BawldGuy Audio Podcast

What are your income tax rates in retirement gonna be? Though we can’t be specific, of course, we can know if they’ll be more or less.

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Transcript:   One of the myths – and it’s a myth according to my opinion – about retiring and the income rates that you’ll be charged is the wisdom of the ages coming from way of Wall Street where the advisers will tell you at work that you listen to for your 401k, they’ll say “Well John, we have found that those when they hit retirement, they don’t have to worry about taxes because they’ll be in a much lower, marginal rate. It won’t matter that much.” Then people just go on their merry way thinking wow, that’s really good. I have to worry about taxes now but I won’t then. Stop and think what is the only plausible reason you would be paying at a lower rate. Ah, I just saw the light go on. It’s because you’re making less. Well if you’re making that much less, wouldn’t you rather be paying the same rate you were? Because now you’re making more in your netting more. Here’s the thing, and I’m going to make this into a nutshell because I have been challenged by the Wall Street believers and advisors my whole career. They always stop when I say this. The only reason people with 401ks retire so poorly is because for the last 25 to 40 years they’ve been listening to that advice. If you got a million dollars in your 401k when you retired, and then that makes you hen’s teeth rare. People just don’t do that. You know what the average 60-year old man in America has in his 401k today? Not six figures, much less a million. Let’s say you retire with a million bucks. They’re going to tell one of two things. You’re either going to make a yield of about 4% a year or you’re going to be taking out enough to live on comfortably and then the million’s gone. Don’t live too long. Now imagine you spent 25 to 40 years amassing a million dollars in your 401k at work. You’re thinking man, I’m in the deep end of the pool; this is cool. Then you find out because you’re now not looking to see how much risk you can have in your investments. You’re clearly risk-averse as you should be in retirement. Now the same advisors, they tell you you’re going to make about 4% because you’re not trying to be risky. Right now the ten-year treasury is under 3% so let’s say you do get the 4% somehow. That’s 40,000 dollars a year before taxes. Are you telling me that you’re getting something that is a little bit higher than social security by 10 or 15,000 dollars a year and that you scrimped and saved and sacrificed for 30 or 40 years for that? Really? No you didn’t. We both know you didn’t. What you did was hope to qualify for a nice retirement where your home was free and clear maybe, you had enough cash flow through two or three different sources, and all of your sacrifice and investing that you can take the occasional two or three week vacation to another land. You can visit your grandkids anytime you want, do anything within reason. When you invest in real estate and just let time do its deal, you’re not trying to be fancy, you’re not being aggressive, you’re not even expecting appreciation, I’m here to tell you if any real estate you ever bought never went up a dime in 40 years you’ll have more cash flow than that million dollars would in your 401k period, end of sentence. Because over time … For instance, if you just bought four little duplex in East Toilet Seat, Texas and you spent your entire retirement money not on a 401k but just in retiring that debt, and that was your whole plan – it’s my con...

Self directed 401k plan distributions aren’t the same as IRA distributions. They don’t just happen, as they require some action on our part.

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Transcript:   Self-directed 401(k) plan distributions, it’s a bit different than your regular IRA. How are the distribution rules different and let’s define a distribution. A distribution is a time in which you want to take money from your plan, whether it’s an IRA or a 401(k) for living expenses. To keep it simple, I’m going to assume that you’re over the age of 59 1/2, so don’t need to talk about early withdrawal penalties, but if you’re over the age of 59 1/2 and you have a 401(k) plan and you wish to take a distribution, you may be familiar with IRA rules where a custodian sends you that distribution. You take that distribution obviously as cash. You’re using it for your living expenses, et cetera. That custodian is then responsible for IRS reporting on that distribution. 401(k) plan, a self-directed 401(k) plan, is different. How is it different? Remember that with an individual solo 401(k) plan, you are your self-employed business. You most likely are the trustee of that plan, so what now happens if you wish to take a distribution from your plan while you’re still operating your plan? The plan has to prepare a 1099 similar to the IRA, but since you’re the trustee, you as a trustee and the plan is responsible. You have to record that 1099 showing that taxable income went to you as the participant. Now in doing that, it’s not something you should be scared of, and obviously if you need the cash or want the cash for living expenses, you’re certainly entitled to take out those distributions. You should always review everything related to the distributions with your tax professional. I would even highly encourage that you utilize the services of your tax professional to prepare the 1099 on behalf of the plan and for you as the participant, but keep in mind, don’t be one of those individuals that takes up the distribution and then says, “Oops, what do I do now?” Always keep in mind, you must do the recording. You must follow the 1099R and you want to be able to show that you received taxable income from your plan.

