Hi {{first_name}},

Back in June I put out an issue of this newsletter titled the Freedom Four. In it I outlined how to generate a top 1% income annually with a $4 million private credit fund investment. 

I was excited to share the strategy with readers. Obviously, it's a way of making roughly $480,000 a year in passive distributions, in a model that doesn’t require my capital appreciation, $2m to $20m framework. It’s a faster path to individual agency.

Shortly after the issue came out, I was at my parents' farm in De Soto, Missouri. My dad is a combination of a gentleman farmer, a retired business owner, and an investor. He’s also the man who taught me my earliest lessons in money, and has recently been exploring generating more investment income. So, I was especially curious to get his take on it.  

"Yeah, but I'd never do that," he said.

"What? Why not?" I asked.

"Because I'd be paying ordinary income taxes. I only want to pay capital gains tax rates."

I blinked. He was objecting before I'd gotten to the good part. "So, you are objecting to the taxes, not the framework?" I asked.

"Minimizing taxes allows me to keep more of what I make."

He wants to prioritize tax efficiency.  The government taxes capital differently than it taxes labor. It quite literally rewards investing over working.

Quick side note on this. As an example, take $550,000 earned two ways. Earn it as salary or business income and pay $118,769 in federal tax at the top 37% bracket. Take the same $550,000 as a long-term capital gain and your federal bill drops to $67,665, thanks to the 0%, 15%, and 20% capital gains rates. That's $51,104 in your favor. The only thing that changed is how you earned it.

That $51,104 holds too, because most states tax gains and wages at the same rate, so the state side nets out. Missouri's the exception. It became the first income-tax state to exempt capital gains entirely. I love my state. :)

So when I built the Freedom Four, the problem I was solving was speed. How do we use the most efficient cash-flowing private investments to reach a top 1% income, and how fast can we get there if we optimize for it over total appreciation? 

That's what investors had asked me about, so that's what I built, and the response told me I'd again shared the massive efficiency gap of private investing.

But my dad had pointed out the other side of that, and it kept nagging me. He didn't care about getting there fast. He cared about keeping the dollars that arrived, and taxing those dollars at capital gains rates. That's a different problem, and a different model is needed to solve it.

Challenge accepted.

I went back to the drawing board and built the efficiency model he wanted. What came out is the Capital Gains Ladder. It reaches the same top 1% income on a third of the capital, taxed entirely at capital gains rates. I built it for one man. But it's ready for everyone now.

This week you can dig into:

— Walker Deibel
WSJ & USA Today Bestselling Author of Buy Then Build
Founder, Build Wealth

P.S. 

If you haven’t read the Freedom Four. Check it out. 

And if you want the interactive Capital Gains Ladder model I built so you can test out your own investment timeline, hit reply with the word "GAINS" and we'll email it your way.

Essentially, the solution is building a Capital Gains Ladder: a series of stacked investments where, after an initial multi-year investment strategy, a portion matures every year.

The challenge is that private investments are illiquid with irregular cycle times, so the criterion that makes a Ladder work is targeting investments offering a 2x in about 36 months. That's about a 26% internal rate of return. For clarity, the projection on a $100k investment looks like this:

Year 0 (your investment): -$100,000
Year 3 (your return): $200,000

No cash flow in between. A total illiquid investment, with the possibility for upside and downside.

The point is that these "2x in 3 years" opportunities do exist in the private markets, and if you can find a series of them annually, it's an ideal setup for a Ladder.

Want to run some numbers and see how you can build one?

Since the top 1% is the target, let's work backwards from a goal of earning $450,000 pre-tax annually. ($450,000 is the top 1% individual earner threshold; use $659,060 if you're targeting top 1% household income.)

Here's the plain version: you invest $450,000. Three years later, it comes back as $900,000. Half of that is just your return of capital (ROC), your own money returned. The other half, $450,000, is profit, your target gain.

