Wealth Formula Episode 249: Ask Buck 2/21!

Catch the full episode: https://www.wealthformula.com/podcast/249-ask-buck-2-21/

Buck: Welcome back to the show everyone and let me get started with these questions here and some of them are written and some of them are recorded. This one was actually an email, the first one, and I thought it was a good question. I thought I would share with you. It’s from Max. I think Max is local here. Max asked the question: the bonus depreciation advantages in a WF Velocity ATM Fund are intriguing and my decision to invest is influenced in part by my ability to apply bonus depreciation to other investments. Okay, so he’s talking about the ATM fund WF velocity ATM fund if you’re curious about that go to WFvelocity.com. So he goes on to say from your podcast and bonus depreciation-related comments made by Tom Wheelwright from this article when he points out this article and he quotes here’s where it can apply to any real estate investment: let’s say you’re renting the real estate or use the real estate in your business as long as you bought it after September 27, 2017 you can use bonus depreciation for new or used property that’s a quote from Tom Wheelwright the potential savings are significant for example your client buys a fourplex for one million dollars typically as much as 30 percent of the price would qualify for bonus depreciation this means they could end up with a 300000 deduction in the very first year and consider the fact that their down payment was in the neighborhood of 200000. Real estate is a whole different animal as far as investing than it used to be. So anyway that’s a quote from Tom Wheelwright that he wrote here and then he goes on, Max goes on to say however speaking with my CPA and reading the IRS guidelines it does not seem bonus depreciation is applicable to the purchase of real estate at all since the depreciation table for real estate is greater than 20 years. Perhaps Tom is implying bonus depreciation is applicable to improvements on the property and not the property purchase itself? And he says I realize you’re not able to provide tax for financial advice but any guidance on this matter would be very helpful. So here’s what I got to say about that okay I had to include this question in this show because these kinds of things drive me absolutely crazy and I’m not talking about your question Max it’s your CPA’s answer and let me be clear I’m not a CPA and it’s not legal for me to give tax advice but when I hear about such incompetence on this side of the CPA it makes me wonder if it should be legal for them to give you tax advice because really I mean seriously it has these kinds of things pissed me off so much they were continuing to piss me off so much that I’m actually considering starting my own CPA firm and I’m not kidding about that listen obviously my ire is not directed to the question Max and you know that well we’ve had some back and forth in email so let me tell you though as a non-tax professional let me tell you all those people out there that Tom Wheelwright my CPA is right here bottom line is that the detail your CPA overlooked when giving you that information is the cost segregation analysis piece of this. So by your definition, the cost segregation analysis of course segregates your property into two types of property right, you’ve got real property which is you know real estate the stuff you learn about if you get your real estate license the stuff that’s sitting there that you can’t pull off the ground and throw out the window that’s real property. But there’s another part of that property that is segregated out in a car segregation study and that is chattel or personal property and that is the stuff that you can pull out right, you can pull out the shelves, you can pull out anything that’s not fixed and after dozens literally dozens of cost segregation analysis that I’ve been, apart of from single-family homes and multi-family properties ranging from a half million bucks all the way up to 100 million dollars, the cost segregation analysis at least in residential property has been pretty consistent and it’s consistent with Tom’s assessment of about 30 percent of the acquisition cost to channel. So going back to Tom’s quote yes 30 percent on if you put down 20 on a property, you’re putting down 20 equity on a property and thirty percent of it was channel and deductible in the first year. Then you would in theory be able to deduct more than the actual equity you put in the deal right. Now the one part that Tom sometimes you know he doesn’t really cover when he talks about this is he doesn’t take into account that in most cases when we’re doing these big investment value-add properties we’re also budgeting a significant sum of money for capital expenditures right value-add. So it might be 10, 15, 20000 a unit in some cases depending on the value-add situation. So in that case you could end up you know you have the equity that you need to bring to the deal which might be you know 20, 25 whatever, but then you could end up having another 20 percent that needs to be raised on the equity side because of the capital expenditure because of the value-add. So the point I bring that up is because that’s why you typically are probably seeing you know if you’re in our investor club or whatnot you’re probably seeing k1 losses on multi-family closer to 70 all the way up to 100 you know 106. We had one last year principal investment amounts right so a couple more tips here, I know guy who does even smaller properties under a million who’s great he’s been I’ve had him on the show before briefly and I’m happy to plug him his name is David Brizel look him up or you know tell them I sent you; If you can’t find them email me buck@wealthformula.com and I’ll connect to you but he’s definitely very good and he’s affordable and he does really good work on these properties where you don’t think you can do a cost seg, he did my house that I moved out of in Chicago that I still have and can’t seem to sell. Anyway finally with regard to this question, if your CPA is giving you horrible information, it is going to cost you a lot more money in the long term than paying for a decent one. So I’ll put a plug in for Tom’s group wealthability.com. Go get yourself a good CPA now when you go to WealthAbility, you talk to somebody you plug in whatever you need to do. Make sure you mention that you’re part of our community when you do this. Why? Because Tom’s a friend of mine. Tom is my CPA and I guarantee you, he said this himself, you will get pushed to the proverbial front of the line if they know you’re one of our listeners because I’m always on their case if I feel if I hear about a situation that I think is less than optimal. And you know Tom does great. He’s very responsive in that regard but it’s nice if you use the leverage of our group so just mention that you’re part of our listening community if you go to wealthability.com. But do something. Get yourself a competent CPA is going to save you so much money and if they don’t even know what a cost segregation analysis is, they don’t know you know the depreciation elements of this I mean gosh good lord if you’re dealing with real estate you’ve got to make a change. You’re losing, you’re hemorrhaging money. Okay, so that’s all I got on that.

