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126: Ask Buck

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It’s amazing how we learn isn’t it? I watch my little girls and I realize how much we, as adults, take for granted when it comes to everyday things.

My three-year-old does not know how to tie her shoes yet—in fact, she puts her shoes on the wrong feet 50 percent of the time. At least she’s consistent.

Last weekend, my nine-year-old was blown away by the concept of compounding interest when I asked her to figure out how much money she would make in 4 weeks if I paid her a penny today and doubled it every day for 28 days.

Actually, most adults would be blown away by the compounding interest example but the point is that it’s obvious to me.

Tying surgical knots is also a brainless activity for this former brain surgery resident. But I have no idea how to change my car’s oil (I am ashamed to admit) and some people would find that comically easy. I’ve just never been taught.

Over the years, I have come to believe that most everyone can learn just about anything. Some of us might have a shorter learning curve for certain things and get labeled as “smart’ in school, but that doesn’t equate to mastery which can only be achieved through repeated practice.

I remember my first day as a surgical resident. Everything was foreign and I couldn’t operate to save my life. Then, a few years later, I woke up and I was operating on people on my own.

Money-talk is no different. It’s just a different language. The more you hear it, the more you eventually just know what’s going on. It’s not brain surgery.

But, you gotta start somewhere and my podcast might be a good place to do that.

In the spirit of that, we back up a little bit on Wealth Formula Podcast this week with another episode of Ask Buck.

 

Transcript:

Buck: Welcome back to the show everyone. Now so we decided to do as I mentioned in the introduction, we’re doing an Ask Buck Show. And what one of the reasons for this is that Stephen Honikman is now part of the team. He’s new. He’s been on the show before, he was a guest in talking about solar panels and that sort of thing. But Stephen is now part of the Wealth Formula team and as part of that, he has been sort of catching up on the types of things that we do. And so I wanted, I thought it was a good idea to include him in the Ask Buck series here. I know we had one fairly recently but we had like some questions come up so I figured why not, let’s do it and get Stephen caught up in the process as well. So Stephen, you ready?

Stephen: I’m ready!

Buck: All right.

Stephen: Learning by doing.

Buck: So let’s see. I’m gonna go to the first question here, they’re not in the order necessarily, any kind of order, I don’t even know what the questions are right now. So this is from Derrick. Here we go.

Caller: Hey Buck my name is Derrick Lane. I just wanted to follow up with the question I had from the last Ask Buck podcast. You talked about preparing for the next financial downturn and that it would be good to be in things that cash flow with favorable loan terms. You specifically talked about being careful of loan covenants with commercial property and that if the value of a property drops, you may not have as much access to credit with the bank because it may only give you 70 percent loan to value instead of 80 percent as an example. Now I’ve only been involved with residential real estate and to me it’s pretty cut and dry you get a loan, buy a property loan, terms are locked in but I’m not familiar with commercial deals, but the way you talked it sounded like the bank doesn’t distribute all the loan proceeds upfront and that the loan terms can change over the course of owning the commercial property based on the appraised value. So I was wondering if you could just dig into that a little deeper and clarify a little more that’d be great, thanks,

