If You Don't Understand Debt, You Don't Understand Business

You're not going to get rich without using debt. The average person has $108,000 in debt right now. But then you compare that to Larry Ellison, who has $1.2 billion in debt. Why is it bad when you do it and good when Larry does it? It comes down to the fact that they know something you don't about money. And we are going to teach you how to use debt smart in this video to make your riches. Let's go to the first one, borrowing against assets. The first part is probably going to make the IRS cry. Oh my God. Let's start with one of the ways rich people get rich, stay rich, and avoid the tax bill. First of all, the rich never sell their assets. They borrow against them and use those assets to make more money. How? They use things like stocks, real estate, business equity, crypto, and equipment in order to actually get more capital. Let me show you a case study. So you guys know about Elon's Twitter acquisition? What did he need? He needed $44 billion. $62 billion to buy Twitter, now X. Instead of dumping his Tesla stock to raise all of it, he pledged $62.5 billion worth of Tesla shares as what's called collateral and took out a $12.5 billion margin loan. This is called a security loan. So what does that mean? It actually means that he kept all $62.5 billion of those shares and the voting rights. He kept every dollar of the upside if the stock went up, which it has a lot by now. So he actually just used his position as leverage instead of cashing out. Now you might say, well, I don't have $62.5 billion, so how do I use that? I'm going to show you how to use it for us normal people. Let's say that you own in your brokerage account right now $100K in stock and that right now today, in order to buy your next investment, to get into crypto, to buy a business or whatever, you need $20,000 of that today. Let's talk about the two options and how you could break them down. Option one, you have your $100K in stock, but you've taken out $20,000. It's now $80,000. So your stock left is $80K, but you got your $20K cash to invest in whatever you want. Problem is you do have to pay actually capital gains tax, which we don't even have calculated in this, but you get a return in the stock market of your $80K of 10% annualized on 5 years. There's actually no interest rate you'd pay over here because we're not taking out a loan, we're just taking straight cash. So that means over a 5-year period, we're going to have about $128K. But let's look at option number 2. We have the same amount of money to start, $100K in stock, but instead of taking the money out directly, we take $20K out in a loan. This is called a security-backed line of credit, or an SBLOC. The bank can actually give you this $20,000. You still own the $100,000 portfolio, and instead of selling this, all you do is is you pay interest on the loan, just like you do on a mortgage. The crazy part is you can use this money on almost anything. You can use it as a down payment on a house, on a business, a tax bill. What's interesting here, you still have an interest rate of 6%. You're gonna have a return of 10%. But look at this, the $100K compounds to $161K over this period. You— we subtract the $6K in annual interest,. And then we're going to pretend like we didn't make more money with the $20K. And so we're just going to pay back the loan. Even in the case where the $20K does nothing for us, we make $135K here instead of $128K here. Now, over time, if this continues to compound, it gets really sexy. So the difference between taking out a loan and selling a piece of your asset comes down to a pretty decent return here. And that's the billionaire strategy of Elon Musk and Larry Ellison. They're not actually selling their golden goose ever. They You're borrowing against it. And if the asset grows faster than the cost of debt, aka the interest rate here, then the math works. Okay, so if you're clever, you're going to say, how do you pay the interest payments? That's where you use your salary or your business cash flow to cover the interest, this 6%, just like you would any other bill, like your mortgage or car payment. But the amazing part is that the interest payment can be tax deductible. So you can actually ask your CPA, hey, if I start paying back the 6% interest, can I deduct it from my taxes? You certainly can't do that with deducting out cash you take. Or two, you just never pay it back. We call this the borrow, buy, die strategy. You buy an asset just like we did before. So maybe this is your first rental property or your first small business. Then you borrow against it from the bank. Then you keep borrowing and include from the bank what we'll call accumulating asset payments until you die and you borrow continuously. And then when you eventually pass on your inheritance and your big, huge stack of cash, the loan gets repaid, but not by you. As long as you keep paying two things, as long as you keep paying your interest rate and if the market ever goes down, whatever amount you need to bridge the gap, then your