What the 1 Percent Really Do With Their Money with Tad Fallows

Steven Weinstock (00:00) Hi everyone and welcome back to another episode of the wealth clock with Steven Weinstock. I am Steven Weinstock, your host. I've been investing in real estate for close to 25 years. I started in a single family, graduated to multifamily and recently I've been investing in private credit, firstly in positions. I love to speak to operators, business people, entrepreneurs, and anybody who could add value to my audience. This episode is sponsored by Cable NOI. NOI stands for Net Operating Income. This company helps multifamily owners earn revenue from cable companies such as Spectrum, AT&T, Verizon does not cost a penny to the owners and they will pay you a commission, a per door fee upfront. It's really a no brainer. I've used it on my properties that I've owned. and it's the easiest NOI enhancement I've come across. So they are now a sponsor. It's free, doesn't cost anything. All you need is your address and 20 units plus in the building, and they can decide and figure out how much you can earn. Today we have a guest. His name is Tad Fallows. He is the CEO of Long Angle. Tad works with experienced entrepreneurs, executives, families navigating complex wealth issues across all different life stages from growth, liquidity, and to their legacy. Tad, welcome to the show. Thank you. Tad Fallows (01:28) Thank you so much for having me here, Steven. Really excited for the conversation. Steven Weinstock (01:31) Okay, let's jump into it. First, what's your background? Where are from? What was your first job? And what did it teach you about money? Tad Fallows (01:40) All right. Got a lot of questions there. So, from the Washington DC area, but I have not lived there since high school. And for those not viewing this, I'm in my mid forties. So it's been a little while. My first job out of college was actually as a math teacher in Southern Louisiana, right on the Mississippi border. I did teach for America out of college. I made it one semester and then I determined this was a value destroying move. I was miserable. My kids had a terrible teacher. I don't think I was actually even a statistically significant outlier on the age versus my students. So that was not a win. And I decide, you know what, if I want to get back to society, I'm probably going to be more successful getting a normal job, making money and donating money rather than being a low quality underpaid teacher. So I have a ton of respect for those who do it, but I quickly pivoted toward the business world. I then after a brief stop in China, which corresponding with SARS, I went into McKinsey, I did consulting for a few years, and then my main professional from sort of my mid-20s onward has been as an entrepreneur, largely tech-focused entrepreneur. So I bootstrapped a software company from about 25 to 35, 10 years to the day from when we started it to when we sold it to a strategic acquirer. I grew it to about a hundred employees before we sold it. And that was fantastic learning experience. Cause you go from, okay, there's three of us. We are literally doing everything. I'm the sales. I was kind of the suit and my two partners were the more technology guys. And so we'll go from being all the sales and legal and finance yourself to hiring out a sales team, a marketing team, a finance team, et cetera. So that was a great experience. And then that meant my mid thirties, I kind of went, since we'd bootstrapped it. basically paid ourselves almost nothing for 10 years. And then on one day got the deferred liquidity for the last 10 years of effort. And so had a whole bunch of new high net worth questions, whether that was around taxes, estate planning, raising kids with wealth, umbrella insurance, kind of you name it. the biggest challenge I had at that point was I felt like all the advice from those questions was coming from Goldman Sachs. And I wanted to get advice from people who are in the same situation, who are not trying to sell me anything, which is what actually led me to start long angle, which is really, it's a community of first generation wealth creators. So mostly people in their thirties, forties, fifties with call it five to a couple hundred million of net worth. so enough money to have a lot of this complexity, not so much money that I'm a billionaire with a family office and Ryan, the PJ around, but still sort of having to do this stuff yourself. And so yeah, that's kind of my background. And then from an investing side, I've gotten into a bit of real estate investing myself. Largely unintentional where I've had a series of bought a single family house, bought a house that we really liked, got a low rate mortgage. And then when we move said, Hey, this really makes more sense to turn into a rental property rather than just selling it. So my portfolio is much more heavily skewed toward class a luxury single family real estate than anyone would intentionally put together, but it's actually ended up being a pretty good portfolio from investment point of view accidentally. Steven Weinstock (04:42) Yeah, you have a lot of real estate investors that got into this as accidental landlords. Exactly what you said. They have a house, great rate, or they have a job that's moving and either they can't sell it, they don't want to sell it. They inherit a house and they become landlords and the numbers start clicking and they really love owning a piece of real estate. Typically, it comes with hopefully some easy property management that allows them to move further and continue loving it. First property I ever bought was 2001. I was a young kid and I purchased a single family home. My goal was to buy just one and keep it for 30 years, pay off the loan. And when it's time to retire, it's like an added 401k bonus, so to speak. But after about two or three months, the numbers really started clicking. It's one thing when you just think about it in theory. another when you actually own it and you're in the thick of it and you see the payoff schedule every month in the statement. And I said to myself, why just one? Why not two? Three, why not five? And it's close to 25 years later and I'm still in the game. Tad Fallows (05:43) I mean, yeah, I'll tell you one that my journey sounds similar to yours. I haven't bought stuff explicitly to be rentals. It's