I’ve been sayin’ for quite awhile that real estate investors are in the middle of the perfect investment storm. Don’t take it for granted.

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Transcript:   The last several years, as far as real estate investors are concerned, we’ve been experiencing what I call the perfect storm in a very positive way. Let me begin by going into the way back machine. I got licensed in the early fall of 1969 as a know-it-all wet behind the ears 18 year old. The interest rates were in the upper single digits, they went from about 7 to 9. Right now, we’re nowhere even close to that even for investors, and investors will usually pay 0.5% to 1% higher than owner occupied borrowers, home buyers. What’s happened in my 32 years beginning, was that I never say an interest rate ever for a home buyer that began with a number lower than 7. Think about that. Over 3 decades I’m in the business, I go from being barely out of high school. I go through college. I meet Mary, my wife, we have a family. We move a few times. I am at this point, I am now over 50 and I finally see an interest rate that starts with a number less than 7. I didn’t know how to act. Then you take where we are today. Although they’ve gone up a tad, my investor clients are now locking in investment loans fixed for 30 years in the high 4s and low 5s. They can put 20%, 30% down on various properties and get pretty decent cash flows, so they have enough money instead of in the old days buying one 2 to 4 unit property or maybe 1 rental house. They can buy 2 or 3 more because of the down payments that are possible due to the low cost of money relatively speaking. Now, add to that, that the rents are going up while the prices have taken a huge hit because we all know, when the bubble burst back in late 2006, early 2007 and it really, really became the valley of death for owners who bought at the top all through 7, 8, 9 and even in 10, and we all learned what upside down meant. That meant your loan had more owed than your property was worth. Well, imagine if you’re just buying now as an investor and you can get a rent-price ratio that is give or take 1%. What that means is take the rent per month that that property you’re looking at generates, divide it by what you’re going to have to pay for it, and if it’s about 1%, maybe a little above it, maybe a little below it, man you’re good to go. I never saw that as 20 years old. In San Diego, we had properties that were renting in 2006 for 30,000 a year, $2,500 a month, and they were selling for over $550,000, $560,000, $570,000 and people were paying it. By then, I had been long gone. I left San Diego on the spring of 2003, but my point is this, here’s the perfect storm. You have rent-price ratios reminiscent of the ’50s and ’60s all over the country, and especially in really nice places. We’re able to buy in neighborhoods that you would put your 80 year old grandmother to live alone and get those rent-price ratios and pay this historically low interest rate to get them, and you can buy them so they’re not a century old. I talked to a guy from New Hampshire the other day. He was real happy. The latest duplex he bought was only $110,000. My point is this: the perfect storm of low interest, a really attractive price-rent ratio, rent-price ratio, the fact that those values are so down now that the stuff, for instance in Texas where I really like, things that in San Diego are 60 years old, the poster duplexes and four-plexes for functional obsolescence are selling at a cut rate value of $400,000, where you can get a much better location, a way better and far superior rent-price ratio and pay 25% to 45% less in taxes, and other places around the country too that are good markets,

Whenever I find myself discussing formulas I get a lotta feedback from real estate investors about what’s worked. Here’s another way to look at formulas.

