Category Archives: 1031 Exchanges

Long Term Relationships — Video

Over the years one of the most asked questions aimed my way is, “Long term relationships with your clients — how does that work?” I talk about that here.

 

Transcript:   Hi this is Jeff Brown the “BawldGuy”. So many times, callers that are new to me want to know, “Long term, what is our relationship?” And over the first part of what we do is easy. We figure out where you are as an investor. Maybe you’ve never invested before in your life, but you have the assets to make it happen. That first round basically becomes mechanical. You buy this. You buy that. You kind of get things set up. But what really happens, and where I try to bring as much value to the table in the long run is, how do we adjust that plan when things outside of our control come to the surface. Interest rates are low now. What happens if interest rates go to 9% or 10%? What happens if for some reason unemployment rises. There’s all kinds of things that can happen. How do you do it? Well, flexibility is always the number one thing that is required in any purposeful plan, and the reason is, you adjust. It’s very simple. You never say, “I’m going to buy this asset. I want to buy that asset. And in five years we’re going to sell. We’re going to exchange. We’re going to change this.” Looka, I put my crystal ball into the repair shop in the late 70s and it’s still not come back. I’m tired of wiping egg off my face, and I stopped predicting beyond tomorrow. Now, I still talk to clients, and I’ll say, “Well, in six months or 12 months.” But I still buffer that with the idea that that’s a given that these factors remain intact, because we just don’t know. So what I tell people is, there have been times when I’ve had clients, I just say, “Go take a vacation. We’ll talk next year.” During the S&L crisis, I personally, for all intents and purposes, took two years off, and I told my clients to do the same thing. There was nothing they could have done prudently, unless they had eight figures of money, because all the various government entities who were getting rid of all the problem properties were only selling to the big funds and the big players. A lot of times, even guys that had $20 million couldn’t compete with the billionaires and the big funds with $100 million. So we don’t know what’s going to happen. Sometimes, I say, “Look, we’re not going to assume any appreciation.” But what if it happened? I might come to people that bought a year ago, and in three years the atmosphere is okay, and I’d say, “You need to do a tax-deferred exchange, and here’s why.” Or I might say, “We’ve done some other strategic planning for three or four or five years ago. You’ve executed your part of it. We’re going to get you half a million dollars of after-tax cash in your Levis. But when I previously told you that probably buying more real estate would make sense, well that’s not true anymore. Now you need to buy this, or you need to increase your cash reserves to this amount.” We just don’t know. Here’s the thing, and here’s the takeaway to planning. Whenever you can increase the options on your menu significantly, you do it. Because even though it’s true that the man with the gold wins, the investor with the most options wins, and that’s the whole idea of purposeful planning. You’re trying to get from point A to point B, which is retirement. You want the safest income tax sources you can get. You want the most after-tax retirement income you can get. But you also want the flexibility, and you want the ability to move when you can, and you can only do that if you have more options than the other guy. A lot of people ask me after talking with me one or two times, usually for over an hour each time, we get very in depth in our conversations. They want to know, “Jeff, you’ve never asked me to pay you a fee for your time. You freely give of it. How do you get paid? I know you don’t donate your time.” And it’s very simple. I’m not special. I’m a broker. If you buy a piece of real estate from me or a note, I get paid by the note seller or the seller of the real estate. It’s just that simple. Now, I have a retainer. That’s $3,000. And that $3,000 is taken only to make sure I get serious investors. As soon as they do something where I do get paid, they get that $3,000 back in the next two to seven days in their mailbox. I don’t want their money. I don’t need their money. What I’m avoiding with that retainer is to avoid wasting my time. My own CPA tells me at least twice a year that he figures I save 400 to 500 man hours a year of my own time by having a retainer, and ensuring that I’m only dealing with serious people. But again, they get it back 100% within two to seven days after they do something where I get paid.

Real Expertise — Video

Everyone’s an expert. But when the Firestones hit the pavement, what is real expertise?

 

