BawldGuy Audio Podcast

It’s an innocuous sounding question, isn’t? “What are your retirement income expectations?” Yet, it may be THE most important question you ever ponder when speaking about retirement income. The reason? Most folks frame their answers based upon false assumptions fed to them for decades.

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Transcript:   Everybody talks to me about their expectations for retirement income, whether it’s five years from now or 35 years from now. I talk to all ages. One of the things that I notice is that a lot of them repeat what they’ve heard from various financial advisors, whether it’s a 401k guy at work or maybe their neighbor who might be a financial planner of some sort. Those guys, they know what they’re doing. One of the things that has always bothered is when these advisors tell people about not to worry about income taxes and retirement because they’re going to be at a lower rate. If you’ve been investing since the 20s, 30s, or 40s age brackets and you’ll retire at 65, 66, and you’re going to go down in tax rates, what we’re you doing wrong? I’ve never understood that. Let’s get specific. If you have a family, whether it’s one or two working parents and they start out, and we all experienced this cycle, we’re learning whatever industry we’re in, we start getting better. Sometimes we switch industries. That happens more these days. We used to have one or two employers our whole life. Now, we’ve got people now in their 30s they’re already on their third employer because that’s just the new nature of the economy. Over time, they begin to make more and more money. They understand that their lifestyle doesn’t have to keep increasing with it, they save more and more and they begin to invest because they understand the dynamics of investing for retirement. How they invest for retirement really begins to show itself as being just extremely important. Are they going to do the stock market? Are they going to be in bonds? What are they going to do that’s going to give them enough money to retire on? If we have somebody who, by the time they’re 40 years old, is making somewhere between 75 and 150,000, clearly that’s more than the median 50,000 household income for the country. They’re not living up to their eyeballs, so they’re saving money, which is why they have money to invest. If they’re going to invest for 25 years from that point on, they’re 40, they’re going to retire at 65, they’re saving and they keep making a little bit more money every five or ten years, they can look back and say, “I’m making more money now,” and they’re saving more. They invest in real estate. They invest in notes. They maybe got themselves EIUL with a David Shafer here on my staff. What ends up happening in about 25 years is they’ve compounded all those investments and they haven’t relied on the stock market or some kind of fund, they’re not subjecting themselves to these huge cyclical and sometimes pretty stealthy drops. Now, I understand. Real estate has it’s on bubbles, this that and the other, but in real estate and especially notes, and I’ll address that, but in real estate, even when property goes down in value, you have to understand, there’s a false assumption that that’s deadly. You’re not getting to retirement with the biggest of net worth that you can create because you’re going to be spending your net worth in retirement. You’re not going to spend your net worth. You’re going to spend the yield on that net worth. If you have a property that might have been worth half a million dollars when you’re retired,

When I’m talking with folks thinking of becoming clients, and mention my team, I make sure getting to know my team happens sooner, rather than later. They’re as close to bullet proof as I’ve seen.