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Transcript:   One of the things I love about real estate sites and real estate seminars is the common thread for most of them is either one or several formulas are just a guarantee to get you from point A to point B and faster than the average guy. I’m here to tell you, this coming October is 45 years being licensed in the business. The only formulas that ever worked for me was to make sure to cash the checks. The rest of it is this. One of the formulas I’ve learned is a formula about formulas. They all worked until the day they don’t. Here’s what I mean. Fix and Flippers have this formula. They want to buy it at a certain percentage of prefix value. Sometimes they want to say what’s a percentage of post fix up value. It’s very low and they know that if they can buy it at that price or lower, they’re going to come out okay. There was recently a very insightful article on Bigger Pockets. It spoke of how this wholesaler like to find fix up properties and it would wholesale them and make a descent quick profit giving those properties and the contracts to buy those properties to these Fix and Flippers. He didn’t kept finding properties worth, it didn’t make sense, he couldn’t sell them off to the Fix and Flippers but he knew they had equity. He knew that they could be bought for a below what he knew was market. He was of highly experienced professional. He said, “Look it.” Here’s the example, the comps easily showed $150,000 value in that neighborhood. Now again, don’t say, just said check the comps and then you’ll know what’s going on. Because most damages we’re looking comps in the neighborhood and it’s almost worst than never looking at the comps because they add so much to it and they don’t know what they’re seeing a lot of times. They either overshoot or undershoot the runway on value when they do that. This guy is a professional, he’s done many many many of these. He knows what he’s talking about. He sees the properties as, “You know what? This property’s worth a 150 and the owner just said they’re going to sell it to me for 107.” 107 isn’t low enough for the Flippers to buy. However I have enough money to buy those, I could either get a conventional loan to do it or in the case of the author of this post, and again it was an excellent post on Bigger Pockets. He could buy it for 107 for cash. He knew that it probably wouldn’t earn on the market. 150 that the comp said because I’m not sure he put it this way but I kind of discern between the lines, there was some functional obsolescence involved that could be fixed up, 10 or 15 grand. He put it on the market for 135, somebody bought it, they wanted to live there, they got a good deal, he made a lot of money even after commissions, sales, cost, all that. He made a quick 15 to 17 thousand bucks in less than a month. Now, why would you pass that up?Well, because the formula said, you shouldn’t do it. Formulas work until the day they caused you money, you can’t be locked in. If there’s anything that keeps you in a box, it’s a formula.That’s what the formula’s designed to do. Look at it, I’m not saying there are some formulas that aren’t great. The only formula I know that’s worked every time its tried, is buy low, sell high. The rest have their days when they just don’t do us well. Keep that in mind and forget it at your own risk.

Most real estate investors simply don’t realize they’re sabotaging their retirement. They don’t understand the timing of capital growth vs cash flow.

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Transcript:   When investing for retirement, people tend to think about building their net worth, that that makes sense on the surface. Here’s the problem with that. When you’re retired, you don’t spend your net worth. When you’re going to get the groceries for the week, you don’t give them a slice of your pie. What you do is you give them whatever cash flow you’re coming in and whatever they ask for, you just give it to them. Net worth generates cash flow. What you have to do when you’re a younger investor, when I say younger, that’s a relative point of view in concept and that you might still be young when you’re 50 because you know you’re not going to stop working for 15 or 20 years. On the other hand, I have many people that are clients, 35 to 40 years old and they want to retire by the time they’re 50. They need to get on their horse. It’s makes my job a little tougher because each decision carries a little more weight. One of the things you want to make sure you get right is the timeline you have versus what makes sense to put first. Cash flow doesn’t come first. Capital growth comes first. Cash flow is merely the yield that you finally get in retirement from your capital that you grew. If you have a net worth of 2 million in retirement and you’re making 10%, you’re making $200,000. It’s not that the guy with one million gets a lower yield, he’s making the same 10% you are, he’s just making half the money because he has half the net worth. Growing your capital as a young investor also makes more sense because you don’t need cash flow now. You’re investing because you have more cash flow than you know what to do with. The idea is grow your capital while you’re young. Keep growing it. Do the things that keep that capital on an upward trend. Sometimes that’s easier said than done. I’ve gone through all kinds of good times and bad times. It’s times when it’s much safer just to go fishing for a few years. The idea is when you’re investing up till you get close to retirement, you want to grow that net worth as safely but as quickly as possible, the bigger, the better. Now, how do you do that in real estate investing? Because everybody says by cash flow, by cash flow. Well, you obviously want to have cash flow. Don’t go away saying, “BawldGuy says don’t get cash flow.” You want the property you but to pay for itself, you wanted to have some positive cash flow. The idea is to use your capital in such a way that you can take advantage of any upward movements in the market, value wise if it might happen. Now, when you do those analysis, never bake in any appreciation. I’m not telling you to do that. I’m saying position yourself such that if it should occur and we’re blessed by an increase in value, make it so that you own more real estate not less. You’re going to be using sufficient and down payment amounts but generally 20 to 30, 35%. That way, if something goes up 5% and you’ve got 25% down, you capital grew four times that fast. It went up about 20%. We’re going to talk about this more in other times. I want you to get this one concept today. That is capital growth comes first unless you’re retiring next year. You want to get the cash flow when you want it to be the biggest and most available and safest. That’s when you’re retired. You’re making enough money now.

