266: Ask Buck! Q2 2021 Part 3
Catch the full episode: https://www.wealthformula.com/podcast/266-ask-buck-q2-2021-part-3/
Buck: Welcome back to the show everybody. Okay, let’s start. You know I’m always biased towards recorded questions because then I don’t have to read them and I don’t know just I like them better so I’m going to start with some of the recorded ones that we have and I’ll start with Kelly.
Kelly: Hey Buck. This is Kelly in Austin Texas. I noticed a couple years ago you had a couple of webinars and podcasts about life settlements back in 2018. I haven’t heard much about that lately. I’m just curious if that’s still something that you think is a good strategy in the current conditions. Would love your input.
Good question. So first of all let’s start out. What are life settlements? life settlements basically, so it’s an interesting concept. So life insurance, cash value life insurance like you know, like Wealth Formula Banking, like Velocity Plus these things, they are products that are considered assets right, they’re basically a life insurance policy, is an asset. And the supreme court made that decision almost 100 years ago when there was some issue basically with a patient who didn’t have any money and he needed some surgery and the surgeon said well what else you got and the guy said well I have a life insurance policy that you can have. Well, I don’t advise that by the way, I mean don’t put your life in the hands of somebody who will benefit from your death. But anyway as it turned out, this person did fine during the surgery but eventually did die. When the surgeon tried to collect, there were some issues with that and then it went all the way to the supreme court and the supreme court said yep that was an asset and it was transferred to this surgeon and therefore he owns it. So that is a life settlement, when you transfer the ownership of a life insurance policy to a third party when you sell it away, it becomes a life settlement. Life settlements, as you can imagine, are potentially a very valuable type of investment because as of right now, everybody dies right. So everybody dies. So essentially, what you’re doing is you’re buying basically at a discount a death benefit that you’re going to eventually get. And the rate of return you’re going to get on that is a little difficult to predict because every year a person lives, your return goes down. So usually what you do is you rely heavily on these kinds of actuarial studies and that kind of thing and you get a pretty good idea of what your investment might be. It’s obviously going to be more accurate if you have a whole bunch of policies that are in a fund because then they kind of average out, right. Some people live longer than they’re expected to, some people live less long, and so on. Now, we used to do some of this in the investor club and it’s still something I think is really valuable, but one of the reasons that we’ve stopped kind of talking about and doing things Kelly is frankly because you know the cat’s out of the bag, right? I mean this has been going on for a while. But it really wasn’t something where retail investors were participating in much and now they are. And so before we were just you know we were buying them alongside Berkshire Hathaway and you know other major companies. but now, the price is, like everything else, has gone way up. And right now, at least from what we’re seeing, it’s not really making sense to buy anymore. And so that’s why we’re not. So hopefully that answers your question. but in theory, it’s a very interesting thing. There’s not a lot of tax advantages to this kind of investing so that’s another consideration to think about, you know, people have typically done it through qualified accounts where they don’t have to worry about the tax implications and all that.
So all right, let’s see. What’s our next question here? Hi Buck. I love your podcast and I’ve already participated in three investment opportunities thus far. I’m about to move forward with the Wealth Formula Banking solution but I’m deliberating on what the ideal minimum-maximum annual contribution levels should be. My current plan is to place 100 percent of all newly created post-tax surplus into the policy and then always use the simple interest loan feature to fund all new investment opportunities moving forward. I don’t see a downside to doing this, but this method is completely new to me. So can you tell me if this closely matches your own investment strategy using Wealth Formula Banking? And if not, then would you share what the pitfalls you think my strategy might present as well as what your general strategy is with regard to utilizing the Wealth Formula Banking solution in conjunction with funding your investments. I’ll save you some time by stating that I understand that you are not a tax professional or an attorney and that you are not giving me financial or legal advice. Thanks a lot, Buck. Well, that’s funny because I was just about to start down that way. so yes I’m not here to give you financial or legal advice etc. Now listen, first of all, what is Wealth Formula Banking? If you don’t know what Wealth Formula Banking is, make sure you go to wealthformulabanking.com and watch the webinars. Powerful, powerful concept. Essentially what you’re doing is you’re using a type of life insurance policy that has a cash value to it that’s growing at five, five and a half percent compounding, and essentially what you do is put in the capital there, and then when you invest in something, you’re borrowing out money from your life insurance policy. But here’s the kicker, the money you’re borrowing actually stays in the account and continues to grow at a compounding rate. What you’re doing is you’re borrowing from the insurance company essentially using your own cash value as collateral. And when you borrow, you’re borrowing at a simple interest. So