Buck: Great well good question. This is something I think that a lot of people don’t really know which I think is the real, what is the real danger of an economic downturn when it comes to commercial real estate? So most people who are dealing with single-family houses, duplexes, triplexes, etc., this really is not an issue for you but because what happens there is what he said, Derrick he basically, you get a loan, you’re cash flowing, there’s a downturn, you don’t have to worry about it. You’re kept, you know you’re still cash flowing because you don’t really care what the value of your property is, right? Because you’re not trying to make money on capital gains you’re just trying to get cash flow. And that’s fine. That’s the way it works if you’ve got you know your typical smaller residential loan. The challenge is where you get into the larger assets and say the ones that are using Fannie Mae or Freddie Mac debt because what happens with those kinds of loans frequently, and even with loans that are maybe smaller banks you just have to check every individual loan document for this is that it works the same way to start which is okay you get you know you’re gonna get eighty percent so you’re gonna get eighty percent or you’re gonna get seventy percent whatever you’re gonna get loan wise and the rest of the down payment. That part’s the same right that doesn’t change. The big differences is that in some of in some commercial loans that you get that number whether it’s you know 80% or 70% what we call loan-to-value that is a covenant in the loan and what does that mean? A loan covenant means that it’s it’s a promise you can’t break that promise to the bank. So let’s say for example you have a building that you bought for, you know, say it was producing a million dollars per year in net operating income, round numbers, and that came back at a you know that was with a cap rate of six and at a cap rate of six and you know that that was where you purchased it right so you’ve bought a cap rate six and you’re on a net operating income of a million dollars. And the bank saw that and they, based on those numbers gave you 80 percent loan to value. The the tricky thing becomes that that cap rate as you know can compress or decompress, right? The cap rate can decompress in this kind of environment that’s what you worry about the cap rate decompressing and therefore the value of the property drops. Even though your cash flow may not have changed at all, the value of your property drops. Now, so this is more again more applicable to commercial loans. But say now eighteen months later which is often the case, this is what happens, there’s an appraisal on that property and you’re just humming along, you’re cash flowing, you don’t think anything of it, and that Bank does an appraisal and they come back and say well yeah you still got a million dollars of net operating income. That’s fine, I know your cash flowing, but guess what the cap rate just went up and according to the cap rate now your property is not worth as much, right? It doesn’t have the same value that you bought it for and we’re only given you eighty percent, we’re not giving you more than eighty percent you’re at eighty five percent right now, and you’re at 85 percent so either you’re gonna give us five percent more, a capital call, or you’re gonna give us you know or you’re defaulting on your your covenant and you’re gonna lose the building. Now that seems unlikely right but it’s not in fact if you look at what happened in 2008 this was frequent this happened all the time in fact I remember a conversation I had with Robert Kiyosaki about this. At one of his properties he got a call from the bank and then he was making thousands of dollars per month on this this property. He got a call from the bank and he he was like why are you calling me when I’m cash flowing like crazy I mean there’s no problem with this building well we just appraised a building it’s not worth as much as as it used to be and and and now our debt now we’ve got too much debt hopefully that makes sense it’s the value of the building that changed. With the value of the building changing, all the sudden you have more if the value of the building goes down for example all of a sudden out of nowhere the amount of leverage you have on that building went up and it violates a covenant and that’s where the risk is. So again this is usually not applicable to smaller loans like you know if you buy a single-family home 30-year mortgage you know you’re not gonna keep doing a refi, no one’s gonna know no one’s or no one’s gonna keep doing an appraisal on that house or maybe it’s a duplex probably up to four units and those kinds of mortgages generally that’s not gonna happen. But anything in the larger stuff it’s gonna happen. And right now I should also point out, the market is ripe for this and there is a real danger there’s a lot of what I would call indicators out there that are taking 80% LTV, 80% loan to value you know raising a lot of money with a lot of inexperienced capital and they would be fine if they were driving net operating income up but they’re not doing a whole lot with the property and if they’re not driving net operating income up and cap rates decompress, then there’s going to be violations of of covenants and there will be capital calls there will be people losing their proper mark my words. Stephen do you have any questions on that?

Stephen: I was gonna ask you to just sort of think through the reason behind it because I think it makes a lot of sense if you understand that the banks themselves aren’t making up these rules. They’re regulated. And if there are regulators who say you have to maintain a certain maximum amount of leverage that you’ve put out on these properties. And that’s actually what caused the collapse in 2008. It wasn’t that the the properties weren’t performing, it was if the regulator’s came in and said you got a bunch leverage.

Buck: Yeah no, I mean I think that’s, and that’s really important, that’s really important. You don’t have to be upside down in cash flow to lose a property. You know one of the appeals of the main multifamily group that I’ve been working with, and those of you in the investor club know this, is that the loan covenants that they’re working on are for a hundred percent loan to value. In other words, they can go up to a hundred percent, they never do, they’re at 72-73 percent, but the covenant’s at a hundred percent, which means…

Stephen: They’ve got a nice buffer.

