Critical Thinking Required

This is Part 2 of the episode where we discuss real estate private equity investing with Moses Kagan.  Southern California, in particular Los Angeles, has a great advantage for real estate investors: Proposition 13.  The law limited property tax rate increases by 1 percent of assessed value in year one, and the assessed value can't increase more than 2 percent afterward regardless of the market value.  Now, that means the property tax (which is usually the highest cost for real estate investors) is increasing dramatically slower than rent growth.  Thus you have almost guaranteed margin expansion.  Nathaniel is curious about Moses' opinion of the zoning issue in LA.  Moses feels strongly that to fix the supply shortage in big cities in the U.S., the authorities have to limit or lose the zoning restrictions.  Not only do they create social living inequality, but they also affect national economic growth.  But you know what? Supply-demand unbalance is exactly what makes investors money... Talk about incentives!  Two pieces of advice Moses has for first-time investors: find a reliable and experienced operator and use leverage very, very carefully. 

This is Part I of the real estate private equity investment chat with Moses Kagan.  Real estate investing has always been on the top of our clients’ inquiry list.  Normally, for real estate investors, they try to buy, fix, and then sell the property as fast as they can.  But Moses is doing this differently: he has a true value investing mindset.  He firmly believes that when investing in real estate, one way to lose money is to be forced to sell in a downturn.  All markets swing up and down in the short term, but if you have a long-term investing horizon, through generations, the power of compounding is extraordinary.  To achieve this goal, Moses has two rules: he only looks for long-term investor partners that are willing to invest longer than a typical 3-10 years private equity cycle; in addition, he uses debt leverage very carefully so the bank can’t force him to sell.  In Part II’s episode, we will dig deeper into the LA real estate market with Moses.

This is an interview with our newest team member Kennidy Briggs.  Growing up, Kennidy found that she loved puzzle-solving, identifying patterns, and being creative. Her favorite outlets were drawing, designing clothes, and playing games. Kennidy studied at Florida State University where she received her Bachelor’s in Sociology along with a minor in Anthropology and a certificate in Leadership Studies.  In the interview, Kennidy shared how her seems-to-be-irrelevant major is exactly what a financial planner requires.  She talked about her motivations, her advice for colleges, what failures did she cherish, her greatest mentors in life, etc.  When asked "what have you sacrificed along the journey of speaking true", her answer was so real and impactful.  Kennidy, we are so excited to have you join the LBW family!

What does a car mean to you?  To some, it is just a tool they use to get from A to B; but to others, it’s a passion, it’s a hobby, it’s a lifestyle.  Today, we invited one of our team members, car enthusiast Gary Grosskopf to join us and talk about cars.  First, what to look for in a car?  Gary talked about different cars’ sizes, drive types, seating, quality, and brands.  And then, the forever “gas vs electric” argument.  Gas definitely gives cars more of a “Vroom-Vroom” experience.  However, if you are “team environment” (and that’s great), please do the research and understand where the electricity is coming from in your local area.  Because if it’s mostly from coal, maybe an electric car is not nearly as clean as you think.  Gary also talked about where to find your dream car and financing options.  If you love cars as much as Gary, as a collector, he also explained how to view luxury cars as an investment, and the expected work that you need to pour into them.

This is our first quarterly commentary for 2022.  The team discussed:

1) the potential SECURE Act 2.0, and how will it impact retirement.
2) Inflation & interest rates, and where will they go?
3) Student Loans getting deferred again, and the potential loan forgiveness for some.
4) Taxation on goods over $600.
5) The Ukrainian/Russian conflict.

How was the first quarter of your year?

The U.S. House passed the SECURE Act 2.0, which includes provisions to boost retirement savings.  In this episode, Nathaniel and Tim discussed the bill, and expressed their mixed feelings about some of the provisions: 1) Increase catch-up contributions; 2) Increase RMD age from 72 to 75 by 2033; 3) allow employers to place their match into the Roth portion of your 401(k) (Nathaniel is beyond excited about this one!); 4) allow employers to make matching contributions if you choose to pay your student loans over retirement contributions; 5) expand saver’s credit; 6) auto-enrollment into employer-sponsored plans; 7) annuities can be offered in employer-sponsored plans (oh no… this is asinine…).  Overall, other than the annuity one, we are onboard with most of the legislation.  It will be interesting to see how the government executes if it becomes law.

