What’s up folks? I’ve been getting a lot of questions on land conservation easements after the omnibus bill seem to break the conservation easements at a two oh and a half x multiple. Is it true? Are there loopholes? We’re gonna be going through both sides of the argument here so that I kind of stay in the middle and kind of say that I just gave you all the information that I tapped from my sources.
Ultimately, you gotta make. Station, but here we go.
Hi, my name is Lane Koka. I run the Who We Do Pipeline Club. If you guys would look on to join and get involved in our deals, go to sy paso castle.com/club. Um, if you haven’t heard what a land conservation easement is, You know, you’ve probably been living under a bus or some rock or something like that, and you’re probably not an a credit investor.
If you’re not an a credit investor, don’t listen to this video. It’s just, uh, not gonna help you out very much. What this is for high income earners that are making over three to $400,000 adjusted gross income every single. So a bunch of higher roller cokes. This is something that the IRS has on their kind of watch list.
Nothing that I’m talking about is going to be construed as tax legal advice, blah, blah, blah, blah, blah, blah. This is kind of the latest and greatest of what’s been happening. What I’ve been hearing from my insiders on this issue that is all kind of stemming from in December of 2022, this omnibus bill kind of came forth and changed a lot of the tax governments and how this stuff was gonna be viewed by the IRS from the 2016 latest.
But so we don’t lose anybody here. What is a land conservation easement? But basically it is sort of like a donation, right? Where donations, if you guys aren’t familiar, you donate something and you get a tax deduction on your taxes. Real simple. But in this case, what people are doing is they’re going into syndicated land conservation easement deals where a piece of land is syn.
And that piece of land is donated to be put on a conservation easement list where there will not be any type of development. Basically, the land goes to the ducks and the wolves, basically. Nobody else can build on it. It is kind of for the sake of the environment, and this is kind of a good thing in the long run if you’re kind of one of those green people.
But the main thing we’re talking about here is the tax side. What people are doing, or what they were doing is they’ve got a million dollar piece. But they’re getting it reevaluated for a higher and better use. Maybe that land can be redeveloped to put solar panel cells or put a big high rise casino on.
Of course, that wouldn’t be very practical, right? So there’s a level of how practical the ski land can be developed. Some cases it could be developed, you know, 20 x 30 x and that was what people were doing at one time. If you’re kind of following me, What they were doing was buying a piece of land, you know, for a million dollars and saying that it’s worth 20 million in their deduction.
Now, sort of along the years, certainly around 2016 to 2020, these kind of ratios came back and kind of got rained back to earth and the five x multiple put in a million dollar property and you get it reevaluated. 5 million. To get the deduction for the people in these deals still can provide a net positive for a lot of.
Take somebody making a million dollars a year, if they’re able to drive their income down to 50% of that to $500,000, they just shelter that $500,000 from that highest tax bracket, and especially if they live, you know, in state taxes too. And that could mean that their AGI goes from a million down to half a million, but more importantly, they save 50 cents on every dollar on that delta.
So that means that they just saved a quarter million dollars in taxes right there for putting in an investment of maybe a hundred thousand dollars. Again, that five x multiple a hundred thousand dollars infusion of. To get a $500,000 deduction in their adjusted gross income, and that equates set 50 cents on the dollar, a $250,000 gain back, so pretty dang good investment, right?
Something that kind of takes overnight in a way less a hundred thousand dollars and get two 50 back, right? That’s more than double your money. Now, what was been happening in years prior to 2023? Is that these ratios were being pulled back to a five x with the omnibus. There is a little bit more of a ruling system around the governments of this multiple, and that multiple now is two and a half x.
Now, using that same example, right, A guy, you know, using one of these syndicated land conservation easements, they’re adjusted gross. Is a million dollars. But instead of that, that five x multiple, now they’re only kept at two and a half X. So they’ve gotta spend, say, a hundred thousand dollars to get $250,000 of AGI differential.
So that means with a hundred thousand dollars, they can lower their just gross income from a million dollars. Down to $750,000. Still a big amount, but is it worth it? That delta of $250,000 may only mean a, you know, tax savings of $125,000 at 50 cents on the dollar there. Remember, they spent a hundred thousand dollars.
In this investment. So that means they’re only gonna get back $125,000 a delta of $25,000 to the positive. With that, it kind of negates the whole purpose of doing this whole thing unless they’re doing it for the benefit of the ducks and the air and the rivers and you know, all the Pocahontas environment type of stuff.
But is it worth it? Right. And this is kind of what the Omnibus Bill has kind of put. Now I’m gonna be going kind of through my notes here of what I’ve been kind of collecting from my sources that wish to remain anonymous, and that’s kind of the world that we live in this stuff, because a lot of this is not to be considered as tax or legal advice.
If you’re somebody who wants to do this type of stuff, well make sure you work with the right people. This is why people join our mastermind group, our inner circle, and join our club, right to learn about things just like this and deals and you know, where do you invest. Again, you guys can join that at simple passive cash flow.com/club.
A lot of this is based on your personal financial situation. This may not be for you, but certainly if you’re making over, you know, a few hundred, 400, $500,000 adjusted girls income. Probably is something you should learn more about. I’m gonna be going into a little bit more of these details from my notes.
So in years prior, you could kind of be in a deal and as long as you’re in the deal for one year, you could kind of make that election, or the syndication could make that election to make this donation. But now with the omnibus, now they’re saying you need to be in it for three years. Now I don’t know where this magical three year comes from, right?
A lot of these bills and government, you know, regulations don’t make any. The closest thing I can subject that where it comes from is maybe they’re trying to emulate long-term passive income, which, you know, my CPA tells me to hold onto an asset more than a couple years to get at better capital gains treatment. But it is what it is. Three years is what it says.
Another nuance is in years prior, you know, when people were going five x 24 x, 15 x under multipliers, there was some wiggle room. Now what they’re saying is if you go any higher than 2.5, you essentially brick your entire deal. You know, in years prior, you would’ve gone up to maybe 2.4, 2.5.
Anything higher than that would’ve just been, eh, yeah. You know, you’re not gonna be able to count that. But now they’re saying if you’re going higher, It’ll get all disallowed and thrown out Again, these are just, you know my notes, right? Not saying that what will happen if you get audited and what will really happen in the enforcement.
These are just kind of ideas that have been thrown around that I just want to kind of put into your guys’ head. For some of you folks who did conservation easements in years prior, maybe in 2022, and you’re probably freaking out, you’re probably like, oh my goodness, my conservation easement is gonna get thrown out because it’s higher than 2.5.
Here’s the deal from what I’m hearing, as long as your deal was first off, voted for, it was filed into the law in that jurisdiction and everything was kind of wrapped up in a bull before the omnibus came. Through in December of 2022. You should be fine in terms of being kind of grandfathered under the old regime.
Now, of course, you know, nobody wants to do this and I don’t really, I don’t condone any of this, right. But there’s a probably gonna be a lot of people out there who are doing this stuff, who made back date documents, forge documents to get it in before the conception of the omnibus bill in December, 2022.
I’m not, I’m not condoning any of that again, right? That’s not good. But I, again, I think I’m saying that because we talk a lot about entities, legal protection. When people wanna sue you for frivolous reasons, that’s the kind of garbage they’re going to do and pull on you. And this is why having, you know, if you’re a higher net worth individual, just having some LLCs probably isn’t gonna help you too much in terms of protection.
And this is why, you know, the wealthy people go through great extremes to totally eliminate liability or more protect themselves to a certain higher. Because there are a lot of unscrupulous people who do stuff like this, and it’s very easy kind of to fudge a date here and there. All somebody has to do is the CPA Turner who’s gonna be doing stuff like this.
Hey, gimme an extra X amount of dollars, it’s a consulting fee, and I’ll make this work for you. Scribble some dates back here that are completely illegal. I hear about it now. The omnibus bill is pretty rock solid in terms of saying, Hey, 2.5 x multiple, no more. There are some hopes here. Now the new commissioner is coming in and we don’t know how that person is going to be.
Are they going to audit this stuff? Well, we know that the old commissioner would audit everything from 2016 and beyond, so we know that for a fact. But what to what? Right. So one of the due diligence things when you do look at these types of deals was to go into a deal that had a healthy legal budget.
Why? Because if you had a healthy legal budget, maybe seven figures, to keep a battle going, at some point it may not be worth the effort for the iris to fight you, and it will just lead to a. These things are always settled. It just really never gets to the end, like law and Order where there’s a judge that says this or that, it typically gets settled just like any other litigation.
This one’s no different just with tax court. So if you’re able to fight it and be a pester, the theory is that you can, you may be able to get a better multiple or just ski through the system on escape. That is if they audited you, which if you work off years prior, you probably. But I think this is the biggest thing that people who are still doing this conservation easements are kind of looking towards as they’re kind of saving grace of, well, you know, at least I got the tax savings in the meantime.
And if I grew my money, if I double my money in the last two to three years anyway, or maybe even five or six years, by the time this work its way through the audit system as I would imagine something like this would just taking forever. You know, you’ve gotten that time benefit of money. Now, maybe the counterpoint to that is they, maybe they would backdate the penalties and.
And this and that. But if you’re able to grow your money, maybe you’re able to beat that taxes and, and, and penalties. Just another thought. Now we’ve kind of beat up this conservation easement. At this point, I would probably think at home that, yeah, I’m not gonna do this stuff. Now the other side of the coin is, here we go.
And again, no tax legal information on my part. I’m just telling you what people on the streets are talking about, that I kind of interact. So first off, we kind of mentioned it, right? Let’s just say the evaluation is two and a half or five x is what it used to be. There’s a certain amount that your evaluation can go down to that you still get a net positive benefit to.
That’s up to your personal situation, and I think that’s something that I can kind of help out in helping you determine if it makes sense for you or maybe there’s just some other mechanism, maybe real estate, professional status and passive activity. Losses are just a better way of going than this.
Little bit more risky. We’ve got the Tax Pal fund. I’ll get more into that at the end of this video as a more safer option, in my opinion, to get passive losses that are not recaptured. But you know, this is the counterpoint, right? This is kind of the devil’s advocate approach. One thing that I think people have to realize is why do you have this whole conservation easement thing in the first place?
Well, the purpose of it is to designate land that you cannot develop it for the sake of the environment. And whether you kind of believe. Yes or not, kind of do need it, and the government wants a certain degree of this right now. This is just a tug of war game. The omnibus bill has pushed things very in favor of just killing all these conservation easements.
The good ones, the ones that want to go through are not because of this is kind of killing the deal. The only people who are able to do this are big, big players not to doing it in the syndication space or so they. And these are kind of the loopholes. They’re kind of being evaluated by a lot of people right now.
If this year kind of passes by and maybe 2023 passes by and there’s not that much land being designated conservation easement, they may look to ease back on some of these regulations. Or what I kind of feel like is they put these types of loopholes in here. So as a means to allow for future land conservation easements, it’s actually to fulfill it Our.
But they kind of have the ability to award it specifically, or for people who have the legal team to fight it through. That loophole that I’m kind of getting at is right now there are regular conservation easements and these simple conservation easements. Regular conservation easements, the rights are kind of given up.
Land is not really donated, and those are more the traditional conservation easements that I think a lot of us are used to. You are able to, in the syndicated deals, you can use the benefits up to 50% of your adjusted gross income. If your adjusted gross income was $1 million a year, you could buy up all these conservation easement.
Maybe only at a two x two and a half X multiple. Nowadays, we don’t know yet, but you can drive it down to 50%. The other method is this fee simple, which may not be under the omnibus jurisdiction, and I’ll explain why later, but what they’re saying is you can possibly still use these fees, simple type of arrangements where the land is completely given up.
It’s not just the rights. Be simple, just donated and given away. The downside to this is instead of a 50% ability to lawyer h ei, you pony unlimited to 30%, which may be good enough. And what I would probably recommend most people to do is see your tax mitigation strategy, not as just a one trick pony with conservation easements, for example, but to use a conjunction of different mitigation.
And this kind of actually forces you to do that because at 30% maximize use of this, what’s happening is say, take that guy who has a million dollars adjusted gross Inca. 30% of it means that he’s only able to go from $1 million to $700,000 ei. And if you’ve seen our tax videos in the past, I always try to get people around $340,000 married, filed jointly, or maybe even around $200,000.
So obviously if this guy’s at $700,000 right now, there’s a lot of room of improvement here. Maybe they implement real estate professional status, or they have a lot of passive income and they use the passive losses, which again we’ll talk about here at the end of the video. But they use those passive losses that drop them from 700 back to 300 or 400 wherever they really want to follow that particular year using conservation easements.
But again, this be simple conserv. When I started to first hear this, I was like, I thought the omnibus bill was calling out all conservation, syndicated conservation easements as a whole, and to me this was a head scratcher. I personally don’t do the conservation easements, but I know a lot of my clients use them every single year.
Which is why it’s important to get around other people actually doing this type of stuff, because if you google this stuff on your own, you’re gonna find all the content marketers who are posing as CPAs that wanna put out a puff piece like this to make them seem really conservative. So most people will go to them, but there are a lot of aggressive folks out there that are investing in the right things that the IRS wants, that wants to mitigate their taxes as much as legally possible, who are looking for the.
So where’s this like little crevice that lawyers can kind of get in here and break up the whole omnibus thing? Well, it seems kind of strange and stupid. I kind of think it’s a little stupid, but the way it was written into omnibus, it doesn’t specifically call out the whole nuance between free, simple, and regular easements.
So again, where does this lead into? Well, it leads into, well, when the conservation easement deal is being audit. It will eventually go into this audit, and this is where we pay lawyers to do this stuff. And if anybody has done silly things for some legal reason, this is the reason why we have lawyers, and thus conservation easements may not be dead.
But in my opinion, at the very least, you can’t use that 50%. You had to go with the fee simple and do the 30% is what I’m. And maybe that two and a half multiple lies. Again, I don’t know, I just personally think it’s just better to use passive activity losses to lawyer your passive income completely and to dwindle your ordinary income amount over time.
To do this, you’re gonna need to get rid of your traditional investments and get into alternative investments that give you passive activity losses, and to do this a very old fashioned and clean way without having to use conservation. To me, conservation events are kind of like a wonder drug, whereas using passive activity losses offset passive income to cancel that out, or maybe to use a conjunction into real estate professional status to use your passive losses to lawyer AGI at that point.
That’s very basic stuff, and that’s kind of like good diet and exercise in a way, instead of just using the magic wonder. But however you guys wanna do it, and I think this is really gets into your own personal situation and your own risk tolerance you have with this type of stuff. I’ve been very clear, I’m not getting tax or legal advice, but I think this is where you need to have a group of community around you.
And that’s why we always, you know, have these events where people get to see each other face to face and talk about things like this instead of just Googling stuff amongst. Now I’ve mentioned, you know, how do you get these passive activity loss, which I feel is like, is a lot better way of mitigating tax.
Good old fashioned passive activity, losses, depreciation to knock out your passive income. If you’re somebody who has moved off of your W2 job, your business, your ordinary income, now all your income is passive income and therefore you could drive your income down to none. That’s kind of like how I live personally.
I pretty much just have passive income these days, and I’m able to use the massive amount of losses I get from real estate to knock it out, and therefore my adjusted gross income is pretty much nothing. No. Completely legal. So what we have is our taxal fund where what we’re offering investors in addition to a little bit of returns, is you are going to be putting in a dollar to get $1 of passive activity losses.
Now normally with passive activity losses, when the deal is exited or the asset is sold, you have to recapture those losses, which can be a bit of a drag. But we’ve talked about other strategies to mitigate it in other videos. But in this actual opportunity that we have, the passive activity losses will not be recaptured.
In fact, if the asset is ever sold me as the general partner will be, recapturing it on my side, shielding that recapture from you. So this is kind of a game changer. So way you use this is maybe your, you’ve got half a million dollars of passive income and you wanna bring that down to 300. So you need a couple hundred thousand dollars of passive activity losses.
You go look at your 85, 82 form, you, you don’t have it there. Or maybe you only have a hundred thousand. Well, you may need to buy some, and the tax power fund that we have will provide that. We have a lot more information for folks that are in our investor club, if you wanna check that out. Simple paso castle.com/club.
But I think it actually makes this kind of arrangement a lot. More desirable, especially when you combine the fact that bonus depreciation is not a hundred percent anymore as it was in 2022. In 2023, it’s down to 80% and in 2024, it’ll go down another 20% down to 60% until it con completely phases it out, and there’s nothing out there that gives you passive losses that you do not have to recapture.
This is the only thing I’ve heard. So it’s a tool and it may be a tool for your situation. What I would say is join the investor club, so paso casual.com/club. Check out the webinar we have, it’s about an hour and a half. It’s a little technical, but if you are into saving taxes, and you certainly should, if you make over half a million dollars a year, taxes is probably your number one expense.
And with conservation easements through this omnibus bill getting tougher and tougher. Sure. There may be some hope. As I alluded to in this video, it just seems like it’s getting harder and harder. Right? Just like infinite banking or credit investor banking. You know, the terms are just kind of getting worse over, slowly over the time horizon.
But the big thing is the best time they get it was yesterday before they make it even worse. Right? Same thing. But anyway, let’s end of the video folks. Thanks for listening. If you guys have any other questions or specific questions about this, put into the common box below, we’re gonna be releasing other videos that you guys ask us to do. Our email is team@schoolpassivecashflow.com. Share this with a friend. Thanks.
What is up investors? Now on today’s podcast, we’re gonna be doing another doctor coaching call, like how we did a couple of weeks ago. But if you haven’t checked out, I think it was Brian on that coaching call, sometimes we change the names , and then that, I think that goes for if anybody wants to do these, Free coaching calls where we go into your personal financial sheet.
We’ll send you the blank personal financial sheet to fill out so that it helps expedite things and people on feedback. Do people really like to look at people’s personal financial sheet as financial voyeurs is the term. If you guys are listening to this on the podcast form, go on the YouTube channel to find this podcast, if you really want to follow along on the personal financial sheet and see all their numbers and a lot that we don’t talk about, I had a lot of questions and feedback over my analogy that I had a couple of podcasts ago, I believe, and then go back to Brian’s one for the full discussion. But this whole concept of, you know what, all right, we’re investing in deals. We are playing these different tax strategies, or at least learning it, maybe doing, getting some passive losses artificially that you don’t have to recapture through the new Taxal fund and you’re doing a little bit infinite banking or a new accredited.
or a new accredited investor banking, which you guys will probably learn as we rolled that out this year. Let me know if you want to try it out, but, it’s working, but alright, people are moving down this path and I think everybody here pretty much, they’re not trust fund kids.
They made their own money and they’re still working. working hard in their jobs or as 10 99. So their small businesses and what is the path forward and how do they keep working? Do they titrate down? Do they work, do they spouse work? How do you implement rep status? And I introduced this Raptor, Toyota or Ford Raptor gas guzzler versus the Tesla model versus the in the middle hybrid.
Prius model of kind of different paths to doing this. Of course, all this is personal finance and what I really urge you guys to do is sign up for the club if you haven’t, and even if you are scared, book that call with me. I won’t rip your head off. I’m really nice when you get to know me. , we get on one-on-one and you.
Let’s go through this and let’s see which one of these paths really fits well for your family and or at least give you some what the options are. And let’s try and. Compressed time cycles for you because time is really the most important thing out there. But if I’m not gonna go into what the heck this analogy was, but what I’m gonna say is go back to the previous podcast that we did coaching call with Brian.
He was also a doctor. I go over this loosely, if not shoot us email, maybe we’ll do more. But certainly if you’re on the YouTube channel, put a comment below. We’ll answer, this is, this kind of, it’s real quality of life questions and personal finance questions, and this is ultimately what I really like because this changes lives.
Like going into a deal, doubling your money, whatever. That’s cool. Tax savings. Yeah. That’s amazing. When, a lot of the doctors will save 150, $200,000 in their first year by doing some of this stuff, and you. , of course. That’s, if you guys heard my kind of confession last week, sometimes when you have a lot of money, that may not mean too much, but you know when your net worth is under a million, a couple million dollars.
This is. Big life changing moments and maybe can be the difference between you having a second child or third chat, or even kids at all, or even, going down a different path in life, whatever you choose. But again, go check out that order podcast and if you have any questions let me know. Or if we ha you haven’t burned up your free intro call with me.
I urge you guys to do. Let’s get you guys going or at least get you a different viewpoint in so you don’t just screw around for the next 30, 40 years of your life, putting your money blindly into the stuff that they want you to do and enjoy the coaching call.
Hey folks, we have another hard work in a professional. Who’s going to be a volunteer to do a coaching call here. So Derek is a doctor. And if you guys like, like you guys are really liked this, I don’t know why people get like financial warism when they appear in on these things. But the truth is not many.
There’s not too many different profiles. And if you’ve gone to the YouTube channel and look for the coaching call playlist, or got an access to our members portal, which is free, you just got to sign up@simplepassivecashflow.com slash club. We actually align all the coaching calls based on networks.
So you can just find yourself and fit right in and find some of the past coaching calls people in the lower net worth than you. And some of the higher ones that you’ll get to at some point, but Dick in here, there. Thanks for doing this. Why don’t you quickly go over a little backstory to get the people that get to know you like.
Sure. Yeah. Thanks for having me. I’m excited to do this coaching call. As far as my background, so typical working or professional kind of investment background. I met my wife in medical school. We were both physicians and busy with training and residency and all that. So we just went down the typical route of basically doing retirement accounts and funneling all our money into stocks and bonds.
We thought were pretty smart cause we were doing mostly low fee index funds. So we weren’t picking individual stocks. We were doing a lot of just basically Vanguard mutual funds. And we’re doing that for basically 10 to 15 years. Cause we had two children along the way. And then just recently, actually earlier this year brother-in-law got me turned back onto real estate.
So went down a really deep dive into the podcast world and bigger pockets on your podcast. And really just started to look into this indication space and rental property space. And this year we actually purchased two rental properties. So one that’s for a longterm property where we actually have some in-laws staying in it.
So it’s not like a typical rental property, I would say. And then a second was a short-term rental property that we got in the mountain area in North Carolina. So we did all that this year. And then now I’m at the space where I really want to start more looking at passive, truly passive, so syndication type deals and maybe even starting to look into like infinite banking.
So basically just trying to get more sophisticated away from just mutual funds, stocks and bonds actually start. Getting some more investments into real estate. And then where are you guys at? Age-wise you guys got kids? So I am 40. Unfortunately the other complicating factor of my personal history is my spouse passed away suddenly like a few months ago, which complicated the issue.
So it’s just me now as a single father with two kids who are six and nine that has also led to this push very recently to really try to simplify my life and simplify my investment strategy. Obviously I want it to be high yield and useful, but I just really want simple. Sorry to hear that.
I know it’s something that all of us as we’re trying to get our stuff together, we never know what’s going to happen. It could be you, it could be them. I was kinda thinking the other day, if it was me. What’s the point. If I’ve gone, it’s all done the simulation ends, but that’s not a good way of looking at it, but yeah.
That’s definitely gets you on the right path or at least tell you what I think. And great. But but right now you’re still working, right? Yep. I work full time W2. I know I’ve listened to a bunch of podcasts, yours included where there’s talk about like real estate status, professional, all of that.
I am not going to qualify for that. And that’s probably years out because the place I work at is actually pretty cool place. It’s a fun startup and I’m definitely, I think, going to continue it at least for the next few years. So I don’t really have any, that’s not in the immediate future to shut off my W2, if that makes sense.
So just a quick snapshot for people listening on the podcast. We also do this via screen share on the YouTube channel. So if you guys want to flip through some of the personal finance sheets as we go through, I’ll pop on over there later the net worth about two and a half. But what I wanted to dig in on, so assets first, right?
You S you mentioned a lot of it is just traditional stocks, bonds, mutual funds, et cetera. So at what I’m seeing is about 800 grand in that stock bonds mutual funds stuff. And then you’ve got a lot of equity in the rental and the primary residence that you guys live in that equity might be wrong. I might have filled out the sheet wrong.
So the equity is probably in the primary residence, I would say between three to 400, depending on what it’s going to sell for in the market. Okay. Know, you didn’t, you did it right. You did it right. You have the this is what it’s worth now that the Delta is, this is the mortgage on it. So I think you got it, right?
Yeah. So it’s three to 400 probably in my primary. And then the two rentals were just purchased within the last, six to eight months, the equity. And that’s definitely not quite as high, although the market is probably somewhere between 50 to 75,000 for each of those. Okay. So we will we’ll circle back around them.
Like we’re going to invest what money we’re going to use first in one particular order, which is always a very common question that comes up, but let’s figure out what your philosophy at this point. So what is your kind of your adjusted gross income? What do you guess it’s going to be this next year?
So right now, my wage is 265,000 per year. For that comes to after taxes. It used to be, my, with my spouse working as well as closer to half a million, but that’s obviously going to keep and then your expenses, right? Not cheap having a couple of kids, but luckily. The wonderful state of California, a little bit cheaper where you’re at, right? Yeah. North Carolina is not too bad. Although the area man is a little bit more expensive than the typical North Carolina, but it’s definitely, yeah. I lived in the bay area before, too. It’s not like San Francisco, other California areas. Yeah. Did you move over to the Carolinas for work or kind of her family?
So I was in the, I used to be in the military, so we were in California, then Colorado, which I actually really loved, but a lot of my wife’s family is from the Northeast area, so we just wanted to get closer to them, but didn’t want to go to an expensive New York or Massachusetts area. So that’s how we ended up in North Korea.
Okay. So what would you say you guys, monthly burn rate for expenses? You use it utilizing daycare or, yeah there’s afterschool, so our kids are in school, but we have to put them in after afterschool or after care. My wife has some car payments. Cause she got a new car. A couple of years ago.
We have our mortgage taxes, groceries, all that stuff. It’s probably around 10,000 give or take 10 to 12,000, depending on the months I used to track the budget a lot more closely. And then that kind of went away the last year or so, but that’s probably about it and that’s including like our, we would set aside money to go on nice vacations and stuff like that.
We lump that in. So probably 12,000 a month would be Yeah. And I think, this is 12,000 burn rate every month. And so you net about 10. So you’re spending at least a hundred grand a year. Maybe that’d be a couple of investments every year. As long as you for you guys, as long as you can stay above 50, 75,000, I think you’re good enough.
You can let off the gas a little bit, whereas some of the folks that are under 1000001.5 million they might want to tighten the belt a little bit. Going at a pretty decent clip here. It’s just a matter of being smart to work with putting the money. I think that’s my next big step is just being smart with deploying all the capital out for sure.
Yeah. I’m not a big personal finance guy anymore, saving the coupons, that type of nonsense. But you guys are doing pretty well. I’ve talked to some people in California where they make more than you yet. They’re barely able to save 30 to $50,000 and I’m like, dude, what’s going on.
It’s typically private school for kids is what flips that up or extremely big outs. But I think, your house is pretty big for North Carolina. You got the salary to support it and that’s actually something I’ve already been in the process of looking at, I put an offer in, on a townhouse that would be smaller to downsize.
Like I’m already looking at a way to either, do a cash out refi or just selling downsides. So I’m actively looking to pull the equity out of this house. Yeah. Let’s so let’s do this. Let’s go over the deployment strategy first and then we can loop back around to like kind of life choices or transitions.
Maybe I can just be a sounding board for you because at this point I know where you’re going at a certain rate, and I know where you’re going to be in the next four or five years. And most times I think you folks and myself included at one time, you operate as in scarcity mode, right?
You think we’re not going to be able to get there. So we’re pinching pennies, but if we make the right moves and especially if you want to downsize that gives you a lot more. Pushes you further down on the financial independence road. So that said, let’s talk about where so let’s look at this 800 grand in your retirement accounts, you had it broken down one of these sheets, IRA versus RA, right?
I think down here. So let me see here. You’ve got the Roth stuff is about 150,000. 401k 4 0 3 BS. That’s the majority at five 50. And then you’ve got the IRA miscellaneous stuff at one at night 90. So one thing I’ve looked at or I’ve reached out to a company it’s like ERP or something was like one of those trying to tap into specifically that 4 0 3.
Is my wife’s. So now I’m, I was beneficiary now it’s mindset. I’m still trying to look into if that’s yeah. Everybody’s trying to sell you a bunch of stuff, huh? Yeah. All right. Here’s my thing. Retirement counts. You’ve heard me say at night, if you just add them, like I think you’re better off paying your taxes on it today while you’re in a lower tax bracket today.
Look, you’re at two 50 or under the three 40, right? And then especially if you believe taxes are going to be going up in the future, especially if you think your financial picture’s going to be going up the future, that argument where to put it into these self self-directed accounts or qualified retirement plans is what they’re technically called.
Not some marketing term or whatever. They’re all the same thing. Solo 401ks. If that works, if you’re investing in non tax advantage, Okay, like crypto stops, but if you’re investing in real estate, the damn thing should be tax free. Anyway, because you get the losses from the tax advantage asset.
That’s the key thing that people glaze over all the time. So I guess my first question is, are you going to be investing in real estate or do you want to be investing in stocks, bonds, which are funds crypto? So I’m still trying to figure out like what I ultimately want my asset allocation to be. I know that I want to, like currently I’m very heavily in stocks and bonds, and I want to shift that and probably get anywhere from 40 to 50, maybe 60% of my total net worth than real estate, probably 20 to 30 ish and still stay in stocks and bonds index funds.
The crypto piece is the one that I’m still figuring out. I actually listened to one of your webinars that you did. I forget who the person was, where they were, making the point that he thinks Bitcoin is. However many million per Bitcoin and all that. And I have some friends that are pushing Bitcoin hard as well.
I’ve gotten a tiny bit into that space. I wasn’t anywhere on the worksheet, but I think 10 times and crypto dabbling slowly and a little bit, a bit pointed, Ethan, I’m trying to determine is that going to be like 1% of my net worth? Just so I have a tiny stake versus five to 10%, and I’m a little bit more aggressive in the crypto space.
So I’m still doing a little bit of research on that and that’s what makes us hard, right? Because if we’re before we start to decide on self directed IRA, solo, 401k, or take it to cash, you got to figure out what that end asset allocation pie chart is going to look like, but you don’t know what the hell that looks like at this point.
Like I have some ideas. I’ll just shoot you. What most people in our kind of mastermind group we’ll do at your network? They might do like pitfalls five, 10, 5% into crypto. The crazy ones will be doing 10%, but as you can see, it’s, you’re not going balls to the wall with this type of stuff.
The St. Wall street bets type of stuff. So sounds a little bit like more reasonable to me. Yeah. I, and then most of ’em based, they start off with that 50% alternative asset idea, which I think you’re hitting down over time. I think that it creeps over to the majority, but I think most people they’re always going to have order or third of the traditional garbage, if you will.
Personally, I don’t have any of that stuff, but I’m not normal. And I think it’s prudent to have some of that stuff so that you’re always in it. So you’re learning. So the idea is you build the alternatives, get your net worth up to five, 10 million, and then possibly come back to the traditional space is the idea.
But if you leave them the traditional space, you’ll never, you might as well stay on the alternatives because that’s what you got you there in the first place. But let’s just go with, you’re going to in the next several years, we’ve transitioned to half alternatives, half, I don’t know, 40, 45% traditional stuff.
So we’ll leave half of this stuff alone in a way. Are you counting like syndication. Yeah, those are what I call alternatives. Yeah. So real estate is alternatives of crazy. Where did I actually be more comfortable with 65% alternatives, 30%, 5% crypto. That seems like a reasonable starting.
Yeah. And I think that’s, again, that’s no, that’s very typical. The people on the family office group that are, have that kind of mindset, but of course you got to get to your 50, 51st. So let’s have that to be an intermediate goal these next few years, and then get to that once you get proof of concept, but that in mind, of course I’m aggressively pushing you to move this stuff around.
What I would probably do in that case is let’s see again, 800,000 of various pre-tax post-tax various IRA, 4 0 3 B 4 0 1 K stuff. First thing we always do is we don’t touch this stuff first. We, you got liquidity, right? You have full equity first. Yeah. So I have home equity and then there’s a decent amount that I have in checking and savings.
And then also I’ll I got a lump sum for the life insurance, a supplemental life insurance benefit. So what would you say like that liquidity with some up to about like several thousand? It’s about 700, although I like to keep some in reserve, like I’m one of those people that probably wants 75 to a hundred.
And so deployable capital right now, I would say comfortably between six to six 50 that I could deploy pretty quickly. So there’s two paths. Ideas I’ll give you like first is what I’ll do. Cause I’ve already know it works personally. And then there’s the one that most people will do that I see, which has all of a C takes him to the count.
The whole let’s try this stuff out first, before we go crazy with this stuff, to make sure it’s real, let’s get proof of concept, call me crazy. Like when I bought started to do out of state turkeys, I bought one property first and then I bought 11 very quickly, but I think it’s prudent to get proof of concept.
Although we’ve had people invest a million dollars in nine months by joining the family office group and building relationships with other peers and then quickly moving in, which makes me stressful for them. But now they’re happy with, 10, 10, 5 figures of monthly passive cash flow. Now, two years later, those are the two goalposts to think of.
I would say normally I’d be more on the cautious side. I think the one thing that makes me think I might be a little bit more aggressive about deploying the capital is just the inflation that’s already here. And it seems like it’s not going to slow down. I don’t want to just sit on this pile of cash for two or three years and have the purchasing power.
Yeah. So let me, those are the two goals, right? So what I’m going to propose just so we don’t have too many things floating around out here is just the bare minimum conservative one, the bleeding and slowly. So what I would do, so there’s a shoot, there’s three things going on here that I’m thinking in my head first, we got to deploy the liquidity first because that’s the stuff that’s not doing Jack for you.
Then what I want to do is I want to take, I want to leak money out of these retirement accounts slowly so that your right now, your adjusted gross income is about two 50. What I want to do is take, gosh. Wow. You’re married file single now. There is some sort of, I think I can technically still file married jointly for the next two years.
I believe my CPS. Yeah. And that was the same for you. That’s part of the reason too. I’m thinking of selling the house. He said it was like 24 months after she passed that thing. I can still get the full half a million tax-free when I sell the house versus the that’s fair. That’s good. So here’s what I’m thinking.
Say that, that is the case, right? If you’re making two 50 and then you leak out the retirement funds slowly to take you up to this three 40 number about right. So you’ve taken a hundred grand out every year for the next couple of years. If it’s unlucky where you don’t get that treatment then I, then you’re already topping up at the higher tax bracket.
Suz. Does that make sense? So you’re going to have to walk this path down the road with your CPA. Okay. But the idea is we want to be leaking out or retirement funds as quickly as possible, but not to go over this red line here. That makes sense. Do you understand the logic? Yeah. Gotcha. And is there like what, like a rank order of how you think those out?
Yeah. Good. Quick question. But let me get back to that school. So
the one thing that Roth IRAs are you’ve already paid the taxes on it and you can take out the contributions tax free penalty fee. So that’s your, you could always be taking that out in a way. But you have so much money, liquidity wise that you don’t have to touch this probably for the next several years.
And like I said before, I’m still considering keeping, a quarter to a third in stocks and bonds. I could, yeah. I, for you, and this is very personal for your situation because you have all this other liquidity at this. I would probably leave the Roths alone. Okay. You probably don’t have to touch them.
So to answer your question your current one, your 401k with your current employer, all, they can’t touch that. So let’s just leave it alone. The next one would possibly be the four old we B from the previous employer, spouses or this IRA
probably do. The 4 0 3 BS, because my logic is you have crappier options, like IRA, you have a bit more choices with it. And these are typically more of a pain in the ass to manipulate. So let’s get it up now. So I would say,
yeah, I would split a number here first would be the, this would be the first year, because if you’re going from 250,000 to two, try, do this year. And you can, there’s a couple more weeks left, but I still have my spouse’s income for most of this year. And then they also paid out like some months for the, yeah.
The income for this year is going to be well over half a million, but it’s going to be married, filed jointly. So next year is really. Got it.
Got it. Yeah, let’s ear mark that for 20, 22. And then we chip away at this 420 23, 20 24, 20 25 and 26. And is it thought that I’m just slowly drawing it out, stay below the next highest tax bracket and then redeploying the money into like syndication deals? Yeah. Yeah. Of course, people are, will tell you, they said the best thing.
It’s you’re going to have to pay the taxes on it at some point, and you’re not getting the tax benefits today. Yeah, that makes sense. Okay. And then the 401k would be probably you could probably, I’m thinking you’re probably going to quit your job. 20 probably. Yeah. The place I’m at, it’s like a startup and just the trajectory of it.
Like I think the interesting work will be done by then hopefully, yeah, actually 20, 27 with IRA and then 20, 28 for the later. You’ll probably come to a couple of hundred sheets by then and you’ll probably, maybe do a backdoor Roth at that point. A lot of this will change in the next three years anyway, but that’s let’s get you going down the path first.
And I would probably recommend. I can’t the only reason where I might make sense to do a qualified retirement plan is if that doomsday scenario where you are limited to single joint or that 170 max, then you might like, again, like for people listening, the only reason that stuff makes sense in my humble opinion for that tax attorney.
But there’s no right answer for this stuff, as it is if two things apply, number one, you’re already in tax Breck, highest tax bracket, which you are, and number two, you have a boat load and your retirement, which you do. Like I’ve seen people with more like a million million, half in their retirement accounts, you certainly have more than half a million, 600,000.
So that kind of satisfies that. And the reason being is it’s oh shoot, what do we do? Let’s just kick the can down. It’s punting and football, right? In a way, unfortunately, in the things you have to balance. And the reason why I’m not super keen on is these damn things cost a lot of money.
I like your plan. I’m slowly drawing this out as you noted. And then you did mention like the backdoor rods. So that was something we had been doing the last couple of years of my spouse. I didn’t do it this year, but is that something you typically the recommended for? For most people know, because they got to get their stuff together and get their cashflow bucket filled today.
Then when you’re already cash laying 10, $20,000, then Danielle do your backdoor Roths after that people do it all backwards. It’s your scene. So you have the general idea and it sounds like you have a pretty good understanding of, leaking things out. If that would be the conservative way of doing it, if you want it to be a lot work or.
You take it out two times as fast and you start to supplement with some some other more exotic tax strategies and stuff like that. Like land conservation, easements, that type of stuff. Then I, I think at that point it probably makes more sense to join the family office group, talk to other doctors, doing that type of stuff.
See who, with operators that they’ve been working with that, at that point, we’re going to save you 10 times as much as your initiation before a group like that. But again, that’s not for everybody, right? I think you have a pretty dang good like conservative middle of the past strategy right here that you could probably implement, but if you want it to be optimized that’s the way you go to, and then you can unlock all this money and get it deployed right away before the great recession happens, I do have a question about the infinite banking concept, which I know you’ve mentioned on some of your podcasts, like webinars and stuff. Is that something I should consider with starting one of those policies since I do have so much cash that yeah. And that was the other thing I wanted to, so that’s always people always geek out on infinite banking.
And then if people want to, I would always say check out the free, if in a banking e-course we have, you’ve got to sign up a simple passive castro.com/club. Or I think if you go to simple pass to castro.com/banking, you can sign up directly for just that e-course, but it would probably make sense in your position because you have so much that you have that 700,000 just sitting there.
And it sounds like you’re on board to leaking out your retirement accounts quickly. So here’s how I would like mind model this thing out like 28, 22.
So I start to build these like timeline deployment plans and then motto how much liquidity you have. So right now you’re starting with 700 of liquidity. And this let’s just say this line is like how much you’re going to invest. How much money are you going to, you think you’re going to invest in 2022?
I guess it would depend on how comfortable I am findings. Yeah, I’ll say like most people they’ll do at least a hundred, 200,000. Again, I see people do a million the first year, so those are the two ends of the, kick the football. Yeah, I think it will come between anywhere between two to 300, depending, whether that’s $200,000 deals or a few $50,000 deals.
He’s probably a good number to put on that. Yeah. So what I’m doing here is just not figuring out how much liquidity you’re going to be left with. And let’s just say, you go with the same thing in 2023, you’re going to have 200, but you’re also speaking out number were leaking out a hundred thousand each year from IRA.
I think I got my, all my rules messed up here, but I see what you’re doing. You’re going to have 300, right? Yeah no. You’re going to have, okay. So the dude that you’re going to start off with four. Yeah. If you have 700 and you invest that, now you go down to five 50. And then you pull out another hundred, but you invest that you basically went down by four by a hundred thousand each year,
or yeah, down one 50 a year, investing two 50 employees, maybe this year, you get really go crazy on this year to go 300, but you’re still, yeah, I like this. I see what you’re doing. This makes a lot of sense. Like then I get more comfort investing in these deals and then what their deals are.
This is why I look, I like working with smart people. You guys catch onto this stuff. It’s still frustrating, but what does that mean? Think my head against the wall. If I can’t, I don’t know a good communicator, but this is what I’m. So you’re going to invest another 300 this year. I actually think what we’ll probably do is an east each year you might even two X, this investment probably was going to happen.
But yeah, I think you’re probably right. Cause I’m really starting to lean into learning more about this and I’m strongly considering joining your mastermind group, but really getting a strong network of like good syndicators and understanding this space more comfortable. Let’s just say let’s just bump it up a little bit.
Three 50. And I think that went to three 50. Let’s just say you do get a little bit more aggressive, like we’re saying, that was 3 50, 4 50. I think that’s how it is. Okay. So you’re going to, you’re going to basically burn through your past liquidity in three or four years. Okay. So what I’m trying to do is I’m trying to motto how much cash liquidity you have and then how much. So it’s two things. My Jew, this is just real general rule for how much money should I put into my infinite banking every year for six to seven years.
So my general rule is take one third of your annual debt. So for you guys are saving a hundred grand a year, so that’s 330,000 or 32 grand every year, but you have a big amount of liquidity, which we’ve modeled on it, estimated this line, what it’s going to be. What I want to do is estimate, I want to utilize this so that by the year, by the middle of the policy, you should be using this up.
Best as you can. So this is really, this is where, I’m just shooting darts out there to the universe a little bit, but my gut tells me that I’d like you to put in at least a hundred grand because that your liquidity is so high. So I would say on the low end, 130 grand every year, 130 grand every year.