Buck: They have a very infinite buffer basically. That’s that’s a big deal and for those of you out there doing syndications at 80% LTV and not working like hell to drive up that income, you better be careful because that is something that could come back and haunt you. Let’s see, let’s go to the next question hopefully that answered it, if it didn’t look you know. And to a certain extent it is an argument for small toughest you know smaller investors right now you know to stick to high-quality smaller assets. I mean I’m not big into single-family homes and duplexes and stuff like that but I think if you’re not going to invest with, you know if you can’t find a syndicator where you can find that kind of buffer on the leverage, then it might be you know it might be a better safer route for you. Next question here from Parker Ashley, and by the way I know Stephen you have questions, if you have questions that are related to any of these please you know interject so…

Stephen: Sure.

Caller: Hello Dr. Joffrey. My name is Parker Ashley from San Francisco. Hi, I messaged you on LinkedIn a few months back in which she responded to post my question here on speakpipe on WealthFormula.com. So you know your journey inspires me. Yeah I was accepted in a medical school a few years ago but a few injuries had led me to reconsider and kind of during that journey I felt the draw to learn about and start business find my own path to wealth creation you know I found your podcast a few years ago after hearing you on the BiggerPockets podcast and I had a question from that BiggerPockets podcast that I wanted to pose you first mentioned, or you mentioned that your first multifamily property not succeeding because you only looked at the numbers. Outside of not getting the proper management place, what specifically did you mean by that, or was that it and if so could you kind of dig in a little bit further? Another question I wanted to pose to you kind of after hearing some of the information on your podcast was regarding life settlement investments. What specifically are there any, are there any channels or vehicles in which you prefer to choose to make those investments such as a fund or how do you go about getting into that specific investment vehicle? Your thoughts on that would be great because I’m having trouble kind of determining the best route forward with life settlement type investments. Anyway thank you for taking the time to answer my questions hope to hear the response to the podcasts and keep doing what you’re doing. Really appreciate it.

Buck: All right let’s see what was the first question?

Stephen: First question was how would you characterize the actual reason your first multi property failed.

Buck: Oh that’s right, that’s right. I have like a super short term attention here so, so that’s a good question Parker. The first the first property you know I described this elsewhere I think in this podcast at times. You know I got super excited I finished my training and I’d read Kiyosaki’s book Cashflow Quadrant and I had that purple book glow about me, had the purple glow. A lot of people know what I’m talking about. All of a sudden you think I know something you don’t and you want to tell everybody right so that was me. Then I picked up Kenny McElroy’s book, The ABC’s of Real Estate and then Advanced, I don’t know, I can’t remember what the second one was called but his advanced books really. Anyway Kenny’s super smart guy, great guy, he’s been on our show, you know just a really quality person, and his book is extremely well-written and it really goes through the numbers, right? If you didn’t know what I was talking about earlier with regard to cap rates, with regard to loan-to-value, all these things in terms of real estate, very easy thing to do is just pick up Ken’s books, probably the best books you’ll ever read on the topic, pretty much all you’ll need for the numbers so to speak. Now what I meant by you know I, by doing a lot of the things wrong, so the steps I took for that property, first of all I’ll tell you, I went to, the first thing I did is, I didn’t know where to look for a property so I went to LoopNet. Usually that’s a bad idea. LoopNet, for those of you who are not familiar, has a nickname and it’s called the place where deals go to die, okay? That’s typically what it is.

Stephen: I notice were they’re called dupe net.

