Kevin O'Leary REACTS To Graham Stephan's $10 MILLION DOLLAR Investment Portfolio

A lot of people don't understand how debt can put you out of business if things go wrong. Imagine being in your 40s and being wiped out, having to go bankrupt. So, I want you to react to something.

Sure. I have my entire portfolio—worth a little bit over 10 million dollars. Yeah. So, I want you to go through one by one; just give me your individual stocks.

No, this is everything. This is real estate; this is every single one of my investments. Got it? So, I want you to look through this.

Okay, so this is a piece of property. Number one: purchased in 2012 for 59,000 cash, 12,000 reno out of pocket. 71 rents, 14,000. So, this is a good investment. That was, unfortunately, a cash deal. That was the whole thing—a cash deal. I was all in 71,500.

You couldn't get credit for that, right?

I didn't have a credit card. No bank wanted to give a 21-year-old a loan because I had no credit history.

Okay, so right there is an important lesson, and I tell every millennial— even though I don't endorse credit cards—it's very hard to advance your credit rating without having one. So, it's good to get a credit card, put maybe a thousand dollar limit on it, and then start paying off, you know, use 200 bucks a month and pay it off every month.

So, I told my son, as soon as you get one, Trevor, put 50 bucks on the card and pay it off. Now he's got a pristine credit rating, and he's only ever put a few thousand bucks through the card. Everybody should understand that there's no way to game that system. You've got to establish a credit rating, or you can't borrow.

Property two: purchased in 2012, cash again—seventy-two thousand, eight thousand renovation. Okay, so now you're eighty thousand in the hole, rent twelve hundred a month, net nine hundred after cost. Right? Another two hundred and eighty thousand dollars because the market has appreciated.

Yes, you're putting up a lot of your net worth at that time. That was everything. I sold my car at the time so I can go and buy real estate.

Yeah, I get it.

Okay, property three trip purchased 2012 again, same thing—125,000, right?

Okay, that's a serious chunk of cash. I used four years of savings to buy these.

I said, you're still not using any leverage?

Nothing.

Okay, well, that's remarkable. Fifteen thousand rental on top of that. So now you're out of pocket 140,000. That's a little nerve-wracking.

Red 21.45 per month after cost—1,500. Worth 400,000 today, so that's a really significant bump.

Yeah, but you know you've got to admit you've benefited from the appreciation of this one asset class, real estate, as interest rates went down. Correct?

So, there is an inherent risk of concentration here. Your entire net worth is only in real estate so far.

Okay, that's an issue. Property 4: purchase 2016—780,000. You must have used that.

I did 60,000 rental on top of it, out of pocket 210,000. That's your principal down payment plus renovation.

Okay, that's good. That's, you know, also a great investment. But now we've brought leverage into the portfolio.

Yes, this is the one that you saw—this is the one that I was house hacking on that you thought was a good idea.

Yeah, 585 loan 620.

Wait a second, you borrowed more than the purchase price because they did a cash-out refinance?

Yeah, so what I did is I fixed this place up. I put about, right here, 220 thousand dollars total in renovation.

Whoa, whoa! So now it's worth about 1,250, and I did a cash-out refinancing.

It was a real junker, right?

Yeah, because that's a serious amount of change you're putting in.

Yeah, that one you did a lot of work. So now you're using leverage and you're spending to invest, including adding more leverage.

Correct. So what I like to start thinking about in terms of debt—a particular leverage on real estate or any investment: if the pupil hits the fan and values go down across any asset class including real estate, you still owe that million dollars.

Correct. So, you got to start being sensitive to how much debt you want to bring into your world. A lot of people don't understand how debt can put you out of business if things go bad. You have to be ready to pay that million off at any time.

A great analogy: I met a very, very wealthy real estate developer in New York that came over with nothing from Europe when he was young. When he was 18 years old, he's a multi-billionaire now, and each time he bought a building, he did apartments.

He would call it either a pasta or a protein building.

And I said, what does that mean? He said, well, I start with my first building, and I would take a lot of debt down, and I would get the rent roll up so I was 100% leased out, and I would only eat pasta until I paid off all the debt.

I said, really? He said, yeah, because it was just my wife and I, and we had all this mortgage on that building. And I got—I know what happens during, you know, cycles.

And so once they paid off that building, and now all the cash flow was coming out of the building with no debt on it, he'd start to eat steak. That became a protein bar.

And his whole life was always making sure that he had enough buildings with no debt on it to sustain the downturns because New York in those days, every seven years, would take a dive of 30 percent.

So what he would do is he'd always have a couple of protein buildings spinning cash. When the correction hit, he'd use that cash flow to buy new buildings.

But he never let—he never went bankrupt because he never extended himself so far that the protein buildings couldn't pay off the mortgages, you know, of the past, the buildings, right?

You get the energy right. My thought has always been the interest rate is so low, fixed for 30 years; cash flow sustains it.

Yeah, and between the write-offs and maybe inflation, maybe we don't see it, but either way, the worst case for me has always been a break-even on the interest rate that I'm paying.

So, okay, we go on here. So this is property number six.

Yeah, six. This is another duplex. Everyone is going up.

Yes, like we're spending more. Yes, we're putting more debt on. This is 815,000 loan, 680.

So you put—there's a little equity from day one, right?

Right. 3.625, very good down payment—115,000 worth 965.

Okay, so that's good. And all of these, by the way, are rented under market value.

I get it, but how long are the leases for?

One year.

And so do you get to bump it up?

I don't raise rents, believe it or not.

What?

Yeah, really.

Really? Why not?

My thought is if I have a really good tenant who always pays on time and no issues, I would rather just not raise the rent and keep them there a long time.

