Deleveraging – The Generational Harvest – Episode 468

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[00:00] Welcome to the Prosperity Podcast. Welcome to the Prosperity Podcast. Kim, we’re going to be talking about de-leveraging. This was a chat that you and I had before we hit the record button, so let’s rip into this right away. Well, it’s a fun one because people take on debt, right? That’s adding leverage to your finances and there’s good reason to do it. It’s a use of other people’s money. Sometimes a use of other people’s time and assets and other capabilities that people bring to the table. When you bring on debt, you bring on a business partner, you bring on a bank, you bring on the government. All of those are aspects of leverage. You can even cross leverage using one piece of real estate, for example, as cross-collateralized

[00:51] to another piece of real estate. All of those are good things I find as business owners and many of our clients, even a simple mortgage, a car loan, all of that kind of thing is adding leverage to your balance sheet. But there is an opposite side to that transaction and it’s de-leveraging. It’s taking a moment to sell a property that has been useful for you for a period of time in your current real estate space and now is maybe cash flowing, but where you want that money freed up to be able to go get another possibly larger property. So that’s de-leveraging one to be able to go get it. There may be a vehicle in your family’s environment that is no longer needed that has a loan on it and you’re de-leveraging from that.

[01:42] There may be a business that is ready to be sold in your family that may or may not have some form of debt on it. Regardless, that’s de-leveraging because of the time and effort that’s associated with the business, even though it may not be debt-laden, it may be time and effort-laden and it may be time to de-leverage your family’s time and effort from that. Spencer, I know you’ve recently heard about families thinking around that space with some very specific guidelines for de-leveraging. Talk to us about that. Yes, it was one that I found so interesting. So they said they do a generational harvest every 20 years and the term generational harvest, like that piqued my interest. I thought, wow, that’s so well put and they do it for a couple of reasons.

[02:32] One is that generational harvest of 20 years makes it so that you can have some liquidity. So it could be the current family members or a rising generation transition era, whatever you call it. We’ll now have that capital to go and put it towards other businesses, investments, philanthropies, however they choose. But it also, it’s a harvest of taking your finances and you say, okay, we now moved something old and we now have something new and there’s value to that. And you were mentioning the selling of assets. Some of the very wealthy real estate investors I know, some say they’ll never sell anything. And then you have on the flip side, the real estate flippers, like people that just never hang onto anything and then they just sell it all.

[03:26] And I find that there’s a balance that needs to be had. I don’t think one of the extreme works and I’m sure we’ll dive into that in this episode. Well, self-knowledge is such an important thing in this environment. So sometimes people are super comfortable with debt and leverage and they’re happy to use leverage to get the next thing, whatever it is, investment-wise I’m speaking of, not material items. Whereas others are not comfortable at all. They’re super conservative. They want low loan to value ratios. They want to put as much down. And even though I personally don’t recommend that because it’s not financially efficient, what’s important to them is their peace of mind. And peace of mind overrides financial efficiency every single time.

[04:15] I always just feel like it’s important to understand the financial efficiency aspect of whatever the decision is that you’re making. But again, that’s self-knowledge. So whether you use Colby or maybe the Clifton Strengths Finder, knowing what’s going to work best for you is the most important thing. And as you said, I, you know, I know people that still own the first single family home that they bought and they’re still running it out for $600 a month or, you know, some tiny dollar figure and the mortgage may or may not be paid off. It’s not really the relevant point. The fact is that they still have a particular cash flowing real estate deal, whereas other people have parlayed that particular first, quote,

[05:01] single family home as an investment three or four, 10 different times into maybe a fourplex, into maybe a small apartment building, into a larger apartment building, into possibly a, you know, hotel or an even bigger commercial building. And so it’s what matters to you. And it’s in the quiet of the moment, you know, when you’re able to be by yourself and you are able to listen, what in your heart really matters to you, or maybe you prefer to listen to an outside source, like father, mother, God, or whatever it is that you’re speaking with, whether it’s yourself or some type of outside source, listening, what works best for you and your family and your skill set. And really I want to reiterate that part again, and because you’re

[05:48] the one doing the work, so, or not doing the work as the case may be. And so being clear on that, which is not an easy thing to get clarity around, but the quicker in life, you can get very clear on your strengths and on what’s really important to you and how you spend your time. Then the more aligned you can be with the investments. And that goes to how much debt you have on the investments. It goes to the type of investment you have, you know, do you like short-term rentals? Do you like long-term rentals? Do you not want to do real estate at all? Would you prefer to be involved in businesses or crypto or whatever, you know, stocks as a trade aspect and, you know, not hiring others, but actually doing it yourself.