Buck: Well it could be dupe net – I haven’t heard that one, but it’s certainly the place that deals go to die. So usually you’re not gonna end up with great deals on LoopNet. So the next thing I did is I was on LoopNet and of course if you just do the math, what makes sense to search by? You have these different categories to search by, I searched by highest cap rate. I mean if you if you’re just doing math what do you care about? You care about cap rates, right? So I picked up some properties on there and then I said well gosh I should probably get a broker involved here so I can go look at those. So at the time I didn’t know any real estate commercial brokers but I had just picked up a two million dollar house in the in the North Shore for myself and and so I thought well hey I’ll just ask this guy this you know guy who deals with luxury property I have him help me, and it didn’t occur to me that well this property was a c-class or you know probably C – it was more D Class C – D class property in the south side of Chicago that this guy would have any clue what he’s doing to guide me in any sort of way. Well so that was another bad play because you know you need a team when you look for these types of properties, we didn’t really know the area very well. Again I was focused very much on the numbers. Finally the way that ended and I won’t go into too much detail because I think it gives gets a little convoluted, but I bought the building without even thinking about management and then at the closing like somebody asked so who’s managing this building and I said well actually I hadn’t really thought about that. So that’s pretty stupid right? But that’s just the truth so at the end that very moment I said whoever’s managing it now I’ll just give it to them not realizing part of the problem that would be having is the fact that the property manager was owned, the property management company was owned by the seller himself. And then precipitously after you know closing, rents they’re paying paying tenants money of any kind precipitously dropped off. And although it was very difficult the forensics on this were too difficult for me to make a big case for it, but it was pretty clear that what was happening was that this guy who was sold me the building owned a bunch of buildings in the area and that he you know he was basically, you know the cooking the books, right? So this is a building you want to get rid of, you can make up, ones that you that you didn’t want to get rid of, make them look bad for a while, push money into the books of this one they’re on mystery people who aren’t paying their rent for physical occupancy, and then the next thing you know you’ve got a building that looks really great on paper. Well that’s what I bought and then it’s it’s a complicated story with a lot of lessons. But in short that’s what happens when all you do is look at the math. So by the way I do anything right now is all you know, if you follow me at all after you know a decade of this stuff, is I always go in with team first. I always go in with you know, I go in with knowing everybody involved, you know. I’m not gonna look at the deal unless I have a very trusted broker. I’m not gonna, at this point I only really work with operators and operators who have stellar track records and who are recommended by people I know, like, and trust, and I know, like, and trust. Now for me 90% of the due diligence on a building on an asset to acquire now has nothing to do with the numbers. The numbers, that’s easy it works, it doesn’t work. It’s that simple. So hopefully that answers that question, Stephen does that answer the question?

Stephen: I think it knocked it out of the park. Good point just to take it away is like, the numbers can be whatever the owner wants them to be because we know how people push numbers around.

Buck: Yeah I mean you’d I mean you know I can sell you anything if all you’re looking at is an Excel sheet.

Stephen: But a smart buyer would say great numbers they look fine, now let’s actually look under the kimono and see what’s good.

Buck: Actually the other way around. I think you have to look at everything else around before you look at the numbers. And to me that’s critically important. That’s a big part of my investing philosophy. Nw I will add that since I have taken that approach, I, knock on wood on this desk in front of me, have never lost money and a real estate deal. And by the way selling one of them in a week closing that I bought three years ago at a five hundred percent return.

Stephen: Nice. So I guess the question before we move on to the second one is, is that lesson that you just recounted covered in Roberts book, Robert Kiyosaki’s book?

Buck: No not really. And that’s where I think that you know that’s where Wealth Formula Podcast and my course and these things kind of come in because I think what what Robert’s genius is, what Robert Kiyosaki’s genius is well and Ken McElroy and all but particularly Robert’s, is creating a framework of of investing. A framework for looking at entrepreneurship and your place in this world that people like me who never even you know contemplated this idea of becoming an entrepreneur that never even crossed my mind I didn’t even you know, what do you want to be when you grow up I don’t know doctor, you know, say no matter what I said I was working for someone else. I was fine and and there’s nothing wrong with working with anybody else with it you know for anybody else, my point being that he created a framework and a framework that is real that exists that but for most people who live in in a in a culture that is driven by conventional wisdom and you know.

Stephen: Common sense it isn’t common.

Buck: Or an educational system that was created during the industrial revolution.

Stephen: Wrong paradigm.

Buck: Right that’s the big deal. Nuts and bolts and real world experience that is stuff that Robert doesn’t write about very much and you know I think he, but he certainly does his part I think. I think he’s single-handedly probably created more millionaires than any any single person on earth ever has. So the second part of the question was life settlements. Life settlements as you may or may not know, if you could if you would like to by the way watch a webinar on life settlements you can do that on WealthFormula.com look at investment opportunities and go watch that webinar or you can go to a microsite that I created called hedgetheeconomy.com because that’s exactly what you’re doing, you are hedging the economy. But what they are is, they are life insurance whole or not whole but permanent life insurance policies of octogenarians typically, right? So you’re you’re buying life insurance policies from people who don’t need them and/or can’t afford them anymore. Their alternative is to basically stop paying on them they’re gonna get nothing out of it. If they know enough to get their cash value, they’ll ask for their cash value, but more often than not they just end up not you know they just end up running out of cash because the cash just pays the premium and then boom it’s dead.