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Transcript:   I think it’s about time we talk about the team—and the teams actually—that are behind what makes my firm run so smoothly. First of all, let’s start at the top. I have a couple, Matthew and Karen, who not virtually, almost literally, run my firm. They are in charge of IT. They’re in charge of making sure everything works, not only on the website, but they’re coordinating everything to do with how we deal with clients, that everything’s going smoothly. If there’s a problem in communication in email, we have our own server thanks to them, so we’re not reliant on some other server. It’s all because of them. When the events that we do come off without a hitch, that’s Matthew and Karen. Without them, I am face down in the water. That’s the only way I can say it. We brought them on a few years ago, and my life ever since has been so smooth, I can’t begin to tell you. What they have allowed me to do is what I do best. From the time I get up in the morning and have my first conference call until I’m done at the end of the day, all I do is talk to people about things that only I can do in the company. Because of Matthew and Karen, I get to do that. I figure they’ve allowed me an extra 10 to 15 hours a week, if not more, to do exactly what I do best. And the benefit, of course, falls down to my clients. That’s the best thing I can say about those guys. As far as in Texas, I have teams in three major markets, soon to be four; so in the Dallas/Fort Worth area and San Antonio/New Braunfels and Austin. Each area has a different local professional management firm that takes care of our clients. Now, they don’t just take care of our clients. Because we have the benefit and luxury on our side of volume, they service our clients just as well as any other client off the street, but generally speaking, for a 20 to 35% discount. When my clients call and invoke the BawldGuy name, all of a sudden, things start to move a little more quickly, if necessary. They do everything they do for everybody else not only for less money, but they want to make sure that at the end of the day, my clients, my staff and me are left smiling. We have the same title and escrow company for everything we do in Texas. I often call my teams in Texas the 27 Yankees, but I’ve had to fire my way into that status. We didn’t start out with this title and escrow firm, but now we use them for everything all over the state. And the next problem that they have caused in an escrow or a title will be the first. When I go there, lunch is always on me. I love them. They are the most efficient, professional, and solution-oriented group of people I’ve worked with in the business since I’ve left San Diego 11 years ago. I have a lender. I went through half a dozen lenders in Texas before I found Chad Emerson. Chad Emerson sets the bar. I had a guy in San Diego I worked with for just short of 20 years, and Chad Emerson is the 40-something version of that guy. All he does is investment loans. Now, lenders will always tell you, “Oh, yeah, I have investors that buy one to four-unit properties all the time.” Well, let me tell you, they’re fibbing. If you really look at their closings in any 12-month period, I can almost guarantee you, giving you 5-to-1 payoff odds that 80% to 95% of their closings are for owner occupied buyers. Chad, on the other hand, this year, will not close ten owner occupied loans, and he does literally hundreds of loans. This guy is absolutely the gold standard.

Here’s an arbitrage case study. Though most think the principle of arbitrage is too sophisticated for them, it’s actually a fairly simple concept to execute. Take a look and make up your own mind.

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Transcript:   John and Mary had decided to use some arbitrage for the first time and they refinanced their home and they borrowed $50,000, and they were making $8,000 a year in payments. Now after tax, because you will be taxed on the interest that you receive if it’s not inside an IRA or 401k. Let’s say that they net $6,000. They do okay at work but they’re not huge wage earners. They have $500 a month after tax. They can take that $500, and since they don’t live up to their eyeballs with their lifestyle, they can add their own $500 to that and they can pay that loan off in just over 6 years, 6 1/2 maybe, 77 months. Think about that. In 6 1/2 years, they’ve attempted the time when that note might pay off, just going by the averages, which is give or take, 6 to 9 or 10 years. Look it, it’s random. Just because the average says 6 to 10 years, it could go 2 years. It could go 22 years. There’s no way to know. You have no control. Let’s just say that sometime in that normal 6 to 10 year range, that note pays off. They have cleared their condo. Look at all the options they’ve opened up all because they used a little bit of arbitrage where they borrowed money at way under 5%. They made 10% to 15% with that money. They paid a little tax on it each month. When it got paid off, they didn’t have to pay ordinary income taxes because it’s considered a long term investment so they got treated capital gains, only 15%. When you do that, what that allows you to do is simply add a page of options to your menu when it gets paid off or you get another page on your menu added when maybe the note hasn’t paid off, but because you’ve applied a little bit extra money from your own account to your loan and you’ve added that aftertax monthly payment from the note in addition to that, you’re paying off your home loan way more quickly. That means you can keep it that way, you can sell it, make a lot more money on your net proceeds check. You could borrow a lot more, maybe 2 or 3 times more than the first time. There’s all kinds of options, and the key to take away from this is anything we do, the number 1 goal at first is to create more options for the investor because the investor with the most options wins.

What’s the value of high and low interest rates? The answer is not much when you factor in the points paid to enjoy a lower rate. The lesson here is to do the analysis all the way to the end.

