Financial Education and Entrepreneurship for High Paid Professionals
Financial Education and Entrepreneurship for High Paid Professionals
183: Investing in Collectible Cars!
By now, you know my paradox. The more I invest in real estate, the less I pay in taxes because of my real estate professional designation.
It could be worse. I could not have the designation and not be able to apply passive losses to all sources of my income! It’s a good problem to have.
My situation makes me think about the profound impact of the basic tenet of microeconomics. That is, people do things because they are incentivized to do so.
In my case, I am incentivized to invest in real estate. Because I have profound tax advantages from investing in real estate, it makes me hyperaware of investments and expenditures that do not have any tax advantage.
It’s the reason that I won’t even consider investing in the equity markets. If I’m operating outside of my real estate happy place, there better be tremendous yield potential (ie bitcoin), a benefit beyond just the investment itself (Wealth Formula Banking), or something else compelling.
As a car guy, this has put me in a difficult spot. I love cars—especially Italian sports cars. But buying a Ferrari off the lot just makes no economic sense at all. It’s guaranteed to depreciate by no less than 50 percent over the next 20 years. Then, it may or may not start to regain its value.
Another option I have considered is focusing on maximally depreciated sports cars—say something from ten or fifteen years ago. At least then I wouldn’t have to worry about losing value as much.
What I would really like to do eventually is have a collection of classic cars. I’ve mentioned this before and almost did pull the trigger on my first acquisition a few months back after a perceived near death experience. But the microeconomic incentives once again prevailed. I also realized that I didn’t really have the garage space to park a multiple six figure investment.
So…for now, I am still driving my Prius. However, to be clear, I still love the idea of buying nice things that will likely appreciate over time. Nothing you buy from Ikea will ever go up in value. So, why not buy some things that are more expensive that you can enjoy for a lifetime and sell them at a profit someday?
Anyway, I will follow my own advice soon enough when it comes to cars. In the meantime, I have found a super cool business that allows you to own a fraction of your favorite classic or rare supercar and trade it via an on-line marketplace.
The business is called Rally Rd. and it functions solely as a mobile application. It’s a fascinating business model and one that you may particularly enjoy if you like to combine your hobbies with investing.
This week’s Wealth Formula Podcast features an interview with one of its founders, Rob Petrozzo!
179: Buy, Borrow and Die: Bitcoin Style
I am in a financial position that may seem somewhat unusual to you. You see, the IRS rewards me for my real estate investments by taxing me less. If, on the other hand, I keep my income in the bank, or invest it in traditional equities or bonds, the IRS shows me no mercy!
Admittedly this is by design. I am a real estate professional. One of the great benefits to that designation is that all of my passive losses flow through my personal tax returns. In other words, all that depreciation and mortgage interest I get by investing in real estate not only builds my net worth, but SAVES me money in the form of tax mitigation. Not a bad deal right?
To illustrate the power of these completely legal tax advantages, remember that with bonus depreciation even limited partners often end up with K1 losses of 50-100 percent of invested capital. Those losses add up in a hurry!
With that perspective in mind, why would I EVER consider investing in anything that is not tax advantaged? Think about the returns I would need to get in order to simply break even with the tax breaks I’m getting from investing in real estate. The returns would need to be HUGE. I’m not going to get that through Vanguard ETFs!
In fact, I truly believe that the only way I can get higher tax equivalent returns on capital is by investing in asymmetric risk type investments. For me, that means a little bit of bitcoin.
You may think I am crazy, but I actually don’t even consider investing in bitcoin all that risky. Sure it’s volatile, but I’m pretty darn sure that 5 years down the line anyone who buys bitcoin today will be pretty happy. I’m less sure about all of the alternative coins/tokens. They may have more explosive returns or they may simply go to zero. But bitcoin going to zero?—ain’t going to happen if you ask me.
Now I don’t overdo it with my bitcoin portfolio. For one, it’s important to have discipline and value add real estate is my bread and butter. In fact, I bought bitcoin with only about 5 percent of my investable assets this year. Aside from its riskier nature, buying bitcoin does not save me any money! It’s not tax advantaged.
