Ever wondered how the rich keep getting richer? The secret lies in their ability to leverage advanced tax strategies and maximise wealth through smart investments. In this article, we’ll break down how the rich minimise their taxes and use debt to create income streams, allowing them to build and protect their wealth over time. Find out how you can implement these strategies too!
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Nobody likes paying tax, and here in Australia, there are ways that the rich actually use their portfolio to minimise their taxes and make so much more wealth over the long term.
This is such a big advantage for the rich getting richer, and unfortunately, the poor get left behind because we don’t have access to this information.
In this article, I'm going to jump into my whiteboard and show you exactly how the rich do it. It's something you could implement later on, as this is quite an advanced strategy.
If you're interested in learning more, then definitely keep reading...
I wish there was a blog like this when I started property investing 10 years ago, but there wasn’t, and that's why I'm here making these blogs and video content on my YouTube channel.
The rich get richer because they know who to talk to, get educated about the right way to do things (and the wrong way), and they double down on those things to really grow their wealth.
Unfortunately, many people get left behind because we don't have access to that information. So I'm going to do my best to break it down and show what the average person is doing and what we can do in our own lives to really upgrade our wealth.
I'll give you some context, so bear with me.
Most people have a job, and from that job, you make an income. On that income, you are paying taxes.
Now, what most people do is they go and purchase their own home and repeat this process, earning from their job, retiring with their home probably paid off. But at that point, you're now relying on the government for retirement.
Therefore, you're not self-funded; you're relying on the government system to provide you with the pension. If that’s not enough money for you, bad luck, because at that point, you're probably finding it difficult to get a new job, and this is what most people are doing.
Now let's go across to what the rich are doing, and then we can start learning from that.
What the rich are doing is most likely earning an income from their business, and what they do is pay less tax, but they pay themselves a minimum wage—just what they actually need.
Let’s say for an example:
$100,000 minus the 30%:
Your $70,000 left minus your expenses to live your own life, let’s say only $40,000–the difference between these two is your savings.
In that case, you still have to take the $100,000 worth of income, which means you got taxed on everything.
As a business owner, you could have the business operate at a net profit, but you don’t have to pay yourself everything. This is what happens—business owners could pay themselves a lot less and cover their expenses, which means they’re getting taxed a lot less, and business profits are getting taxed even less than that.
This really sets them up straight from the beginning to have as much income available to them to go and invest, and that’s what they do next—they use that money to invest, allowing them to retire early. So not just self-retired, but early and self-funded.
This means they have the choice.
Let’s say you’re reading this blog and have one property or are trying to build a property portfolio. You might sit there at some point and wonder, "Why am I doing this?"
The reason is that in 30 or 40 years, depending on when you start, you’re hopefully relying on the income those properties generate to pay for your living expenses, versus the first example where you buy your own house and rely on the government to give you money.
This way, you are your own government. You are your own bank. You use that money and pay yourself as you like. Some of that money might be invested, some of it might just sit in your bank account, but you have the choice.
Now, that's not to say that rich people don’t buy their own homes. We see it plenty online where celebrities buy $20 million houses. I’m not saying you shouldn’t, but this is the system they work with.
Once their portfolio has grown to a certain level, they may take that money and buy their own place. They might rent first in the beginning—something I’m doing at the moment—but equally, they could go and buy a property. If they know how the tax system works and have a good tax structure, they're in a position to invest earlier into that market.
Let’s look at how property can help in this scenario.
You might be here reading my blog to understand how property investing works.
When we go and get debt from a bank, we use that money to buy our principal place of residence.
The reason they call it bad debt is because the debt has no tax deductions.
If you use the same amount of debt from the same bank but invest in an investment property, the debt is now productive, because it reduces your taxes—there’s a tax deduction.
Now, I’m definitely not a tax expert; I know the basic stuff. You should definitely reach out to tax professionals. There are plenty of good accountants out there who can actually structure you properly and are legally allowed to give advice. I can give you high-level stuff, but you need to take this knowledge and go to them.
While I think that's pretty common knowledge, some people may not have known that. But now we’re stepping up into the advanced level—let’s see what they’re actually doing.
When you earn income, you pay more tax. Fairly obvious, right?
I get a lot of flack where people say, “Hey, Ravi, I’m buying a positive cash flow property; how does this reduce my taxes?”
I’m like: you’re looking at this wrong. If you’re making more money, that's a good thing. You wouldn't run a business to lose money; you'd run a business to make more profits, and as a result, you pay more tax.
In this case, you earn income, and you pay more tax. But what if we treated debt as income?
Now you might be thinking, "What the f—" because debt is not income.
Let me break this down for you. Be patient, but I'll get you there.
A property has two main sources of wealth creation:
The reason is that debt is not taxed; income is taxed.
Now, if you sold this property, you would pay capital gains tax.
