The concept of Purposeful Planning is exceptionally powerful. Once the real estate investor understands its potential, the first thing they usually do is reassess their retirement goals.

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Transcript:   People hear me talk about purposeful planning, and I write about it all the time. It’s got a good ring to it. It sounds really nice. But it does mean exactly what it says. It’s the foundation of what I do for people. I tell them, you’ve got to have a plan, and you have to execute it on purpose. Now, that all sounds good, but then I turn around after saying that and tell them, flexibility’s got to be the number 1 factor in your plan. Like the bumper sticker says, mildly paraphrased, “Things happen.” One of the things I tell people is, they say what do you do Jeff? I get people, when they call me and I say, hi, this is Jeff. I take them from that point to retirement. One of the things we decide is, where exactly are you now? Because you can’t decide how to get to point B if you don’t understand not only what point A is, but where is it on the financial map. Because you can go to Hawaii, but you’re going to take a different route from Tokyo than you are from LA. You’re still ending up in Hawaii. So you’ve got to know point A and point B. Everybody gets hooked on Point B. Once you’ve established everything about point A, and that includes how much you make, how much you save, what future cash drains are going to come your way. That usually is spelled K-I-D-S. Then later on it’s college. I just got rid of my last, and the Bank of Dad is closed. But it costs money. You can save for it now. You can make part of your plan. You don’t know what’s going to happen. You just hope that you will have to pay for a nice college education for your kids. There’s all kinds of things that you have to plan for. So think about how you’re going to fund your first investments. What are you going to do? Are you going to buy locally? Probably not. It’s very rare that you’re luckily living in an area that makes sense to invest. My clients who live in San Diego where I live, and have since the 60s, they’re usually surprised when I tell them, “I’m not going to sell you anything here, and if you want to buy investments here, you have to talk to somebody else.” It’s horrible investing here. People in California don’t like it when I say that, but you have to go where the investing is good. There’s a lot of places. I prefer Texas, and I love Boise. But there’s a lot more places than that. Those are the two I favor, and I favor because I’ve done the work. I’ve put my own boots on the ground. I have found out all the factors that I needed to learn and made my decision. Purposeful planning sets out the arena. You know what game your playing, you know the rules, and you know the arena that everything’s happening in. Once you have that set out, then you’re just knocking dominoes down one at a time. Interest rates go down? Excellent, you can do something maybe before you had planned. Values rise a little bit and rents go up a little bit? Same thing. But you don’t plan for that. What you plan for is the flexibility to be able to respond to those things. Good, bad, and ugly. Purposeful planning is just that, and it’s serious as a heart attack. You have a plan that is based on a timeline that adopts a certain philosophy of investing. You’re trying to get to your retirement with X amount of income, which you can’t pinpoint exactly, but you can get in the range. You set out to see what you have to do along the way to make that happen. Add flexibility in it for seasoning, and the chances are highly likely that you’ll get ...

Are you over 60 but have a lot of money? Sounds good, doesn’t it? For the vast majority of Boomers in that position, anxiety over disappointing anticipated retirement is the rule, not the exception.

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Transcript:   Every now and then I hear from fellow boomers. They might be in their late 50s or early 60s. They’ve done well. They’ve managed to save money both in their own account personally and in their 401K or IRA, or many times both. Sometimes they’re Roth, sometimes not. But they want to know, because they’ve seen the writing on the wall, that if they keep going down the road they are, it’s just not going to work out very much for cash flow in retirement, and they’re ready to retire, or soon. A recent client had roughly $500,000 in 2 separate qualified retirement plans. One was an IRA and traditional, not Roth, and the other one was a previous employers 401K. Now, he had established a little business several years ago, because he’s a woodworker, and he only makes about $1,000 or $2,000 a month doing it. He’s not really making all that much money. It’s a hobby. But I told him, since he has that business, we could have John Park set him up with what’s known as a solo 401K. Now that was invented solely for small business owners, and he qualifies. The next step after setting that up was to roll those 2 plans assets, in this case he had converted them to cash, into the solo 401. Now the solo has more or less 2 parking spots. One’s traditional, and one’s Roth. The mechanics and the rules call for the taxpayer to roll over in the traditional side first. Now, he has to make a choice, and he hasn’t yet, whether he wants to roll that $500,000 from the traditional side of the 401 to the Roth side, because he knows if he does he’s going to pay a ton of taxes, because it’s going to cost him at least $100,000. It could cost him up to $200,000, which means his $500,000 turns into $300,000 or $400,000 overnight. I don’t care who you are, just the thought of that hurts. On the other hand, the silver lining, and it’s a huge silver lining, is everything he does for his retirement income from that point, not only remains tax free inside the solo, but when he takes it out in retirement, it’s tax free by definition. If you live in a high tax state like he does, he lives in California, if you have, say, $350,000, and you’re making, say, somewhere in the vicinity of $50,000 on that, and it’s tax free, if the $500,000 is making, say, $65,000 instead of $50,000, in California after state and fed, is that going to get down to around $50,000? I don’t know. Let’s say it doesn’t let’s say it gets down to $54,000. So he would have been better off not to pay the taxes. But he’s investing in discounted notes secured by real estate, and he’s buying them at a huge discount, usually 25 to 50 cent discounts on the dollar. When he does that, the first time his portfolio starts to turn over, and it will, we just don’t know when, because it’s absolutely 2 things, uncontrollable and random. When it does, that $50,000 of the $350,000, now goes up. Because he makes the discounted, built-in profit when they pay off, which means he’s investing more, which means the payments are going to be more, because it’s going to be about the same yield. It’s just the same yield on more money, because he made the profit, untaxed. Now he gets a raise. He’s not making $50,000. He’s making $60,000, $70,000, $80,000 tax free. The taxable side, if he hadn’t paid that $150,000 in taxes, sooner or later not going to be able to keep that. Because every time that taxable side makes a rate hit, and that income goes up,

