To those raised on the notion that Wall Street stock offerings are the end-all to creating wealth, it might seem odd that we suggest borrowing as your primary wealth management strategy. Keep in mind we’re talking about a specific kind of borrowing, defined as a fixed-rate, long-term mortgage tied to a piece of income producing property. Older generations are likely to tell you that borrowing is the way to certain financial ruin, but they were raised under a different economic reality, one in which inflation was negligible and many companies paid healthy dividends.

Here’s why borrowing works as a wealth management tool…

Inflation is a virulent factor that drains away our wealth at an amazing pace and, as long as you’re dealing with cash based assets like stocks and bonds, there is little you can do to escape it’s effect. But there is one way to bypass inflation, or even better, make it work for you. The trick is to incur as much of the right kind of debt as you can, which means mortgaged income properties. First you must realize that when a bank loans you money in this type of scenario, they are taking on a diminishing asset – a mortgage. In real terms, the money you owe them is being degraded by inflation every year. The end result is (let’s grab an example out of thin air) the $500,000 you owe the day you signed the note is reduced in real terms of what a dollar can actually buy by about 10% per year (our estimate) because of inflation. At the end of the first year, the real term value of that mortgage is only $450,000, even if you paid nothing but interest in the interim.

See how the right kind of borrowing can make you wealthy?

This wealth management strategy requires a way of thinking almost the polar opposite of traditional wealth building strategy. In inflationary times, the more mortgage debt you can accumulate and the longer you delay paying it off, the richer you become. It might take a bit of pondering for the possibilities of income property investing to sink in properly. Keep this in mind. This is how the rich get rich in America, and it’s they way they always have.

Got questions? Call 714-820-4200 and ask to speak to one of our professional investment counselors.

The AIPIS Team

Flickr / S.MiRK