The Hierarchy of Wealth Part 2 : Generating Passive Income

The Hierarchy Of Wealth Part 2: Generating Passive Income With John Stewart

In this episode, we are going to discuss tier 2 as part of the Hierarchy of Wealth series. My guest is the most seasoned wealth strategist at Paradigm Life, John Stewart. We love talking about this stuff. John introduced me to several different personal development groups, which we consider one of the best investments in tier 2, personal development, investing in yourself, and ways in which you can improve your value to the world and subsequently make more money. Also, in tier 2 are investments that have collateral that you understand, are familiar with, subsequently control but also produce residual or passive income. John and I can bolt the test firsthand to how this has benefited clients to generate multiple streams of income, as well as ourselves, and has helped to grow their wealth, ultimately an income for life that they don’t have to work for. Finally, a lasting legacy for their family. The resources that we discuss will make a lasting impact on your life and help you understand some of the best ways to allocate your hard-earned to make more money.

—

I’m joined with my good friend and the most snazzy dresser at Paradigm, John Stewart. John has been here for a long time. It has been an honor to get to know him and his family. We’ve had the opportunity to travel together a few times and there’s no one more honorable than this guy. I’m excited to have him on to talk about the Hierarchy of Wealth, specifically about tier 2. John, why don’t you talk about your background as well as your experience here at Paradigm?

Thanks for the kind words, I appreciate it. It was interesting you asked me to join you to talk about tier 2, which is how we met. Tier 2 was a big part of my life and I was trying to figure out how to get more of it. Someone brought up your name, and said, “You need to talk to Patrick Donohoe.” That was before Paradigm Life, but that’s how we met. Prior to that, I owned several companies. I had about 170 some odd employees. We did work nationwide in 39 states and started acquiring a lot of real estate and a lot of these tier 2 assets as a way to be home with my family.

It ran into issues in real estate that they call Fannie and Freddie out as many as the bank would give us. As we went through 2008 to 2009, it was probably one of my biggest life lessons behind money realizing the importance of tier 1 and realizing how heavy I was in tier 2, tier 3. I had a lot of real estate, these other assets, and not near enough a foundation tier 1. That was a painful experience, but I’m glad that happened to be in my 30s and not my 50s or 60s. I had a policy at that time and it woke me up to the value of a life insurance policy in those tier 1 assets. As I’ve rebuilt from that, it’s been completely structured the way we teach in Paradigm Life.

The interesting thing is hindsight is the best teacher. It doesn’t always have to be your hindsight, it could be other’s hindsight. I learned some of the same lessons you did, based on my own experience, not from the experience of others. It does teach you the value of liquidity. Oftentimes, it’s difficult and challenging for those that haven’t necessarily gone through difficult times. You look at what was described in the book as the Hierarchy of Wealth, which is a way to categorize your assets. It’s not an objective categorization of assets, like some of your asset allocation models that are out there and your portfolio creators. This is something that’s a function of risk and control. There’s always going to be a risk, but it comes down to how do you mitigate it? We’ve found that the more control you have, the more you’re able to mitigate it. The more education you have, the more you’re able to control it. At the same time, having foundational assets liquidity helps when there are these different events that occur in life that throw off what your assumptions were.

The clients that we talk about in the book, but also clients that we work with, oftentimes it’s challenging to talk about something that may be a foundational tier. It has a good return way better than cash in some other features to it, but yet there are assets out there that will perform better or have in their pro forma a rate of return that’s superior. How do you go about describing or differentiating the tier 1 assets as we describe as high cash value, life insurance and a tier 2 asset, which is an asset that has collateral behind it and has cashflow and a higher return?

Most of our clients remember or experience similar stories in ‘08, ‘09 and some of our clients, the 2000s. It is a little fresher on our minds as COVID. The tier 1 assets are what’s called staying power. Not only myself, but a lot of friends and family had amazing portfolios of real estate and business and all these other tier 2 or tier 3 assets. The problem was when capital dried up and when cashflow quickly coming in. I had 43 rental properties. I still remember exactly, November of 2009, in one month, I went to 70%. I didn’t pay, I had vacancies and left my properties. I thought I had a decent nest egg, but tier 1 is the staying power, so I can maintain and hold on to my tier 2 assets like with the COVID. The tenants don’t need to pay their rent.

