The Hierarchy of Wealth Part 3: Expanding Your Investment Opportunities

The Hierarchy Of Wealth Part 3: Expanding Your Investment Opportunities With Gary Pinkerton

We are still talking about the Hierarchy of Wealth, which is a tool to categorize and better understand the assets that you have and the assets that you want to make investments in. I’m joined by someone that I have a great deal of respect for. He is an incredible person that has benefited my life in many different ways. His name’s Gary Pinkerton and we’re going to get into Tier 3. Gary has invested a lot in residential real estate. He has a couple of dozen properties and understands the value of Tier 2, but his properties and the amount of time and effort it takes to manage all those has allowed him a big appreciation for Tier 3. Get ready for this awesome conversation.

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Thank you for joining me and I am here with my dear friend, Gary Pinkerton. Gary is in New Jersey and I’m in Salt Lake. Gary and I have known each other for quite some time. I consider him a friend and he’s one of the most amazing people, the smartest people I know. He has done an incredible job advising clients over the last several years, but for Tier 3, I thought it would be appropriate to have Gary on. Gary and I met through an investment group, specifically the real estate guys Summit at Sea, as well as a few other groups, mainly with Jason Hartman. It’s been awesome because Gary came to Paradigm as a client and had a little bit of an understanding of what we do, but also had intrigue and interest in investing.

He has been exposed to lots of different investments over the years personally, and with clients. I know that’s where he plays. I thought, no one better to talk about than Gary in relation to the purpose of Tier 3, what is Tier 3 investments, and how they relate to the overall hierarchy of wealth and The Perpetual Wealth Strategy? Gary, for those that have not heard you before, you’ve been on the show several times as well as done other material or for those that may not be familiar with you, why don’t you give them a brief background of your career and then how you came to start being a wealth strategist at Paradigm Life?

In 2011, I’d never even heard of infinite banking, I never heard of Pat Donohoe. It’s been an amazing ten years. Before that, I grew up in Southern Illinois. I’ve never been out of the Midwest, dirt poor on a farm because it was a dairy farm. We were in high-interest rates of the Jimmy Carter era and we lost our farm, we’re bankrupt. It was about time for me to go off to college. Thankfully I’d studied a lot and I went to the Naval Academy. I had a 26-year Naval Submarine Officer career finished up commander of the USS Tucson in 2011. It’s a tremendous time. I loved my time in the military. I would never give that back. As I was leaving the military, we’re not a family. I was looking for any challenge and a lot of things came together.

I got extremely excited about real estate in personal finance. I’ve been inside about personal finance, my whole life. Those two led me to find the real estate guys and find Patrick Donohoe advertise nonreal estate guys. He’s still doing it. This thing called it Wealth Maximization Account. I started in my own life in 2011, I was investing in 1 to 4 families. Susan and I did twenty properties, 1 to 4 families. We grew past that. We grew into this Tier 3 thing that I didn’t know it was called Tier 3. I’ve had a tremendous life. I’m experimenting in that place. It’s been good. It’s nothing compares to the Tier 2 asset, which is my own business, working with Paradigm Life client. I am excited to talk about this topic. I’m honored to be on the show with you.

Gary, it’s been an honor to see how much you have learned in regard to personal finance and how you’ve applied the principles to the specific clients that you work with. There is an intrigue with these Tier 3 assets, which we categorize as not having guarantees, limited collateral, not much if any control, you’re essentially relinquishing control to a professional. These are the typical investments that people have. What’s been your experience talking about Tier 3 and why certain investments were categorized that way when it comes down to control and risk, which are the ways in which we create those categories? 

I like everything to a car because I’m a huge car enthusiast, but I would say that Tier 3 asset, you’re the guy who wants to be the backseat driver, but we all know that doesn’t work. You need to pick who’s driving that vehicle for you because your future is in their hands. That is a Tier 3 assets. It’s an asset that typically is what we call an alternative asset. It’s not on Wall Street normally. It’s an asset where you have some insight. You know who the individual is that you’re investing with. You have an opportunity at least to sit in a webinar and ask some questions typically. In the end, you’re pictured in this, or you are a part of this as the backseat individual, you are what’s called the limited partner.