Okay. Yeah. But you want to know what I would do? So this is the, this all depends how you create the policies, how much commissions the agent wants to take, right? So you can crank down the commissions, but, and what that does is cranks down the life insurance portion, the 10 to 20% is the best practice.
If you don’t want to gouge their clients with permissions. Which most people do. It’s like a 50, 50 split. The other good benefit to doing that is you don’t have. You may sign up to do a hundred thousand dollars a year, but only $10,000, really what you have to quit in that year. So that’s the beauty of it.
And I, that took me like three years to latch on because out here we’re all, you’re going to be our good as citizens are like if we save with a life insurance company, we’re going to put in 200, should we have to put in that every single year for six years to a total of 600,000.
But in reality, all we have to do is put in 60, maybe a hundred grand and shoot, we fit that in the first year. Yeah. I haven’t been in talks with somebody who does this and it was, I forgot what the once it’s topped up to one 30 or whenever you’re done the policies. Self-sustaining.
Yeah. And as long as you hit that, if it was a 90 10 split with 10% of the it being insurance premiums, once you hit that, you’re good. You don’t have to worry about the policy cannibalize. Or for the longest time I thought oh, you got to put in the whole thing, not necessary. But if it was configured in a jacked up way where it was 50, 50, 50% of it.
So on the 600,000 fully commit policy for six years, a hundred grand every year, you have to put in 300, that’s a bigger nut. You have to keep funding as opposed to 60, the more important number on these is basically what’s the total amount I need to put in to get past the point where it can cannibalize itself, like where the fund is self-sustaining and if I stop funding it I’m okay.
The policy still, right? Ideally you want to create the biggest container size without losing such container. So for you, you could probably, you have, I just add up this line here R. And you’re going to have it. I’m just looking like on average, you’re going to have maybe 50 at time.
Again, this is the low end one 30 every year.
You know what? I would get just get a max 10, $10 million policy. So $10 million is an important number because at that Eagle higher than that, you got to show a whole bunch of BS documentation to get higher than that. And really you don’t really eat more than $10 million because $10 million typically is a payment of 50 K or six or seven years.
I would just again, this is just what I would do, right? This is more of a progressive way of doing it. I would just start off with a 250 K a year. And then you fund that, maybe you. Backdate it, if you’re a, depending when your birth date is and you fund that first two years right away or worse, probably what’s going to happen.
You go to 50 and then you go to 50 and then you start to just fund the insurance premiums from there on out, but you’ve already hit your watch to your minimum lot. So it doesn’t cannibalize in their first year. So good. Yeah. That kind of answers the question that I had just jotted down to ask you, which was like, where am I going to park my money now?
Cause obviously you don’t get anything on savings or CDs. And I had I have to open a bunch of separate bank accounts. I’m not above the FDI seat limit. So I kind this option. If I can, fund those basically double fund and deploy some of that capital that funds taken care of. And then if I put all that money in pretty quickly, then depending on how the policy is written from my.
With anywhere from a month to six, I should be able to start borrowing a decent amount from that policy to put into. You can do it the next week, get the money back out next week. So this is one of them. This is this one’s funny, right? Because it operates like a hilar account. But it’s still like people, even in the mastermind group, they’re oh, I got to pay interest payments to myself.
I don’t want to own, that stresses me out. That’s $400 a month. It’s no, that’s just a mindset thing. You’ve got to get over that. It’s just the way you’re supposed to use this thing. If you put in two 50 and now your cash value goes down to 200, and then you put in the next two 50 the next year, maybe it’s worth for, I don’t know, four 50.
It’s just call it that the next year you, what you want to do is you want to take out that four 50, and put that into deals or crypto. Whatever. I’m assuming you guys have good contacts for these infinite thinking. Yeah. Yeah. Just yeah, go through the e-course and then, I would say just it’s a couple hours for do that.
E-course but it should get you set up and then yeah, we can refer you out from there. What’s your kind of studied up, but they’re commodities, right? They’re all with the big major companies, that’s really what you want. But the question is where are you going to put the money?
And that’s really up to you. You can put it into deals. Some of what some people do is they, I think a mistake that I see, especially for somebody in your cases, like they want to leave their dry powder. And only take out. You don’t have like that, dude. That’s not what this is for. You got to take it all out.
Unless you’re a business owner that needs a lot of dry capital for yourself. 20, 50 grand and checking 50 grand is way more than you need. But 20 grand just to float your monthly expenses every quarter and then maybe 50 grand to leave it in here. So you deploy 400 in this case, that’s really the way you want to play this.
And then if you want to do 300 of that 400 and deals and then a hundred crypto, that’s how you do it. Okay. I didn’t even, I hadn’t even looked at infinite banking for crypto. I was just looking at it for syndication. So that’s good. No, you can use the money to go to Disneyland. You want it to, obviously you’re not going to do that.
People who listen to this podcast, don’t do that stuff. And, or you could use this as a way better than 5 29 plan. Hell of a lot better. I don’t know why anybody does a 5 29. Oh, I even forgot to put that down. We do have 5 29 plans for our kids, but we shut them off, I think six months ago, after listening to your podcasts and other ones, like those have been shut off, they each have 10,000 in it okay.
Yeah. Just shut them off because just, I would just withdraw it just for simplistic music. It’s today I was trying to get rid of my health savings account because I got 15 grand in there, but it’s like what, a pain in the plug to have this thing. And it got a PM through chip bucks every year.
Like really a 2% adds up all the time. Yeah. 300 grand for, do you have any thoughts about the, like the lump sum? What are they called? MEK plans are like for infinite banking, like the life insurance policy where you can do the lump sum. Instead I spoke to somebody the other day and they were like, oh, some of the.
Drawbacks are that? I think it was, if, the distributions were not taxable, I believe, versus in the other one, they are, there was some differences with it, but I had never even heard of the lump sum thing until I spoke to somebody. I don’t know if that’s something we’re going to have to talk to our experts on that one.
That just, there’s all these kinds of other like variable life. That’s, like they miss the point. They’re like don’t you want higher returns, right? No, we want like liquidity so I can go invest it better stuff. I don’t need six, 7%, once your net worth goes over five, 10 million, then you may come back to that type of stuff.
That’s I think when it makes more sense, but there’s a lot of. Shady stuff, especially in the IUL people’s trends stuff, missions on that are extremely high. There’s a lot of like breasts of salespeople running around saying nonsense for that. But some countries companies actually like really aggressive of teaching the agents.
They have this like farm school where they teach people because it’s such like a obscure product with high commissions that it makes sense to just train trainers or just make real estate agent armies. And out there one in a hundred will actually sell a policy, but it’s pretty good commissions for them at the end of the day.
But basic IPC. This is what it’s for. Once you go over 10 million, I think that’s a little overkill, especially because, you want to get this money working at four or 5% tax free. And then another thing to think about is because you’re the only one for your kids now.
I mean it’s, it would probably be prudent, single point of failure at this point. Now that’s true. That is another good benefit of opening up one of these. And that’s it. You guys have, you have a trust build and all that stuff dating? Yeah. I’m in the process. I got to read it. We were in the process of getting it set up and then my wife passed away before all this stuff was notarized and finished.
So it’s a little bit of a mess. So then I was obviously not in the right state of mind for quite a bit. So I’m finally getting my brain back from brain fog and I’m going to start cleaning that up. Yeah. Yeah. I think that’d be a good to talk to other people too. I mean the questions and like what, who watches your kids?
I’m not giving any advice on that and the cyclist. No, I don’t know. I wouldn’t even trust myself with my own kids.
But yeah, it’s, these questions come up. And it’s hard to find other people doing the same thing. Yeah. You technically just listen to your attorney, but I don’t know if that’s super prudent, you need other viewpoints too, but getting back to the numbers here. If you do that large of a policy, once you fund it up to you, you have that 500, 300,000, you’re going to fund it halfway.
That’s well past the point that it’s going to collapse on you, black hole one on you. So you’re good. And what’s potty going to be happening around year three or fours. These deals are going to start to refinance, or it will be full cycle at that point. And I think that’s the point where it’s a kind of a, make it a break.
It’s if you don’t fund the policies anymore. Cool. That’s fine. I think what’s probably gonna happen is you get that windfalls and you’re like, oh yeah, let me just find the policies the remaining of the three years. And now you’re set up. I like it. That makes sense. Cool. Yeah. But bare minimum, one 30 and I think what most people do is like they, they get up small balls.
Like when I first started to do this, I did a $50,000 policy every year for six, seven years. And then it was just cool to use it and be like, oh, this is like a heat lock. Oh, what is that thing on my portal? And saying, I owe $5,000. Oh, that’s just the interest. I don’t care about that because my cool friends actually know about money.
Don’t freak out about it. And then you add a zero on top of it, once you get the hang of it right in a few months, you, you withdraw money, you pay it back. And then some people in the family office group work doing this site, instead of getting the loan from like Ameritas, Penn mutual guardian, they go to a third party bank instead of paying 5%, they pay 3%.
If you’re doing a larger policy, like how you are, like that adds up, 1% on 600 grand adds up.
Yeah that’s the IBC thing for you. And I think, if you want to play it more conservative, only go into a few deals at the minimum on the investing side, I’ll play more rested on this stuff. Okay. That makes sense. Yeah. And I think as far as the investment side, like I’m willing to ramp it up.
Once I feel more confident in how I can bet, sponsors and deals and have a good network of people who have invested as a past and. And then also, like we said, you could really ratchet this up by getting more aggressive on the withdrawals from your IRAs, right? Mitigate the higher income by conservation easements or something like that.
If it’s still around, if you’re willing to, be careful and work with the right people at that, of course it’s on the list of transactions freaked out. I got a Google debt and this is naughty. Oh, I don’t personally do it. Because I’ve gotten to the point where I don’t have active income, it’s all passive.
And that’s where you’re going to get to at some point. But how can we bridge you to that promise land in five to six years when most of your stuff is passive, so it can offset passive losses. Okay. We got a plan on the IRAs a little bit. You’re such, this is a good call. Your situation is confusing and there’s a bunch of things moving around, talked about IBC. Let’s talk about like lifestyle and just cause that may increase your, if you sell that, you’re gonna stay in that house.
You guys live in now or downsides or, but the plan is to try to sell I’m a little bit constrained in that. A lot of our family is close by and they’re the ones helping a lot with the kids now and they’re in a good school system. And so like I can’t just pack up and go wherever. So a little bit constrained in the market where I live.
It’s quite hot, which is a double-edged sword in that I think my house would go pretty quickly for a good amount without having to do a lot of work to get it ready. Then I have to find something to replace it with. But yeah, the ultimate goal is like, our house is a decent sized, a lot of land and just way more work than I need.
And it’s too big for just one adult and two kids. So that’s definitely something that I want to do is downsize get some equity out. And that would also have the function of reducing my payments, monthly mortgage payments. Anyway. Yeah. I would just say from a, you don’t need to downsize, like some people I’m like under half a million dollars net worth, I’m like, you need to do, you’re already behind in the game, right?
You’re already in your forties and fifties, you have to do this stuff, but for you, you can keep living there. That’s cool. Again, they say you never want to listen to the wherever the heck they are, but they say don’t do anything like drastic for the first year or whatever. But I will say that speaking from the experience from some of the other folks who’ve downsized, they’ve gotten away from living in the big house.
And they’ve gone to one of the luxury condo where now they enjoy it because now they’re hanging with their kids. They got the pool, they don’t clean. It’s just simple, simpler, living, less headaches, nothing breaks. So if you’re going to the more simplistic life, that’d probably be the way of doing, that’s not a bad way of doing things.
I actually personally I think I might like the condo life a little bit better, less nonsense. Don’t have to clean my own pool. That’s what I’m looking at a other con condo or townhouse where there’s community pool and they take care of all like yard maintenance. And it’s just, and again, just getting back to the simplifying things like it’s become clear.
Like I don’t need a lot of stuff, but I just want, time with my kids and possessions that I have enjoy and travel and. Yeah, you, in that primary residence you have now you got to worry about half a million of equity in that thing. So we’ll depend on. So we got, it was a 0% down cause we had a physician’s loan, which was nice.
But the, and we only bought it just under six years ago, but the market’s gone up so much that I’ve talked to a couple of different agents and looking online. It would probably be between three 50 to 400, depending on what it sells for is about equity that we would get. So one thing, this is a tax thing, right?
You’re only able to write up like the exempt from what a $4 million of that’s what I thought too, because it’s just me now. But my CPA said within 24 months of my stuff’s passing, I should be able to get the full half a million. So you’re not thinking you’re not maxing that out. Yeah.
Not quite, but yeah. If I stay in this house for another couple of years, then I’ll be above, the half the quarter million max for myself. Cause then it’s going to revert to it’s just me. It would just be the, yeah. Like it kinda has a good tax need, because you have, it’s something I wanted to do actually, even before this happened, I had already been talking about Hey, we should simplify.
So it’s if the right house comes along, that I can get, I think I’m going to do it. And that’s yet another windfall and more cash that I can do. Yeah. Because if you don’t vote before the year two, you’d use that double tax exemption thing. Yeah. For me, I am, I don’t want to push you either way, unless that’s, before I heard that, I’m like, yeah, you got to just move out, move out and buy it back again.
Feel that’s what you want to do. I don’t know if you can do that. It’s not like a wash sale, but. Yeah, no I think it’s a strong possibility. And even where we live it’s a, it’s more of a isolated subdivision and there’s not as many kids around and there’s plenty of neighborhoods where a lot of their friends from school are that would be cheaper and smaller and have a lot of the things we talked about.
So yeah, it’s definitely on my radar. And that would just accelerate what we talked about. Give me more cash to put into these funds. Yeah. But maybe think about it, I think wait until the spring time or summer, that’s when the Marcus pulls the hottest the world doesn’t end before then.
Yeah, no, I got, yeah, I got my I’m like, I’m looking now to potentially hop on something. If somebody putting something on in December or January, but my goal is probably listing my house in the spring. Cause that’s just, it looks the nicest, it’s the hottest market. But it stinks like, fuck Matthew he’d dump out for a hundred grand.
You put it into an even bigger infinite banking follows. Are you just doing the banking right away at 5%? No. 2020 grand a year. It’s a couple of grand, a couple of grand a month. You always want to do this equation and think how does that two grand a month changed my life if you had to use it?
That could be a lot of less home cooked meals eating out less the more time, right? If you can use that $2,000 every month, that is time or for time. That’s money will work. That’s a good move to create that cashflow and that’s everlasting cash. Let’s just not just running through your pile.
That’s how I would look at it. So you get to live in the condo, get the free, free maintenance on the pool. But what are the downsides of that? I don’t know. Is there a downside of. The only downside is less privacy. Like a lot. I have it’s great. Private lot. It’s gorgeous. Like you’re by nature and it’s very private, very nice.
But I think the positives of moving outweigh at though the just simplifying life, getting a bunch of equity out and redeploying it, getting my kids in the neighborhood with a bunch of their friends, I think definitely outweighs the privacy concern. That’s why I asked cause some people, when they talk to the spouse and they’re like what’s the downside if they can’t communicate because there is a, you just don’t want to do it, which is silly.
You’ve obviously been able to voice your concern, just privacy. But so what if you took $2,000 a month and you bought the penthouse instead of the other one, right? You rented the penthouse instead make $2,000 pumps you into much higher or exclusive community. So think about it like that. The term life, you could get that big of a policy.
You don’t have to pay this anymore. So that feeds up.
That’s been done then.
Yeah. Think we covered a lot here. Any, anything else you want to? No, I don’t think so. This is very helpful. Thank you. I’ll play with helpful to people listening and then I will definitely check out that e-course on the infinite bank. Yeah. I think
trying to think what is the first domino that’s got fall here, but either the house, there were three things moving out of the house. I think you can delay that to the spring or summertime. So that’s third on the list. You already have liquidity, so you could have the, and then you don’t have to do the taking out of the retirement accounts quite yet.
It’s a rough situation, but if the banking seems to be the first domino here, which you’re listening on the podcast, that’s typically not it. If you’re screwing around in front of banking stuff, doing and wasting your time, especially your net worth is under a million dollars. You haven’t invested in anything.
Yeah. I agree though, in this case it makes sense. Cause it gives me a little bit of time to deploy some of this extra capital and then I can get spun up on what’s indications. I want to invest in, educate myself. The house can come later in the year and then slowly peeling away. Some of that retirement stuff can start happening at any point in 20, 22.
Once I have a better idea of my adjusted gross income as well, and then decide how much I’m going to pull. Yeah. And I think once you get moving down the road, once you deploy a million, you should be making. A fraction of your salary. And then when you double that, we should be able to start to see the light.
Once you deploy about a million or 2 million, you start, it should start to see the light on when exactly you’re going to wit yeah. That, that dovetails nicely with where I’m at now, again, the place I’m at, it’s a lot of fun to work at. I enjoy it, but I reading the tea leaves, I think four to five, maybe six years at the most actually doing what I’m doing and then be ready to you write out the the startup or five years that, but you don’t want to go back to practice.
I don’t want to do like a typical family practice. Seeing 20 patients a day, every day, that’s too much. They would want to do that, but it’s something like that. It would be part-time or it would be like part-time remote. There’s a lot of, remote providers where you can work anywhere you want in the world and do telehealth.
And I could do that. Part-time and supplement with my past. Pretty much lifestyle. Yeah. Yeah. I think you’ll have enough at that point where you don’t really need to make a hundred, hundred 50,000 a year. Part-time right. Type of thing. Yeah. But I know you’re you being close mode going 70 miles an hour at that point, but then we’ll see in the next several years, we’ll see if you get bored or not.
You want to yeah. That’s the thing, like I, I do like healthcare, it’s fun working in healthcare. The U S healthcare system is so broken. So if there’s cool projects or companies to work on to try to fix stuff like that interests me. But it would be nice to be in the position where I can decide, what’s project or work on.
I want to take on. And if there’s nothing that’s interesting or exciting or what the work I can. Yeah. If you’re the current employer, the startup thing, is it pretty time intensive or is it. It’s hit or miss. It depends. So it’s actually, like some days are less than others. It comes in fits and starts like a typical startup.
So it’s not a lot of patient care for me. I’m doing a lot more project work, data work, and all sorts of things where sometimes a big project comes along and I’m spending a lot of time one week and then the next week it’s relatively slow. That’s awesome. If would you being the primary caregiver, I would manage if you can’t handle it, you need to step back.
You could. Yeah. If you stuff all this money into infinite banking and you get maybe a quarter million, half a million into deals making 10%, you probably have enough to definitely sustain your costs of living. If things get too busy, like I know you have the option.
To do that. Yeah. Right now it’s not too bad. And the good thing is most of the time I actually get to work from home, which is nice. So even though, even if it’s busy, still have the time with the kids. And then a lot of the work I can do at night when the kids are asleep, just the nature of the startup and I’m doing it.
A lot of it’s project work worker, things I can literally do at 10 o’clock at night while they’re asleep, I can just sit there and get my stuff done. So it’s actually not too much of a hassle. And we have a lot of family nearby that spending time with the kids and watch them a lot and hang out with them.
So far, it’s, I think I’m in a good spot, at least for the next couple of years, if things they are you is a family decently well off where you the, you guys have more wealthy folks and the rest of the family is pretty well off. At least the ones close by. So like my mother is about ready to retire.
Like she does pretty well for herself and she’s transitioning, she’s going to probably transition to working. Part-time she’s. My wife’s parents. I’m not super well off, but they’re fine. Like they’re the ones actually in that long-term rental property we have, and they’re paying well below market rates.
That’s when we’re basically it’s cashflow negative. Like we bought the property, they’re paying the HOA and the mortgage it’s cashflow neutral for us, but it’s building up equity and it has them in a nice spot basically under market. So that’s like a win-win what is their long-term like, they’re going to agent place at least for now.
Yeah. They’re healthy enough and doing well enough. I don’t think there’s any imminent plans for them to go to letter like that. And then also my brother-in-law lives close by as well. And he has his own marketing company and does pretty well. Okay. Not, I live in Potts basement, sealer chat. Okay good.
Yeah, because some of the people that, they’re like obviously the most, often their families, so they have to also keep in mind, providing or in a way, thankfully everybody else in the family is fine. Yeah. Everybody got their stuff together, so that’s good. That’s good. But yeah.
Yeah. Yeah. Any, anything else Derek you guys want go over or? No, I don’t think so. I think that was, yeah, very thorough and super helpful. Okay. Thank you. Cool. Yeah, folks, if you guys like this, you guys wanna volunteer the stuff shaped the folks that email team at simple passive cashflow dot.
And if you haven’t yet joined the club, I book your free onboarding call before I start to outsource it out to the team. I won’t go as in-depth into this type of stuff, but we’ll try and knock it on 15 minutes or 20 minutes or so.
What’s up folks? On this video, I’m gonna be going over the action plan for your 2023 taxes. I’ve been going over what really moves the needle and what really doesn’t work. I think the stuff that is out there in the mainstream, and this is how I’ve found to lore my adjusted gross income drastically over the.
Just a little bit. No, I’m not a cpa. I’m not a lawyer, but I also don’t have a day job like a lot of those guys, and this is a lot of the stuff that I’ve learned from working with other accredited investors through our business and just through my own travels as an accredited investor and an owner of 8,500 rental properties. Here we go.
The first thing I’d like to just identify, we’re not gonna be talking about the lay mold stuff like the 401ks, the Roth IRAs, even solo 401ks, IRAs, stuff like that. . These are all things that I put in the category of small ball type of tactics, small ball, and if you don’t know baseball, right?
This is all kind of stealing bases. Taking walks, little base hits what I wanna do because my time is short and your time is short, as a higher income earner is. Really focus on the big rocks as opposed to the things that don’t really move the needle. Yeah. At some point, these things, which you maybe should jot down or just check out on the YouTube channel, take a screenshot yourself for later, are things that I call optimizing.
the big rocks out of the way, but just in case you want to know what I’m talking about, and you’re somebody who likes to focus on the small stuff. I personally did at one time myself. Again, that’s putting me money into tax-deferred accounts such as IRAs, solo 401ks, or playing around even Roth IRA accounts.
All that stuff just shifts the taxes around. And if you’ve taken a look at some of my other stuff on my past Podcasts you guys can check that out at simplepassivecasual.com/QRP. I really explained the reasons why. There’s no reason that you should be in any of these kind of so supposedly tax shelter accounts, unless your net worth is, I would say four five plus million net worth.
or you wanna really hold non-real estate assets for some strange reason. The next kind of item here is, timing your game harvesting. If you’ve suffered a loss in crypto, which you probably did in the last couple of years, wouldn’t be a bad idea to sell the assets and buy it right back.
Crypto and taxes are its infancy. There’s not really this like 30 day wash rule that you have with stocks. I guess you can make lemon with lemonade or and get the deduction there. But that’s another. . The other one is, income shifting. , this is the whole paying your kids concept.
The whole idea is, your kids don’t make as much money and you’re in, they’re in a lower tax bracket as you. Therefore, if you throw them a bone, throw ’em like five, six grand. You can shelter some taxes that way at their lower tax rate as opposed to your higher tax break. And again, here’s where I’m talking about like small ball kind of things.
Whoop, they do. If you save 10% on your taxes on that six grand right? Yeah, you’re saving money and I don’t wanna phoo this, but again, these are small ball type of activities.
Even smaller than that, buying things that you may need for your business or your real estate rentals or helping you become a better investor. Maybe an iPhone, maybe a printer, or some iPads, maybe even a watch for all I know, right? The, it has to be reasonable, one part of your business. Running these things to your business is a great way to pay for things that. bought anyway and gotten a sort of discount on it because it was a deduction.
Now when you really add this stuff up, does it really move the needle? No, it doesn’t. And it is this same thing like. Buying a rental property next to you.
Know your relative’s house. Your family’s house. And I always tell people like, yeah, it makes sense, but like really how much money you’re really going to is the delta there? How much money would you go to see grandma’s house? You really spend there to be able to deduct and justify to, I would much rather be in a better location, better submarket, or even a better value idea like a syndication.
Who cares if it’s next to grandma’s? and where you can get the, write off some personal things right there. And this is a another example. Play the big game, the big picture. And this are these small ball activities. The last thing that I think a lot of business owners will do is like a S-Corp strategy where they’re playing these salary dividend split.
As W2 workers are 10 99, most of you guys are getting killed with pseudo faf fica South self-employment taxes which get added on top of your federal and state taxes. But when you have a scor, you’re able to carve off salary portion and then the dividend portion. Then dividend portion is the portion that doesn’t have to be subjected to those extra layer taxes.
Kind of a cool thing. , but again, these are small ball activities. Those extra taxes might mean an extra 10, 15%, but on how much, like a hundred grand. Yeah. I guess that might move the needle. Might move in if your, you’re moving $500,000 in a dividends, but at that point, you’re probably better spent, minding something else or what.
I’m gonna be going into. But I’m gonna be going into really the big things that I focus on my clients. The first one, especially for the high income earners, making over $340,000 is charitable donations.
Yeah, giving us stuff away at a Goodwill, but what I’m really talking about here is land conservation easements. Now, I’m not gonna be going into this particular one because it is a Pandora’s box of really explaining it. What I would recommend is go to my website and signing up at simplepassivecashflow.com/club or you’ll get a lot of free content to learn about these types of more advanced tax tools.
But what I also wanted to really go into was, A lot of this stuff is predicated on managing your adjusted gross income, not just deferring, right? Deferring was part of the last slide where it was small ball activities. What I’m talking about is just lowering your AGI.
Through a couple of ways, which I’m gonna get into here, but if you’re able to lower your adjusted gross income, now you’re able to pay lot less taxes. And the more you lower it, the better it gets. So if you’re making $400,000 and you’re in this 32% tax bracket and we lower it a 200, not only do you shelter that $200,000, don’t pay taxes on it, but it’s at a higher rate, right?
And that’s because our tax system is this progressive tax. What I recommend most of the clients do is really try and get to this red line here that I have shown, and this is a point where the break between the 24 to the 32% range, which is a big gap these days, I’m actually saying, maybe even try get into the $200,000.
A g I range at 22%. Of course, I’m talking for merit follow jointly. The, for the single folks. It’s a little bit different on the left side of this single filer status here. But, this is the concept of this is the big things as opposed to the small things that you should be looking at.
The question is, all right, cool. I get it. And this is the 1 0 1. In fact, this is more like the 2 0 1 tax class. How the heck do I do this right? Easier said than done. Here’s a little bit of review for some people who are brand new at this. . And you guys can check what I’m, I’ve got this diagramed in the right way.
On the left side here, I have ordinary income. Ordinary income, boo bad, ordinary income is like the W2 income or, and even 10 99, it gets hit with all these taxes, your ordinary tax and your FICA social security, about 15% on top of the zero to 37%. . We don’t like this stuff. Why? Because it’s high tax. What we want is on this other side of the fence, which is the passive income.
Passive income is cool, right? Passive, right? But other than the fact it’s from a tax standpoint, it’s actually defined as passive income, which can be offset with passive losses, passive activity, losses, suspended, passive activity, losses. We’re gonna use just the short word as pals, P A L S. Kind is cool, right?
Cuz they are, you’re a pal in this respect because you can use these passive activity losses, which you get from large syndication deals or rental properties. The fact that real estate degrades over time on paper, these are losses that you can take to offset your passive income. And when you are in larger syndication deals that do cost segregation and aggressively right off the.
which is a good thing. You’re often able to take, create a surplus of these losses and show a big red. One of the things that like really boggles my head and my clan’s head is in we try and show this to the banker or the mortgage lender and they look at like your tax profile, and you’re like, but you’re losing money.
Yeah, heck yeah, we’re losing money because all the depreciation and they just don’t get it. And just like how people don’t. Forget the 401ks. Forget the Roth IRAs. Forget the IRAs, right? That’s all deferring. What we’re trying to do is lower our a g I today doing these types of things, so getting back to using passive activity losses to lower our passive income.
Again, that’s zeroing that out. Now we cannot use passive activity losses to offset ordinary income right from our day job or your business because it’s separat. , there’s this red line of do not pass, sir. Now, the only way to get past. , there is a way to use their passive losses off offset your ordinary income.
And we’ve done this many times with clients, a high paid doctor making a million dollars, lowering their income to whatever they want, depending how much passive activity losses they have. They do this with a thing called real estate professional steps. We’ll call it reps for short. Now I’m not gonna get into too much of the detail.
Again, sign up for the club, simple passive cash.com/club. You get the eCourse and also check out the taxPage@simplepassivecash.com slash tax to learn more on how to qualify this and to review what we’re talking about. But in a nutshell, if you are able to qualify for real estate professional status now this kind of red line of demarcation goes away and it’s a bit of a free for.
A good free for all for you because now you’re able to use these losses that you get from the real estate to offset and lower your income. And this is where, a high paid person getting, million dollars of income a year, all ordinary income is able to use the losses from the real estate to lower that to whatever they want.
Now there’s a kind of a overlying portion of this that I think gets lost and this is where I come in, for those of people who, sign up for the club form and we get to know each other, I can help you walk through your personal situation accordingly. And then this is really gets into personal finance, whether rep status makes sense and where you are in terms of ordinary to passive income.
Most people I work with, they have a mostly ordinary income, right? They’re doing it the traditional way. They have traditional investments, stocks, bonds, mutual funds. They don’t really have too much alternative investments and pause there. I don’t know why they call it alternative investments when you know real estate is an alternative investment, but
I don’t know why you would call it alternative when it seems pretty traditional to me anyway, but anyway, that’s the terminology we’re using. It’s an alternative investment and real estate is. Something that per the iris code gives you a lot of losses. Again, pals. Our pals, we like ’em and at this point we’re able to get a lot of these losses to play these different games at our taxes.
But if you look okay, what do I do? Here’s what I’m saying, you gotta move away from the traditional investments because that stuff is portfolio income there and there’s no losses. You can’t do anything. And this is exactly what the government or society. , they want people to stay in that garbage so that they pay a lot of taxes.
And oh, by the way, the big brokerage fees are killing you in this process. , when I owned a rental property, I was making like two, three times better than what I was in the stock market. If you don’t believe me, check out an old video I did at simple passive cash flow.com/returns. I go through the numbers and show you exactly, the returns on an investment so you know how you’re making money through cash flow appreciation, the tenants are paying down your mortgage, and that these tax benefits all combined two to three times greater than what I was getting in that 401k nonsense.
But until you start to see this stuff for yourself, you don’t really get it. Hopefully you got from this video, you know this other alternative goal, which is forget about deferring with all the traditional stuff. Get into alternative investments so you can get these losses and over time your passive income will grow also, but also grow as a percentage in terms of.
In comparison to ordinary income because once that happens, now you don’t need that real estate professional status tag, right? If all your income was passive, which is personally where I’m at and a lot of my clients at who invest quite a bit, right? They have a lot of assets real estate assets that proves to a lot of passive income, and especially when they leave their day job, most of their income is passive income and they don’t need rep.
To offset that if they have the passive activity losses. So it becomes this kind of strange paradigm as you move through this financial journey the right way, in my opinion. Picking up alternative investments for the passive losses and then you start to get from, you start to get away from ordinary income and go to passive.
It almost is like you’re. Running paying a lot less taxes, a lot more like cleaner, a lot more efficient way of doing this. And that’s just it just makes so much sense once you understand this whole paradigm
And this is my bucket system that I talk a lot about people, the people ask should I do a Roth theory and Ira solo 401k? To me it doesn’t really make sense until you have today’s cashflow. Figure it out. And what is today’s cashflow bucket? What’s this whole bucket system?
I talk about a lot about my clients. The whole bucket system is. Imagine three buckets. The first bucket is get yours today, right? And I define this as 10 to 15, maybe in $50,000 of passive income a month. Typically that’s gonna be anywhere from three to 5 million net worth. Accumulate that much, and at least that much assets to produce that for you so that you’re living on good life.
That’s a great life. And at that point, you can’t really spend. At that point, that bucket fills up and it’s then the overflow spills into that next bucket, and here’s where you start to fund those self-directed IRA accounts, the solo 401ks, that type of stuff. But if you notice the way conventional financial dogma is structured, , it’s, they say to fill up this stuff first, and to me it’s completely backwards.
And the sad part that I see is that people never get to filling up their today cashflow bucket and they have to keep working. Maybe that’s how they created it so that we all keep working maybe, but, , you know that at that point, once that bucket gets filled, then you start to fill up nonprofits and make me make a mini foundation.
But most people don’t get there. And I think that would, at that point, you would probably have to come out to an event, learn the insider secrets at that point. But for now, just, in a quick YouTube video, just understand, create your cashflow bucket today outside of the tax.
Vehicles so you can get the losses. So you can use these losses to offset your taxes to date, and that’s how you’re gonna have more money to invest. Do other accredited investor banking. That’s another tactic that we have and that’s also in the e-course that you guys can get at simplepassivecash.com/club signup there for free.
What is up? Investors Happy 2023 if you haven’t heard of it yet, or you’re still making that mistake of writing in 2022, but here we are, another year, and another new group of folks coming to the retreat. and I am excited. It always we’re getting better and better at getting people over the hump of, investing in alternative investments, getting over that queasy feeling that, taking out debt outta your home and getting your lazy equity outta different places and putting into stuff such as real estate that can power other tax benefits and better returns.
Today we’re gonna be doing a coaching call, and if you guys like these coaching calls, you guys can volunteer for one for yourself in the future. Make sure you join our investor club@sypasocasual.com slash club and email the team and we’ll try and get you lined up if you guys are more than willing to do something like this in the future.
Now as I’ve been getting better and better, I’ve been seeing different case scenarios such as the doctor that we’re having today. And you know what, I wanted to just briefly talk specifically today, and this probably was one of these categories.
A lot of people here are first generation net worth. You weren’t born with money, you weren’t a trust fund kid. Now maybe some of you guys are, and I would probably, I look down our larger investor list. I think more than 800 of you guys. The US said at least $50,000 with us thus far. And I would probably say less than maybe 5% are people who were born with more than a million dollars net worth.
So that means most of you guys out there are folks who’ve saved hard, worked hard, maybe put your money in the four oh places you shouldn’t have. And I think you’re starting to learn what a mistake that was. , it’s all a transition. It’s all part of the journey. And what I’m seeing is, you have to have a high amount of W two or 10 and nine income, or in other words, ordinary income.
And you, if you’re a good investor, maybe you have some stocks, funds, mutual funds, or playing around with that type of stuff, and you have portfolio income. Portfolio income, order income bad, right? Because passive income is what we want, not only for the fact that it’s, it’s passive lay on the beach mailbox money, but more in terms of taxes, right?
Because when you talk about passive income can be offset with passive losses. Pal is what we call for short. The new tax PAL fund that we have coming up which you guys can get access to the info page through the member site is going to give you guys passive losses so you can knock out those passive income and offset that.
Now, for a lot of you guys, especially the people starting out, you have a predominantly majority past. Ordinary income, and you’re trying to get to that point where you can cap more and more of this ordinary income. And if you’re watching the YouTube channel, you’re seeing me put my two hands together and be a big kind of needle showing that the majority is ordinary income.
And over time, as I’m getting my arms, the other way, the needle goes back to more passive income. To a lot of myself and a lot of the higher net worth investors who have gone to many deals and gotten a. Passive income, passive losses, you start to get to a point where most of your income is passive as opposed to ordinary.
And the reason, part of the reason is, or maybe even the biggest reason other than the better returns, but the fact that you can offset the passive income with the passive losses and stay a whole boatload of taxes right there, that you wouldn’t. Able to do and shelter yourself on the ordinary income side.
I’m, we’re all running these synergizing, these ideas are much better in my next book, which is gonna be rolling out, hopefully by the end of this year, where it’s gonna be talking about these, these nuances of really, we’ve, I think in the past book we talked about a lot of these in generalities, but what are like the steps?
And real briefly, I’m gonna be going over this before we go into the coaching call, what I’ve. Putting together here is this idea of there are different use cases here for different people in terms of, a lot of you guys just, depending on if you do income household some people are single and that’s cool, but I would say the majority of our investor group are married with kids and have, small, two large families and with the two people at the house at least I don’t think we have polyamorous folks out there. I’ve never seen people with more than three incomes. Some people joke that their rental properties or their syndications are multiple spouses, but for the most part, there’s two people kind of building widgets, right?
Or in their income. A lot of putting. Putting ordinary income into their income pile, and that’s what you’re gonna need to do, especially when you’re not a trust fund kid. You don’t have a lot of money to begin with. You have to build your net worth to a million, 2 million, and I’m gonna say loosely two and a half million with a range of a million there, because this is the point where you’re building that critical mass.
To be able to get over this hump. And that’s what I see is down. Now, once you get to two, two and a half million, you’re coming downhill and you’re gonna hit that four or 5 million in-Game Mark. But there are few use cases here. A lot of your folks, especially when you and your spouse are making about the same amount as high income earners, it makes more sense for you to both work your day job not do rep status and burn the afterburners, hopefully, and at some point shut it off. And what we call this is , there’s the, I call this like the Ford Raptor, big truck, you gas guzzler kind of snare where you’re working hard, making a whole bunch of ordinary income. You’re still saving it to put to investments and put to the simple passive cash flow cycle.
And, but you are paying a lot in taxes and that’s just how it is. When you have ordinary income, you’re gonna have to pay taxes on it. There’s no way around it. When you have a big truck like that, you are gonna pay a lot of gas. the next stage. On the opposite side of the spectrum is the, I’m not a big fan of Teslas.
I don’t have one, but they’re clean, efficient energy electric. Type of car and it goes fast too, which is cool. And they’re sleek. But in this analogy, what I’m gonna pull from it is it’s like switching over from like this gas going to electric and what that is, it’s like cleaner, efficient, seemingly if you don’t count all that damn coal that battery, the lithium charging up, the lithium battery and all that stuff.
But if you’re just looking from the cart point of view, if you follow me with this kind of loose analogy, is, or at least people who are more experienced, like I said, like myself or people in dozens of deals, most of their income is passive and that way it’s very clean and efficient in terms of taxes that their passive income is essentially wiped out by.
Passive losses or most of it is, and they don’t pay that much in taxes. A lot of folks, who’ve been investing, go look at your 85, 82 form, you probably have more than a quarter million, half a million in passive losses. Some of you guys have a million or few million dollars that spend a passive loss and yeah.
If you got around a lot of the other accredited investors that are doing this too, you probably scratch your head around and you’re wondering, when am I gonna pay any taxes? In fact, and you may. , and that’s the Tesla kind of side of it, which it’s electric now for a lot of you guys.
And this is where it really gets more personal finance. This is the Prius and yeah, of course the Prius is a much Suckier car than the cool Ford Raptor, which I personally own, and a Tesla. But the Prius was the only car that I could think of that, is a hybrid where it uses gas and it also switches to electric.
and this it’s, this is a tough place for a lot of folks. It’s maybe the incomes are disproportionate where you have a guy who makes. Some gal makes 200,000 and their spouse only makes a hundred together. They make a great salary, right? $300,000 a year. But it’s a little bit disproportionate and it makes sense for them to keep working, but maybe one or the two don’t like their job.
And there’s kind of two case scenarios where. Maybe the higher income earning one, the person making $200,000 a year isn’t doesn’t like their job. And ideally they’re the ones that they want to quit or go part-time first and get rep status. Now that is tough because they make more money. and oftentimes what I’ll advise based on their personal situation, this is where, nice to come to retreat, build a relationship, and understand this.
Or you can learn this from your peers, which is why people join the family office group to synergize over these, these bigger concepts or these more, less high level financial topics. It gets into more personal finance. And for these people it may just mean to just suck it.
and you are the breadwinner and you’re just gonna have to keep working even though you don’t like your job more than your spouse. And where it works better is around, for these Prius owners, all these are Prius owners, right in the middle, in this hybrid. They don’t make too much.
But you have the person who doesn’t like their job making a hundred grand a year. Stop working. Go part-time or just quit working at all. Then, your breadwinner can carry your household and this is where I think is a huge improvement in quality of life.
Maybe that person can get rep status and now take down that barrier where you can use your pals, your passive activity losses to offset all your ordinary income. Now you’re seeing why people are diving into our next tax PAL fund and using these things and using a couple synergic strategies. And two, of course consult your own tax attorney, c p a.
If you guys, most people need a new one. 95% of people, I would say, change their CPAs cuz they don’t know. They have, that’s why the CPAs have day jobs. They haven’t figured this stuff out. But if you guys need a referral, let me know. Shoot us an email. This is a beautiful situation.
Right now. The person who doesn’t like their day job doesn’t have to work and they can spend time with, most of you guys do have kids out there, quality of life, right? It’s great. And sure you’re not like burning both ends of the candle. With ordinary income. And if you’re making $300,000, you’re not able to save a hundred grand a year, and it goes down to maybe 50,000 a year, but, We don’t need that much.
My whole simple passive cash flow prerequisite is, being able to save 25, $50,000 a year, that’s really all you need to do. Some of you guys blow that outta water, a hundred, $200,000 a year, that’s great, right? That’s just gonna accelerate you to get there and blast past 5 million, $10 million net worth.
But that’s not needed in this case. Of course there’s, I think, what we might talk about today with our coaching call participants, doctors typically doctors, dentists, or folks at high income earners that make over 300, $400,000 a year by themself. It typically makes most sense for them to just get rid of the spouse’s job and have them do rep status, especially if you’re above that $340,000 a e i for 2023.
So there’s a few Prius scenarios. What I wanted to say was like, every, there’s a few scenarios here. There’s the raptor, there’s the few Prius scenarios, and then there’s a Tesla scenario. And this is why, I think what makes it a little confusing is because you’re getting advice from all kinds of angles, yet, you don’t know who to really trust and you know what’s really for you.
And that’s my kind of, my job is to simplify things. So if this is new to you guys, welcome to the channel. Welcome to the podcast. Join the club. I give everybody kind of a short time to, if I can get in there and just punch you in the right direction.
And, I still do these onboarding calls with you guys. Would like to get, let’s know you guys a little bit and share this with a friend or interact with our community because likely your friends are co coworkers, family not doing any type of this stuff. Join the simple passive cash from a clan.