However, if you have capital gains in the property—for example, you bought something for $500,000 and now it’s worth $700,000—you’re not realising a taxable event because you're not selling your property. What you could do is access that debt in the form of equity.
What the rich are doing—and hopefully, you guys are falling into this bucket now—is if you can purchase a property this year for $450,000 and it grows in a year to $500,000, that’s $50,000 worth of growth.
You could extract that debt out in the form of a line of credit or equity top-up.
This means you're basically going to the bank and saying: Look, I have given you this property to hold, and I’m taking debt against it. I pay you interest on it, so you're happy. But I want to use some of that equity to live my life or invest somewhere.
The banks will go: Yeah, you're taking out more debt, and you're going to pay more interest—sign me up! This seems like a no-brainer, and if you can use this productively, you’ll beat the system time and time again. It compounds.
It may not seem like much in this example, but if you do this year in, year out, or every five years, you suddenly get ahead a lot faster.
This is how it works—you compound that growth, and over the long term, you see the benefits.
Let’s say you’ve got $50,000 worth of equity. At 90%, you've now got $45,000 worth of equity to take out. You could use that money and pay yourself $900 per week, tax-free.
The reason it’s tax-free is that it's not actually income; it's debt. So, in the bank's eyes, it’s equity you’re using, but effectively it’s still debt.
Now, I’ll give you a caveat: Just because I’m saying you could go out and do these things doesn’t mean it’s actually a good idea. I don’t give financial advice—you’ve got to rely on your own situation and understand if it’s debt you can actually take on. All I’m showing you is that this is possible, and this is what people are doing. I’m not saying whether it’s good or bad—I’m just saying that’s how the system works.
Why would you do this? Because debt is tax-free, whereas income is taxed.
If I pay myself $50,000, I get taxed on that from day one. But if I use the equity in my property and pay myself $900 a week, I pay no tax.
If I don't pay tax in that situation versus someone making fifty thousand dollars from an active income, and they have to pay tax, well, guess what? I've got 30% more purchasing power from the beginning. So I can go and use that money and invest in something.
Therefore, if I wanted to buy fifty thousand dollars worth of shares, I could go and do that because I pay no tax. But for someone else who just earned fifty thousand dollars and has to pay tax of thirty percent, then they can go and invest in that market. So again, my asset base is a lot higher because I get to avoid having to pay tax upfront.
So, the rich are using debt as their income.
You'll often hear that if you have a portfolio worth a couple of million dollars, you could go to the bank and say, "Look, just pay me a hundred thousand dollars, I'll take out equity."
Let's say their property is actually increasing by 7 per cent, yet they're only taking out three to 4 per cent. You're in this infinite money loop where the property keeps growing in value, but you're just using a portion of it to pay for your living expenses. So effectively, in that case, you would have actually retired.
Now, there are two main conditions to this:
If you don't have a borrowing capacity, you can't access the equity.
If you go and buy your own home or you go and invest somewhere, and you're like: Okay, I'm gonna wait for the 10% growth—year one goes, year two goes, year three goes, and then maybe in year four, you're like: Oh, I got my 10% of growth, but I also needed money for the last three years.
What I'm saying here is that you could buy a dud investment, and it doesn't appreciate in value, which means this system doesn't work. This relies on you actually purchasing a good investment, a good property that's actually going to go up in value.
So let's look at my client strategy.
If I was to look at the majority of my clients, what are they trying to do as part of the buyer's agency?
In this case, what they're doing is they're trying to create the foundation to their wealth, and that usually is in the form of two million dollars worth of assets.
Now, I'm not saying, "Hey, buy two million dollars worth of assets today." No, some people are in a position where they're going to build it over the next five years because that's what they can afford.
Others have the cash already upfront, which means they can go and build way beyond two million straight away.
Everyone is different, so again, it's not about you compared to someone else's situation. It's about how you can improve your life from what you were living only a month ago, and that is the whole idea of investing—it's a personal journey. My goals are different from your goals, and your goals are different from someone else watching, so why would you compare what you're getting to someone else?
So now, if they're going out and they're wanting to purchase 2-million dollars worth of assets, that could be in the form of five $400,000-dollar homes. Keep it real simple—that's 2 million dollars.
Now, at 5 per cent growth, that means a hundred-thousand-dollars a year is being generated in equity.
A hundred thousand dollars at 90 per cent, because the bank will usually give you 80% or 90% of that equity value, means 90-thousand-dollars worth of income that that person could now use tax-free every single year, as long as they can make the repayments, as long as they have the borrowing capacity to go and access that equity. They make $90,000 a year, tax-free.
Now, at this point, your head might be spinning, or you might be understanding this, or you're actually already doing this, but you're now wondering: Okay, if equity is now being used as income and I get no tax on it, that's free money. But am I racking up more debt?
I hope you guys have enjoyed and learned so much from me in this article!
I'll catch you in the next one.
Thanks, guys!
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