BawldGuy Audio Podcast

Wanna know why 9 of 10 real estate investors are lost when understanding loan over basis? They’ve never heard of it. It can and often does prove a very expensive lesson.

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Transcript:   We’re going to talk today about a problem people have that they didn’t know they were creating. It’s called loan over basis and it can get you into a real problem. You invest in a property and when you bought it it cost you $200,000 years ago. You end up borrowing 150. It got down to 100 but over all these years your property value went from 2 to 300. You say when the rates when down in the last several years, you said “You know what? I can borrow a lot of money here and Jeff says it’s tax-free when I do that.” Well, yes it is. You have a $300,000 appraisal and you go get a loan for $210,000 because they’ll let you take a 70% loan and get some cash out, and $210,000, you owed 100. You took $110,000, put it in your Levis. So far so good, right? Then we have something like the bubble bursting. Now your $300,000 property that you paid $200,000 for can only sell for enough to net $210,000. You get a check big enough to pay for Happy Meals for the wife and the kids. You say “Well, at least I didn’t lose any money.” Here’s the problem. Let’s say you had that property for a decade and you took depreciation for a decade. That means, being conservative, you probably took, give or take, $250,000 in what we’ll call straight line, vanilla, boring depreciation. That $50,000 means you didn’t pay 200,000 for your property; you now paid 150. They call that your adjusted cost basis. Let’s assume that that’s how you ended up. At 150 what they’re going to look at is that even though you didn’t get anything out they’re going to take that $210,000 sales price that you sold to your neighbor across the street and they’re going to say “You had cap gain,capital gains, which means you’re going to be liable for tax, of $60,000.” Now what if there was no real capital gain? Maybe that value went down to where there was a wash. The IRS many times is going to like at that refi you did not long before that sale. They’re going to say “You know, that smart guy was clever. He took out over $100,000 and when he closed his sale, which was for 150, he owed 210.” We call that loan over basis. Even though you had no net proceeds in a literal sense almost you’re going to owe taxes because they’re going to say “You did that in anticipation of selling, or worse, if you didn’t sell maybe you were going to do a tax-deferred exchange and you had a lot of equity but you refi’d before that 1031 exchange.” They’re going to look at it like you got cash out of the exchange, not in the refi. Either way, be careful of selling and/or exchanging your property not long after you do a refi with cash out on that investment property. The last thing is this. It doesn’t matter what your intent was, and there’s no set time. I can’t look you in the eye and say “As long as a year has passed you’re good.” I’ve seen it go two or three years and they go “No, that’s why you did that.” They’re going to tell you your intent. It’s the government, right? So beware. Talk to your tax accountant, the expert that can tell you in terms of the internal revenue code what might happen. Just don’t look at the tax-free aspect of refinancing for a cash out on an investment property.

Wanna know why 9 of 10 real estate investors are lost when understanding loan over basis? They’ve never heard of it. It can and often does prove a very expensive lesson.

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Transcript:   We’re going to talk today about a problem people have that they didn’t know they were creating. It’s called loan over basis and it can get you into a real problem. You invest in a property and when you bought it it cost you $200,000 years ago. You end up borrowing 150. It got down to 100 but over all these years your property value went from 2 to 300. You say when the rates when down in the last several years, you said “You know what? I can borrow a lot of money here and Jeff says it’s tax-free when I do that.” Well, yes it is. You have a $300,000 appraisal and you go get a loan for $210,000 because they’ll let you take a 70% loan and get some cash out, and $210,000, you owed 100. You took $110,000, put it in your Levis. So far so good, right? Then we have something like the bubble bursting. Now your $300,000 property that you paid $200,000 for can only sell for enough to net $210,000. You get a check big enough to pay for Happy Meals for the wife and the kids. You say “Well, at least I didn’t lose any money.” Here’s the problem. Let’s say you had that property for a decade and you took depreciation for a decade. That means, being conservative, you probably took, give or take, $250,000 in what we’ll call straight line, vanilla, boring depreciation. That $50,000 means you didn’t pay 200,000 for your property; you now paid 150. They call that your adjusted cost basis. Let’s assume that that’s how you ended up. At 150 what they’re going to look at is that even though you didn’t get anything out they’re going to take that $210,000 sales price that you sold to your neighbor across the street and they’re going to say “You had cap gain,capital gains, which means you’re going to be liable for tax, of $60,000.” Now what if there was no real capital gain? Maybe that value went down to where there was a wash. The IRS many times is going to like at that refi you did not long before that sale. They’re going to say “You know, that smart guy was clever. He took out over $100,000 and when he closed his sale, which was for 150, he owed 210.” We call that loan over basis. Even though you had no net proceeds in a literal sense almost you’re going to owe taxes because they’re going to say “You did that in anticipation of selling, or worse, if you didn’t sell maybe you were going to do a tax-deferred exchange and you had a lot of equity but you refi’d before that 1031 exchange.” They’re going to look at it like you got cash out of the exchange, not in the refi. Either way, be careful of selling and/or exchanging your property not long after you do a refi with cash out on that investment property. The last thing is this. It doesn’t matter what your intent was, and there’s no set time. I can’t look you in the eye and say “As long as a year has passed you’re good.” I’ve seen it go two or three years and they go “No, that’s why you did that.” They’re going to tell you your intent. It’s the government, right? So beware. Talk to your tax accountant, the expert that can tell you in terms of the internal revenue code what might happen. Just don’t look at the tax-free aspect of refinancing for a cash out on an investment property.