A simple passive cashflow listeners today, we have a, another coaching call and you guys love these things. You guys eat this up like candy, it’s like financial fans, lawyers call it that. So I have Brian on the line. He is a doctor and he’s been heavily invested in private placements since. So I’ll have Brian tell his story a little bit, but so do other great accredited investors all here.
So enjoy and thanks for jumping on Brian. Yeah, a little background on me. I am a physician and kind of fell into the standard path, what physicians are told to do and channel all of your. All your earnings and into your 401k and get a nice little stash of equities going.
And maybe if you accumulate enough, by the time you’re 60, you can retire. And a couple of years ago I was on vacation in Asia and I discovered that I didn’t want to work. Ideally I wanted to be totally retired by the time I was 55. I was about, I dunno, 47 at the time. And I looked at my portfolio and discovered that.
Pretty much, all of it was equity and bonds and it was yielding about 1%. And I was thinking there’s no way I’m ever going to get to where I want to be with 1% yield on my portfolio. So that’s when I started educating myself on passive investments in alternative investments. And was there some kind of like thing that happened at work or you just had some free time on vacation?
Oh yeah. No, it was just. For the first time, in about five years, I had a nice two week vacation and we decided we were going to go to Asia and we had a lot of downtime and you just, I kinda self-reflect and thought I really liked this relaxing stuff I could get used to this, can turn in my 80 hour work weeks for this.
Certainly. So yeah, I guess that was the epiphany. It’s there’s more to life than slogging in the office, 80 hours a week. And you’re married. You got kids. So I have a long-term partner. I have two kids. Daughter is a freshman in college and son is a sophomore and got divorced about five or let’s see that’s about eight years ago now.
And still so paying some of that off. I have two and a half years left of that. And then it’ll be clear that. So at this point in the game, are you doing. So let’s just paint a story. You, did you buy any rentals? Did you go through that? Yeah, I did. I did. I bought a single family rental on the east coast in 2007 in a nice little seaside town that had a lot of vacationers from Connecticut and New York.
And got it. Ready to roll. In 2008, then you know what happened in the market in 2008 and it lost about half its value. And so that wasn’t the best experience ended up having various tenants. Some were good, some were bad. One of them ended up being a mobster. After finally getting out of that deal after about 10 years and not making any money out of it, I soured beyond to honor the single family thing.
But when did you start to get into the private placements? That syndication 2018 was my first one, actually, maybe 2017 was my first one, but I really started taking the plunge in 2008. Okay. So yeah, the whole 10 year period. You just work the day job and manage your work in the day jobs, shoveling everything I could and to index funds and all that good stuff.
Yeah. That’s unfortunate. What has been a one or two years later, maybe it would be different, right? Yeah, the syndications, thank God because it’s essentially, the value add deals are doing what I would want to do if I was doing it myself, but there’s teams of professionals that are doing it that are actually good at it.
Like I know where my strengths are and being a landlord is definitely not one of them. Yeah, the property manager is definitely not one of them. Yeah. It all comes down to what your highest and best uses. Like you might be at eight out of 10 in terms of being a landlord, which might be a hell of a lot better than the average Joe listening out there.
Who’s a five and a half out of 10, but because you’re a nine and a half doctor making that hourly rate, it just a no-brainer you spend your time on what’s your highest and best uses. And you focus on that. See, we’re also showing on the screen here. If you guys check this out on the YouTube and I would probably suggest handing off to YouTube channel for this one Brian’s got a plethora of different, all kinds of syndications as private places for the, what are you looking like more than a couple of dozen of these things?
I think it’s, I think it’s up to 22. Yeah, very, yes. Investments between 25 to a hundred, $200,000 minimum. Take us through the, like, how did you first discover syndications and what was your kind of first steps? Because this is the hard part, right? Like you hear about this mythical creature called private placements in syndications where there’s value, add there’s cashflow.
You don’t do anything as a passive investor. You don’t get dead in your own name. You don’t get the high liability, which is a huge deal for doctors. And it all sounds amazing, but you’re stepping out into the a bit. How did she step forth into the, yeah, so the, probably the first thing I did is I found a community of people online and they were.
Vetting some investments and I didn’t, I knew nothing, absolutely nothing. I didn’t know it, a debt fund from a, from a syndication from I mean I knew absolutely nothing. And the people in the group said, Hey There was a triple in lease fund, which is basically a fund that takes over the leases for Walgreens and Rite aids and, Michael’s stores and stuff like that.
And you get like a monthly check every month. And that was probably my first. My first swing and I just went, I cause everybody in this community said, oh, it’s great. It’s great. It’s great. And then they said, Hey, this this is a really good sponsor. If you want to get into apartments, I’m like, oh, okay, cool.
Except they’re like stabilized class, a San Diego. Type apartments. And I didn’t know anything about a, B, C any of that at the time. So I just thought, oh yeah, these guys recommend it. That’s good. So I jumped into that and I still have that. And that’s probably been my worst performing investment since I started.
There’s just the cashflow in that thing is like one and a half percent, I think. Yeah. Class a. C class classic in California. Doesn’t cashflow. I saw a deal. I’m not going to say where it is, but it’s near Disneyland. And I felt like I should put in a bunch of grand just so I can write off my trips to Disneyland.
That’s really the only reason why we do pop up meetings when I go to Southern Cal or Cal. So I can write off my personal trips. Know why you’re investing, right? Yeah. But I decided, I didn’t know. I was investing just going through this I got into some more clubs and met some more people, and then I discovered value add, and the numbers of value add, made so much more sense.
It’s okay, you take this property that this mom and pop wants to get rid of for $25 million. And if you can get it up to par, renovate it, get good tenants in, you can make it, just like that. You can force the appreciation. 31 30 $5 million and. Boom. You’ve, you have an instant return right there.
So the numbers of that made sense to me. So it was like, okay, I gotta find some more of these deals. So just some trial and error and found a couple of sponsors that I really like. I’ve been back to do a couple of deals with, and there’ve been some shiny objects in there. I think I’m in like muse of music royalties.
I saw that. Yeah. I wouldn’t recommend that. At least not in a taxable account. There are no tax advantages to music royalties, and that’s been a stinker, but. If my life settlements, if I was going to do that, I want to invest in like specific songs as opposed. I think he did a fun, he did it. Yeah.
Yeah. Yeah. There’s no fun. No, say it all. No final. And it’s pretty funny too. Cause they send you like the list of the sign that they bought rights to. And you’re like, nobody who listens to this crap. It was listening to that. And about 30 years, what do they do? But that’s probably what makes it a good investment, right?
Like you’re not going to like a Beatles song or instinct song, actually, boys SBA class. You’re always going to over pay for that stuff. Like a sexy California class C property. Yeah. Someone told me once that I forget the exact quote, but it was something like, you never want to show off your real estate portfolio at a cocktail party.
Yeah. So just saying that you don’t want it, you don’t want to buy the shiny as class, a assets. You want to buy unloved, class B minus C that you can make into a nice class B. Yeah. But as you can see, what’s happening in this podcast right here, I’m digressing and going down this rabbit hole, that’s like.
Half a percent of your portfolio and it doesn’t mean anything. It doesn’t return it, but that’s all we want to talk about. Don’t do what I did. Okay. So going back, so a lot of the listeners, they jumped into this world and it is very laughable after the fact, that you just jump into stuff off random referrals and recommendations, but it is what it is. That’s what you do. What are some things that you. Thought initially that you later learned to be not. You got. Tiffany, kinda like I said is more of a live where you want to live, but invest where it makes sense, just because, oh, it’d be so nice to live in San Diego, but it doesn’t necessarily mean you want to invest there.
Like you want to invest where the numbers make sense. Like Huntsville, Alabama, do I want to live in Huntsville? I don’t know, but the numbers, if you look at the numbers of Huntsville, Alabama to invest there absolutely totally makes sense. So I think, yeah, definitely look at the numbers more than the emotions of the investments.
That was the, that was a big one. Try to expand your, talk to as many people in your network as possible because you will learn about some stinkers sponsors and you’ll learn about some really good sponsors. And. No, this alternative investment space is all personal connections. You’re not going to be able to go check a Google review on a sponsor.
So it’s all word of mouth from people who’ve been there, done that. And I’ll just say cause it frustrates me. We have people like, I don’t want to do the family office, a Honda mastermind. I want to start investing a little bit. I’m like, dude, you’re the most exposed right now. This is the time to do.
Yeah, but anyway, you get off of that, but yeah, what, most people that don’t have a single friend or family person that invest in this type of stuff, they’re all investing in the wall street garbage. What do you do? Where do you go? I always tell people that, there’s the free stuff, but I always tell people to be very careful about that stuff.
You always got some shady people trying to sell IUL, ELLs and random stuff like that. You gotta be careful. Yeah, absolutely. Absolutely. Yeah I don’t do IUL, but I am a huge fan of the the infinite banking, the cash value life. God, I wish I knew about that about 20 years ago and we are doing that for our community.
You guys can get the free e-course at simple passive cashflow.com/bank. Yeah that’s a game changer right there. The other thing I wanted to tease out of you is, like you mentioned meeting other people, you’re a fun guy, you, a lot of people are very abundance mindset.
Once you find the right people that aren’t the salesmen or the syndicators of the sharks, trying to find those pure passive. Are there some ways that you build those connections? It, was it just an expensive bottle of wine or no, it’s funny you realize that the whole like passive investing space, it’s a pretty, it’s a pretty small club.
And I actually, lane, I, I. Met you through another friend that I knew from another investing club and you spoke at his club and I’m like, oh, this guy lane just got to figure it out. I got to meet this guy. And it’s just, I think it’s just, you can’t. Go in your little shell, it’s find your people.
And then by, by talking to your people and your network, you’ll learn about more people and you talk to them and you’ll, they’ll tell you to talk to some other people and you just keep expanding your horizons there. Yeah, you can’t shell up. You gotta be, you gotta get out there and actually talk to people.
Yeah. I just got off the phone with somebody and I was like, dude, you gotta get out there. If you’re unwilling to meet other people, you’re just going to be stuck. You’re. That lonely guy who has 20 rental properties and he’s cranky all the time. And if the best thing you got is investing in these garbage, private money lending deals, reinvesting in class C paper and no ordinary income.
Exactly. No, like just keep at it, just put yourself out there and it might take a few years, your course is great. Just learn as much as you can. Because no, one’s gonna, you’re going to have to find this stuff out for yourself. No, one’s no, one’s gonna, you’re not going to have a a rep come into your office and say, Hey, look at this, look what I’ve prepared for you here.
It all is, you really got to get under the hood and learn. And I find it interesting. Much more expense, more, it’s more interesting than learning about stocks and PE ratios and book devalues and all that. Yeah.
So last thing I want to tease out of you and then we can go into your overarching questions that I can do to help, you’re a very, you’re not like in the weeds type of person, which is why you’ve actually invested and they’re seeing the good results.
I think that’s the right attitude. You open up a pitch deck. Are you checking your inbox, seeing a bunch of deals? What are like the first couple of things you’re looking at? Just from a real high level? How long do you even look at that deal? So I think number one is the sponsor. What helps is if it’s a sponsor that I’ve invested with before and I trust.
The, you don’t want to read the thing. You got to read a little bit, but for the most part, it’s okay, I know what I’m getting with this deal so I can just skim over it. What have you. Yeah, that’s a tough one. So if it’s say we’re looking at a multifamily deal. First thing I look at is the market, is it a market that I believe in?
Is it, something like a Phoenix or a Dallas or a Huntsville, or is it, San Francisco? It’s do I even want it, do I even want to be in this market? Bird’s eye view look at the market. So I, okay. Is it the market I want to be in? And then I look at what kind of deal is, this is a class, a stabilized asset type deal.
Is it a super heavy value add like C minus they want to bring up to a B, or is it a, somewhere in between? I the kind of, in-between like maybe C plus that they want to bring up to a B minus or a B minus. They want to bring up to a B plus, I think that’s the sweet spot as far as value add.
And I do like value add as opposed to stabilized. I get personally get scared on development deals just because I want to know that the money’s going to come in sooner rather than later. Obviously the returns are bigger. Potentially in the development deals, but I just, my, my sweet spot is the little value add.
So then once I, once I check those boxes, then I look at it and look at the numbers a little more and say, okay they say that they’re projecting 17% IRR and. Do P 2% return on equity and five years and whatnot, how are the numbers going to make that work? So then I look at and you always gotta remember, you can only trust the proforma so much, it’s kinda it’s like doing a medical study.
You can make the data, say whatever you want it to say, again, it goes back to the sponsor. If you know what you’re getting, you can, you can take the numbers a little more seriously than someone you never did, but still. I want to see what they’re planning to do for the value, add what they’re planning to do.
As far as rent increases, how much that’s going to increase each unit, what that’s going to do to the overall value going forward? What the like the debt service coverage ratio is those types of things. Like how many people are. Are, how many tenants can they lose before they can’t pay the mortgage type thing, breakeven point and the break even point and those types of things.
And if it seems like, checks all the boxes and take the next step, talk to the sponsor, see what they’re all about and go from there. Did you do this by syndication? E-course any kind of, there’s such a things in the numbers to look out for. I did. Yep. Yep. I did do it. You have to remind me what, which ones you’re getting at though.
Like the reversion cap rate increases per year, the annual escalators become expensive. Yeah. So rent increases per year. If they’re projecting over 5%, I kinda, have to look a little closer to say really reversion cap rate. Ideally, I’d like to see 1% above where they’re buying it out.
If it’s a super hot market, I may go down it’s maybe 0.7, five. It has to be really compelling if they’re presenting an exit cap rate that’s 0.5 or less. I think that’s bordering on speculation. So yeah, I mean it’s, after you look through, if you just kinda, you get a sense of what you want to see in the big picture and it’s it’s unconscious, you just go, it’s oh yeah, there’s the cap rate.
There’s the excess cap rate and that, comes to practice, I guess you just gotta do a bunch of them. And then you’re like, yeah, that makes sense. Oh, that one smells fishy. Yeah. Yeah. And then you parlay that in meeting other people, talking the story about this type of stuff. Yeah, totally.
Do you like those kinds of, you mentioned you liked those class C plus. Hi cashflow deals. You’d like those kinds of deals that people do in like Memphis. They’re a little bit more higher cashflow. I haven’t done any Memphis yet. I’m looking at one in Indianapolis and again, goes back to my markets.
Like I’m not real sold on Indianapolis for a market, but the cashflow in this one deal looks pretty kid. So looking at the numbers. My, I kinda like to balance my portfolio. Okay. Half of it is more of an appreciation play, like a heavy value add that doesn’t cash flow a lot. And then the other half is the more, we’re looking at cashflow between six and 9% type thing, still safe assets, just a little higher yield.
Yeah. I haven’t done Memphis yet. I just haven’t. I was just curious. I don’t have any good reason why, and I’m open-minded but that’s a good example for folks like, this is where these are the conversations you have. I don’t know when this podcast were released, but we’re having the retreat in January.
Probably have it again the next year, but that’s where you have those evening cocktail discussions, or if you’re not a night person, that’s where you have breakfast. People are encouraged to have informal breakfast as with each other, have these kinds of conversations. And, you just get your mind open to people’s arbitrary.
Here’s what I like to invest in my personal portfolio, whether it’s right or wrong. Just another few point, totally BS. Nobody is writing some stuff, the end of the day you’re picking pick and resources. Exactly.
But what can I do to help Brian? You think you’ve given the folks a lot of good information. Yeah. One of the things look looking at my portfolio is a little more than 50% of it is tied up in a solo 401k. And the problem with that is there’s obviously no depreciation benefits to being in there. The cashflow is, it doesn’t really do much good imprisoned in the solo 401k, and I would like to start getting that out.
And I’m only 50, so it’s nine years before only like saying that, yeah, it’s nine years before I can start doing it without penalty. And I know you’ve walked some people through how they can gradually exit the solo 401k is, or the work 401k is and try to minimize the tax. Getting out of that what’s your, and by the way, like you, I think he did this exactly the right way for your income level.
Whether you did it on purpose or not, but just for a review for some folks, you can guys can go to simple passive cashflow.com/qrp to read about this whole argument. But generally you want to take, not invest in these retirement accounts because you don’t get the passive activity losses to play different games on your tax.
But the only reason why it makes sense is number one, you have to have a high income you’re already in the highest tax bracket, which should Brian is already number two. You have to have a lot in your retirement. What, a lot more than half a million in there. If it’s less just take the sucker out, it’s just going to befuddle and confuse your life, simplify things.
And what Brian did here, because he qualified. He’s in both of those camps, essentially what he did is he played. You put some stuff into these retirement accounts just to delay the taxes cause he’s already in the highest tax bracket once again. So then now there’s a point, here’s a point where he’s already got him proof of concept with these couple dozen deals and he’s looking for more capital to harvest and now’s the time that we can strategically take it out.
So here’s, let’s go to the questions here, Brian. Where approximately is your AGI. So this year, make it up this year. It’s probably going to be a three 50 K, but next year I’m cutting back considerably. So my bet is next year, it’ll be somewhere around 200 to two 50. Perfect. Must’ve been thinking about this.
This is all coming to comment play, right? When you’re in investing this much, you ideas to quit your job at some point, or to titrate down like how you are. So what you’re having is this opportunity where you want to stay below the highest tax bracket. So anything, when you go over three 30, that’s when you’re in the red zone.
So if you go down the 200, you could ideally beak out one 30 every year. Okay, but let’s before we go there you’re married, filing, jointly, actually hit a household. Okay. Okay. Yep. Is your significant other partner? They work in or what’s yeah, she she’s a nurse and we, we have, we’ve lived in the same household for quite a while, like six plus years, but we just said, we’re not getting married ever again.
Yeah. It’s archaic.
yeah. It’s just that just for us, we’re much happier and she keeps her finances under her belt and I keep mine under my belt. Yeah. Some people think marriage is forever. Some people think of it as, Hey, let’s just renegotiate every day. Everyday you, you don’t sell as another day chosen to buy it’s the same for rental properties, of course, which, by the way, I’m selling out my second to the last one.
Very happy. I thought that so in Y in Birmingham, yeah. Yeah. Yeah. Together, you guys make you guys, aren’t going to be doing real estate professional status. Are you guys thought about that? That might be another talk to have down the road is once I’ll be part-time next year.
You know how to go. I guess the question there is how to get reps without being the landlord. You’ve got to talk to the right CPA. Cause I have a bunch of people who are exactly like you, where you have a boatload of investments and I’ve seen it where they work. They’re still full-time jobs and their CPA is yeah, man, I’m just gonna check this box off for you now.
Totally defies all the little rules, but it happens. You can bet your butt, that Donald Trump is checking that box and real smooth. But he’s obviously the president of their freaking United States for as a full-time job plus. But how can the men not check the real estate professional? He’s checking the box.
Yeah. Maybe he should, technically he shouldn’t right. Is what we’re trying to say, but, that’s where you’re going to work with your CPA. In my non-tax legal opinion. You have a lot of stuff. It’s becoming a full-time job. I actually think you have too much stuff. You should probably go down a little bit and bump, bump your minimum investments up.
But that’s another side thing, but I think what you’re doing is very typical for people getting started, right? Like you go into a lot, you’re trying to see which jockeys are gonna invest more heavily on in the future. So this is very typical, but. But yeah, real estate professional status may be going KP on some deals.
Get some of that carried interests in there. As a loan guarantor to that helps to build the optics, but don’t listen to me talk to your CPA but what that will do, that will be a big thing because now you can, instead of just taking. The default I think is to take out that one 30 or so a year.
So stay right around that three 30, I think that’s the default, that’s the prudent thing to do here, but if you want to get a little more, how much do you have in your retirement accounts now? Just say I think it’s around 1.2 million. Yeah. So it’s going to take a lot of years to leak it out.
A pain to do, to do this. It’s going to take you a decade to do. That’s just, this is use that as the bookend, right? I think that’s a no brainer. You want to take it out. You don’t want to leave it to when you retire because your income is probably going to be higher in a decade.
So you want it to get it out now under that three 30 mark or whenever that changes next year and the year prior. So one 30 a year. You’ll get it out in 10 years. What I, if it were me and I was going to be playing it a little bit more aggressively, what I would be doing is I’ll do real estate professional stuff.
You got to jump through the hoops to get that, obviously, maybe I’m sure you have a boatload of passive activity. Losses builds up right on your 80 to 84. Do you know how much? Half a million probably around there. Yeah. And you’re guessing, and you’re a prime example. People always ask the question.
What happens when I exit a deal and I get my $50,000. Dude, you should’ve been like Brian, you should invest in a dozen plus deals. So you have, you’re sitting here and passive activity loss, Nirvana, and you’re untouchable. Yeah, there’s a deal that went full cycle this year and it was a pretty, pretty nice gain. And I’ll be okay, but a lot of the other guys in the deal, they’re like, oh God, I gotta get something before the end of the year. I gotta share this. I gotta buy something. I got buy this.
It’s yeah, it’s funny. We have guys like yourself. This is the one at school. When you come on their cheat and you meet other people like this, but they have a rap sheet of a dozen plus deals.
They have a half, a million million dollars plus a passive activity losses. And they’re like, yeah, man, I haven’t paid like taxes in seven years. I feel like I should, like at some point, I don’t know if I’d ever get to that point, but I’ve definitely paid enough in my first 30th, so years of work.
Yeah. Yeah. But you’re cutting to the point where you technique, especially FICO real estate professional status, you really shouldn’t pay taxes. You shouldn’t need to pay tax. You can, if you want to hold the passive activity losses to the end, but the way my CPA does it is he just burns up my passive activity losses.
So I pay zero taxes. Gotcha. And, you only live once, right? Or may never see the next time. Yeah. Have you ever heard? I was talking with someone and they said, oh one way you can get reps hours is to take over a triple end, lease for a Walgreens or something like that. Have you heard of anyone doing that?
Yeah. So the easy, like low hanging fruit is like a short-term rental. Maybe your spouse enjoys doing that, or maybe you enjoy. I would not recommend buying some crappy class C rentals. That’s like going backwards or like you said, getting a little triple net, but then the problem with that one is big money.
And kinda gotta be, know what you’re doing when you’re doing that type of stuff, but it is relatively easy. That’s it? I don’t do it. I don’t know. I’m just talking about it, but here. Yeah. Those are your three options, but that’s where you talk to other people doing this and similar situations.
It’s I’m working my doctor job on the side. What are you doing to get the rep status? And so 130 K taken out of that a year. So I’ll owe a third of that, which is what about 45? K? Yeah. But what I would recommend is make for you, it makes a lot of sense to make that jump to rep status, especially peak Fisher point depart time.
And especially with, in my opinion, with your rap sheet here, you have a lot of stuff. You might be a passive investor, but the scene is like a full-time job that somehow you can justify. It takes a good amount of work just to stay on top of everything and don’t waste it on just practicing right.
For your CPA now, or that totally. You don’t want to talk to have your CPA talk to them. Of course, that’d be. Oh, no definitely doing 40 hours a week working on that. Yeah, definitely. Yeah. But yeah if you were to do that, maybe I would two X that and take out 200, $300,000 out of there every year, extinguish that with most of your passive losses.
And then now you’re out of, you’ve withdrew the whole thing out in a handful of years instead of a day. I would play it that way. Yeah. I’ll wait and see if the reps happens or I guess when the release happens, one of the other things I’ve been doing, how I’ve been paying my.
Life insurance premium is with the solo art 401k. You’re allowed to take a $50,000 self-directed loan. And so what I’m doing is I’m taking $50,000 out of that, just paying myself back in that. And then when it’s time for the next premium, just taking that loan out again and paying it back. I still have to pay it back, but nice being able to pay yourself back.
And yeah, that’s a nice little hack there. Yeah. But yeah. Just the hard thing is this is an art form. Like we don’t know what’s going to happen with bonus depreciation in a couple of years. It’s supposed to phase down a little bit. In 2024, it’s still going to be fine, but we don’t know if that’s going to get extended.
We don’t know if you can use a hundred percent of your losses to offset your income, but we don’t know if that’ll be Kat, like how like conservation easements are all a gas where it’s your captain, like 30 or 50. We don’t know how the world is going to change it, that type of stuff.
So a lot of this is a risk and uncertainty, which is most people aren’t comfortable with that type of stuff. And it’s not an exact science, but that’s why I would say, like right now, there’s a clear path on how to get it out in a few years with if you’re able to rep status. And I would take it before it closes up.
That said you could sit around for three years and something really video will Wade better could come down the road. But you’ve also missed out on deploying those funds to right now, it makes so much more sense to have that, not locked up in jail, give it so much more flexibility and yeah. And when you crack those open those retirement funds, then you get more passive losses from that.
So it is a multi-gender dimensional. But that’s how I would play it. I would take it now, or in the next few years with rep status, start researching rep status more. And I that’s where I’ve, it’s really suggest meeting other people that are doing the rep status because now you have a specific target, right?
You’re trying to find those right people to high income earner. With disproportionate incomes that were ideal. You’re unusual where you’re the high income earner yet. You’re great. Part time. Normally that doesn’t happen, right? Yeah. Not really other people’s relationships. You just suck it up and go to work. And then the other person takes over their rep status, most cases, but where you do it all, man.
I’m gonna do it all. Yeah. Yeah. Make them make the money and bring it home. Cook the baby. Also do a 750 hours of the side, right? Yeah. It’s all in documentation. Yeah. Yeah. Any other questions you got or anything you want to talk through? I don’t know.
I think you said maybe I’m a little over diversified, but just going forward, what I, what. Bird’s eye view of what I should be focusing on going forward. It’s, I love multifamily, but I think I’m about like 65, 70 5% or, yeah, multifamily. And I’m trying to get in a little bit of self storage here and there, and a little bit of mobile home parks, but I don’t know if there’s any other directions you think I should be looking into.
Yeah. Just the fact that, your percentages, you’re probably a lot better than most people. Again, like most people who are new, they go into all a bunch of stuff like the Las Vegas and Fay, and they just file, they just go into all these random asset classes, in my opinion, that the way to do it is going deep with one asset class, it learn it, learn the people and then branch out.
As you find other passive investors who also investing in self storage deals, office deals. I’ll just say for myself, right? Like I’m an operator of apartments. I know that a thing or two about that. So I would say 80 to 90% of my stuff is apartments. Vast majority. I don’t know exactly. But I, when I go outside of my comfort zone, apartments, office, self storage, mobile home parks, I want to invest with the institutional operators, especially when I’m not controlling my own debt.
No everybody listing here is our passive investors. You guys don’t have the luxury of being, behind the curtain, on the operation side of apartments. So they have take it for what it’s worth. But yeah, when I invest in stuff where I’m an LP, I don’t want to invest with somebody who just did a weekend bootcamp or on their first dozen deals.
I want somebody who’s more institutional, even though I’m willing to give up return. I’m okay. Doubling my money every 10 years instead of every five. Does that make sense? No, that makes sense.
But if you’re a passive investor and you don’t know one from one first of all, you should know you should meet the other people doing it too, but then maybe if that’s the case and it’s all shades of gray to you anyway. Maybe just to diversify or I guess, yeah. You were saying before, do you have any advice, w you wish you could give to your rookie self when you’re just starting doing this and that would be.
No exactly why you are investing in a certain investment. Like when I was doing it before, it was just dartboard, it was like, oh, this looks good. Throw the dart, oh, this looks good. Throw the dart, throw the dark. And now it’s okay here’s what it looks like. And here’s what I need.
And oh, I need some more higher yielding, higher using plays. I need to start looking at some more, some more of those deals or, oh, I just, I need more cash flow from this. Maybe I’ll double down on the ATM investment or, really think about before you, you pull the trigger, what that’s going to do to the portfolio as a whole.
Yeah. Yeah. But I think one thing. That was really good as you got your skin in the game, that we can have conversations, other paths and investors that you’re not just some newbie accredited investor that has invested in check and adds no value. And that’s why I say go learn one thing first. So you can use that as your ticket to get in cahoots with other people.
Totally. I totally agree. Yeah. But know why you’re doing it just don’t do it because everybody else is doing it. That’s the other thing, right? You have a lot of, there’s a lot of like doctor groups or investor groups where they all like group think their way into, oh, this, these guys are good.
These guys are good, but I would never invest in them because you have this thing called sponsor creep. They become more institutions. Yeah, we’ve got people lining up around the block. It’s I think everybody who’s listening who has gone through the single family home, like turnkey circuit, like they know that there’s two or three companies that everybody talks about, but you only buy from them.
If you’re a sucker that wants to pay 10 to $20,000 over market price. Sure. They’re reliable. That’s the way to invest in my opinion. And it goes same for this type of stuff. There’s some people. They can put garbage out. People will invest because they’re more institutional operators.
Any last thoughts or any questions come to mind, Brian? No, this is helpful. And that is a lot of fun. If you guys want to do one of these calls, even if you’re less experience reach out team@simplepassivecashflow.com. And we mentioned the retreat.
We’re not doing like a really open house type of events these days. I think we’ve realized that a lot of people have figured it out that simple passive casual is a bunch of passive investors. So we got a bunch of those, like newbies syndicators poking around and we have enough live investors, like 700, if you guys out there.
So everything is more closed circuit only to passive investors these days. So that’s kinda why things are the way they are. But yeah. Thanks for listening folks. And we’ll catch you guys next time.
What’s up folks? This is the December, 2022 monthly market update, and you’ve got a long one for you guys, which is probably why we’ll probably move to break these up as weekly installments into the future. But if you haven’t yet, check up my book, the Journey to Simple Passive Cash Flow. I think we’re a little bit over a hundred reviews at this point.
If you Pick it up or if you guys listen to the book on Audible. You guys can leave us a review or you can check out the free book@simplepasscash.com slash book, which is your little trick. If you guys listen to these episodes and we put these monthly reports up on the website at simple pass cash flow.com/investor letter.
So if you’re listening to this on the podcast and something sound interesting, you wanna look at the graphic later you can go ahead and access all the recordings with the cool visuals and highlights and graphs and charts on there. But before we get going Just see you guys here in about a month for the annual retreat.
If you guys want to jump on board and hang out with us for three days you guys can go to simple passive cash flow.com/ 2023 retreat. I think it’s like we’re calling the Huey five cuz it’s, making it like UFC where we start to number them. So we’re on their kind of our fifth one of these big events, but it’s great opportunity for folks to get to know other real.
Credit investors since most people out there just don’t have a clue about, using passive activity losses to lower the order income to drive their AGI down under 300 or 200, or not pay any taxes, or they still think tendered ones are a good idea and get around other people who aren’t, don’t think you’re crazy for taking money outta your HeLOCK to go make a higher rate of return outside of there.
First teaching part today anchor retail. Investments with fitness centers. Now the term anchor tenant is is very familiar in retail, shopping, malls, centers, stuff like that, where you have a grocery store as your anchor tenant. Now, I personally don’t, not super fond of shopping malls and that type of stuff, but like now they’re saying that the fitness center is the retail.
Anchor tenant for that. So that’s just a little bit of information for you guys to just always be learning, right? I think I personally like a lot of apartments maybe even self storage a little bit not huge of animal mobile home parks. And I like office if you can buy it at that right price, even in this pulse pandemic market.
But I’m not a huge fan of shopping. I think e-commerce. I do the little shopping centers, but I think it’s always good that people keep learning about these types of things. Also in the news, our business online reports, especially this great news for you, hunts investors with us.
As you guys know, we’re just wrapped up and we are starting to lease up our first development 230 unit development out there and we are start going to start to lay the foundation for our second development, which is 300 unit apartment complex in Western part of Huntsville. But the good news keeps happening.
First solar. Announce plants to develop 1.1 billion solar module manufacturing facility in Decatur, which we have three apartments out in Decatur, which is, I call it 20, 30 minutes west of Huntsville. So that’s always good to be investing with a storyline like this. Not only is storyline, but also, the numbers and growth population keeps going up and up.
So let’s talk about FTX and Alameda. And although I don’t invest in this type of stuff, and this is exactly the reason why I’ve been following this story as like how some people watch The Bachelor. Because it’s entertaining to me cuz I don’t really have money in it.
I’m sorry. If you had money with block fi and you were lured by the high staking yields and always scratched your head, how are they making those high yields? And to your dismay, this all happened, but for those of you guys who don’t, aren’t familiar, it’s this this dude’s fault.
Sam Bankman freed SPF is what we’ll refer to him. He’s the shyster involved in this. He created an exchange where people would load up their cryptos or buy cryptos and it’s supposed to act like a bank, right? Or like a, like your Vanguard account or your brokerage. But little did people know that, SPF and his little band of eight to 10 misfits in Bahamas, and the story kind of goes deep.
A lot of it is. A lot of the extra stuff, like the whole polyamorous group of bandits he had and his girl ex-girlfriend who had no experience trading or really no real job prior to this. Running a multi-billion dollar company. A lot of this stuff is makes the story interesting.
I see it as a drama unfold, I’m just gonna report on the facts here, but Fdx. Was one company and their other company was this Alameda Research, which SPF kept arms length transaction, arms length to him. He put his ex-girlfriend in charge there. But obviously everybody knows what’s going on, that he pretty much has direct control over both of these entities.
So Alameda Research is the the high risk trading company, which is really how they got started back in 2000 and s. But what they did was they used the deposits from people putting money into ftx to bankroll the Alameda research bets. And so the way the story unfolded, you know, ftx, I believe was the second or third largest exchange at the time.
I think the first was Binance. So these guys are always competitors and they always went head to head and there was a . Twitter, I don’t know what you call the tabacco or they basically, there were some tweets went back and forth where, finance revealed some holes in fgx and people started to look and basically it made the whole house of cards fall.
And boy did it fall. And this is maybe about a month ago, this all happened and basically it. Everybody found what a kind of a Ponzi scheme it all was. Now the lesson learned or at least for myself, is when you have two entities, like we have an apartment here, we’ve got well over 50, some 50, I’d say 50 live deals.
Right now, we’re not allowed to commingle the funds from one deal to. Even though 49 of ’em are doing really well and one is struggling, you can’t bring over funds to save another. That’s commingling now, unless you state it in your ppm. It’s illegal. What these guys did was obviously legal, but the thing about crypto is like, there’s not a lot of regulation in auditing in this.
These guys never even had any board. There was no really adult supervision in this FTX company. Ftx, you might have heard of ’em. They were signing up all these celebrities as spokespeople, like Tom Brady, his ex-wife super model. They were all not in on it, but they all were all paid off to promote the company.
And I just, came back from a going to Miami and I went to a basketball game and the, it’s still named FTX Arena. I don’t know when they’re gonna take that off, but, I guess the lesson learned there is just because there’s a big charade and marketing push around something for example, crypto.com is owned by, it has her name all over the X Staples center in Los Angeles where the Lakers play.
Not saying that’s a scam or anything like that, like a lot of this is like manufactured celebrity manufactured it may or may not be real and I for one know What I do, what we’ve done at Simple passive cash flow.com where we created this investor group it’s follows the same thing.
We like to, I, I like to put it all on display and be very transparent with investors, which is why we do the events so you guys can come and meet real investors than to just go off of how many Facebook likes or Instagram followers somebody has. That’s, that stuff can be engineer. I’ll be the first one to tell you guys that to me the really, the only way to really know if something’s legit is to know the business and know the people, and maybe most importantly, know the people.
Know the people who’ve invested with the people in the past.
But anyway, I’m sorry if you lost money through this. And, the, it seems to be this kind of fraud is pretty ramped in, in the crypto world. blocky.com, which is another big, I don’t know if the word is exchange or brokerage is the right word, but whatever it is, they were also back to backing FTX in some indirect manner, and they also went bankrupt and a lot of people lost lofts money in there.
They’re still investigating all this stuff. It’s fun. If you didn’t lose money to watch all the SPF videos out there, he’s running his mouth and his driving his lawyers crazy. But this is man, like this just reiterates like, why do we invest in real estate? Because it’s a hard asset at the end of the.
Is worth something. In fact, it’s a com. It’s a working commodity where people live in it, and that need isn’t gonna be really going away anytime soon. Out of everything I can think of, other than throwing away the garbage, I think that real estate, especially workforce housing, real estate is here to stay, whereas crypto is not a concern and nor does it provide any utility.
So I’ve always thought about this esoterically and how do I create a will or trust and make sure my kids aren’t idiots investing in Luna or some kind of fake thing. And other than I put the rules like invest in real stuff where you’re highly collateralized and the thing actually makes, has utility in the world because it’s like the tulip thing again, right?
The tulip thing. I guess there was technical collaterals, a physical object, but what the heck did tulips do? What utility did it do? Take it for what you wants. Just ideas I have. Real estate hits both of those. Plus the taxes, right? Getting the passive losses and being able to legally pay less and less, or even no taxes at all.
I just don’t think you can be real estate. I think the one bad thing about real estate is you can’t trade in and out of it on a whim, which might be a good thing for most people. And the other bad thing is you’re not gonna make huge amounts of money. You’re not gonna make 30, 40, 50% plus a year on it.
And if that’s you, maybe. It’s probably a sign that you don’t have very much money and you have to, you’re lower net worth and you have to take these moonshot. But if you’re an accredited investor, you don’t need to get these high returns. You just need your money to be stable and safe and not lose your money and not have it just drop overnight. 10, 20%. Like the stock market or 80%, a hundred percent like crypto. That’s not any utility in the world.
All that said, I the idea crypto. I like it’s, I like the how it’s circumvent countries, they can’t really control it. There’s a whole conspiracy theory over, maybe the politicians or the people who are really in charge or trying to create this debacle on purpose to create the reason for the regulation.
That’s probably gonna be coming down the pipeline. And, so that the kids are finally regulated with this stuff and are taxed, right? That’s the IRS love the taxes stuff as it, as of revenue source. I, for one, has follow Who follows s e c law Think it’s great. Yeah these guys need, people in crypto need to follow scc.
It’s a security, in my opinion doesn’t really matter. I like to see them follow the same rules that I have to do. But anyway, that’s off my soapbox. If you lost some money with this stuff, I’m sorry. Next time, invest in real estate in cash flowing stuff that is providing real utility in the world.
In fact, create value, right? That’s real. Wealth comes to people who create value. If you’re not creating value, you’re just. And we create value by just slowly and very boring fashion changing out units and increasing the value of the property, which our tenants to pay more on rent for, which makes the price of the property go up.
It’s very boring, although it’s very prudent. Okay, so back to the Real news. JP Morgan is about to spend 1 billion on hundreds of rental homes across the. becoming a mega landlord. So I always say Follow what the smart money is doing. They’re picking up rental problems.
So what they are doing, because they have so much money, a lot of times what they’re doing is they’re building big developments build to rent kind of model. And so that they can scale with this. And this is, I think, where the small landlord has the advantage over these big guys because small landlord can pick up rental property here, and here.
And, they’re willing, small landlords willing to put in a little bit of sweat equity and trade time for money where it’s not really efficient for a large player like JP Morgan to own 2000 units across a five mile ring. It’s all over the place. It’s not scalable, which is exactly why, we in this middle market between, few million dollar transaction to 50, a hundred million dollar transaction like apartments because, some of the big players, they don’t really play in the space too much.
Yet we can get better pricing than the, and better synergies and better efficiencies. Than the average mom and Paul investor, even the mom and Paul investor buying a 20 unit or 40 unit apartment complex. Equity multiple says going beyond narrative market drivers wage growth is still healthy.
5% in the US where the fed’s target is 2% inflation. We haven’t really seen the inflation come down by huge amount. There are talks in the tech sector of some layoffs there, but still, Job growth and unemployment is still pretty dang good, which is a great sign for the economy. I actually would like to see that go down so we can just flush it all out and get back to the lending markets being normal instead of being assaulted with these high interest rates.
But in all due time office loans are hard to come by and this is one. You’re buying office. I think if you can buy it at the right price, it’s a good deal. But the thing that impacts that is your lending. And this is why we’ve pause our normal value add apartment acquisitions.
I would say probably at least for six months until we start to see the interest rates come back to earth a little. No different than you buying your home to live in, right? Like the price might stay the same or even come down, but if interest rates go up, your affordability gets worse and worse.
As we kind of brace for even more interest rates hikes on November 2nd, the interest rate got roll 75 basis points and I suspect maybe one or two next year to be coming. We’re just not seeing a real big dent on the unemployment. It’s like you just take a big stick and like trying to chop a tree down and just take a big whack at it.
Fed just took 75 basis points, which is a big jump, but the tree’s still standing. So you, what do you do? You just keep chopping at it until it breaks or the unemployment starts to go up. So you’re trying to induce the unemployment to. So inflation comes down. Big picture, foreign investors continue to seek stability in the United States.
If you think inflation is high in the United States, look elsewhere it’s climbing and I think the United States, even though we, I don’t know if we or myself or we always have a self doom look at our country. A lot of times, United States is probably one of the more stable places, at least legally, and as far as you’re the best amongst the world.
Fundamentals that they did point out is impacting a US apartment market, including home high prices and rising mortgage rates. So this makes people renting in apartments. Even more of a demand as people can’t afford houses to live in. They have to rent somewhere. And a lot of that is in multi-family apartments.
Another shift. Foreign investors are becoming more accepting of secondary and tertiary markets versus a prior narrow focus on US gateway cities and urban cores. It’s always funny, I’ve talking with some foreign investors and a lot of times they don’t know anything other than Los Angeles, San Francisco, and New York.
And you tell ’em, oh hey, there’s this place called Seattle. And they’re like, no, we’re not interested in that. We never heard of that place. That’s just how it is. We think it’s stupid, but I don’t know what many people can name more than six, five or six China cities. I dare you.
I dare if more than five, but I don’t, I certainly don’t. But that has a bigger population in America, so probably should. . But what the, the light reported that Sunbelt cities, including Austin, Dallas, Fort Worth, along with Charlotte, Denver, Nashville attracted more interest, partially due to lower tax.
Incentive is other areas of interest include Atlanta, Phoenix, and Seattle. More stability, consistent returns and current strength as opposed to property sectors in Europe and. There the US dollar offers a degree of stability international currency fluctuations.