I had a friend of mine who had a bunch of rental properties and they went to collect rent. They never had a late payment from several of their clients. They’re like, “We’re not paying this month.” She’s like, “What do you mean you’re not paying this month, you’re living in my property?” The lady went, “Now, we don’t have to pay it. I don’t know what’s going to happen, so I’m not going to.” Even the crazy things we’re going through, to me, the tier 2 is where I love to play in. Every time I’ve been burned it’s because I haven’t had the staying power in tier 1.

The Hierarchy of Wealth Part 2 : Generating Passive Income Share on X

Tier 2 is one of those assets that doesn’t have the risk of tier 3 or tier 4. It’s an asset that you control because case in point with your example shared, you have someone that owns the property that has someone in the property. They control the mortgage and the management, but yet, there are these things that happen out of the left-field like, “We’re not going to allow evictions. We’re going to have this happen.” There are things you can’t necessarily control such as vacancies.

That’s why number one from a defensive standpoint is staying power. It allows you to supplement income or pay a mortgage for a few months until things turn turnaround. Maybe talk about as you’re doing strategy with clients, how do you position the Wealth Maximization Account, that foundation to act as an opportunity fund so that when opportunities arise that are in that category of tier 2, that you can capitalize on those opportunities?

On those opportunities, like this other lady that tier 2 example, she’s making a double-digit rate of return. It’s a great investment, but if she doesn’t have that tier 1, she doesn’t have the ability to hang onto that investment in those times. As I’m going through with clients, we’ll look at what are the goals. For me, I remember in the early 2000s, I hated money sitting in a checking and savings account, earning not even a full percent. I was constantly putting it into my companies, real estate and growing those out.

Once I understood the Wealth Maximization Account, my money is earning 100 or 200 times more than a bank account. I’m loving being a lot more liquid and having that money sitting there and grow. When I do an example with a client, looking at building out a real estate portfolio, a lot of times we can buy half the real estate and end up with the same return. We’ll always look at what are their goals. Is it reaching a cashflow projection to get out of their grind? What are their goals to do it? We’ll then look at what they need for that reserves to make sure they hang onto those properties. How fast they can build those properties up? Maintain a little bit that they can jump on the deals rather than constantly be looking and buy the first thing that comes along. Everybody’s a little bit different. It depends on the amount they can put away, what their risk tolerance is and their other forms of income. That’s what makes it fun. Everybody’s different and every plan is slightly different for that.

One thing that I have always found valuable personally, is as you take a loan from the insurance company against the cash value and acquire something. It could be something that you buy as a part of your lifestyle or something you buy that is investment-related, let’s say a rental property, investment fund. There’s a built-in discipline where there’s a return of principal before return on investment. As the return comes in, there’s this built-in strategy model, discipline structure.

You treat it not necessarily every asset, every acquisition, every investment, the same way, but you treat it where it doesn’t necessarily go to lifestyle expenses or allows you to buy new doodads. It allows you to have a structure to continue to build wealth. That question came up because of your comment about goals, knowing what the goal is. Is that a future income to be able to get out of your grind? If it is, it’s setting up a system and some rules within your system so that you can achieve that goal. As opposed to what most people do when they get more money from an income standpoint is, they spend more money.

That’s one of the hardest ones. For most people, these alternative investments, the tier 2 assets are to replace a 9:00 to 5:00 job or whatever they have. Taking a lump sum of money or a chunk of investments and living off of that income without having the reserves, you’ve jeopardized not only their lifestyle and their investments. Even when they get to that point, one of the big things is it’s not about stuffing your money in all these cashflow properties and investments and living off of it. You have to make sure that you’ve got that buffer, the reserve fund somewhere because people buy and sell the properties and add to when you find great deals. You’ve got to have that fund to continue adding to them and fix them up whatever it may be.