You’re not making the decisions. As you go up that Hierarchy of Wealth pyramid, every time you go up a new Tier, you’re giving up some control and some insight, and that results in more risks. We write control versus risk on the scale. I talk to people all the time that the reason you don’t have control most of the time because you don’t have insight. You may know where the property is and you may even be able to go drive by it. You know the person who’s syndicating, their phone number, their address, and their email address and you get the reports from time to time. If they stopped giving you the reports, there’s risk there. It’s all about the people.

Everything in life is about never doing a good deal with a bad person. Share on X

Everything in life is about never doing a good deal with a bad person. Finding a good person, that’s the most important thing. It’s not about the deal. I have some people in my life, one is Dave Zook, The Real Asset Investor. He’s a guy who’s been on the show many times. With Dave, I spent years developing that relationship. I would trust the guy with about everything I have and he’s in it in a small group with Patrick Donohoe and some other people like my friend Aaron Chapman that if they say, “This is the right thing to do.” I will do it because I’ve developed a lot of time in that relationship. What I see us as wealth strategy at Paradigm Life it’s not just the life insurance advisor, the agent.

We want to be the financial advisor that you can’t get elsewhere, specifically, an advisor that won’t talk to you about a few asset classes that are in their narrow wheelhouse. What I say to my clients is we want to be the financial quarterback. We want to be that person who can help you talk about different aspects of your financial life and bring other team members on like CPAs and attorneys. These people who are running the Tier 3 asset sometimes called syndicators. We want to help you partner up with somebody like that, where that’s an ethical individual, at least that we know to be ethical.

We have strategic partners like that. It’s also important to say that at Paradigm Life, we call these individuals strategic partners, but across the spectrum, whether it’s attorney CPA or somebody that’s raising funds, we don’t have an affiliate paid relationship with it. It’s super important that we don’t have that because you can understand, or you can feel that our entity is aligned with yours. It’s not that we’re going to steer in one direction because we have an incentive. I’ve had a great experience with Tier 3, maybe throwing out some ideas of what Tier 3 is. A mobile home park, a large apartment building. Maybe a fund for lending out or doing rehabs and things like that.

It can be syndicating anything. I have a friend who is syndicating poppy farms down in Panama and chocolate farms in Belize. Also, syndicating single-family homes. Maybe you don’t want to go and buy a single-family home yourself, but you wouldn’t mind participating in a group of ten single-family homes. People who are putting together funds and you’re more of a limited partner in that environment. That’s some of the things that I talk a lot with clients about, but it is a place where a lot of people need to operate or feeling you operate and I agree with them.

First of all, if your number one asset is yourself and what we believe at Paradigm Life, that you’re the number one asset and if you end up with a business. You’re the number one asset and you’re performing at a high level, you’re either a highly paid W-2, employee or executive, and about as busy as you want to be in the professional life, or you’re running your own business and you’re just as busy. If you have your expertise nailed, if you’re working on a unique genius in the Tier 2 level, that’s about all you need. I have single-family homes, but it started to get busy for me. I may go on my own mobile home park company. I’m not going to do it at the scale that I thought I was going to do when I first started because Tier 2 can drag you away from what I think the most important Tier 2 is, which is working on yourself, number one asset and your business.

Tier 3 is one of those interesting ideas because I would say most passive investors have some form of Tier 3 or Tier 4. As you were speaking, a relationship is a dynamic that will make or break a Tier 3 type of investment. As I look at how we’ve done this series, there’s always a return associated with the money you put into this specific Tier. In the foundational Tier, which is your safest assets what we specialize in, essentially the highest return with the most features, benefits than anything else that’s out there. That’s why we’ve chosen that for Tier 1. Tier 2, a return comes from personal development.

It comes from having a return associated with the money you invest in yourself that is infinite. You also have some collateralized type of investments there that you control and have to, as you were mentioning spend some time and effort and work with, but there’s a return associated with that. You get money back, you get cashflow. There’s a degree of certainty there as well, because typically with single-family homes if you’re buying them the right way, even though you may have market dips and fluctuations, it’s an asset that performs well. A lot of things have to go sideways for it not to perform well.