It’s commercial property Executive. That’s a article here on the pros and cons of zero cash flow deals. There are times when such deals can be advantageous when they come with a warning label while zero cash flow de. Assets do have a place, especially when it comes to single tenant lease properties.
They’re certainly not for everyone. So here’s my take on this. We always preach cash flow and cash flow is there just in case of hard times. But what do you do? Say you are in tough times and the. The cash flow isn’t there because hey, interest rates went up and which they have.
Are you willing to take a hit on your cash flow to go into a deal, purchase a deal? To some extent, if, I think the second thing to look at is if you’re picking up a property in this environment where the price is lower because. The seller needs to sell it. And they know that it’s a softer market out there, meaning there’s not that many buyers who can qualify or get financing to make the deal work.
So they have to drop the price. And that’s exactly what’s happening. Now we’re in this kind of price discovery land where, buyers still think their price is worth what it was, maybe a year ago. They understand that the new buyers just aren’t able to qualify for as much affordability and they’re holding costs and their debt service is gonna be a lot more, and therefore the demand is less and the prices should come down.
Right now the sides are very separate. And this is this again called price discovery land. Now, I don’t know when the, when it’s gonna stabilize more, but you. We always in these reports talk about things in generalities, good investors should be picking out the outliers, right?
When somebody is really desperate to sell, pick it up at a good price, even though your interest rate is high and potentially maybe even more even. if there is zero or negative cash flow, maybe you guys are gasping out there, right? No, I’m not saying that you should buy something with zero cash flow, but it may make sense if your property capitalize.
Maybe you have 1, 2, 3, 4, 5 years of cash reserves to paid to debt service if you know that you have the collateral there. So a point would be like if you buy, if a property’s normally a hundred dollars and now the price is 75. And you’re gonna suck away a dollar every year on the debt service because you’re negative cashflow.
I might take that deal because I’m like I mean it’s 25 years for me to get to a point where I’m just not going to I’m gonna be underwater now. That’s a very rudimentary example, but it just proves my point that is one way I would say it. And so it’s not, this is what I think.
You just stay semi-hard or it takes a business mind to say in everything that there is risk, you’re going into an asset. In that example for severe discount, how long can you hold onto your breath till things get back to normal and things get back up to where it should be.
And then you know the people who took a bit of a risk or gamble. And that’s not saying that it’s a good or bad thing. Can capitalize on that. Buying something for 75 cents on the dollar like that October. CPI suggests inflation may be slowing as housing demands continue to weekend. This is something I’m looking at closely, and this is from Fannie Mae. Say shelter costs continue to grow at a robust rate, however arising at 0.8% over the month and 6.9% over the year. New cyclical highs.
So owner’s equivalent rents slow to a 0.6 month of or month gain. You’re starting to see the signs of inflation cooling off. I don’t think it hasn’t hit. If you Google CPI or like the big numbers that your layperson will be looking at. But I think these are good signs that you’re seeing things start to reverse on the inflation.
And then the Fed can just give us a break on those interest rates and get back to business. So still we know that shelter’s a legging indicator and that home prices are beginning to. Decline and private measures of rent increases have slowly have slowed and they outright decline in the coming months.
Although we don’t believe this one report will significantly affect the Fed’s current aggressive tightening stance we do view this as a sign. Inflationary pressures are generally slowed this is from Chandon economics. Differences in rent or home personal inflation rates, reach a record. Personal inflation rates can look much different depending on if somebody rents or owns their home. Adjusted CPI inflation rate for renters was 7.8% in October, 2022. Meanwhile, the adjusted CPI rate for fixed rate homeowners total just 5.6 or the same period.
So I guess, overall what they’re trying to say here is the renter inflation. The difference between the spread, between inflation, between the renters and the homeowners is really big right now. A lot bigger than normal. I don’t know what that really means. Maybe it, maybe it’s just saying that the rich get richer and the poor get poorer again.
But or maybe if I’m reading into it, saying, The people who are homeowners and locked in at those nice 3%, 4% interest rates. They’re sitting pretty right now, where the renters are still out there in the cold and rain and their rents are being increased on them. I. Wealth management.com says multifamily investment coming back to earth.
They’re starting to see the rents not level off, but it’s not growing at that astronomical rate as it once did in the past year. Which is echos that last article where we’re saying, inflation is seeming to slow down a little bit.
Arbor reports, this is they’re talking about small multifamily investment trends. Consumer price index services increased 8.2% from a year goal from September, 2022. That’s them again, measuring. I know, I’ve heard of this being as high as 9%. I had to bet that things would get around 10%, but hopefully, we’re just gonna level off here and go back down.
The multifamily sector and small assets sub-sector continue to benefit from a unique set of circumstances. While multifamily assets are not refresh recession proof, they are downturn resilient. Even as rent growth decelerates year over year gains still outpaced inflation. The sector’s unique ability to absorb inflationary pressures in a powerful determiner.
Continues to attract new buyer demand liquidity is another factor that has enabled small multifamily subec to maintain its ity. And this folks is the reason why I invest in this type of stuff. It does well in recessions. I don’t know if the word is, recession resistant, recession proof.
I guess nothing is recession proof unless you’re investing in life sediments, which just determines if people are dying or not, but, a lot. I can’t think of any other businesses more recession resistant than multi-family apartments. If there is, let me know. I’d sure to invest in it, but that’s the thing.
You can’t invest in that type of stuff. It’s going to be somebody’s, business that the average person, the passive investor out there who’s looking to diversify in the multiple things is not able to. Obtain, like how it is with multifamily apartments and syndications and private placements.
A also reports that the loans are way down, which is, no secret to everybody and which is why if you’re a mortgage broker right now, things are pretty tough because just, it’s just hard to get deals done when people, saw like some of these interest rates. Half of what, it was not too long.
And I believe that this is in, just like how the lumber prices shut up a year or two ago. I think we’re looking at the same thing, and maybe even on the same timeline, where it goes back down in a year or two.
Refinancing share of multifamily lending. Loans originated for the purpose of refinancing, accounted for 75% of the small multifamily. So not new originations, but refinancing. You know what I’m prob what I’m thinking a lot of that is, is maybe people taking equity off the table and liquidating it to just put the cash reserves or to show up other projects.
And this is very different than what the regular person will be doing out there, right? People like to pay down their debt. They don’t like to liquidate their equity, but I think everybody needs to take note of this because this is what the pros do. If you had a few million dollars of equity in your apartment, it makes sense to take that off the table and just stick it in the bank.
Because in, in times get tougher, it’s harder to get at that equity. It’s not liquid. Which, just this is befuddles me, right? Why is it that everybody’s taught to pay off their houses and throw money in there where it’s inaccessible in tough times.
So CAPA rate spreads. So I’ve shown this. Many times, and it’s always good to come back to it, why do we invest in real estate? Real estate’s great in all, but like we make a good amount of returns when you apply leverage. And the thing is the price that the percent or interest rates that you borrow, the money is, not saying always, but typically lower than what the cap rates or what the returns on the properties.
What you don’t want is, a time like in 2020 when this delta, the spread is low. What you want is a nice, big, healthy spread there. If you recall, 2010 to 2000, I would say 16 was coin the golden age of apartments in multi-family, where the spread was huge. Then things got a little tricky, right?
As things started to really tighten up. Now, one could say that, this spread is a little bit wider now, a lot wider where it’s been in the last couple of years. But this is a time where it takes very the reason why is because the prices in, that you could buy these properties have come down.
But your hoarding costs has gotten way. But that’s where we are in terms of the spread. It’s, I don’t think it’s not possible for you to be like, oh, like the spread is small now I’ll just wait. Or it’s large. Now I’ll, it’s time to buy multifamily. It doesn’t work like that. Because going into deals, it takes a long time to transact, maybe two to four months from first contact to actually close an asset, and then, who knows what’s happening then.
Which is why the whole. Just keep buying good deals is probably the best approach or kind of dollar cost average to this is always, typically the spread between interest rates and CAPA rates go that spread is there and you apply leverage and you, that’s how you make money.
But, so looking at the graph. This lower one is the all multifamily and this is the small multifamily. Your small multifamilies are typically gonna have a larger cap rate because it’s more headache, it’s more pain in the butt and not, and that’s why the cap rates are higher because you know you’re probably gonna have it is just it for a lay invested.
They’re like, oh, let me go after a small multi-family because the cap rates are higher, but, More experienced investors know that it comes with more headaches and shovels and friction costs too, that aren’t really accounted for in it. But been there, done that. I, we started with a lot of Class C.
Smaller units, like 50 units, 70 units, and we graduated to the larger Class B stuff. Now we’re trying to get to a development and being more of a pro equity lending lender source and just give predictable returns to investors in the debt fund and then for larger returns to do the developments.
But, that’s the, our stories, it started with those Class C buildings, which is typically the smaller multi-family stuff. Not saying we chased the returns because a graph like this told us it was higher returns or higher caps, which not entirely all part of the story.
It’s that was all that we could do back then. But I’m, I’ll give first an experience that it’s maybe not worth it. It isn’t worth it in my opinion.
I would say, There’s a nice, sweet spot, with good tenants or no tenants. That’s why we do the developments,
expense ratios. So this is your expenses and expenses has been going up and up. I would probably say that well next quarter will probably see this bar graph jump. Now, expenses are coming from. Higher insurance costs, rising utilities, which is completely inflation inflationary. Other costs like taxes to property taxes, especially when prices have increased the last several years.
And then now the other thing is that is testing all apartment owners today and all real estate and owners today is the the interest rates going up, especially if you had a bridge law. Hopefully you’ve got a rate cap in there, that also increases your debt service, which makes your holding costs go up, which is why you’re starting to see the expense ratios climb across the bar.
But, it’s all, it all works within the system because if the expense ratios get so high where people aren’t making money, , that’s when kind of the prices go down, and that’s when you know the Fed should manipulate interest rates down. It all it, the nice thing about real estate is you can stay in business as long as you have capital stores to last these things, and these things don’t last forever.
As you can see, the loan to values have come way down, which is tied in with, people think when I talk about capital markets tightening and the lending market getting more difficult, that it just means instead of us borrowing money at 5%, it might be 7%. , but it’s also the loan of values go down.
So they’re like, all right, you can have 5%, but we’re only gonna give you 50% loan of value, for example. So those are the two main terms that are being moved around so that the lenders are basically getting a better deal, so that is consistent in this bar graph on this left side. Now average 66%, which, it’s all this is just averages right across the country.
But you can see where it was at the peak. 20 20, 20 19. Average LTVs were up in the 70% range. Now it has come down quite a bit. And we’ll end with this, the top 20 markets for four cast multifamily growth. This is from wealth management.com. Not saying that this is the all inclusive list or correct, this is just a guess.
But 20 Austin, Texas, and we’re working our way down from the top, from the bottom to the top. So Austin, Texas, Chicago, Seattle, Philadelphia, inland Empire, Los Angeles.
Portland, Oregon, Tampa, Florida, orange, Cal County, California. And then we get into the top 10 here, New York, where rents are going up. Raleigh, North Carolina, Boston Actually Boston’s number 10. Raleigh’s nine. Eight is Charlotte. Seven is Nashville. Six is Kansas City, Missouri. Five Dallas. Four is San Jose, California.
Three is Metro Miami. Is Orlando, Florida and one is Indianapolis. And that is the show. Folks, if you guys are interested in interacting with other high net worth investors, check out simple castle.com/journey. Our paid Inner Circle Mastermind. Say we’ve got almost 800 investors with us. We’ve got a hundred investors in the family office group, so not everybody joins.
But to me, if you’re investing more than a quarter million dollars, joining a group like ours is. Not only the only one out there for purely passive accredited investors, but it is, I think it’s insurance for investing with the wrong people and, but I’m big on like building the community where it’s more about the social connections within the group.
And then also check out my book and give us some feedback. We’re gonna be moving around this format a little bit. I’m gonna be breaking it up as today’s call was pretty long. And then if anybody has any feedback on the podcast things you guys like to see, things you’d like to see less of, feel free to email us at team passive cash flow.com.
And if this is the last time I hear you, see you guys have a great holidays. Happen in there, right?
What’s up folks? On today’s podcast, you’re gonna be hearing a little bit more in depth in my story. I get interviewed a lot and it’s very rare that you get interviewed well, like on this recording that we’re gonna share with you guys so you guys know, there’s a lot of podcasts out there, but, we try to keep things cool and authentic for you guys.
And part of that is, not just sugarcoating the narrative that a lot of people will put out there. With that in mind, if you guys have any questions we probably need to do another, Ask Lane show where we open up the question bag. But if you guys have any more relevant, to what’s gonna going on lately go ahead and email it in at the team@simplepassivecashflow.com
We’ll get it. Show going here in a bit on that. If you haven’t yet go and sign up for the club simplepassivecashflow.com/club. You get access to. All the e-courses that we have for free, The Infinite Banking e-course and then a lot of insider information as well as deal access there. And you can also take a look at all the other past deals we’ve been doing for the handful of years prior to this.
I think maybe we started doing this, maybe 2017 was our first syndication transaction. But yeah I feel like we’re not the new guys anymore, right? I think you can tell who is fake if you make it. It’s one way of doing that is just seeing how many assets they own.
Today we own $1.2 billion of assets under ownership. And I’ll be the first one to tell you, 2019, when we are around that half a billion dollar mark, we were getting our feet under. Since then we’ve expanded the team. I personally am not really in the day to day, nor are the principles and partners not in the day to day as we’ve hired that out to industry professionals.
What does that mean? People who’ve been property managers for a long time and have. This is what they do for a living. And we go on and headhunt the best people and bring them in house to asset manage for us. Very different from, I, I think there’s a lot of people out there that think, it’s the bigger pockets mindset, right?
Somebody who just doesn’t like their day job can be a. Real estate investor. I do believe to some point, but when you start to run thousands of rental properties and accept other people’s money in the terms of the syndications, I think you need to really hire a professional to do something right.
And I just don’t wanna discredit people in the real estate investing, real estate operating asset management industry, You. Yes, you don’t need a college degree to do it, but I think experience in this industry is very valuable, which is why we’ve hired people who are much better than you know myself.
And I’ll just, I’ll call myself out on that. But if you guys want to get more involved with us, join the club. We’ll simplepassivecashflow.com/club. Beyond the lookout as we’re gonna start to put out the. The info pages and the signups for the annual retreat here in Hawaii, January 13th to the 16th.
Make sure you apply and if you are on our investor club list, you can’t just come, you gotta just, you have to book that onboarding call with myself so we can get to know each other. And even if we’re not a good fit, I always try to make it a point to point you guys in the right direction cuz it’s, that’s ultimately what I’ve found that I enjoy doing for some strange reason.
So we open up your balance sheet and we look in. It’s basically a short period of time where you get to ask the questions and send you off on your merry way. For a lot of people it can be life changing and that’s, I personally like to be that person to make that impact for you. So make sure you guys sign up for that after signing up for the club and enjoy the show.
Lane, welcome to the show, my friend. Good to see you. And I look forward to the discussion today. Thanks for coming on. Yeah. Thanks for having me love everybody. Yeah. And before we get into your W2 prison break story, which is an awesome one right now, you’re doing some great things. We’re gonna definitely dive into it.
Just, I, to expand on the intro that I gave your bio kind of gives us some background on you. Take us back to the early days when you got outta college and started working and ultimately what led you to where you are right now? Yeah, I grew up in a household where your chocolate goes to school, studies hard, is a good kid, and invests in your 401k and max that out.
Just work it and grind at a job and work your way up the ladder for several decades. Yeah, I was always, we were always taught to save, like when we went to restaurants, we never bought soft drinks. Those are always costly, we are pretty frugal with our money.
. I was able to save, 80 grand in a couple years working and to buy has to live up in Seattle. And that was that program. I call it the linear path. Cause you just follow it, like your brain dead and just good boys and girls just following that path. And that was me like right outta college.
I was a construction supervisor out there. And a hundred percent travel. And I knew you had to pay your dues. But very early, I was like, this sucks, like this engineering job sucks. Yeah. Another fun thing people like say, oh, it’s good to be outside outdoors.
And not stuck in office. I’m the opposite. I went to the, go to the office every day. So be the same thing. Go to the gym the same time. That was more like me, but , that was how, how I was in my early twenties. And you were in engineering, it sounds like that’s correct. I got a bachelor’s in industrial engineering because I wasn’t smarter enough to get it in computer science, electrical, chemical, and not smart enough to get it in like mechanical or civil for undergraduate.
Yeah. So I went to project management, right? There you go. And you mentioned about you were being taught to save. Hey look, my parents did the same thing too. We were frugal. It’s invest in, I drank the Kool-Aid too. Invest in your 401k and save and get a good job. And. Hopefully you retire when you’re 65 and you’ll have enough money to live for the next 20 or some odd years.
What did you do with that? You saved up the 80 grand. So obviously there was some benefits there, you learned those lessons. What did you said you bought a house with the 80,000. Did you buy a rental property or did you buy your main residence? Yeah, I bought the main resonance first because that’s what everybody says to do.
Get on the escalator of wealth building and oh you’re paying rent and throwing money down the tube, which in my opinion is totally false. I don’t know people get that from, but I blindly followed the dog. One, bought a house live in and, appear this 20 something year old kid is living there all of himself and he’s traveling a hundred percent for work.
So what does a cheapo do? I started to rent it out. And I just lived off the company dime, living in hotels for several years up straight. And I, I tell people it’s not what you make, what your top black income is. It’s more what you save. Now, it’s making close to six figures, but like nothing like how kids are making these days, or I know a lot of your guys are making like two, 300 plus thousand.
A lot of my clients make over 500, 600,000 as doctors. It’s all what you net. And at that time, making a hundred grand, I was able to save sometimes 80, $90,000 a year, just paying taxes, basically. So all that money went to buying more and more rentals after that first one, I got that taste of cash.
So I was like, wow. The tenant’s paying down my mortgage, I’m getting the equity appreciation there. I’m getting cash flow, which I can feel like I can finally spend it, cuz it feels like free money. And then I’m getting the tax benefits and then the appreciation to which I don’t really count on, cuz I don’t believe in gambling on appreciation and be going cash flow. But when you add those four up, you’re making like 20, 30% plus and your returns on your money. And I. Why the heck am I doing this? Eight to 10% nonsense.
Great insight. So it sounds like you had a pretty significant mindset shift early in your W2 career. And that really helped you, understand that, Hey, there’s I can leverage my W2 job, you’re out traveling. You’re not really there. So you just said, Hey, let’s rent this thing and you got a taste of the passive income, and then you started acquiring some more properties. And we talk about that a little. And before I go any further, I know people have heard this before, but we’re not talking about wholesaling and flipping houses to me.
That’s what you do when you’re broke. For many of us with good paying jobs and, are busy managing our, like our day job. So we don’t get fired the stuff on the side. it needs to be passive. So I was buying these what they were called, turnkey rentals. Sometimes folks out, out there, like the flyover states where the numbers work way better.
One of the things we look for even today, when I buy large apartments is like this 1% rent evaluat ratio. So you take the monthly rents divided by the purchase price and it needs to be 1% or higher for the numbers to work for the cash. Why is cashflow important? Obviously you get paid every month and, but in case of a recession, you’re not, out on the code, right?
You can pay your debt surface. We, we don’t really look at like loan, the value. We look at debt surface coverage ratio for some more sophisticated investors out there of debt surface coverage ratio, 1.2, five or greater. Like going into these types of deals, you. It’s typically not gonna be where you live.
Most of my clients live in Washington, California, New York. It ain’t gonna be there. Those are called primary markets. So I was buying in lot of these secondary ter rate markets like Birmingham, Atlanta, Indianapolis, Kansas city, Memphis, little rock, places like that. Not the funnest places to go and visit, but they have these great rent value ratios that allow you to cash flow.
They don’t appreciate as much. No, I don’t really care about that. I don’t care about what cash. So I started to buy all these 20 key rentals and just all my money plowed to just down payments on these things over the next several years. Did you, okay? This is great. This is great stuff. So you’re not living in, you’re not living where you’re investing.
Which I think is a misnomer for a lot of folks who are, working in a job that they want to get out of and maybe create some cash flow. So you did this all virtually, essentially, and maybe touch a little bit more on what you mean by turnkey. Rental. And how active were you in managing these properties that you ended up purchasing in other states?
Yeah. This is actually like a product that people will sell Turkey rentals. If you Google it things will pop up. Guys, providers will pop up and supposedly there’s different layers of turnkey, essentially the idea is house flipper out there will go buy a beat up piece of junk and they’ll fix it up.
They’ll but they’ll put it put like a renter type of standard type of stuff. It won’t be like super pretty, but it’ll be like really durable and good enough, for government work or for, class B and C renters for the most part. So they’ll fix the roof, the flooring appliances, the new page job they’ll fit all the interior stuff.
And. Sometimes these guys will even put a tenant in there for you and manage it for you. I always recommend my folks to get a third party property manager to get this all in place. So you don’t, you buy from somebody else, it’s a great way for like new investors to put on the training wheels as a landlord.
But this is what I did, I bought from 2012 or 2009 was when I bought my first rental . So 2015 is when I stopped by these little rental properties, I got up to 11 of ’em and I think they’re a critical part of wealth building, but if you’re already in a credit investor or million dollar network or greater making more than two 50 a year it’s little rental properties are a pain in the ass and they’re still have some little bit of li legal liability and the debt’s in your personal.
Syndications and private placements might be more of your style. That’s where I switched. So for 2015, with 11 rentals, each rental gives me like a couple hundred bucks, few hundred bucks, a cash flow every month. So you add that up. I was positive cash flow, 3000 bucks, which was BEC a lot of that’s when it’s real, estate’s tax free.
So it was essentially like half my paycheck. I saw the like to financial freedom. Yeah. And I actually saw this very early on and my, my attitude towards work changed pretty drastically in the first, even the first several years doing this where I was I don’t really need to do this too much longer.
Yeah. So you were planning the exit. You were you saw it as you said. Yeah. Yeah. My first job was pretty hard. I worked for a very conservative company where, quality of life is low, but the pay is a little higher. And maybe that was probably a good thing too. Yeah.
Because it cl it heated up the wa falling water and it made me really hate my. And wanna get out even more and more motivation to saving, to put the down payments and more properties. But that was I would say my attitude definitely changed after a while. Like I became apathetic in a way where it’s I don’t have to keep doing this.
Like I make more than you guys at me. It’s start to realize. 95% of people out there. They just are really bad with their money. They can’t save it. They spend more than they make. And, let’s put aside the folks who don’t go to college. Not saying college is really that great at anything, but don’t go to college, don’t get a professional career.
A lot of those people, it’s an income. They just don’t make enough money. If you don’t make 50, 80 grand in this country with a family, you’re not making enough money. Quite frankly. Yeah. That’s a different problem. I don’t know how to fix that. There’s so many websites, debt, consolidation. I don’t know about that, but I was good with my money.
So a lot of folks that I think are listening resonating with this, right? You make six figures, but there’s this kind of money mindset out there. Like Dave Ramsey, C you Orman the saver mentality. What I tell people a lot is that’s good for people who, number one, don’t make that much money. Or number two, maybe you do make a good salary, but you suck at your personal finance.
You can’t really keep a budget. And I would still argue that most people are like this. The people who cross over, like people like myself, right? We save a boatload of our, into 401k, even though we shouldn’t be doing that. And we were on this fast pass to financial independence, need to get rid of the Dave Ramsey, Suzy Orman save, say, save.
And you gotta get into being buy assets with good debt and leverage your debt and in a way, be on the offense. People don’t realize that there’s these two paradigms and the two some people call it the rich dad, poor dad mentality to operating system. I call it the simple passive cash flow.com mentality.
Cause actually tell you guys what to do, buying little rental properties to your network, cuz half a million million, then go into syndications and private placements. After that. But that, that’s what I followed. I followed this journey. Once I got to the accredited status, I started to go into syndications in private placements and I started to dump the low, annoying rental properties.
But the annoying rental properties to me was a way how I learned and it helped me really do due diligence on the larger deals as a passive investor. And Yeah. Yeah. Great share. Can you talk about, and I love the simple passive cash flow.com. That’s your, that’s where you teach people how to do this.
And basically follow this path that you’ve developed, which are gonna get to there’s. So a lot more here, maybe talk about one of your first syndication deals. Cause you did make the leap from single family too, to, to syndications, to mal. Yeah. I already had that mindset of these rental properties are a pain in the butt.
It’s not scalable. Yeah. For if, like I said, I had 11 rentals and maybe a few hun $3,000 and pass the cash flow every month. And it was a bit of a headache because with 11 rentals, just to give some people some insight. I had maybe an eviction or two every year, which are a little annoying.
Of course I have a property manager on all these properties. I’m not some idiot who runs this stuff myself remotely. There’s somebody else that takes 10% of the rents that does all my dirty work for me. Yep. But yeah, to deal with these evictions and these, every quarter, you’re gonna have some big kind of catastrophe.
If you have a love of rentals, it’s if you have 10 sons, one of ’em is gonna go to jail every decade, like that’s just the odds. I’ve never heard that before, but yeah, I guess that makes sense. I don’t have sons, but I just see it on TV and, I just see it out there, see if Felic, some kids gonna go to jail, typically a dude . But yeah I, you see where this is going, and totally I’m like, then I started to join. This is where the big thing aha moment for me was I started to interact with other high network accredit investors.
And these aren’t, super rich people, but they have a million dollar net worth or greater. And a lot of ’em were. Of my pedigree I was an engineer, there are a lot of engineers. There’s a heck, a lot of engineers as investors, doctors, lawyers, dentists, accountants, pharmacists, lot professionals also working their day jobs because it’s a great way to, build up that cash to buy more rentals or go into more deals.
But they’re all their main thing was that they were, you. Dumping their rentals and going into these Archer syndications. And I just saw the writing on the wall. And when you meet people who do what you do and they say I used to do what you do, but now I do this. That’s probably one of the best arguments for me that I at least start to look into these large syndicated projects.
But when I first started saw this stuff, I thought they were like Ponzi schemes. But then I started to get to know the people build relationships. And that’s what this world is. It’s a people game, building relationships, the right operators and building colleagues and peers of other passive investors to know who’s legit in this business.
The trouble is everybody’s got podcasts these days. Everybody’s got books. So it’s really hard to determine who’s legit in this, fake it to your, make it type of world that the general partners live. Which is why I tell everybody and how, like my whole method is like building relationships with other passive investors is why we have a community for this.
And you just basically copy what other passive investors do, that have gotten good returns from people having gotten their money. And this is the essence, like this is the country club deals. This is the virtual country. In a way. And this is the way that a lot of investors invest and we can get into it later, but it really opens up the taxes because now when you’re going into these deals, a lot of these deals do cost segregations, which if some people are rental property owners, you can deduct 1 27 of the value of the home every year and take that as a paper loss.
But with this stuff, you could deduct one third of the property all in the first year. Yeah. Like it could be like a 10 or 20 X that deduction, and now you can implement certain strategies. The typical one for my clients are like, you have a couple, one higher paid person and maybe another lower paid one that we wanna have ’em to stay at home and play with the kids and enjoy life.
Now that person can implement real estate professional status rep status, which is a checkbook on checkbox on your taxes. There’s a few loopholes that jump through, but once you do that, now you can use the passive losses to not only offset all the passive income, that’s the gimme, but use it to offset the ordinary income, which I know a lot of you guys have high w two or 10 99 salaries.
And you can basically, if you can pay whatever taxes you want. At that point. Correct. And as you alluded to earlier, it’s not what you earn. It’s what you get to keep, right? This is right. This is a tremendous way to reduce your tax liability. And even to, to zero in some cases, I’m sure. Yeah.
I don’t pay taxes equally. I have million plus bucks of passive activity losses. To use at my disposal. Yeah, there’s a strategy to it. And unfortunately, a lot of CPAs tax folks don’t really understand this stuff. That’s why, like a lot of this stuff is if there’s one big piece of financial advice, never take financial advice from people who are not financially free themselves.
Like, why would you wanna take financial advice from a CPA? The dude has a job at J B. He works for a paycheck. He hasn’t figured this stuff out. Yeah. Show me your income statement. Show me your net worth. Yeah, i, I don’t income. It’s all what you keep and what you accumulate at the end of the day.
There’s a lot of people with high incomes that aren’t the most sophisticated investors. or money managers. And it’s all net worth to me is what your age is. So when did you great stuff? It’s you’re now in these multi-unit deals and you’re buying a lot of commercial assets if you will.
And you’re up to several thousand units now, but when did you start. Really think about, okay, I’m exiting my W2. yeah, I did this. So know, switching back to the W2 world I did change jobs few times actually. I started to work for the government and , I actually, the job became pretty I actually enjoyed it at that cause I enjoyed the full workers.
I liked the management. I didn’t like what I did one bit, but I mean to me, there’s like a triangle of who do you work for? Who do you work with or your subordinates, and then do you like the work that you’re in? I think if you have two out of three of those, you can be pretty damn happy.
You can’t have one or not. Yeah, I guess what you’re trying to find is something that’s all three, which. Good luck but some of my doctor clients have it, because they, if they happen to be, have a good boss, that’s the hardest one. They work with people and they, they often work with people on their worst day and that could be very enriching.
And then they obviously, they may like their coworkers to have a great team environment. That’s the perfect environment where you can make a full load of money doing that. Most of them work two to three days a week. But they typically do once they find this stuff. But for me it was like just downgrading to like more quality of life, less work responsibilities, but after a while, I went into some bad deals with people as a past investor.
Then I realized that I needed to control the capital stack myself and, that’s why I started to do deals myself. And then my impressions would come in and that was it I felt felt a little irresponsible, like bringing in my constituents that here I am working this W2 full-time job on the side.
Little Iwan still. So I eventually cut the cord on that, but if I wasn’t like a general partner geo operator, Probably, that would’ve been a great, like I could have probably still doing it today. Like I enjoyed the work somewhat. It was cruise. I got to do my investing, passive investing thing on the site, which isn’t that hard.
Yeah. To be a passive investor, maybe takes five hours a month to do it. Yeah. That’s really all it takes. Yeah. Great. Yeah. But that, yeah that’s what. I couldn’t just stayed in that job and just kicked back and cruise, but, I think I quit around like 2018, I think. 18 all right.
So you’ve been here for about a little over 10 years in W2. Yeah. But the w two really helped me, propel our company and, build our organization that, I, and I think for my kids, I’m not a huge fan of college and higher education. But I do think that it gets you in a position to compete and get into a fortune 500 company.
And I’m not a huge fan of fortune 500 companies cuz of bureaucracy and everything, but it helps puts you into a system and you can be on the inside and be a. You can learn how their systems are. And a lot of those systems I implement today, minus all the BS, essentially. It goes without saying congrats on the on the exit there, but talk about your company now, you’ve got this big real estate company.
You’ve got over a billion assets under management, over 8,000 units. Talk about what, talk about your business and maybe a little bit about what, like a typical day looks like for you? What are you doing? Yeah, today it’s changed a lot. In the beginning we were running around.
Doing everything, managing the manager, working with investors. When we went over, I would say 500 million of assets on their management. It became unscalable to do it like that for ourselves. And that was a period where we had to reinvest a lot of our. Profits into other staff with who did our job a lot better than us.
So some of the key hires other than, investor relations staff and, marketing staff, but the key hires are like, hiring other property managers. But the property managers who did, were in the industry for a decade plus, and they have this insights, it’s just if you came at, and play doctor or computer scientist or computer engineer for a day, you just can’t do it. Like even if you studied up for six months to a couple years, you just can’t do it. And. Here I am, I guess I’m a semi smart dude, right? But I don’t know, like the little nuances that somebody who was, worked at a 30, $40,000 leasing agent job and stepped up to a property manager that maybe started their own property management company.
Those are some valuable insights that kind of, we have as our operations staff now that we’ve engulfed. So we’ve, our role has changed from, doing everything, to just creating the org structure. And that, that was not one of my forte. So we have some C level staff that help us do that.
But these days it’s more like guiding the direction and business development. Cuz that was essentially what got us started was the key relationships and continuing to build key relationships in the future, like with banks and with equity partners and stuff like that. What is the, sorry, go ahead. Oh, I think still.
I have a life coach and he tells me you need to figure out what you really enjoy out of all these random things you’re doing. And for me, it’s interacting with investors, give them that all home. And you’ve been doing it all wrong of 401ks, this bunch of retail investments that just, go out to the clueless and you need to get into like deals where, people and where.
It does well in recessions and then you you implement that, then you get the cost segregations and the depreciation and losses to do different games on your taxes. Then you do a little bit infinite banking, which is like cash value, life insurance at a 90 10 split with 20 10% being insurance.
And those are 1, 2, 3 combos. Like it’s a powerful thing that is very counterintuitive to how normal people do finances or people still in that Dave Ramsey school of thought. It’s a game changer and it allows, people who’ve been working so hard, I’d say our average client, 1.5 million net worth in their early forties with two kids, you change one thing around now, one spouse doesn’t have to work and now they’re, they see the light instead of now they’re 20, 30 years of working.
It’s really five years ahead of ’em. It’s totally transformational within, these individual families and, putting on the events and then meeting other people who have taken the red pill of finance. That’s what I enjoy. Awesome. And you, so you’re putting on some events too. Talk a little bit more about about that.
It sounds like you have events for your clients. Yeah, we’re a kooky bunch, right? Like we are our deep down core is like we’re savers. We delay grad and we get off on that. People come to, we do in Hawaii, like people come to Hawaii, nobody stays at the high end stuff. That’s not good use of, that’s not good value.
They stay in like kind of the more boutiquey, three star, four star hotels. A lot of these guys are very affluent, especially once they start to invest and. It’s lonely, right? All our friends and family are investing in like the 401k or some of the, the more aggressive ones are doing crypto and Bitcoin or worse out coins.
And it’s just here. We are investing in very stable, boring assets. Like I almost call it like investing in blue overalls and machines and hard work. We buy. 1960s and 1990 properties that caters towards the lower middle class, a grungier demographic. It’s not sexy. We slowly and it takes a while, right?
It’s not a get rich quick steam. We go in and we rehab units slowly as 10 minutes, move out takes forever, takes, several years. but in recessions, it performs pretty well. And in good times it outperforms a lot of the good stuff. Yeah. And it’s like this idea of doing this with so many people is crazy too, that like when people, assemble, I’m going out to like LA next week and Arizona, and just to do a little pop up.
Meeting, but when people assemble and they’re like, yeah, I don’t do the 401k because like all the reasons lane said it totally makes sense, but like none of my coworkers, I can’t, they start to become very distanced from most of their coworkers, because none of that stuff, when they actually use their head and get away from the financial dog mouth put on by all the fan guards, alies all these institutions that want you to put your money in that stuff.
Yeah. They’re. It makes no sense, but I still, people are still like, they’re stuck in that spell. But when I come here, I can have great conversations and we disclose what our net worth is, what we’re investing in. And these, we can talk about these alternative investing ideas, talk about deals. It’s just it’s like a cult to the us, right?
You’re around like-minded people and you’re, you’re all it’s always good to be in, in a different room, especially when you don’t like the one that you’re. Yeah, I love what you talk when you, I love what you say about 401ks. And I saw the light on that too. I always knew it, but I just kept feeding it in cuz it became like automatic, I caution anyone to be very leery of putting your money into into a program, whatever what, for lack of a better phrase, where they control, how much you can put in, they control what you can invest in.
And then. Tell you, when you can take it out, they, and then they tell you when you have to take it out. So it’s just very limiting and it’s all completely one sided. And I saw the light on that. I’m sure you have plenty of thoughts on the topic, but, I got completely out of that.
I, yeah. I, over pretty concisely in a, couple minutes I have four big issues with the 401k. Yeah. Please share type of stuff. Like first, like it’s a lot of it has to do with taxes. . When I put my money, a lot of the whole dogma is predicated on you will be, you’ll get older and you’ll Shivel up and die and make less money in the future.
And at that point you’ll be in lower tax bracket. But not me, not most of my investors, they’re gonna be baller in the future in me in that much higher tax bracket than they are today. Yep. Therefore, you should pay your taxes on the damn thing today. Take it out today while you’re in a lower tax bracket.
Number two. Look where this country is going, how are you gonna pay for all these government entitlement programs with raise taxes in the future? So again, pay your taxes now, get it out. Now the next biggest thing is I think the argument for these 401ks that oh, gross tax free.
When you invest in real estate, that has a bunch of paper losses like depreciation, you can write all a bunch of other stuff. It often is tax free anyway, so that point is negated, but here’s the big kicker. I think, we briefly touched upon this, like how most people are playing checkers, putting money in their 401k or Roth IRAs or whatever.
And we play chess, right? We’re manipulating our adjust gross income on our personal tax return based on what our investments are. And when you play this chess game, instead of checkers, I want the depreciation and losses that come from my investments where when you’re investing, you can invest through a self-directed IRA too.
But when you’re investing through one of these type of programs or solo 401k, it’s you don’t get the passive losses, the flow on your personal tax site. It stays locked up in there. Yeah. And that’s the downside to this. It’s more about using the losses on the deals and the investment ties from depreciation, which is just paper loss to clean up your pay less taxes today.
And you lose that ability when you invest in this insulated 401k or solo 401k. So unless, the only good thing it’s. If you’re investing in non-tax advantage type of stuff. What it’s non-tax advantage stuff like, like your crypto things like that, or if you’re a private money lender in, in, in a, in real estate I wouldn’t do that anyway.
Where you just lend money to a house flipper. And there’s no losses you’re getting paid with a 10 99. There’s no tax advantage with that, that’s the stuff you’re supposed to do it in those type of stuff, but I don’t do anything. That’s not tax advantage really. So love it.
Great share great insight. And something more we can learn at simple passive cash flow.com. I’m definitely assuming that. And then you have a podcast as, as well. Talk a little bit about your. Yeah. It’s basically a fall of my journey. I started back in 2016 when I was buying little rental properties and I would just teach people how to buy, turnkey rentals and yeah.
Back then we had a little incubator group and. Now a lot of the information’s for free. And if you’re just in the game of buying little turnkey rental, you can go to simple pass cash, flow.com/turnkey and get the free guide there. But as I became over an credit investor, and like I said, at that time I was going into a lot of larger syndication deals.
I saw the light and for credit is just, it’s a no brainer to go into these syndicated deals. If you could build relationships and build a community around your. Or join a community out there. And that was where it transitioned and it is, that’s my whole thing is I. I know that there’s something else out there and that’s my job is to cut the corners for a lot of folks, right?
If you’re net worth is a million bucks, you shouldn’t Dick around with little rental properties, you just go to the big stuff, the syndicated deals. But for a lot of my investors that are like one to $10 million net worth what’s after, what do you do after, when you’ve got, five, $10 million plus, and you can comfortably live off your four or 5% off of that.
What are like the 50 million, a hundred million dollar families the family is doing, right? Yeah. That’s the kind of stuff that I try and learn these days and I try and bring it down to my folks and just that insight. Cause you wanna just always be improving as a investor and be, become a professional investor.
The trouble is right. Most people are working their day jobs, so they don’t really have the time to, and, but the, and the issue is interacting with the right higher level people, higher level investors, getting access to those rooms, which a lot of people don’t have the time for nor the network.
But that’s been my passion to uncovering this myself. But even, to implement the strategies for one to $10 million net worth people, I. You look at it and it’s not that hard. Like I said, invest in good deals. Use the passive losses on your taxes, tell your CPA what to do or find a new one.
Yeah, infinite banking and it’s pretty simple, but it’s very counterintuitive to what, like they normally tell us right. To do. Extremely. Great chair. Great journey. Love your story. Just before we wrap up, I got a couple of couple questions for you. I wanted to ask one, do you, whether it’s a morning routine or some habits that you’ve adopted, that you could share with the listeners that have really led to your, to success or keep you up, on the path, if you.
Yeah, I think one thing I do well is I execute I’m the person who will write down my list of things to do, but I’ll actually do it. I, and I think that allows you to constantly innovate and constantly improve. I don’t know what that, if you improve one person every day, at the end of the, you’ll be like 20 something times better than what you.
I’m not a huge fan of like boring routines. I don’t wake up and do yoga. I jump on the emails and put out the fires, just like anybody else. I don’t wake up super early, today was a little early for me. I try to wake up around eight. Nice. If I can. Yeah. And I think like my whole advice from that is Hey, do what works for you guys.
Not everybody is the same, but make sure it works for you. And I would say I’m really good at focusing on what the business is. And for a lot of folks listing, it’s like your own personal finances. What are you gonna do with the investments and taxes? Not what you’re doing with your employer.
You’re building somebody else’s dream with that. Build yours first. Even if it you’re like me. You’re working a day job. You’re sleepwalking through it for a decade. That’s to me, that’s the most important thing is get your own stuff. And doesn’t take that much time to learn, to do what’s right.
And to implement it, especially once what you should be doing. But you can sleep sleepwalk through a job. They take, they pay for your time and your head, but they don’t charge you for your heart. So you you always have those sex, those few extra hours a day to put to where you are doing after you play with the kids and you do your family obligations and you’re tired.
Course, too many people spend so much time, like over the news or like focusing on things that don’t matter. What’s the saying? Most people major in minor things. Tony Robbs both. Yeah. Yeah. Great stuff. Get your own stuff. Awesome. Share. Do you believe in, do you have a coach or a mentor, do you believe in that?
Not really. I think when you’re starting out, I think a coach would be good. That’s the role I play for some folks. My inner circle and mastermind group and. But, you gotta pay ’em right. If anybody’s worth it, you gotta pay ’em and the trouble is there’s a lot of fake gurus out there that don’t really do anything.
They just write books and stuff like that and have YouTube channels. That’s why a lot of stuff on my website is free. I hate that fake picture stuff. The guys that teach people and they mostly prey on not your audience, they mostly prey on the guys who don’t have money and are really desperate.
And they sell ’em on hope and fear, but yeah. Yeah. I would say You need to find a model that’s doing this, but if you’re starting out, there’s a lot of YouTube and podcasts to just start to absorb it. And I would say focus on getting a community rather than worshiping the gods and the gurus.