Three years is also what makes the staggering work. Start one rung a year for three years, and they finish in three consecutive years too, which is what turns an irregular, illiquid asset class into something that pays you annually instead of once every few years. Since it's a 3-year hold, you'd invest $450,000 every year for three years, then reinvest that same $450,000 principal into new "2x in 3 years" investments after that. Over time, it looks like this:

No income lands in years one through three while you're building the three rungs. The first payout arrives in year four, when the first rung matures and you can take the distribution instead of reinvesting it. That's a top 1% income, via a Capital Gains Ladder, completely passively, funded by $1.35 million total, starting in year four.

Compare that to the "work for 40 years, save for retirement, 4% drawdown" model we were all taught. You'd need $11,250,000 saved in the stock market to draw the same $450,000. Even if that's accessible to you, the Ladder achieves it with only 12% of the needed balance.

Here's the number I didn't expect when I started building this. The Freedom Four gets you to a top 1% income with $4 million. The Ladder gets you there with $1.35 million. Same tier of income. A third of the capital. The ladder pays you gains, taxed at 15% to 20%. That's what makes the ladder tax efficient. The Ladder's interactive model runs that exact number for your own state and filing status.

That's the real conclusion of this framework, worth sitting with before you build one. The Ladder is dramatically more capital-efficient than the credit fund model, and it asks something of the reader the credit fund doesn't.

A credit fund keeps paying whether or not you sourced a new deal this quarter. A Ladder depends on finding one. It needs a fresh "2x in 3 years" opportunity, sourced and underwritten, every single year, for as long as you want it to keep paying. Private markets don't hand those out on a predictable calendar. Some years hand you two. Most years, you're lucky to find one. If a rung underperforms, or an exit slips a year, the gap lands directly in that year's income. A credit fund spreads that same risk across dozens of loans. The efficiency is real, and so is the sourcing burden that funds it.

Building this for my dad, I set out to solve for tax rates and landed on the most efficient framework I've built yet.

You don't need $1.35 million in cash to start building. The Ladder scales to whatever you bring, and there are three ways to fund it depending on what you're working with. Every path demands the discipline to fund a rung on schedule, year after year.

Step 1: Choose your funding path.

Fund it now. If you have the cash on hand, commit $450,000 a year for three years, exactly as laid out in Shift Your Stack. Your first after-tax distribution, $394,565 (at the 15% federal long-term capital gains rate plus the 3.8% Net Investment Income Tax), lands in year four, and it repeats every year after that as long as you keep sourcing new rungs.

Double the assets with an ABLOC. If your capital is in a stock portfolio rather than sitting in cash, you can borrow against it instead of selling it. This is an advanced strategy that increases risk by introducing leverage, but it lets you build the Capital Gains Ladder while keeping your public equities portfolio invested rather than trading it out. The interest payments are tax-deductible, and can be funded by the Ladder's own cash flow starting in year four.

Leveraging the ABLOC is how the rich increase velocity of their wealth. In a prior issue we also explored how an ABLOC can bridge a passive investor from $2m to $20m in about 15 years.

At a 40% loan-to-value, you'd need $3.375 million in equities to borrow the full $1.35 million, drawn down $450,000 against your line each year for three years. The total interest across those three years comes to $162,000. Because that interest is tax-deductible against your ordinary income, it brings the total cost down to roughly $102,000 after the deduction, about $34,000 a year across the buildout, and after year three, the Ladder's own distributions cover it going forward.

Build it gradually. If you don't have $1.35 million or the equity to borrow against, you can grow into it, trading time for capital… and the actual math is even more impressive. 

The slower path takes four extra years but gets you to the same income on $600,000 of total capital.

Step 2: Source your rungs.

This is the step that needs you to work. Every rung needs a real "2x in 3 years" opportunity, sourced and underwritten on your own. The Proximity Playbook is required reading here, it's the actual mechanism that keeps your ladder fed. A rung like this might look like a short-term bridge loan on a property already under contract to sell, or inventory financing for a business with a clear, contracted purchase order behind it: a defined exit rather than an open-ended hold, and a structure where your return doesn't depend on market timing. Line up your next rung before you need it, not after the previous one matures.