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Transcript:   I have gotten more free drinks and dinners based on the value of interest rates in almost any bet I’ve made. I got into this conversation one time with my favorite Texas lender and we were talking about the difference of and the decision made because of the difference in interest rate options when purchasing an investment property. My people are mostly purchasing one, one to four unit residential income properties. Do they pay 4.75 and point plus whatever or do they pay a quarter point or no points but pay a higher interest rate save five. They don’t know what to do because they hate the fact that they could get four and three quarters which is under five, which is pretty sexy these days. On the other hand that extra point on the property they bought is two or three grand. What to do? Let me make it easy for you. I’m going to tell you why in second but the short answer is take the higher interest rate, keep the two or three grand in your Levi’s. It’s just not worth it, here’s why. Take John and Steve, they buy a couple of duplexes for $290,000 apiece. Floor plan is the same, they’re next door to each other, they we both finished the same day. There’s nothing different about these, they’re clones. They put the exact amount down 25% that means they got the same amount of loan. One of them gets a 4.6% loan, that’s John. Steve got a 5% loan. They’re both going to add a thousand dollars a month to their required loan payment because part of their plan is for them to end up with this property free and clear. Not that they would retire owning at that way but once you get a property for in clear if that’s the best thing to do, sometimes it’s not, usually it’s okay to do that. Now you have more options because you have a free and clear property, right? The investor with the most options almost wins every time. Here is what happens. Let’s take a look at what happens over x amount of time with both of them adding a thousand dollar to the payment but John has four tenths of a point less in interest, then Steve What happens is whether it’s four years, five years, seven years, however many year you want to do almost always usually it’s four to 10. I can do this all day and you can buy me my 18 year old MaCallan all day. Here’s the deal. The difference in amount owed is one month or no months in time passing. It doesn’t seem on the surface that it should be that way but I’m telling you it is. Yet even though John got there the same speed as Steve did, Steve has two or 3,000 in his pocket, John doesn’t have. John’s never getting that money back because as you can see it didn’t make any difference, it just didn’t. The case is where it does make a difference over the long haul for the lines to cross on the chart and it usually has to be so long that it just doesn’t matter. Then you get into the future value of money and then you … And you work your way back and you go, “That really was a whole lot of math for not much return.” Just remember if you forget everything I said today take the higher interest rate, don’t pay the extra fees.

We’ve discerned a significant demand for a relatively hands off method of joining group investments in discounted notes. We’ve decided to supply that demand.

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Transcript:   This is another group investment for you to consider. This is more traditional. What we’re going to do is we’re going to create a sub note fund. This will be for those people who want to buy notes, are not accredited investors. For those of you who have not heard that phrase before, an accredited investor, which is a Securities and Exchange Commission phrase, it’s a legal phrase more or less, it just simply means if you’re single, and you make $200,000 or you’re married and your household income was $300,000, you’re accredited. Maybe you don’t qualify that way. Maybe you have a net worth of $1 million or more, not counting the home you live in. That makes you accredited also. You have two ways to qualify, but these groups are going to be for those, for the most part, who are not accredited, but they have capital in which they would like to invest in notes. One of the things we’re going to do is we’re going to take a bunch of money, and let’s say there’s $1 million in the group. There’s going to be a preferred return. It’s going to be just like the note fund, just like accredited investors get, it will be 8%. That means you put your money and say you put $100,000 in. Every year, you’ll get $8,000. Of that $1 million that was collectively put into the group, we’ll buy somewhere between roughly $1.4 million to $2 million in notes. These will be re-performing notes and they will be exclusively first position re-performing notes. What will happen is those notes will make roughly in the range of 10% to 15% cash on cash, so let’s just use 12%. That $1 million will generate $120,000 a year. You get 8%. That’s your return. Over and above 10%, BawldGuy Inc. will retain that for their share. Everything between the 8% and the 10%, the investors get. In this example, it’s making 12% a year. The $1 million will generate $100,000 a year, 10% cash on cash, to the group, per their ratio of investment. When it paid off, and let’s say we bought $1.5 million, now they’re going to pay off all over the place time-wise. Let’s just say they all paid off at once, which believe me is never going to happen, but if it did, there would be roughly $500,000, it would be less than that because of some principal payback, but for the math, let’s say $500,000. At $500,000, the group would get $250,000, my firm would get $250,000, and that means that let’s say it took 5 years. In 5 years, the $1 million would have generated $500,000 payments and $250,000 in pretax profits. If you look at it that way, in 5 years, they’ve put in a million and they pulled out one and three quarters million. That works for most people, and the reason I say it’s probably going to be for people who are not accredited investors is that they’re not allowed by the FCC regulations to invest in the BawldGuy note file, which essentially will have the same setup except for in return for me running everything, I’ll be taking some of the cash flow and my firm will be taking some of the profits. In the meantime, what you need to look at is what would you be comparing this return to, and what would you be comparing this risk to? Right now, CDs are, if they’re overpaying, they’re doing 1%. Most of the people I know are getting 0.8%. Let’s say you’re making 1%. Well the preferred return on this is 8 times that. You win there. Then you have a built in profit. There’s going to be foreclosures here and there, and that’s where you have the convenience factor.