Transcript:   Hi this is Jeff Brown the “BawldGuy”. Today, we’re going to talk about real expertise, especially when it relates to teams and real estate investors and who should we really believe. I maintain experts in every, even minor, topic as it relates to real estate investment. I’ve done that for the last 25 years. Most people who know me know I’ve been licensed for over 40 years, so I was a slow learner, thought I knew everything. What a joke. It just doesn’t work that way. The biggest problem is, is when we do acquire just enough expertise in a subject to think we actually know where the bodies are buried. It just never works out, because that goes back to my very, very favorite BawldGuy Axiom, and that is, “It’s the answers to the questions we never know to ask that ends up biting us in the end,” so we have to have real expertise. This is why I make sure I get the best most reliable investment lenders. I do the same thing with insurance and all the rest of it. The idea is to have expertise on the team in every possible topic. Let’s move and start talking about some of them. One of them, for instance, would be CPAs. I’ve had a love/hate relationship with CPAs my entire career. Their problem is the same problem they say real estate investment brokers have, is that we both sometimes tend to think we know more about the other guy’s practice. It’s just a huge mistake. I have gained an enormous respect for real estate investment-related CPAs because, man, they bring answers to the table that nobody had the questions for, and they do it all the time. I have learned enough to understand that if you don’t have a real estate-related CPA on your team, you’re just playing games. It just is not the way to go. Let’s talk about management. Management is one of those things where that’s all you want them to do. You don’t want them to address anything else. You don’t want them to give their opinions about anything else. We don’t care about management’s opinion on the viability of any particular piece of property. If they have something to say about its rentability, we are all ears, and we’re going to shut up. We want to know what their professional opinion is based on what they do for a living. The rest is just worthless and absolutely hurtful. I could go over example after example of people who have listened to so-called professional management opinions and not only lost out on investment properties they stopped the purchase of but end up having more cost because of it. Same thing with qualified retirement plans. How much do you really know about 401(k)s? About self-directed, not self-directed? About traditional, about Roth? You get the point. Get somebody who knows. That’s why I have John Park. The guy’s forgotten more than I know about this stuff. My clients love him. I always tell people, they ask me a question about it on that topic, I will give them an answer. Before I give them that answer, I say, “Look, you’re going to ask the same question when we hang up of John Park. If he gives you a different answer than I just did, forget what I told you. He’s the expert.” I will say the same thing about David Shafer in EIUL, builders, lenders, all of them. Let’s talk about lenders in an example of how getting an expert lender isn’t as easy as most real estate investors might think. They will always tell you, “Oh, we do investors all the time. That’s a big part of our business.” I switched to investing during the years ’76 and ’77. I opened Brown & Brown with Dad in January ’77. I can tell you right now that I have known three lenders in my life that knew about lending on two to four units to investors. One of them is Chad Emerson, the guy I have in Texas. Here is the question you want to ask these lenders. You don’t want to get super sophisticated with them. You don’t want to play who knows more. Here is what you want to ask: “Out of your last hundred loans that have closed, how many of them were investor loans, and how many of them were owner-occupied loans?” If you ask Chad that, somewhere between 92 and 97 of those hundred loans are going to be to investors. That’s the answer you want to get. The rest is happy talk. With builders, yes these builders build this fourplex. I just had a client recently fortunately get out of a transaction in the general Austin area … San Antonio, excuse me, of Texas where the builder ended up in midstream wanting to know if they could take over the financing and finish the building. Really? That’s your expert, two to four-unit builder? No. Ask the builder how many income properties have they built in the last 10 years? The builder I use, they’ve specialized in it since before Reagan was in office. That’s good enough for me. Let’s move on to an example of what happens when you use a wrong expert in a 1031 exchange. I get calls all the time that say, “We’re going to do a 1031 exchange, and we’ve sold the property.” When you sell the property, you’re going to get a situation where you better have an accommodator. But what this guy said was he already told the seller of the property that all they had to do was keep the proceeds in the escrow in which it had been housed to begin with, and then they had a certain amount of time to find the property, and then somehow, they had to tell their escrow what property they were going to buy and all that. Here’s the problem: As soon as that escrow closed and those proceeds went to him, regardless of whether they stayed in that escrow or not, they were under his control. That was the end of his 1031 option. It just wasn’t going to happen. They got everything else exactly right, the timing, what had to be done mechanically, everything. They missed one fact, and that fact was that the investor in a tax-deferred exchange can never be in control of the net proceeds of the property they’re relinquishing, the property they just sold. That’s what the IRS calls them, the relinquished property. Their expert, in this case, it was a combination of their house real estate broker and the escrow officer who pretty much thought this was the way to go. Are you kidding me? I said that the property had closed. It actually was a day before closing the loan had closed. They even screwed that up. I called the escrow officer. I said, “I now represent the seller,” and they stopped the closing. I set him up with my local accommodator. They then had a special closing that afternoon in real-life closing. Nothing changed, and we saved their 1031. How much did that luck save them from paying in taxes? In that case, it was literally over 40 grand in cash. Get the right expert. Man, I hope this helped you. This is Jeff Brown, the BawldGuy. I’ll see you next time.

When To Make RE Investment Portfolio Moves — Video

One of the most often asked questions clients have for me is when to make RE investment portfolio moves. That is, how do they know when it makes sense?

 

Transcript:   Hi this is Jeff Brown the “BawldGuy”. Today we’re going to discuss when investors should make portfolio moves. When at least one of your properties has enough net equity to significantly improve your status quo that might be time to make a move, if the market’s going to allow it. Let’s take a look at an example. Let’s take some West Coast investors who have a free and clear condo worth 350 which will net them about 320, 325 after selling cost. They have a lot of options. Let’s take a look at a few of them. They can trade in to a free and clear duplex using unencumbered cash flow to then increase the velocity of the loan elimination for the rest of their portfolio. That’s a significant benefit to be sure. It gives them the luxury of saving time, something we usually can’t buy. Saving time is always good. They could use the proceeds to acquire properties twice as valuable as the one they left. The IRS, by the way, calls that the relinquish property. They could execute option A then refinance that free and clear property for 70% of the value. This is not even a taxable event. They then have the tax free cash for whatever their plan requires, maybe notes. We’ll talk about a synergistic combination of strategies that will demonstrate empirically how to grow both capital and cash flow without getting into your savings nearly as much as you’re used to. When should they opt for any of these choices? When the results of the move improve your status quo tremendously that’s when, if not don’t make the move. If you’re going to go through all the hassle of selling and/or tax divert exchange, at least get a commensurate reward for it. It’s a tremendous hassle, don’t do it for nothing. In this example, their options are all pretty enticing right? The worst one is trading into a far more stable market with a much better economy than where they are. The net operating income on a new property completely skunks the one they got rid of. Furthermore the market to which they’re exchanging is where most of their portfolio resides anyway. If they trade for much more property, they will not only have increased their ultimate retirement income but their annual deprecation too – but we digress. The take away here is simple, unless the move your contemplating is a no-brainer, don’t do it. The results must be a significant improvement in your status quo or it simply won’t be worth the hassle. This is Jeff Brown, the BawldGuy. I’ll see you next time out.