Having constructed spreadsheets since Ford was in office, I realize what goes into them. But the importance of spreadsheets is something every real estate investor should seriously review.

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Transcript:   Spreadsheets are the bane of my existence, and yet most of my clients can’t get enough of them. They love making their own, and I’ve finally gotten so tired of my clients messing with mine, I only give them out in PDF form now. I don’t care that they’re dated. Here’s what happens. I vet my own spreadsheets like I’m sure you do, as an investor. You try to get the numbers right. We all do, because we don’t want garbage in, garbage out ruling our lives. I put my own boots on the ground. I go to whatever state the property’s in. We do rent surveys. I not only do a rent survey, I have my team do a separate independent survey another day. We don’t share information until it’s done. We get the numbers right. Often times the number’s right right down to the dollar. Sometimes it has to be an estimate. Who knows what repairs and maintenance is going to be? Well, I kind of know from experience. You know? Almost four decades, if a property’s 50 versus new, okay, we can all do that, only to the extent we know the new is going to have less. But what do we put though? In the end, what I find, is that brand new properties, very well-located, and again, my definition of well-located is not only subjective, but ironically empirical, and I mean by that is, I put my 80 plus year old mom to live there alone. That equals a good quality location. All right? We’re not arguing about what’s quality. I do all the numbers, give or take the expenses and the vacancy, everything out the door that is come out of your Levis to operate that building is about 40% of the gross income, the gross scheduled income, not that you got it all. Okay? That leaves about a 60% cash to you net, and we’ll call that the net operating income. Right? Then, out of that, you pay your loan payments. Now, that’s a spreadsheet, and I can defend that spreadsheet, and so could you, until the cows come home. The problem is, there’s this pesky guy, Murphy, and he knows where we live, and he’s going to visit all of us when it comes our turn in his barrel. When he does, that spreadsheet is going to be a joke. You might as well roll it up and light your barbecue with it for all it’s going to be worth. Let me explain what Murphy’s spreadsheet is. Instead of going through all of the numbers and hitting your boots on the ground and getting your clipboard out and out there among them and getting them right, just take that gross scheduled income, that GSI, and let’s say it’s 30,000, and I came up with an 18 or 19,000 NOI, get my numbers exactly right, just take that 30,000, divide by two and say the net operating income is $15,000. By the way, when you’re actually making prognostications for cash flow, use Murphy’s, don’t use mine. Don’t use yours. Just divide by two and be happy, because if it does worse than divided by two, you’ve got the wrong property or something really ominous happened in the economy.

Here’s a case study on notes with a real client.