Find other peers on this journey and that’s gonna be the way to get you off the ground. Of course, I’m super cheap. And that’s how I used to do it initially. But then I saw the light in 2015 when I really started to pay, like five figures plus a year on these mastering groups in education.
And that got me connected with the right committee. Then there’s the freebee free loader tire kicker crowd of peer groups. Yeah. So that was a big thing in hindsight, if somebody’s starting out, so much free stuff out. You should be able to dissect, but just know you’re trading time for money in a way, but I’m always just rolling down the road before you interject any kind of type of money into it.
Like once, once you’ve got some, you might have a rental property or in several deals, then I would say it makes sense to phony up. Once you get proof of concept and this whole thing works and then accelerate it with a better community and network after that, that is actually serious. Go ahead. Yeah.
Thanks lane. We’re gonna, we’re gonna give the website again, simple. Passive cash flow.com. Simple passive cash flow.com. It’s been tremendous, haven’t you? I just, I love the insight. I love the way you think. You obviously think a lot differently now than you did when you first started out, so that’s the, you can see the growth there and really appreciate the share.
Anything else you want to share with the listeners before we sign off or that I forgot to. No, I think some people are saying that eventually you’re gonna quit the day job. I think that’s probably the mindset of a lot of folks, but, speaking from myself and a lot of my folks who are like two to 5 million networks who broke through that part of the stratosphere.
Everybody, you gotta do something with your time and you gotta try and figure out what makes you happy. I do think you have to go through a period, like a little air pocket where you don’t do Jack for maybe six months to several years where you just go weightless.
And this concept of financial freedom to me is kinda like you, you need to save enough money to buy enough assets, to create enough passive income, where it exceeds your expenses. So 10, 20 grand per month. And then you put your. And then you go wait less and you gotta go through this vacuum and air bubble where you’re just floating, but until you’re floating and searching for your next main life mission it’s hard to do that, to search when you’re stuck trading time for money.
So I think that’s what I’m uncovering with myself. And some of my clients have to go to that stage. You gotta get your own oxygen mask in the first year, you gotta get the fi and then the next chapter, your life will come. But it’s a lonely world, right? Not many people get to ponder these types of first world, or I know first world problems, but like the upper 1% first world problems, where you’ve searching for autonomy and trying to find some kind of meeting of what the heck you’re here. when your money continues to compound on itself, where it compounds at a rate where it’s quicker than you could spend at a regional rate of course, but like yeah. Not many people are faced for that.
Most people are stuck in a day job just going at training time for money. Yeah. Don’t have to do that. Great final thought. Appreciate the share. And you are spending some time with us today. I know it’s valuable. Everyone, thanks for tuning in as always to make it great.
What’s up folks? Lane here. I’m gonna be talking about bonus depreciation and it going away here in 2022, but don’t worry, it’s not going away until the next few years. It’s just stepping down every single year. So first off, what is bonus depreciation and why should you even care about this thing now?
All right, so for you, those of you guys who know, you know, with rental real estate, one of the main reasons why I like rental real estate is because you can depreciate the asset and create a phantom loss or paper loss, whatever you wanna call it. But you can create these passive losses or pals for short.
P A Ls kind of clever, right? But you can take these pals and these passive losses can offset your passive Inca passive income from what you may say. Well, passive income from rental properties. So like your cash flow that you’re getting from it. Or you know, things you’ve held for a while and you’ve sold it.
Um, in terms of real estate, you know, you can use the losses from other investments to knock it out and not pay any taxes. And this is how I’ve kind of lowered my tax bill quite substantially over the last several years. Um, and this is, I think, the biggest thing that I’ve learned. Why do you wanna do real estate and why do wealthy people do real estate?
You know, for a lot of folks out there, before they even start working with us, they’ve got a high ordinary income or active income, maybe from a day job, or maybe they’re a business owner. But you know, we have a lot of clients that, you know, are maybe dentists or doctors making 600, $7,000 a year.
But that’s all ordinary active income. The problem with that is you can’t use passive activity losses or pals to knock it out because pals are, again, only used to knock out. Passive losses can knock out passive income. So what do we do? Well over time, you know, people work with us. They, you know, they join our network.
They get the connections and the deal flow to, you know, go from high active income or income where they can’t really shield themselves. And where, you know, the IRS is just absolutely destroying you every single year, and we’re moving you away from that to passive income. Why? Because you can use these passive losses to shield you.
From the taxes. And a lot of people who invest a lot in real estate, um, maybe not even more than like a quarter of their portfolio could possibly wipe out their entire tax load, um, from doing it this way. And this is the reason why I don’t invest in crypto or stocks because when you sell that stuff, it.
Consider all ordinary income before I go any further. Of course, I’m not a CPA, a tax attorney, anything like that. But hey, you know, um, I’ve been doing this for quite a while myself, and these are just some things that I personally do and also some of my, uh, colleagues who are also professional passive investors do themselves.
So what is this bonus depreciation thing? Right? So I think so. You guys have maybe owned rental properties before? No. You can write off the property over 27 years as a paper loss or depreciation loss, um, which is great. Just 27 years is a really freaking long time. Um, and this is excluding the land portion.
We’re only talking about the, the, um, property improvement portion that you can depreciate because land is not depreciable cuz it just stays there. But the cool thing about commercial real estate, and when you start to do these things called cost segregations, and we’ll get into what the heck a cost segregation is, is you can do these cost segregations and you can aggressively write off the property a lot faster than that really long 27 year cycle.
A lot of times you can write it off the entire building. Third of it in the first year, which we’ve done on many of our past projects, to create a huge, huge amount of these passive losses that dump on ourselves and passive investors, K one s, and now they can take this huge, huge loss and maybe offset their passive income and some of the people doing rep status.
Which is a little bit more of an event strategy that we kind of help people implement along with their cpa they can use these passive losses to lower their income. We’ve got a great example of that. Come to the next slide and how people are lowering their adjusted gross income from a million dollars maybe to a half a million dollars a delta to 500.
And at 50 cents on every dollar tax savings, that’s a quarter million dollar tax savings right there. But getting back to like this bonus depreciation via a cost, eg, right? So what the heck is the cost? So a cost e.g. is pretty much you pay a geeky engineer like how I was at one time to go out and itemize the entire building.
And if this is all kind of go, get you. It really doesn’t. You pay a guy about five to $10,000 to do this. There’s different ranges, and of course you wanna find a good one and we can kind of help you guys out if you guys need any referrals to this. But the engineer needs to actually go out and visit the property and, you know, take some notes and do their report.
But basically what it is, is this large report where they itemized all the little components of the building from, you know, from roof to plumbing, electrical, concrete, you know, everything. Basically what they’re doing is itemizing all the little components into dollar amounts into different categories, and those categories are five v, seven, 10 year category assets.
Certain things depreciate a lot quicker. Certain things to depreciate have a little bit longer lives than they might be in the 10 year category or more. So again, not really needed from a passive investor’s point of view. Passive investor’s point of view is to understand this stuff on a high level to know who to go get the cost tag or which in syndication to invest in that they’re doing a cost segregation, getting the bonus depreciation, and then be able to communicate.
To your CPA and what the heck to do with all this? Because most of the CPAs we find, or at least from what I see a lot of you guys out there, my clients, 95% of you guys have to change your cpa. Because a lot of CPAs just frankly don’t understand it and it makes sense. That’s why the CPA has a day job. They haven’t figured this stuff out yet.
Right. But hey, you know, maybe not everybody should know this stuff because then who would do our tax returns for us? Right? But anyway. So this Costa gets done, it’s passed off, uh, probably in a nice little PDF or Excel format, whatever. It gets passed off to the cpa, um, that you have and that can be distributed out to, um, yourself or as when we do it, we do a big syndication.
We do this all for our investors. We get the Costa, we pay for it, and then that allows us to pass it to our cpa, who then distributes all the losses, the passive losses to all I. Via the individual K one. So it all comes out at the end of the year on this nice little clean one page, K one document.
And what this does is now each individual past investor, or you know, if you’re doing this on yourself, um, doing it on your own properties, Um, you guys can check out the referral, um, partners at simple passive cash flow.com/coste. By the way, there’s some older videos and education on there if you want to do this all on your own.
But you know, you can go over there and, um, you know, you can do this cost segregation and get all this extra depreciation. Now, coming down here, you know, investors. You know, some of these deals I see, you know, you put in a hundred thousand dollars, you may get a hundred, $120,000 of depreciation losses more than offsetting, you know, maybe you made five, $10,000 a year more than offsetting that, and you’ve got this surplus and.
For those of you investors out there, you really want to have this form called the 85 82 form. Every investor needs to have this. If not, you need to ask your CPA for it. And a little dirty trick is the CPA is never like they give you this stuff because then they know you’ll probably just leave them after that point.
But, You know, I always check my 85 82 form and see how much passive losses I’m floating because that allows me to play strategy and whether I deploy the passive losses and activate it, essentially, you know, keeping it from my storage and using it to lower my AGI that year. Or do I keep it because maybe I’m having a big, uh, capital gain the next year or three, four years from now.
Right? And this is where it gets com complicated and every situation is just a little bit different. And that’s why we tell you guys well. You know, join our organization, you know, a book of free intro call with myself. We can kind of walk through this. Um, I’m not gonna give you any tax illegal advice here, right?
But I’m gonna teach you how this kind of works so you can make the best decisions for yourself. Or at the very least, have an educated conversation with your CPA because, um, you guys need to educate yourself. If not just CPA’s, just gonna do it the easy way, right? You ask most CPAs, how do I save tax?
They’re just gonna give you a bunch of lame stuff like, um, you know, do a 401k, do some pretax, post tax, maybe Roth ira, lame stuff, folks. That stuff is like playing checkers where we play chess. So, moving on. So what’s this bonus appreciation thing, um, going on? So in the following year, um, you know, this is gonna be stepping down.
So from the tax cut and job act, uh, I believe that was maybe around when Trump came into office, he signed in this, uh, nice little, uh, carrot for real estate investors. There was gonna be 100% bonus depreciation, and this is gonna be phasing away starting next year, 2023. Um, where right now in 2022, you get a hundred percent of it.
Next year you get 80% and a year after you get 60%, and then the year after that 40% and the year after that is 20%. So it’s phasing away is. Slowly, right. Not to say that 80% isn’t just as good as a hundred percent, and what I’ll kind of cover is that it’s just, it’s not like you’re getting 20% less.
It’s just for the bonus part. Right, so it’s, you’re still getting the normal, regular depreciation, so it’s not like you’re getting 20% and I don’t know exactly how much, and cuz I haven’t seen it, I haven’t compared my K one s from this year to when? Next year. it’s only 80%. But when I look at cost segregation reports from my own viewpoint and look at the numbers, I really don’t feel like it’s that big of an impact that a lot of people are kind of making their way out to be.
I all kind of feel like it’s a little bit of a scare tactic saying You better invest now, right before it’s a hundred percent before it goes down. Um, if you’re a passive investor and. Number one, your adjusted gross income is not higher than $340,000. Don’t even worry about all this stuff. Right? And I, I think this is a big mistake I see a lot of passive investors making is that they hear about these opponents appreciating passive losses, and they’re great.
But they may not be able to use the damn thing. So again, book a call with us, get to know us. Um, we can dive into your strategy, we can talk specifics, but if you are, again, you’re not a high income earner, this stuff doesn’t really, really pertain to you. It’ll, it only may, uh, mean something later on. But if you’re one of those people like myself who, um, likes to hoard passive losses just for the heck of it, even though I don’t need it, it may not be the best thing.
And you should maybe focus on investing. Better investments, better returns than forwarding passive losses that you may or may not need.
Where does that three $40,000 number come from? Well, these are the tax brackets in 2022, and I think they’re gonna be in inflation and adjusted for next year. So the premise is gonna be the same too. There’s, a lot of my clients who fall right around this red line in terms of income, and that’s why I talk about it a lot.
But also when you look at this, like if you look at. The progressive tax system, you know, most people are paying 22, 20 4%, but there’s a big jump between the 24 to the 32% range and that’s where that, this dotted line where I draw this dotted line where, you know, for a starter strategy for, you know, just somebody listing, you know, just kind of the default.
It probably is a good idea. Uh, above, stay above this line or below the line, however you want to call it. Right? Or keep your adjusted gross income under $340,000. Married, followed jointly. I’ll say that again. Keep your AGI under $340,000 adjusted gross income. Um, if you’re single, uh, it’s a lot lower at $170,000 adjusted gross income.
Now, personally, I’ve kind of taken the strategy where I wanna drive my income down way, way. Um, I use this in conjunction with real estate professional status and also I don’t have very much ordinary income, and if all my income is passive, I can use as much passive losses that I have to offset my passive income.
So if I have a million dollars of passive income and I have a million dollars of losses, I can drive my income down to zero if I wanted to. Right. And that. We’ll save that for your guys’ individual calls, right? If you guys, um, choose to step forward with that and, you know, we, we work with the credit investors here, so, um, if you guys are not a credit investor, maybe check out some of the free content.
Send me an email with some specific questions and we’ll point you where this stuff is in the podcast, on the website. But for, you know, kind of a typical client making say $500,000, you know, What are they gonna do to drop themselves down to three 40? Well, they, that’s a delta of about $160,000 that they need to lower their agi.
So if they can turn, if they can create that passive income to get that and also create the passive losses, they can use the passive losses to drop them down. Um, But if they are somebody who just has, you know, and this is probably you listening right out there, you don’t have any passive income. You only have ordinary income, right?
Ordinary income sucks because you can’t use the passive losses to lower it unless you have real estate professional status. And this is again, where a lot of new investors like this idea of passive losses from real estate. But if you don’t have rep status, It doesn’t do you any good, and it doesn’t really help that you’re hoarding these things too much.
And also, if you’re under, you know, if you’re making less than $300,000 a year, you’re not paying that much taxes as it is. You’re in the 22 or even less tax bracket. It may make sense just to pay the debt taxes, right? Not until your AGI goes up higher. Does it really make sense? Pull these levers again, every situation is different and we give everybody a free introduction, one complimentary conference call with myself because, um, you know, time is important, but I like to help out people.
Um, as this was all new to myself and like when I was, when I graduated college, started working for the man as an engineer in my twenties, the most useless information I got was investing in a 401k. And that’s just crap in my opinion. Sorry if you, that’s all you. But you know, welcome to the simple passive cash flow where we do things Definitely a little bit differently.
But what is this sales tactic that, uh, folks like myself are telling everybody, bonus depreciation is going away. You know, well, it’s, it’s phasing down, right? And you know, like next year it’s gonna go down 80%. But, you know, if you were to think about the bonus depreciation portion is just a portion of all the losses that you get.
There’s. A lot of that, that stuff may not be taken in the first year. And, again, I just don’t think like, it’s, like it’s literally gonna step down 20%. So an example would be maybe you invested a hundred thousand dollars and you got a hundred thousand dollars of passive losses because, you know, the deal is using pretty good leverage and that’s how you’re getting that much capital and equity, um, to contribute to so much of that losses.
So in that, Um, what, what I, what I would say like in the next year when bonus appreciation goes down to 80%, it’s not like you’re gonna get 80%, if it was the same amount of capital contributed the same deal, but in the 2023 instead of 2022, at that point, um, I probably guesstimate that it might be maybe like 10% less than what you got.
Still pretty good, right? Um, you’re just gonna have to invest a little bit more. But you know, at some point this stuff is phasing. And the best time to do this was yesterday. Like, you know, we talked to a lot of our clients about infinite banking, right? And how there was last year there was this big, um, harrah over like the 77 0 4 changes or whatever it was.
But you know, this stuff is never getting better, just like investing, right? The best time to invest was yesterday. But, you know, another thing that these passive losses can do other than just manipulating your adjusted gross income from that year is also. Offsetting capital gains. So capital gains is, you know, when you sell an asset or syndication comes full cycle and you get your money back, and you get your nice returns exactly why you went into an investment for the first place.
Um, you’re gonna get this, uh, hit with these capital gains. And this is straight from my tax form. And back in 2017, I sold, uh, I believe this year I sold six or seven of my little rental properties for a capital gain of, uh, almost $200,000. They’re in line 13, $198,000, right? Oh, crap. Right? That’s a lot of, uh, taxes.
Um, if I’m, if I was in like the $300,000 range, Exploded my AGI up to $500,000. But what I did was I used my passive losses because I was investing in syndication deals prior to this, or maybe in the same year. Um, I was compiling all these passive losses via cost segregation, bonus depreciation, and I was, um, I.
I had a pretty good amount just, um, being suspended is what they call it, suspended passive losses or passive losses that haven’t been executed or used yet. And what I did is I just pulled it down from the cloud in a way, um, and I put it there on line 17 to offset it. Boom. Knocked it out, and then paid no tax.
And this is where a lot of like old school investors, they always talk about this 10 31 idea. Um, 10 31 is just another way to defer, but the problem there is you’re putting all your money from one deal to another and the deals are getting bigger and bigger, which totally violates one of my big things. I tell a lot of my investors, you never want to have more than five to 10% of your net worth into any one.
So old school investors, what they’re gonna do is they’re gonna buy a single family home, 10 31 into a duplex 10 and 31 into a fourplex Aex 16 unit. You know? Then they’ve got all this capital gain and the only way that they can get away from the taxes is die. And the problem with doing it that way is everybody knows when you’re a 10 31 buyer, you’re a sucker.
Right? We love it when people buy our apartments that are 1031 buyers because we know that they are motivated buyers. In fact, they’re so motivated that because if they don’t close the deal in 180 days or whatever, that they have to pay all this taxes to the IRS and to get absolutely killed. Right?
Maybe their four might look like this, but like add another zero here at the app. And this is where this whole new school way of thinking of get rid of that stupid 10 31 exchange and break up your portfolio into many, many deals. Like personally, I think I must be in like 80 or a hundred syndications at this point.
And all my net worth is di like very diversified geographically, different asset classes, different deals. Um, I do a lot of apartments personally and we operate that, but I also go into many, many other asset classes that are a little bit diversified on how it’s correlated with the economy, right? We never wanna know what’s gonna happen with the economy and we never know how it impacts anyone.
Asset class sector. So well, from a tax perspective, what this is doing for me is it’s allowing me, you know, these deals that I’m in, they may cash out and gimme a huge gain, which is good. The bad part is you’re gonna get the capital gains and depreciation recapture. But if I break this up so much, And I keep a certain level of passive activity losses on the 85 82 form.
Then at some point I’ve created this Nirvana world where, you know, if I’m in a hundred deals and 10 of ’em cash out, it gives me a whole bunch of money. You know, my passive loss, suspended passive losses, maybe a million or $2 million. But it may go down to 800, but then when I invest, reinvest the money, it’ll go way back up and it just keeps going up and up and up.
And this is kind of the concept of passive loss nirvana. And you really never pay taxes just like you were with a 10 31. But with a 10 31, everything is pegged on one asset, right? Again, not diversified. Um, Just a different concept, right? Like if you’ve been, think you’ve been kind of beat to death by the 10 31 guy or the salesman selling it, you know, you probably think it’s the best thing.
It’s one alternative. And to me, um, a lot of these, what I try and do, and I try things, make, make things very simple, especially for the people in our ecosystem, right? Like, there’s so many things out there financially, but for high net worth, high paid, professional, professional investors, passive, I. Things are very simple and when it comes to deferring taxes, you know, other than you know, the Section 1 21 where you only have $500,000 in your primary residence in opportunity zones, which is something very different to cover, maybe in another video, but.
The only other options you have is deferring it right? And a 10 31 is just one way you’re deferring your taxes, whereas doing it this kind of chopped up method into diversified many deals with bonus depreciation is so much more of a superior strategy. Um, 10 31 is just a tool, right? And it’s all tools.
You only use the tools in the ripe situation, in my opinion, my humble opinion, because apparently I’m not a financial planner, right? I can’t sell you garbage commission products like they can. Um, a ten one exchange is used in certain situations where you have a highly, highly appreciated asset. You know, so for example, like say a, a guy has a business that he started like a dentist franchise for 50 grand and you know, 30 years later it’s now worth 10 million and now you’re looking at a $10 million capital gain that you made 10 31 into something like kind.
But in that, in that situation, I may probably consider more of a monetized installment. So which is more superior to 10 to one exchange, but either. Like before you got to that point, you should have took the money out and invested in a syndication deal, started to compile your 85, 82 form padded with passive losses.
So when this fateful day comes, and it does always come, um, you have these passive losses to as a, as kind of like a pill to sell the asset and offset that. And then if you come short, maybe there’s some other advanced strategies like land conservation easement. Uh, oil and gas deals, uh, what’s in an op, the combo with opportunity zone and your rep status.
Um, you know that there’s a myriad of different ways, and at that point, if it’s that huge of a, uh, capital gain of over a million dollars, $2 million, then yeah, maybe you would need to do a myriad of different things. But if you’re. Average investor and you bought a rental property for a hundred grand and it went up by a few hundred thousand dollars capital gain.
Dude, that’s not that much capital gain. You should be able to invest, you know, several hundred thousand dollars or at least, you know, refinance and get that money out and invest it. And then you should get, you should be able to pick up, you know, a few hundred thousand dollars at least a passive loss is pretty dang easily.
If you don’t know how to do that, you need to get around other passive investors that are accredited and figure out how to do it, because this is, I mean, taxes are your number one expense in life. But anyway, that’s then on my spiel folks. If you guys like this video, Please leave a comment below or ask any questions.
If you guys have any specific questions, send it to the team at simplepassivecashflow.com. If you’d like to hear more and enter into our free e-course. To learn more about this stuff in a more curated form, um, you guys can join the club at simplepassivecashflow.com/club. Thanks.
Here we go. It’s the November 2022 monthly market update. The year is almost over. Interest rates are being jacked up even more to curb inflation. But what are the other stories coming up? Welcome everybody. This is the monthly market update. Here we go. All right. If you are new to these monthly updates.
You guys can check them out at simplepassivecashflow.com/investor letter. You’ll find this in all the other monthly reports. We do this every month. If you guys are new to the group, also check out the I think we’ve got like a hundred reviews on this thing thus far. My first book, The Journey to Simple Passive Cashflow teaches all about taxes, investing in deals, and infinite banking.
A lot of the stuff that I didn’t realize was. Very counterintuitive ways of building wealth that we use for a lot of our clients in the family office group and our investor group. But let’s get started here for you folks. And for some of you guys joining live on some of the social media channels of the Facebook groups and LinkedIn.
And those of you guys who are also checking this out on the podcast form can also check these great graphs and visuals we have on each of these articles. on the YouTube channel. But the first thing coming from John Burns real estate consultant is that apartment rent doesn’t grow to the sky. And I think we all knew that’s why, we never really underwrote more than a 3% rent escalator.
Whenever I see that in a deal, I know that they’re reaching or maybe that they need to inflate the performance a little. And that’s what we teach in this syndication e-course. As a past investor, what are the kinds of things to be on the lookout for? So in this article saying the rents are set to fall in many areas around the country, which is exactly what the Fed needs to help get inflation under control.
So like a lot of places, like we are investing in Phoenix, some of those rent girls were like 20% or greater year. And you know that definitely that’s not sustainable. I would say more on a five to 10 year time horizon. I think Phoenix is more like a two to 3% annual rent growth, or at least that’s what you should underwrite so that you under promise, over deliver.
The combination of recession concerns, requests to return, the office rents that are just too high and a multifamily high of new rental supply are all combining to cause rents to soften. Potentially decline and of course, take all these articles with a grain of salt. And I try and interject my commentary on top of this because, this is national data here, we always try and look at the emerging markets and within emerging markets such as like a, Dallas or Phoenix, you’ve got your submarkets there may be a couple dozen submarkets within one of those major Ms.
But what led to this great growth? Strong job growth, income growth, household formation, bolster demand in nearly every market, even with those with elevated levels of supply move outs to purchase a home or at all times, lows. And are likely to stay low given the relative affordability of apartments at 6% plus market rates.
So what they’re saying is, a lot of the people who were on the fence to buy houses up until maybe a quarter or two ago, they got the wind knocked out of ’em with the interest rates exploding on them. Now they cannot afford that much in terms of monthly payments. Which is why a lot of those people are moving back to apartment dwellings, nicer ones of.
but they’re taking a step back from home Ownership rent to income ratios of 20 to 23% are completely normal within ranges and a testament to the strong growth in incomes among new renters that REITs have observed over the last several quarters. So they get, I think what they’re saying is, people’s pay, their salaries are there too.
The higher rents. Of course we always ask like, how much more can it be going up? Really it’s not getting to that, that one third, rent to income ratio quite yet. We’re still in like that 20% range of business online. Here they’re talking about what were the things put in that, that latest inflation reduction act.
It always seems like they come up with one of these things once or twice a. This one got signed in on August 16th, 2022. And the way it normally works with these is, they sign it in and then, they’re investors and, a lot of the sophisticated investors start picking through it and start to see any carrots or sticks in there.
So some of the tax credits and incentives promoting clean energy in. One of the sole purposes is to incentivize and revitalized domestic manufacturing and many of its tax credits and incentives are focused on clean energy manufacturing. Now, I don’t know how that really impacts any of you listeners out there seems obvious that would be, that where money would go.
Obviously, this is the whole joke about this, right? What the heck does that have to do with inflation reduction act, if anything, that just is more spending, which increases inflation, but any. . We don’t like to get political on this show because it is a waste of time, right?
We need to figure out as investors what is happening here and how can we react for our own good. So one of the things of this inflation reduction Act is the advanced. Project tax credit provision credits up to 30% of the investment in PR in property used in a qualifying advanced energy project.
That one’s a kind of a head scratcher on how to really use that one. I’ll be honest one of the significant drawbacks in the Investment reduction Act is enactment of a corporate minimum book tax. The minimum book tax would be 15% of book. and lastly, as a condition for being subject to the corporate minimum book tax for a year, that the, a coal corporation must have an average book income of excess of 1 billion over three years prior to the tax year.
So it really probably doesn’t impact many of our listeners. I don’t know if any of you guys make a billion dollars. If not shoot me an email. Let’s get you into some deals or especially some of these benefit deals we have coming up. As it’s harder to find deals out there and we’ve taken a break from the normal value ad apartments because it’s not the time to be going into those deals, but these high interest rates.
So I’ve personally been looking at ways to save taxes, right? It’s getting time to be efficient, so to find, seek deals that provide those tax minutes for our investors. So we’ve got some things coming down the pipe for you guys, if you guys are interested in those. If you’re not part of our investor group, go to simple passive cash flow.com/club and get educated and see what’s coming down the pipeline there.
For multi-housing news the article headline is the fed’s painful ounce of prevention worth a pound of cure. And obviously what they’re talking about is curbing inflation, which, they pegged at 8%. The Fed’s funds rate Feds have increased the cost of doing business across every sector of the economy.
This also impacts the US and abroad. The economy this time around is more on secure footing than 2008 excess. Access is where we saw in residential real estate and construction that drove the economy in places like Phoenix, Vegas, Florida, and California in 2008 are not the norm today. And said, we’re still seeing everything from manufacturing and entertainment and technology and healthcare drive our economy today.
And I will also personally add that, we don’t have these no doc, these ninjas that they gave anybody with a pulse. To invest. And I mind you, investors like the, I think the reason that sets us apart from the average investor out there is that we try to invest in things that cash flow and are backed by equity even in hard times.
And I think at the end of the day, you, if you go into things that cash flow, you should be a lot better than most or be able to weather a lot longer recession or maybe even depression, if that will. To be able to come out the other end and hold onto your asset. Hold on to your debt service, whether you do that with cash flow or cash reserves, one or the two or the combination of both.
I know I’m going through this very quickly, but these are very simple yet, these concepts are, have taken me a long time to realize and really think of and how do I strategize my own the whole balance between trying to grow your money. How much cash reserves do you have on ti on, on.
But if you need to invest, like how we are now with, inflation at very high levels where you’re just losing your money, not doing anything, where can you make it and get a nice little yield, maybe low double digits and yet be very secure in investment and not have it be a high risk type of move.
That is the question. That’s what we’re all asking. I’ve obviously got my opinions and I will be sharing those, especially with you guys coming on the January retreat on January 13th to the 16th here in Hawaii. Beyond the lookout for that. Again, club members you guys get invites to that. Freddie Mac reports multi-family investment market index down in the second quarter.
Decrease nationally in all 25 markets on both accorded annual bases. It is similar to the last article, right? Things couldn’t grow at a 8%, 20% rent increased level for very long. And at what point that rents are still going up, but not at that feverish pace as it once was, but it’s not really going down yet.
That’s a. And I don’t really anticipate it going down. And I said this before, if there’s if I was a gambling man, the one thing I would bet on is rent’s not really going down for a long period of time.
And again, different source. Here, there’s seen primary driver between the quarterly decline was higher mortgage rates.
And Aln. Also was saying the same thing. Quarter three brought an end to coasting on 2021. What they found made demand rent growth. Finally, losing steam was a major development in third quarter, but net absorption deserves all the attention has been getting. As mentioned, apartment men has been poor.
All year at mid-year 2022, net absorption was 75% lower than it was in 2021. So what that means, what absorption is new units getting filled in a timely matter, like a days on market. It’s, I would say overall, occupancy is pretty high and, there is a housing shortage and especially with people not being able to afford houses, that’s where the apartment demand is still pretty. For both average asking rents and average effective rent. Third quarter growth was a loss by any quarter since 2021, quarter one. For a price class perspective, average effective growth, rent growth was stronger in the quarter for price classes, A and B, with the other two price classes also seeing larger declines in rent growth.
So what they’re saying, again we’ve talked about this in. Your higher end tenants with, they call ’em class A and B here are less impacted and going through less declines than the Class C or below cohorts. And that makes a lot of sense because this last pandemic really hurt the low end as opposed to the high end.
But I think a lot of it is and don’t get it, don’t get it mixed up with these. Fear mongering headlines. The industry came into a year with a very high average occupancy, very low lease concession availability and double digit 2021 rent growth, thanks to the demand explosion, the from the previous year, and the fact that we had a freaking pandemic in 2020, right?
The high average occupancy provided upward pressure for rents, even as lack, lesser demand was slowly eating away at surplus occupancy. Very low apartment demand degraded further even falling into very slight negative territory nationally in the period. But ultimately lack of household creation and affordability is the cause of this.
The fourth quarter is usually the softest for multifamily demand, and the largest macro economic situations does not prove much reason to expect this year to be an exception. And I would say maybe on 10% of our assets, we are taking a very conservative approach because we’re starting to see some of the signs of normally like we start to see a slowdown in leasing activity.
We’re about Thanksgiving, but we’ve really started to see that here in October. So we might be reading it. Into a lot, but that’s your guys’ antidote from what we’re seeing across the portfolio. But top five markets from multifamily deliveries, and this is where the pros, the big money, is putting money into building new assets due to long term the fundamental growth.
And I, again, as a real estate investor, I think you need to be looking not on a 1, 2, 3 year time horizon, but like a 5, 10, 20. Or more time horizon. Those markets are Dallas, Houston, Washington dc Miami and Phoenix.
Multi-Housing News came up with this great article that I wanted to pull out, why Affordable Housing Production Lakes Demand. We’ve always, everything that’s built is always class a brand new, right? Some of the reason here, housing aimed at people with low to moderate income is not being replaced at a fast enough pace to meet our demand.
Of the nation’s 43 million multifamily units, roughly 10% are considered affordable for those whose incomes are less. 80% of the area median. So this is what we’ve called the missing middle, or I would just call it the lower middle class and workforce.
They’re talking here about the l i htc I call the LTA Lurk program, with, low income requirements for, as part of the building. We try to stay away from this in our investments. It’s just a different little bit different type of a business plan. If you’re that kind of investor, you don’t knock yourself out, right?
You guys that your money. But we found that, whenever we have more than 10% section eight, it gets to be a little bit seedier of a property, although like the LTA and the lurk and depending what municipality you’re. , it’s more, it’s nicer pro assets typically of what I’ll see and they’ll pay get if the average rents are like one 1500, they may require like 20% of the units to rent at 1300.
We’ve got a couple of the buildings like that, and they’re nicer pro properties, so you don’t really attract the CD tenants. But, I really would stay away from that on Class Bs or worse. They’re saying that, Missing middle housing is much more problematic. Very low New construction is coming online.
One reason is rising construction costs, but all require new projects to be more expensive Class A properties. Another factor is regulate regulatory barriers, especially in small markets where there are no clear rules when it comes to zoning issues. I will also. Cause we were always looking for land and we actually just dropped the project in Alabama that we were looking at.
The, some of the costs were just too high. So there you go. Some of the, that’s a real life example of what they’re just talking about with rising construction costs.
Adams reports. US foreclosure activity continu to increase quarterly nearing pre pandemic levels. Definitely nothing near what it was in 2008. I’ll probably call it one or less than a 10th of where it was, but it is picking up from the low of 2020. 1% from the previous quarter and up 167% from a year ago.
But that number is, yeah, this is a great example of fear mongering right here. They’re saying it’s up hundred 67% from a year ago, from a year ago it was pretty much nothing. And it is nothing compared to what it, I would say average it is foreclosure activity is reflecting other aspects of the economy as unemployment rates continue to be historic.
the mortgage delinquency rates are lower than it was before the Covid 19 rate outbreak. And this is what’s the Fed is looking at. Or this is a byproduct of unemployment, which is something that the Fed is looking at. The Fed needs to induce a little bit of unemployment right now. Again, unemployment rates continue to be historically low, so they need to induce more unemployment so that they can get this inflation under.
It’s under control, to get it down to, I think what we’re used to under 6%, I think I made a bet last month with Dean from when we do the Real Estate Brothers for the Hawaii investors, I think I said it was gonna go up to 10% for a 30 year mortgage and then come back down maybe a year from now, or 18 months from now.
Which is why, we’re switching the acquisition strategy. A little bit states that pulls the greatest number of foreclosures, including California, Florida, Texas, Illinois, New York. And some of that’s misleading, some of those, like California, duh. Because they’re like a huge state with a big population.
So its Florida. I’d like to know more percentage per capita, maybe or per person. I think that’s a little bit more. Then just going after the Biggers bigger states.
Last fact here, in fact, nearly three times more homes were repossessed by lenders in the second quarter of 2019 than in the second quarter of 2020. We believe that this may be an indication that borrowers are leveraging their equity and selling their homes rather than risking the loss of their equity in a foreclosure auction.
I would disagree with that. Common. I think right now the foreclosures is really low. I think really all that is that, that’s basically just shit happens. I don’t know if it’s really indicative what’s happening in the economy, but it’s just, sometimes people go, Troubling times personally, or this, they, they get into a car accident, somebody gets hurt or somebody just loses their job.
I think that’s just the, exceptions coming from, people who just go through tough times in life. And that’s always going to be there. They call it the death, despair, destruction, divorce disaster. That’s what, like those wholesalers prey on right? People, other people’s misfortune, which I don’t really think is very ethical.
I don’t know. I’m not gonna say it’s ethical or not, but it’s jacked up if you if you think my opinion. And that’s always been tick me off that, these guys will go around they’re here to help people solve their problems and buy people’s houses for 50 grand where they really could just sell it to a realtor for 90 and.
They say they’re doing a good thing. I see it as screwing somebody who isn’t the most financially minded or in a stressful distress situation. That said, we don’t have any problem doing it when it’s a rich apartment investor who is just a little clumsy with their money or worse, second generation, third gen generation wealth person who doesn’t know too much about money and is just looking to get paid quick and selected at a good price.
but maybe, I’d say maybe next year, if this all continues and interest rates go up and some of these adjusted adjustable rate mortgages continue to increase the debt service amounts, maybe some of these apartment investor owners might be more distressed sellers ready to sell, at which case might be, we might get involved in some of those acquisitions musicians.
A lot of those people, maybe they just don’t have adequate cash reserves to, whether that’s storm or, some of our cases, like general partners will put in some of our money and that’s why we are here. Because I think I, I will agree with Sam Zel here. He says the US economy is softening, not in a recess.
I says we’re not in our recession yet. We’re in a market softening in inflation reduction. Act pass in August resulted in a lot of spending and is irresponsible, and the title of the act is misleading and it’s going to add on the inflation pressure and not decrease it. Yeah. He’s probably right.
He’s probably right there. Real page. Apartments remain hot, but peak rent growth could be in rear view. I would probably agree that they’re, these guys are spot on with this.
Some of the highest comparison to the 2022 peak in this order. West Palm Beach, Florida, Phoenix, Arizona, Jacksonville, Florida, New York. New York. Fort Lauderdale, Las Vegas, Memphis, Riverside, California, San Francisco, California, Miami, Florida. They’re all. And you were from six to 2% off of their previous high.
Still, if you definitely jump, they jumped, but it’s still up overall.
So these are the top cities where housing markets are cooling the fastest. You don’t wanna be in these markets, I guess is what they’re saying. Or maybe it’s just they, these markets really got really hot and there was just a big delta, what we were saying on the last slide. But number one, Seattle, then two Las Vegas, three San Jose, California, San Diego, Sacramento.
Denver. Then Phoenix, Oakland, Northport, Florida. I’m by a little biased cuz I invest in. I think Phoenix is on here just because Phoenix was like the hottest market in the whole country. So I think that’s what’s contributing to their big Delta. I still think it’s a great place to be, but yeah, like Seattle, Las Vegas, San Jose, those things really spiked and cooling down now.
And this is more for home cells, has nothing, not talking about.
Affordable housing trends Report affordability has emerged as a primary concern for low income earners living in naturally occurring affordable housing apartment asking rent peaked at 16.9% between mid 2021 and compared to an increase at 2.3% in the average already wages over the same period, so people’s pay is not going up.
Their rent is financing gaps widen as construction costs soar. We talked about this earlier with construction costs going up. We just finished our Chase Creek construction 230 units where I would say we probably got hit the hardest with this, with the lumber, I think a year and a half ago.
Our lumber budget exploded, three x outside of our control, but it is what it is. We recovered, moved on and got over it. Substantial progress remains elusive, modest increases, and we’re talking about the Affordable Housing Trends report. So this is where a lot of the federally subsidized rental units by program.
From the most to least is the housing choice vouchers. Then a project or section eight, then public housing and then another.
Si joint Center for Housing studies of Harvard University reporting, leading indicator of remodeling activity. Okay, so as we know in 2020 the remodeling took a big peak there. And then, maybe cuz people were stuck at home and their homes were important because that was the only place they could go.
But they’re saying annual gains in improvement and maintenance. Expanders to owner occupied homes are expected to climb sharply by the middle of next year. So maybe this will help lower some of the raw material costs like lumber.
How rising mortgage rates are pushing people back into the rental market. We talked about that earlier. Here it is in a different format. The tightness you said was created by a decorative underbuilding followed by the global financial crisis in 2008, which occurred when millennials were coming of age forming households and creating a surge in housing.
It’ll take a while before you see a substantial improvement in rent affordability. But a supply increase should eventually boost rental vacancy and decrease pressure on rents. But that’s not coming anytime soon. And this is why I still believe residential multifamily is still the place to be with this fundamental shortage or more demand than supply.
Here, Rob Page reports higher income, renters pay the biggest rent hikes and are least likely to miss a rent payment. That’s because the high income earners, or we call ’em here, market rate, class A people have more liquidity, more savings as opposed to the Class C staff where, you know, I would probably assume that a lot of those guys have either no savings or maybe a thousand or a couple thousand bucks.
When there are uncertain times or a pandemic, those are the people that kind of need that government assistance first, where it’s the wealthier people who have liquidity and savings. And I think that’s what’s hard right now is there is a lot of liquidity still in the system, which is why with the interest rates being cranked up, you’re not seeing the inflation.
go down the next month or the next quarter, right? That’s what’s the problem right now. There’s a lot of quitting in the system, which creates a lot of SL and slack from the Fed, increasing interest rates and that the unemployment doesn’t pop up and doesn’t lower inflation right away. There’s that leg.
Here they’re saying the average renter in class A and B units have seen rent increases 14 to 15% since. Of 2020, which is maybe it was called that three years ago. So about 5% a year, which is pretty high. Again, that’s where we get that two to 3% is what I would normally underwrite. Or, somebody could probably truthfully say it’s 5% but I just probably wouldn’t use that just to be safe, unless you’re somebody who likes to just promise the moon and not.
Wanna make excuses when you don’t hit your targets later. If you’re using the right numbers, then it is what it is, right? Things happen, but, I think something can be said for fudging those numbers and then, when you don’t hit ’em well, it’s yeah, obviously it wasn’t, The rents weren’t gonna go up 5% every single year.
Different story with Class C renters, of course. These are more workforce housing. Folks of average WA range lower than $62,000 a year. Their rents probably went up about 10%, so maybe 3% across the board or 3% per year over the last few years.
But that’s it. That’s the end of this month’s report. We will see you guys in December. If you guys haven’t joined our club, go to simple passive cash flow.com/club. We’ve got the annual retreat from January 13th to the 16th in Honolulu, Hawaii. You guys have to complete the form there and book an onboarding call so we can get to know you because everybody who comes to our retreat, we’ve met, we’ve vetted, we know that they are going to make a great community member there.
Not gonna be a weirdo in Hawaii. We don’t want any weirdos in Hawaii and it is what it is. It’s like we have a private life. Group. We don’t just let anybody in and we especially don’t let anybody come to the physical in-person events because it reflects badly on me, right? , It’s like people think that I know these people super well and a lot of people I would say maybe it was a little bit different than the pandemic, now that we’re out of the pandemic, I would say people who come, I typically met at least half of the folks out there, but it’s always great to.
Associate the face to the name and it gives you guys the opportunity to ask the real questions that you want, right? I’ll put, I’ll remind you guys, whoever’s coming what do you guys need? What can I do to help you? Let’s talk about your situation, right? Let’s not talk about the weather here in Hawaii.
That’s boring, right? That’s not a good use of our time. Anything I can do to help. And that’s what you guys get when you guys come out to Hawaii here in January. Again, join the club, simplepassivecashflow.com/club, and I enjoy the Thanksgiving holidays and we will see you guys in December.