Stephen: It’s really sad.

Buck: Yeah and we’re talking about somewhere in the neighborhood of like 90% of policies never pay out.

Stephen: But a hundred percent of people die.

Buck: That’s right. And so the 90% of people, that’s why insurance companies make so much freaking money by the way, right? So here’s what a life settlement, just as a reminder, what you do is in 1911, I think it was 1911, 1914, one of those two, can’t remember which one, Supreme Court ruled that a life insurance policy is a true asset. It is an asset just the way an apartment building or a house or a piece of gold or whatever it’s a real asset and if it’s a real asset it can be transferred to another person. And so effectively what you do in in life settlements is you buy you give people who need money today who would prefer to have money today rather than in the afterlife. You give them you know a big chunk of cash today but it’s still a discount compared to the death benefit that eventually it’ll pay out once they die. So it’s a win-win situation for the person selling the selling the policy and for the investor. The only one who loses there is who? The insurance company. Right and if only 10% of these things go on to ever payout, I don’t have a tear for them.

Stephen: And to the point they had that policy on the books while it was being paid, they were making money on the capital sitting in their accounts.

Buck: So well anyway yeah the bottom line is though, I think there’s no reason that this is a beautiful situation if you want to you know talk about having a situation where you’re helping people and you know not letting Wall Street and the big insurance companies win the game all the time so, to your question about how best to invest in them, I do think a fund model is the best and again I think if you go to hedgetheeconomy.com you can get a sense for what I’m talking about. But there’s a couple things that are important in this and one is diversity. This is an actuarial. And the more action, so typically you know you want to have each policy of multiple actuarial studies on it you don’t take an average of that and then you want to have multiple policies in a fund structure because that gives you diversity and then it actually makes the power of numbers even stronger. So that’s my preference. That’s my preference on how to invest in this asset class. There’s a lot more detail again in that and that webinar which you can go to hedgetheeconomy.com and check out but that’s, in a nutshell I would say yes, I think you should have a fund at least you know, four to six policies in each each fund so your so you have some diversity. You also want to make sure that there is means by which there’s a plan to actually pay the premiums because remember you still got to pay the premiums, right? So you got to have a plan for escrow of premiums and you know I think that the most important thing for this asset class in investing by far, is transparency and so that’s where I leave it. So Stephen did you have any questions on it?

Stephen: I did and and it’s not exactly in line with how do you get into it. Once you’re into it though the exposures are what are seemingly, as long as you pay the premium and you’re pretty much sure that the original policyholder is eventually going to pass away. You’re going to get the death benefit.

Buck: Yeah so that this is a this is a very good question because what are the risks? The biggest risks in reality are longevity right? And so as a physician I can tell you that right now there’s no cure for death, right, and particularly when it comes to people who are already in their 80s who have multiple health problems, that’s really not where life expectancy changes. It’s usually it’s our children, right? It’s the kids who are being born today this generation of children who’s literally being born right now, they’re going to see you know life expectancies well into the hundreds I believe that. But that’s really not where you’re at if you’re already 85 and you got you know you’ve had two heart attacks and you still smoke, which literally is what some of these people look.

Stephen: And the example in the webinar is a good one of they start listing the actuarial number of months left and that’s what you’re actually investing in.

Buck: Right, right.

Stephen: So the question on that was, are there things that can happen in the event of a death that could make it not pay out?

Buck: So theoretically again the risk the biggest risk is longevity. Now in reality that’s where transparency and investing in and a very you know I guess again you gotta know, like, and trust who you’re investing with, you gotta have referrals all that business. But really the the other risks are you know again not escrowing premiums, right? Because if you can’t pay for these things guess what you’re going to do you’re gonna go back to investors and you’re gonna ask for premiums. The other thing is are these life insurance policies actually paying out. Now there is a statistic that there has never been a life insurance policy that did not pay out for, unless it was completely fraudulent.

Stephen: But the capital was there to pay it out assuming it was legitimate.