Starting your investment career can be a bit daunting. What to do? Where to begin? Sometimes a half step is the best first move.

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Transcript:   You got a lot of friends and you’ve got various small amounts of money you’ve saved over the years, but you know it’s enough to get started in real estate prudently. You’ve heard about these notes. You don’t know what to do, but man, there’s 5 or 10 of you. You’ve got a couple of cousins. You’re 24 years old. Nobody in your group is over 30. You know what? Between you, you’ve got $30,000, $40,000. Come to me. We’ll put you in the group. You guys will do all the accounting. You guys know what you want to do. You’re homogenous in nature. We’ll get you a small note. You buy a note. The payments come in. You do with the payments what you want as a group. Separate it, don’t separate it. Do what you want. Maybe use the payment so that at the end of the year, you have a party. When the note pays off, that’s the big profit, and now you guys can do it again, and every time a note pays off, do you know what that means? At the end of every year, you just have a bigger party or you’re saving the payments too. The key is if you’re young and you’re getting your career going and you’ve got a few thousand bucks, you just don’t like it sitting there making the 3/4 percent before taxes, in a 2% inflation economy, but you’ve got a lot of friends in the same boat, and some cousins, maybe your big brother, put yourselves together. Make yourselves stronger because you’re a group. You have more money. Get started with a little discounted note. It’s better than not doing anything.

Required minimum distributions are evidence the government has a dark sense of humor. At 70.5 years old they force us into a race between two events. What happens first — do we die, or run outa money?

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Transcript:   Self-directed IRA and 401k distributions, specifically what’s referred to as RMD’s, required minimum distributions. Unless one has a Roth IRA, any IRA or any other 401k plan has a required minimum distribution. In simple terms, once you reach age 70 1/2, the IRS is going to require you, even if you don’t need the money, even if you don’t want to take the money, the IRS is going to require you to take out those RMD’s, because they’re going to want to get paid their share of the taxes that they previously did not tax you on. So, what’s critical to keep in mind, especially with a self-directed plan, is it doesn’t matter what assets you have within the plan. If you had a million dollars in your plan, and 900,000 was tied up in real estate and you say, I can’t pay RMD’s because it’s not cash. Guess what? The IRS doesn’t care, and that’s in very simple terms. They just don’t care. At age 70 1/2 you have to take out those distributions. You have to make sure that you have funds available from somewhere to pay that RMD tax. Again, even if all the assets of your plan are tied up in non-traditional assets such as real estate.

Far too many real estate investors view tax deferred exchanges the same way some view hammers. Everything they see is a nail. It’s merely another tool.

