264: Ask Buck! Q2 2021 Part 2
Buck: Welcome back to the show everyone and let’s just go ahead and get started. The first one I’m gonna do here is a question that was sent in. Louis asks what type of life insurance is used in Wealth Formula Banking. Is it whole indexed/variable life insurance? I am 68. Is it worthwhile at my age? There’s a five-year vesting period correct? Is there any documentation you can point me to? So there’s all these questions. Well first, I would highly recommend Louis that you go to wealthformulabanking.com and there’s a couple of webinars there that are very helpful and I think it’ll be very clear because it seems like this is all kind of jumbled here. I think you’ve got Wealth Formula Banking and Velocity Plus all kind of jumbled up together. But anyway, I forwarded this question over to our friend Rod Zabriskie from Wealth Formula Banking and he recorded this message so let me see what he’s got here.
Rod: Hi everyone. This is Rod Zabriskie. Buck asked me to cover this thing and maybe I’ll just real quickly describe what that is. If there are any listeners who are not already familiar with it, it’s a strategy that we use to enhance active cash flow investing. So typically when we bump into people who are active investors, they use a regular bank account, savings account, money market account as we call the opportunity fund, the place where they build up the funds. They take that money go and invest it, use it to create some cash flow. They take that cash flow, funnel it back into the savings account, go back out and do it again right? This whole concept of velocity, what we’re doing with the banking is we have a much better vehicle for that opportunity fund. We’re using a strategically designed life insurance policy to use as that vehicle and it gets us three things: number one we’re getting some growth whereas we get little to nothing inside of the savings account, secondly that growth is tax-free, and then third there are some additional efficiencies that are in the flow of that money and if you want to learn more, go check us out at wealthformulabanking.com where you can get a webinar there and then if you want to talk with us and you know learn a little more after that then we have a form. Okay with that as a background, let’s get into this question from Louis. And first off, he asks what type of life insurance is used in Wealth Formula Banking, whole indexed or variable? So real quickly cash value life insurance comes in a few different forms. It’s very familiar with the whole idea is that the inside of the account there’s what we call a cash value. And so it has an underlying account value that is independent of the insurance itself. And so really the heart of Louis’s question here is how is the growth happening inside of the account? And so real quickly with whole life, we have a guaranteed interest rate plus a dividend. That’s how it grows. In an indexed universal life policy, the interest that we’re earning is based off of what’s happening inside of a market index. It’s not invested in that index it’s just using that as a measuring stick to determine how much interest you earn each year. And so if the index goes up in value, we capture the growth up to a certain cap in the year where the index loses value. We don’t participate in the losses. We just don’t earn any interest in that year. Okay, so that’s how the indexed one works. And then the variable on this one, it actually is invested in the market. The equivalent of mutual funds inside of the insurance policy and then the value of the underlying account the cash value will fluctuate based on the ups and downs the volatility of whatever market-based securities that those funds are invested in so okay that’s those are the three now back to the question with Wealth Formula Banking we recommend whole life, and it’s not because that’s the only kind that can be used, but if you think about the whole strategy itself the idea is that we are using it to enhance cash towards people who are investing in real estate or businesses or atm funds a lot of different things cash flow investments and what this provides for us is a consistent, steady growth. It’s happening inside of the account and because whole life has just a lot of guarantees associated with it and even the portion that dividend that’s not guaranteed the companies are just so consistent at paying a dividend. So it just creates a very consistent underlying growth that happens while we’re also out there creating value in these other places which tend to carry a little more risk with them. So we’re taking all that risk in the investments themselves. We like the idea that we have a very secure consistent growth generation happening inside of these policies in the background. Okay, so then the next question Louis asks is what life insurance company do we use. Okay, so we have relationships with lots of companies. Basically what we want to do with Wealth Formula Banking specifically is we want a mutual life insurance company because that means they pay a dividend. We want them to have been around a long time, be consistent paying that dividend, and just be A-rated, like very financially secure. And so there are about 10 or 12 companies that fit those criteria. And then what we do is we just compare them all say okay which company, which product is turning my money into the most cash value that I can then loan against to go and invest? And so that’s