Okay, next question is from Jeffrey Haldeman. Here’s a question. Hey, Buck first I’d like to thank you for all that you’re doing on Wealth Formula. I spent years going through the process that you’ve described, 401ks IRAs.com bust followed by ups and downs of tech stocks, all much to my frustration until I came across concepts of whole life independent banking what we call Wealth Formula Banking and syndicated real estate and I’ve been reading and listening to everything I can find on the subject and actually investing for the last three years. You are spot on with your storyline and I swear sometimes I feel like you’re actually talking to me specifically. I am, Jeff. I’m just kidding. I feel like I found an investing home on wealthformula.com. What I was looking for was a group with integrity trustworthiness and a very low threshold for BS and I found it with your guidance. Please accept my heartfelt gratitude for that Buck. Thank you for that Jeff. Yes, very low threshold for BS is a good description of me. He says my question today is regarding the ATM opportunity, again he’s talking about the WF ATM velocity fund which you can go to WFvelocity.com. He says I expect some divester events next year and want to invest with WF Velocity fund and I was wondering what you see for the fund’s run rate. Do you see another 5 10 15 years for this type of investment? One more thing I’d love to hear a podcast on what to do with dry powder while one’s going through the process of deploying it which sometimes can take a while. Where can one put it to be safe maybe gain enough interest to keep up with inflation? Okay so with regard to the ATM fund I guess the question really is how long do you think the United States of America will continue using cash. This is sort of the question that really I mean defines that entire fund, after all as long as we use cash we need ATMs right. So you know listen I’ve invested quite a bit of money into WF Velocity ATM fund myself so as an investor in the fund. Let me tell you how I look at it, okay so it’s a seven-year fund right if I’m able to use bonus depreciation which I am, and use that to my advantage my effective return of capital occurs at around three years. Because of the huge return I’m getting from that depreciation now that means my risk is essentially off the table in three years and the rest is upside the last four years that’s the way I look at it. So as long as I believe that we will not be a cashless society in less than three or four years I feel very comfortable with my investment. Now let’s look at the facts okay let’s look at the facts. The facts are that there is no current congressional legislation to eliminate cash. No one’s talking about it, some have pointed out that hey there’s these rumors about research being conducted by the federal reserve and they’re looking into fedcoin and distributed ledger technology and all this you know means the end of cash. Well, let me remind you of something because I keep hearing about this. The US does already have a digital currency it’s called the US dollar right US cash only makes up about 10 of money in circulation. So what’s the whole fedcoin distributed ledger thing about then well it’s about improving technology that we have on 90 of the digital money that’s out there that makes up this so-called US dollar right so Jerome Paul himself you know had said specifically that the US is not looking to replace cash he said the distributed ledger technology is something they’re looking at maybe to improve technology you know wire transfers all these things that crypto’s really good at and maybe they don’t talk about as much obviously if there is a distributed ledger it makes transparency to the government extremely high right, in other words, you can’t hide money on a distributed ledger it’s very difficult. So tracking money becomes a lot easier for the government in that situation but really again remember 90% of the US money the dollar is already digital so we’re really talking about there is making some digital some improvements to that technology that’s what Jerome Powell says that’s what makes sense to me as far as cash. Listen, there has been a significant backlash in cities where cash has been you know effectively minimized you know some of these tech cities like San Francisco cash is the money of the under banks so not accepting it has been labeled racist by some listen make no mistake the elimination of cash while it may happen in our lifetimes you know it’s a big deal it’s a really, really big deal, it’s a generational change and one that will have a lot of very, very strong opponents to it. Now if there’s a lot of very strong opponents to it, it makes up 10% of the money in the population, it’s used by the poor who’s going to make it their cause right, I guess that’s the question right now. Nobody is and I guess that’s where we’re starting so with all that’s going on out there right now and all the things that Congress needs to focus on do I really think that cash is in danger in the next seven years? No I don’t but I especially don’t think it’s in danger in the next three or four years which is where the risk with my investments in ATMs are so I would say as an investor, my philosophy is approach each year and ask yourself the same question you know three, four years really it’s gonna happen well right now I don’t see any reason to think of a cashless society being around the corner I really don’t I don’t see it you know and so I’m not terribly worried about it but listen, it’s something that we have to kind of you know keep track of and at the end of the day just remember it’s a big deal it really is a big deal and so it’s not going to happen that easily or anytime soon. Now the other question that you had was about dry powder where to keep it well I think the obvious thing that comes up in my mind is that whole Wealth Formula Banking concept again it’s sort of the most obvious answer, in my opinion, I mean if you can get five, five and a half percent compounding let it you know grow at a compounding rate and then borrow at a simple rate right now there are these banks out there that are lending on these things that like three percent, somebody even mentioned sub three percent on our Wealth Formula Network call the other day and so you’ve got the arbitrage of you know the five, five and a half versus three percent but then you also have the arbitrage of a compounding interest rate that continues to grow versus borrowing at a simple interest rate so it’s really a pretty dramatic way to do things. We’ve talked about it on the show you know several times you’ve got the compounding versus simple arbitrage on top of the nominal arbitrage if you don’t know what I’m talking about definitely go to wealthformulabanking.com watch the webinar on Wealth Formula Banking but again to me that’s sort of the most the no-brainer in terms of where to keep your money and while you’re waiting to deploy and allows you as I’ve said before to invest the same money in two places at the same time.