loan-to-value ratio will stay healthy., and you can carry this thing forever. Now, how do people mess this up? There are two traps that get people here. If you never pay down the principal and the asset you borrow drops down below what's called loan-to-value ratio, which is what we call here LTV, uh, different type of LTV than lifetime value, you don't get a grace period. The bank issues something called a margin call, and the margin call means you have to either post collateral immediately or they sell your stock for you at the worst possible moment to protect their money, not yours. But a second, uh, way to do collateral may be that you put up more securities. You could put up a house, you could put up a car. Now, the second trap is people borrow way too much. Like, look at this for a second. Robinhood lets you do 1:1 leverage. That's like if you have $10K, they'll give you $10K in margin loans. Please, dear sweet baby Jesus, don't do this. This is how you give yourself an ulcer and lose your house. The gap between your loan and margin is called sleep, and it will affect your actual sleep. Buy as much as you can feel comfortable with, and Elon is no exception. Tesla's board got so nervous about how exposed this made their CEO that they capped how much Musk could personally borrow against his own shares at $3.5 billion. The danger zone at the time was around $114 a share, roughly halfway of where Tesla was trading. If the stock had fallen that far, the bank could have forced a sale of the exact asset he was trying to protect. Let's talk about how to use this like the 1%, because rich people have figured out how to make millions and pay no taxes with this. And if you can't beat them, join them, right? So here's how to use it like the 1%. I should know this because I do. First of all, please, please, please do not borrow too much. I feel comfortable at this ratio, 20 to 30% loan-to-value. For stocks, I'm good with that. I like not more than 10% for crypto because it's so volatile. So any volatile asset, if you need to take out a line of credit to use outside of the stock market, the big guys like Morgan Stanley, they usually will require $250K or more in stocks and a minimum line of credit of $100K. If you've got $100K in stocks, I don't think you need Wall Street's velvet rope. Schwab has a pledged asset line that has $100K minimum. The catch is your money doesn't stay where it is. Once you're approved, your securities get moved into a separate account. At Schwab, it's called a pledged account, and that account loses its margin and option trading privileges. It's collateral now, so you can't trade it. And again, collateral just means something that they can come back to. So what's the consensus? So I don't know if you saw this image, like all the yachts sitting in Cannes and Monaco for the F1. I want to tell you something. Those yachts, And houses are never bought with cash. It's always debt, but it's not beginner debt because you need assets to borrow against. The strategy is own assets that will appreciate, produce cash, or hold value and use borrowing to buy more. That's the difference between poor and rich people borrowing for survival and borrowing for debt. Now I want to talk about the second way the rich people really do this, which is called business debt. This might be the biggest debt hack you can take away. It's my favorite category, my love language in business, if you will. Here's why it's so powerful. Let's say you have $200,000 and you put it in the stock market having an 8% rate of return. Oops. You will make about, let's call it $170K at the end of 8 years. If you take that same $200K and you put 10% down on a $2 million business, and you finance the rest with an SBA loan, assuming an industry standard growth rate of 5%, so less than the stock market, you will profit how much, you guys? $5.1 million. Looks like a 51, but it's $5.1 million at the end of that same 8 years. That is over— does anybody know? 30x the return of the S&P 500. And you can check out this dashboard my team made if you want to see it in detail. You can enter any number of buying a business with an SBA loan and compare it to putting in the S&P $500. This is for free. You can take it. Links in the description. Now I want to talk SBA loans. SBA loans can be used to buy business, to expand your business, to provide you working capital equipment. Here's a great example of how this actually works, and this is actually from somebody we helped to do this live. Anna Poplik started in the military. Now she didn't have experience running a business, didn't have millions in cash lying around. She joined our Contrarian Community. She closes a $1.5 million deal using an SBA loan. She was able to completely replace her first income in the first year, and she was able to do that without laying down the $1.5 million. But let me show you how people mess this up. SBA loans have something called a PG, a personal guarantee, meaning they're tied to your assets. If you buy a business with an SBA loan and it goes out of business before the loan is repaid, the