Wealth Formula Episode 300! ASK BUCK!

Buck: Welcome back to the show everyone. Let’s start an episode of Ask Buck. And I’ll tell you, there’s lots of questions we’re going to really focus on, at least for this show, the ones that have associated with them, because I prefer those. I like to hear your voice and we’ve got a number of them. So we’re going to start with that. And what we don’t get to in terms of questions we will do in follow up shows, we’ll have probably a series of Ask Buck shows after this.

So let’s see now. Okay, the first question comes from Anant.

Anant: Hey, Buck, this is Anant from Atlanta. I’m one of your newest members. I’m very impressed by the Wealth Velocity Formula. I have a quick question on that. Do you think this Wealth Velocity Formula would be something that would keep on going for many years, or is this something that is time limited due to circumstances in the financial markets or the housing cycle or some other factors? Is it safe to assume that this would last at least another 20-30 years away it’s going, or is it short lived? I would appreciate it if you can answer that question. Thank you.

Buck: Thanks for the question on it. When you say Wealth Velocity Formula, I’m assuming that you’re talking about sort of the mathematical formula that I have used to describe the Wealth Formula. Right? Wealth is equal to a product of mass times velocity times leverage, where mass is the amount of money you invest.

Velocity is how quickly you get your money in your pocket to redeploy. And, well, leverage is just good debt for the most part, right? That’s what that is. Now, I would argue that the equation here is indeed timeless, but of course, the determination on whether it works or not is really dependent. It’s dependent on the assets that you invest in, the operators that manage them, the managers that manage them, et cetera. If you look at the individual variables, what is mass? Mass is just obviously, the more money you invest, the more you have potential to grow. That’s why the rich get richer. They have more money to invest, so they’re investing a higher proportion of their income, therefore, they can grow their money faster. Really, that is, as long as you’re investing in producing a positive rate of growth, that’s not going to change velocity again, how quickly do you get your money in your pocket? That’s what that means. It depends on what you invest in.

With cash out refinance on value add real estate that we do typically in our space, in syndication and in our investor club, that can happen pretty darn quickly. But even if you’re getting a positive 5% of your money, you’ll eventually get it back. It just might take 20 years for that velocity. It’s not very fast, so that’s not ideal, obviously, but in times where markets are hot, you have the potential to get your money back in your pocket much quicker. You’re seeing that in real time. Right now. And sometimes that can happen within a year or two years where you can get 50, 60, 70% of your equity back so that you can start reinvesting. And obviously, it depends on what you’re doing to create equity, value add, real estate, which is my obvious preference, if you haven’t figured it out, does not rely on the whole hop and wait for capital appreciation. The idea is to create appreciation. And if you happen to have tailwinds like we do right now, then great, we’re making even more money.

So finally, I can say with a high level of confidence that debt and leverage, they’re not going away anytime soon either. Bottom line is people have been using this formula for years, forever, and they’ll continue to use it in good times and bad. They just have to find the operators that are going to figure out how to make the money and the right assets. And I don’t really see that as having a timeline on it. So hopefully that answers your question.

All right. Next question is from Darshan

Darshan: What is the typical cost segregation on one of the Western Wealth Capital deals?

Buck: Well, that’s a good question. And in the spirit of making this an educational show, I want to rather than just answer a specific point about a certain kind of investment, I’d rather kind of take it back a level and kind of explain the concept to everybody who doesn’t maybe know it yet.

So I’m going to give you an example of what this whole thing, cost segregation, bonus depreciation, what this is all about. So my Ophthalmologist, I got whatever, had some floaters whatever, and I had to go in. But anyways, I talked to my Ophthalmologist, and he found out what I do a little bit and asked me if I knew of somebody good to do a 1031 exchange for him. And I asked him, well, what’s the situation? Basically what happened was he has a house that he bought a couple of years ago. You’re in Santa Barbara. I think it was like 2 million. He’s selling it for 4 million. Obviously, the traditional way you get out of paying the capital gains, long term capital gains on that is by doing a 1031 exchange, a like exchange. And that’s what the traditional thing has been to do that now. So he’s planning to sell this property. And I said, well, gosh, you could do that, but it’s going to be expensive, it’s going to be hard. It’s a lot of work.

And at the end of the day, I’m not a CPA, but I’ll tell you what I would do. And that’s, of course, what I’m going to tell you now. And remember, I’m not a tax professional, so I’m going to just tell you my opinion and what I believe I would do in that situation. So I’d sell the house and invest at least the profits, probably some level of the basis as well into more residential real estate. And then in doing that, I would do a cost segregation analysis on that residential real estate on the new property. And then I’d use bonus depreciation to essentially try to offset the gains I made on the sales.

