BawldGuy Audio Podcast

When it comes to getting real expertise for real estate and/or note investors, most investors strike out. You want a pitcher, not a thrower.

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Transcript:   Today, we’re going to talk about real expertise. In baseball, we call pitchers either real pitchers or throwers. As an example, let me explain what pitchers really try to do. It’s very simple. Real pitchers break up the timing of hitters. That’s what pitching is all about. Hitting is all about timing. If you could break up their timing, you don’t have to throw 100 miles an hour. You don’t have to have the best curveball since Sandy Koufax. You don’t have to have any of that stuff. If you have control, and you can keep your ball from landing across the middle of the plate belt high, and throw hard, and throw soft, and have movement on your ball different each time, so they’re at the very least guessing, you’re probably more likely to be successful each time out than not.The same goes for real estate brokers when investing in real estate. There’s a lot of people I know, they tell me this exact same story in one form or another. They wanted to get started in investment real estate. They didn’t know how. By hook or by crook, they found a broker in their area and they told the guy or the gal what they wanted to do. The agent then went to the inventory, found the property described by the “investor” who is not an investor at all. You’re not an investor until you’ve invested. Many people who have invested in many properties just haven’t found out that they’re not investors. They just bought a lot of property. They’re property buyers. What really happens is this. They’ve entered into a situation where they’ve hired a broker to advise them who is not advising them. Somehow, they’re convinced that this guy throws a 98-mile-an-hour fastball. The problem is, as most young pitchers who never get out of the minor leagues, their 98-mile-an-hour fastball means nothing if they don’t know where it’s going, or if that’s all they have. What you find out in baseball at the major league level is that a major league hitter, if he sees a 100-mile-an-hour fastball enough times can time it. You can shoot a baseball out of a cannon. If they see it enough times, they can time it, and the ball generally comes back off the bat faster than the 100 miles an hour at which it came in. Here’s my point. Real expertise means that the investor is not telling the broker what to do. That means the investor, either in reality or only in their mind knows as much or more than their broker. That’s not a healthy position. You want your broker to, at very worst know a lot more than you about investing. It’s not just how to buy a property, write a loan to get this, that and the other. It’s about using strategies, and using a lot of times more than one strategy synergistically. They need to understand that, because otherwise they’re just like the pitcher that can throw 100 miles an hour and never got out of the minor leagues. When you’re looking to invest, and frankly, what’s worth more to you, what has more value to you, outside of your health and your family’s health than your ultimate retirement income? That dictates not only how you spend your life after work, but it also dictates that you can stop working. People make that assumption, but if you’re literally giving marching orders to your “investment broker”, you’re dealing with a thrower not a pitcher. You need real expertise.

When investors, or those gettin’ started ask me about their plan to develop long-term investments, I smile. They have the concept right. However, they tend to over simplify how they’re gonna get from Point A to Point B.

