when we go somewhere, and the rates are remarkably similar. The brackets are different, but the top rates are about the same. If you're self-employed, you get more education, you decide to be, you decide to start your business, you're up to 60. But a big business owner is down around 20. This is why Warren Buffett famously said that he pays a lower tax rate than his secretary. She's an employee, he's a big business owner. That's the fundamental difference there. And then if you're a professional investor, you get down to zero. That's what Kenny was talking about. Okay? He's a professional investor, hasn't paid taxes. So basically, if you look over here, this is Biden, this is Harris, attorney, and this is Trump. You know, Trump, New York Times said Trump, 10 out of 15 years paid no tax, and two years paid 750 in tax. And somebody asked me, "What do you think about Trump paying 750 in tax?" I said, "His accountant should be fired." Because why is he paying any at all? Because Trump uses so much debt, there's it would be so hard for him to ever pay tax because he does what Kenny does, but on a larger scale, right? That's his business. So love him or hate him, this is, this is the way the tax law works.
So the tax law is about itself is about six thousand pages. And there's one line in the tax law that says, "All income is taxable unless we say it isn't." There's another line that says, "Nothing's deductible unless we say it is." There are a few pages that tell you how much tax to pay, but the rest of it, almost literally 99.9 percent of it, is just an instruction guide on how to reduce your taxes. It's very much a roadmap. And the reason is, is because there's incentives. And when you look at who's, who does the government want to incentivize? Okay, well, not employees. Employees, Trina, consume it earlier. Consumers pay a lot of tax. This is why savers are losers. They're consumers. Okay? So if you consume it, if you're an employee, okay, well, they're just going to pay tax. As a self-employed, if you don't pay attention, you're just going to pay the same amount of tax they do, plus, plus extra. But what happens is that the government says, "Well, wait a minute, what would we really like?" Well, over here, what we really want is we want to incentivize job creation. So that's why this is 500 employees or more. Okay? Once you get over 500 employees, now, now you're really creating jobs. The government wants jobs created. That's one of their number one goals. What about down here? Well, they want housing. Kenny talked about that. But what else do they want? Energy, agriculture, and technology. So they incentivize all of those. That's what they incentivize. So once you, once you get in your mindset that the government, I get to choose, right? Where I'll partner with the government. I get to choose. Am I my asylum partner over here, or am I an active partner over here doing what the government wants done?
These people, you know, there's been a lot of discussion lately about, "Rich people are cheating on their taxes." My experience is, the rich don't have to cheat because they have all the incentives. The people who are cheating, frankly, number one cheaters in the world are right here. That's true. And these are the people, they're your, they're your stylists. Thank you for admitting that. They're your stylists. They're your, they're your, they're your contractors that say, "Here, pay me cash, and I'll give you a 20, 20 discount." What is that? Well, they'd rather give you a 20 discount to pay the government 60 in tax. That's all that is. That's just money under the table, under the table from the government. So that's where all the cheating is. Okay? So don't, don't, don't believe this. These people don't need to cheat. You know, Trump, I love this. So I love that New York Times article. I know he hated it, but I loved it because basically it said, it said he made 400 million dollars on The Apprentice. That's his S, that's his S income. But what did he do? He did just like Robert was talking about. He borrowed, rolled it into real estate. And what do you get back? A 70 million dollar refund. Wow. He rolls it into real estate, his hotels, golf courses, etc. And once he get back, he gets a 70 million dollar refund. That's why they're complaining. They're complaining to the wrong person, right? You want to complain? Complain to the government because they're the ones who make the laws. All we're doing is our job. And my job is just to explain how the laws work. And then we get to choose. Now, you get a choice, right? You can pay taxes over here if you want, but you don't have to. Once you get the education, you can pay taxes over here. Does that make sense so far? Yeah.
Okay, so let's go to Kenny's side of things. Okay, this is the financial statement that Robert has right over here. Cash flow. This is financial statement. We have income, expense, asset, and liability. Okay. What happens for most people? Money comes in, and it goes out. It's taxes. So what's happening is they're either consuming it or they're saving it. And people who are consumer, save, they pay taxes on 100 percent of their income. That's the rules. You consume it or you save it, you pay 100 percent tax on your income.
There's one more thing about the 401k. How does that tax work? That's even better. So, so the 401k, you, you put money in, but you pay tax on the, at the highest rate coming out. You don't pay tax at lower rates. You pay taxes the highest rate coming out. It's, it's earned in its ordinary income. So when you retire, it comes out ordinary. It comes out as ordinary income. Even if it were invested. Say, I mean, some people tell me, "Well, I'm going to invest in Kenny's deal through my IRA." I'm going, "That is literally the dumbest thing I've ever heard." Okay? And I hear it all day long. Okay? Well, because what's happening? You're losing all the tax benefits that Kenny's been, we were talking about with Kenny. But when it comes out, it's taxable as ordinary income. So you turned a non-taxable event into a taxable event. Yeah. That's dumb. Okay? That is not, it's not rocket science to figure out that I don't want to do that, right?
