Hello Mr. Collier,
I hope all is well with you. When you have some time could you please answer the below questions? Thank you so much for your time and thoughts!
What is the best asset class to preserve wealth? What’s the best wealth to preserve wealth? How do you preserve wealth?
First, Wealth PRESERVATION is very different from Wealth CREATION.
Short answer is Diversification; don’t put all your eggs in one basket. Next, live in a state without an income tax (Florida! Texas!). After that, own your own home free and clear, don’t fall for siren song of home equity loans etc. In Florida, homestead protection is unlimited in dollar amount and up to an acre of land inside city limits.
Longer answer is that you have to peer into the murky future and decide what threat most concerns you. Disability/Disease? Old Age? Hyper-inflation? Apocalypse? Become a prepper! Predatory Personal Injury attorneys are always a concern, one rogue jury and you are in the poor house. If you have an active business, a bad business cycle combined with an ill-timed investment could drive you to the brink of bankruptcy.
Usually wealth creation is an active process, wealth preservation a more passive one. I love real estate however doing it well requires involvement. I highly recommend an S&P 500 index fund i.e. place a long-term bet on the American economy and since so many companies are global in nature, I would not bother with an overseas fund. If you wish to spread your bet a bit more, the Russell 2000 covers small and mid-cap American companies. When interest rates are attractive (i.e. not now) and stable to possibly falling (i.e. face value of bonds will rise, rising rates means market value of bonds drops, inverse relationship), some of your portfolio should be in bonds.
Properly done, trusts are an excellent way to protect assets from judgements/creditors/Personal Injury attorneys. Delaware statutes allow for self-settled trusts i.e. a spend thrift trust you set up for yourself. British common law generally only allowed spend thrift trusts (assets can’t be touched by beneficiary’s creditors) to be set up/funded by 3rd parties (parents for kids etc.) under the “but for” theory: creditors not harmed because assets would not have been gifted to the beneficiary but for the protection provided. Nevada also allows but Delaware is probably the best bet to stand up under legal attack from creditors going after assets in other state’s jurisdiction, has better reputation in judiciary, corporate law is Delaware’s stock in trade, more Fortune 500 corporations headquartered in Delaware than any other state, however neither state’s statute has truly been tested in court yet.
Trusts may also serve to preserve wealth across generations, consult your legal advisor or CPA.
How important is leverage when building a multi-family portfolio?
Anytime your expected Rate of Return/Return on Investment (ROR or ROI) exceeds your cost of debt, debt will in theory leverage up your return. However, your ROI is a projection subject to the vicissitudes of fate and fortune, the interest on your fixed debt is a certainty you must deal with no matter what and if you gamble with variable rate debt, it can rise on you. Also, if your debt amortizes (and most does) then the percentage hit to your cash flow is even greater than your interest rate. This is your mortgage constant: You may have a 5% interest rate BUT if you must also pay down 5% of your principal every year, you have a 10% mortgage constant, a 10% hit to your cash flow. If your ROI is only 8%, you may have a cash flow challenge depending on the amount/percentage of equity you have.
As always, I share what I most want and need to learn. – Nathan S. Collier