SBA will come after everything that you own, your house, your car, any sort of assets or investments that you have. And they will do it aggressively because they want to get repaid. The way that this happens is when people buy a business they don't know how to run, they don't do their due diligence, or the sellers lied a lot. Here's a great example of a business listed on BizScout that I wouldn't buy as is, and I would renegotiate before I did this. So what type of business is this? It is a luxury boat rental business. The asking price for the business is $150K, right? The boat is included. Now, the revenue— here's the problem, boys and girls. The revenue is $20K, and the cash flow, what do you think that is? How much money you get in your pocket? $10K. The location, Lake of the Ozarks, means this business can't be run year-round. So this business transaction seems like It only makes sense if the cost of the boat is really more than $10K because you'd have to hire a captain so you don't have to drive the boat and the profit is virtually nonexistent. So I wouldn't do this deal unless I was getting a crazy deal on this boat for some reason. That's actually why we obsess on having advisors at the Contrarian Community walk you through a step-by-step process for buying the first business so you don't make one of these awful mistakes. Now let me show you how to use it like the top 1%. SBA loans are incredible, but there's an even better form of business debt that the top 1% use. And what is it called? It's called seller financing. That means instead of paying the seller everything up front, so you have cash, you go to buy a business, you give the business owner a bunch of your cash, and they give you the business, right? That's how you think it would work. This would be like a normal transaction. But in this transaction, that is not actually what we're going to do. You don't have cash, but you want the business. So you actually ask the owner to give you the cash from the business and take those profits and use them to buy the business with seller financing. You're basically flipping the transaction right here. At the owner. Now, this is kind of cool because sometimes that lowers the cash you need at closing, can help bridge the gap between what the bank will lend and what the seller wants. And if you might be thinking, Codie Sanchez, this isn't real, why would anyone want to sell their business for less than full price at close? Remember this number: 60% of all businesses close with some version of seller financing. And I know this may shock you, but there are other things. A McKinsey study actually found, I think it was by 2035, 1 million small businesses will be on the market as baby boomers retire. We know there's 60,000 listings right now on BizGel, and you can actually go on there and see a bunch of these transactions. And then if you want to learn how to buy them, you can go to Contrarian Community and we'll actually teach you how to do it live. Now what's interesting is these people want to retire, but they don't want their legacy to end up with a big red sign that says closed on the door. And that's where you come in. Let me show you what that actually looks like on a real deal lot. Let's say that we have a lawn care business. That's grass. In this lawn care business, it's located in Texas. The asking price for that business is $349,000. It's doing about $325K a year in revenue and in cash flow, some money in your pocket, about $144K. Now, how much is the difference between the revenue it's doing and the cash flow you're getting, well, that's about a 44% profit margin, which basically means when a customer gives you a dollar, you get to keep about 44 cents of every dollar. That is a really good margin. Now, if we go to the SBA, you're going to put 10% down. The asking price for the business is $349K. So you're going to put about $35K down. You can raise that from other people. You can put it down yourself. Then you're going to finance that with a 10-year SBA loan and you're going to have debt service. That means that interest rate you've got to pay on your debt. That means in year 1, you're going to have to pay the bank about $51K. What does that leave you with? About $93,000 in cash flow. That's in your pocket. AffinBank gets paid. That's on this $35K down payment. What does that mean? Well, there's a number called the cash-on-cash return, which means how much money do you make on your money down? If you're making $93K a year, the cash-on-cash return is 265— whoops— 265%. This is already an incredible deal. And the seller finance version of it actually gets even sexier. Let me show you that. So if I wanted to do that deal even better, instead of going to the bank for the loan, what could you do? Well, you've got this business, right? And you want to buy it. So let's negotiate with the seller. We're going to say we want 40% of the profits until you pay back $375K, not even the $350K you were going to pay. You're going to pay it back inside of how many years? 