HOW TO BEAT THE 1% AT THEIR OWN GAME (LEGALLY AND ETHICALLY)

Is it just me, or is vilifying affluent members of society really in style right now?  The media would have us believe that the economy is a finite pie and if one person has a bit more, then that means someone else has to settle for less.  I’m sorry, but that’s economically backward.

The One PercentIf Larry Ellison (founder of Oracle and multi-billionaire) moves into your town, is your town in better shape or worse shape?  It’s in better shape by a long shot.  Just the drippings from his proverbial plate would greatly benefit numerous aspects of your community’s economy.  It could lead to increased employment (Larry needs a contractor to build his new garage), increased tax revenue (Larry’s big income means big taxes), and increased spending (Larry has a taste for the finer things in life).  If Larry Ellison moves into town, your country treasurer celebrates, and so should you.

I’d like to emphasize that Larry’s prosperity does nothing to diminish your own ambitions and pursuits.  Just because a rich guy lives up the street from you doesn’t mean you too can’t become independently wealthy.  He’s enhancing your neighborhood’s value, he’s invigorating your local economy, and he can serve as an inspirational example of what’s possible.  These are good things.

CLASS WARFARE?


Now, I’m not numb to the fact that there’s a massive income disparity in this country.  The welfare state is growing, the middle class is being compressed, and while the financially prosperous may be few in number, they control a disproportionately large amount of this nation’s wealth.  This is no secret.  There are polarizing views on this matter that make for good political banter from our elected officials.

The 1% exerts tremendous influence and control over the wage rates in this country.  For the last few decades, middle-class earnings have generally stagnated while the cost of living has continued to increase.  As a result, middle-class families have had to use debt to make up the difference.  All the while, corporate executives that control the company purse strings are cashing out stock options that amount to the GDP of small countries.  The business was built on the backs of the working class, but the few at the top receive all the benefits because they’re the ones in control.  Unfair?  Definitely.

So here’s my question to you:  Is there a way you can legally and ethically beat the 1%?  Yes, there is.

BEATING THE 1%

The 1% may have a stranglehold on the country’s wage rates – and they’re not planning to loosen their kung-fu grip anytime soon – but there’s one thing they love to do that we can easily exploit as investors:  they love to lend money.

The elite banking cartels have understood this for centuries.  They loan money to consumers and businesses and collect interest and fees for the duration of the loan.  This lending arrangement is what fuels the mortgage, banking, and credit card industries.  It’s practically the foundation of our economy.  So how can we capitalize on this model to legally and ethically beat the 1%?


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Well, consider how banks make most of their money.  They lend your deposits out to borrowers, right?  They pay you something paltry like 0.8% interest on your savings, then they turn around and lend that money out at 7% to a business that needs to buy some new equipment.  The bank pockets the interest rate spread — commonly known as the net interest margin.  They receive 7% and they pay you 0.8%.  They can also use a financial construct called fractional reserve banking that allows them to lend out money that they don’t have on deposit.  This use of leverage is what amplifies the returns that banks generate on the money they lend.

Can we do the same thing?  You bet we can.  As investors, we can exploit the same system and beat the banks at their own game.

For example, we can borrow money from a bank at a rate of 4%, then use that money to purchase an income property that boasts a 10% cap rate.  Now instead of the bank pocketing the spread, we’re pocketing the spread.  I just did this last month when I closed on another income property for my personal Pay Me Plan.  I pay the bank 3.25% (mortgage rate), and the property yields a cap rate of over 12%.


The One Percent

As investors, if we can keep our cost of capital low – which is very easy to do in this current low interest rate environment – and earn a high rate of return on our investments, we can participate in the same model that the 1% use.  They’ve been doing this for centuries and it’s allowed them to build empires.

LIKE IT OR NOT, WE NEED THEM

The financial cohort and the top income earners have tremendous influence over both the private and public sector.  We all experienced the impact they can have on the economy during the Great Recession.  The rich have a lot of pull.  And whether we like it or not, as long as the current monetary system is in place, we need them.  Businesses need them to buy inventory and finance expansions, consumers need them for car loans and mortgages, and governments need them to facilitate the flow of capital across borders.  We may not agree with their ideologies and their business practices, but we need to maintain this symbiotic relationship for now.

I’d advocate that instead of demonizing the rich, how about you strive to join them?  We can see how the game is played, and it’s a game we can actually participate in.  The 1% may not like to pay much in wages, but they love to lend money.  And if we’re savvy investors that know how to use that money to earn an enhanced return, we can legally and ethically beat them at their own game.

Those are my thoughts. Feel free to share some of yours below. Thanks for reading and as always, make it a great day.

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Gerald Larue thumbnail pictureThis post is by Gerald Larue, the founder of DEMOS Financial, an investment training, education, and financial research company. DEMOS Financial is a California limited liability company that specializes in helping novice and intermediate investors with strategies, approaches, and techniques for generating investment income and putting their money to work for them. The Pay Me Plan home study course was created and produced by DEMOS Financial.


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