Donte Whitner: The Benefits of Pledged Asset Lending

By Donte Whitner | Posted 5 days ago

How I and my business partner, James Luthardt, are building an investment empire—and helping professional athletes do the same.

 

One of the hardest things to do in life is to get rich. Less than 10% of the population has one million dollars. It takes an incredible amount of talent and skill (or luck) to get rich. For professional athletes, we’ve already accomplished getting rich at a young age. You would think that would lead to long-term wealth. Unfortunately, a large percentage of professional athletes face financial distress shortly after their careers are over.  But the ones who are disciplined and understand the blueprint of turning “riches” into “wealth” create multigenerational wealth. Luckily, I have been blessed to be around the top investors—like my business partner, James, and other top family offices—to show me this wealth formula. Today, we are showing professional athletes who look like me, and who come from neighborhoods that I came from, the blueprint for multigenerational wealth.

 

Very few understand what it takes to create wealth from the money they’re earning with their paycheck. Many confuse being rich and being wealthy. Being rich means you have a high income. Being wealthy means your money works for you. Once you have wealth, economies of scale are on your side, and one of the best ways to leverage your wealth to create more wealth is through pledged asset lending: An uncommitted revolving non-purpose flexible line of credit secured by assets held in an investment account.

 

The wealthy use securities-based loans for easy, tax-free access to money.  It’s how wealthy people leverage their money and use other people’s money to buy asset classes such as real estate and private businesses to enhance their net worth. Being rich isn't just about buying big houses and fancy cars with a big paycheck. It’s about generating money from your investments and increasing that passive income in perpetuity. There’s a blueprint that all the wealthy families use to generate wealth, and ironically, that blueprint hasn’t changed for 200 years: it’s buying financial assets like stocks, real estate, and businesses. 

 

On Jay-Z’s most recent solo album, 4:44, he has a line from the song “The Story of O.J.” about generating wealth and the importance of credit:

 

“You wanna know what’s more important than throwin’ away money at a strip club? Credit. You ever wonder why Jewish people own all the property in America? This how they did it.”

 

One of the first steps to building wealth is to develop your foundation in stocks. For 90% of the population, an SP500 index is fine. For wealthy families, the foundation is a high-quality dividend growth portfolio in stocks like Blackrock, Lowe’s, Nike, Apple, Sherwin Williams, etc. At Kirtland Hills Capital, our investment management firm, we call these the “All-Pro” stocks of the global economy. They are companies that have a sustainable competitive advantage—an economic moat—or thesmall minority of companies who have enjoyed high returns on capital for long periods of time. These companies are referred to as “wide moat stocks.” These baskets of wide moat stocks have historically outperformed the market over many market cycles and have done so with lower risk. As a long-term investor, a company's common stock price will eventually reflect the per-share value of the underlying business profits. Therefore, above-average stock price performance results from above-average compounding of intrinsic business value of profits. This kind of compounding requires an economic moat.

 

Once you build your foundation, you can then borrow against this portfolio and not have to sell securities to obtain liquidity to purchase real estate or private businesses for increased passive income and capital appreciation. You are using your securities as the collateral and getting access to low-interest cash without incurring capital gains—and, more importantly, without giving up the growth of stocks invested. In other words, you are using your “credit worthiness” to gain access to cheap capital. 

 

That means you can use secured lending against your portfolio to go buy other asset classes that have historically lower, unleveraged returns. For example, you can buy an apartment through pledged asset lending, which means you’re not using your own money to purchase that property. Over the past 50 years, real estate has returned around 4% and the stock market 10%. Those are just the averages, so by prudently investing in stocks and then using leverage in real estate, we are enhancing our total returns, getting incredible tax benefits, and receiving 100% of the cash flows from a property we used none of our own money to buy. In addition, gains on your stock and real estate portfolio could be used as an estate planning strategy, since they will likely never be taxed; this is because, if you do not sell the asset securing the loan, the cost basis of the security or real estate will step up to the fair market value of the security or real estate on the date of the owner’s passing. If I hold the assets until death, the assets receive a stepped-up basis, and there is never a tax paid. The assets can then be sold to pay off the loan, or I could purchase life insurance that can be used to pay off the pledged account loan upon death. 

 

For example, if I borrow against my dividend growth portfolio, not only would I not have to pay tax on the portfolio gains, but I wouldn’t have to pay tax on the potential millions I borrowed for real estate. 

 

One of the biggest benefits to this practice is the low cost of borrowing. If you’re borrowing this money at, say, 1-2%, the income generated from the asset should be enough to cover the fixed cost. It’s a low-cost way to generate even more income on a regular basis.

 

One mistake I made when playing in the NFL was buying real estate with my own money. I used cash—no leverage—and returned very low returns. I didn’t know how to use pledged asset lending, so I was paying for these properties with earned income instead of leveraging the assets in my dividend growth portfolio. I’ve since learned from this mistake, and I'm hoping to help other players avoid making the same mistake.

 

Another big no-no when it comes to buying properties is using pledged asset lending to purchase liabilities: cars, jewelry, or even a personal property for oneself or a family member. The problem here is that is you’re adding a liability to your balance sheet rather than an income-producing asset like a rental property. In other words, your asset base isn't supporting the loan amount with passive income; it’s rather a cash outflow (liability), which is a major financial issue in the long run. If not done correctly, securities lending can turn risky. A falling market could mean a borrower has a margin call. When your asset base can’t afford the loan amount, the bank calls you and demands that you must cover it immediately, requiring you to sell stocks to get the necessary funds to pay back the bank. This defeats the entire purpose of using prudent leverage. James and I are constantly educating professional athletes on the difference between assets and liabilities.

 

Just like there’s a structure to an NFL playbook, there’s a structure to generating wealth, and it’s essential for players to learn this. Pledged asset lending is a great way to prudently leverage assets you’ve already accumulated, especially as you diversify into real estate for increased passive income.

 

There are also no fees when borrowing this money, and there’s the added benefit of no closing costs, too. And, unlike a fixed loan, there’s no repayment schedule. 

 

Pledged asset lending isn't strictly for real estate, either. You can use it to purchase cash-flow-producing franchises such as Papa John’s, Dunkin’ Donuts, or McDonalds. Those purchases shouldn’t be made with cash, but rather by borrowing against your stock portfolio after you have acquired adequate wealth in your portfolio. 

 

All of this is part of the blueprint for generating multigenerational wealth. Athletes did 99% of the work by making it to the pinnacle of the sport as a professional. Now, it’s about following the blueprint for making their money work for them. 

 

Pledged asset lending plays a major role in this process, and every year, James and I continue to add assets to our balance sheet and generate more and more passive income with this blueprint. And with this same blueprint, we have helped over 100 NFL players who look like me, and who come from neighborhoods like me, generate wealth—multigenerational wealth. 

 

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