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Transcript:   Many people ask me about the home that they first buy when they were just married and they didn’t have kids yet, for whatever reason. Sometimes it’s the economy, sometimes it’s just because they could. They didn’t sell that house when they got the house they moved into when they had kids. They’ve been renting it out, and renting it out, and renting it out. Before you know it, the home that they might have paid $150,000 for, even after the bubble and everything, is suddenly worth $200,000, and they don’t owe 120, they owe 60. When you look at it, even after closing costs, and commissions to the broker who sells it for you, they’re still going to net out maybe $185,000 minus the 60. They’ve got $125,000 if they want to do something about it. Well what if it’s in an area that I don’t particularly think is good for them to be in, and I’ll pick on my own area, southern California. I have these conversations with California investors all the time, and you get a lot of hemming and hawing until you pin them down in the corner and they go, “Okay okay, the rent price ratio is horrible, and the stuff in Texas, or Boise, or sometimes in Tennessee, or the Carolinas is better. Stop saying it out loud. Money’s money, and when you can take 120 or 80 even, something like that and you can sell that, and you can either pay the taxes on it, or you can do a tax deferred exchange, whatever makes sense for your particular circumstances, you can now go get something that most of my clients like, which is the brand new duplex in a blue chip location. What the heck is a blue chip location? I erased all debate years ago when I started running into this subjective definition problem, because you’re 9 might be my 7, or vice versa. Well my mom is 83 years old. She’s had a couple of minor strokes, she lives with us now, she’s totally mobile, but she shouldn’t be alone. I would put her in every single investment that I’ve put my clients in since I’ve been to Texas, and I’d put her there to live alone. That stops all argument. That’s how good these locations are, and that’s how good the buildings are. Now what if they can take this 80 to 125,000 that they got, and they put a down payment, usually going to be about 25%. They’ve got a 30 year fixed rate loan, these days it’s the high floor is 5%. Fixed for 30 years. It’s got cash flow, and they don’t have to think about it, there’s management there, we’ve got a whole team. Everything’s done. What they’ve really done, is they’ve gone from a southern California market to a superior Texas market. Now we don’t have to go through all the reasons why they’re superior or inferior, just understand we’ve done the analysis. Anybody who lives in southern California is already nodding their head, they know what I’m talking about. Here’s what happens. They now own this duplex, and they started out with the first home they ever bought they turned into a rental. The idea is, in a nutshell, to dig out a retirement for themselves. Maybe they bought that first home in their mid-twenties, early thirties. They’re now forty, and they’re going to retire sometime between 55 and 65. They’ve got 15 to 25 years, so what to do? They don’t print money. They’re not making quarter million dollars a year. They work hard. She’s a stay at home mom, they’ve got 2 or 3 kids. They live in southern California,

Here are some snippets from our San Diego Sheraton Marina event. It sums up in a few minutes what we do for people. To get a full day of this, join live at our next event. We have a good time!

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Transcript:   What Brown and Brown, BawldGuy Inc. brings to the table that’s different is the ability to combine multiple strategies such that the results, if it works right, will literally have been caused by real empirically-measurable synergy. You know you’ve experienced synergy when one of two or both of these two things happen. You retire sooner than you anticipated or you retire with more income than you anticipated. Cash flow and capital growth are incredibly crucial to what you do. Nowadays, you’ve got so many restrictions. You’ve got so many governors on the engine of tax shelter that you have to do everything on purpose. That’s why I say purposeful planning because if you don’t have a plan and you’re not executing every single minor step on purpose, you’re going to run into some regulation that’s going to be maybe more than a speed bump on your way to a really cool retirement. Right now the sexiest thing for investing, and Dave will back me up on this, is notes. Man, everybody wants a piece of notes. You cannot look at any strategy as if it’s in a vacuum. You’re taking what the market gives you. You’re taking what the market gives you when it gives it to you. Of my almost 45 year career, I have never ever, no exceptions, seen it when the rent price ratios were really good. In areas I would put my 83-year-old to live alone in very young or brand new properties built well with freaking interest rates that go from 4 to a little over 5. That’s all at the same time. I just freeze frame every time I look at the current financials on Yahoo! Financial. That’s how bad I am. I see that, okay, everything is still in place. We’re cool. Because I know this is not going to last. I want to take advantage of it. I want to have my clients take advantage of it while it lasts, because it matters that you have this opportunity right now. This era will be called iconic. None of this is rocket science. You all can do it.

Purchasing life insurance out of a 401k is an option of which most people are unaware. Here’s a quick rundown of what’s what, the rules, and limitations.