Buck: Right. So even in the case of suicide, usually the insurance policies and I didn’t know this but I got an insurance producers license which just, and I know you’re about to get, but the typically is a two year window, after two years if even if people kill themselves, doesn’t matter the insurance companies have to pay out. So there’s it’s it’s really difficult for them not to pay. The bigger challenges that these things come into is like, you know, was the transfer done properly, you know, is there family members who were not consulted and they were heirs and it was on the estate right and you’re an attorney so you know all the issues regarding that. So the way you avoid those typically is that you only invest, I’ll tell you the way I avoid them, the fund that I invest in that I’m involved with only buys them through what are called life settlement brokers. Some major brokers that are out there and these brokers what they do they act basically as a, they do due diligence on all these things by the time they get to a marketplace they are clean, right? They’ve got like 21 points of check up whatever they do typically, they have you know they have families signing over any potential you know acknowledgments or whatever that they have that they know that this is happening and these are the same brokers that Berkshire Hathaway buys their policies from so these are, you know this is how you this is how you buy stuff. I would highly, highly suggest you not even consider buying individual policies you know from people who are selling them. I just think it’s fraught with danger and I know actually of a couple people in my investor group who have bought policies from individuals particularly one guy who writes a lot of books about life settlements that have ended up not paying out and they were because of a lot of these kinds of technicalities, you know the dotting i’s crossing T’s which you won’t get into if you actually deal with the you know a real group.

Stephen: Now is the death benefit itself when it’s it gets paid out tax-free?

Buck: No it’s not.

Stephen: And that’s an important distinction.

Buck: It is a death benefit is it’s not tax-free. Well it depends who you ask. It can be considered you know, it could be considered if you have an individual life settlement and typically it will be ordinary income. Now if you’re in a fund that raises a lot more questions and again I’m not going to give an opinion here, but typically in a fund you are not buying a policy anymore you’re buying a security. So then the question becomes if it’s a security and you own a security, is that capital gains or you know or is that ordinary income? That’s a question for your accountant.

Caller: Hi Buck. Have a question for you. My father is 57 years of age and has a 401k that was managed by his employer. He’s on a self-employed track now so I’m interested in investing his money in a better vehicle. He has approximately $27,000 in there so can you advise me where would be a good vehicle to put his money in? Thank you.

Buck: Okay I’m gonna assume that this means that he still is using the 401k, that it still needs to go into a retirement account, in which case I think the, so do you, are you understanding this question as…

Stephen I think we need we’re missing a piece.

Buck: Yeah well let me try to answer a few different parts of this. Because I think if the question is he, has a self directed 401k, is that the best vehicle for it? I would refer you back to a couple episodes again, we had a really interesting episode with Damion Lupo who introduced us to the concept of QRPs, you can also go to WealthFormula.com and and get a copy of Damion’s book he’s gonna send it to you. But really interesting concept in a nutshell and I won’t go into the details largely because I don’t understand them and I don’t have a retirement account myself so I don’t take that much time to understand, but the big difference in my view with this kind account a QRP versus a self-directed IRA is the ability to you know self direct and also have, be able to not pay UBIT or UDFI on basically taxes on the leverage component of profits. So for example if you have a self-directed IRA you can invest in real estate, but technically if you have you know a part of your profits that are made because of leverage which hopefully you do because I mean that’s one of the beauties of real estate right is the leverage, that you are supposed to pay taxes on that leveraged component. Now if you use a QRP you don’t have to do that. That’s why QRP is some kind of form of a self-directed 401k from what I understand so he might be ok anyway. Now if that’s the question that’s the answer. Now if the question is what should he do with that money, this from the from your father’s standpoint, boy I would hesitate to even go down that with you Stefano because it’s just a you know loaded question, and i can’t really give you investment advice. You know obviously i’m a big fan of real estate i do think you know there’s notes, there’s some notes groups that i’ve talked about you know on the show frequently in the past that I think are worthwhile considering, but gosh if it’s only twenty seven grand and it’s your dad I really don’t want to give you advice on what to do and also obviously depends on you know whether he’s accredited or not. There’s a million different things but hopefully you know…

Stephen: I guess you’d say the takeaway is if he’s accredited, which is a first question, then regardless of the things he could do, it sounds like it needs to stay qualified.

Buck: I don’t know, I mean it depends on his…

Stephen: If he takes it out of the qualified fund he’d pay taxes on that.