What’s up folks, we’re gonna be talking a little bit about house hacking. Now house hacking might be for the younger guys, in my opinion. Great way to get started when you’re low on capital. Most of you guys out there have spouses. That’ll probably kill you if you even consider having somebody else live in the house with you guys.
Maybe not the best idea for people who want to stay married or above the age of 30. But, maybe if you guys have kids, this might be a great option to reach out to them. Or, maybe if you’ve got kids in college, maybe your kids can house hack it. And this is a great way to collect rent and see how money really is made as opposed to trading time at your W2 day job.
But before we get going, somebody asks a question there, people send me emails all the time and they say, “ Hey, I found this investment making 13%, 15% a year. And I just glanced at it and not all investments are made the same. And the first question that most sophisticated investors ask, including myself is like, what’s this investment backed off of, of course. Beyond performers can mean anything, but this is more like, all right, say an investment performer is. It’s not just some kind of crazy Bitcoin mining machine based on the price of Bitcoin. Where if Bitcoin tanks, so does your investment because it’s based on that, but let’s just say it’s like a legit investment that, there’s a sound P and L and supposedly you’re gonna get 14, 15% off.
The next thing is what do you collateralize? By what are you backed by as what we talk about? When sophisticated investors talk and, sometimes, you’ll see these investments and, there’s kind of one making that reigns through the internet.
Is that you’re investing in these businesses or providing startup capital, but, again, answering that. Butterfly money collateralized by there’s not by much. And which is why it’s a risky investment. And which is why it’s a higher rate of return, or it commands that because it’s more risky.
And this is, I think, where a lot of newer investors chase the higher returns. Ooh, 15%, Ooh, 18%. And they just gravitate towards that, but they just don’t stop to think and ask this question and they realize if things go bad, if shit hits the fan what are they gonna go and collect?
On the right. The nice thing about real estate is the real estate is there and it typically doesn’t go up and down in value. And if it does go down in value, just hold and wait till the better time for the sale, an operational business, like the one I’m referring to here that has like this higher rate of return.
In bad times or, if you ever needed to recollect on the asset’s not worth very much some of these businesses, there’s no real physical inventory. And even if you, there was some inventory in some warehouse somewhere, good luck. Even collecting pennies on the dollar on that.
That’s just another view to look at these types of investments and at least spotting out the bad ones. Another thing that I see going around a lot, especially in the house flipper world, is that there are pretty a lot of good house flippers. Once they do it for several years, they realize house flipping really doesn’t make that much money and it’s super risky.
So what do they like to do? They like to become a marketer, use their social media influence, and that’s why you see all these silly house flippers on social media, all the. Creating this brand. And what they’re essentially doing is they’re taking the unsuspecting passive investors and putting them in a newer house slippers deal and making money on the spread.
So what this kind of more experienced house slipper is doing is they’re pawning off. Somebody else’s deal as they’re up. Some newer flipper who’s really inexperienced, a huge risk. They, their fair market rent for private money might be in the 20% range. Sounds crazy, but it’s also very crazy to be investing in a newer flipper.
It’s, very bad paper. If you wanna use that industry. So what this kind of this middle man will do is they’ll pay, they’ll charge 20% to that newer flipper. And then they’ll give the passive investor 12 to 15% and obviously pocket the spread in the middle. And yeah, I think this is there’s some bid of a cloaking of this a lot of times, and a lot of times just the past investor really doesn’t have the experience to ask the question who the heck is the operator?
And this obviously happens in the syndication world, too, right? Where you have these kind of Daisy chain deals put together. And there’s everybody in their mother raising capital, which, in my opinion, is illegal. because, you need to be a licensed broker dealer to be able to do that.
You need to be an operator and not just a capital razor for that deal, but, I think that’s where there’s all sorts of things out there going on and, potentially nefarious activity and it’s hard for passive investors. And that’s why we always tell you guys, build a network, get going building your inner circle.
And that’s what we provide in the family office. Oana mastermind. There’s well over 90 members in that group right now. We asked you guys to test drive our organization, see if it’s the right fit for you. I really don’t think that there’s anything else better out there with this much sophisticated, accredited passive investors, right?
We’re not some real estate groupy group trying to teach you how to fake it to you, make it and make it rich. Cuz quite honestly, a lot of those groups. The failure rate is like 95, 90 7%. It’s and that’s why I never wanted to create a group like that. I wanted to create a group for folks like myself who are still working their jobs, still running busy entrepreneur businesses.
And how do you be the best pass investor on the side? And my whole formula was for that is relationships and really banding together with a bunch of other purely passive investors and trading the best trade secrets, where to invest who to stay away from, and then ultimately building those relationships with the people. If you guys are interested in that, check out simplepassivecashflow.com/journey for more details and enjoy the show.
Hey, simple passive casual listeners. Today. We are gonna talk about house hacking and how you can implement that or do that alongside of your normal investing or do that as a primary form of investing our guest today is Andrew Kerr from fi by rei.com. So Let’s get into your story, cuz you’re pretty accomplished real estate investor been doing it a while. How maybe give us a little rundown of how you got to this point. I had actually was working in the mortgage banking industry. I skipped college, started right away at 19 working and by 20 I was doing well enough where I could buy my own home.
So at 20 I bought my own place and I did this sort of house hacking style room rental, where I bought a place running out the other rooms. So my roommates, my friends were essentially covering my cost of my mortgage and along the way I had built up. Decent size real estate portfolio. I ended 2016 with about 40 doors, 40 rental units spread out across a couple different states, but most of my investments were there in North Carolina where I grew up.
And then I had this progression in life where I wanted to change my lifestyle. And started selling off all my properties that I actively own and actively managed and started investing in passive income. So I started investing in larger syndications where all I had to do was manage the sponsor or the individual or the team that was running the, this syndication.
And that’s let me free up a lot of time to focus on passion projects, like working for nonprofits and travel. And I think a lot of people listen and they hear about your story and how you’re investing in bigger syndications. And obviously my story is sort very similar. I started in 2009 and our paths it looks like a mirror a little bit.
Yeah. And they’re like I’m gonna invest in syndications, it took a long time. For me, it took since 2009 and then 2015, getting up to 11 rentals. And when did you start again? Just to give some people, how long it. It’s it grows at a snail space, right?
Yeah. I really started going heavy in real estate there in 2010, 2011. I had, while I had bought my first house at 20 and I had owned that property for quite a while. I didn’t go heavy there until 2010. And that was partly because I went from. The mortgage industry, where I had a six figure income to working in the nonprofit industry, where I started as a volunteer with an $800 a month stipend to then $2,000 a month.
So I did it built up a real estate portfolio on a very minimum budget, very minimum salary. And. It takes you about six to 10 years to really change your life around with real estate, which in the grand scheme of things, when you look at it, if you’re gonna be 70, 80, 90, a hundred years old, focusing really hard for six to eight years, isn’t that long of a period of a time.
I know a bunch of investors they’ll do the short term rentals or the house hacking very similar variety, but at some point you had a turning point where you’re like, screw this is too much work. Was there any kind of particular thing you can remember back to, or was it a sort of a gradual thing of slowly transitioning into syndications?
Yeah, it was a bit of a gradual thing, I’m 37 now. So when I started going really into it, it. Late twenties. And at that time I had more time on my hands. I did not nonprofit work. I did hanging cabinets. I did floors. I did painting. I didn’t have capital. So I did a lot of the work myself and the two niches I focused on were.
College housing and affordable housing. And then as life progressed, you start to get into your thirties. You start to get serious relationships, you get engaged, you get married. And I just wanted to be more hands off. My college housing portfolio was always managed by someone else, my affordable housing I did until I just ended up selling it, but just life as transitioned, you wanna spend time on different things.
It is just this progression where I didn’t want to be involved on the day to day anymore. And that’s where I started as I sold off my portfolio, reinvesting it passively into syndications. If you could define house hacking for us and we’ll get into your little twist on house sacking, cuz I, I think when people hear it, it’s it can mean a lot of things, Yeah. So I really look at house hacking as just making a slightly different choice for your housing. All the way back to a lot of folks have read that rich dad, poor dad book that basically says your house is a liability, not an asset. So the idea is just to do the slight change on how you pick your housing, especially if you’re in a high cost of living area.
So you can reduce. That 30 to 40% of your budget. That’s on housing and cut that in half or completely reduce it. And then the idea with house hacking is I define it as these six styles of house hacking. There’s the room rental style house hacking where you buy a big house, you rent out the rooms.
That’s great when you’re just getting outta college and then. There’s the sort of live and flip where you’ll live in the house for a year or two while you’re renovated, and then you sell it. That’s a lot of work. It’s not great for a family. Then those couple other styles are this sort of income suite where you convert a basement or you have a mother-in-law suite.
You have an accessory dwelling unit, like a pool house that you can rent out or a garage apartment, you have this sort of small multifamily and then you have a work provided housing. And then the idea is with all those different styles, you can run out to long term tenants. You can run out to short term tenants like Airbnb, V R B O, or you can do midterm.
Sort of rentals where you rent to corporate housing or traveling nurses. And the idea is you pick the model that’s best for you and pick the type of tenant base that you want. And it lets you reduce your housing costs. My first two house hacks were that room rental style. My third and fourth house hack were this sort of more luxury house hack where we bought this small multi-family property and really created these high end apartments for it.
And I’m happy to dig in more to that style of house hacking if you want. Yeah. When you went, when you did that style the more higher end one was that a short term or long term, the way you did. Yeah, we did a little bit of both. So when we moved to new Orleans, about four years ago, we run in an apartment right away because we wanted to start for looking for real estate and to do a house hack.
And what we found was this old 1920s corner store property that was in really bad shape, had broken sewer lines, it needed new roof. It had knob and tube wiring. And what we did is we gutted it to the studs and we converted it to three high end apartments. And then out back was this barn building that we turned into a one car garage and a sort of carriage house guest house.
And what we do with that carriage house is we rent it out on Airbnb, V R B O. So like during Mardi Graw we get 200 bucks a night for this $500 square foot place. Then the main building. We live in the upstairs, which is a two bedroom, one bathroom apartment. And a lot of folks when they think of house hacking is you really gotta sacrifice on CRE creature comforts.
You can really do it really nice where, we’ve got the farmhouse sink, the stone countertop, the higher end kitchen cabinets with the crown molding. We have a jacuzzi tub in the bathroom, $20 square foot, marble floor in the bathroom, hardwood floors. And then downstairs, we have long term tenants, we got a one bedroom and then a two bedroom.
And the really basic idea of it is those downtown stairs tenants cover our mortgage and a little bit of the taxes and the insurance for the property. And then that short term rental Outback covers all our additional costs. And we usually make, five to 10 grand on the property as well. So not only do we have a really comfortable, nice, higher end place to live, but we also have zero housing costs and then usually are able to pocket some money off of it.
And that gives us a lot of freedom to do a lot of other things that we want in. And you’re taking advantage of it’s your primary home. So in terms of financing and were you doing like a FHA, like 3% down or, yeah, for this one, we actually used hard money because it needed so much work. We bought it for two 70 and it needed to be gut to the studs and we put in about 250,000 into renovating it.
So we used hard money. We got all the renovations done after about 11 months we moved in and then we refinanced out with the conventional loan and then we’re able to pull back out most of the cash we put into it with our equity line that we added on the property. We’re actually working on a new property, which is just a due duplex, which is gonna be a higher end house hack as well.
But like with that, we ended up doing a FHA loan cause we’re sitting on a bunch of cash, but we wanted to. Have that cash on hand to do the renovations and do the value, add expansion on this next property that we’re looking at. So there’s a lot of opportunities out there, but most people, if they’re short on cash will use that FHA loan to do a house hack, cuz you only have to put that three and a half percent down.
And the, you get a little bit better interest rate when you’re the when you actually live in that property, as opposed to a non-owner occupied property, I would say probably what a quarter point or a half a point better. Yeah. Usually about a half a point dependent on the bank. So it ends up being work, working out pretty well.
I know a lot of listeners they live in like California, where a lot of these higher price markets are, they’re priced out. They don’t hit the 1% rent value ratio. And for those people I’ll say, Hey, go outta state rent. Get above that 1% rent value ratio, but some people.
They have limitations and it is what it is. I say something is better than nothing. At least you get outta the stock market and all of those type of investments and house hacking is another option. Or maybe you can go over some strategies for folks who have been investing, but it more, it’s more of a lifestyle change too.
And part of it is with the house hack house. Doesn’t have to meet the conventional 1% role. If you wanna buy the property and have it be a long term rental, you should definitely have it meet those traditional real estate investing roles. But, we’ve worked with some folks that have done house hacks where, maybe you’re in that high cost of living area like California or Seattle or New York and your housing costs are.
Three grand a month. If you can do a house hack and just reduce your cost to 1500 a month, that can be life changing for a lot of folks. Maybe the property will never become a long term rental, but if you need a place to live for that next 5, 7, 10 years, and if you were cut and cut those housing costs in half, most people for $1,500 a month, that gets ’em a new car, that lets ’em travel.
If they want to travel that lets ’em pay down debt, for $1,500 a month in savings. You can max out a 401k at work. So even if you never want to be a big real estate investor, or you’re just trying to, or you wanna save money to invest in real estate, do a house hack in, in that higher cost of living area and reduce your housing costs that will frees up the cash that you can then put in other places.
So now maybe you’ll feel more comfortable investing that estate. Any other nuances about house hacking that after being doing it for a few years, You know the listener out there might, clean some insight over just anything random. Yeah. The biggest thing is that most people had this default of, if I’m doing a house hack I gotta become a giant real estate investor and that’s not true.
And then the other is most folks feel like, oh, house hacking is something you can only do in your twenties. And it’s where you’re gonna have all these giant roommates. And you can really. Quite the opposite of that, where while my wife and I have tenants living below us, we didn’t have to sacrifice on any creature comforts.
Where we live in new Orleans, we have the street car two and a half blocks from us. We have bars, restaurants, grocery store Walgreens, within four or five blocks walking distance, we’ve got original hardwood floors in the place, 11 and a half 12 foot ceilings. That’s this misconception a lot of folks have with house hacking is it has to be giving up and making a lot of sacrifices on location or space.
If you plan for it, you can really get everything you want. And that’s the obvious cons, right? You’re living near your tenants. Me personally, I’m an introvert and I that’s a big one for me. , that’s why I don’t do it. I actually house hacked my primary residence in Seattle for I put it on Airbnb and that was just tiring to have people come in and out.
I just rented like the bottom floor. So I’ve done it, but I know a lot of people there, they might be a little bit more outgoing and they might like to chat up people who are out of town. If that’s you this could be something that you wanna create your life around and.
I guess a captive audience for all your stories, if whatever you will, but maybe give people like insight in your life today. Like how are you using house hacking cuz you’re you’re definitely more on the fi side of things and just given an idea or another viewpoint of things you don’t hear talked about in the workplace cubic.
So back in 2016, I had from building up with those portfolios and selling off money and reinvesting, I got to where in that sort of P community folks call lean fire. So I achieved that towards the end of 2016, and now I’m working towards fad fire, but what house hacking lets us do is, You essentially have five big expenses.
You’ve got taxes, you’ve got healthcare, you’ve got your housing. You’ve got automobile and food and real estate through the depreciation and doing things like cost segmentation. I’ve essentially offset almost all of my income. I have a very minimal taxes. And then by eliminating my housing costs through house hacking, I freed up 50% of my income.
Just by reducing my taxes, my tax liability, and by eliminating my housing costs and that lets me work for a nonprofit. Traditionally, in nonprofit world, you don’t get paid a lot of money. You also don’t have lucrative benefits, stock options, retirement accounts, those type of things, where I know my retirement set from a real estate portfolio and through house hacking, we also, my wife and I have a huge passion for traveling.
I’ve been to 34 35 countries and she’s been to 40, every year we seem to take off for several weeks and travel. By knowing that we have zero housing costs, it’s really easy to say, let’s go to the middle east for three weeks and we don’t have to worry about covering a cost of rent or mortgage back home.
So it just gives you a lot of flexibility in life. So you’ve left the 40 hour a week type of job in an office. Both of you guys are no longer doing. That you can travel. O oddly enough, I ended up sometimes with the nonprofit work. I ended up spending 50, 60 hours a week, partly just because I love it.
But yeah, I work from home managing my real estate portfolio and then doing some nonprofit work. And then travel. So in 2019 we visited guitar, Egypt, Jordan. We went to Jamaica, we went to Mexico and then we visited family and friends throughout the us. So it’s just given us a lot of flexibility, but yeah, we definitely don’t travel full time.
That’s a little too much for us, now in our thirties, we like to have a home base that we can come back to in a regular bed we can sleep in. And we like to just go out and travel, for a long weekend, a week or several weeks at a time. Yeah. I hear you. We’re about the same age and it’s nice to have a garage so you can put stuff in it, right?
Yeah. A bunch of bigger toys. Maybe if you could go over like the high level of your portfolio, right now people are thinking you’re not the Airbnb guy, but the house hacking guy, but how does it look and what’s the percentages of, is it like half syndications, half active, more active income like this?
We’re currently living on our third house hack, which is essentially four units. And we’re currently renovating our fourth house hack, which is a duplex. That’s all we actively manage. When we move out of our third house hack, I’ll actually turn it over to a property manager.
and then I will, when we’re living in the duplex, I just use cozy to collect rent, manage maintenance request from that person living on the other side. That’s all that we own now. And then probably about 80% of my net worth is in syndications. And then the other 20% is in, IRA, 401k, Vanguard, brokerage account, where I take that, jail call and simple path to wealth.
Idea of investing where you’re in a index fund and passively invest that way. Outside of those, I guess it’s six units that I actively manage. Everything else is in syndications. And I think at this point, I’m, I don’t know, maybe in 10 syndications now, I think. And you made me chuckle a little bit.
You actually said you were gonna go visit one of these deals before you go invest in it. I always put it out to my investors. I’m gonna be in Huntsville later on this week. If anybody wants to come join along with me and out of the thousand or people, or so, only a handful of people come cuz everybody’s busy.
Like it’s a little hard except a guy like Andrew shows up cuz he’s got, nothing better to do no offense. That’s the kind of life you want. Exactly. Another thing, I think some folks get too lazy with passive investments where they’re like, oh, it’s passive.
I don’t have to manage it. And my approach has always been, yes, you’re investing in a syndication, but you should still check up on your syndicate or. And then also check up on the property. So I’ve used a service called we go look where if I’m not traveling to the area, you can hire, we go look and they’ll send out a Looker who will then take pictures of the property and you spend a hundred, hundred 50 bucks, I’ll do that where.
The syndicator will send back a report for us. I’ll actually send out. They like, oh, the report says they just renovated the roof. They did all new siding, did all new windows and did landscaping. He sent pictures, but let me spend 150 bucks to send someone out to verify that works actually done. And it wasn’t just something they pulled off the internet.
So I’m always big on while it’s passive. You still need to mind your investments and check up on them from time to. . Yeah. And when I have people come out, we check out units. But if you’re going out by yourself, you’re typically not gonna be able to do that, nor do we encourage ops to even talk with the property management.
A lot of these deals, there’s 50, a hundred guys that’s impractical and not very good LP etiquette, but. What I do recommend LPs do is go ahead and check out the property and walk it and get the feel for it. Is this really a, B, or is it more of a B class neighborhood?
Absolutely. Any insights there that things you key in on, like I know personally, I look for bars on the windows, in the, is it in a primary residence kind of areas and renters area? What kind of cars people are driving? Anything that you can. Kind of things you’ve picked out or things you look at when you do this.
It’s a brief and how long is the trip? Oh a lot of times it’s really short and I love the fact that you mentioned that sort of etiquette is. So when I go in, I don’t go bother the property management. I don’t disturb the tenants. It’s very much, I’m gonna go drive through the apartment community or walk through the apartment community.
Or I might go in not announcing that I’m an owner where if they’ve got, Open house, or if they’ve got the onsite office where I’ll go in and just ask about what apartments are renting for and get the materials. You definitely want to have some etiquette and don’t go in trying to act like you own the place.
Definitely have good etiquette. But yeah, what I like is I love to see where the closest Starbucks is. What’s the closest grocery store and then any other single family neighborhoods that are around, do they have window units? Do they have the AC units in the windows? Do they, like you said, the bars on the window, are there check cashing places close by?
Usually if there’s a check cashing close by you’re definitely a C or. Area unit, if there’s a Starbucks close by, you’re pretty much a B or an a, a class unit. So I try to look at those things. And then I also look at the schools and then what are the ratings of the schools that are close by?
And that can tell you a lot about an area as well. But yeah, most of the time I’ll try to visit friends in the area or go to do some nonprofit work. And then I might spend an hour or two where I’ll drive through the community and drive through their surrounding neighborhood. Just to get a sense.
What are the window? What are you looking for? The window units there? So a as an example, if you’re looking at a single family neighborhood and it looks like it’s an older neighborhood and there’s the window air conditioning units that tells me it’s no central air, no central heat. So it’s an older unit and.
Renovations haven’t gotten into that area yet. So if you drive down a street and you see half the houses have window AC units, it’s definitely more affordable housing, affordable rent area where you can go buy a window AC unit for a hundred bucks at lowes or home Depot, where to put in a central air AC and heat, you could spend eight, 10 grand or more.
It’s something that I always look for to tell what the neighborhood’s and that gives me indication if it is a, B or a C class area. Yeah. I look for the, if it is sort of sensor air which a lot of properties like in Alabama are, for example, If there’s a cage on it. When I had my single family, I always put cages on it.
If it was B minus or worse, I, oh yeah. I probably had two or three of those things grow legs and run away. Yep. I’ve been there. But it’s weird in some, in other markets like Texas, your class C stuff, they don’t have, it’s not normal to have cages on ’em so it’s all a regional thing. Texas, everyone carries guns in Texas yeah.
Yeah. And that was, you. Come up with these stories of reasoning. That was my reasoning too. It’s so hot there. It’s man, you just don’t do that. So Andrew runs fi by REI a A website, a lot about a lot of articles about house hacking.
You’ve got the podcast, you just check that out. But yeah, appreciate you coming on and yeah, you getting to know you a little better here. Thanks lane. And we’ll have to get you on our show to talk about your early house hacking experience and where you’ve been going with your real estate investing.
All right. Everybody out there. Thanks for listening. Join the investment club, simplepassivecashflow .com/club. And let’s get on the phone and let’s see what we can do to move you guys forward to financial freedom. It might not be an apartment deal, might not be a turnkey rental, sometimes it might just be a little a referral to the right CPA or some kind of tweak. Something’s better than doing the whole 401k thing, all right, guys, we’ll talk to you guys later. Bye
On today’s podcast, we are going to be replaying the almost two hour long webinar that we did on the introduction to infinite banking. Now, if you guys wanna check this out on the YouTube channel, go to simple passer cash flow.com/banking. And you can access the YouTube video there. So you can also go along with the slides. I wanted to leave it here because I think a lot of you guys are audio learners and also the team has gone on the road this past week.
Depending on when you’re listening to this audio we are either getting over our October 1st Napa valley hangover. Or we are already doing our property tours and our grand opening party of our new Chase Creek apartments in Huntsville, Alabama.
If you guys have been trying to get a hold of us to book your introductory calls with us, we can get to know you a little bit better. Please get on that right away because my schedule is booked up as I get back into the swing of things later on in October, but super happy to meet all of you guys in person.
If it’s not too late, please sign up for that October 6th, seventh in Huntsville, Alabama, If you really like this infinite banking concept again, you can go to simple passive cash flow.com/banking, and you can get access to this video, of course, but you can also get access to the two to three hour long eCourse where you can go through each of these sections. We dive into a lot more detail in more, a readable and short video.
Format. So if you guys put in your email address in there, it will get you access to the closed end member site where you get access to infinite banking eCourse enjoyed this webinar that we.
Welcome everybody. This is the intro to infinite banking. Here’s what’s gonna go on in the next couple hours. We prepared this deck and we added a bunch of slides, including some use cases. I also look at my working sheet here that I use to keep track of my infinite banking.
And, when money goes out alone, it comes back. But this is meant to be a CRA school for a lot of you folks. We see a lot of familiar faces. A lot of folks who’ve joined us recently and the infinite banking is new to them. Even some people who have policies on the line today it’s always good to review a little bit. But I would say we’ll knock this out in under an hour’s presentation, but we’ll have time for plenty of questions.
But just a little bit of background on myself. I grew up in Hawaii. Seattle’s 2003 to 2017. I Have a wife, a child, a dog and a Ford Raptor are the things that I have these days, no longer an engineer and then real estate. I started with that first rental in 2009, and then I got up to 11 rentals in 2015.
But since then, as the investor group has grown 1.2 billion to assets on their ownership, 8,500 units, 55 projects, and about 95, 90, 95 people in our family office group. That’s our inner circle mastermind group. And also joining me Tyler Fuka. Why don’t you introduce yourself a bit, Tyler?
Yeah. Hi, I’m Tyler Fuka. I am also married, have two boys. I do have a dog. I forgot to update that. I grew up in Hilo, Hawaii. Then I went off to the University of Washington to study engineering. I was there on a ROTC scholarship. So when I graduated, I got commissioned as a Naval officer stationed out at Mayport, Florida in Jacksonville, went to grad school in Monterey, California, and then moved here to wahoo where I’ve been since 2006 came here as active duty.
As an engineering duty officer transitioned out in 2009. To basically become a civil servant or DLD engineer did a lot of project management, construction management, a supervisor, and then eventually moved over to the department of veterans affairs. And he was a chief engineer there for a while.
Up until 2001, when I left, I decided to leave the W2 world. As far as real estate investing, I’ve been investing since 2002. My path then was single family rentals and doing what we call house hacking back then. I got up to, four single family rentals and basically got overloaded with work life and investing took a pause, started really looking at alternative investing in 2017 ish met lane in 2018 and just been totally doing syndications mainly from there on and where or lane really opened up our eyes as far as insurance wise always been interested in that.
I got introduced to the infinite banking concept. Probably about 10, 10 years ago. Didn’t really do anything with it. Although when I was in Lane’s group and other groups, I was with, I, we kept on hearing about infinite banking. So I eventually got my license in 2019 mainly to study and learn about the details of the industry, the different products available and then been helping lanes groups since then or licensed across the state.
So we basically can serve anywhere. Yeah. And a little bit more context of that, cuz it’s always fun for people to learn the story. I heard about this a while back ago. This infinite banking strategy, I would say since 2017 and I tasked Tyler with learning about this stuff, cuz I knew there were a lot of commissions in fees and it’s a strange product that, it’s not as straightforward as deals to me.
So I asked them to learn it more so to eventually do a policy for myself. So I wouldn’t get gouged with pricing and Tyler would be up front with how it all worked. I also, we also told you to go learn notes and what assisted living facilities are. Which those didn’t work out as, as well as this as most things don’t it’s funny, like those assisted living facilities, I haven’t really found anybody who does that halfway decent.
There was just like a house, like a few blocks away, like an illegal assisted living facility that got taken down by police recently. But it’s like this thing stuck. And we do this for a lot of the clients and the whole point is we crunch the commission and fees as low as they can go.
So in other words, if you guys have a policy, you’re looking at some other policies, probably beat him. But as I learned and what I’m happy about, Tyler kind of focusing it on full-time is that there’s this whole complex structure and we’ll maybe get into it a little bit, past the lowering the commissions as low as possible and past like the 90, 10 70 30 split, which we’ll talk about today, but there’s bunch of other ways that I don’t personally understand to customize it to what you guys want.
But yeah, this is, brief illustration. I think what a problem that most investors face, which is what the heck do I do with my short term liquidity, midterm liquidity, or my college savings before I put it into longer deals, right? Three years, seven year deals, that’s ideally where you wanna put your money, cuz that’s where you’re gonna make a higher rate of return.
Sure. Might be a little bit more risky, but it comes with a higher reward. You don’t really have 50 grand, a hundred grand ready to go all the time. The infinite banking, this is just one example of the many use cases. And I’ve created maybe about four or five use cases to use this very, a flexible kind of strategy, but it fits in my whole, 1, 2, 3 trifectas of simple passive cash list.
But if you’re new to simple passive cash flow, it’s first investing in good deals with honest people where you don’t get your money stolen, where you get higher returns than the retail stock market mutual funds, et cetera. And then number two, you, by getting all these passive losses through deals and other tax benefits, such as going from ordinary income to passive income you could unlock a lot of tax maneuvers and then obviously that creates more money for you to invest and then put more money into us. The third strategy, which is infinite banking here which is what we’re talking about.
This is something that we’ll get into, but this is basically a strategy. A lot of the wealthy will do. I dug up this video cuz I wanted to date how long we’ve been talking about this thing. Dug up this video from 2017 when I was a really shitty speaker back at Toastmasters, I was talking about this thing.
I was awkwardly taught to use my hands when I talk. We’ve been talking about this thing for quite some time and I didn’t really get a policy till much later than this and or it took me a long time to wrap my hands around. So if it’s confusing to you guys, sit back and, we can, we’ll open it up for questions at the end, but you it’s something that I think that it takes a while to understand like a lot of investors understanding the difference between ordinary income and passive income and how passive income can be offset by passive losses.
It’s a simple concept. And I think, we have a lot of engineers in our investor group and sometimes the engineers can over analyze this whole thing, in the banking I’m talking specifically about if that’s maybe taking a step back. It’s really not that difficult, but. It took me a little while to understand this whole thing.
Basically, getting rid of the middle man here we’ll talk a little bit about how big companies use these bank on life insurance, but to me of the main points about using these infinite banking policies is you’re making an interest rate and, , there’s a middle man here by with the bank is how normally it works.
But by using this life insurance policy, you cut out the bank in a way, and you make a little bit of that spread back. . Yeah. One, one of the main benefits is you’re recapturing your earning power or the opportunity costs. Cuz once your funds leave the bank that earning power for that dollar is lost.
Banks, they make their money basically off of how they have deposits come into them, they’re landing the money out. So whenever the money exits the bank it continues to earn funds. Similarly with the life insurance policy, we’re putting funds into the policy, we’re able to access those funds and not still have those dollars in the policy earning and not lose that opportunity to, for that dollar to continue to earn while you’re using that dollar somewhere else.
I’ll do it quickly, so yeah. So what is infinite banking? It truly is a concept of what I was mentioning before about recapturing those losses. You basically are utilizing an asset where you’re able to basically use that dollars, keep it in that asset, but obtain that dollars through alone.
And that there’s multiple ways of doing that. And now you’re able to have your funds work in two different places. So the original asset will be growing. And then the dollars that you access, you can do what you want and you could use it for expenses. You could use it for investing. You could use it for college planning or retirement planning, but that’s the overall concept.
The vehicle of choice that we choose to use for various reasons is dividend paying whole life insurance. And there’s multiple benefits with whole life insurance. And there are other products out there, but whole life specifically, there’s a level premium. So that’s one of the main benefits. The insurance costs and fees are pretty set as at, in regards to the insurance premiums themselves.
There’s guaranteed growth. And it’s right now, tho those ranges around two or 3% guaranteed seems small, but when we’re talking long term wise, this is uninterrupted compounded growth, and that steady growth can then help you plan, for long term. You can be used for multiple things, investing education.
So five, it could, this could replace your five to nine. Your 401k IRA you could use as your own bank to use it for lending instead of car loans, mortgages, and then it also is a safe place to store your capital. That’s where I personally keep my reserves also. There’s of course we’re not designing it for the death benefit, but there is, there is a death benefit component to it that helps with legacy planning or will transfer to different generations.
You are accessing the growth of the policies tax free. There’s no capital gains. There’s no income tax because the way you’re utilizing it is via loans. It follows what you may hear as the buy borrow die strategy, where you’re really purchasing this asset. It grows and you’re borrowing as the asset grows, you’re borrowing from it.
And that way you’re eliminating capital gains along with income taxes. And the policy isn’t designed in a way where you don’t have to pay for your entire life. So traditional whole life you, that you may have, there’s a premium due usually to age 95, 99, or a hundred. We design it where there is a cutoff at some point.
And even though you’re no longer contributing, the policy continues to earn dividends and that dividends then helps to boost up the value of your policy in the form of death benefit along with cash value. So this is a, there’s a handful on this slide. And again I’m gonna go over this in my, in a different way, cuz I think people learn in very different ways.
And although I do think that the most effective way of learning this is talking to somebody who just went through the process with Tyler and it’s fresh in their head and they’re, they’re using the loans or taking loans from themselves, funding the policy and then using it in their whole investment strategy.
Although, we obviously can’t recreate that on a virtual seminar, but that’s why we do the retreats. That’s why I tell people to come out to Napa, come out to Huntsville, meet other investors. So you can talk about, how you’re using this type of stuff. Just speaking from my own personal experience what I do is I, I max fund my policies and I store a cash value in there.
And Tyler mentioned the word asset, right? What’s the asset, right? In this case, I think a lot of people. The way to think about it is, think about it exactly like a HELOC right. You have a house and that was your asset, right? You might be paying it off or you have equity in there, but you use a HELOC to tap that equity, taking loans against that and paying the interest to that loan.
But you can use that loan to a lot of you guys will, who are new or using that HELOC to invest in your first few, several deals, same thing here, except instead of house being the asset is this paper, whole life policy, which is probably one of the most secures pieces of assets out there because the underlying that the asset is backed by these insurance companies that have been paying out dividends since the civil war much more secure than your average bank out there.
But, as Tyler mentioned, there’s a lot of benefits to doing it. I’ll highlight the guaranteed cash value growth. So when, just like how you HELOC your money’s in your asset, which is the house in this case your money is in the asset, which is the whole life policy.
It continues to grow just like the house does. So that’s where that guaranteed cash value comes from. The, and then the tax leave loans and withdrawals, that’s part of how I use it, right? So when my money’s in here, it grows with that. And. At that point, it’s considered tax free per the IRS.
And this is an important thing. We’ll get to later designing the policy. So you don’t go over that minimum threshold. Certainly you don’t wanna overfund it too much, cuz we’ll talk about fees, commissions and try to lower that as much as possible. By having it in this life insurance policy it’s the tax loophole to have this thing grow tax free.
And then when you take withdrawals or you take loans from your policy to go in and invest it or do whatever you need to do with the money. Lot times if you’re smart, you can have that be a business expense and has it have it be tax deductible. But we’ll hammer a lot of this stuff multiple times here.
Other ideas, doctors and high net worth investors like to use this as the asset protection component. And then, I’ve personally cond this with Ivo trust for simplicity of the use. I can talk about that at the end with another use case. But again, lot of stuff here, but basically it’s like a HELOC where you can take loans from it and then pay it back and have this be a constant source of capital.
That’s also grow. But it’s much better than a HELOC for three reasons. First, the banks can pull your HELOC at any point, right? They can freeze credit lines. They can’t do this with your infinite banking. And this is the whole where the whole term comes from family vault and people call this a family vault, but, or being your own bank, you own this policy, this asset is yours. The second big thing on, why this is better than the using your own HELOC you have the asset protection when your money is in under this policy, it’s protected, just like how, a lot of people will think they’re retirement accounts, the 401k are protected from creditors and litigators.
And then, the, my biggest thing, why I don’t like the helos is, they’re great to get started, but you can’t use the HELOC to tap all the equity. A lot of times your banks are gonna play games with you on your appraisals and then lower your loan to value on that loan with the bank.
None of that nonsense games, when you’re doing your own infinite banking policy, you can pretty much always, it’s not like you have, you can’t touch a certain amount of equity in the policy. If you’re using your HELOC now to go into deals. Cool. But eventually what most people will do is they’ll transition the equity into an infinite banking policy for the mentioned reasons.
Real quick. Okay. There, there are some questions being type. So if people have questions yeah. I think we want them, they can type it in during the presentation, we’ll probably cover some of those. And then at the end we’ll make sure to go over all of those. Is that yeah. Yeah. And put it into the question and answer box, cuz it allows us to check it off once we’ve answered it.
But if something is pertaining to the slide we’ll try and get to it for sure. Just all the random questions. Maybe hold to the end, cause we’ll probably answer it like Tyler said. But if you guys have been paying attention, we met, we uttered the words, whole life insurance and typically the whole life insurance is quite the scam.
I’ll be the first one to tell you, right? This is the one where your long loss acquaintance from college or high school, or maybe grade school hits you up on LinkedIn or Facebook or Instagram or for some of the younger people TikTok or whatnot. And they say, you wanna go to lunch and they sell you this like garbage whole life policy that was configured with high amounts of insurance, where is basically where all the commissions and fees come from, which again, what we cranked down to the minimums for you guys in our.
And, it’s just not a very good policy. And this is where Dave Ramsey and those guys say, yeah, just do term life. Whole life is a scam. So I just wanted to just, mention, yes, we are using whole life, but it’s configured in a very different way, but this is actually something that like my spouse got suckered on.
And then, what Tyler can also do is if you have a whole life policy, there are things that you can transfer and he can talk to you about that. But you can dissect current whole life and you can break down what percentage of it was insurance and paid up additions.
And then, most times my spouse’s case, she was, she got taken for one of these, but, she didn’t really the way the financial planning world works. They get a bunch of young salesmen to suck at their friends and family into these types of arrangements. What we did is we just cashed in her policy is what we did, but sometimes it might make sense.
Tyler can work with you guys to exchange it or whatnot. And I’ll say it a little bit differently. I think. Insurance has its purpose. And the purpose of life insurance is to protect your human life value. So I think that there is a purpose there, but as an investment or what we’re doing is totally opposite of that.
We’re utilizing it for the cash value component not the protection part of it. If it is purely the protection part, it is considered could be expensive. I’ll use a gentler word then a scam or something then lane. But yeah, I think it is traditional whole life is expensive.
There is a cheap coverage, which is term, but again, those, rarely ever pay out, but again, it’s there to protect your life or the what ifs. And this is a total different strategy. So that’s where people may get confused if they hear it. And I think we have someone on here or a later slide going over, maybe some of the chatter people may hear about whole life in general.
Yeah. And when I talk to some of you guys have made me talked to your whole life, financial planner, people, and most financial planners or people who make these things, they don’t get it. They don’t get us as investors. What do we want? We want liquidity so we can take the money out and invest it in much better deals.
But these other guys, they say we wanna give you. Higher returns. And we want the bigger death payout, that’s in their head, what they think life insurance should do, but we’re using this, we’re using life insurance. Yes. But really what I’m using it for is to get that tax loop pulse.
So I have to pay my taxes on it and I wanna get the liquidity. I wanna maximize liquidity and I’m willing to give up the death payout and the returns on the policy because it’s small. Anyway, it’s different than 5% to 5.5% returns on this stuff where, what I really want is the liquidity.
So I can go put it in something making 10, 15, 20%. And that’s the idea of a sophisticated investor. And that’s where these other guys, they just don’t get us. How we do things with our money and how we invest it in alternative assets.
Yeah. And this slide just kind of highlights. Lane touched on bank on life insurance. So life insurance, is a asset that a lot of corporations use including banks. So specifically it’s called a bully or bank home life insurance. But if you were to look on the bank’s assets, the list of assets you’ll see life insurance.
I think chat is able to pull this up and you’ll see highlighted down there, life insurance, but. Bank banks clearly understand life insurance, the risks associated with that. And they hold a lot of their assets in that also. That kind of was the proof in the pudding as far as how safe it is.
They’re also willing to lend against that. We’ll touch about a cash value line of credit. So you could take your policy to a bank, not all banks, there’s banks out there that will specifically give you a line of credit based on your cash value. And that to me is similar to a real estate.
They understand the asset and, but unlike real estate or HELOC where, your loan to value is more in the seven or 80% loan to value the banks will lend you 95 to a hundred percent loan to value on your cash value. That kind of says how secure and safe banks consider whole life insurance.
Yeah. It, and again, this goes back to, lot of my discoveries and like what the wealthy do, investing in alternative assets, getting off of wall street and putting their money into these life insurance products. You follow what the wealthy do, and they’re quietly doing something a little bit different as the same goals money talks, but 📍 wealth whispers, you.
Another example is like Walmart, Walmart will buy insurance policies and their top dogs and store it on their balance sheet, as they’re safe semi-liquid stores. What I tell a lot of people is I follow what the wealthy do, but also what the banks and what the big companies do.
And you take a hint from what they’re doing. This is a strategy that they’re employing and if you own a business it’s not a bad way of doing things. So different use cases again.
Yeah. It’s more than just the type of asset. So I think that one of the biggest key factors on the performance or the utilization of the strategy is the policy design. We’re using, we’re independent where we can write with multiple companies. We choose, certain companies, some for their flexibility and then also just how we can design it.
The product is the product. And, most people can utilize and design it the same way we just choose to design it. The most cash value efficient and flexible because that’s what appeals to us as investors. And our design is really caters towards investors because we are investors first and that’s how we want to utilize this strategy.
There’s other designs out there and it has its pros and cons or the different levers. So we, our main focus is cash value and flexibility. Yeah. And this is the portion of the show where Tyler’s gonna spearhead this next few slides, because this is somewhere, this is a time where I realized the strategy and started to employ it myself.
But then I realized how like more technical it gets and that’s where it required a engineer like Tyler to really learn this on behalf of you guys. If you guys look back in the coaching calls, which we keep in the members site, and we arrange everything, everyone from lower net worth to over, accredited beyond, we do, we talk about implementation speed and, maybe you wanna put 200 grand every year in this stuff or 50 grand a year.
You can see some of those examples. We can probably do that at the end. If there’s time here, but. This is some something where I had the self realization that I didn’t have the bandwidth to keep up on this stuff constantly. And, I need to focus on deals and finding, deal relationships out there.
I’ll vouch for Tyler. Tyler gets on flights, he goes to these infinite banking industry mastermind, again, events, and I forced them to do it because, I said, you gotta like really, you gotta get involved in this stuff, just like how I did with this other stuff.
And really transcend your average, keyboard, jockey insurance provider, who just happens to have a license or worse social media influencer. That’s, this stuff is a technical stuff and it needs to be tailor to each person. These are the ways we’ll get into designing the policy the right way.