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Transcript:   I spoke before about whether a 401K plan should’s, shouldn’t’s, what has to happen for a 401K plan to purchase life insurance contracts. What I want to visit about right now though is what funds can be used from a 401K plan if the decision is made for the 401K plan to purchase a life insurance contract. Again, I’m going to say at the very beginning, you should always review these types of decisions with your tax professional because the numbers need to be crunched to determine the pros and the cons of this kind of a situation are. If the 401K plan purchases life insurance contracts, what funds can be used and is there a limitation. Funds with any 401K plan can be used but with the following restrictions. The good news is that if you establish a self directed 401K plan and you rolled over funds from another IRA or an old 401K into the plan, those are considered rollover funds. 100% of those funds can be used towards life insurance contracts. Realistically even if the plan decided to purchase life insurance contracts, would it use the whole 100% of those rollover funds for that, probably not. The power of the point I’m trying to make is that 100% of those funds can be used if elected to. Are there other limitations of funds within the plan. What about contributory funds, contributions that you make as the employee of that business, that you wish to be used towards life insurance contracts from the plan. There’s very specific rules, let’s go through them. If the plan is purchasing from contributory funds, life insurance, 49.99% of contributory funds can be used to purchase whole life insurance products. If contributory funds are being used for non whole life products, such as term, IULs, EIUL policies et cetera. 25% of contributory funds can be used towards the purchase of the life insurance premiums. We have some powerful tools to work with your 401K plan and the self directed. You can invest in traditional assets, you can invest in non-traditional assets, you can even invest in life insurance. As a reminder if the plan is purchasing life insurance contracts, the plan documents have to be written or amended to permit that. The bottom line is the plan has the ability to do that and it’s a powerful tool in addition to your traditional and non-traditional assets.

Timing cash flow with investments is often very misunderstood. This time it’s not about the relative order of the timing of cash flow vs capital growth.

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Transcript:   Today, let’s talk about the specific timing of cash flow in the real estate investment problems. I’m not talking about what I usually mean when I say timing which is buy for capital growth at first and then switch to cash flow at retirement. What I’m saying is this zero down school of though 5 or 10% down. You have to understand that the timing even if you’re successful I won’t be part of that for people. The next zero down that one of my clients buy will be without my help. I’ve never been a part of that. The next one will be my first and it will never happen. What happens with these low downs is fine but even when low down are 25 or 30% down. The timing of cash flow means this, if you’ve got 28 years before you’re scheduling your retirement don’t worry. The loan is 30 years, you might pay it off in 28, you might pay it off in 18 depending on your income and everything else you may be doing for investment in your purposeful plan. You might pay it off in 8. I’ve got clients that pay off real estate loans on small multi unit properties in two to three years but they are very high earners. The key is this, the timing should be that you enter retirement debt free. Now, I’m going to reverse myself by saying even if you enter retirement debt free what you’ve given yourself is a new page of options. Remember the principle, the investors with the most options wins. What if you have a million dollars of property and you retire next week, you just made your last payment on all of them and you own them free and clear, it’s a million bucks. If you want, even thought you’ve got cash flow from debt free property you might do the comparison and say, “You know what? I’m making 5 or $6,000 a month from these properties, maybe more.” It depends on how bad of a neighborhood you were in so how low a price you pay, right. My people buy in the best neighborhoods only. What if you decided to refinance that property at 4 to 6 or 7% at say 70% loan value. You get $700,000 loan. You just destroy the cash flow from those four properties but you’re still having cash flow. It’s paying for itself for the buffer but now you’ve got $700,000 that’s tax free, it’s not even a taxable event. You can go out and you can buy 80 to $100,000 and note income through discounted notes. Again, that’s a timing thing. You want that option. You don’t need that option till you retire but if you’ve got a wait a year, two years, three years for that to happen and you know what? Sometimes that’s a fact life. Things happen, we talk about Murphy a lot here. He knows where we all live and it’s our turn in the barrel sooner or later. Nobody escapes Murphy. For the record, O’Tooles comment about Murphy’s losses. Murphy was an optimist. The key is if you can time it right the ultimate timing factor is your debt free at retirement. You can keep those properties debt free, you can decide to borrow and get another vehicle. I use discounted notes that you might have something else to do. Maybe you’re starting a business in retirement. Nothing like having half a million tax free dollars to get a good running start. Again, timing. The fact that you could buy more real estate only means that if you’re wrong on your timing you’ve entered yourself times three or four or five if you have not the cash flow you need to retire. I’ve seen people that had to delay retirement because they missed time when they were going to be able to pay it off. You can’t be all rosy,

In selling commercial property part 4, we discuss what’s possible, and finish up with a sell financing a property sold with a dangerously low down payment. Included is a short discussion on why different investors will pay more or less taxes than others on this exact scenario.