There are more than a few schools of thought when real estate investing for retirement is the subject. Most investors, at one time or another become loyal to at least one of ’em.

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Transcript:   Man, you want to start an argument? Go into any place where there’s more two investors and say “This particular school of thought for long-term investment is by far the best, and the rest are just followed by idiots.” Man, you’re going to be there all night. There’s the super old school guy that’s never adopted to new economic times who says “If you don’t pay cash … Real estate’s just like cars. You don’t borrow money ever. That’s just not the way it’s supposed to go.” Then there’s the guy that says, on the opposite end, “I just don’t understand using any of my own money ever. The idea is use other people’s money. That’s it. That’s the ticket: OPM.” That’s super extreme. I’ve had many people come to me saying they want me to advise them but they want to use zero down loans, back when you could do it, and I refused. Literally without exception every single person came back to me within one to three years later so I could dig out my magic wand, which I’ve never owned, to fix the problems that came. Zero down doesn’t work unless it means you’re not using any of your money. You are putting down payment but it’s other people’s money. That I get. Then there’s the people that say “You never ever end up with a free and clear property because it’s a sin to waste low interest, especially historically low interest.” They get upset at the very idea of having the equity in your property vs. in the bank. I get that. Stand-alone, I’m not going to argue that principle. That comes from an author named Andrews who I like very much who wrote I think the name of the book was Fortune 101, but the idea is this: Nothing is in a vacuum. What sounds good in and of itself stand-alone, when you put it in a room full of other factors it doesn’t work. That includes things that I tell people to do. If you subtract the factors that it took for me to get to that decision and to give that advice I maybe wouldn’t have said it. What you have to understand is, a school of thought for investment if you come from my school of thought, is long term if you have the capital, if you have the ability to save, and you’re going to have a 20 to 40-year timeline, you’re buying investment real estate. You’re generally putting reasonable down payment. Now I’m not going to talk about leverage here today, but leverage in this sense is the traditional cultural definition of down payment, which is by the way, not – read my lips, n-o-t – not the real definition of leverage. Today we’ll use down payment amount. At 20 to 30% down when you buy a property you’re not at the extreme of 0 down vs. buying for all cash. You’re just using what I would call prudent leverage. Now the word prudent is subjective and relative at the very least, but if the interest rates are historically low like today, 20 to 30% is fine and will generally speaking give you cash flow somewhere between four and five on the low side, cash on cash 4 and 5% up into double digits. It depends where you’re buying and what your agenda is. The difference, though, is if you have enough to pay cash for a $300,000 residential income property, that means if you were to put 25% down on that, which is $75,000, and let’s say it cost you $85,000 to close it, that $300,000 will allow you to buy three properties with prudent leverage. If you do that over time and get those properties free and clear you end up with three times the ca...

After over three decades the American worker has begun to see the light when it comes to the employer backed 401k. Though many will argue it’s an effective retirement strategy, they lose the gift of speech when the results are mentioned out loud.

