Tonight let’s take a look at what’s possible when times are, uh, not normal — whatever that is. Believe it or not, I was in the business over three decades before I saw interest rates below 7%. Think about that. My perception was that 7% was the best rate possible. When in 2003, one afternoon for about 90 minutes, rates went just under 5%? I thought maybe I’d accidentally ingested an hallucinogenic — I knew 4.9% was fictional. There was no other plausible explanation.
I tell you that to give some perspective to today’s goings on. Step back and really get the lay of the land. What we have here, say my long gone, but never forgotten mentors, is a failure to communicate.
We used to have meetings at the Wenchell’s Donuts down the street from my office. We’d get there at 7 AM. The owner let us use his little cubby hole of an office. Over what I still believe is some of the best coffee ever, and 15 minute old apple fritters, they’d start talkin’ about real estate investing in general. One such meeting found me whining about double digit interest rates, and the state of the local market — i.e. just this much better off than death on a cracker.
Almost on cue, they all began wiping phantom tears from their eyes while they openly mocked me into embarrassed silence. I was 31 at the time. One of them had a 20-something year old grand daughter. They threw no empathy my way. They did do their job though, and really took me to school that morning.
Here’s a tool most haven’t ever heard of, much less used. It’s been a real lifesaver in the several down cycles I’ve experienced.
First of all, while it seems cool to throw around phrases like tax deferred exchange or 1031, the exchange itself is merely another tool in the shed, albeit a sexy one. There’s a certain allure to the deferral of one’s income taxes — I get it. But think about it. There have been dozens of times when an exchange would’ve hurt one of my clients. A hammer’s a must for any carpenter, but they don’t use it to saw wood, right? It’s about knowledge and expertise.
Sometimes tools come in the form of simple knowledge. Did you know that unlike being pregnant it’s possible to do a partial tax deferred exchange? Yep. Not only that, but I’ve constructed (designed?) transactions over the years, combining exchanging, installment sale treatment, cash flowing directly to the seller/client, with hypothecation as the cherry on top.
Define hypothecation? Sure — Most simply put, it means you’ve pledged a financial instrument (in this case) — in return for (usually) money. The instrument is either returned to you upon the repayment of the money you received OR the instrument itself gets paid off — simultaneously resulting in the payment in full of the pledge.
Let’s say you own a note secured by a trust deed. A bank (or anybody) lends you some money, charging 2% more than your note rate. The payments are amortized to pay off in five years, the same time your note is due. They’re also equal to the payments you’re receiving.
1. With very rare exceptions, none of which I’ve ever seen, hypothecation is not a taxable event.
2. You’ve gained access to cash without incurring another payment. Remember, your payment to the lender and the one coming to you each month are the same amount. You’ve entered the payment neutral zone.
3. It can mean the difference between getting something done or not.
4. Often it works as a tool to access tax free cash while you wait ’till your note/TD pays of in a more favorable tax year. So by default, sometimes it’s also a tool for tax planning.
That’s not every benefit, but you get the drift. So much of what’s available for use in your real estate investment toolbox is wasted. It’s not your fault, you don’t know what you don’t know.
Was gonna go through more ‘tools’ but don’t wanna write a book here. I miss those guys. For several years they took me under their wing and taught me, brutally sometimes, what was what. What’d it cost me? Donuts and coffee — bargain of the century. That kinda mentoring pretty much isn’t done much any more, and that’s a shame.
More tools to follow.
The first and without a doubt, the most effective tool you’ll ever employ is your own Purposeful Plan. It’s the foundation of a magnificently abundant retirement. If you’d like to talk with me, I’m easy to get a hold of. Have a good one.