You get into Tier 3, the idea is that you give up control but you still want the highest return possible. What’s interesting is that sometimes when you’re in Tier 1 or a Tier 2, the returns you can get in a wealth maximization account when you factor in fees, volatility, and taxes, it sometimes outperforms some Tier 3 or Tier 4 investments. What it comes down to is, the risks that you’re taking by giving up control, there has to be a compensation for that risk. That compensation is essentially a return. Understanding the investment, having an education, there is one thing that’s a way in which you minimize risk and understand the best-case scenario, here’s my return.

Worst-case scenario, here’s my return. Your things go sideways. You have that knowledge in advance. There’s this I would say marginal benefit in most Tier 3 investments. That’s where I look at it as you’re better off putting money in Tier 2 or Tier 1. Looking at Tier 3 is where you want to understand that, “I’m giving up control, but then I want a lot of upsides associated with that.” How do you usually weigh that, “I’m taking additional risk, where am I getting the reward for that risk?” and also assess that? 

Most of the time, it is about being able to participate in a preferred return flush equity. That’s the real estate model, self-storage, and mobile homes. The alternative when it’s real estate side, there’s a lot of other things out there that I haven’t played much with. If you can get a decent preferred return, 7%, 8%, or 9%, and get an opportunity for appreciation. There are a lot of things that you can do or that the syndicator can do on a larger scale with different agency type loans or commercial loans that can provide a decent return at the end, like a pop on a cash-out refi. For example, it takes a lot longer for me with my single-family homes to get to a position where I’m an infinite return, where I pulled out all the equity of what I put in. I could force equity. I can do my own rehab and then cash-out refi, but then you’re shifting your focus away from your business, your primary of polling and that’s going to cost you every time you do that.

The idea to be able to have the preferred return while they’re building the equity force and the equity does not, you personally doing it and then being able to refinance out your cash and do it again. That’s where I like that. To me, the straighter path or well-worn path towards an infinite return, to use Robert Kiyosaki’s term where you can refinance out the investor dollars and still get cashflow from it. That’s what I like about Tier 3. The other thing I love about Tier 3 is it allows you to feel a focus on unique genius. The thing that inspires me is that we want to help. I say that my job in life is to help people put in place of a pyramid where Tier 1 is handled. That is our expertise but then that enables them to focus on Tier 2 and build something that’s going to add tremendous value to the rest of the world. If they’re doing that in Tier 2, my single-family homes, what did that do for me? It allowed me to play at a smaller level. To learn things at a pretty low level without a lot of risks so that I could apply it to what I’m doing into Tier 3.

That’s a huge piece, Gary, with what you said. Can you explain that further? The knowledge and experience and what you gained by owning twenty single-family residences that allowed you to better assess, analyze, and understand Tier 3 and the value associated with that. How did one I would spill into the other as far as making a Tier 3 investment, a wise decision? 

If you get an Uber car and you’re riding around in the back seat, you’ve not experienced what driving is like. You don’t understand what’s going on in the head of the person who’s running it. What is it like when the governor stands up and says, “Your renters don’t have to pay?” I had a different perspective than a lot of the people who invested for the first time in an apartment building and all they knew before that was their mutual fund. I understood. I knew what questions to ask before I got into the investment with a syndicator because I’d been through that.

Understanding the demands that happen when you have to evict somebody or when rehabs coming or what questions do you ask when the tenants and toilets events happen? When the repair has to happen? Knowing that it makes sense to be in an environment doesn’t have bad weather conditions or the value of setting up your rents so that they all happen around the May, June timeframe, and then in September around the school year. There’s a lot of stuff that I didn’t know before I started investing and the whole concept of being win-win with the other people on your team. Squeezing the property manager doesn’t work long-term.

Those are the things that I don’t think you learn if you jump right into Tier 3. The other thing, Pat that isn’t related to that is the primary reason that I did the single-family homes is because I was convinced in 2011, ‘12, ‘13, and I’m still convinced that the actions we’re taking are going to result in inflation. I had this core thing in my being from when I was a teenager about what high inflation can do to your wealth. When I saw I was starting to print in ‘11, ‘12, ‘13, ‘14, I said, “I want to offset that.” I believe the biggest value of the single-family homes and the direct investments is your ability to lock in that equity and hold it for many years. It would be hard to find a Tier 3 investment where the plan is to hold up for 30 years. It’s not going to work. They’re all short-term because some of the investors need out. When you buy a bunch of properties and lock that stuff in for 30 years, offsetting inflation, it’s a tremendous asset.