7 years, because you're going to do it faster than the SBA loan and save yourself tens of thousands of dollars. So what does that mean? Well, that means You would put down that $35K in order to get this business, and you would do a transaction where it's still debt. You owe the seller the agreed amount, this $375K, but there's actually no banker in the middle telling you what you guys need to do. Just old-fashioned you plus the seller determining this purchase price, having this down payment, and you give the seller 40% of the profits until you pay back the $375K. Over these 7 years. So what does that mean for you? It means over the same 10-year window, you're going to have an additional $135K in your pocket. All right. So are you guys starting to see how not all debt is bad debt? Some of it is really smart. It can actually allow you to preserve Main Street while making a ton of money. Because when you think about preserving things like a Main Street, you think about preserving cash, structuring smarter deals, and negotiating terms that work for you. It's exactly what the right financing should help you do. So when you're growing a business, you should make sure that that business is making you money. In fact, that's why I'm excited about a new business lending product from SoFi. Capital is a tool, right? So the goal isn't just to borrow money, but to use it strategically so you can keep cash in the business and keep growing. So let's say right now you're a solopreneur and you're running a business and that business needs more capital. Getting started shouldn't mean typically you wait weeks at the bank to get a loan. Or sign a lender deal that buries the real cost in the fine print. Your business is moving really fast, and your financing should too. So we partnered with SoFi Small Business Loans because they're built for growth, like a quick digital application, not in weeks, receive a decision quickly, and if approved, get funding as fast as 24 hours later. I also like that their pricing is really clear up front, so you'll actually see your terms before you accept. No surprises, no penalties for paying your own loan off early. So if you are actually looking for capital to buy, build, or grow, you can head to sofi.com/codie or click the link in the description to check your eligibility for a SoFi small business loan. SoFi small business loans originated by SoFi Bank N.A., subject to eligibility and approval. Terms and conditions apply. This is a paid SoFi partnership. And if you own a business, I want to talk to you about something right now. So we just talked about business debt, but what I think a lot of people don't realize when you own a small business is your business itself is an asset, and that asset actually increases in value each year or decreases in value each year. And for every, let's call it, 100% you could increase in your business, you can actually get a valuation or asset increase of anywhere from 2 to 10x. So if you have a business right now and you can double the value of the business, from $100,000 to $200,000, and then you get a value on the business overall, that means you didn't increase it by $100,000. You actually increased it by $200K to, in some cases, $1 million plus. This is because when a business goes to sell, you get what's called enterprise value or multiple value. At something called The Boardroom, this is the only thing we obsess on.. And so we help business owners that are doing at least 6 figures up to 9 figures in revenue grow their business by 24% each quarter plus. The idea is, can we take your business to the next level? And can we make the business, one, have an increase in revenue, but also have an increase in profits? And if we can do that, then the best debt you can get in your business is actually getting a debt based on the valuation of your business. If that sounds interesting to you, click the link below, talk to one of my advisors about if Boardroom's a fit for you as a business owner. The biggest debt you will ever take on usually is mortgage debt. It's the one people get weird about. You say you rent and suddenly everyone's uncle becomes Warren Buffett. Renting is throwing away money. Your house is your best investment. But the truth is your house is not automatically an investment. Sometimes it's just a lifestyle purchase. And sometimes it's a very expensive adult piggy bank with never-ending plumbing problems. For most people, buying a house can be smart because it forces you to save. Why? Because every single month, part of your mortgage goes to something called principal, right? And principal is basically an automated savings account that traps your money inside of your house before you're allowed to blow it on DoorDash, Amazon, a third Stanley Cup you claim is for hydration. And what if— but if you are highly disciplined, you will actually make more money not on buying a house, but on investing somewhere better. And here's why. Look at these numbers. Since 2001, the average home appreciation— so how much homes have increased in value every year— is about 4.5%. You guys remember what it is in the stock market. So