So what’s a bitcoin HODLR to do? How about “Buy, borrow, and die”? That’s the mantra of the ultra-wealthy. The idea is that you can borrow against most assets that you own and invest in something else. You don’t get taxed on your loan and you’ve got a way to create liquidity out of an asset that is sitting around waiting to appreciate. If you invest those borrowed funds into real estate, not only do you get the benefit of investing your capital in two places at once, but you also get the tax advantages!
You can do this with all kinds of assets. Traditionally, the wealthy have done this with brokerage accounts and other real estate but also with gold and fine art.
The good news is that these days you can even do it with bitcoin and that’s what this week’s show is all about. Zac Prince is the founder of a cutting edge company called BlockFi. BlockFi is essentially creating financial products from the cryptocurrency ecosystem including the origination of loans and even savings accounts that pay cryptocurrency in interest.
In this week’s Wealth Formula Podcast, Zac tells us all about it and gives us his take on the massive infrastructure that is creeping slowly but surely into the bitcoin ecosystem. Whether or not you buy bitcoin, you are going to want to understand what’s going on in the digital ecosystem because soon it will be part of your every day reality. Don’t miss this show!
178: Fixed Income for Dummies!
Have you heard of the 4 percent rule? I’m guessing you have as it seems to be some magical number espoused by traditional financial advisors and bloggers alike.
The idea is that you should safely be able to withdraw 4 percent of your portfolio to live on for retirement. Theoretically the 4 percent is based on the idea that, over time, portfolio yield should outperform 4 percent and result in principal preservation.
Is it really that simple? Maybe it is. Maybe that’s all you need to do and it will work out for you. As you may have guessed, I’m more than a little skeptical of the rule myself.
Why? Well, for one thing, I’m a real estate guy. I like income producing assets with tax benefits that I can see, touch and feel. Admittedly, that’s just my bias.
The bigger problem with the 4 percent rule is that it is based on old data. Specifically, the modeling uses data from 1926 to 1976. To me, that’s a little concerning.
You see, the underlying assumptions of the 4 percent rule are that most of the most of the portfolio income is produced from dividends and fixed income.
What is fixed income? Fixed income comes from bonds of course and bond yields are reflective of interest rates. I don’t need to remind you that we are at historical low interest rate levels now and our president is advocating for negative rates.
How does that make you feel about the 4 percent rule now? It makes me very concerned for my high-paid professional colleagues—doctors, lawyers and engineers who are following the 4 percent paradigm like it is religion. While it may work out, it sure doesn’t sound like a risk that I would want to take.
We live in unparalleled times. How in the world can we use hundred year old data to guide us into retirement? No way I’m doing that. But the problem is that most of our colleagues will and all we can do is watch them like an accident ready to happen, hoping they will survive.
In the meantime, we need to continue to educate ourselves. Financial education is our best weapon defense against going broke.
In line with that, my guest on Wealth Formula Podcast today is an author and educator that I have invited to teach us about the biggest financial sector on earth: the bond market. Without understanding the bond market, you cannot understand the economy. Don’t miss this interview!
176: Should You Invest in Multifamily Real Estate NOW?
There is clearly fear in the heart of investors in the equity markets and real estate alike as talk of trade wars and recessions abound.
Meanwhile, I’m investing more in multifamily real estate this year than I ever have. In fact, I’m investing my 80 year old dad’s money in the same offerings—the opportunities everyone sees in Investor Club!
So why would I do this? Well, lots of reasons. Here are just a few:
1. I can’t time the market. The podcast echo chamber has been warning of the impending zombie apocalypse for at least 4 years now. Since then, I have been in and out of multiple deals creating permanent wealth. If we do have a recession (which I don’t doubt), does it have to be a blood bath? Remember, the average length between recessions is 5.5 years. If you enter an investment today, you could very well be back at the top of the cycle by the time you are ready to sell.