what we’re going to do. We’re going to pick the company that gives you that. So again it’s not an individual company but we’re just continually keeping up on what’s happening with all the different companies. The next question, I am 68. Is it worthwhile at my age and I would say age by itself is not a factor that would kick you outright, it has more to do with the investing that you are doing, how long you’re planning to do it, and then we can plug this in look at some numbers and see if it fits. So I wouldn’t say for a 68-year-old or really any a person of any specific age that that by itself wouldn’t disqualify you from participating in Wealth Formula Banking. Okay, the next question, he says is there a five-year vesting period, correct? I’m not sure exactly what you mean by vesting period but I’ll come at it from if the question is do I have to wait five years of putting money into the policy before I can start accessing it to use in investing. Then the answer is no. Depending on the specific company that we’re using determines how long I’d have to wait, but certainly, within a year, you can be at start accessing the funds and be using them for your investing. So some companies are even you know a shorter time frame than that. So no you don’t have to wait the five years, if that’s your question. If the question is do I have to commit to funding the poll for five years, then even that we can get a policy to be self-sustaining within about three or four years. And so depending on how much a person is putting in and a few other factors. From just a pure funding standpoint, how long do I have to plan on putting money into it? It’s relatively short, three or four years. When you compare that to what a lot of people assume because it’s life insurance, a lot of people assume you have to just keep putting money in forever and so that wouldn’t be the case. So it could be even shorter than five years from a funding standpoint. And then final question, is there any other documentation you can point me to? Well like I said a little bit ago, I would say start with the webinar that we have at wealthformulabanking.com and then if that gives you a good feel and you feel like it’s something worth looking into a little more then get in touch with us and what we can do is have an initial conversation understand your situation a little bit better and then point you toward some additional resources that can help you learn the strategy a little bit more and really not just learn it so you can make a decision on whether it makes sense for you to pull the trigger or not. But really our whole goal with this education is to put people in a position where they can really make use of it and have it become a part of the decision-making process as they’re evaluating investments and as they’re flowing the money in and out of those investments that this becomes a core piece of that. That’s our whole goal and from an education standpoint on that. So thank you for your question, Louis.
Buck: Well thank you Rod for all those answers and certainly giving me a little bit of a break here with my voice. But lots of detail there’s certainly something to check out. I use recommendation in a very non-financial advice or way but recommended at least making sure that you understand what these products are is a key I think a foundation for investing especially in cash flowing real assets. So check out wealthformulabanking.com.
Now before I move on to the next question, a couple things that just came to mind, again stream of consciousness this week. I had so many questions about following up on last week’s podcast interview with Mance Harmon and the most common one was well where can I buy it? So right now HBAR which is the native coin is not available on Coinbase which is you know the usual easy way to get cryptocurrency is and in that sense it’s actually an opportunity because if it was on Coinbase, which it will be eventually, the price will be higher because it becomes much more accessible to a lot more people. Now, I mean from my understanding, there’s a number of other places to get it. The place that I’ve been buying and watching you know to buy more frankly has been through Bittrex. If you have a Coinbase account you can move your stable coin or your ethereum or bitcoin whatever you want to use you can just move it over to Bittrex and buy HBAR there you can also earn money directly to Bittrex. I think sometimes that’s a little bit harder but that’s certainly an option as well. I still think that I’m looking at those prices and you know last over the last week there was a significant blow to the crypto markets in general because of these comments from Elon Musk. Elon’s a character man, I’ll tell you. He totally gets behind bitcoin and then you know Tesla accepts bitcoin for payment and all this stuff. And then of course he does a total 180 there and realizes that there’s actually a lot of energy consumption with bitcoin and then he can no longer support it. So bitcoin actually took a hit from that. You can see how volatile this market is when you have one guy who seems to be moving it by so much. But that’s what happened. Drove it down. But what happened in the interim was actually that even though HBAR initially went down with everything else, it popped right back up and actually stabilized higher in part because HBAR is one of the “green cryptocurrencies” and green protocols. It doesn’t really consume much energy