It’s one thing to know where we’re goin’. But it’s quite another to know in which direction we should begin heading on the road to retirement when we’re not sure where we are now. We can’t get to Point B when we don’t know our Point A.

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Transcript:   Today, let’s talk about where your point B is, but more importantly, the principle that says you can’t know how to get to your point B, being retirement, if you don’t know where point A is. Let’s start taking that apart. In a blank sheet of paper or get some software program that you like, let’s start out by listing all your assets, all your liabilities, what’s really going on in your financial life. Most people that I talk to find out that they’re a little bit better off than they had anticipated. Some of us find little baby spiders that we don’t like, but now we know they’re there, we can deal with them. Write down what you think your equity is in your home, if you own a home. Do you own a rental property of any kind? What’s the equity in that since you bought it? How’s the cash flow working out? Find out if the rents are higher in other units nearby you and you’re just behind the times. What’s the equity in your cars? What’s the payments going out of all your loan payments, all your bills. How much are you saving after tax from the household family budget? Once you know all this, you can take a step back and you’ll say, “You know what, I’m worth about this much, about x amount represents my liquidity or indirect liquidity. I have more equity in my home than I thought. Maybe it makes sense to refinance, maybe it doesn’t.” We’ve talked about arbitrage here before and maybe it makes sense to start that. Maybe it’s past time to talk about taking the equity and turbocharging it in any investment properties you may own. Then when it comes to your IRAs or maybe you have an IRA that’s self directed and a 401k at work and you look at those and you go, “Son of a gun, I have more money than I thought.” I’ve had that happen many times with people. What you have to understand is until you have painted a very clear and understandable picture of where you’re at today with your net worth, and that includes everything, you can’t possibly know how you can get to your point B. I talk about this a lot in traveling. If everybody’s going to meet in Chicago, we’re going to take different routes from New Jersey than we are from LA. One’s going east, one’s going west. Once you are completely aware of your point A, then you can start mapping out how to get to your point B. Here’s the assignment. Do all this. Get to know intimately where you are. Lay it out, so the two things you’re going to find out is what’s your worth today and your liquidity on one side of the coin, and how much you’re able to save every month after tax, after your family pays all the bills. When you get all that, give me a buzz. Send me an email and we’ll talk about what’s possible.

It’s one thing to know where we’re goin’. But it’s quite another to know in which direction we should begin heading on the road to retirement when we’re not sure where we are now. We can’t get to Point B when we don’t know our Point A.

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Transcript:   Today, let’s talk about where your point B is, but more importantly, the principle that says you can’t know how to get to your point B, being retirement, if you don’t know where point A is. Let’s start taking that apart. In a blank sheet of paper or get some software program that you like, let’s start out by listing all your assets, all your liabilities, what’s really going on in your financial life. Most people that I talk to find out that they’re a little bit better off than they had anticipated. Some of us find little baby spiders that we don’t like, but now we know they’re there, we can deal with them. Write down what you think your equity is in your home, if you own a home. Do you own a rental property of any kind? What’s the equity in that since you bought it? How’s the cash flow working out? Find out if the rents are higher in other units nearby you and you’re just behind the times. What’s the equity in your cars? What’s the payments going out of all your loan payments, all your bills. How much are you saving after tax from the household family budget? Once you know all this, you can take a step back and you’ll say, “You know what, I’m worth about this much, about x amount represents my liquidity or indirect liquidity. I have more equity in my home than I thought. Maybe it makes sense to refinance, maybe it doesn’t.” We’ve talked about arbitrage here before and maybe it makes sense to start that. Maybe it’s past time to talk about taking the equity and turbocharging it in any investment properties you may own. Then when it comes to your IRAs or maybe you have an IRA that’s self directed and a 401k at work and you look at those and you go, “Son of a gun, I have more money than I thought.” I’ve had that happen many times with people. What you have to understand is until you have painted a very clear and understandable picture of where you’re at today with your net worth, and that includes everything, you can’t possibly know how you can get to your point B. I talk about this a lot in traveling. If everybody’s going to meet in Chicago, we’re going to take different routes from New Jersey than we are from LA. One’s going east, one’s going west. Once you are completely aware of your point A, then you can start mapping out how to get to your point B. Here’s the assignment. Do all this. Get to know intimately where you are. Lay it out, so the two things you’re going to find out is what’s your worth today and your liquidity on one side of the coin, and how much you’re able to save every month after tax, after your family pays all the bills. When you get all that, give me a buzz. Send me an email and we’ll talk about what’s possible.

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 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,

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.