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Transcript:   Today let’s talk about your employer back 401k and the matches that he may give you. Most people fall in love with these matches. They’re usually somewhere of 50 to 100% match depending on the lock of the drawer your work. If you’re the typical American that makes 40 to $60,000 household income before taxes, you don’t have a lot left to put in your 401k in the first place. Most people are putting two to 5,000 a year unless they start making a lot more money. Even the cost of living in the Midwest it’s a lot of cash just to live. The reason people get excited because they think, “I put in a dollar and my employer puts in 50 cents. How … I can’t do anything wrong.” Here’s the thing I’m going to work backwards with the result that’s going to knock that down. People who think that it makes sense mathematically, I totally get it. “I’m making 50 cents on my freaking dollar,” well you’re not because we have those pesky little 2008 crashes. What happens is your built up $50,000 went down to 35 faster than you could watch it happen and your match is just disappearing. Now and then people say, “Well, if I didn’t have the match I could lose more.” Okay, but you would have less to lose so what it is matter. The thing is this, let’s go to the end game where people say, “Because of that match my retirement is going to be hugely improved or over what might have been.” Forbes came out recently with an article that said, “The average 65 year old American only has $100,000 in their 401k.” Now, that average American by my reckoning has been contributing to that 401k for somewhere in the vicinity of 30 to 34 years. 401k’s givers give or take began around 1980. Three decades give or take they ended up with a $100,000, if they’re going to make 4% which is what the Wall Street financial planners are going to tell you that’s $4,000 a year of retirement and they all had matches of some sort or at least the vast majority of them did. Stop looking at the matches as the savior of your retirement, it’s the bait. 401k’s are a guarantee of you living out a life sentence of a horrible retirement not the guarantee of a robust retirement.

Group investments building homes isn’t really investing. Confused? Much like flipping homes, the building of homes without a buyer in hand is pure, unadulterated speculation. Don’t let anyone tell you it’s not.

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Transcript:   Today we’re going to talk about group investment. We’ll do one at a time. Back in the day when I was in business with Dad still, late 70s and 80s, we did what was known then as syndications, limited partnerships. We bought real estate. That’s what we did. Sometimes we fixed them up. Sometimes we bought and held, and they turned out fine. What we’re going to be doing now and we’re tooling up right now, frankly one of them I’ve been a pioneer on myself with my own cash. That’s the one we’ll talk about today. We’re investing in the building of relatively luxury level homes in the southwest area of Austin, Texas. Now, when I say luxury, most of the homes in Austin, let’s call it the median, are selling $250,000 to $300,000. The homes that this guy’s building for us are $500,000 to $1 million, so you have a different clientele. What’s good about building luxury homes and they’re speculative, they’re completely speculative. I’ll get back to that part a little bit later. When interest rates go up a little bit, luxury home buyers don’t panic. They either just pay the extra $500 a month or $800, whatever it is, or they just add another 100 grand to the down payment. They don’t think about it that much because they’re, generally speaking, high wage earners. What this is, and let’s go back to the speculative factor here, this is highly speculative, highly speculative in the sense the only way I could think would be riskier would be for you to fly to Vegas, go to the roulette table, put your 50 grand on black and red and spin her. I’m joking a little bit when you’re building spec homes, don’t let anybody ever tell you it’s not risky. It’s way high on the scale of risk and what a normal investor is used to or even comfortable with. You should use money that is over and above your investment. It should be a different basket. You should invest it thinking if I lose this, I’m okay. I won’t cry for more than a few minutes. Now, a couple of my investor buddies and I put our shekels together last year and we put over $600,000 of our own money in with this start-up company. Now, they build five homes, one of them’s about to close escrow already but the bottom line is our 600-and-some-thousand is, that’s all coming back and the profits are going to be somewhere in the vicinity of $200,000 or $300,000 so we’re happy. Is it always going to be $200,000 or $300,000? No. Sometimes it’s going to be $400,000. Sometimes it’s going to be $100,000. The key word is profit. The way it’s going to work is this. We’re going to put groups together and your job is to invest, have all the documents in your den in the desk and forget about it and just look for our monthly updates. There’s going to be a preferred return. It’ll be different for each group. It’s probably going to between 8% and 12%. That means that before my company gets any part of any profit, you must get your initial capital investment back to you plus the preferred return. Then the profits are divvied up. What will typically happen is half will go to the group, half will go to my company. Let’s take an example. Let’s say we capitalized at $1 million and we bought various pieces of dirt. Let’s say that we’re not going to build houses. We’re just going to develop the dirt. Now that’s pretty cool because we don’t have to go through the risk of building.

I’ve always held that short term investments aren’t really ‘investments’ in that they’re usually more speculative in nature. Flipping and building new homes are two solid examples.