Buck: Yeah if he does then just you know the QRP is the thing to do, from what I understand. You know I mean again everybody needs to you know do your own research but you know order Damien’s book, you can get that on WealthFormula.com but it’s pretty compelling and if I did have a, if I did have a retirement account, which I don’t, I use you know Wealth Formula Banking type vehicles myself, then I would you know I would absolutely consider a QRP, especially as a rollover from from a traditional IRA because even by the way the good news is if you have assets it that you’ve invested already in a self-directed IRA and they’re in real estate you can roll them over into that QRP. So the beauty of that is you can still save yourself even if you’ve invested in something with the IRA you can still save yourself theoretically from paying taxes on the leverage component of your gains when they when they happen. So anything any other questions follow-up on that at all?

Stephen: I think we need a little more information to know if we answered it.

Buck: Yeah so if we didn’t, Stefano, ask ask a follow-up on the next show. Well let’s see that’s it looks like we we covered some of the the main calls here from the standpoint of those who are calling into the show and thank you for those and please I do encourage people to go to WealthFormula.com, go to speakpipe and leave your questions there. Now we’re gonna move on with some of Stephen’s questions. And this is good because I’ve asked even to try to get caught up with a lot of the things that we talked about as part of you know Wealth Formula and the brand and that thing so he can be of service too. So Stephen, let’s start your questions.

Stephen: Yeah let’s start off with with Wealth Formula Banking, as a as one of the key lines that as said repeatedly and seems to really present the value is that it’s a replacement for a traditional bank account, not necessarily like your data to checking account, but how did you mean that in terms of like, instead of a savings account or because it’s the idea of having access to your money but it’s an investment account, just how did you mean that?

Buck: You know I don’t really, it’s funny because I don’t really emphasize the bank account as much even though we call it Wealth Formula Banking. I know others have you know used in that context more often. The reason we call it Banking is because you know, let’s put it in an example. What do you typically do when you let’s say you are just buying, let’s say you were buying a rental house. You take you have money that’s sitting there and it’s making a you know point zero five percent interest which means you’re losing money, right? Because interest is, inflation’s at about two percent. So you’re losing money until you find something to put it in. Then you put it in and then you get, say you put a hundred thousand dollars in or something like that and you end up with you know like a thousand dollars back a month what do you do with that thousand dollars? Well you typically would deposit back in your bank only to get point zero five.

Stephen: Point zero five percent right we just learned that lesson. why do you do that?

Buck: Right but there’s not a whole lot else you can do with it necessarily because you can’t use that thousand dollars to go you know buy something else so you’re waiting to accumulate and so that’s where this concept began I think really being thought of as banking because here with Wealth Formula Banking it’s a type of insurance product that you know is very clever and the insurance effectively becomes free after two year. But here in this situation what happens is from the get-go the cash value that you have is growing at a compounding rate typically between somewhere between five and five and a half percent which is tax-free. So that’s probably the tax equivalent of what maybe eight or nine percent. So right away that’s better than 0.5%. Again you’re not losing money now you’re actually making money with that money sitting there, okay? The next thing is you take this money and you use it you borrow it from your account and you use that now you use that for a down payment of $100,000 like we did in the last example. So there’s two things that are different here, first of all when we start getting our money back we’re not putting it into something that is only paying us five or 0.5%, we’re putting something that is making us back five, five and a half percent, right? The second thing here and this is where the magic really is in my view is that even though you borrowed the money from your account, your account is still growing as if that money was still there at a compounding rate. Because when the insurance company lends you that hundred thousand dollars, they’re using a different account and that different account is lending you that money at a simple rate. So you’re taking, so you’re growing at a compounding rate, you’re borrowing at a simple rate, you’re investing into something that then gives you cash flow, and you pay back your loan which is just at a simple interest and you replenish the money that’s growing at a compounding rate.