One of the things we talk about that you hit on, in a sense, is the idea of personal development as being part of tier 2. You have investments that produce cashflow that have collateral, where you have a great deal of control over it, but you also have yourself as an asset. Oftentimes, people don’t consider that an asset, especially if they work for somebody else. If you look at you, I would say in my experience, the most amount of money is going to come from you, not necessarily an investment. It’s you as your most valuable asset where that money is going to come from.

It is you – not your investment – that is the most valuable asset where the money is going to come from. Share on X

As you improve, whether it’s your experience, certification, training and you pursue something meaningful that you like to do. Even though we’re drawn to the retirement of not having to do what we’re doing. At the same time, most people that get there don’t live a fulfilling life because part of that fulfillment comes from continuing to create value. You’re the one that introduced me to a lot of different personal development, leaders, and groups. Talk about that and how important that’s been to you and your development over the years.

I remembered Robert Kiyosaki or Tony Robbins said, “Your investments will only grow as much as you do.” I have found that to be true. Part of that is perception. What I see as possible is what I’m going to make happen. If I don’t see it as even a possibility, it’s not even on my radar, I’m not even going to try it. There’s so much of that personal development as being in that space of constantly growing, constantly learning. A lot of times, that put you in groups of likeminded people that are somewhere on the same journey, as afraid and a little behind you, a little ahead of you wherever they’re at. For me, it’s not only changed my perception when I’m around people that have accomplished things that I want to that is in a place where I want to be. I’ve been at different places where I’ve made tons of money, but not in the best relationship with my wife or my kids. I’ve been in a place where I’ve got a great relationship with my wife and kids and not where I want to be financial. There are all these areas of growth that are important.

In most positions as well, you interact with human beings. You talk to and try to understand them and they have a different perception of the world than you do. We all do. Being able to connect, have a conversation, and be aware of things oftentimes requires introspection. It also requires education around understanding others, where they’re coming from, what their goals are, how to ask good questions, how to communicate, and how to articulate? That is part of every profession. Becoming more self-aware, and getting that type of training allows you to ask different questions and to connect at a deeper level with people. Ultimately, that leads to providing more value and subsequently more wealth.

One of the main things I hear with almost every client is, “Why have we not heard of this before? Why is this not out there being shared more?” It’s interesting because without fail, I can say 9 out of 10, every client I meet with says that. Yet, the funny thing is that like real estate or business, why doesn’t everybody start their own business? Why doesn’t everybody know about the powers of real estate? We tend to think that we already know everything and getting in a space of personal development and constantly improving ourselves. I know for me, it’s opened my eyes up, but the more I learned, the more I realized I have no idea. That’s one thing that intrigued me about the industry we’re in is we come in, we carve a little niche out, and we’re helping a lot of people with their retirement and investments. There are many areas we can go to in the financial world that people need a lot of assistance. That’s probably one of the things I love the most is being able to help people in that area.

I’ve got a question from someone who was a neighbor of mine. He said, “What distinguishes you from the Edward Jones guy or the Fidelity guy down the street?” I said, “For us, it’s internal. We teach people how to value themselves more and take control of their wealth as opposed to turning over their wealth to somebody else to take control of, to grow and perpetuate it.” That’s the biggest distinguishing factor. An amazing business opportunity could be right there in front of you, but because you’re not aware of it, you’re never going to capitalize on it. That’s where we look at the Hierarchy of Wealth being more subjective because there are things that you knew, understood and experienced.

They give you a degree of education that you can take to whether it’s your career, it’s to your business or to an investment. The degree of your education equates to the degree of control that you have. The more control, the less risk you have. For what might be at tier 4 risky assets for somebody, might be a tier-2 asset for somebody else that has training, knowledge, understanding, and experience. In the end, what we subscribed to in a nutshell is to empower human being to improve their internal wealth, which is their ability to create value for others. Everything else is essentially supplementing that or enabling that. Whether it’s the cashflow on investments in tier 2 that allow you to resign from a position that you don’t like. Not necessarily because you’re not good at your position, but because maybe you don’t like your boss or the culture of the company. This allows you to go and pursue the same type of career, but as a consultant or as a freelancer with another company.