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Transcript:   I don’t do long-term investments anymore. Don’t need to. I still buy notes, because why not? There’s little or no management. There’s a lot of income, and my notes are inside a tax-free wrapper so what do I care? However, every now and then I’m offered a short-term opportunity. Now that’s a very pleasant buffered way of saying a speculative transaction where you could lose your rear end in a hurry. The stuff I’m doing right now is in Southwest Austin. It’s with a builder. I’ve known this builder now for about six years. They’re building homes that are geared towards upper middle class. What does that mean? That means the median price in Austin for a house is, give or take, 290, and the homes he’s building are running five to eight or nine. There’s a huge demand for those kind of homes in Southwest Austin, and very little supply. They’re less interest rate-sensitive. What does that mean? That means when interest rates go up, and they will, these people aren’t affected nearly to the degree regular folk are. They just tell their wives “It’s going to be another thousand a month. Relax,” or “We’ll just put another hundred down. It’s okay,” and they buy the house. The profits on these are really nice. The returns for investors are probably going to be in the range of 20 to 40 on an annul basis. Now that sounds really good, doesn’t it? I’m here to tell you these are speculative investments. The good news is they pay off pretty high. They pay off 20 to 40% because they’re speculative in nature. Let me give you an idea. I’m going to exaggerate like crazy. Compare it to going to Vegas, heading straight to the roulette table with $100,000, and picking black or red. Now that’s more speculative than this but I’m going to tell you, treat it the same. Act as if if this money goes down the drain you’re okay with it. Now, I don’t talk about my own portfolio ever. I’m very old school private that way. That’s the way I am with everybody including my family, except for my inner core family. I will tell you this, I’ve invested well over a quarter million in the last several months in this. I’ve brought a couple of good friends in it. We got this company started. Between the three of us, just to get this company started we put in over $600,000. We took the initial risk of turning out fine. Can it not turn out fine in the blink of an eye? You bet. You think Murphy likes buy and hold investors? He loves short-term people with speculative deals because he doesn’t have to spend that much time. He just kicks over your apple cart and walks away laughing. You can lose your money, period. On the other hand, you can put 1 or 200,000 in with me and in six or eight months, say, get your hundred back that you put in and get another 120, 30, 40, or 50 in six or eight months. Now could it go a year? Trust me, it can, and we can’t control it. You’re dealing with government officials, suppliers, subcontractors. There’s all kinds of stuff that you just want to pull your hair out or get a gun. It’s what Murphy is all about but I think this is a really rare opportunity. The last time I did short-term investments I don’t even remember who was president. That’s how long ago it was. I really like this stuff. It’s still speculative. You can still lose money, but I’m doing it and I’m putting people I like into it. If you’re interested, nobody knows it.

People ask me every now ‘n then if they can invest in the BawldGuy Note Fund without ever buying notes. The short answer is yes, and here’s how.

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Transcript:   I was asked by a guy that was wondering about what it’s like to be a client of Brown and Brown Investment Properties. What if he was an accredited investor, but didn’t want to buy notes, but he saw the return I talked about, 8%? Well, he’s on to something. There’s nothing that says you can’t put in whatever money you have and get your 8%. The fund’s going to profit by that, by using your money to create a lot bigger yield than that, but you’re not getting into the risk that you perceive is more than you’re comfortable with. The other thing is the difference between what you could be getting with that money right now, which is probably 4% at the most, five if you’re lucky. If you’ve got, say, half a million bucks, it’s the difference between 20, 22, 23,000 and 40,000 a year. That makes an impact. If that’s what you want to do, the commitment inside the BawldGuy Note Fund is for three years, and you make 8%. It’s electronically put right into your designated account every month. That’s the management you have. No muss, no fuss. You’re under no obligation whatsoever, no exceptions, to ever buy a note. Yet, you’ve increased your income 72 to 100% from what it would have been, avoiding risk on Wall Street. I think that’s something that matters to people where you can make just a small change in where your money is, and come close to doubling the yield. In some case, actually doubling. That’s all I wanted to talk about today. That’s available to you guys. I’ll see you next time out.