2. I only invest in quality assets that are in quality markets. What does that mean? Well, I like multifamily real estate located in high growth areas. If there is strong growth in population and in jobs organically today, then there is no reason that demographic trend shouldn’t continue with or without a recession over the long term. That means a lot of people needing to live somewhere and multifamily real estate solves that problem. While it may be the case that my returns slow down for a year or two if rent growth slows, if I invest in quality assets in quality areas, I don’t worry too much about it. I don’t believe I will lose money.
3. What makes me so confident that I won’t lose money? Well, the basic thesis of my investing is to not buy and hope. For those in INVESTOR CLUB, you know that I am a believer in forcing equity through value-add strategies. That means we are dynamically decompressing our own property cap rates and giving ourselves a bigger cushion in the event of any slow-down. We create value from day one and that’s why our multifamily investment returns have averaged 30 percent annualized over the last 6 years—way above proforma's. If a downturn happens, we have a big cushion!
4. I believe in the volume averaging approach. This goes back to the fact that I cannot predict market cycles. I prefer potentially less growth and capital preservation during a recession (real estate) over negative growth or losing money (money in the bank or stock market). As long as I invest in the right deals with the right operators, I just keep deploying capital on a regular basis. The ups and downs of the market cycles will take care of themselves.
5. The longer I’m in the investing game, the more I’m convinced it has more to do with the team than the asset itself. Right now, I have operators that I trust that make it very easy for me to deploy capital and that is the BIGGEST reason I am investing so much in real estate NOW. Even if there is an economic downturn, I’m in a very safe position with an extremely competent team. In fact, we will continue to buy through any potential downturn and follow it all the way back up!
Do I sound too optimistic? I would say I’m being realistic. Understand that, although I won’t be surprised to see a downturn in the next 12 months or so, I believe the next decade will be the “roaring 20s”—just like the ITR economics guys told us in a previous podcast. I don’t want to miss any of that!
That said, I’m always listening to what economists and other experts have to say. In fact, on this week’s Wealth Formula Podcast, I have a highly respected economist who specializes in multifamily real estate. His name is Ryan Davis and he definitely knows what he’s talking about so make sure to tune in!
175: Cryptocurrency and Asymmetric Risk with Teeka Tiwari
Up to 10 percent of my liquid assets are in very risky stuff—specifically digital assets and startups.
A lot of people people think I am being irresponsible—particularly because I have a captive audience with whom I have influence.
Now if I was shooting at the hip and telling you to put all your money in this stuff, I would understand. But even highly volatile investments (ie. gambling) may have their role in your portfolio.
To be clear, every year, I allocate no less than 80 percent of the money I invest into real estate through Investor Club. There are many “wealth advisors” out there who would tell me that’s nuts too—that I would be better with a substantial portfolio of stocks, bonds, and mutual funds. Ain’t gonna happen.
One of the great benefits of becoming financially literate is that you get to make your own decisions and feel confident about them. You don’t need someone with a three month long accreditation course to tell you what makes sense.
In my opinion, residential real estate isn’t risky if you know what you are doing or invest with someone who does. People have to live somewhere regardless of the Dow Jones Industrial Average.
Real estate in the hands of an ambitious immigrant with no money (my dad), ultimately paid for my upper middle-class upbringing and my education through medical school! Why would I consider it risky? The only time my dad got in trouble was when he invested in the stock market.
Now, let’s go back to this buying digital currency thing again. You and I know this is seriously risky. But you know what?— a lot of people have gotten very wealthy off this stuff already and it’s still in its early days.
So let me ask you this. Say you invested $20K into a variety of cryptocurrency projects today and lost it all. Would that kill you? Alternatively, say your $20K became $2 million—is it worth it for you to at least have a chance of this happening in your lifetime?
That’s the kind of analysis you need to do for yourself when considering investments of the asymmetric risk profile variety. Chances are if you are a follower of Wealth Formula Podcast, you are already doing fine. You make a great income and have all the basic things you need to live a happy life. But what if you had exposure to something that could put you in another league of wealth entirely? Would it be worth putting a little capital at risk to make this happen?
It is for me and that is why I invest in cryptocurrency. This is not foolish—this is calculated risk. It is the kind of risk that the wealthy take all the time. It’s how millionaires become billionaires and how ordinary people can make money that they never imagined possible.