I know that maybe the tiny upgrades you did in your house you feel makes it special. I'm sorry, Zillow actually does not care about your accent. Wall. So right now, if you have a 30-year mortgage, you can be spending 6% on your interest rate and your house is growing at 4.5%, but your debt costs 6%. So appreciation alone is not saving you. Yes, you are also paying down the principal like we talked about. That matters. But mortgages are front-loaded for the bank. Your first payment might be around 80% interest and only 20% principal repayment. This is how people mess this up. People mess this up because they compare rent to the mortgage payment and they sort of stop there. I think about that like toddler math. A house is not just principal and interest. What else is it? Well, let's think about all the things you have. Closing costs, property taxes, insurance, repairs, your AC unit deciding to freak out the week after you buy a house. So rent is not throwing money away. Rent buys you a place to live. Homeowners throw money away too. They just call it interest, taxes, insurance, repairs, and, you know, accent walls. The other way people mess up mortgages is they get a raise and think it's responsible to pay their mortgage off quicker because it usually feels good, right? Here's why. Say you have a $400,000 mortgage. That's the average home cost in the US at a 5% interest rate for 30 years. Which is the average duration of a mortgage, you wanna throw an extra $800 a month, which is not nothing, at a principal payment to kill it faster. Feels really good. Looks good. If you do the math though, you would actually pay off the loan in 17 years. Now what's interesting is if instead you did what a disciplined person would do in the stock market or somewhere else, you take that $800K that you were gonna do monthly, and you put it in an index fund at a conservative, let's say 7% for the same 17 years, your investment ends up at what? $300K, guys. So that savings on the home loan at the 17-year mark, how much do you think that is? That's about $245,000. So the difference between this and this is $60,000. $660K. To go even further, if you invested that same $800 over the full cost of the 30 years, that amount is about $975K that you'd have. And it's not just about return, it's about liquidity. Every extra dollar you send to principal gets locked into this house that you have, and it doesn't come back out unless you sell, refinance, or borrow against the exact asset you just paid down. If you put it in a brokerage account or a Roth and instead, and your business has a bad quarter, your car dies, the money is actually usable. You can go get it. So before you send an extra dollar to mortgage, max out your 401, kill anything above 10% interest, build a real cash buffer, max out your tax-advantaged accounts, invest in a higher return rate. I'm not telling you what to do, I'm just telling you what you did. Your house is not an emergency fund. It's a very expensive vault that only opens when you sell. Now let's talk about how to do it like the 1%. So Top 1% math. They do not ask, can I afford the payment? That's how normal people become house poor. The wealthy ask, is this the best use of my capital? What a fancy question. I love using that. So if you want to use mortgage debt intelligently, you need to know 3 things. Number 1, what is the total cost of owning? What does that mean? That includes interest. That includes taxes. That includes HOA fees. Maintenance, all-in costs. You want to know what is the appreciation rate in the market. So how much can you get somewhere else? And 3, you want to ask yourself, what else? What else could this money be doing? If renting is cheaper and you're disciplined enough to invest the difference every month, renting might be smarter. But the rent and invest strategy only works if you actually do the second part, which is invest in something else. If you're not going to be that person and you're just going to blow it, instead be honest. For most people, a mortgage can be useful because it forces you to save. So what's the theory here? Buy below what the bank approves you for, keep cash after closing, do not assume refinancing will save you. As a business owner though, there's a tax move worth knowing. This one is called the Augusta Rule. Now, anything like this you got to check with your tax advisor, but basically you rent out your home to your business for up to 14 15 days a year tax-free. You have your business use your house for a meeting or retreat, and the business can actually pay rent to your house. Talk to your CPA. There are rules around documenting. The IRS does not accept, hey, I got this advice on YouTube. Oh no. Like, make sure you use this right or they will come after you. But use right, it turns your house from a pure expense into a very small income stream. Now, credit cards. This may be the most obvious one. Credit cards are sometimes really good though. I'm gonna give you the cheat code behind which ones to use. I think they're a little bit like tequila. Like, if you just have a