All right next question is from Todd this is an audio question.

Todd: Hello there Buck this is Todd Reiter. I’m a podiatrist from Wisconsin and member of the investor club. Just a question about bitcoin: I just wanted to maybe invest a very small percentage into bitcoin. I guess I know that there’s more technical ways with wallets and etc I’m not too tech-savvy. What’s the good and bad of the funds like GBTC? Just wondering about that so just whatever advice you could give would be great. Anyways thank you very much and keep up the good work. All right Todd yeah so I’ll tell you what I told my dad. The easiest thing to do in my opinion is GBTC off of a New York Stock Exchange GBTC is the Grayscale bitcoin trust there’s also an Ethereum trust from Grayscale which has a ticker ETHE. Of course, you do pay a premium when you buy these things but you also sell it at a premium when you get out so in theory it really shouldn’t matter as you’re focusing on the delta between when you buy and sell. I think that’s probably the simplest thing the other consideration as we’ve talked about recently again is the bitwise funds unfortunately for those of you who listened to our interviews a year or two ago who invest in bitwise, some of the bitwise funds one of the huge benefits was that some of those who invested in those funds they had this option after they bought after they held for a year to sell their shares into a trust similar to the one that the bitcoin the Grayscale bitcoin trust and when they did talk about a premium it was like a crazy multiple they were getting you know I want to say it was like 20 times or something like what the actual value was that they could sell at. Anyway, I can’t say that’ll happen again but certainly something to think about. It could certainly have it again so may consider that obviously, that’s going to be for somebody who invests a little bit more money I don’t know what their minimums are. Now I think they were like 50000 back a while back but they might have gotten a little higher so anyway you can check that out obviously I don’t know it’s not a recommendation from me or anything like that and I have nothing to do with bitwise. I wish I did because you’re making a ton of money I’m sure but yeah that’s a that’s another consideration as well.