In fact, even the largest, most respected university endowments like Yale and Stanford are getting in the game with small allocations in the digital currency space just to make sure they don’t miss out.
And why now? Well—because no one is talking about it. The bull market of 2017 had everyone and their mother investing in cryptocurrencies. Two years later, technology is better and institutional money is starting to get in, but investors don’t seem that interested.
That’s exactly why, if you have not gotten exposure to digital assets, now may be the best time to take the leap. The more you read about this stuff, the more excited you will get!
To help you understand what is going on with cryptocurrency and whether you should consider getting into the game, I invited Teeka Tiwari back on Wealth Formula Podcast. He’s a former Wall Street guy with serious credibility with institutional investors and family offices.
He is also a great teacher so make sure you tune into this week’s show.
P.S. To find out EXACTLY why investing in cryptocurrency makes sense NOW, make sure to sign up for Teeka’s upcoming webinar HERE:
174: How to Invest in Fine Art with Beer Money!
Last week I was in Monterrey for car week. While I still drive my Toyota Prius from 2008 that I purchased during my final surgical residency year, I have an appreciation for vintage Italian cars so I attended the annual Concorso Italiano.
Those old Ferrari's are beautiful! There was a particularly stunning silver 1973 Ferrari Dino that I couldn’t get out of my mind. There is a guy at my YMCA who drives a Dino (only in Montecito)—he bought it brand new in 1975! I was telling him about the event and, as it turned out, he was there too.
“Yeah—but Dino’s are slow,” he said. “If I buy a new car, it’s going to be a Tesla. Those things are crazy fast!”
“But Tesla’s have no soul!” I argued.
To me we were talking about two different things. He was talking about performance, and I was talking about art. Now, I’m not much of an art guy but I think my love for old Ferrari’s is much more inline with an art critic’s love of Andy Warhol rather then a guy who just wants a fast car.
I could care less if that Ferrari is slow. I just want to appreciate it for what it is. It’s a sensory masterpiece. Look at it. Listen to it! Tesla's are silent and damn ugly in my opinion—especially that SUV. It looks like an overgrown Prius.
Now why did I go to this car show anyway? Just to torture myself with envy? No… I’ve been thinking about buying my first vintage car. There’s a few I have in mind. I love Ferrari's but a 1967 Lincoln Convertible sounds cool too, and I could throw all my kids and their friends in the back seat (and the rest of the neighborhood as well).
A couple years ago, I would have never even considered buying something so “frivolous”. That’s because I never saw it as investment. While it’s true that buying a fancy new car would guarantee a loss of money for the foreseeable future, buying one that has fully depreciated in value and pivoted to become a collectors item is a totally different animal.
The new car is what Robert Kiyosaki would call a “doodad”. While a vintage collectible car would be, what I would call, an asset. Sure it doesn’t cash flow but neither does gold. I would rather have a Dino than a few ounces of gold any day!
In the world of the affluent, the theme of buying things that you can enjoy today and have as something worth more ten years from now is quite common. I didn’t really notice it until some of my wealthy friends opened my eyes. If you can afford it—it’s a very smart way to live. Just think about the amount you spend on cars, furniture, watches, and wall decorations that are sure to be worth zero some day. What if you could replace all of those with appreciating assets?
It’s a very interesting way to live and one that I am really starting to warm up to—that’s not easy for a guy who still drives his 12 year old Prius.
Now I get that not everyone can afford to spend $300K on a vintage car or $3 million on a piece of art. But financial technology is really making some of the things that were previously not attainable for most of us into a reality.
How about owning an Andy Warhol? Did you know that right now you can invest as little as $25 and own part of a famous Warhol piece? You can even visit the painting at a gallery in New York and enjoy it for yourself.
This whole new world of investing is very exciting and my guest on this week’s Wealth Formula Podcast is one of the entrepreneurs who is making it happen.
So, if you want your piece of that Warhol or whatever blue chip artist gets you excited, listen to Scott Lynn tell us exactly how to do it.