Look for opportunities, not prices. Share on X

The trade-off is important because that’s essentially what you learned and what you started to value because the trade-off is you don’t have to do property management in Tier 3. You don’t have to assess the deal. You don’t have to make decisions. You’re relinquishing that to someone else, someone that has a tremendous amount of experience but you know that. Someone that goes in with maybe a REIT or a mutual fund understanding, they get into these types of private, syndicated deals. They’re not going to necessarily value what the provider, the general partner’s going to do for you, and charge fees for that. It’s one of those assessing it but also valuing it is important. For you, as we wrap things up, you already mentioned one way in which you do due diligence through relationships, looking at what they’ve done in the past. What are other things that you’ve done that have been successful when it comes to due diligence? Maybe if you know of a failure in syndication, there was the result of not doing good due diligence.

Certainly, the first syndication that I participated in, and let’s use the first two. One was a medical office building. The reason I got into this deal is because I had a quick relationship build with one of the members and one of the people who were working on the project and it was near my home. It was on my drive home when I used to work in DC all the time when I’d come home on the weekend. I didn’t do due diligence at all about the market. A lot of things that were said they didn’t bear out. What resulted was the people were ethical, the business model was failed. We’re stuck with this property that’s paying its own bills, but I can’t get out of it. It’s like the doors are locked on the back of the car. The people were ethical and it had the best of intentions. I didn’t study the market and I didn’t study the business plan. Frankly, I didn’t know anything about the business plan. It was the only commercial building I’ve ever been in. I didn’t know what I was doing. That’s a lack of due diligence.

Another one was in oil and gas and on this one, I got to you use Robert Helms this is letting the “The tax tail wags the dog.” I was suckered in on that one. I made some assumptions like all prices will never go down again. The big lesson learned there was that it happened to be in an event where the head guy was at. Pat Donohoe might’ve been there too. I had this interaction with a guy where I realized these values are not too solid to be specific about it. He was a married guy who was paying too much attention to a single young lady who was at the event. I saw it. I felt it and I’m like, “That’s his personal life.” I didn’t know any better at the time. Those are a couple where they did not go well, things that I have learned. On the positive side, they’ve all been when bad things happen. We always call them bad, but it’s our choice to call them bad. The learning experience comes from when challenges occur. In cases where I’ve been involved with individuals that I thought I’d done the due diligence on the person. I’d done it on the deal. COVID-19 is a classic example. After everything I’ve learned, I’m in different deals now than I was when I started many years ago.

It was a totally different experience here during COVID-19. The communication was exceptional from the leaders, from the syndicators when we had the problems associated with maybe the tenants aren’t going to pay their rent. The properties had a whole bunch of capital sitting in the background. That is a full circle, making different decisions, and seeing what happened. The experience of how it’s better working with people that you know. For me, the biggest thing is, is it a good person that I’m working with? The next is, do they communicate? Are they okay telling bad news because bad news does not get better with time? If you’re in a partnership or you’re in syndication as a limited partner and the people are willing to tell news quickly. My biggest lesson learned would be talking to get referrals and ask for a referral from the situation that didn’t go well, like the question you asked me and ask those people, “Did they communicate with me?” This is the worst thing in the world when you’re in something your family’s money is in it and they stopped talking to you. They keep delivering me the bad news, that’s okay. Don’t stop talking to me.

Here are a couple of pieces that I’m taking from that. First off, when you’re in Tier 3, where a personal financial situation is destined for disaster is when the bulk of assets are in these types of investments. That’s where, when things do go sideways, there isn’t cash, there isn’t liquidity. That impacts emotions and emotions impacts logic. Even the way in which you earn money is most likely negatively affected. I look at Tier 3, there’s a role. The role is after Tier 1 and Tier 2. In that role, the returns are higher. It’s much more passive, but you relinquish control. When you relinquish control to somebody else, I think that sometimes the past is an indicator of what’s going to happen in the future.