at all. And so there is a relationship between HBAR, Hedera Hashgraph, and Google. Google is on the governing council of Hedera Hashgraph Hedera has been involved with the Google Cloud and the Google Cloud just made some kind of a deal with SpaceX which is of course Elon’s company the one that flies the moon and all and so I think some people were probably speculating that maybe Elon would be looking into HBAR who knows here’s my take on it. I don’t think that you ought to look at this as a short-term investment. I’m not. Even though it’s cryptocurrency. Here’s the thing, you look at like bitcoin and ethereum. I mean they’ve been around for a while right and bitcoin’s been around since 2009 or something and it’s taken a while for this thing to really take off and ethereum’s been around for a long time too now and they’re really sort of you know blockchain 1.0, really established and they’ve got these massive market capitalization. The way that I think about this is that there’s going to be this surge of 2.0 coins and this next generation blockchain or in the case of you know Hedera not being a blockchain just distributed ledger technology which is so important in the way technology is headed in general. And so if you look at those market capitalizations, that’s to me I look at those very closely because logically as this technology progresses there’s just no way. Okay let’s just take bitcoin out of the picture altogether. Because it’s a different animal. But ethereum for example. To me it’s a little clunky. It’s a little clunky and I think it’s first the game and people are just looking at it as this you know it’s the king right now of that sort of smart contract platform. But you know there is so many second-generation protocols out there that are superior technology-wise, HBAR of course being one of them in my view also and of course like Mance Harmon said, they do different things but they’re all better and faster than ethereum right now. Another one that we talked about in our group before it was released which I was very, I’m lucky to get on the pre-sale in 2017, was dfinity also known as the internet computer that native coins ICP literally launched on Coinbase. It was the biggest launch ever came into the top 10 market cap of cryptocurrency. This is another phenomenal project and my sense is that what’s going to happen over time if you stop looking at these markets like we’re used to in cryptocurrency like one month at a time is that over time you’re going to have these second generation ones you know gaining massive market cap. Now I’m not saying that I know for sure you know which which of these new second generation protocols is going to end up having a hundred billion plus market cap I mean dfinity’s gonna get there for sure. In my opinion I mean it’s already like number eight market cap a day. But if you look at HBAR that has a two billion dollar market cap right now can get to a hundred. That’s a 50 x multiple on the price right now which is only you know about 32 cents as of this recording. Do the math there. That’s an enormous potential return. So I think it’s a huge asymmetric risk play but the thing about this company is that it’s a real company right and so I do encourage you to look at it. They don’t spend a lot of time like out there marketing but quietly if you look at the number of things they’re doing, they’re working with NASA, they’re actually being used. HBAR as the protocol tracked the international space station. I mean this is like one of the few projects that is actually really doing something as opposed to you know just being a bunch of hype. So if you’re willing to hold something like you should frankly like an investment right in real estate we just assume five years we don’t sit there and watch it month to month. So in my opinion if you’re looking at this as a five-year hold this is a really great opportunity and you know who knows. It’s not investment advice. I just look at it but I’m excited about it so check it out.
All right well let’s see let’s move on to the next question from Ethan. He says I want to thank you for all the great opportunities to provide your accredited investors. My question is regarding negative K1s for investments within a qualified fund i.e solo 401k. How can they be utilized and when thanks again for all you do. Hey, they can’t really Ethan. You can’t really do anything. That’s the disadvantage of using qualified funds for investing in anything that actually has a tax advantage. Because you’ve already taken the tax advantage by using your tax shelter your solo 401K. So you know even listen if you have capital outside of your qualified funds, you’re probably better off using those for these types of things. Now does that mean that you shouldn’t invest in real estate with your solo 401K? No I don’t think that’s true. I know I’ve heard people say that before. I think the big difference is that if you’re looking at investing using a solo 401k or self-direct IRA or whatever at that point you don’t pay attention to the tax benefits. You have to look straight up at the numbers and the numbers are still usually far more compelling in real estate than they are with other opportunities. So anyway yeah that’s basically it. But unfortunately, you know I mean I’m not a tax professional but I don’t know of and I’ve never heard of anything that you can do to utilize K1 losses from depreciation within the confines for qualified plan.