And if they do move out, then it's kind of like gravy to me because I'm able to rent it out for even more to the next tenant and then tell them they could stay there as long as they want at that price.

Yeah, and for me, I've had some tenants now for seven or eight years.

Property seven purchased 2.1 million. That's our number one, right on the hit parade.

Right, this is this year?

Yeah, so this is where I am living now.

Okay, loan—this is your primary residence; that's where you got the 2.875.

Right. Now at the end of this journey, what is your total debt nut across all the buildings?

About 2.9.

Okay, I'm just saying that would start to make me nervous, just not because it isn't well invested. That's a big number.

Like a lot of it. Can you take the hit? If just look at it that way, yeah, can you pay down, you know, three million bucks?

Yes, as long as you can say yes to that, you can continue to do this. But the minute you get so levered up that you can't find 15 million dollars…

I don't have any debt. I don't. I've got to a point in my life where I just don't like that. So, I buy things for cash, and I understand why debt works in this model, assuming the rental market remains buoyant.

But there comes a point in your life—and you're still too young—I don't want any obligation to anybody.

But don't you think that's because you already have so much money now, that for you going and trying to borrow it three percent to make five might not be worth your time versus just the hassle-free of I'm gonna buy it cash?

Don't think about it—well, except because I'm older than you, I've seen a lot of things, and I've been through a lot of down cycles.

Lots of my friends got wiped out. I mean, imagine being in your 40s and being wiped out, having to go bankrupt.

Like that changes your life forever because you have that on your back. I would never want to wish that on anybody because it is a horrible thing to happen.

And the only reason it happened to them is they didn't respect debt.

You're being disciplined; you're buying assets that have income. They are buying boats and cars and watches and getting divorced. They loved their lifestyle; they went to zero.

You have to respect that, and you do. This makes sense to me.

But again, I go back to that guy in New York—protein building, pasta building, and the whole idea of respecting how debt can rip your life apart.

That's—but so far, I don't see any credit. You're not using debt to buy stupid stuff, right? That's basically what's going on here.

All right, so this now is—since your video—he's got a little bit more to go in terms of diversification. He wasn't at 10 because he didn't diversify enough.

Yeah, well, I'm glad to see that because I never let one asset class ever become more than 20% of my net worth.

Clearly, real estate still remains more than 20% of your net worth. One of your goals should be over time is to make it to get such a broad portfolio in your net worth that real estate's only 20%.

So if that asset class really has a hard time, it can't take you out of business.

Got it? So, let's look at this: stock market investments—individual stocks, 1.14 million. Index funds—7, that's good—772,000. California state-free bonds, very good—150,000. Silver, 12,000. Acorns—so using Acorn, that's good.

Yeah, I test out all the apps so I could give it.

Yeah, that's fine. Okay, cash—320. That's within the stock market brokerage; it's not all cash. Just so I continually buy into the market.

The discipline is every 90 days to trim back anything over five percent and put it into something else that you decided to go into.

What happens to portfolios like this? That aren't—it's like trimming a hedge—no sector more than twenty percent; no stock more than five.

You've got three stocks here over five. You give up some of the upside, but when the correction hits, like a Tesla rolls over and goes down 38 percent, you don't take the full hit because you've taken profit out on the trimming.

I'm worried about taxes.

Yeah, because it's 50%, yeah. And I'm telling you, that's the biggest mistake you can make in your life is to worry about taxes.

The fact that you have to worry about taxes is a wonderful thing. It means you're making money.

But to say, oh, I don't want to sell, you know, stock that's now 11% of my portfolio because I don't want to take the tax hit—you will pay a brutal price for that.

You'll have a massive correction; you won't have taken any gains, and you will hurt yourself immensely. That's the one thing mistake you're making here.

So you've got to do your work. Are you using any margin?

No, that's the other thing—never use margin in stocks. Never do that. Never, never, never. People think margins free. When there's a correction, you get slaughtered, right? They'll sell you out in two seconds.

Cash position: 1.8 between cash—1.75 12-month CD—200,000 cash. And, but you need this to make down deposits, to make deposits on real estate.

What is cash for your total net worth? How much cash do you have versus your entire net worth?

So cash would be about 30%.

That's how much I actually have—more than 30% in cash.

Really?

Yeah, yeah. I've had some exits in real estate recently. I sold my commercial real estate, and I'm going to wait until I see what the economy looks like in 36 months to go back in.

But as a result, I'm sitting on a ton of cash. This is a really exciting one. I don't know if I can mention this in the video because I haven't announced it yet, but I put a company called—there is a startup valued.

I've learned from Shark Tank because this is a Shark Tank investment type thing. You must be ready to absolutely write that off because there's a 50-50 chance you will; it'll be a tax loss.

Very few people can achieve this; I didn't achieve it when I was 30. That's really, really hard to do.

And the reason you got there is you're extremely disciplined; you only deployed capital into assets that you thought might appreciate—primarily real estate.

Listen, the only negative I could say about you is that you got too much real estate. But that's how you made your money in the first place—working on it.

Yeah, so what would you give this one out of 10?

I think you gave me an eight point two three four. As an operator, you know, you were an eight, but as a portfolio manager, I got to bring you down to probably a seven, maybe a six and a half.

Why?

Over-concentrated; one asset.

Fair enough. So if I just looked at this without knowing who you were, I'd say this guy has too much real estate.

Okay, and so, you know, but if you—real estate is who you are, so I get it. But all your maneuvering now should be raise more cash, buy more diversity—maybe a little more conservative.

You know, my portfolio, I probably have a thousand stocks, but the majority of them all pay me, and they pay me monthly.

So I have a really strong cash flow every month, and my biggest problem is what I do with the cash. And that's how I buy watches.

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