essentially what Lane is talking about is using a very powerful technique to invest your money in two places at the same time because it’s growing at five, five and a half percent compounding. Then you’re borrowing it, maybe you’re buying it four, five percent but usually probably less these days. But it’s not compounding. So there’s an arbitrage between not only the number, whether it’s five or four percent, you have that one percent, but also the arbitrage between compounding interest and simple interest. And so essentially what that does is that it creates an additional layer of leverage to every investment that you do. That is the power. And what we think is the true benefit of Wealth Formula Banking is double-dipping investing the same capital in two places at the same time and essentially juicing up your cash flow investments. To the question of how much you put in there, Elaine, it’s a tricky thing. We talk about this all the time. But you know listen, the bottom line is that remember that you’re going to get the most benefit out of it if you maximally overfund it. So Christian and Rod are good at reverse architecting this thing so that you can come up with what you’re planning on dedicating every year. So maybe it’s a hundred thousand dollars per year to maximally over-fund a policy. Well, they can create a policy that will show that if you consistently do a hundred thousand, you’re maximizing the over-funding. So I tell you that because that’s really the question. It’s not about how much to put in, but it’s really how much can you comfortably put in and know that you can put in the same amount for several years in a row right. So if you say you made a commitment to over-fund up to say it’s a hundred thousand dollars per year, but some years you weren’t able to do the full hundred thousand dollars, well you’re not gonna get hurt by it. But if you can only put in like 75 grand into something that was structured for a hundred grand, then you’re not going to maximally benefit from the strategy. So I don’t think there’s anything inherently flawed in what you’re doing. A lot of people do it but I think you have to be really sure that over the course of however many years you’re planning to fund that. You feel like that. The number that you’re working with is a number that is fairly easy to achieve. So in my case you know I’ll have you know a certain threshold that I know that I’m gonna have at least this much in my account at a given time for investments and that’s the amount that I will put into that. So hopefully that answers your question. I know it’s a little complicated and of course, we don’t wanna give you financial advice and all that mumbo jumbo but the bottom line is, make sure that the way that a number of people are doing it is they’re saying what is the highest number that I know I can fund per year and not feel like I don’t have I won’t have enough money to do that, understanding by the way that you’re going to be able to within 30 days or so borrow back the majority of the money that you put in, so it’s not like you’re creating money that you can’t get access to, but you got to have a threshold of money that you can put in as a lump sum. Okay so that’s good.
I think Lane has another question. Let’s move to that one. Hello again Buck. A while back you mentioned that you were looking into some potential solutions that might solve the issue of not having enough or any passive income that can then be offset with the passive losses created by these passive investments. Anyway please let us know if the idea is dead now or if you are still in the process of validating and vetting this solution because I am not a real estate professional that generates passive income and neither is my wife and there may be others in your listenership that are in the same boat. Anyway thanks again, Buck. Well yeah so there was a show we did actually I did with Tom Wheelwright not too long ago and you’ll have to look it up but the last Tom Wheelwright show I did specifically talks about passive income and different ways to potentially convert business income and that kind of thing into passive income. So I’m going to defer to that again just because I don’t want to give you any legal tax advice. But in a nutshell, the idea is behind structuring various types of businesses that you have. Now, if you’re a w-2, there’s just not much you can do right? But if you at least have some business ownership, say you have a practice and all that, there are ways to structure businesses so that maybe ownership isn’t per se. It may be your spouse or it may be your children, in which case that income becomes classified as passive income. So those are the types of strategies that you really need to look into and you need somebody like Tom or another tax professional to do. So what I would suggest is going and looking at our last interview with Tom Wheelwright about passive income. I think that’s even in the title, something about passive income. Now, you know another option is for w-2 people you gotta start somewhere, right? So you know I think you know Ian Kurth was on this show last week but he’s a classic example. He’s a w-2, he’s got that kind of income, but he has, over time, created a number of vehicles that create this passive income for him. If you want to jump-start, there are certain things that are heavily weighted on cash flow and not as much downstream like real estate. And a good example of that is the ATM offering that we are talking about wfvelocity.com. But if you can really jumpstart the amount of passive income that starts coming through then you can kind of build on that wave if you’re a w-2 person. But in terms of the creative stuff, it really has to do with people who are in one way or another business owners or practice owners. Right now that’s where there is opportunity. But I encourage you to go listen to that past interview with Tom.