All right next question after that is from Greg. Greg is asking, Buck thank you for the financial education opportunities that you have made available to all of us. I just looked at my K1s for last year. By not having to pay taxes, the government contributed to my investments that speeds up investing. Please help me understand how recapture works. If WWC, meaning Western Wealth Capital, sells a property before five years, I think I have to recapture some of the K1 loss correct? Okay so Greg let’s revisit this concept called the golden hamster wheel which we’ve been using and we’ve talked about on on some past Ask Buck shows, and you may want to listen to them too. I might explain them better in the other ones. But basically here’s the deal right, yes you do get the depreciation. The depreciation is not permanent. There is a recapture. But first let’s look at it on the surface what recapture looks like. So if you’re able to use money that would otherwise be taxed at ordinary income and you were able to save that going in by getting the depreciation and the deduction at ordinary income rates then that’s awesome because guess what, recapture comes out only at 25 percent. So there is arbitrage in the tax rate right off the bat that saves you. It’s almost like you would have been taxed at you know 40 but instead, you’re being taxed at 25 every capture. So there’s that benefit but there’s also this other benefit we’ve called the golden hamster wheel which is essentially that you know people who are investing in these opportunities are typically investing in multiple ones. So you are continuously generating more and more and more losses and oftentimes you’re not using all those losses. So what happens is sometimes when you have a divestment say you have a divestment and you’re supposed to be paying recapture, what you see is that the recapture and the capital gains is being offset by some of those losses from the other investments that have not been used. And that’s why it’s like a hamster wheel a golden hamster wheel hopefully that makes sense and I’ll just add that I am not a tax professional and that is not tax or legal advice as I always do to cover my backside. Anyway thanks for the question there.
All right next question from Brent. Brent says, Hi Buck. It’s Brent Altman here writing from Israel. With record-low interest rates, so many large players are diving into the multi-family real estate space these days. We’re seeing prices rise and cap rates compress. Is there a point where purchasing these multi-family assets stops making sense? Are we at that point yet? And if not, what indicators are you looking at to determine it’s time to invest elsewhere? I listen to tons of podcasts but, as ever, yours is the only one that actually results in me generating wealth. I truly appreciate it. Well, that was really nice Brent. I’m glad we’re able to generate you some wealth. That’s good to hear. Well Brent I think that’s a really good question. I just think the thing that you need to think about is this is I think that there’s a lot of danger in trying to time the markets and I think there’s no better way to explain that than to say listen there are some seriously high-profile smarts indicators that have been pretty much inactive for the past five years thinking that the market was too hot. It couldn’t possibly you know get hotter and guess what, in the last five years, companies like Western Wealth Capital and others who continue to go made money hand over fist and even a year and a half ago when we had a meeting I remember and I think it was in I remember Dave’s still talking about how he thought interest rates were going to go down even further because compared to the rest of the world our interest rates are relatively high and that was a bold statement. And of course Dave, as smart as he is couldn’t have predicted Covid but what he said actually came true so interest rates even went lower and that drove cap rates down even more it drove interest rates down even more and of course cap rates follow that so I think the challenge is predicting the future you know we may just be in a new type of economy where you know we may have decades of like super, super low interest rates who knows. I don’t know that. I don’t think you know that. So I think the best thing that we can continue to do is sort of volume average into these markets. I mean don’t expect that every time you invest that you’re going to hit a home run things that we invested in a couple years ago that we’re going to probably divest in within a year or two are probably going to be massive home runs but I don’t think anybody would have predicted that necessarily given where the markets were now. I also think that things are going to get a lot hotter from where we are now. So I think it would be in my opinion a mistake to stop investing right now. There will be back and forth there will be recessions there will be setbacks in the economy et cetera but I think that what we’re seeing right now is what do we see in the first quarter six percent growth in GDP. Things are super hot. They’re only going to get hotter once this pandemic stuff goes away and people are traveling and spending and all that. So to your question of when do you stop for me what I’m looking at really is again sort of the more macroeconomic picture and I think what I like to think about is sort of the ITR Economics model where there’s a pretty good if you go back and listen to some of those episodes they talk about how the the 20s are going to roar and there been right so far about that and they’re roaring right and after covid this is gonna be the roaring 20s next three years four years whatever. I think they’re just going to fly and then they’d talk about a depression happening in around the 2030s. So I’m paying a lot of attention to that large macro shift and does that mean that you know 2027–2028 we stopped buying. I don’t know the answer to that yet but that I think that right now I would continue to buy given where we are from a macroeconomic standpoint keeping an eye out on to the late 2020s and not trying to predict smaller dips in the economy and setbacks along the way. I think that you know you have to remember too that you’ve got very low interest. You’ve got cap rates that are compressed but that’s really being driven by the fact that the interest rates are so low and so it’s again it’s all based on a big macroeconomic picture. So I think that’s what you have to focus on. I don’t think you can just look at the real estate market in a bubble and I think that’s what real estate syndicators who stopped buying five years ago have done. They just look at it and say well we’ve gotten really hot and we can’t get any hotter so we’re gonna stop you have to look at what’s going on in the larger macro picture and make some decisions based on that and I think if you continue to you know volume average in even if there are dips you know then you’ll you should be just fine that’s my opinion and when it’s time to stop if I feel like we need to stop at least in our investor club we will do that but I don’t foresee that for the next several years. I don’t know if that’s a very good answer to your question. This is one that I probably would have given you a better answer if I wasn’t doing it by the seat of my pants today.