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Transcript:   Tax deferred exchange gets everybody excited because the only thing they know about it sometimes is it gets you out of paying capital gains taxes. That’s true enough. The word they never hear or sometimes don’t hear anyway, is deferred. You will owe the tax at some point, and if not you, maybe your heirs. For every good thing that happens in a tax deferred exchange, there is something that the code gets a little bit of payback. For example, take one guy who buys a small income property. He’s just buying it with his cash down and gets a loan and now he owns it. He may end up with 10,000 a year in depreciation. He’s subtracting the value of the land which may be anywhere from 10 to 30% of his purchase price, and then he just, for lack of … I won’t go into all the details, but you just take the rest which is called improvements on the land. You divide that by 27-1/2 years. That’s your 10 grand maybe. The other guy buys the duplex next door, but he does it via a tax deferred exchange. What I call excess baggage you’re carrying from previous ownership, the tax code makes you take it with you. When you buy a home or a duplex or a 4-plex or whatever, what you paid for that property give or take is what’s known as your basis, your cost basis. Let’s say you paid 100,000 dollars. If you owned it for 5 years, and you had 4,000 a year of depreciation, you would have taken 20,000 dollars in depreciation. The IRS says, you’re adjusted cost basis is now the 100 that you paid minus the 20,000 in total depreciation you’ve taken in the 5 year whole. Now, if you sell it for 150, you’re gain is not 50,000. 150 minus 100. It’s 70,000. 150 minus 80. Now, there’s a lot more things that affect your adjusted basis upon sale. It has to do with the cost of selling it when you get rid of it. All these other things, but we’re just going to keep narrowly talking about tax deferred exchanges. The number 1 thing you should know about them is that if at all possible, avoid them. The only reason you ever want to do it, is that the capital gains taxes in terms of dollar amount are so onerous that you just can’t get around that barrier. It just takes the flavor out of even doing what you want to do. Then you do it because even by deferring your taxes and taking that extra baggage with you to the next property, it’s worthwhile long run. What that excess baggage does is on the property that you end up with or the properties in many cases, instead of getting what your buddy got which is 10,000 a year on his purchase, you’re only going to get maybe 6-1/2, 7,000. That’s because you had to bring your other one with you. You can only depreciate extra over what you left as the difference between the debt you left versus the new debt you acquire. You might have left 100,000 in loan balance when you started your tax deferred exchange, and you might have bought a whole lot of property, but your loans only increased by 80,000. You can only depreciate 80, and you really can’t do that. You’ve got to still take the percentage of the land value from what you purchased away from that 80,000. If it’s 20% you’re taking 16,000 away. Your depreciable basis on that exchange is now 80% of 80,000. 64,000 dollars. Your depreciation is way less than it would have been and add insult to injury, down the road if you ever want to sell that property, your capital gain will be larger because part of that baggage you were forced to take with you when you did that tax deferred exchange was that it kept that cost basis that you brought with y...

A case study part 2 — the second of three parts in a case study.

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Transcript:   Our 32-year-old couple who were making $180,000 a year, before taxes, have a duplex in Texas, and they’ve spent about $80,000 out of their $100,000. They kept $20,000 back for cash reserves, and I asked them if they would please build that up to about $45,000 over six months. They could do that because they save about $4,000 a month. When they did that, they immediately started an EIUL with the specialist in that discipline, David Schafer, and they put in $1,000 a month. They’ll do that for at least 20 years until they’re 52, maybe until they’re 59 and a half, probably no later than 62. They’re going to end up, depending on how long they go, 20 to 30 years is a big difference, somewhere between $4,000 and $9,000 a month tax-free for virtually the rest of their lives once they start. What’s next? Remember, they have $50,000 in a retirement plan. Now, I initially said it was a Roth IRA. Many people don’t have Roth’s. They have a normal IRA. Maybe they have a solo 401k because one of them is already a small business. We’ll deal with that later. I said it was a Roth IRA, so let’s do it this way. They take $50,000, and let’s be conservative and say they buy a $85,000 note in first position. When they did that, they made a profit right away. They bought into it, because the ultimate payoff of that note, $85,000, they only have $50,000 in it. What’s happening now is they’re making, give or take, $500 to $600 or $700 a month. They’re going to pay taxes on that. Let’s say for the sake of discussion they were doing around $6,500 a year. Let’s say now that’s, give or take, about $4,500 a year; $4,000, they’re going to take that $4,000 and now we get into the synergistic blending of strategies. That’s what’s really going to help them down the road. Now our couple has invested in a small duplex, in EIUL, and some discounted notes or maybe just one to start with. They had $50,000. What do they do with those things? How can we use what I call synergism with the strategies? I call it strategic synergism, to enhance either the growth or speed up the time in which they can reap the rewards of all of these investments. First or all, one of the strategies that we’re going to blend with another is the buy-and-hold strategy using prudent leverage of 25% down with a fixed rate, remember they paid about 5% for their loan, with the strategy of buying a note. Now, we can’t really take the income from the note, because we’re going to let them keep doing it and keep doing it inside their Roth. What can they do with notes outside? Here are their choices. We’re going to take another $1,500 out of the $3,000 dollars have left they’re saving. They’re still saving $1,500 every single month they’re going to add to their $45,000 cash reserves; $1,500 every month is going to be added to the cash flow each month on their duplex and is going to be used to pay off that loan way sooner than just 30 years. Now, that cash flow’s going to ebb and flow, but that $1,500 a month is not. Probably what’s going to happen is they’re going to pay off that loan give or take 8 to 12 years. Let’s say it’s 12. They’re 44 years old now. They own a property that’s, give or take, worth $280,000 to $300,000. What do they do? I don’t know any more than you do. What’s the market? What’s the economy? Are we at 5% or are we at 9% interest? Are we at 16% interest like we were in the early ‘80s? What’s the real estate market itself? Does it make sense to stay in Texas where they bought, or does it make far more sense to go to another state?