So what Greg does, and he was telling me, goes, "Well, I've been putting all my money back in my business." Right? If you put your money back in your business, you pay no tax. That's called a deduction. That's just called a deduction. And if we have time, I'll show you how to make anything deductible. Okay? So hold on to that thought. This is, this is really common. All business owners know this. You guys are deducting the money that you spend on your business, right? Your business expenses. You're deducting that. That's just an expense here, okay? What Robert does differently than most people is, yeah, he's still doing this with his business, but then what he does is he takes what's left over and he puts it into real estate, energy, right? That's commodities, right? Or a business. And if you do it, any of those three, because those are government-favored investments, then you pay zero tax. The difference between what Robert does and what most people do is, most people looking at an expense. One expense. The difference between expense and asset is an expense. The purpose of an expense is to produce income. Okay? But expense produces income once. An asset produces income for years and years and years and years. So if you had your choice between putting your money into an expense which produced income once, or produced, putting your money into an asset which produces money over and over and over again, who would choose putting money into an asset? Raise your hand. Right? And especially now where the tax benefits are just as good here. In fact, they're even better here because what Robert does and Kenny is, they add debt. So they're actually compounding their tax benefits. They're compounding their tax benefits. So by doing that, you get an asset that produces income over and over and over again. You don't pay tax over and over and over again. Okay? And you constantly have that cash flow. But you still have the asset. The asset lasts as long as you, as long as you want to last, as long as you, you make it last.
So I'm going to finish up for a second, and then I want you to have a little discussion here. Who can tell me, what's the purpose of income? What's the reason for income? Purpose of income is cash flow. If your income, if how many of you have people who owe you money in your business? Raise your hand. Okay, that's not cash flow, is it? They owe you money. There's no cash there. They owe you money. That doesn't, there's no value to that money, to that income, until the money comes in. Purpose of income is to create cash flow. The purpose of an expense is to create income. And the purpose of an asset is to either create income or reduce an expense. The only reason you should ever, ever have debt is to produce an asset. But what the debt does, it increases my depreciation, right? Increases your depreciation, and increases your returns, right? That's what I mean. It does both.
And here's where people get scared of debt. How many know people who are scared of debt? Raise your hand. Maybe you, maybe not. If you're afraid of debt, what is it that you're really afraid of? No, you're not afraid. You're afraid you won't be able to pay because you don't trust the asset. It has nothing to do with the debt. You don't trust the asset. Kenny trusts the asset. Does Kenny sound like he's afraid of buying real estate and putting 600 million dollars of debt? No. Why not? Because he's done this over and over and over again. He knows the asset will produce the income. He don't worry about the asset. Then therefore, he wants as much as possible. But if you are not trusting your asset, okay, because you don't have the systems, bi-triangle, you don't have that in your business, for example, okay? Greg can go out and borrow money in his business because guess what? How many think Greg pretty much knows what he's doing when it comes to his asset, his business? Right? He trusts your asset. Absolutely, right? I just borrowed five million dollars. There you go. He trusts the asset. So when you trust the asset, you no longer have to worry about the debt. It's irrelevant. If you don't trust the asset, don't be buying the asset in the first place. Forget that. Don't be buying the asset.
His asset, right here, how much does it have to produce for him not to be in trouble? Over four percent, right? He's paying four percent. So if his asset doesn't produce at least five percent, he's in trouble. Okay? But he's not selling the asset. Okay? If you're selling the asset, it's not an asset, it's inventory. Okay? Just to be clear. If you have something like, let's say you're flipping houses, that's not an asset, that's inventory. Okay? That's different. That's part of your operations. That's, uh, that's an expense. Inventory is really an expense because it produces income once. So flipping a house is inventory, it produces income once, it's an expense. It's not an asset. An asset produces income over multiple years. A rental property would be an asset. An oil well would be an asset. A business that produces income every single month, every single year, is an asset. Okay? Those are assets. A dividend-paying stock would be an asset. Okay? Most stocks aren't dividend-paying, but that would be an asset. Dividend-paying stock. You know, a capital gain stock, that's not an asset, it doesn't produce any income. Apple, Tesla, they don't, they don't, they're not producing income. Those are, in my mind, that's not an asset, it doesn't produce cash flow. So I would never borrow to do that. Bitcoin doesn't produce income. Now, it may be a good way to hold money, right? As opposed to savings. That's called a store of value. Does it hold as value? Right? Gold, silver, Bitcoin, Ethereum, whatever. Okay? That's some place to stick your money. Okay? But if you want it to be productive and you want tax benefits from it, okay, then it has to be in, it has to be in this loop over here. But if you stay, if you stake your Bitcoin or Ethereum, then then it becomes an asset. Then it could become an asset, right? Because now you're earning interest on that bit, on on that Bitcoin. They're taking it for price. That's correct. That's correct. Now, that's still, that's a very volatile asset. So that's still very risky, um, proposition.