But all right let’s see. I think we have time for one more here maybe. Here’s a nice bread and butter question from Eric Payne. Hi Buck. My question: is it better to continue to invest as an individual limited partner myself or to set up and use an LLC investment company that is the go-between for these investments? I’m looking at asset protection and also potentially moving investments into a trust at a later date. What would you recommend to make it easier in the future? This is a very useful question because we can review a couple of different things. First of all is Eric out of his mind for not using an LLC to and make his investments in the first place? No he’s not because as a limited partner he doesn’t really have any liability from the building or whatever it is that he’s investing in right? So if it’s a multi-family building, somebody slips and falls, well they’re not going to sue Eric, he’s a limited partner. He has limited liability that’s why it’s a limited liability company and he is the limited part. So anyway that’s why he doesn’t need it. Now however as an individual, if he invests as just as an individual, I don’t know if I would recommend that either Eric because you’re doing that if you just want to invest as an individual you should probably at least use what is known as a living trust and the reason for that is that any of your investments if they’re in your own name and you die they will end up in probate and your children and your heirs will not get access to that for months and months and months and it’ll cost a bunch of money. So if you simply have say like you know an Eric Payne living trust which is easy to establish for a couple of grand from any estate planning attorney has your own social security number and you invest through that, that eliminates that problem altogether. So I think at the bare minimum that’s what you need to do. Now the next thing the next level and again, remember, I am not an attorney or a CPA or anything like that. I’m just a guy who does a lot of this on my own. So I’m just giving my own opinions and what I do. So I’m going to tell you what I do and what a lot of people do because while Eric you don’t have liability from the property itself, you are a doctor and you have a lot of personal liability and you drive a car and you have that kind of personal liability. If you hit somebody or something like that you could get sued and because when you’re driving a car and you hit somebody that liability is against Eric and if your investments are all titled to Eric well they become target for any sort of lawsuit and collection. So that’s why a lot of people choose to use an LLC because in especially in a state where there’s good charging order protections for LLC’s it’s a very useful device to create a level of protection against you as an individual in your liability and your investments. So that’s why a number of people in our group including myself use LLCs like a holding company in order to you know deploy capital or limited liability investments and then you know that’s also where you get your money back and so it makes it kind of you know a little piggy bank for your investments. Now as for moving to a trust this is also a very useful thing because what you can do and what I’ve done in the past is you could have a holding company and say that initial holding company is owned by Eric living trust say it’s owned by Eric living trust and Eric is the sole member and Eric is the manager, what you can do at some point is just make it so that you can move that whole holding company and move the ownership over to a trust. So the sole member becomes the trust rather than Eric and you’re still the manager but now it’s in your trust so it makes it really easy. So that’s what a lot of people do they end up having a manager-managed LLC holding company in a state where there’s good charging order protections such as Arizona or Wyoming. I think Texas is good too but I’ve never done a texas LLC. I’ve always done Arizona or Wyoming mostly. I’ve done Wyoming but now I’m doing Arizona because there’s a lot less stuff you have to do in Arizona to keep the LLC and then as you have a manager-managed LLC in one of those states and then and then basically you have all the flexibility in the world. So hopefully that answers your question. I think it’s a good move.
One other follow-up question that I had via email and privacy issues I won’t say who it was because I don’t know if he wanted me to bring his name up about this but there was some question. Somebody asked me a question about he was getting divorced and wanted to know what to do about the all these limited partnerships he had invested through well with the 50–50 split with his future ex-wife. So unfortunately I have some experience with this but you know having that LLC with the investments and holding company actually made it really easy because you know instead of trying to create you know do a valuation of these things and spending 20 30 grand or whatever, what we did in our case was there was a bunch of investments in a holding company and you know we’re friendly and we just said okay well we’ll just be 50–50 partners on this holding company. We’ll take it out of this trust and that money as it comes out it’s 50 mine 50 yours. So it made it that easy for that purpose too. So anyway that’s the little additional bonus for those of you going through any sort of divorce situation. Anyway, I think that’s about it for questions today. Let’s take a break and we’ll be back right after these messages.