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Transcript:   We’re getting to the fourth installment now of one of my clients selling a commercial building in New York for $1.25 million with a silly low downpayment of only $100,000, and we’ve been discussing the structure of that note. Today, let’s talk about how that note payment might be received by the seller in terms of what his liability could be to the IRS. Here’s what happens. Every dollar you receive, especially on an amortized note, has three sections to it, and there’s a formula to decide how two of those three sections add up. The first one is interest. That’s easy. Interest received is taxed at ordinary income rates for the vast majority of the time. If you receive $10,000 in interest for a year, it will be a lot more in this case, but if you did, that’s like getting a raise of $10,000 at work. Same tax, right? Now, what about the principle inside of each payment that’s amortized? We know that every payment you receive has a little bit more principal than the payments received the month before, and that’s how you pay those things off. That part of the dollar that is not interest, that is to pay down the principal balance of that loan, was divided into two parts, one is return of capital and the other is return on your capital. There is no tax liability whatsoever on return of capital. That just means you got your original downpayment or whatever or however you bought it back. If you put $200,000 down, there’s a formula and you come up with it and you get it back. That’s not taxed. The other half of that principal paydown you got in each payment is return on capital, and as long as you qualify for long-term capital gains treatment, and in this case they do, it’s taxed at 15% instead of ordinary income. We like that because you’re just paying each year on the value received, and since it’s spread out over 10 years, not only are you only paying give or take 1/10 every year, although that’s not really true, but roughly speaking, we’ll work with that. There’s no balloon payment. There’s no gigantic tax liability in any 1 year, and that can be really good planning over time because you have to plan for those liabilities. What many people don’t know, and this is a red flag, you always need to address with your attorney and/or your CPA. Many times, you can incur tax liabilities due to the way your sale was structured when you really didn’t receive all that much cash from the sale, or you receive no cash from the sale. You can still owe up to 5 or 6 figures in taxes, and people wonder about how that can happen. It’s just about your basis. The basis doesn’t have to do with, “Well I paid this much and I sold it for this much.” It’s more complicated than that, and the formulas for computing adjusted basis, especially when somebody has maybe handled more than one tax deferred exchange for that equity over time, and there’s domino after domino of deferred capital gain, that’s where you can get into a problem, where maybe you didn’t sell the property for that big of a gain, but because your adjusted basis was about $0.37 over a happy meal, you still had the tax liability. That’s something you want to really red flag and make sure that it’s not laying there to trap you.

In Selling Commercial Property Part 3 we continue to explore the options available for this particular owner financed property.

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Transcript:   We last left the seller of our New York City commercial building for a million and a quarter, wondering if maybe there’s another way to structure the carry back loan that he’s going to do with the buyer. One of the ways that he can do it, instead of structuring it for a ten year amortization, no balloon, is to maybe charge more interest. Instead of four percent, maybe charge six percent but amortize it for 30 years. This will save the buyer some money on a monthly basis but it will also mean that in roughly ten years, they will have over 900,000 dollar balloon payment. As a seller, and that’s who I would represent here, we’ve got to look at what are the downsides to this approach. Right away, I don’t care if you’re selling the property for market now and it’s a decade down the road, the bottom line is you’re going to be owed 930, 940 thousand dollars in ten years. What will the market have done? In ten years, that value could have doubled, could have gone down 30 percent. We don’t know that. There’s nothing like being owed almost a million dollars and the property not be worth almost a million dollars. That’s where the buyer, if they wanted to, could just walk away. Now, that’s an unlikely scenario, but it is not rare, so don’t push it off and say, “Well, it’s not going to happen.” You definitely have to think of that. The way you look at it is this. Let’s explore a couple of different approaches. If they know they’re going to get 900 and some thousand dollars, ten years down the road and they realize that in ten years all three of these partners selling it will be retired, they may be in a better position tax-wise. Now, they may not but it might be something that they can consider restructuring as it gets closer. Usually when you restructure so as not to incur a tax liability as a note holder, usually the note payer doesn’t object, because that’s 900 and some thousand they may not have to come up with. Let’s talk about how the seller’s going to be treated tax-wise. Let’s save that for next time.

In selling commercial property part 2, we continue the discussion of the ins and outs of how sellers might better protect themselves when providing seller financing to buyers, especially when the down payment is far too low.