Yeah. And touched about this In the previous slide, but the, as, in order to maintain the taxable treatment from the, in the IRS’s minds, there are some tax laws and unfortunately, the IRS got involved in the eighties, so they created something called a me limit.
Some people may hear that, or it’s a modified endowment contract, which really prevents pre 1980s people ready to dump in a whole bunch of money into a policy lump sum, very little insurance and really capitalize on the power of insurance. IRS has stepped in, in the eighties, they created a limit basically where it says, Hey, in order for this to the taxable the taxable treatment only will apply if it’s insurance and it, you really need to purchase a certain amount of insurance in relation to the amount that you’re stuffing in.
We maximize, we, we take that to the limit and so we’re able to stuff as much funds into the policy have as much cash value early on with also long-term growth, but with the flexibility while maintaining within those IRS rules and, these rules have changed and tightened over some time.
So that’s. , it, it is, we’ve had to stay on top of things. BA basically in the beginning of 2021 or the end of 2021 was when the new law took into effect also. So they’re changing and updating things, every couple years or so. But that’s where the design is really crucial in order to maximize those things.
Yeah. And this stuff isn’t getting any better. So like the best time to get a policy was yesterday, just like how it was to go into deals, the deals in 2018 kind of cashed out, that’s the best time to do it was yesterday. And it reminds me a lot of like real estate professional status, just like the way lavage changed.
There’s a great tax loophole. If you wanna use that word. guess for the real estate professional status, I think 10 years ago, a lot of what a lot of doctors were doing that were making, 500, $600,000, a million dollars a year was getting a little whimsical rental property.
And then now getting rep status and now using all the passive losses from their deals to drain their income down to, 300 or zero and not pay any taxes. And then the IRS is wait a minute, guys, this doesn’t seem right. So they implemented all these like rules for getting real estate professional status.
It’s the same thing. Tyler mentioned here for the life insurance before you could just write all this stuff off and all the returns would be tax free and, people would put like a dollar, the life insurance, and then the Iris was like, wait a minute, guys, there’s a limit to this. Like you can’t just put $1 and have the whole thing be tax free.
Cuz you can imagine if you guys are like, financial hackers like us, where that goes, put a gazillion dollar policy and put $1 in life insurance, whole thing tax free. So there’s a certain limit to that and where we get into this 90 10, this 10% insurance thing. That’s a little bit more historical context on we always try and stay one step ahead of, the latest, the, where the tax laws are and always be tax compliant.
Of course.
Yeah, so the, that meth limit that is a IRS limit there’s two main, large limits. It’s usually it’s the IRS limit or this meth limit. And the second one is just company limits. So that’s internal limits a company puts on and some constraints they put on. Again the choice of company is almost as important, but as far as the me limit that really, that, that limit is defined by your age, gender along with your health rating status.
So when when you go through the underwriting process, you get approved for a certain amount of death benefit based on your age, gender. And you’re given a health rating and of a better health rating will, will drive your death benefit up a little bit more. So then your me limit will also be slightly higher.
But yeah, the main factor is for a me limit is the amount you wanna stuff into a policy a year. And then the factors are your age, gender and health rating. And then the second limit is basically company limits. There’s various company limit. The big one that we focus on is the paid up additions or POA limitations.
Because the POAs are so beneficial for the cash value companies limit basically how much you can put in per year based in relation usually to your base premium. So that’s the cost and you can think of base premiums. The cost of insurance paid up additions as truly, the cash dump or the cash value addition and internal companies put internal limits as far as how we can design these.
And you might hear three times POAs, five times, POAs, 10 times POAs. The companies we use have 10 times POAs and that’s really beneficial as far as cash value growth. And, I think again, maybe in the back of your head you’re sharing, you know what Dave Ramsey said?
We all know Dave Ramsey, great guy. And I think he does a great job for teaching those, people, most people out there, 90, 95% of people who are in debt don’t make too much money. I think he means well, he’s said whole life insurance is a rip off and it’s cuz we mentioned at the top, it’s all how you configure.
I was watching some YouTube videos of the stuff last night and, trying to see the bad thing about a lot of this financial world is a lot of people, they just don’t really dig into it. And the secret isn’t how you create it and how you structure the whole encompassing strategy, where infinite banking is just one of ’em, this particular YouTube video the caller set mentioned a few things here, which I’ll highlight.
They said the break even point for his policy was year seven. Yeah, when you’re configuring this stuff with higher insurance, which you don’t, which where the commissions and fees come from, you’re gonna have a higher break even point. I don’t know, like some of the last policies you’ve been doing Tyler, but I’m pretty sure it’s a lot less than that.
And then he also mentioned the one thing I will agree with Dave on is he said, and I quote, when you work for the certified financial planners, the CFPs is he called them, they work for the Northwestern mutual guys, he just laughing and he says, those are the guys that just screw people every day.
So it wasn’t me who said it, anybody gets offended and mad at Northwestern mutual, any XYZ mutual company. He that’s what Dave Ramsey said. But again, we’re configuring this a little a lot differently with lot less insurance, which is where the fees and commissions come from. Again, I think this is where most people, and this is what kind of gets me with a lot of things.
Most people will just only read the headlines of videos or news clips. But when you actually read the damn article, the story is very different.
Yeah. And I think Dave Ramsey is also El alluding to that whole life is expensive. And I think traditional whole life, the way it’s designed it is very, it is expensive in relation to possibly O other things out there to protect your life such as term. But again, we’re doing it differently.
And the design, so this slide represents a little insight on as far as the design traditional whole life. So this is a 50 50 split. Traditional whole life would be more, hundred percent premium. So all of that would go to, the death benefit cost a 50, 50 design or 50% is the expense or death benefit or base premium 50% is paid up additions.
That paid up additions as mentioned earlier, really has reduced fees compared to the base premium. So in relation that $500 going to base premium. maybe a few dollars of that will show up as cash value. Whereas for POAs, 500 goes into POAs. There is a fee slight fee in there, but I would say 4 75 will actually show up in cash value.
So much, much drastic change. And that’s why we wanna really minimize our goal is to minimize the base premium and maximize the POAs. The next slide shows a 10 90 split. You may hear a 90, 10, 10 90. I think that’s all the same a lot of times. Some people put the PAA portion first in this slide, it has the base premium.
First I personally call it the 10 90 split where 10% goes to base premium. And a lot of times that is also a company limit. In relation to, the factor, you can put a hundred dollars in as base premium, again, maybe $1 or so of that will show up as cash value and then putting $900 into UAS and your cash value, would be 850 or so not quite 900, but drastically different.
So out pocket from, as the client, it’s the same thousand dollars coin out of your pocket, how it performs or where that money is going. Is very different based on the design. Again, same thousand dollars going out. If it was a traditional whole life, you probably have $0 cash value that 50, 50 you might have about $400 for four 50 cash value.
And then a 10 90 would you’d have, 800 or so cash value. It’s all just purely the design. And then that impacts your cash value portion. Yeah. So some people might say, oh, we’re already doing the infinite banking thing, but they could be in this format where they’re paying five times as much fees and commissions, and they’re getting five times less cash value than they should be getting with this 10 90 split.
Not all policies, still again, it’s do you read the headlines or you actually analyze what’s in the content here and how, or in this case, how it’s designed, right? You may be implementing I B C banking from yourself. But if again, like we, we kind of urge people if you’re already doing this strategy.
Just check out what the split was on the premiums versus the paid up editions. This is typically. What most people will do. Some people in our mastermind group they’ll do 70, 30 or 30, 70 splits. So like like a mix between the 50 50, which I don’t think you ever wanna do that. There’s some other advantages to doing it that way, I’d say, the first thing is like lowering the commissions and fees for you guys, which I’m sure the question comes up.
Like, why the heck would you and Tyler lower the fees and commissions, I guess I have my reasons which is then you put more money into deals and you actually have more money than paying out in fees and you invest more and you tell more of your friends about this type of stuff. But to me, it’s like most of our clients are doing really big policies.
So the commissions and fees are there for us that kind of keeps the lights on, but it’s, I’ve always thought of this as like an added service for our investors in our investor group. Certainly staying away from this 50 50 split. Yeah. And to not get into too much technical detail, but the design also enables a lot of flexibility.
So on a 10 90 split that a hundred dollars, even though your target amount in this case would be a thousand dollars. What you have to put in every year is really only the a hundred dollars that, that additional $900 in this case is flexible and optional. And that’s where, that’s how the design also plays into the flexibility.
So not only the company allows, the insurance company allows you that flexibility, but the design then again, allows you to put in capital as you have it, throughout the policy year versus having to save up and have that thousand dollars or in the 50, 50 design case $500, available on your premium anniversary.
That’s a, that also plays a big factor. For me personally, just having my, since I have most of my capital working, I don’t wanna sit around and, bank up the large payment and have that only be able to put in once a year. I like to spread it out over the year and dump it in.
We had a question here from Hillary. Does the me limit include the amount of premiums you pay a year or is the me limit the amount of additional PUA you can add to the policy? Yeah. Good question. Yeah, it’s it is a cumulative amount. So that me limit is the total amount of funds you can dump into your policy.
So that would include your, the premiums for that year.
So one unique way, a lot, some people, he struggle to hear how the PWAs really added add value to the policy. We came up with this scenario where it’s similar to a house cause most of us are investors. So think of the base premium as your debt servicing on your mortgage, right?
You’re, it’s something you have to pay in order to keep that asset yours very little value added if we’re talking the debt servicing portion of your mortgage, but that’s what you have to pay paid up. Additions would be more like if you were to do a renovation to your house, there’s some expenses to it.
But a lot of times it increases the value of her house, to the more than what are equal to, or more than what you put in as far as repairs. So paid up additions would be similar, like a renovation blue seeing the value of that house, which later then you have you, you boosted up your equity.
So you can have access to that. Or when you sell that you make more of a profit base premium equals the debt, servicing on a mortgage, very something you have to pay very little value add to, to, to the asset. And we had a question from Luke here. So if you take a loan against your infinite banking policy, as it grows, can the growth pay back to the loan?
Yeah. So paying back the loan, you can, you, you could either pay that out of pocket or as you mentioned the policy grows, it’ll just, it’ll take it from the cash value component or, it’ll take it from your policy to pay that debt servicing if you didn’t pay it that year. Yeah. So I guess the kind of the similar thing is again, think about it like a HELOC right.
You can take loans from your HELOC. But I think where a lot of people, they get it mixed up or they have this false sense of needing to pay off that debt. And we get this question a lot, right? I have a hundred
thousand dollars, I took a hundred thousand dollars outta my HELOC to go into this deal.
I’m paying 5%, I think what is that $5,000 a year on that? And they think most of us on the call today, we all pay off our credit card, we pay off our debts, but it’s not like you have to really pay it off. Just like your Helo, right? Yes you do. But then again, if you’re making 10, 15, 20% on this.
Then just let that 5% roll. And that’s what the big companies do. That’s what businesses do. If they’re making money somewhere else where it’s just an arbitrage game and in a HELOC, that’s where you would just let that line of credit revolve and in, in an infinite banking, same situation there.
And answer Luke’s question, just like in the HELOC you’re taking a policy, your HELOC loan from it. Your house is gonna continue go up in value the asset and in this infinite banking world, same thing same kind of phenomenon is happening. But again, like the HELOC is cool, cuz it gets people started and it’s easy to tap that equity.
But at some point you draw the limits of that policy because the banks always play these BS games, which you guys on sandbagging you on the appraisals and giving you worse loan, the values, especially if you’re here in Hawaii, you get these teaser rates and then goes up after that. And then the banks can always pull your helos on you where the infinite banking it’s yours, that’s why the term comes banking from yourself. But you also get the added asset protection, the being life insurance, which you don’t really get with the, he. If you’re one of those high income earners or like a high liability profession, like a doctor, that kind of means a lot to you guys.
All right. Yeah. And I do see a lot of questions about the policy loans. So I’ll try to cover that on this slide, but the, there, there is a way of, so how you access the cash value is through a loan and we’ll touch a policy loan. And then we’ll briefly touch what a cash value line of credit.
So those are the two main ways. So a policy loan, literally there’s no what you’re putting up as collateral is really your death benefit. So going through a policy loan the insurance company knows that you have the death benefit. They know at some point you will die. So what they’re doing is they’re, collateralizing your death benefit.
So your death benefit overall stays the same, but your net death benefit which would mean if you pass away, if you had any outstanding loans the outstanding loan will get subtracted from your death benefit, and then the net death, the net would get transferred to your beneficiary.
There’s really no approval process. As long as you have that cash value in your policy. It’s usually about a two business day process where you go online and you request it. California residents, they do need to print it out, what, sign it and email it in. So it’s a little bit more difficult, but again, very simple same time turnaround as, as far as two business days.
But in, in some companies and they show it slightly different cash value. Norm technically stays the same. Your net cash value may go down or in this case, your available cash value. But for one, for one company we use a lot is guardian. So on guardian, whenever you take a loan out on the portal, you’ll see your cash value actually just remain the same, your net your death benefit.
You’ll see, go down because that’s your net death benefit in regards to how much that can you access. So we like to tell people, if you see your cash value, you can access 95% of that via policy loan. The company, the, your basically paying up front, the ins interest owed till your next policy anniversary date.
So they’re precalculating that based on your loan size. And then they’re holding some reserves to cover that, that one year of debt servicing. You don’t have access to a hundred percent of your cash value especially if you’re doing it early on in your policy or as you get closer to your next anniversary because there’s less.
Reserve required you’ll have access to greater than 95%. But we just use that as a guideline 95% of your cash value. There is another question from Dave about, what happens in the end if you keep if you only ended up with a 10% year after year, because you keep kept on pulling out, but basically 90% of the loan.
When you do take a policy loan, similar to a HELOC versus on a house, the policy continues to grow the whole amount. Once you put your funds in there, it continues to grow that the growth rate might be slightly affected based on the company. And if it’s direct or non-direct recognition, but the policy continues to grow similar to your house.
The, your house continues to grow, whether you have a mortgage or HELOC out on in, and that helps to offset the debt servicing costs. But the main benefit for us as investors accessing the funds is, we’re gonna go put it into a asset or an investment. And a lot of times the, that asset cash flows is what helps to pit on that debt servicing while your policy as a whole continues to grow.
Yeah. And. And, it is sometimes conceptually hard to see that. Get with us, we can do what we call illustrations, where we simulate, Hey, what if I take a loan out every year and either not pay the interest or pay the interest out of pocket or have the policy pay the interest. But we can show the illustrations to project and see, Hey, how will this perform?
What if scenarios or, just for planning purposes. Yeah. And that’s all, I’ll tell you, go talk to Tyler about that stuff. Like the direct recognition. I still don’t understand that stuff. And I think that’s where you partner with Tyler and then, he’s the guy you call when you have those kinds of questions or, if you did pass away, that sad event where you’re worth more to your spouse, then you are, cuz that’s pay out somebody to call, who’s a real life person. Who’s your in between the big life insurance company. I think that’s the value that Tyler provides, but getting a little bit more and we’re illustrating what this whole policy, what this infinite banking thing.
This is a screenshot of a video I did for folks. And a lot of this is in the e-course did you guys go to. Members that simple passive cash flow.com. You guys should have all access to the eCourse, which goes into a lot more in depth that what we talked about, what we’re talking about today, but there’s this video in here where I’m balancing, you can get multiple policies, you can layer them on top of each other, which is a strategy that I recommend.
So you implement at different speeds, but this is a little tracker sheet that I personally made to keep track of. Here I have little policies, right? Where they’re from. The CV is cash value, right? This is how much I money to tap into. And then I might have some loans out at a certain percentage.
So this is my little dashboard just a simple spreadsheet of how one might keep track of this stuff. And then, your future payments that you’ve gotta make in the future. We’ll get into this a little bit later, but like when you configure this with a 90, 10 split only have to do 10% of the commitment money.
And this is the game changer folks, right? If it was 50% then, so you got to put in five times as much money. So if money gets short and you don’t have to really fund this, the policy can won’t collapse or cave in like a black hole. Especially when you could figure what that 90 10, like how we.
But, I use this to keep track of my, 20, 22, 20 23 premiums and PUA paid up additions. That’s what that means here. But the way I’m using this as an investor, this is more, the practical usage of this thing is all right. I’m going into deals, right? I’m gonna put a hundred grand in this deal, a hundred grand in that deal.
And I’m looking for more deals based on here. I’ve got several hundred thousand dollars to tap for some deals, or maybe I wanna put in some hard money and then maybe I get the hard money back and I gotta replenish my infinite banking so I can keep making my return there. This is how one might use this.
This the end game of probably using this product. And, for a lot of people getting a million or $2 million in here and just socking it away might be a good end game strategy. But it’s just really nice to know that you have a large sum cash that you can get at an emerging, especially for you business owners.
This is where I keep a lot of my cash stores. So when deals, if a deal were to struggle, I pull out a big sum of money and put it in there because I’m, I’m not gonna have a capital call. I’m gonna make every like personal thing I can do to make, prevent that from happening for you guys.
But this is where the money is coming from. it’s coming from my infinite banking. So I’ll just call up. Actually I’m old still. So I call up the insurance company and do my loans whenever I want to. But as Tyler said, you can just get on your computer dashboard and have it direct deposited.
One funny thing that I learned is if you, at some point you start to get policies and your spouse, cuz if you’re married to a female, they typically live longer. So the pricing is a little bit better for them, but it gave me a hard time. can I get a policy loan from my spouse’s policy?
Probably because 50% of people get divorced and they maybe they raid their spouse’s in front of banking policy. That’s just opening up the whole idea of not only getting the policies on you, but your spouse. And so people will also get on their kids too. But there’s a lot more of this content in the e-course and then when you become a client additional material gets unlocked, but we wanted to keep that separate from you guys coming in.
It’s not in your guys’ portals now, but we thought it might just confuse people, but there’s a lot of these other techniques that people, in the film are doing and investors that, really comes alive when you start to come to the retreat and you start to mix it up with other accredited investors.
These guys come with all kinds of stuff. Yeah. And one thing we didn’t highlight, so policy loans you are totally in control of that. There’s no monthly statement that comes in says, Hey, you owe this much interest that is truly up to you. As far as if for when you pay that back.
We always recommend paying the debt servicing what happens is, we, they, precalculate the debt of interest owed up to your policy anniversary date. If you don’t make that interest payment, the interest will then get tapped onto your loan principle at the, on your policy anniversary. So prior to that, it’s calculated simple interest.
We like to keep it simple interest. So we pay the debt servicing prior to your policy anniversary date while your policy continues to grow compounding. So that’s also some of the magic there. Yeah. I personally don’t really, I try and keep it stupid for myself or keep it simple, stupid for myself, the kiss format.
I just, once you get past the first year, you’ve paid your 10%, which is all you really need to fund this thing without it collapsing your caving in which is again, why the 10% insurance Is a game changer compared to how most people will configure this with 30% or 50% where you have to put a lot more of money into it.
So it doesn’t collapse. So I don’t really freak out whether it’s, I’m not paying I’m Def like, like Tyler said, like I don’t really pay the policies down unless I don’t have the money and I don’t really worry about, paying off the interest. I just let the cash value pay it automatically.
So I don’t really, I don’t really worry about it, but that’s just how I use my I C everybody’s a little bit different. This is an example of, you have a hundred thousand dollars cash value. What you have available for a loan would be about 95% of that. But in this sense we’re taking a lower loan to value.
So 60,000 simple interest loan, when you take that 60,000 loan, the a hundred thousand continues to earn, and, there’s various dividend rates. And whenever you hear any company announced their dividend rate, that’s a gross dividend rate. What historically what we’re seeing is about four or 5% IRR.
In this lower interest environment, we might see more three and a half to four and a half percent IRR. But in this case I think it’s illustrated showing a 4% IRR. So that hundred thousand dollars policy would grow by about 4,000 that’s $60,000 loan. You have four or five five 6% loan. And again, that’s te technically on the higher side would be $3,000 in debt servicing.
You can, you’re able to take that 60,000 then invested in a asset that asset, even if it’s 6% cash flowing asset cash flows 3,600 a year, that by itself would be enough to pay for the debt servicing. So you have some positive cash flow from the asset, along with the policy still growing. And that’s the beauty combined, it’s better off than just doing one of the assets by itself.
And I wanna emphasize, we were talking a lot about the design and the whole life product. That’s just one aspect, right? The whole banking system is the flow of money. So it really is accessing that cash value to have it work outside of the policy also. So that in, at the end, you have your policy grow.
But you also have assets outside of the policy growing. So your net worth is combined is better than just putting it in the policy and just leaving there that still grows and works, but the true magic is accessing it and growing outside of the policy. So just wanna really highlight that cause that’s where a lot of people, are either debt, aver.
They don’t want to take on any debt, if you take on good strategic debt, then you can really maximize your growth. And that’s what this strategy really helps you to do. Yeah. And this is where most of the life insurance guys don’t really get it, they’re like don’t, you wanna make a higher, I can give you a higher return in this policy than the four, 5%.
But we give up the liquidity and as investors, we want liquidity. So we can take that liquidity and go invest it in an apartment deal or a fixed and Flatt or some other maybe venture capital, right? Whatever you guys like to do. Personally, I like to go put my money in stabilize real estate that I could make maybe a 15% return.
And there’s that Delta, right? 15 minus the 5% that I pay, that’s that Delta and that’s an arbitrage game, but I’m still having my underlying asset, which is the life insurance policy. Grow. So it’s there’s that this is the, where the whole idea of where you’re making money in two places or money is growing in two places.
Yeah. And I, or, sorry the other thing too is, you may hear people call it the, an asset or the dual asset. Cause it truly is that it’s not a, or a lot of people when they’re, when they talk to us, they’re saying I’m trying to do this deal. So I don’t have the funds to do a policy.
It really is a, it’s a compliment to each other. So you could do both, right? Granted you’re gonna lose some liquidity or one, but in the long run that’ll pay off. But it shouldn’t be looked at, you have to do one or the other, it really should be looked at, you can do both. So you would put the funds into the policy first and then access those funds to do the deal.
And the first year is obviously where all the expenses or most of the expenses are taken out of. And that’s where you’re gonna feel the biggest hit, but we’re able to design and tweak some things. So even from year two, definitely at year three, most people will see it as truly a deposit. So when they put that a hundred thousand into their policy, that would have access to a hundred thousand.
Year three, year four and even more as the policy ages. So that’s where, I mean takes some time to really see that benefit, but like any, anything, you need to capitalize it for a little while and then it’ll pay off in, in the long run. And in, in this case, we’re talking you’ll two to three years and then you’ll see the great benefits, down further down the line.
Yeah. And maybe it clicked for you at that point, you’re making money in two places and, so what some people will do, over a million dollar net worth, maybe they have a lot of money in their home equity, even half a million, that’s where maybe they might wanna do 200, $250,000 a year.
And then you can do strategies, maybe get with Tyler, like depending on where your birthday is, this is what I did to kickstart my per mine is I doubled up, like I was able to, back fund for the previous year and then the next year, all right away. So I could fund it, put my liquidity in there and then the next day, get it into the next several deals that came up.
That’s really what we’re talking about. That’s the strategy where we’re coning it with investing in real estate or other business furniture.
Alright. Just some, there was a lot of questions on policy loan rates. Again, this is, as there’s a lot of fluctuation, but for policy loan rates and if it’s fixed and it varies from company to company. And I’ll say guardian is one of the main companies we use. Guardian is a fixed interest rate.
What you’ll feel is a 4.76. So that could be that will be the fixed interest rate for the life of the policy. If it’s variable, then that, that variable interest rate is usually tied to the moody, triple a bond index, the corporate bond index rate. There usually is a floor. So a lot of companies now have a floor of 3% around.
But then that’ll it can vary. And what the company will do is they’ll announce it every year, what their variable rate is. And it’ll, it can’t fluctuate more than half a percent per year. So even though like right now, the interest rate shot. A lot of the variable interest rate company or for the companies that have variable interest rates, they’re only increasing it half a percent a year.
It has no limit on how much it drops. For me personally, I like the fixed rate because we’re utilizing the strategy for long term planning for the stability. I just I like that. I wouldn’t wanna have a variable and the unknowns down the line, but there are those options.
Now we’re not gonna go too much into this strategy, but this is just a, like a preview of, the different advanced strategies that some of our members will do with our policies. As Tyler mentioned, you can get a loan from your life insurance company, and that’s the easy way.
That’s what I do. It’s the easiest thing to call them up or, get a policy loan from them at their, what about 5% rate. But, as most of our financial hackers in our group, they always like to optimize things and they found that they can go to these third party banks that will give them loans on the cash value in their life insurance policy.
Around like the three and a half, 4% range. So they’re making an additional 1% doesn’t sound like a lot, but, they could be saving maybe 20% in interest. Of course like the bigger the policy. And this is what I tell my guys. It’s man, you guys to spend a lot of time on these trade line things, these little things that kind of, moved, it’s moved the needle slightly, but then again, thinking back to when, I was just barely in a greater investor, like this wealth building, journey, it’s all about a game of inches, like kinda like football, those are the things that are gonna get you that momentum forward and eventually push you to that hockey stick of growth where maybe I’m in that stage personally.
And I don’t really, I value my time more than money, if you’re somebody who’s still growing your net worth, these are the kinds of strategies that you could employ by even by getting a lower rate on your loans to increase that Delta between what you invested in and get and what you’re paying your policy loans at.
But again, a lot of this stuff will be in the E course unlock for clients. All right. This is just an example of a typical policy we would do. This is for a 50 year old male with a preferred non tobacco health rating, which is, or, sorry, this actually is a 45 year old male at a preferred non tobacco health rating. The guardian is, we are independent.
We mainly write for mass mutual and guardian. Most of the policies write for investors and including myself is with guardian and that’s because they offer the greatest P wave flexibility. So this specific design is a 50,000 target amount and a funding duration of seven years with this specific design and product the kind of the sweet spot would be between five and 15 years or so of funding duration.
And there’s various reasons why people would choose shorter funding period or longer funding period that, we would go over their goals during a call in this case. It’s a seven year funding period looking on the left of the annual premium breakdown. So this is where that $50,000 target amount, the base premium is really only 45, 46.
So that is what we would call the cost of insurance. Commissions are based off of that. So by shrinking down that number to the smallest we can, and this is basically the smallest number we can based on the 50,000, this is a company limit. That we we’re shrinking that down. We’re really shrinking down the expenses and commissions, therefore, really boosting up the cash value to you as a client, but that 45 46 buys a certain amount of whole life.
That’s $190,000 of whole life death benefit, but in order to stay within that me limits and the IRS limits that $50,000 target amount, you need $985,000 of death benefit. So because you only have 190 of whole life, the cheapest way to boost your death benefit up to that amount is the use of one year term.
So you’ll see this other number $478 and 86 cents. That’s the paid up additions rider scheduled. So that’s so that you can add UAS to the policy, but embedded in there is this $402 and 14 cents of O I T. And that’s one year term. So that one year term is buying an additional, $794,000. So combining that with the whole life death benefit, that’s how you’re getting up to that required death benefit and then allows you to stuff in 50,000 total.
So what would be due on your premium anniversary date or initially to put this in is the sum of 45 46. 478. So that’s, $5,025 is basically an or about 10% is what would be due. And that’s basically all ex insurance expenses and costs, but then that 44,975 that’s paid up additions, unscheduled. So that’s the cash dump.
That’s the flexible portion that you can put in as you please throughout the year. Now there’s a question out there. What if you don’t max fund it that year or the flexibility of it, especially with guardian, not only within the year, you can dump money in as you please up to your target amount or your me limit.
If you don’t reach that amount the remaining amount will roll over to the next year. So say 50,000 year one you dumped in 50,000 year two, you only dumped in 10,000, that extra 40,000 of space will roll over to year three. So year three, you would be able to catch up that missed 40,000. So you could dump in 40,000 in addition to the 50,000.
So you could then catch up a whole 90,000 in year three and make that policy whole. So you don’t really lose the ability to dump your POAs in as long as it’s within your funding duration. So within that seven years, as long as you make your catch up payments within that seven years, then you can do that as you please outside of that seven years guardian in this case, and all insurance companies will require you to go through additional underwriting to qualify again that, Hey, why are you dumping in this large amount?
It did some health. Did you get some health scare or something happen that you’re dumping a lot of this money into your policy? So that’s where the funding duration can come into play. And that’s why, longer funding durations allow greater flexibility. It does require more insurance products.
So there is slightly more expenses, but that’s where we, on our call, we can model out different scenarios. So you can see what best fits for you. Some of the key things that we, the metrics that we like to look at is how much cash value do you have early on and this design maximizes that cash value.
So you look at that column, the net cash value. So dumping in 50,000, year one, you would have $41,735 of cash value. That’s about, little over 83%. So when people ask us, what is the expense of, what is the cost of starting this policy? That is one cost. What I like to tell people you’re gonna lose about 20% liquidity, in year one.
You’re 50,000 you’ll have access to about 40,000 via policy loan. However, in year two, if you’re to dump in 50,000 you’ll see the cash value go up at the end of the year by about 49,000 and change. So still some hit, but way less of a hit as most of the expenses are front loaded.
And then you’re three, if you’re to dump in 50,000, that’s where a lot of people have that shift in mentality from, Hey, this is an expense or premium. I have to pay to more, truly a deposit where they’re putting in 50,000, what shows up in cash value is 50,000. And then every year after that, it just gets more and more, so that’s where also, the funding we can play around with the funding duration because in the later years, including myself, we start looking forward to when can I dump in more cash, more funds into the policy and boost up the cash value even more , that’s that one metric of cash value, then the break even point is another one.
So the break even point in the sense of the amount of cash value you have versus your total outlet when does that break even, and in this case is breaking even between years five and six. So you’ll see, at year five at the, you put in 250,000, you have 249,934. Again, these are projections based on the current dividend rate.
This is assuming, 5.65 gross dividend rate is what this illustration assumes. That dividend rate is not guaranteed. Dividends are pretty likely to happen. As lane mentioned, guardian specifically has been around for 162 years. They’ve paid a dividend for 162 years through, consistently the amount of dividends have fluctuated.
We are historically in a low interest and dividend environment, 5.65. But and we would expect it to possibly remain low interest rates are increasing. So possibly, we’ll see a rise in dividend rates, but this illustration assumes 5.65 gross dividend rate. Every year, there are some tweaks we can do with the design, that possibly pulls that a year ahead.
So breaking even maybe between years four and five, even that liquidity as far as 83% year one, there’s, it there’s some tweaks we could do based on your situation that maybe we can get that as high as 87, maybe 88% liquidity in year one. If you have capital available and able to jumpstart the policy, basically the, so my understanding of this sheet of numbers, and this is the, this is what’s called an illustration.
So this is what Tyler when you guys meet and you guys get illustration, this is what pops up and is given. I don’t really understand all these numbers, but I personally look at is, the net cash value as a percentage to what you put in, like Tyler said, you, when you configure like how we do, typically you’re running away with something better.
You’re losing less than 20% your first year. I know. My first policy I did who, who was taking a lot more in commissions before I found Tyler it was like, Double that or double the loss basically. That’s your little quick tip on comparing these policies. And then, another good exercise is that, it might be a loss of 20% here the first year, but then you start to recruit it by year three.
It might be half of that. 90, 92% is what you get. But then, like Tyler said, like the break even point is always a quick way to compare policies and ultimately how much fees cuz these life insurance policies, they’re commodities at the end of the day, they’re all underwritten and done by the same top tier companies.
Now I’ll mention there are other, some like lower tier companies that you wouldn’t even wanna mess with. In my opinion, you might get a little bit better, but I just don’t think it’s worth it when you know, the whole purpose of you doing this is security and asurity that’s that net cash value.
That’s how you evaluate the break even point. And again like that, most people doing these policies it’ll break even at year seven, you’re eight at best, but obviously, when you ran this number little after your five. Yeah. And you’ll see on that left the premiums go to zero.
So from year eight on, when we’re designing this for a seven year funding, you, we ex you’d exercise the option where at year eight, you’re converting this pre the policy to a paid up policy. So by, by doing so, no more premiums are due. That’s the good thing. The bad thing is then you can’t contribute, you can’t stuff in any more funds or POAs also.
Again the that’s where we can play around with the funding duration. Some knocks on the, this 10 90 design is that, Hey, we wanna fund this for long term. That’s where maybe we would choose a different company that has a different flexibility, but again you’ll be giving up some of that year to year.
Flexibility that guardian specifically is to me the benefit of that is not having to dump in 50,000 on your policy anniversary date, every year you have that flexibility throughout the year. It rolls over and things of that sort as lane mentioned other companies, and I think we cover that maybe in a later slides are all companies the same.
And we, I can go over some of the basic differences there. Did you get a next question? I think that was it right? Yeah. So we are independent. I would say ma the majority of the companies we use majority of the policies you write is for mass mutual or guardian.
Mass mutual has a different flexibility and that’s in the funding duration, but that’s where that the, that company the P way of flexibility is not as great. So the funding duration, they have a lot of flexibility in that. So we don’t have to necessarily determine the funding duration up front.
Whereas with guardian, we’re saying, Hey, this is a seven year design or a 10 or a 15 year design with mass. You don’t have to set that. It could be a five year design, or it could be a 30 year design. However, it’s best suited that you have that 50,000 it’ll dump in every year on that policy anniversary date.
So not too conducive for investors in the sense where most of our capital, we don’t wanna have it tied up and building up and have to put in 50,000 on that, on, within a few weeks, every year early. So you can’t contribute, but that’s another option with mass mutual. Yeah. And just Tyler says, uses the word flexibility.
The way I look at that word is I have three policies, emeritus, pan, and guardian. So what I don’t like about my emeritus is exactly what Tyler’s talking about, which is the the flexibility. I gotta like fund that thing every single year or something like that on the policy. And I think at Penn, I have to do it every other year.
I’m probably butchering this, that’s what it means by flexibility. Whereas guardian, I don’t really have to do that. Tyler tell me, yeah, 10% like this design it’s the 5,000 a year is what you’ll be putting in for a $50,000 design. And the 45,000 is truly flexible and you won’t lose the ability to put in that 45,000 if say you skip two or three years it’ll just bank up and then you’ll be able to make that catch up at the very end.
Yeah. And going over Annette’s other question in this illustration is the policy paid up after seven years and no more premiums need to be put in. I can already tell Annette’s already doing something like this, like this is the, I think this is the downside of the 90 10 arrangement because the 90 10 is great for new people, stuffing a whole bunch of money in here, right?
There’s a deal. You’ve got two, 300 grand, you just throw it into the policy and then you take 180 200 grand and put it into the next deal. That’s ideally what, the 90 10 it’s kinda like the launch pad, the quick start plan. But what I, what I tell most folks is yeah, do the 90 10 get started, get. A hundred, few hundred thousand dollars of cash value loaded up in there and just get that. You might take the money out the next day and put it into deals and that’s great. That’s exactly what you should be doing, in the long run, as in, that’s looting to shoot, as you near end game, right?
And it’s not necessarily how old you are to me, it’s where your net worth is when your net worth starts to go around four, 5 million net worth or even two and a half. If you guys are more frugal out there, you start to be seeing this infinite banking policies as end game for you to where you can make 5% tax free with very little to no volatility.
Then you’re maybe looking for more of a long term place to just store money as deals, cash out. You don’t go into more deals. You just put it into your life insurance and have it grow under your umbrella. That’s I think where, some of the members who are already in that end game stage might be one to that 70, 30 split. Is that right? Tyler? That’s my understanding of it. Yeah. I’m a strong believer in the 10 90 for all situations. I outlet. There’s some questions on here about so main mentioned, there are no deals. In life insurance. That is a very true statement. I know we’re talking a lot about the different companies, maybe different products.
The statement, there are no deals in life insurance is. Yeah. If you look across the board through all the strong mutual companies the product themselves, I think will vary very little in actual performance. Now, illustrations is one thing, actual performance, historically, I think and we’re talking the four mutual, large mutual companies, which is like New York life, Northwestern, guardian, mass mutual, all of those have all fluctuated basically would be performed the same way in, in actual performance.
What I feel is the differences with the companies is some of the nuances, it might be the PWA flexibility or the funding duration, flexibility the portal use, the ability to just go in and do things online on the portal the ease of the portal I’ll throw Penn mutual in there also, cause I think that’s an up and coming company that has been you know, making a strong move historically though that the, the The actual performance hasn’t and there’s not a lot of transparency there from the company itself.
I think they are performing icy. So I think that’s one other company that may get added as far as a very strong mutual insurance company in the future. Some of the trade offs with the, do the 10 90 split or the 90 10 split for me the one downside is that for the way we’re doing it with guardian is the funding duration limitation.
This maxes out because you priest premium is so small there’s a racial on the amount of death benefit you can get towards this 45 46, or really in this case, 190,000 of death benefit. So I can’t, we can’t push the death benefit, say to two mil based off of this 190,000 of whole life death benefits.
So it ma it, it limits that part where you can’t do this, you’d start have to paying a little bit more premiums but it also limits you on, 15 years, 16 years max, maybe for 50,000 design that you would wanna fund this towards now, I personally view, 16, 15 or 16 years as a pretty long funding period.
The true IBC practitioners or Nelson Nash, you’ll hear that you wanna fund this thing forever. I personally feel well you would open up additional policies. As long as you have, you are insurable. If you’re not insurable someone within your family or within your business, you would have an insurable interest for.
So that’s the one major downside you may hear on the downside is the dividends are less because it gets, PUA gets treated different than base premiums and so forth. But from all of the case studies we’ve seen is that overall, even though your dividends may be less, your overall cash value is more.
And that’s really what we care about is the cash value component of it, of the way we’re designing it. We haven’t been able to find one where overall performance, as far as cash value wise is impacted versus say a 30, 70, or a 40 60 design. Because even though on those other designs, the dividends are higher.
The overall net cash value is AC is still less because of the added expenses built in there. Yeah. And I think we’re getting out the scope of the infinite banking today. I think a lot of the people are, that question is alluding to what do I do an end game in my opinion, end game, like IOLs and these putting a whole bunch of money in here, like we’re talking over a few million dollars in life.
Insurance is a little overkill to me. Yeah, you might not be in value, add real estate, but you’re at least in like triple nets and you’re still in real estate. And that’s why the way for most of the people listening here, you guys are sophisticated investors. You guys aren’t like the average, Joe, just throwing a whole bunch of money in life insurance in end game, you’re still making, doing better than 5% if you want 5% cool. If all you need is a hundred thousand dollars, a passive income a year. Cool. But I think most of us in a retirement and end game, we all want, $20,000 of cash flow every month. You’re getting a lot of money in life insurance.
So that’s why I, like with Tyler this kind of goes into more end game financial planning, this is maybe we’ll answer questions at the end of this, to me there’s other investment options other than what we’re talking about for.
That lower risk, lower return, like I said, triple nets, maybe going back into the traditional investment market. The kind of we gotta get through some of these last slides here whole life versus term life term life, the reason for that is to protect you against somebody prematurely dying, whether you it’s, your spouse and your family is left out.
That’s the purpose of term life. And I think everybody should have that at least to cover, at least a million or $2 million. But that’s cheap typically. And a lot of times that’s, in your employment, your employer will cover some portion of that already. So I think that’s two separate things, right?
Again, we’re just using this whole life product to get this infinite banking, building this asset, making money in two places at one time. But when you start to fund larger policies like a hundred grand a year, $250,000 a year, it’s a byproduct of the term life. So a lot of the clients just turn off their term life because they already have it at this point.
And then a, quick discussion on IOLs iOS is like the third portion here we don’t use. IOLs are typically for higher returns, but you give up the liquidity. And typically I would be careful everybody, anybody selling IOLs, they’re typically very high commission products and the it’s a very multi-level marketing kind of a program.
What I’ve seen out there, they get you to, they get everybody to sign up for these Training programs where you can sell life insurance to your friends and families and suckers. And, I would just stay away from the IUL. There is a certain tool for it in the end game, if you just wanted to make 6%, but to me, for the people listening to this webinar today, you guys can do better than that.
IUL is investing for the clueless, for it’s like when, you build up four, five, $10 million plus in your kids and your kids’ kids to take over that money. That’s what they invest in because they don’t have a clue. They don’t have a network of what to invest in.
So that’s, to me what the IUL tool is for, but Maybe Tyler, can you go over like the mutual insurance company, stock insurance company differences real quick. Sure. And I’ll just add a little bit about the IUL. I actually bought IUL. That was my very first policy. That’s what sent me down also this rabbit hole of researching because it didn’t really perform to what I wanted to do now, again, with IUL similar to whole life, there’s a lot of design features in there.
So it probably wasn’t the most or best design, but why I personally don’t like IOLs is the underlying product of IUL is term life is renewable term. Unlike the guarantees of whole life where, it’s a set premium those expenses can be managed with renewable term. Basically you’re buying a new insurance product every year.
And although the numbers and the returns may look great as you’re young, similar with like level term is cheap. When you’re younger, It’s ridiculous when you’re older. If in your seventies or eighties, if you’re having that premium renew every year that’s a large expense and a very unknown cost that I’m not personally willing to utilize this strategy for.
That’s my take on IOLs. There is a question. Can you convert it into an I B C there is something where with all insurance, you can do a 10 35 where you take the cash value of one policy, turn it into another PO or roll it into another policy. Sometimes that makes sense.
Not, I wouldn’t say it, blanketly, it, it always makes sense, but there’s times when we don’t recommend it, or we’re just trying to, would recommend people how to maximize what they already have and not roll it over because there are some expenses, you’re starting over, but there is something called a 10 35 where you’re rolling over the cash value to a new policy.
Are all companies the same? We touched a briefed on this, but what we particularly choose and what we recommend is a mutual insurance company. And, the mutual part is key because that’s where you, as a policy holder are basically owners of the company. There’s no stockholders or anything.
A stock insurance company say Prudential has stockholders. So their vested interests maybe split, right? It’s not purely about the policy holders. They have stockholders that they have to appease as a mutual insurance company with and participating mutual insurance company.
That’s where the company profits are returned to you in the form of dividends. So that’s where, you’ll be receiving dividends from the mutual insurance company. We like, the, we like to play with the large ones. Lane mentioned, there are some smaller ones, some of those limits that we talked about, maybe a lot.