From a speculation standpoint, that’s one thing but from a behavior standpoint, that’s another. There’s a part of our hiring process where we inquire within the legal boundaries of, what a person was like during formative years, youth, times in which significant decisions were made about who they are, and what their values are? You can detect patterns. That is the case when it comes to a business. Because it’s not just experience and syndicating, but its business in general. There is a good way of doing business and there’s not a good way of doing business.

If you identify those, now you can ask better questions, make better assessments. In the end, are you going to have a perfect investment out there? You’re not. At the same time, there has to be more pros check than cons. Gary, maybe you can take the final word on this as we wrap things up. You look at the role of these types of investments. I would say the end result is what we try to speak to the most as implementing a personalized wealth strategy is, what’s the end result that you want? What are you trying to achieve? Having clarity around there for the client allows them to understand where their financial situation is?

What do they need to do in order to achieve that end result both from saving their income, making more income, but then also the investments that they’re participating in? As you get to Tier 3, this is where emotions are somewhat heightened and the emotions of greed and gain, Not to say that they’re bad, they’re natural emotions. It’s being able to curb them in a sense by incorporating some good practices of logic, whether that’s asking people questions, whether that’s finding referrals. Getting the experience of others and not necessarily what’s gone right but also what did they do when things went wrong?

If you can get those types of referrals, in and of itself, them giving you that type of person to talk to is a good sign. Let alone the experience of speaking to them and what happened when things did not go according to plan, which is borrowing their intentions. If they’re genuine and so forth, does it mean that they have business wherewithal and know how to operate when things don’t go according to plan. Gary, with that being said, this has been a great conversation. I know you have a ton of experience in that Tier 3 world, what would you end with and maybe express or reemphasize in relation to Tier 3, as it pertains to someone’s personal financial situation? 

What I would do, Pat is I would put Tier 3 in perspective back on the pyramid. We cut it down. We talked about it a lot. My business and my personal life were amazing during this COVID-19 period. It’s not about the COVID-19 like people out there had been tremendously affected by the condition. What I meant is the economic fallout that occurred from all of the stops working in America. What I attribute that to my learning through this period of time was the reason that the business did okay. It’s because I was looking for opportunities, not prices. The way you do that is you have a clear mind. If you’re afraid that the Saber-tooth tigers coming at you as a prehistoric man you’re not going to be using that part of your brain that is the developed intuitive brain. You can’t be seeing the opportunity.

For me, what that was I happened somewhat dumb lucky wandered into March of 2020 with a decent amount of money sitting on the sideline that I was planning to put the work in the near future. That gave me so much confidence, having enlarged Tier 1 of the pyramid, gave me clarity of mind. I remember having a conversation, whereas I said, “What happens if all these Tier 2 assets don’t pay? Is Tier 2 going to cause the entire pyramid to come down?” The fact that we had a solid Tier 1, meant that that was not going to happen in a reasonable timeframe and allow me to focus on the most important thing in Tier 2, which was my own business. Tier 3, you have to do it with ethical people. You have to do a considerable amount of due diligence about good times and bad times.

You need to make sure there are good exit strategies. That’s one of the things about being in the backseat as a passive investor, there’s one exit strategy and whatever the syndicator thinks is going to be the exit. You’re buying a single-family home, you can sell it to somebody who wants to live in it. You can sell it to your tenants. Sell it your mother, if she wants to become a real estate investor. There are lots of options and lots of people that can play on that level. That’s why I would not jump directly to three. The purpose of three is to allow your little soldiers, your money to go to work, and maybe earn a little bit more in those times when you don’t need them down on a foundation. Its purpose is to free you up to be in Tier 2.

That was a perfect summary, Gary. Thank you for wrapping it up so well. Gary, it’s been awesome. It’s always an honor to speak with you and to learn from you. I hope the audience has as well. Thank you again, my friend, I know that this is your 3rd or 4th appearance on the show. We need to keep stacking those up and still have you on next time.

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Thanks for joining Gary and I on this episode. There’s one more episode with this specific season where we focus exclusively on the Hierarchy of Wealth. The next episode is on Tier 4 assets. We’ll talk to you then. Bye.

Important Links:

• Gary Pinkerton
• Summit at Sea
• Jason Hartman
• Dave Zook