All right. So do you trust the asset? Let me put, let me put this in perspective. To Greg's loving this. Let me put this in perspective. Bitcoin is right around 50 right now, 50,000. If you knew for sure Bitcoin was going up to two million dollars, I mean, without a question, you knew for sure it was going to mean two million dollars, how much would y'all buy? How much debt would you get to buy Bitcoin if you knew it was going up to two million? As much as you could, right? Okay. Kenny knows that his real estate is going to produce income. So what does he want to buy? He wants to buy as much as he can, as fast as he can, with as much debt as he can. Wow. Great point. It's trusting the asset. That's good. You can't do this without the education. You can't. You're never going to have an asset that you can trust without the education. So don't be thinking about, you know, the worst question I've ever heard Robert Gatt. I remember this really clearly. He gets it all the time. But I remember one specific circumstance, and I can't remember where we were, somewhere in Eastern Europe, and this woman comes, is, is kind of the hostess, and she comes up to Robert. This is in the, in the VIP lounge at the airport. She's sitting with him. She goes, "So I have ten thousand dollars. What should I do with it?" Do you remember that? You get it all the time. I know. "What should I do with it?" is the dumbest question ever. Okay? Well, the answer to me, in my mind, is spend it on education because you're going to lose it anyway. Okay? It's, and some of the education we get. One of the things that I've been learning from Robert is the kind of questions to ask, right? Because there are stupid questions. "How do I invest ten thousand dollars?" That's a stupid question. I'm sorry, I disagree with people who say there's no stupid questions. That's a stupid question. Let me give you a stupid question in my business. Is this deductible? Is this book deductible? How the hell do I know if it's deductible? I don't know whether it's deductible for you. But you could ask a better question. "How do I make this book deductible?" Now, that's a good question. That's a good question.
So to me, a lot of the studying Robert's talking about, studying, he talks about all this finance stuff, but a lot of it's personal development type studying. How do we get better? Greg just said, "I've never heard you say that before." Well, because I've been studying. I just, and I figured this out like six months ago. Greg, that's why they cover you in copper. So that, I mean, but that's the point is that you're constantly studying, you're constantly learning, you're constantly improving. If you're not doing that, then like you said, Trina, you're going to get passed by anyway. So you might as well give up now. And the difference, if you look at the primary difference between this side and this side, these guys rely on a team. These guys rely on themselves. That's the, the number one difference between this side and this side in my mind is it's the team. These guys can have a mission, they can, they can be driven, but they don't, they don't have a team because they're not willing to give up control to their team or create the systems where they maintain control of the team and still have the team, right? I mean, can you imagine having 500 accountants? It's scary. Scares the dailies out of me every single day, let me tell you. But it's a matter of creating the systems and having the leadership and having the mission and doing the training, doing the work. Then you can have the team. But until you have the team, you never can get big. You're, you will always, that stands for small, and you will always be small.
And the other thing that happens, Tom knows a lot of, is all of my partners came from bad partnerships. I met Tom because I had a bad account. Yep. She was an S and a crook. The other thing is my, my friends are, you know, JW right now is going through it. If you hire a CEO, you hope they share the same mission, right? Right. Absolutely. I, I thought just because a person was an accountant, an attorney, I don't mention their names, that they were smarter than me. Now, there are thieves. It's shocking. My biggest problems have been attorneys, right? Yeah. It's really easy to rely too much on experts. Okay. Having a team doesn't mean you've got a bunch of experts. It means you've got a team. And it never stops. I mean, you, you make mistakes, you learn, make mistakes, you learn. And that's how we learn everything. Here is about cash flow, right? Either it flows out and do what most people do, flows back to the business, which should create more income, flows into an asset, which creates more income. You borrow, you get debt, asset, more income. But it's all about cash flow. So every single thing, by the way, every investment is valued based on cash flow. That's a little secret. It doesn't matter if it's business, we call it a multiple. Um, it doesn't matter if it's stock market, we call it a PE ratio. Doesn't matter if it's real estate, we, we call it a cap rate. But every single asset is valued based on cash flow.
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