Real estate investors often pose this scenario to me. “I’m just 10 years from retirement, yet I wanna do better than the cash flow I’ll have by then. Is there anything I can do to make that happen?”

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Transcript:   You’re 50-55 years old. You know barring some unforeseen circumstance, you’re going to retire in about 10 years. The thing is, for whatever reason, your real estate portfolio is either mostly or completely debt free. Now, your choice is, I can just keep collecting all this income. Maybe I can buy notes with it. Maybe I can just finish paying off my primary residence. Maybe I can take a couple of years of it, 3 years, whatever. Go buy that cabin by the lake I’ve always gone to instead of renting it from Frank next door. There’s all kinds of things you can do with that cash flow if you insist on waiting to 10 years. Let me give you an alternative incumber that portfolio all over again. You’ve got 10 years to pay it off. Because if you can borrow, let’s say you can borrow 2/3 of a 3 million dollar portfolio. That’s give or take, 2 million dollars. For 2 million dollars, which by the way, is tax free. Almost every single time you do that on a pure re-finance, it’s tax free, by definition of the IRS. Now you’ve got 2 million dollar. Of course you don’t have the thousands of dollars a month to cash loan anymore. You’re back to where you were when you start a give or take. Think about it, what if you originally bought all that portfolio with a median interest grade of 4 and a half to 5 and a half. What you did this for 7, you don’t care, you just borrowed 2 million dollars, tax free, fixed rate 30 years of 7%. If you go and, say you went to the BawldGuy Note Fund. You start making 8% right away. Maybe you don’t want to buy notes. You’re making right away, $160,000. Your management is to go online and make sure the electronic deposit of the 8% hit the bank account you told them to use. But you did it to buy notes. Let’s say you are always yielding at the bottom of the range. The range is about 12 to 15%, all that’s going to change over time. I remember in San Diego, where you didn’t buy a note at a discount or you didn’t make 15 to 20. It always changes just like anything else. Now it’s 12 to 15, let’s use 12. That 2 million dollars? At 12%? You’re barely making under a quarter million dollars a year. You’re making $240,000, you’re making $20,000 a month. You think you can pay that 2 million loan off pretty quickly? Nod your head, yes, emphatically. You think you can do it in 10 years? Geez, do you think you can do it in way under 10 years? Yes, you can. You can do all kinds of thing. Maybe you don’t care, maybe you’re going to take 10 of that 20,000 or wait a minute, you’re paying taxes, don’t forget that. Let’s take that $20,000, is a whole lot of 14th, a month. At 14,000 a month, to 2 million dollars in payment, you’ll pay it off. You’ll pay it off in time because you’re also getting cash flow. You still have 30% equity. What’s going to happen is, you’re going to hit retirement, and those things are going to be free and clear again. Meanwhile, back at the ranch, it’s far more likely the not, that that new part of your portfolio of loans, of notes, was just probably at least 3 million dollars in face value, likely a little bit more has paid off probably 40 to 60% of that at least. The current numbers say, the average note for a home is paying off in about 9 years from origination, we just said 10. If you’re going to do that, you have the ability to hit retirement again with your 3 million dollars of real estate free and clear.