all been either intended to live there or did live there myself, but the one that's probably the furthest to field from that, but one data point for your audience is when my wife and I were looking at it, said, Hey, we would really love to have a vacation house in Santa Barbara. My brother lives there. It's a beautiful place. It's close to her mom, all that sort of stuff. But The math on that, even if you have significant assets saying, okay, I want to spend high seven figures for a vacation house, just very hard to make that math work. But actually it's worked really well as, we can use this as our vacation house. And then we also get the income from it. And the way we looked at buying upfront was, Hey, can we use the income to offset a lot of the costs? So it becomes a manageable prices of vacation property as it turned out. actually cash flows like a class C kind of thing. But then you also get your vacation house in Santa Barbara. So that is probably the one that most over-delivered in expectations. And even more than just sort of buying a primary residence. Steven Weinstock (06:54) Yeah, mean, the appreciation on some of these assets are phenomenal. And if you don't necessarily need the cash flow, buying some of these properties is a great investment. I live here in New York, New York City, and you have people buying properties in New York, buildings in Manhattan, where it doesn't cash flow at all. In fact, they might be underwater. They could buy a $10 million building, be underwater 25 grand a month. But six years later, sell it for $16 million. Tad Fallows (07:18) Yeah. Steven Weinstock (07:19) And it's a big boy game, especially in these Class A areas. Tell me about Long Angle. When you started Long Angle, where were you holding in terms of, I guess, your life, lifestyle? I guess you had some money. You had gotten advice on what to do with it. What made you start this business and helping out others? Tad Fallows (07:38) Yeah. So it was really, I know everybody says this, but really true is out of this personal need where my co-founder from the software company and I, we said, Hey, we want to get this advice where we have these questions that are not super well addressed on kind of mass market financial literacy kind of areas. So I think a classic one is estate taxes. The standard advice is look for a couple, there's a $30 million exemption. Nobody ever hits it. Don't even worry about it. And you say, okay, well that is accurate. But that is not helpful if you're in position where you either today or if you're 40 and you have a little bit below 30 million, there's very good chance you're going to hit that 30 million by the time you pass away. I actually want something that will go into some of these more niche questions. But again, I want to be unbiased advice. I don't want to hear what the life insurance salesman has to say about whole life insurance. I want to actually talk with other people, first person in the same situation and say, Hey, did you buy whole life? I'm getting pitched this. did you actually buy or do you run the math and does it not work out? And the same thing around, hey, how do I talk with my kids about wealth or what's the best trip to take to Tokyo or do I need private equity in my portfolio? Any these sorts of questions where they're a little bit niche toward a higher net worth demographic but looking for that unbiased advice. So we just started this community. said, hey, we know 10 other. And I think one of the challenges is a lot of people in this situation. They know a couple other people in the situation. So for me, it was maybe my co-founder and my brother, but I didn't have a full sounding board the way if I have a question about setting up a 529 or maxing out my 401k, I can ask the dad next to me at the soccer game. I'm going to get a good answer. But if it starts to become this question of, maybe in your example, I've got a $16 million office building. Should I 1031 it into self storage or should I sell and pay the taxes? That kind of question, you're going to look like a jerk and you're not going to get useful information. And so we said, OK. Each of us knows a few people in the situation. Can we put together a community where we're not gonna charge anybody, it's just sort of a free peer community and where the guiding principle is just non-solicitation. So you're just here to give advice and get advice, but nobody can get a client, nobody can get investor, it's just sort of peer-to-peer advice. So that was the reason that we started it. And then over the past five years since we started, it's grown a lot more than we expected. So we started with a few dozen members. They ended up just sort of a constant set of this guy from my board of directors would make a great member or my college roommate would make a great member. And so we've ended up with about 7,000 members now, mostly in the US, although across about 50 countries worldwide. And still keeping that same principle, we don't charge for membership, we interview every potential member. Now it's not just me and Suryam and Matt personally, we have a few dozen of our members act as volunteer ambassadors, kind of do these interviews. So we still interview them and vet the community and moderate it. And then there's a few things that as we've gotten bigger, we've said, hey, there's certain ways we can take advantage of this scale to collectively drive value. Steven Weinstock (12:36) So let me ask you a blunt question. How rich does somebody have to be to join Long Angle? Tad Fallows (12:41) Yeah, I'll answer that three ways. One is the average net worth is going to be low eight figures. I would say the people who tend to find it most valuable, it is somewhere between five million on the bottom end and call it 200 million on the top end. And I know that sounds like a really broad range, but what we have found is that the person with eight million and the person with 28 million, it's really not that different of a situation. You have enough money that you have lot of these complexities and you have to think about these things like, okay, if I can save half a percent of my portfolio management fees, it's a lot of money. Or I can realistically think about a second house, I'm thinking about estate taxes, et cetera. But again, you don't have so much money that you truly set the infrastructure of