Key to Riches: Control vs Ownership

If we want to become wealthier and later achieve our financial freedom, we need to learn to understand this very important concept: Control vs Ownership. Not only understand it, we need to be very comfortable with it and doing it inside out. This is one of the keys to riches.

Why? Because we want to achieve our goal sooner than later – while enjoying the journey. Without applying this concept, our journey to achieve the goal will become very slow or not even started and not too convenient. Slow because your profit is not maximized . Not convenient because this thing will bug you down.

And if these happened, the tendency is people will just loose the spirit, forget the goal and just give up.

Ownership – Owning

Merriam-Webster define “to own” as: to have or hold as property. If something is your own property then you are free to do whatever you want with it (with certain restriction as allowed by law, of course). You may use it, modify it, you may sell it, you may gift it to someone else, etc. And of course, your name will be on the title of ownership.

How to get an ownership? To get an ownership we need to buy it. We either can buy it outright (pay it off upfront) or with debt (pay it off over certain period of time). This is what we call: the cost of ownership.

For example:

• You want to buy $550,000 house. Then you can buy the house outright (if you are rich enough to have $550 grant sitting on your bank account) or get a home loan and pay it over 25 years. Either way, you are toward an ownership of the house.
• You need a car. Then you can buy it outright or take a car loan and pay it off for fixed interest rate over 5 years.

Control – Controlling

Merriam-Webster define “to control” as: to exercise restraining or directing influence over. If you have control over something, you pretty much can fully use it as if you own it, although with certain limitation.

Similar to ownership, we still need to pay some cost to get the control. This is what we will refer as the cost of controlling.

There are 3 important aspects below that can be achieved by taking control (compare to taking ownership). These aspects are where the wealthy and riches really pay attention to and should do we. They are:

1. The cost of controlling can be significantly cheaper than the cost of ownership. So, the general idea between comparing ‘owning’ vs ‘controlling’ is how to get the full benefit of something with the least amount of cost to maximize profit. For example:
   • Instead of paying “principal and interest” loan for your own house (toward ownership), you choose to pay “interest only” loan. Read this property article: Why Not Paying Off Your Mortgage is Better For Investing for further detail. When you take “interest only” loan, your intention is just to control the property, there is no intention of paying it off.
   • Instead of paying your $100k share portfolio upfront, you choose to take 100% loan – capital protected margin lending which only cost you $700 per month instead of $100k upfront.
   • Instead of buying a car for your business, you rent it. Not only you got direct deduction, but also save resources and hassle in maintaining the operational of the car (service, repair, registration, insurance, etc) and concentrate on your core business instead.
2. Controlling can provide additional asset protection. If you own an asset, and something goes wrong and someone initiate a litigation against you (you being sued), then that assets will be safer from that litigation.
   For example: you put the family trust as the owner of your house instead of yourself. Hence is your business is in trouble, your house cannot be seized as it doesn’t belong to you.
3. Controlling can provide additional anonymity. If you own an asset, and you don’t want your competitor or other party knows directly that its belong to you, then you can choose having the asset registered under other entity while have full control over it.

So, because of these 3 factors – for smart investor – controlling is a better alternative compare to ownership.

What’s need to taken care of

As with anything else in life, we cannot just blindly applying something without assessing it properly. Some factors that you need in related to ‘Control vs Ownership’:

• By not paying off your asset, you will be constantly in debt (usually large one) which exposed you to additional risk. While eliminating this risk is not difficult, you need to consider this factor carefully. For example: big mortgage debt can be covered by life insurance/income protection insurance which allow you to still serve the loan if something unwanted happened. Another example: Downward movement in your 100% finance share portfolio can be protected by simply take the put option.
• You *have to* carefully optimizing and do your own calculation to determine that cost of controlling is significantly cheaper then cost of ownership that help you to maximize profit. The significant benefit will highly depended on whether negative gearing apply in your taxation law, your tax income bracket, the interest rate, the value of investment, credit history, among other things. Your specific circumstances may prohibit you reaping the maximum benefit. Check this first.
• Additional cost may be involved related to your asset protection structure. The usual way to achieve better asset protection is by creating legal entity as limited liability company or trust with company trustee. Creating this entity will involve setup cost, registration as well as more complex accounting requirement. They all will be translated to significant yearly cost. You need to weigh whether the benefit outweigh the cost based on your current situation. For example: if your business is not prone to litigation (low risk) probably it’s not worth it. Or if you just starting and the total asset in management is very small, maybe you can postpone this until your business/investing grows to certain level.

Conclusion

One of important keys to riches is understanding the concept of Control versus Ownership. By applying this concept to our wealth creation journey, we may be able to reaping the benefits explained above. Although certain consideration and care are needed – in long term – on the way to our success – we will generally better off choosing Control over Ownership.