Step 3: Decide, at each maturity, whether to take the cash or replant it.

When a rung matures, you're holding twice what you put in. You don't have to choose the same thing every year. Early on, while you're still building toward your target income, replanting the full amount, principal and profit both, gets you to a steady state faster. Once you've hit your number, you can start taking the profit as income and only replanting the principal, which is what keeps the ladder self-sustaining indefinitely.

Step 4: Sequence it against your other capital.

The Capital Gains Ladder serves a different job than the Freedom Four or the Capital Velocity Stack: maximum tax efficiency in exchange for maximum sourcing effort. If you're already running the Freedom Four, the Ladder can sit alongside it, funded from a separate pool of capital you're comfortable sourcing deals for personally.

Want a model to test your own numbers? Hit reply with the word "GAINS" and we'll get it over to you.

A deal that doubles in three years deserves some skepticism, especially if you're new to private investing. So here are two examples I sourced and funded myself this past year (not even knowing that I was building a Capital Gains Ladder).

You Can’t Rush Good Tequila.

I'm an owner in a fast-growing tequila brand out of Texas, growing fast enough that inventory had become the binding constraint. The brand also provides private barrel ownership, allowing investors to age their own gold-metal Blanco for three years, transforming it into aged Extra Anejo. Craft tequila is hitting on all cylinders these days and the market for already aged Extra Anejo from distilleries is strong. An investor can keep their tequila, or sell it to a brand. I also became the largest investor in private tequila, which I may choose to sell back to the brand we own. Either way, the inventory is structured around the same 2x-in-36-months profile. 

What gives me confidence in it: this same sponsor's most recent completed cycle, same structure, same asset class, actually finished. It returned close to 2.5x MOIC in 32 months, an implied IRR near 41%, a realized comp.

I could underwrite this one myself. I've seen the growth curve, the reorder rates, and what the inventory is worth if it had to be liquidated tomorrow. That's the informational edge the Proximity Playbook is built around, and it's the reason this rung was fundable at all.

Teaser: our investors may have an opportunity to become the largest minority owner of this brand in the coming months, with unique access to a barrel program, but keep that under your sombrero.

BuildRise III: Rollick

The second rung is a limited partner position in BuildRise III: Rollick, a ground-up mixed-use development here in St. Louis. This was a recent offering for our investors, now closed to new capital. The building broke ground a month ago.

Rollick is projecting the same profile, a 2x return in roughly 36 months, an implied 26.5% IRR. That's still a projection. Construction just started, and ground-up development carries real execution risk between breaking ground and a stabilized exit. As the fund's sponsor, I have a direct stake in how this plays out, which is exactly why the underwriting mattered. I know the site, the entitlement timeline, and the track record of the team building it, closely enough to evaluate the projection myself instead of taking it on faith.

Proximity Is What Makes Them Work

Both deals came from proximity, being close enough to know details a stranger's diligence report can't reach. That's exactly the tradeoff Shift Your Stack named: a Ladder is fed by your own sourcing.

"Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury. There is not even a patriotic duty to increase one's taxes." - Judge Learned Hand

The Capital Gains Ladder is capital you already control, split into three staggered rungs, each one built to mature on a fixed schedule and pay out at capital gains rates once it does.

A capital gain usually lands whenever a project runs full cycle. The Ladder orchestrates multiple projects working together, on your calendar’s rhythm, rather than the market's. 

So where to begin? By building that first rung.

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This is not financial advice. Illustrative output of a reasoned thought experiment. Not a backtest, guarantee, or prospectus. Actual results vary based on market conditions, fund selection, timing, fees, taxes, and factors not modeled. Private credit, CRE, and leveraged strategies involve significant risk including loss of principal. Consult a qualified financial advisor.