Stephen: So this is this idea of keeping your powder dry for when you can put it into something that is…

Buck: Well it’s it’s just smarter, right? I mean I mean just from you know from every perspective if you look at is it’s keeping your powder dry but it’s also, you know, it’s also basically what it’s allowing you to do is to double-dip. You’re investing your money in two places at the same time because you’ve got money growing at a compounding rate even though you borrowed it, it’s still growing at a compounding rate and then you come back and you invest that into something else and then you borrow it at a simple rate and invest in something else so you’ve got the arbitrage of the compounding rate and simple rate and then you have a cash flow. And then you have you know five and a half percent return instead of 0.5. So to me this is one of those things, if you’re a cash flow investor this is why I really do think that this this particular type of strategy is an absolute no-brainer and this is a reminder, you can look at the webinar we did at WealthFormulaBanking.com

Stephen: So that’s a good transition into the into the difference between Wealth Formula Banking and Velocity Plus. Where in Wealth Formula Banking, you actively are looking for things to invest your money into, and that’s why you’re gonna borrow against the account. But in Velocity Plus ,you’re not doing active investment. You’ve got a policy and you’re putting money in every year and the bank is loaning you money to put in there as well. And that same concept that far is the same in both, correct?

Buck: It’s different. It’s very different. So the way I would think about the banking is it’s if in the context of retirement accounts, Wealth Formula Banking would be much more like a self-directed IRA, where you’re investing in things, right? In the context of Velocity Plus, that’s more of your traditional we’re gonna invest, we’re gonna take our money and put it in ETFs and let it grow type of situation.

Stephen: So the value in Velocity Plus is much more that there’s no downside…

Buck: So Velocity Plus is a completely different product. Completely different product. It’s based again in insurance and its roots are in the high super high ultra Net Worth group and that is traditionally there’s something called Premium Finance IULs and basically what you do is you you have the insurance company has options play and the details of that is anything that I’ll be able to explain on this podcast but effectively what they do is they give you the opportunity to invest in an index that is tracking the SMP 500 and you can take up to 12 to 13 percent of the upside, but if the market crashes, it goes down 20 or 30 percent, you don’t have to participate in that crash, okay? And the reason you don’t is because it’s an options play on their side. And to the extent that that sounds great rate 12 and 13 percent, you don’t have to worry about the downside, that’s that’s cool. But you know the SMP 500 has an average of conservatively 7 and 7% of course in our world we don’t really care what it is because we know at any time it can go down 20 or 30% and that’s why we stay away from it. But, what if you don’t have to worry about it crashing then it becomes attractive and you know what’s even more attractive is if you know that the average over historic, historically has been 7 or 8 percent in the SMP 500 I think. It’s probably higher than that but let’s say it’s 7 or 8 percent. Seven percent SMP 500 with leverage becomes quite a bit more than 7 percent so what Velocity Plus does is give you typically three to one leverage so then you’re looking at that return that you get from the policy and from the SMP 500 if it’s 7 percent, that is the equivalent of a cap rate in real estate, right? So it’s like a 7 cap and then you leverage it to make it yield more. So for example if you use 3 to 1 leverage on 7, an internal rate of return of 7 you actually end up close to 20 percent, which is which becomes very attractive. And again the downside protection is really what is appealing to me because I know there’s gonna be a correction, you know there’s gonna be a correction, everybody knows, it’s gonna be crazy, you just don’t know when, we don’t know when. But when there is the of the next year being gangbusters is really high. You know a funny thing that I heard which I thought was interesting is you know everybody’s talking about how you know the first year of Trump’s stock market and and the Dow Jones went up by so much etc. If you look over the first 12 months of the Obama administration it actually went up more than it did the first 12 months of the Trump administration and believe me that that is this is not a political comment whatsoever. It’s a comment on the fact that that during Obama’s first 12 months we were recovering from the worst probably the worst outside of the Great Depression economic collapse we’ve seen. There was nothing but upside.

Stephen: Certainly since the depression.

Buck: Right. So the point being that is you can avoid one year like that and then have gangbuster years afterwards that you can potentially make a lot of money. Well one last thing I’ll point out there is for those of you, there is a handful of you who are what qualify is sort of ultra high-net-worth, and you know it’s such a wishy-washy word, but basically it’s like somewhere in that you know maybe you’re at least 5 million in net worth. If you’re in that category you can get even more leverage and that’s where it gets kind of crazy, And where a lot of ultra high-net-worth people that I know are using the these tools and that’s where I learned it from. But I’ll tell you you know the three to one leverage itself is very attractive and that one’s available to pretty much anybody who makes you know at least $100,000 a year combined familywise. So well great. Any last…

Stephen: No, this was this was great.

Buck: Good, all right everyone. Hopefully that was helpful to you and that’s all I got. And we’ll be right back.