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Transcript:   Where we last left our intrepid seller of a commercial property, negotiating the carryback he was going to secure by his old property. Now the guy was only going to put a hundred thousand dollars down. There’s no way to make that secure by changing the wording in how we describe it. A hundred thousand dollars down on a million and a quarter property is not safe. What you have to do is what I suggested to this guy. You need to check with your real estate attorney and the state you’re considering doing this but you can have what’s known as a land contract. We don’t need to talk about that here except for one factor. The main difference when you do this is that when the sale closes the buyer is not granted what we call fee title, fee simple. It’s not like you buy my car, you give me the money we agreed upon, I give you the pink. You don’t get the pink in this transaction. What the note says inside the land contract, or contract of sale, they call it different things in different states, is you get equitable title so your equity is safe. You start out with a hundred thousand down, that’s your equity. What it does say is if you do these three things, when you can verify those three things have been accomplished then the seller will grant you actual title. In this case I’m recommending that the seller not grant a real title until the loan is paid in full and that will be in ten years. That makes up for only getting the hundred thousand dollars down. If done right, not all the time because it depends on the laws or whatever state, if the loan goes bad, and let’s face it a hundred thousand dollars on a million and a quarter that the odds of that have increased. If the loan goes bad, they can then sometimes even avoid foreclosure, they just take the property over using the land contract and whatever is required legally in that state. They may not even have to go through the foreclosure process formally, okay? The other thing that happens is this: the buyer may say why on earth would I go through these hoops? Let me give you the best reason. They were going to be paying the payments on the underlying five hundred thousand that is on there by the seller’s father. Even though that interest rate is only 3 1/2, the payments are quite a lot because it was amortized for twelve years. If they do it my way, the sellers of the property can sell it this way. If you do it my way where you’re paying 4% amortized for ten years on the million one fifty, it’ll be about six hundred and fifty to sixty dollars a month cheaper than if I just carried a hundred and fifty thousand second and you assume the first. Once they look at that what that really means is they’re saving just short of seventy-nine hundred dollars a year in cash flow by doing it that way. Why wouldn’t you do it that way? They’re already a tenant in the building. In this case they’re taking the most square footage of any tenant, which means they’re not going to benefit from the rent they would have paid so this transaction is actually going to increase their cost of doing business no matter what it is. By cutting it by six-fifty or more per month, we’re actually helping them quite a bit, which I think will be very attractive to them. Next time we’re going to discuss what if they structured it differently and maybe a little bit more traditionally.

In Part 1 of a brief 4 part series, we discuss a case history of how, when selling commercial property, a seller can impressively increase their return when providing seller financing for the purchase.

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Transcript:   Today we’re going to talk about a question I answered for a client about how to structure a sale of a commercial property they’ve owned in a small partnership for years. He bought it from his dad who carried back about a half a million dollars at the family rate of three and a half percent. Now, the payments are amortized over an original twelve years so that payments are relatively high. They’re going to take a very small down payment, only a hundred thousand dollars, which their real estate attorney said he doesn’t feel comfortable with. My comment was he doesn’t feel comfortable because he has a three digit IQ on a price of a million and a quarter. That’s okay, sell it to the tenants, take the hundred thousand dollars down. His question addressed what to do with the note that they’re going to carry back for the difference. What I told him immediately was you don’t want to carry a traditional second position note secured by the building. You want to do what’s known in the business loosely as a wrap around note. In principle it means exactly that. It means instead of them carrying back a note on the difference between a million and a quarter, minus a hundred thousand dollars down, minus the five hundred they owe their dad, instead of having the note be that amount the note would be just the difference between a hundred thousand dollars down and the remainder of the whole price, including dad’s five hundred. What they would do, they would construct a note using a real estate attorney and that note would be for a million one hundred fifty thousand dollars. It would include, inside that note, the five hundred thousand dollar first position note that is secured by their dad on the property. Now, the way we do that is this. You structure the note as if the seller is lending the entire million one-fifty. The payments are structured on that. In this case it’ll be four percent interest amortized over ten years, no balloon payment whatsoever. We’ll talk about that later. What will happen is this, they will get payments that will come directly to them. The buyer will not be responsible, in any way, for making the payments on the dad’s five hundred thousand existing note. The sellers, my client, will take the money from the first payment and take enough money out of that each month to pay the five hundred thousand dollar payment. Now, that note, that five hundred thousand dollar note, has about eight and a half years to go. The note they’re carrying back on the property would have ten years to go by definition. What’s going to happen is by doing it this way, wrapping around, and we’ll get deeper into that later, the seller’s, my client, will be able to get the equity gain themselves on that five hundred thousand. What are they doing? They’re paying three and a half percent on five hundred thousand. They’re being paid four percent on a million one-fifty. Now, normally that loan would’ve only been six hundred fifty thousand and then the buyer’s, the tenants that are buying it, would’ve just paid two loan payments, one of them six-fifty that the seller’s are carrying back and the existing five hundred thousand note that the seller’s owe their dad. By doing it this way they’re making a spread of a half percent on that amount of money, and simultaneously they’re getting four percent on a million one-fifty instead of four percent on six hundred and fifty thousand dollars. We’ll continue this next time.