sip, it's okay. The card itself, not the problem. The credit card debt is the actual trap. And so if you're going to use credit cards for personal life or your business, that is called float. And here's what that means. If you make a purchase on June 1st, you may not have to pay for it until July 1st. What's cool is that's basically Basically a short-term interest-free loan. For a business, those 30 days can be life or death. It shouldn't be, but it can be a lifetime. You could buy inventory, make sales, and on top of that, many cards give rewards— cashback, points, travel, fraud protection, whatever. So if you're already going to spend the money, you might as well be getting something back. Like, here's a real example. The Capital One Spark Cash Plus business offer gives you unlimited 2% cashback on purchases, and there's even better ones I'll tell you in a minute. But here's how this little credit card becomes useful. The bank gives you that float, right? I think about it like floating on a wave, and that float equals also protection for your business and potentially cash back. If you pay the bank back for the money it's given you, you win. But if you do a something called carry a balance on there, the whole thing turns into a financial disaster. Because while other rates we've talked about are 5 to 10%. The average credit card rate, you guys, is quasi-criminal at 22%. So if you spend and leave $10K on your card, what does that mean? That's $200 cash back, or you could owe $2K plus in interest, AKA no bueno. Here's how to use it like the 1%. If you're a new business owner, have physical locations, a good one is like the Ink Business Cash card. At this time, what's cool about that 0% interest for 12 months, 5% cash back on the first $25K spent. You have to spend on office supply stores, internet, cable, phone services each year. So that could be option 1. Option 2, I use a lot of this, is Amex Platinum. There's a hefty yearly fee, but the benefits outweigh it if you use it properly. I like this card because, you know, we are always— this is a plane jet-setting on planes. And if you use it for travel, this might be like, you know, access to lounges. This might be hotel credits. This is helpful for my team a lot. And little things like cutting the TSA line, which is like $100, I think, for you to get anyway. So if you own a business and need a way to track spending and waste, though, I would really look at this one company called Ramp. We're not sponsored by them, although I'd be open to it, because they actually create virtual cards for all the team members and they have pre-approved limits and spending locations. —actually the other day we found one employee was using it for their Hinge account. Bombastic side eye. The employee no longer works at this company, but you can actually see, track spending by department, and track where people are doing anything crazy. So the simple rule is, is really this: if you're going to use a credit card, then you have to pay it off every single month. Do not fund your life with a card. Only charge what you can afford to pay off in full. And if you already have credit card debt, stop trying to optimize rewards. Kill the balance. There's two methods. The snowball method is you start with the smallest balance first because you get momentum. That is like psychologically quite good. Then there's the avalanche method, which is you basically go and start paying the minimums on everything you go. It's mathematically best, psychologically best. You know which one you need between the two. Now I want you to end with Buffett's rule. Never risk what you have and need for what you do not have and do not need. Debt should make you more free. If it makes you more fragile, you're using it wrong. I want you to look at two cycles. The average person borrows to consume, works to repay, borrows again because they're tired, then works more because the payments grew. That cycle can eat decades. I do not want that for you. I want you to see the difference. Some people use debt to buy things that make them look rich. Other people use debt to buy things that make them free. Choose carefully. You are arrogant, you are lazy, and you're stupid. If you're sitting there and you cannot afford supercars, you're one of those three. You should work 84 hours a week. No family, no kids, no girlfriend. Every day you wake up, the only thing that should be on your mind is money. That's not what being rich looks like. Jeff Bezos is worth $257 billion because of Amazon. He drinks coffee and reads the newspaper in the morning. Tim Cook earned $74.3 million at Apple last year. He turns his phone off to go to the gym. Berkshire Hathaway is worth $1.3 trillion. Warren Buffett founded it with his best friend. You don't have to wake up at 3 AM every day. You don't have to give up your life, and you definitely don't have to do it alone. The goal was never a business you run. It's a business that runs without you. It's time to take back control of your business and your life. Come do it with me on September 18th. I'll see you there.