It also allows someone that may be approaching retirement age and that was their goal all along, but yet they realized, “I’m going to have to save way more than I thought I was going to have to save to be able to afford the lifestyle that I want in retirement.” This offers them the opportunity to value themselves to understand that they have been paid because they’ve created some sense of value. They can keep doing that forever and they can start to write their own terms as far as how they do that. A lot of that comes down to personal development, being aware of those opportunities, as opposed to wealth being created outside of you. I think that is the conversation with this guy was, but in the end, tier 2 is what opens up people to the importance of reserves, the importance of having a foundation of certainty, and then to start to create cashflow and value investments. Not based on necessarily the return, but based on the amount of control that you have. It’s to understand what your goal is. What is it that you’re achieving? What do you want as an end result?

Maybe we end with this because this is a question that even though it seems simple, most people can’t answer. Most people cannot answer, “What do you want?” “Retirement.” “What do you want from that?” Digging into that and connecting to what somebody wants to accomplish, achieve, and how they’re doing it, which is a myopic perspective and strategy. What gives us a niche is we’re able to broaden the opportunities and the possibilities of achieving it in different ways, better ways, and faster ways. Speak to that as far as how you’ve been able to connect with clients, understand their goals and dreams, understand what they’re trying to accomplish, and then using the strategies that we’ve become experts in to help them accomplish it.

Learning is an iterative process. The more you learn, the more you’ll realize you have no idea what you’re doing. Share on X

Everybody’s at a different place, one person’s tier 4 maybe another person’s tier 2. This completely changed my perspective with Robert Kiyosaki in the book, Why We Want You to Be Rich. He described in his way what an investment was. He says it has the attributes of an automobile because everybody says, “Automobile is a liability, not an investment.” It’s got to have a steering wheel so I have control. I got to have a brake pedal so that if things aren’t going good, I can slow it down. I got to have a gas pedal so that if things are going great, I speed it up. I got to have a door so when things get bad, I can exit. I’ve got to be able to ensure some of that.

When you look at that for a lot of people, as they’re looking at an investment, depending on their perspective and if they have the money for an opportunity fund. Those are the different things that can take the same thing and be a pure investment for somebody and someone else can be a pure gamble. I have clients go through and go, “I’m looking at buying a piece of real estate. I’m looking at this.” What education do you have? What reserves do you have? What’s your background? Do you have the time for that?

One of the biggest things I see with wealthy clients as they’re making all this money so they get presented all these great opportunities, but they have no time to spend on it. They have no time to research it so they dump hundreds of thousands of dollars into investments that they would have been far better off staying in their field of expertise or putting their money in their Wealth Maximization Account and leave it. That’s not only going over a client with where their goals are, but where is their expertise? What is a true, pure investment? What do they think they’re investing in that as a 100% gamble? That’s important as we progress through where they’re at, what they want but where their personal development is an outside development is.

John, do you have any final thoughts or words?

We know a lot of clients start out in tier 3 or 4 with their 401(k)s IRAs. They cannot control. Tier 2 is a super fun place to play in. A lot of people try to rush it, but it is super fun when you have the right capital and reserves set up.

John, thanks for your time. It was awesome having this discussion. I will talk to you next time.

It is fun as always, Patrick. Take care.

—

I love talking to John. I hope you enjoyed that episode. You could tell that personal development is near and dear to us. It’s impacted us in more ways than we could ever share, but I’m glad you were able to feel that. If you’re ready to dive into 2021, that’s available. All of our summer episodes are available on demand. You can access them on ParadigmLife.net or in your player. Don’t forget to visit the show page at ParadigmLife.net and take a look at relevant content from this episode, which includes a blog post about the human capital statement. We’ll talk to you next time.

Important Links:

• Why We Want You to Be Rich
• https://paradigmlife.net/resources/112/real-estate-investing-in-a-down-market
• https://paradigmlife.net/blog/human-life-value/