In this episode, we had a conversation about private real estate investing with real estate guru Jorjio Hopkins.  Jorjio first explained the pros and cons of three different types of investment vehicles: crowdsourcing, syndication, and funds.  A real estate fund can close a deal much faster than crowdsourcing and is more diverse than syndication.  In terms of choosing between a publicly-traded REIT vs a private REIT fund, liquidity is a key difference.  Typically, a high-income earner who's looking for a relatively low-risk way to diversify their investment portfolio is a good candidate for private real estate investments.  The most important thing in Jorjio’s opinion, without commiserating with LBW (drumroll please!), is asset allocation.  (Please listen to/watch our last episode “S3EP12 How To Invest "F**k You Money? - Personal Financial Asset Mapping” for an in-depth discussion.)  Contact Jorjio at [email protected] if you are interested in learning more about private real estate investments.

People ask us very frequently: "I have $ amount in cash, where should I invest it?"  Hold your horses - before you start, let's go through the personal financial asset mapping process.  First, what are your true investable assets?  Investable assets = net income - lifestyle cost - emergency fund - primary home.  Second, where do you invest the money first? Some people are more interested in private equity because it's trendy and sexy.  Will, before you do that, you might want to max out your 401ks, IRAs, and other tax-deferred accounts.  Third, think about your life priorities: if you want to pay for your kids' college, fund your 529 plans; if you want to buy a beach house, save for that.  Lastly, if you still have some cash left, and it won't affect your lifestyle/retirement, even if you lose it all: that's your "F**k You Money".  Invest in whatever you want (preferably still within your circle of competence) and have some fun.  Overall, the goal of the personal financial asset mapping process is to make you anti-fragile.  Investing in speculative/trendy ideas is not necessarily harmful if you go through the mapping process and limit your risks.

People ask us a lot about borrowing from their 401(k): “Why would I want to borrow from banks and pay them interest when I can just borrow from myself?!”  Well, it’s more complicated than that.  It is true that if your 401(k) plan allows it and if you are fully vested, you may borrow from your own account.  But like everything else in the world, nothing is free.  First, you need to pay it back with interest, and the payments are not deductible as interest payments or contributions.  Second, for most plans, your employer will cease all contribution matches until you pay the loan back.  Not only are you losing out on free money from your employer, but you are also missing the investment earnings from the market.  Third, if you leave your job before you are able to pay the loan back, you will be forced to either pay back the entire amount in one go, or consider the loan as a distribution.  That means, if you are younger than 59 ½ years old, you will be hit with a penalty on top of ordinary income taxes.  Tim gave a great example of how you may lose $450,000 in 25 years from a small $50,000 loan even if you pay it back within 5 years.  Oh man, that hurts!  Overall, please remember, a 401(k) is not designed to be borrowed against - it is meant to be a long-term investment vehicle for your retirement.  There are better borrowing alternatives out there.

In this episode, we invited our friend, realtor Lindsay Koch to talk about the housing market, especially in the Madison, WI area.  Madison has been voted one of the top places to have a family, best cities to live, etc. many times.  People choose Madison for the healthy job market, surprisingly diverse restaurants, vibrant yet still cozy city feel, and the ever-beautiful lake views.  For years, the supply and demand have been quite off in the Madison housing market due to a couple of reasons: people are moving from bigger cities to Madison since remote working seems to be a permanent thing for some of us, and this has brought some “big players” to town.  In addition, baby boomers are buying in cash to downsize, and their demand has clashed with most first/second-time millennial buyers.  As a result, the housing prices have increased massively, and don’t seem to want to slow down.  Waiving all kinds of contingencies and having 30+ offers are still very much a daily occurrence.  The team asked about Lindsay’s experience with buying vs building.  If you want to have a custom-built house right now, expect 18-24 months of construction time, and know that a construction loan is very different from a traditional mortgage.  Your final building price may be uncertain until your closing date.  Tim and Lindsay closed the episode with this: in this crazy market, if you are a buyer without an unlimited cash budget, the only weapon you have is – patience.  Understanding that you might need to wait a while, and you may not get 100% of what you want, are crucial in this emotionally-draining process.