a single family office, you're not a billionaire. So it's pretty broad spectrum there. In terms of the minimum. We have a hard minimum, which is the qualified client threshold, 2.2 million of assets outside your primary residence. And so that's binary welcome with the interview anybody above that. But I do think it tends to become most valuable over about 5 million. Steven Weinstock (20:01) So you're dealing with, I guess, the 1% on a regular basis. Tell us or tell the audience, what do people, I guess, misunderstand about how the ultra wealthy actually invest? Tad Fallows (20:13) I would say the biggest, I don't know if it's a misunderstanding or not, but what I can tell you is we do a lot of survey benchmarks of our members. So we're saying, okay, across the people in this circumstance, let's say most of them are in the eight figures of net worth, what does your actual portfolio allocation look like? And it's pretty interesting. And then you also see some skews within there. What does it look like for the person with 10 million versus 100? How are those different? Maybe the biggest surprise is these people don't tend to overspend on yachts and Rolexes and Bentleys and that sort of thing the way you might expect. The average savings rate is actually about 50% among this cohort. So sure, they're enjoying themselves, but they're making a million dollars a year. They're saying, I could live on half a million. And it's talking post-tax here. So they save about half their post-tax money. They're not spending on, and I'd say particularly not heavy toward the demonstrative flaunting at luxury goods. They'll spend a lot on say travel is the number one category of hey I value going trips with my family but on things like cars watches really not nearly as much spending as you'd think by mass culture. And then from a portfolio allocation maybe the most surprising thing is actually a very low level of leverage. For those of us who are more in real estate probably shocked by it that our typical member has only about 10% of their net worth in leverage. So to put that another way, if somebody has 10 million net worth, they have about 11 million of assets and 1 million of debt. And that's including mortgages. Half of people don't carry a mortgage. You could say, hey, that's inefficient. I should max out my leverage because I can borrow at 4% and invest at 8%. I'm going to be better off overall. But people tend to say, I don't want to do that. I've got 10 or 20 million. I don't need to take on the added risk of this leverage. Now the flip side is the money they do invest, they tend not to put it into low return assets like bonds. They put it much more into either public equities or private assets that perform at equity like rates. We're talking high single or low double digit expected returns. And that's probably the biggest difference from lower net worth investors is let's say that somebody might have 80% of their money in stocks if they're younger and more aggressive. If you look at the higher net worth categories, they might have 50% in public stocks, but then 30% in private equities. And I'm including both traditional private equity as well as venture capital, other small companies, oil and gas private equity, all the kinds of private assets. As you get more money, people do tend to skew more toward private markets. Steven Weinstock (31:05) I know we were talking offline about this and I know your opinion on this, but let me frame it this way. You have a 35 year old who's worth $20 million and he's got kids at home. Should he have life insurance? If so, what type? Tad Fallows (31:20) If his kids will be fine, if he passes away on that $20 million, he does not need life insurance. If they need another $5 million to pay off the mortgage or something like that, he can buy term almost for free. And so if it's like, hey, I'm sort of on the fence about whether my wife would be comfortable, spend $1,000 a month or $1,000 a year and just buy the term insurance and you're fine there. I would say whole life insurance, in my opinion, makes sense for absolutely zero people. It ends up being a high fee, low return vehicle that is good for the salesman and not good for a buyer at any income bracket. What I will say is the one version of permanent life insurance that I've gone very deep on this because life insurance people are so persuasive that you keep thinking you're missing something. Every time I dig down to it, the one exception that is interesting is private placement life insurance. And I will say, I don't sell private placement life insurance. I don't have a policy to offer. So this is as unbiased as you can get. I think it's very interesting. And what that is, is it is a life insurance policy, like a term, so okay, I have whatever $10 million payout or $5 million payout, but it is combined, you put in a specific set of investments that are tax inefficient. So you say, okay, this one's just gonna focus, let's say on private credit. Because as you know, doing this private credit, maybe you get a 9 or 10% headline rate, but that's all ordinary income. So after tax, you're only making 5 or 6% in New York. Say, well, that's not that compelling. If you put that private credit or those hedge funds in there, then they are totally shielded from taxes, not just in the growth, but you can actually withdraw the principal. So the private credit you're putting into private placement life insurance. Let's say there's a 1% tax or fee burden. You're getting a 9% after tax effective return. rather than the five or six percent you get in taxable portfolio. So I would say it's the one exception. There's a bunch of kind of challenges with this in the sense that they tend to have very high minimums. We're talking typically minimum premiums like a million dollars a year. So extremely high, you have to be really committed to this. But I do think that private placement in particular is interesting because you really can get the tax advantages outweighing the fees the way that you cannot in whole life or cannot in VUL or IUL and that sort of thing. Steven Weinstock (36:19) Anyways, Tad, it was great having you here. Thank you for tuning in to the Wealth Clock with Steven Weinstock. Like, subscribe, reach out if you know anyone who should be a guest. Tad, thank you so much. Tad Fallows (38:10) Awesome to speak with you.