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Transcript:   These clients that I have have been investing with me for years. They have a very impressive portfolio of real estate, all of which will be free and clear in the next 8 to 10 years. They’ve got EIULs going, which will come to fruition in about 22 years. Again, very impressive income coming from them. They’re just getting started in notes, although they have again an impressive amount of savings to start with, around 300,000. Now, they are accredited investors and we’ll talk about that later, but for this case study, whether they’re accredited or not really doesn’t have an impact. Now, their first investments in notes, which will happen this summer and fall, will be that 300,000, which will generate 39,000 pretty easily so I’m just going to round 1,000 a year to 40,000. They want to retire when they’re 50 and I may have talked about these clients before. We argue all the time. They say they’re going to do it by 48. I’ve done the numbers and it’s 50, but they think they can do it. I’m going to take 10 years because they’re not in the room. They have 40,000 a year they just turned 40, just this month. Now, 40,000 a year the first year, so that at the end of the first year, that $40,000 is taxed and let’s say that 40,000 turns into 30,000. That 30,000 buys a small little note in addition to the 300,000. Now they’re not making 40,000. They’re making 40-something a year in interest payments. They take that and they buy another note and they end up with not 30,000, 30-something after taxes, and that’s the note they buy the second year. This goes on and goes on. By the 10th year when I say they’re going to retire, when they’re 50, in the spring of ’23, ’24, they’re going to have a trustee note income pre-tax, of give or take, $80,000 to $110,000 a year based on no note ever paying off, which in my experience, and I’ve been buying notes since 1976, when Ford was in office, that hasn’t happened. I’ve never seen it. I’ve never once seen a note go the entire 30 years. What probably will have happened in the decade between when they spend the 30,000 and start buying the little note every year with the payments is that sometime down the road, and who knows? It’s random, notes here and there will begin paying off. They will make a very nice profit because they’re averaging, give or take, $0.50 to $0.70 on the dollar when they buy them. They’re only going to be paying long-term capital gains taxes on the profits, so they’re going to be making significant hits even though it’s in their own names, not part of an IRA or a 401(k). If normal life happens the way I’ve seen it the last almost 4 decades of note investing, really by the time they’re 50, they won’t be doing 80,000 to 110,000 or so. They’re probably going to be doing 100,000 to 140,000, maybe more, but that’s realistic. Then what happens is because they hit retirement at 50, with 80% of their residential investments being clear, I won’t talk about the other two now because it was for another strategy, they can actually refinance those and pull out, give or take, another $800,000 to $1 million tax-free, $1 million easy is my guesstimate. Where it is still cash flowing very well, clearly not as much as without debt, but very well. They’re not to worry about that, but that $1 million instantly once they’re able to turn them into notes, will be generating give or take another 10,000 to 12,000 a month, in addition to their 80,000 to 140,000. I’ll give a range, that they built up just buying more notes with their payments.

In my experience, the difference between success and failure in real estate and note investing comes from the lessons we learn when lookin’ at judgement versus principles.

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Transcript:   Ever since as a young man I switched from listing and selling homes to being an investment guy, I’ve been impressed with the big winners in real estate investment. I followed them. I watched them get really big and get bigger, and I watched them go broke. I watched what they did, where they did it, why they stopped going here and start going over there, and why they switched from this vehicle to that vehicle. They switched the way they bought things. All those, I watched them all. I came away with a false understanding, and that was that what separates the men from the boys, the professionals from the wannabes, is judgment, the ability to judge what’s going to happen in a market. Actually, pretending that they could tell you what’s coming next, which to an extent, people with a lot of experience can. I know. I’ve seen the movies, and I get too much credit many times for being smarter than I am, only because I’ve seen all the movies, and so I sound like I know more than I do. I’ve just seen it before. When you’ve seen that movie before, people say, oh, he knows more than the other guy. No, I’ve just seen it. But I don’t translate that into, I have the ability to see into the future. Because the mistake that I found, trying to pick the best investors for me to model when I was a young man, was that I thought it depended upon, like I said earlier, judgment. And it’s not. To the extent that it’s their judgment that makes the difference in everything. In my experience, and I’m speaking for myself only, my 2 biggest mentors, as far as how to do things on a grand scale in investment as a topic, are Graham and Buffet. Now Graham’s book, called The Intelligent Investor, is the only book I’ve ever recommended to anybody, and I don’t recommend it to most people, because it’s a whole bunch of writing at a very high level. Because that’s the way they wrote back in the 30s. He wrote it again back in the 60s or early 70s. I’ve been real estate-reading it lately. It’s the most chock full of dense wisdom you’ll ever get. But here’s the point here. It’s not judgment. Because judgment implies that the investor with the better judgment can pick stocks, can pick real estate, can pick this note or that note, can pick this company or that company. When the real geniuses will tell you it’s not that they’re that brilliant, although in my opinion guys like Buffet and Graham are, it’s that they understand the principles inside and out. Because the principles in investing are much like physics, the laws of physics. You can do all you want with wings and power and lift and drag, and you can put a 747 with 300 or 400 people in the air. But that plane’s coming down. Because gravity wins every time. Even if you go out of gravity into orbit, you mess that orbit up, you’re coming back down, because you can’t violate the laws of physics. Same with investments. It’s about following the principles. It’s not our judgment, because that implies we can do better than the market, and we can’t. We can appear to, because our competition thinks it’s about judgment. This is why people try to pick stocks and wonder why they lose. You can’t be a stock picker. You look at real estate, like you can’t be a real estate picker. You look at the region. Do I want to invest in this region? Well, there’s all kinds of principles that should be followed, and if that region doesn’t align with those principles to your satisfaction,

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,