[06:30] So these are all important questions to ask long before you say whether I should buy or whether I should sell or whether I should leverage. Yeah, absolutely. You know, when you go through the event of deleveraging, that is one of the areas that can have a significant impact of a short amount of time can have a significant impact on the amount of assets that will be lost if not done correctly. And I’ve seen that happen time and time again. And hopefully we don’t see this happen into any of our listeners, meaning if the stock market tanks, that’s not the time for you to become emotional and say, I want to deleverage, I want to move out or, you know, for a real estate bubble to pop and say, okay, that’s it.

[07:20] I’m gone. That’s not the time to do it. And so tying that into your Colby and their strengths, if the emotion is very high at that time, or if you don’t know that the tax or the long-term perspective, you need that outside counsel hands down. And so that has to happen. And then the second is looking at it and saying, am I making the best long-term decisions? Cause I can look at some of the rental properties I’ve owned. And it’s funny cause I was talking with the, my friend who I owned many properties with, and there are a few that I’m like, I wish I would have kept that one. There’s many that I’m so glad we got rid of and just like businesses, there’s some businesses I’ve sold that I’m glad I did.

[08:08] And there’s a few that I’m like, that was a good one. I wish I would have kept it. And I think having that perspective is really useful. It is interesting. I know for myself and my husband, Todd, we had numerous pieces of real estate over the years and were happy with them until we weren’t. And then it became really clear that our focus was better elsewhere. And so awesome. We were able to get clear on that, make the transactions happen accordingly and move on and focus on that, which our strengths dictated and to be free of that too, and not feel like we’re missing out on it is super valuable. And I really want that for our listeners to be able to be confident and solid and clear on what you are investing in and also on what you’re

[09:03] not and the free other generations to do so as well. And I think that’s one of the most important things about your 20 year generational deleveraging act there. That wasn’t the word that you used generational. What did you call it? A generational harvest. Harvest, right. Because what that does is it wipes the table clean and it lets the next generation decide what to do with the service from that harvest. Right. The thing that the harvest generated, typically cash, not always, but is now no longer tied up in that business, or if it was in real estate or whatever it was in, it can now be freed to go on and serve the strengths of the next generation. And it’s super important as the parental experience jumps from

[09:58] generation to generation that we not get all tied up in what the next generation is doing with the harvest, because that’s their generation’s thing to identify strengths with. And while it may be the same business, it may not be because the strengths are different from generation to generation. Kathy Colby says it herself. So this is the Colby profile, k-o-l-b-e colby.com best $55 anybody could spend, especially for family discussions and that kind of thing, marriage, business, all super helpful. But Kathy will say that there is no skill that is hereditarily passed on. It is all God-given talent installed at birth, the next generation and new God given talent installed at birth for the next generation, et cetera.

[10:45] So I think as a 55 year old speaking, we need to be super careful that we don’t just automatically assume that our children in their twenties, typically or thirties, you know, kind of depending on where you are in life, could be zero, right? These days that we don’t just automatically assume that they’re going to take that business and run with it, but that we look for these generational harvests to clear the decks and go on and recreate based on new strengths, new technologies that are available at the time, the business climate that’s available at the time, the expenditures that are specific to our strengths that are available at the time, et cetera. Yeah, they’re very well put. I think it’s too easy to want to say it’s either all break or all

[11:34] gas and to go scorched earth on it. Meaning, you know, if you’ve set up that family legacy, you may pick parts of the harvest in there. And then what else I was thinking when you mentioned that is that as we look at this generational play and we look at how we’re deleveraging, there could be a significant amount of capital when you sell a business or when you sell a big chunk of real estate and making sure that in that transition, you have intelligent people and wisdom and you have those guideline perspectives as your family set up is essential. You know, you’ve, we’ve mentioned Tom will write on the podcast times, you know, a trusted friend that you have who talks about tax, you know, for you, for a family to go through and say, Hey, how do we look at this

[12:25] from a legacy perspective? And that is something that yes, there may be some deleveraging and then there’ll be some protection elements. And then there’s probably, if done right, enough capital left over for some play and some risk or whatever else that may be. Yes. I’m glad you brought up Tom. He has a new book coming out in July and it’s something to the effect of the seven investments the government pays you to make. And so I’m really looking forward to that. I know it will be well done and give some people some very unique perspective on investment decisions. Perfect. So for you listeners, if you have a piece of real estate that is an investment property and you’re looking to sell, if you’re selling

[13:12] a business or you have a parent that is going through and they’re liquidating assets and you just want to make sure that it’s done right. I would suggest just sending an email to hello at prosperity thinkers.com. I mean, this episode here, it’s not financial advice is really listening advice and as we mentioned in other episodes, it’s clarity. It’s listening and it’s going to say, Hey, here are some options. Here’s some clarity that I have, because everything that I’ve seen Kim do is based off of principles. Thank you, Spencer. Thank you. Thank you for listening to the prosperity podcast to take control of your money and have it work for you. Visit us at partners for prosperity.com. If you liked this episode, make sure you subscribe and leave a review.