Okay, next question here and I guess we’re done with the recorded ones. Okay, the next question is from Mike. Buck, as I move along in my journey I have many deals that are offered to me. I understand the importance of doing the homework, understanding the numbers, and doing business with people you trust with a good track record. I have heard that from you and other trusted sources. Now here’s the question. When you started out, who was the person on your team to bounce things off and weigh options and investments? All these decisions have CPA legal and investment portfolio impacts asking one of these individuals questions. I typically get incomplete answers. Who did you rely on most when you were getting started? I’m sure over time this will be rectified with a team that I will develop but I don’t have that now. Okay, well listen. It’s a good question and for me, here’s how it worked, okay it was really the school of hard knocks. Okay, I can’t say that I did the best. As a passive investor before, I was involved with private equity myself that I started making investments that always were the best investments. And so for me, it was a little bit of the school of hard knocks and trying to educate myself along the way. I think there’s a couple of parts to your question. One is and I think you also address part of it which is you know determining first of all what is it that you’re looking for, right? Are you looking for tax mitigation? What kinds of investments are those that provide tax mitigation or what kinds of things that you need to put into different kinds of structures and all those things? I think you can learn from the professionals like CPAs and I think you can learn from them, from your attorneys right, and the CPAs, if you have a good one. I’ll say hey yeah you know if you find an investment like a real estate where they’re doing a cost segregation analysis bonus depreciation, we might be able to save you some money and the same with legal. They’ll say well yeah and if you do a limited partnership you know and maybe you won’t have the legal implications if something goes wrong and here’s how you need to structure your own stuff, that’s very different from actually finding the team that you trust with your money because once you find what you’re looking for, whether that’s tax mitigating investments in real estate that sort of thing, the onus then shifts to you to find the jockey. The jockey meaning the operator who is going to make you money and is going to perform that you really do need to rely heavily on. The things that we talk about: know, like, trust. But in addition to know, like, trust, track record and you know sometimes you just get a sense of what people are doing and it just starts making sense. If you’ve been with Western Wealth Capital long enough, you know I mean these guys are just making money hand over fist year over year and the track record is there. And so for me, and for many other investors, that is a trusted group. Now here’s where you have to be a little bit careful because you have to become the expert. You have to become the person who can identify a really good group based off of numbers and based off of track record. Based off of your own personal instincts because. You do not want to rely on your CPA and your tax professionals to do that. They don’t know any better than you. I guarantee you that the most sophisticated CPAs that I know are not necessarily the best investors right, they may know the rules and what they’re after, but that doesn’t mean that they know who to invest with. The nuances of that really are totally different than the professional support that you’re going to get. So I don’t know if that’s going to help you much Mike but I would just tell you that, you know get your foundational information. What are your goals? What are you trying to accomplish and all that from your professionals, from your CPA, from your legal team, and all that. But when it comes to actually picking the jockey, picking the teams as a potential partner, that’s really going to be you and it’s going to be about vetting them over time and taking some leaps of faith and using common sense about track records and that kind of thing. There’s no way around it. And I pretty much guarantee in most cases that your CPA and attorneys aren’t going to know more about where to invest or what’s a good investment than you do.
So all right. Let’s see. Next question. Eric is asking: is it better to continue to invest as an individual limited partner myself or to set up it 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? So I can’t recommend, as you know. I can’t tell you what to do exactly. I’ll tell you what a lot of people do. I’ll tell you what I do. So what’s the idea behind setting up an LLC for your investments in the first place, right? I mean if you are a limited partner, which you are in syndications typically, why would you bother? I mean after all, you have no liability yourself, right? You are a limited partner. Well the reason a lot of people including myself use a holding company structure to deploy capital is not because of the liability that comes from the asset, it’s the liability that comes from everyday living. So if I hit somebody in my car and they sue me, in theory, the LLC provides me some layer of protection. My assets are not owned by me individually where they become an easy target for a creditor, they are owned by an LLC. And if you have an LLC domiciled somewhere with good charging orders, that provides you potentially good protection. So that’s why most people are using the holding company. I think the other thing is on a practical basis, sometimes it’s also helpful just to have all those K1s go into one LLC and provide one K1 for your CPA that’s another practical reason to do it. Now, your question about transferability into trust and stuff, what I’ve done with that is if, and again this is not legal advice. I’m just telling you one possible way of doing it, is that I’ve taken a manager-managed LLC. And it doesn’t matter who the members are initially, but you’re the manager and then you can have that so eventually if you want to move it into a trust, basically the trust becomes the sole member, but you’re still the manager. So that also gives some easy flexibility into what you want to do in the future. But hopefully that makes sense. But Doug Lodmell is a good person to talk to if you want to discuss this further on a legal basis.