Do you know a Boomer nearing retirement? Are they fearful of what that new chapter in their life might be like? For Heaven’s sake, use the buddy system and show ’em where the rest of their options are hiding. Too many Boomers are serving a life sentence, not enjoying the retirement for which they worked so hard.

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Transcript:   Today let’s talk about the buddy system. Let me start out with some interesting numbers. Since January of 2010, and it will go through the whole year of 2030, 10,000 Boomers, of which I am a proud club card holder, will retire, or at least reach 65 every day. Ten thousand. Everyday. From January 1, 2010 to New Year’s Eve 2030. Show of hands, how many of you think of those people are going to retire well? If you go back through all the insurance industry number, and they have the most reliable numbers, it’s worse then the 80/20 rule. Five percent retire exceptionally well. Another 5% live, and retire what we would call comfortable. Another 10% behind them don’t have financial worries, but they’re not members of the cruise of the month club, and the rest, they’re just making it, if that, or they’re relying on family, or they’re moving in with family. Who knows. One of the reasons that has happened more, and more … This is my professional low purpose personal opinion, is that they’ve relied so heavily on the 401K program at work. I want to take an example. I talk to these people 1,2, or 3 of them every week for the last few decades, and it goes something like this. “You know, my buddy next door, we’re best friends. We watched each other, the family grow, we’ve helped each other add family rooms. We’ve done a lot of things, and I’m looking at him, and he says, ‘You know what? I have $300,000 in my 401K. I’m retiring next month, and I’m so scared I don’t know which way to go.'” When he retires, and he’s got $300,000 what’s he going to do with it? The people at work in anticipation of his retirement had a meeting with him, and said, “Because he should be,” and I agree, “Risk averse,” he’s only going to make 4%. Maybe a little less, maybe a little bit more on his $300,000. Well, let’s say he makes 5%. That’s $15,000. He’s getting more than that in Social Security, and it’s taxable. If he’s getting say $25,000 year in Social Security, $15,000 from his $300,000, that’s $40,000. He lives in a state that has an income tax. Eighty percent of the states have it. He’s getting taxed on the federal part, you know, that’s not much of a retirement. I understand he may, or may not have paid off his house because if good old Charlie next door hasn’t paid off his house, and he’s doing $40,000 before taxes, he’s got a real problem. He’s not going to be his buddy’s next door neighbor for long. What can he do? What he needs to do is find out all the pages on his options menu for which he’s been unaware. He doesn’t know that he can buy discounted notes. For all he knows that’s too risky. They don’t know, and we’re all fearful about those things of which we’re ignorant. My purpose today is to let you know that just because you only have a 50, or 100, or 200, even $500,000, you’re retirement is not going to be that cool. $500,000, and the insurance charts say that you’re going to live 20 years. Well, what are you going to do? If you’re like my Grandpa, you go out every year on the 1st of January, and you look underneath the tomato plant where you keep all your cash, and you pull out 1/20th of that $500,000. You don’t want to be too healthy when you’ve got 2 years to go. How sad is that?