Less restrictive on some of these smaller companies. There’s usually a reason for that, that they wanna, they’re trying to build up, they wanna attract people. So maybe that 10 times P limit maybe 15 or so, or it may be, you could do like a 90 or 5 95 split on a policy. But there’s high risk.
I think with, smaller companies, the unproven track records. I don’t, I wouldn’t wanna utilize a long term strategy with some of the smaller companies. That, that’s where again the strategy is more for stability and for long term planning and I prefer to use proven large companies.
Yeah. And trust me guys, I get approach of all kinds of stuff these days. And like insurance companies show Puerto Rico that supposedly can get you around some tax things and all that type of stuff. Like to me, like you’re not like this infinite banking thing is what, like everybody should do. Everybody should be flowing your money through your infinite policy.
So you can be growing that asset there and then taking out in an invest it right. And make way more money there. That’s the one, two step program to make a little bit more on the, on this banking side. Taking on a lot more risks is just not worth it guys like that’s, I don’t know. I don’t, I just don’t think that’s Wises.
Yeah. And this is another question we get asked a lot. Is, am I too old to, to start this? Or would this strategy benefit me? I’ve had, I have some 60 year old clients 70 year old, maybe pushing it, but again, we can we can run some scenarios and see if it makes sense. The, again, because we’re using insurance, I think the largest determining factor would be being able to qualify.
The age itself, isn’t really the factor. It’s health conditions. Even whether you’re 70 or 40, the health conditions usually is the factor on being able to utilize a strategy, if it makes sense. The biggest thing, a 20 year old versus a 60 year old, if you look at the illustration the biggest difference you’ll see is the amount of death benefit.
So say for that 40 thou $50,000 policy, it’s around $900,000 of death benefit for a 20 year old, it might be like 1.3 mil for a 60 year old. It might be 500,000 for that same $50,000 target. So that’s one obvious difference. Again, we’re not designing it for the death benefit, but that’s one obvious difference as far as the cash value performance.
Surprisingly, it’ll be pretty similar between the different ages. The biggest difference is when you look further down, because this is a long term strategy where, you know, compounding really is impacted later down the year or down the line a 20 year old has theoretically about 60 plus years of compounding a 60 year old or a 70 year old may only have 20 or 10 years of compounding.
And it’s on that back end when you really see these huge gains. So early on it’ll probably perform the same. It might, instead of breaking, even between years five and six, it might break even between years, six and seven for someone, a lot older. But it’s really what you lose out on the back end.
Compounding, at the end of the day, it’s not configured off, like we’re not doing it for the death payout guys. That’s what term life is for. This is just mainly to get an asset that grows in two places. If you can’t qualify. Maybe you’ve got younger kids, you can buy a policy on them.
We’ve had some people, people who are in their seventies buy it on their 30 year old kids who, that’s where you dump all your money to. And it sounds counterintuitive because you think you’re getting a life and policy on your LF, but then again, you aren’t right. You’re just buying an asset and stuffing money into it is what we’re doing here.
And then I’ll caveat this slide that we, we, you would definitely need to consult your tax professional. We’re not CPAs, but you’ve heard the term me and the modified endowment contract. So if you were to cause the insurance product to become a me, then anything you do from there on forward would be taxed.
So even a policy loan take out distribution a, any of that would be, will be taxed. So that’s why by far you, we wanna prevent that from becoming me. There is maybe a time down the line where you want it to me. If you intend not to touch any funds from it, and you just are planning on having it transferred to your, to the beneficiaries, but while you’re utilizing it, we definitely don’t wanna meet Cash out surrenders.
This does perform like a Roth RA in that sense where you’d be able to withdraw your contributions tax or penalty free at any time. You technically, there may be a time to do that also, and we can talk on specific strategies on that, but once you B take it out, then you’ve stopped the compounding on that.
And that may not be wise, especially early on. As far as the other, any other time would be, if you were to just totally pull the policy out or surrender the policy in that sense where any gains above what you contributed could be, would be taxed at that point. But other than that, the death benefit at the upon death, the death benefit transfers tax free to your beneficiary.
It still falls under the state tax limits though. So be aware of that and there may be strategies to help with that. So we’re gonna get into some questions, that common questions that people will normally give us. The first one here is if I become ill what’s just AATE death benefit writer, caller.
Yeah. The good news. So the good thing is with a certain size policy, there’s an accelerated death benefit writer. That’s free of charge that gets tagged onto the policy. That in the event you develop a chronic illness or a terminal illness, you have early access to the death benefit. You always have access to the cash value regardless, but this, often the death benefit is much higher than the cash value.
And in the event, a chronic and that would be basically, you can’t do two of the six daily acts of living terminal illness would be that, two different physicians determine that you have less than 12 months to live. Both I think, bad situations, but the benefit of utilizing this asset again, we’re not doing it for that, but it does have this benefit where you’ll be able to draw higher amounts from it to help cover those expenses while you’re living versus just the death benefit.
And I’ll just mention it too, it’s a PSA. Like we had a guy, he had a, I, a heart attack or some kind of operation on his heart. And apparently he qualified for this. He’s fine today. Probably just can’t do, enter the CrossFit games or do Woff method and go swimming or anything like that.
But, he got a big payout. So if anything happens like that to you guys, talk to your insurance provider, cuz it might trigger getting.
Yeah, we tell the chronic terminal other writers, there are other writers that could get added to the policy. Again, we are utilizing this purely for the cash value component of it. If you wanted, these other writers oftentimes is better off having a separate policy specifically to address those needs. But if someone really wants to, we could add these on guaranteed insurability rider that’s an added cost that you have on your policy that, even in the event that you your current health rating changes that you’re able to purchase additional death benefit or insurance long-term care writer similar to that accelerated benefits writer, it’ll it just allows you to access some of the funds in the event for care.
Again, that one specifically, I think it’s better off to have it a separate policy or a separate life long term care insurance specifically to address that versus trying to tie it on. And then the waiver of premium writer again, also another Expense that in the event that you can’t make your premiums, it they can cover it for a certain amount, but for our design, because we’re minimizing that the PWA or the premium payments that really doesn’t benefit much, because it doesn’t really add much to the cash value since our premiums are so small to begin with there’s possibly, you could have a PUA premium rider, but that would be very expensive as well.
And usually once you one, if you’re able to make one or two years of full payment, max funding, that the growth of the policy, even if you are to just stop payments from there on out, and, we have the policy growth cover the premiums. That’s usually a better strategy than paying for the premium rider.
Yeah. To me, these are like, add-ons on a car, you buy the car to get from point a to point B, just like how you do this IBC to make money in two places and have a store of cash. So all these other things are just addons and other additional fees. I don’t know, depends talk to Tyler if it makes sense for you, but this is this is I think this opens the eye for a lot of people.
This is like a working example of people actually using this dang. And how it augments what you’re doing on the investment side. So maybe walk us through this Tyler. Sure. This was, if people heard me talk about, Hey, if you wanna get a hundred thousand of passive income a year, you literally would be investing a hundred thousand a year for years, 1, 2, 3, and four in syndications, and then year five, theoretically year one deals would be cashing out doubling if things went well.
So the a hundred thousand in year one turned into 200,000 in year two. And then it would you live off a hundred thousand, reinvest the other a hundred thousand and keep the machine going this strategy, this double dip just rolls insurance into that. The I B C into that year, it would require a little bit more upfront capital because of that loss of liquidity in year one.
But in this case, it would be a hundred thousand dollars target amount funding for 10 years. Your actual me limit would be 150,000. So that’s where you can actually year one stuff up to your me limit, but in this case, so this is that blue box. You max fund, you would fund 125,000 year one. You would have a hundred thousand available, in a form of a loan.
So you take that policy loan. Fund your two policy or two deals. $50,000 deals, year two, you have you fund a hundred thousand and your cash value at that point would be about 198,000. You could take out 90 or total. So it would go up about 98,000. So you could take out nine, 8,000, you’d have to supplement 2000 more.
And these are just rough numbers, but that would fund your next two deals. Year three, you fund your policy a hundred thousand. You would have access to that a hundred thousand and to fund your deals and year four, same thing you’d fund the a hundred thousand to your policy have access to a hundred thousand fund.
Your two deals in year five, when your deals pay out, instead of now having living off of a hundred thousand, you could take that a hundred thousand pay or your policy premiums or max fund it to a hundred thousand for that year, and then take that other a hundred thousand and fund your two deals and keep that machine going.
And then from there on, out from your five on technically, your deals are funding your premiums and you still have access to the cash value. On those later deals, you could then do the reduced, paid up at year eight, or because this was designed for a 10 year funding. You could continue funding at.
Most people at that stage when they’re seeing dumping in a hundred thousand and having more than a hundred thousand show up in cash value would wanna continue funded for as long as the design was for. And another concept that I look at this IPC is when you first do this, you gotta decide how much you’re gonna fund it every year for a five to 10 year range.
Basically what you’re doing is that’s your container side. And because we configure with 90 10, it’s pretty easy to hit your minimum contributions. You fund most of your first year, you’re done. You don’t really need to put anymore. So if you lose your job or something like that after you don’t really need to make your next year’s commitments.
And I think that’s a big game changer and it took me like four or five years to understand that myself. But the idea is creating this container to grow. You may not have the cash value inside, or cuz you’re taking the money out and growing it somewhere else as you should, because you’re gonna make a higher yield.
You should make a higher yield outside of this policy, but at some point, and this is the concept of end game or growing your net worth past two, 5 million, you wanna return the money back to this container and you’re gonna wish you had your container as large as could be. This could mean for a lot of you guys.
You. Maybe a million and a half, $2 million of potential cash value funding that you could hide money in there, asset protected and, tax free dividends there. That’s the concept of, this is more, this is a different diagram, which you guys can take a screenshot.
What, all this will be in the eCourse where you guys digest, this is, maybe partially, this you’re starting, you’re funding it like in toddlers standard plan. And then, you start to keep some cashier for unexpected life happenings college. There are a lot of different use cases where we’ll get to the end of the presentation here, but this is there’s a lot of different uses for the same thing.
And, like I said, this is how I use it in the growth mode, when you’re taking the money out, you’re investing in deals or whatnot. But yeah, just a lot of different use cases.
This is maybe a little another advanced strategy of the triple dip. The first thing you dump it into the cash value or the, you dump it into your policy. You leverage out, you can dump it into a brokerage account and then take a security back line of credit and then do the syndication.
So it’s just putting it in another asset that can be leveraged. Again, these are maybe more advanced and someone who you know, is comfortable with debt and strategic debt and maximizing that. But this is where, that same dollar could technically be working in three areas at the same time the limitations or policies. So again, be because it, it is insurance, there’s a maximum insurable amount. Your human life value is what the, what insurance companies are looking at. That’s generically tied to your annual income. And as you get older, because your earning years or less, that means you, you can qualify for less.
You could qualify for less and less. The rule of thumb is based on your annual income. There’s some flexibility with that and we can talk specifics on a private call. One major threshold is a $10 million death benefit or a cumulative death benefit. That’s where usually a third party verification would be required to validate your, the income look at possible tax returns.
And it becomes a lot more challenging once the death benefit crosses 10 mil health, your health obviously 📍 is a big factor on what health rating you get. Again, keep in mind that you’re being rated amongst the average American your age. So it’s it, some existing health conditions are expected.
The biggest thing is that it’s being monitored or are treated and there’s follow ups in that. One thing we normally recommend, if you, if there are, you would go to your primary care or someone to see what your records will look like, because the underwriting process does pull the records from your primary care provider.
And just see if there’s any notes in there or ask the doctor, if there’s anything in there that may impact your insurability. And if there is say, like there’s a recommended colonoscopy, but then you didn’t do it that it now would be the time to do it. So that there’s that follow up documentation in your record.
And now if you become uninsurable for whatever reason, then that’s where you could look at, a spouse who may be insurable some business partner, as long as you have an insurable interest, or why would you, why the need to be pulling a life insurance policy on someone else? That there’s possibilities of that.
So even though if you’re very old, maybe a working child, that they have a you have an insurable interest on, on, on their life that you maybe be able to fund a policy on a working child versus yourself. Yeah. So the 10 million cumulative death pay, or that, that cap at 10 million, most people won’t hit that in their first policy.
I think most people will get up to that in their second policy where they layer on top of that. But, $10 million, that’s like putting in quarter million dollars every single year for six or seven years, I would say most people will start off with maybe, a hundred, hundred $50,000 and that kind of segues into alright, we talked a lot about this stuff today.
What’s gimme a starter. What do people normally do? I did this video way back when my hair was a little longer, or if it didn’t stay down so here’s the use case. So like a million dollar net worth person, they’re able to save 60 to $80,000 a year. That’s the net, right?
Which you save. Most people in our group make, maybe make two or $300,000 a year and they spend most of it, but they have 60 to $80,000 left over. That’s like the net is what I’m calling. So what I normally will say is now take a third of that net. So a third of the 60 to 80 and use that as your base commitment every year for five to seven years.
So what that works its way out to is for most people here, at the very least do 30 to 50 grand a year. But then if you have a lot of like lazy equity, home equity, IRA money, then you may wanna layer up more on top of there. So in a, in addition to your 30 grand a year, Say another, another case somebody has 500 grand of lazy equity, which is very common.
Most of our investors, they come to me in their forties and they have half a million dollars, million dollars in their IRAs or, various places, at least half a million dollars in their home equity and they wanna get it working. And I think this is the use case of you’re supposed to put it in deals, you’re new, so you don’t really know where to put it. Or so the infinite banking is a great way where it is relatively zero risk in terms of like where these life insurance companies are gonna go. It’s a great place to just throw your cash from now, make a little bit of yield before you get your bearing, build your network, figure out where to put your money, who to trust for these deals.
So for this example, if you have half a million dollars of home equity or some other source of liquidity, what I would probably be doing is in addition to your 30,000 a year and in a hundred, cuz you funded in five years or, double up, put, a little bit more the first several years.
So I mean you could fund it anywhere from $130,000 a year to $250,000 per year again, because the way it’s configured with only 10% insurance, once you’ve funded, the 10% of it you’re done, which is typically in the first year or partial of the first year, If, and this is the game changer.
When people are configuring this with 30% or 50%, you may have to put in, another two, three years of payments so that the policy doesn’t cave in. So this is all the goal of this is to get your money into invest, but also increase the container size as much as possible. The 90 10 policies to me is the best tool for that job to overfund it and expand that container size as quick as possible, getting you the maximum amount of the cash value.
So you can go and take it out as a policy loan and invest it in deals or whatever you want and make our money elsewhere and still make money in two places. We, there was some discussion over what do I do after? That’s where I would say, maybe in year two to four, you get another policy on and layer on top of it.
Cuz at this point you’ve taken some policy loans. You get the you get it, you’re more comfortable with fields. So you layer on a bigger policy, big kid policy. And this is what I did. I started with, $50,000 in my first policy. I did that for a few years and I layered another one.
And then I layered another one where I hit my $10 million. And as an entrepreneur, it’s hard for me to verify my records because I don’t pay taxes cuz I don’t make income. That’s make all passive income. You drive it down to zero. One of the downsides is you can’t qualify for more than a $10 million insurance policy.
Or as Tyler tells me, it’s hard, it’s going to be hard. But I would argue, why do you need bigger than a 10 million policy where you can suck away one, 2 million of liquidity. At some point it becomes impractical. And to me like the way I look at money, even in end game, you should still be growing your money in maybe less value, add aggressive deals, but maybe more stabilized assets triple nets, things like that.
But I would say like the lesson learned that most people say is don’t wait and overanalyze. Like I think we got into some of the details a little bit, but is keep it simple folks, like just create a policy, fund it with a hundred grand a year, take it out, take a policy loan and invest it.
It’s simple, very simple. The interest rates and the way these policies they’re always changing and they’re never getting better. So the best time to do it was yesterday. And at the end, like your money is more safe than deals and banks. And that’s why. Tyler. And I will, we’ll talk about, new people coming in, and, I believe in the deals and I invested in myself, sometimes there’s very green investors that have a lot of money that they need to get it working.
I always can say with a clear conscience, I’m like, yeah, Tyler, just sign ’em up for a policy. And just at least make, they can make 5%, on that chunk of money. Because they’re new, they haven’t done this syndication E course or met other people and started to diversify into a multitude of different alternative investments.
But here’s some of the, if you guys wanna start to queue up your questions, we can get going through them after this slide. But here are the use cases that I’ve personally come up with. So starting at the top, or top left, comboing, this, we’ve talked about this quite a bit, investing in investments, alternative investments I’m coming out with a new pro fund where it’s just gonna be a straight 12 to 13% paid monthly.
What better the combo with your 5% infinite banking? You can also combo it for like college savings. They’re at the top, right? This is the 5 29 plan killer. This is the ability to keep money for the short term. Maybe your kids are going off to college in five years or 10 years. Great place to put this money.
The bad thing about 5 29 plans. They’re like 401k plans, they’re investment vehicles for the clueless, and they’re bad because they you’re stuck with all these retail investment products with high fees. And they’re just investments for the masses where all you guys listening, you guys have been opened up to the world of alternative investments.
Sure. You have to grow your network and get comfortable with the people you work with. But as you can typically find better returns and a lot safer in more real assets than the stock market or those investment options. But, this is where, it’s a lot of people use this interchangeably with their college savings for their kids or their retirement.
Bottom left, the end game investor, the guys that are above two, $4 million net worth, they have, they’re totally fine living off of 10 to $20,000 a month. I probably put Tyler in here a little bit, maybe not all your money, but a good chunk of your money is just sitting here just churning at 5% and.
At this point, maybe like a 70, 30 split policy where you can continue to fund it longer term might be better. But that just an opportunity for you to have just, it’s simple, right? If you need some money, just take a loan from your cash value your life insurance company, it’s super easy and your money is there and secured more secure than banks.
And then the bottom, just general new investors, right? You come into the alternative investment space, you don’t know what to do. Some people call it, wow, I got all these options, right? Multifamily, self storage, hotels, right? All these private funds where you’re investing, when you know the people and you’ve come out to a retreat and you meet all these cool people.
And they’re all like, not paying off their houses using debt appropriately, but it’s, it takes a while to get into this world, right? Unless you wanna just start throwing a hundred thousand dollars in a couple dozen places, know this is a great place to put your money and let yourself season let that relationship seasons, let’s see that first round of deals go full cycle.
Before you start to invest larger and larger amounts, certainly get over 20 to 30% in your net worth into alternative investments. But the majority, I would feel comfortable telling people that putting into this stuff is probably more secure, much more than the stock market mutual funds, and probably more secure than just leaving it in your own bank.
Banks fail. But well capitalized in life insurance companies that put people through rigorous health underwriting is a lot more secure. And at some people, some people will do the Helo set first and they’ll feel uneasy about that monthly interest, same concept here, like instead of the HELOC, you’re using your IPC, but for the reasons that, the banks can’t pull your know asset protection.
And I think this’s also great for, a lot of the people on the call, you guys are the more sophisticated investors in your family, but maybe you have older parents or, younger kids that don’t really understand the whole syndication investing. You, if not, let us know, maybe we can give ’em access some e-courses to get a more educated, but, maybe that’s just all they want.
My parents, they’re never going to invest in deals. They’re just stuck in their ways, but maybe this is definitely better than what they’re doing. And I think it’s something that you can promote to them as and feel good that it is very secure. I, I don’t know if the term risk free, but it’s the closest thing to zero risks out there.
Any other use cases, Tyler? I think I missed, or no I think that 5 29 is a big thing for me per se. I don’t, I have a 12 and a nine year old. My don’t con instead of contributing to a 5 29, which I feel is trapped that I put it into a policy also with long term care because you’re growing cash value or you’re growing cash.
Instead of, having a long term care insurance policy, I intend to tap into my, the whole life policy in the event, for healthcare in the future a couple others. So doctors or just high net worth people in general, who are more concerned with legal liability, getting sued.
Like I’ve combo this with my irrevocable trust where irrevocable trust is not a revocable trust. It’s a lot more heavy duty. If you’re under four, 5 million, it’s probably not even worth it. People who are an end game or high liability, like doctors, you can make an irrevocable trust, get it off of it.
But the problem there is like getting your money in and out is difficult and cumbersome. So by leaving some of your money, your liquidity in this infinite banking policy, it’s life insurance, like we said, it is protected. It’s under the umbrella or in my visual representation. It’s like under the patio in a way that you have the simplicity of use and access, but it’s still protected and you can have maybe more or just a portion of your network in your irrevocable trust.
So that’s another way of, use case for this. And then, entrepreneurs out there, business owners, this, I think the biggest thing about businesses is, there’s always gonna be ups and downs. The people who survive the downs are the people who take over the competition that fails and dies off.
The people who are well capitalized are the kind of, businesses never failed. They just lose money or did they just run out of money to keep ’em. But this would be the place where you would put your liquidity for your payroll. In case of a rainy day now, for most of you and you folks listening who are just salary guys, I don’t really see a huge need for liquidity stores.
Most people, three, four months of, salaries more than enough. So this is more for the, on the business owners out there who may wanna keep a few hundred thousand dollars in there for their, their staff of a dozen people, payroll. And Jay brought up a good point, Keyman insurance for a succession team.
That, that is huge also. So a lot of corporations do utilize that it’s a way of having some incentives also for their key employees. A business will pull insurance on their key employees. Business continues to own it, but it serves as a potential retirement incentive or supplemental income for the employee.
Maybe at some point it become, they become vested and you could either transfer the ownership to them or just pay their retirement from the policy as a business. So that is a key thing. One more thing is just, is, generational wealth. I think we touched a little bit about that, but insurance and life insurance specifically plays a big part in that as far as potentially creating generational wealth and continuing that legacy for generations to come.
All right. So we’re gonna get into the questions as you guys are typing into the Q and a box, but if you have to go, you can sign up and get access to the ecourse@simplepassivecash.com slash banking. But if you’re already part of the club, this is the URL to get access to the e-course. So everything that we talked about today broken up into a lot more bite size pieces.
In the the eCourse format that you guys know and love from us and a lot other, cool little tips in there too. I would say, the next step is, just getting an illustration and just moving forward. But let’s let’s hit into these other questions. Let me maybe accept this overall one that stands out.
So I think mark, mark asked as a commission agent, why would you design a policy to minimize your commissions? Truly it’s the reason why I do it personally is because it’s a better product for the client. I’m really doing it for the client first. I am an investor first also, so commissions are nice, but that’s not my livelihood or why I’m personally doing it.
It really is to give back to lanes, community specifically, but other investors also and provide them the best product that I feel is out there. And, truly have the client benefit. I feel even as with the minimized commissions it’s still very good. I’m very willing to share what those commissions are on a call, but.
Minimizing the commissions it’s still pretty healthy the commissions which is somewhat appalling when you hear like a hundred percent, the standard whole life, those commissions are basically 10 times what I would be pulling on the same size policy. And I’ll also comment that if you look at all my business associates, like the one thing I don’t want at this point in my life is nonsense.
And that typically nonsense occurs from somebody who is not financially free and still working in scarcity mode. And, in the deal side, it’s nice to work with high net worth partners because when things go wrong, we just throw in a few hundred thousand bucks each, and get the problem solved and make it right for the clients.
But, business is tough and when you’re not an alignment for the clients and you’re more in alignment or, there’s a lot of people out there, real estate agents, insurance agents, lending brokers, all the people in this financial industry that are they need to pay their own bills, like financial planners. It’s just not people I wanna get into bed with personally. And I, and I mentioned that and they, I that’s just maybe. Life advice for people is when you can get to a point, why do we all do this to get financially favorable? Why well, to do what we want with whom we want when we want that, so that’s why work with people that are, have seen the investments work fi in, in a place in their life.
And it just makes things better for everyone, including myself. , and it’s not like we need to really make money with this life insurance thing either. It just helps augment everything else going on more, less fees, more money to invest. And then, the investments, we can take down better deals in the future.
But other questions here, what life insurance company do you use? We’re not, Tyler’s not captive, so he’s not forced to sell you like a certain company. He can go wherever. Currently I think I know this is where Tyler goes to all these like meetings and they hang out and they do their secret handshakes and they figure out which ones are like the best one based on the rates and the flexibility.
But I think they’re the cool kids are using guardian these days, but, that’ll change all the time. I’ve seen it change couple times these last five years. There’s a minimum amount of a suggested amount of life insurance.
I would say, look guys, like if you’re gonna do less than 10 grand a year it’s a waste of time for everybody guys. Most people are at minimum, I would say, are doing like what 50,000 a year? I don’t know. What’s your take on this one, Tyler? Yeah. The tech, the true answer is, you could do a, any size policy the, that enhanced accelerated benefits writer.
And this is specifically for guardian that gets tagged on for free. If you’re whole life death benefit is at least a hundred thousand. So in that 45 year example, with that 45 46 a year, he was buying 190,000. So in his case, he could go about half of that 25,000 a year, or maybe 27,000 a year would be the smallest policy that he gets that benefit from.
I’ve done, I’ve written policies for people, a th 10,000 a year. It’s. You can see it, but it’s not the, it’s a small policy where they’re not gonna be able to have access to percentage wise you’ll have access to the same amount of money. It’s just that it is relatively small in the sense of why we would be doing this.
Yeah. You guys are investing in private placements and syndication. I would think guys, and you all your networks are over a million dollars. So I would say, like use case, I would say average person, our group million and a half, they are able to save 50 to a hundred thousand dollars at least a year.
And they have a bunch of liquidity, maybe a hundred or a couple hundred thousand dollars a year for five to six years would be a good starting point. But sure, if if you’d like to get a health review twice, that’s what I did. I started with a $50,000 policy every year and then I wish I did more because then I figured out what it is.
And I think that’s where you talk to other investors. And until you get the hang of oh, we take a policy loan to go into a deal. You realize that 50 grand is hardly anything. And then, you start to understand, oh, I nine understand why every, why everybody’s doing a hundred, 200, $250,000 a.
Into this, they just put it in there and they drain it out.
Number three, I think. Yeah. So niece, wait, our question is we are older and don’t have any children. Can these policies be set up for any relatives like nieces or nephews and maintain all the same loan benefits? Yeah. So there’s three main components to the policy. There’s the owner, the insured and the beneficiary.
So in this case you could be the owner. We’ve had, I specifically having haven’t done nieces or nephews, but there could be a reason why we would do that. And there’s insurable interest. The key thing we need to establish is what is the insureds insurable interest to you? Or if you have insurable interest to the person you’re ensuring and nieces and nephews, if you don’t have children could be that something, some, some writeups we’ve had is that they intend the nieces and nephews will in take care of you as you age.
You guys have that agreement. So you have an interest if they were. Pass then you would use that proceeds to hire someone else or, have to care for that. Or the death benefit would be used to find someone else to care for you. So that’s a typical story we’ve presented multiple times, not specifically for nieces or nephews.
But I think that story plays will continue to, then again, we can talk specifics on a call and to get to know all the details. Question four here is infinite banking appropriate to start if I am over the age of 70.
Yeah. We touched about this on the earlier parts, but it depends typically at 70 you might have a working child or someone else that may make more sense starting on them. But again we could just run the different scenarios to see what makes sense. My oldest client is 68.
And it’s yeah, because normally older people have done it on their working children. Question five here, are there no deals? There are no deals in life insurance. And I would say, yes, this life insurance folks are commodities. You guys can go shop it around. It’s just a matter of how much your agent wants to take in commissions.
It’s all the same Dan thing from the same underlying insurance company. But the question is, can you address the downsides of the nine, 10 design or 90 10 design which again is, where you maximize the cash value you decrease the commissions. So once a policy is paid up, we’re not able to sync a big amount into it.
You wanna take that one? Tyler? Sure. Yeah, we I, we actually answered the first half of the question, I think on the, during the call, the the downsides mainly is, there’s some limitation on the funding duration for that target amount. At some point that’s one of the biggest downsides for a 10 90 or a 90 10 design.
But the other question, once you, once a policy is paid up, you won’t be able to send yes. So you once the policy is paid, it, we, you do an option to do a reduced paid up that makes the policy paid up. So you no longer can contribute any more funds to it out of pocket, the policy will continue to grow.
Cuz as you receive dividends, it goes to purchase additional, paid up insurance in that fashion. But the good side of that is that you no longer have to put anything in either and there the premiums are zeroed out. So they’re not taking out any premiums from your policy cash value.
Yeah. And I don’t comment more on that one. Like I think if you wanted to, do you wanted to fund your policy long, long term because you’re in that stage of life where you just don’t care anymore, you’re not taking coupons, or maybe you are, but you’re not like optimizing at this point in your life, right?
Imagine you got $20,000, $50,000, a monthly passive cash flow coming in every single month and maybe you don’t have kids. You just don’t really care, right? Your time is more valuable than money. You may just wanna put your money in somewhere and have it make a little bit money and be able to continue to grow it and fund it with more new, fresh cash instead of taking that cash and investing it, which I think most of the people on the call are going to do because they’re still in growth mode then maybe a 70, 30 policy where you can keep funding.
It might work. But again, I think that one is, maybe talk to Tyler on that one too. Alright, so more questions. Number one here, can you talk about the advantages of using I B C with your charitable giving
you or so, I don’t know about specifically charit beginning, but you could have the death benefit or a charity be a beneficiary of your policy. Or secondly, the, your death benefit could go to a trust and you could have that within your trust. Determine what to give. I don’t know if that’s the question or in regards to your annual charitable giving.
I know if yeah, I don’t know exactly where that question is going, but. I know you can assign, if you didn’t have any kids you could probably assign an I B C to whoever you want. Yeah. Maybe if whoever’s question that was maybe type it into the Q and a box and we can come back to it.
But question two in this example, and I think they’re referring to that illustration page, what is the max we could take a loan from, is it from the net cash value? Yeah, that’s correct. The net cash value column. And we conservatively say 95% of that is what would be available in a policy loan.
So in, in year one, 41,735, so 95% of that. Yeah. The way you guys should be doing this, or most people, if you put the money in, you have 41,000 in net cash value, but you take a $41,000 loan the next day and you go into some deals, right? That’s the way you do this. And then of course, the next year, when you have to make your next premium and paid up additions and you fund it and you get that, but.
At some point, the money rolls in and then you refund it up and then you use this as that liquidity source to slush money in and out of. And then now maybe you’re seeing the big picture on the usage of this whole thing. There, there is. So there is a slight delay because the, you can’t do it the very next day.
You, it would be 10, it would basically be 10 business days. If you’re using that same funds that you just deposited, cuz the insurance company will need it to clear. So they look typically wait 10 business days, then they’ll process your loan. You can go in and request it right away, but it normally won’t get processed till that 10th business day cuz they, they wanna see that the funds cleared.
There’s one way of getting it slightly sooner than that. And if we can provide a bank statement showing the funds, cleared your bank they’ll accept that and then release the funds. But typically that doesn’t come into play unless you’re taking it out right after. So yeah. Good point.
Good point. I definitely, I think that’s where you guys talk with either Bri or Chad or team at simple passive cash flow.com. If you guys. You guys are cutting the wire a little too close there, just, let us know. And we typically can accommodate people. We do this ourselves, so we know it’s the, it’s not like the day of, but it can take a week or so question four, what do you think is a good target of how much percent of one’s net worth should be atypical and best should put into IBC?
I don’t know if net worth is a good thing right off the bat, but I would say whatever excess liquidity you have should be is more of an indicator. And I would go back to my other RX slide on that. But as far as like net worth as a percentage, when you’re under half a million dollars net worth need every single dollar going to investments, not this stuff.
So I’m not I would say if your net worth is under half a million dollars, don’t waste your time on this stuff, go make more money or will save it, save more money and invest it. But I think once, for most investors million dollar net worth, we’ve got X is we’re not the greatest.
We’re not the most efficient with our liquidity. Meaning you got 10 grand here, you got 50 grand in this account, you got. Hundred $200,000 of liquidity or equity debt equity in your house. I think that’s most of us on the call here who are credit investors, I think at that point, it would make sense to start implementing this strategy.
But as your net worth rose, it’s hard to say, right? And I think this is where you mix it up with other accredited investors. You have these types of conversations to me. If we were on a consult, I would ask you what are, what is your long term goals? Do you wanna continue to ratchet up to five, 10 million, 20 million net worth and con continue to grow, or once you get to formula and you wanna just shut off the engines and live life as the 4% rule with 20 grand of passive income coming in every single month, it’s it really matters up to you.
But I, yeah, I don’t know how to answer that question. I know you wanna put in your 2 cents that yeah. I think you covered, the net worth is slightly different. The net worth can play a part as far as being able to qualify for more insurance based just on your annual income.
But I, I don’t it’s hard to say. What do typically the net worths of these guys and, the financial profiles, like what’s I think that’s what the question is asking, right? Like of all the sophisticated investors doing this, what do you see them doing? Think it’s more like people want a bucket size, a certain bucket size. And so say someone wants, a $2 million bucket at some point, but that could be funded differently, that could be a hundred thousand or 200,000 over 10 years. It could be 250,000 over eight years. Or it could be, 50,000 or 50,000 over what was that? 40 years. So it’s really the size bucket and that’s I’m talking like your cash value size at some point in life. That’s usually what people are trying to target of saying, oh yeah. Good point. I think for like most business owners having half a million or a million dollars to be able to get at an end game is cool.
Any more than that, it’s just a little excessive, right? You could have your money elsewhere. This is not a growth option. You should have your money elsewhere making at least five to 10% elsewhere. To have more than a million dollars is a little silly. So yeah, good point there, Tyler.
This I would look at it, not as a percentage of your net worth, but like what kind of liquidity slush bucket that you want to have? I would say at most investors, it’s at least a couple hundred thousand at least is what you want at some point question five what’s wrong or not so good about, they mentioned Northwest mutual, what are like, we’re talking about the flexibility and the rates, but like, why is it that the ones that, we’re rolling with now are the ones that we are well I think specifically Northwestern, we mentioned them as a, one of the strong mutual insurance companies from my understanding, those are all captive insurance agents where they have to be with Northwestern mutual exclusively.
I personally like being independent and being able to be a broker, shop around or see different companies versus stuck with one company. Yeah. Nor Northwest nation is definitely one of the, like the triple a rated ones which is what we’re looking for. But the word on the street is like, when you start to build these policies for liquidity, taking money. Their policies just aren’t set up for that. There’s certainly your cash values. Aren’t gonna be as high, which is the whole point of why we’re doing this, which most financial planners don’t under, really understand what a question here, would it be better to do two policies and keep one going rather than having it total paid after seven years?
So either way it doesn’t matter. I think, it’s like the whole ready fire aim kind of mentality, I think is the best approach here, especially because the stuff here, commodities, and it’s no risk essentially, these stuff is more secure than banks. So the ready fire aim mentality here might be good to just get one policy and you’ll right, size it on the second one a year or few years later. That’s again, that’s my personal, like I got one and then I got another one for myself and then I followed up with one for my spouse.
I hit that ideal bucket size where I will very soon. And then or comments on that. Yeah. So I. It depends, it, because there’s flexibility in how we can design it. So we’re not, even though we show the seven year funding duration you, if you, if the funding duration is an issue, we can design something for 15 years or so, or maybe even longer.
But from a financial efficiency standpoint, I think starting two policies. If it started, if it’s, if you start at the same time, then I think there’s no loss of efficiency. If you’re starting one, maybe a little bit further down the road then one there’s a risk of the insurability. Something may happen over the two years that makes you less insurable, but also even if it’s the same health rating, you’re, you may be two or three years older.
There is some cost to that. But again, that cost may be less than if you started off with a larger policy that you don’t always max fun. So it depends. And that’s where we can go back and forth with some designs to show you the what ifs or compare the different two scenarios.
Yeah. And then piggybacking on the last question question two here. End game. What amount of cash value would you think is too much, 5 million, 10 million. So the cash value is, again, that bucket, that source of slush fund that you I ideally want, I’d say for most people, it’s at least a quarter million to like a million or 2 million.
I think you gotta be careful that, sometimes the cash value bucket size is different than like the death payout, which we mentioned before, we mentioned 10 million, that’s the death payout. But as far as like rightsizing the bucket, which is the cash value portion, that’s up to you personally, just, just know that, your money could be making more money elsewhere, so you don’t wanna go overboard with it.
I don’t know, a million dollars is a nice, if you’re an end game, it’s nice to have the peace of mind that if something goes wrong, you’ve got a million dollars to just throw down. And bill somebody out bail yourself out at some point that might seem like a lot of money, but yeah, end game.
More security is what you’re looking for at that point. And I think the bucket size can be large, but you’re in control of how full it is. Most of, even though say my bucket is too mill at this stage, a lot of that cash value is out deployed. I can make a choice at some point to start filling that bucket back up by paying off the loans or continue having it deployed in investments.
But having a large bucket size is beneficial to me. How you utilize it. You can make the decision and it’s not one size fits all, or you can course correct. Or right now I have everything deployed at some point I may want it full and just live off that four or 5% dividends be happy and not have to have the funds deployed.
So I think, I don’t know for me personally, my goal would be five mill target. I’m not quite there as far as total bucket size.
I think when you’re getting to really end game. Now, you’re thinking about, you’re putting your life insurance in your irrevocable trust and that’s caught an eyelet, but for most people on the call, your guys net worth is not end 20 million plus. It doesn’t matter because you don’t hit those state and federal estate tax limits.
So doing that is really no benefit to you guys, but yeah, we always like to have a conversation over in person when you guys buy a nice bottle of wine, because your net worth is 20-50 million. Of course, if that’s the question you’re asking, but similar on those lines, maybe your net worth is not 20 million, but it’s five.
You may wanna be thinking about charitable giving and that’s this FI question here. So that kind of was a follow up to the last question. And they said your regular annual charitable giving instead of cash contribution, purchase a single pay life policy with no me concerns for a nonprofit on yourself as a major donor to the charity would have insurable interests on you with the charity as the owner and beneficiary, they can use the policy loans for whatever they would have used a cash donation for, and the death benefit to buy more single pay life, making it an infinite endowment. That actually sounds like a very interesting strategy. I personally haven’t looked or used it in that way, but this definitely sounds like Yeah, it sounds very possible to do this.
Yeah. There’s a lot of uses for this stuff. And I think we put a lot of these more advanced strategies in the client section. Because when you’re in the end game, you get a little bored and you’d look for these types of strategies. For now, I think we just wanted to keep it simple for folks, just get going with a policy, throw in 50 grand a year, a hundred grand, maybe a couple hundred thousand a year for now.
And then, get going down the road and make money in two places. The quicker you start doing this the quicker you can make money in places the quicker you can start to create the time space, the head space for you to ask these kinds of good questions and come up with these strategies. Also along the lines of the end game.
One last question came in here. If you still use this bucket for deals or whatever else you want while still compounding, why would you want to limit it? I think the big thing that I’ve personally found and what was a roadblock for myself is when you go over a $10 million death payout or policy.
Now the life insurance companies are gonna want to see a whole bunch of documentation proving that is how much you make per year. And that might be a little bit of a pain for you to do. And especially if you’re not making income at that point in life. So that, that, I think that is another reason why, if you guys are still working your day jobs, you gotta do this now because all these policies are based on your ability to make money.
That’s what life insurance is at the end of the day, you being able to make money, which is why, getting policies on your little kids is a waste of time, cuz they can’t really qualify for that much. Why? Because they don’t make money. They don’t have jobs. So you know, like a lot of it is based on how much you make at your business or how much you make at your day job, your salary.
So it’s one of those things where you set up a policy before you leave your day job or retire. But if you’re already at end game and you’re looking to just keep funding this thing to in turning, I think you’re gonna run up to the issue of them saying you’re not making any active, ordinary income where you don’t have an income source at that point, other than your passive investments, of course, but they’re gonna have a hard time qualifying.
For you, but I dunno, Tyler, any thoughts on that one? Yeah. I, what you’re seeing is I think right on, I think Mark’s specific comment is why stop using your bucket for deals when you, it still compounds, you can still have it out for deals and grow your wealth. And I personally feel that’s a, the backup plan is to fill back up the bucket, right?
And then you no longer have to chase any deals or expose yourself to risk. It may be de-leveraging risk at that point to just say, Hey, I just want that consistent 4%. I intend to have my money working, at some point maybe deals may be a lot harder to find or whatever it is. This can be a fallback plan to have that, four and a half percent.
Dividend returns and live off of that without having to, to deploy money at all for going forward. But there’s that, I think that’s what that, that alluded to the thing about children which we didn’t really touch about. There is a limitation on non, so you can pull on children or minors.
The limitation would be the death limit. The death benefit limit will be 50% of what the parents have as death benefit. So if you, as a parent, have 5 million, a death benefit, a child would only be able to qualify for two and a half million of that. And then the health rating is a general health rating, like what it would be for a group, like at work, when you get group term insurance, It’s just a generic health rating.
So that health rating is not as great. So oftentimes with all of that combined for a minor, you might be able to throw in, eight to 10,000 a year total that’s the maximum you could put in a year still. And because the health rating is not the best, it may not be the most efficient use of that 10,000 purely for financial reasons.
There’s other reasons you might wanna do it for a minor, for a child anyway, but if you’re looking purely financially that may not be the best use of that, that $10,000. Any other questions please type it into the box?
Oh, Luke, raise his hand or, yeah, type it into the box there guys, but I wanted to show you the E course. So you guys know how to navigate it, but we’ll put the replay of this up on here, the way we have this laid out is, the introduction and then we broke out all the little slides into individual sections here for you guys.
And then implementation. And then, once you become a client, get access to the more advanced content here. That’ll just keep things fun and interesting, but this is the e-course, but, they get access to this. You gotta go to simple, passive, casual.com/banking, put your information in there.
But for most people yeah. The only other thing too is that the, it definitely is customizable and it’s not a cookie cutter, one design fits are or meets people’s needs. So that’s where a lot of times it is some back and forth tweaking and that, so a lot of the information we’re provided today is general overall, guidance definitely feel free to reach out and we can talk about specifics cuz there are small tweaks and things to that. Maybe more beneficial for certain goals and than for others so definitely reach out.