All right, next question. Andrew. Hi Buck. Thanks for putting out such a great show. I’ve been intrigued by the ATM model. That’s wfvelocity.com by the way. Do you think that model could be extrapolated to EV charging stations? They seem like similar business: depreciable upfront hardware technology then fee for each use of advertising, has also sold rent for additional income with Biden’s plans there is a big 20-year future demand. Thoughts? Follow-up question: what about crypto ATMs and international ATMs? Well, Andre, all these are great ideas. Now the challenge, and we talked a little bit about this earlier with questions from I think from Mike about choosing who to invest with or how to invest, you may find lots of different interesting models, right? You might, you know we talked about ATMs here. We found a good model that works for ATMs. You’re right, it sounds like the EV charging stations would be a good concept. I know nothing about them but yeah from what you’re telling me here that does make good sense to potentially invest in. And bitcoin ATMs, we might actually potentially be involved with that in the near future. But here’s the problem though, right, fundamentally, investors have the same problem that sometimes entrepreneurs have. It’s a little bit of a shiny objects problem right? Really good investing generally tends to be kind of boring and rinse and repeat and it’s not that what you’re talking about here are not potentially good investments, but remember, that as a passive investor, it is as much about the team and the operations and the track record as it is about the asset. And everything else, everything that you’re talking about makes a lot of sense, but if you don’t have people with experience in the space, you’ve got a solid business plan who can execute, forget about it, right? I mean it doesn’t make a difference. Same thing goes for real estate. You know we’re buying these assets and you know in many cases coming out with great outcomes for investors. But if another group bought that same asset, they might lose money, right? So I think you’re right. There are lots of options here. But what I want to be very clear about, and I think it’s important for our group and in general for investors to think about, is be careful with the shiny objects. Let’s focus on, okay that makes sense, but is there a team that we can know, like, and trust with a track record that can execute on this? That’s really what it comes down to.
All right. Last question. And I think this is pretty much it. I think this is all we got for this round of Ask Buck here. So this question is somebody who wants to be anonymous and it says, I have a question about not sitting on cash. I’m a single woman previously married. No kids. Just turned 40. I own two condos each worth 600,000 which I bought cash as my business does not generate a lot of income and could not get a loan. I live in one and rent the other. After purchasing my business, I now only have 150,000 in savings and 200,000 in 401k which was split after a divorce a few years ago. Could you please give me some specific suggestions as to how to grow this cash and position it so as to prevent it from losing its value over time? Thank you very much. So yeah. Honestly, I can’t, first of all, I can’t give you advice legally on how to do any of this. But you know, I think that the challenge you’ve got here is that there’s a difference between assets that won’t lose money over time and actually cash flow and it sounds to me like you’ve got a problem potentially with cash flow here too. What I will tell you is if it was me and I had real estate that’s completely paid off, I would try hard to refi in any way I could. That said, you have a situation here where you’re not generating a lot of income so you can’t get a loan. So that makes it difficult. However, if it is cash-flowing real estate, you may be able to find somebody to give you some debt on that to pull that money out and redeploy it somewhere else. It’s a tough question you’re asking because really it’s a global problem. You’ve basically got some assets but you don’t have a lot of income. Investing is very difficult without income. There’s no two ways about it. And I think you know if your business is not generating a lot of cash, that’s kind of where you got to focus. I think if you’ve got money in real estate now, then you for you and particularly if you’re local to this area, Santa Barbara, Montecito, it’s going to probably be worth a lot more in the future. However, the thing that you have to distinguish between is income and investments and it sounds to me like it is not so much of an investment problem that you have as much as an income problem, right? So, unfortunately, that’s sort of out of the scope of most of what we talk about, although it does remind me a little bit about some lessons that we talk about when it comes to getting involved with businesses. You know I think entrepreneurs are interesting people because a lot of times, they’ll go after things because they sound like they’re fun businesses. This is what I can do and this is cool and it’ll make me some money. But one of the things you have to be really careful about is if you’re spending all your time on a business and it’s not making very much money, understand that there is almost certainly other business that you could spend the same amount of time and make a lot more money and I hate to say it like that because of course it seems so simplistic but it’s the truth. I’ve been in bad myself on businesses where I can spend the same amount of time and literally make you know 10 times more and with not a whole lot more work. So part of what I think you may need to do in your situation if I’m you is to re-evaluate what you’re doing with your business and your time. You may not be in the right business if it’s not generating income and investing is, frankly, unfortunately, it’s really the privilege of those who have a lot of income in terms of what you have right now. Again, you know I’m biased and I can’t give you advice, but certainly I think owning real estate is solid. I don’t think that there’s a whole lot more I can give you. And in terms of the 401ks and all that, again, I just can’t give you specific advice on what to invest in but I would again try to make it, if I can help in any way, it would really just be to ask you to focus and think about what you’re doing as a business and you know what could you potentially be doing that maybe has less overhead. Maybe it has less moving parts, less risk and maybe, more importantly, a higher upside because if you’re in a business that relies on you, you’re in a business that the more you work, the more money you make and if you take a day off you lose money that becomes really hard. So anyway I don’t think I was very helpful at all for that question and I apologize but there’s certainly lots of shows out there other than mine that might do a better job. But I think you got to evaluate what your business is and whether you want to continue doing it. Okay well let’s take a break and I’ll be right back.