All right next question Bimal asks, Buck I’ve invested in Western Wealth thanks to investor club. I agree with the concept of infinite return model however the topic of prepayment penalties never addressed. Can you focus on that your next Ask Buck podcast I’m guessing returns have been so good the last decade with a substantial prepayment penalty even with a substantial prepayment penalty I’m really curious about this. Yeah I mean listen here’s the deal so you know we can’t really talk too much about this you know we’re not going gonna talk specifically about you know Western Wealth Capital deals or anything like that but listen the all the prepayment stuff is baked in to those pro formas it helps that generally we’re using floating rates most of these so prepayments generally are not that bad. Prepayment penalties are a much bigger problem in general when you’re locked into a higher rate loan and all of a sudden rates are really low like they are now and so you know we we we have a situation on sort of like that on one of our properties which we bought a couple years ago and the rates were locked in and they were locked in a little bit you know higher than you know than we’d like them to be now because the rates are so low the property itself and in the interim is absolutely you know it’s just crushing it and the way of course that you know our models work in a situation like this we probably would be looking to potentially sell and you know reap in a ton of profit from that property but in that situation, the prepayment would be it would be unattractive let’s put it that way. So rather than do that we’re just gonna plan on holding for another year, year and a half but most of these are floating and they can be fixed at any time and that really mitigates the issue of prepayment.

Ashley: Hi Buck. My name is Ashley. I was just checking in with you to see. We received an inheritance of about four hundred thousand dollars and we are trying to figure out the best way to invest it. We thought probably doing rentals and my main question is if I should buy one house with cash or if I should do a mortgage and buy several houses that cash flow so if you can let us know what you think is maybe the best way to go that’d be great. Thanks. Ashley thanks for the question obviously you know I don’t want to get into a situation where I’m giving you financial advice but let me tell you what I would do if it were me and I had an inheritance of four hundred thousand dollars. First and foremost I would be looking to figure out how to make that 400000 go as far as it possibly could so if it’s me I’m not taking 400000 and plopping it into one property for cash and just cash flowing you know thirty thousand dollars a month and you know it just to me that’s not probably the most efficient use of that capital. I am a big fan as you know of leverage so what I would do personally is take that four hundred thousand dollars and make sure that whatever I do, I’m using a significant amount of leverage whether that’s you know one property for four hundred thousand dollars and a down payment and you know it’s a two million dollar property or you know if you’re going to do multiple smaller properties so the question is would you do one larger property or one smaller property for my money at that point at that level I would personally probably do a slightly larger single property because I don’t like the pain of having multiple smaller properties and the the scale issue is an important one I think I would be focused on getting as many doors as possible and obviously depends a little bit on where you live but two million dollars probably get you more doors under one you know if you’re if you’ve got four hundred thousand dollars and you’ve got a two million dollar total property you’re leveraging 1.6 million or something like that for me personally I’m going to want more doors under one roof than I would you know getting multiple smaller properties now that does also come with a warning a little bit of a caveat shall we say and that is that when you do that you are spending that four hundred thousand dollars in you know on one property that is assuming that you are going to do a good job of running that property right so that’s the other thing to consider right you could lose that four hundred thousand dollars if you don’t know what you’re doing. But you know you could also lose that four hundred thousand dollars if you don’t know what you’re doing with four different properties right the reason I bring that up is part of the question ends up ultimately being whether you should buy your own properties or you should potentially use that money to invest with a known quantity you know syndicator you know an operator somebody who does this for a living. Now I bring that up not because that’s you know a lot of what I do for accredited investors but you know in my experience the challenge for busy people sometimes is they you know they love the idea of real estate they love the idea of what real estate does for them but the reality is they don’t love real estate they don’t love being like a landlord or an asset manager or whatever so in that situation, one thing to consider is four hundred thousand dollars probably could get you exposure to a lot of doors if you use it in the context of you know real estate syndication as long as you know and trust and feel good about the jockey and the operator. Now some people are going to say well you know I’m probably going to make more money if I’m investing on my own rather than investing as a limited partner in this syndication but and frankly, I used to think the same thing but it has been my experience in working with really top-notch syndicators that generally speaking you tend to do either better or just as good and you don’t have the work and you feel like you’ve got you know somebody with experience and time and a full-time operator on your hands watching over the assets that you own. So anyway that the the point I bring up here is I think that’s the real question that you’ve got okay do I want to you know invest this in my own properties and become a landlord or do I want to spend the time and money to potentially in this situation you spend the time to potentially find you know a good operator and with 400000, assuming you’re an accredited investor because if you’re not then it becomes really difficult to find a good operator but if you’ve got that kind of money you could potentially put 50000 in you know eight different deals and have exposure to you know you know 2 400 doors across the country and so from a risk mitigation standpoint that is very attractive as opposed to having like you know 10 doors that you manage yourself obviously you can tell where my bias is and I’m not saying that because of anything other than my own personal experience I mean having professional operations professional operator I think that most of the people who are experienced in our accredited investor group realize that you know there’s a lot to be said for handing your money to somebody who knows what they’re doing and they’re good at it so not sure that that necessarily answers your question it probably just gives you a lot more questions to think about but hopefully it helps.

All right I think I have one more question.

Srinivas: Hi Buck it’s Srinivas. Wanted again thank you for everything that you and your team does with Wealth Formula. Myself, my family and I’m sure all of your listeners and members appreciate it. My question has to do with the privatization efforts of Fannie Mae and Freddie Mac whether or not those will continue under the Biden administration is a little bit of a question mark but just in general I wanted to ask how moves to privatize Fannie Mae and Freddie Mac will affect loans for many of the multi-family opportunities that we have been doing with Wealth Formula Network on the one hand but just in general on the other hand will it make it easier or harder to get this agency debt. Just wanted to hear your thoughts and then correspondingly depending on whether it’s easier or harder to get this type of debt whether that would contribute to asset price inflation or whether it would actually depress asset prices. Again always value your insight really appreciate it thanks so much. Okay, Srinivas always asks the tough questions and the good questions. So bottom line is that it’s a good question but you know I’ll tell you a couple of things. First, you know most people that I’m talking to in the multi-family space about this kind of thing, don’t think it’s gonna happen they don’t think it’s going to happen this year at least but if it happens what does it mean? Well I think the impact on it you know for the most part is it’s probably going to affect you know home buyers a little bit more particularly the you know the downstream home buyer that relies on some of the you know fha guarantees and things like that but how does it affect us as you know agency debt with larger assets and multi-family well in theory what would happen is that it would just continue to sort of potentially contract the underwriting of you know of real estate so how does that affect us if there’s you know some more strict underwriting criteria well we may not get as much loan to value for example on a particular opportunity where you know it could be that instead of getting you know 75 percent loan to value you know maybe we get maybe a 72 percent loan to value or something like that or I think you’re going to see a particular impact in for you know tertiary markets that already are kind of squeezed for you know those kind of LTVs and that kind of thing I think one of the major advantages that we have certainly in terms of you know our portfolio and operators and that kind of thing is we primarily deal in in very strong markets you know DFW, Phoenix, Scottsdale, et cetera. Those markets are going to continue to be easier to get the debt and also you know part of the tightening process will be tightening the underwriting on the actual operators themselves and and in our case actually helps us because we’ve got you know a few billion dollars of of real estate under management so it certainly doesn’t doesn’t hurt to already have these kinds of advantages and that gives us advantages potentially that can offset some of the disadvantages of the underwriting because essentially you know we can potentially see a situation where we are you know we’re eliminating some of the competition from being able to compete of course that’s a sunny look at this whole thing but overall I would say that I don’t think that net net it’s going to have a huge impact on what we do you know at the end of the day yeah could it could it lessen our loan to value could it make it a little bit harder you know to get interest only for three years like we’re getting on a lot of deals yeah I think it could tighten things up but overall I mean I don’t think the impact is going to be significant and I don’t think it’s going to happen this year so hopefully I’m right about that but we’ll see but no I don’t think privatization of Fannie Freddie is armageddon by any stretch of the imagination especially when I think we have such a huge potential bull market in multi-family real estate coming over the next five to seven years so hopefully I’m right and hopefully that that gives you some sense of where at least I’m thinking on this question is. Anyway that’s about all we have today for questions and we’ll take a break for a moment and we will come back and wrap it all up.