So how does that work? Right. Because we talk about that kind of stuff frequently. And so let’s try to back up. So let’s say I took that $2 million from the sale that I had, and I bought an apartment building. I leveraged it into a $6 million apartment building. Now, after that, I would have the cost segregation study. It’s an engineering study, and that would determine what percentage of the asset would be considered real property. And real property is basically things you can’t move. The foundation and parts of the property that you can’t just throw out the door, including the door. The stuff that you can throw out the door, including the door, would be Chattel or otherwise known as personal property. So what a cost segregation study does is essentially segregates the property. So there might be 70% of it. That’s real property, and 30% is personal property or Chattel.

That is significant. Why? And by the way, I use this 70% and the 30% numbers because in residential real estate, that’s pretty close. I think it’s a pretty good estimate. In general, 70% real property, 30% is typically coming out as Chattel. I’ve done several of these, and it’s frequently similar to that. But anyway, so why is this significant? Why would you go to this? Well, again, we’re talking about investment property. And with residential real estate, just like all real estate, the IRS allows you to have depreciation. And on real property, that is 27.5 years, or about 3.6% per year, which is something, but it’s not much.

On the other hand, the depreciation schedule for the real property or personal property component of that asset is five years. But here’s the kicker. With bonus depreciation laws, currently effective, also in 2022, the five years can be squeezed down into the first year. Now that is huge, as many of you know now going back to our example, okay, we talked about 30% being personal property, 70% being real. So what is 30% of a $6 million building? Well, it’s about $1.8 million. So the first year paper loss on that building might be $1.8 million. Now to buy that building, what kind of equity would you have needed in the first place? Probably somewhere between 25 and 30% down. In other words, the down payment needed would, in this case, closely approximate the long term capital gains and essentially wipe that gain out. That’s what I would do.

Again, I’m not a CPA. I’m not a tax attorney. I’m not giving you advice on what to do. Now without getting into too much detail. Some of you know, that story is not even done yet. It even gets better because of the issue that ordinary income is always taxed before long term capital gains in the IRS algorithm, and then that creates additional benefit for you. But we won’t get into that because it’s just too much. Now, the question that you had in the first place related to Western Wealth Capital, which is one of my partnerships with Dave Steele, Janet LePage. And you see, the thing is, you don’t have to buy your own property to do all the things I just outlined. You can invest in syndications, and that’s kind of what he’s asking about. Whenever we buy an apartment building, we do cost segregation analysis and bonus depreciation, take bonus depreciation when we can. So every one of our properties has debt and the partners obviously are bringing equity, and then that depreciation flows through to the partners.

So now it’s a bit simple to say this on a large multimillion dollar apartment complex because it’s not as easy as saying 70% loan, 30% equity, and then you’re going to wipe out all of the equity with bonus depreciation. It doesn’t work out like that. Exactly. Because for larger buildings. Well, first of all, it’s a bit more variable in terms of the engineering sites themselves, but also with a company like Western Wealth Capital that is heavily value add, a significant portion of the equity raise is actually used for value add purposes. Right. So basically, more than the cost of the building is actually raised because it’s going to be used for improvements. Now, this is only going to be seen as a loss for you if it’s used up before year’s end.

So anyway, however, long story short, what I can tell you, Darshan, is that tier one losses in our experience have ranged for investors between 80% and over 100% for investors as a percentage of equity invested. So if invest $100,000, it spends somewhere between $80,000 and 100,000 plus loss on a K one. So hopefully that explains the whole story and gives a little bit more education as well. And frankly, right now, I will say that I don’t think a 1031 exchange is very useful in most situations.

All right. Let’s move on to the next question.

Eric: Hi, Buck, long time listener, first time caller. Just wanted to see if you would call it the article or the video with Mr. Wonderful Kevin O’Leary. And when he said H, and then he stopped referring to hopefully, HBAR Hedera. Thanks for everything, buddy.

Buck: Yeah, Eric, I do remember that. And actually he came out and a few times is actually specifically said HBAR. I don’t think he was trying to hide anything. I think he just forgot what it was. So it was like age. What was that? I don’t remember what it was. Anyway, HBAR, if you look up Kevin O’leary and HBAR, you’ll see he’s actually said it a few times. He has that he’s interested HBAR along with some of the major things there.

But again, let’s talk about the whole thing just in context for learning purposes. So HBAR is of course well, maybe not, of course, but for maybe you don’t know as well. It’s a native currency. It’s a cryptocurrency for the Hadera Hashgraph protocol. Co founder of Hadera Hashgraph, Matt Harmon, has been on the show a couple of times. I really encourage you to go back and listen to those shows.

Now, full disclosure, when I talk about HBAR, I bought HBAR at the initial offering, and it’s a significant part of my investment portfolio in digital currencies. However, I will say that I truly, truly believe is far in a way, the most undervalued protocol of its type right now in terms of the token price. And if you look at what these guys have done and the partnerships they have, it’s really hard not to imagine it’s having a significant upside. And you know what? It’s not even on Coinbase yet, which is really the time to buy it because of course, Coinbase gets coin based, then it pumps right now, I think the only thing to add just to add to this conversation, I think is useful.

A lot of people ask me about cryptocurrency in general, and what I will tell you is, in my opinion, there is Bitcoin and then there’s everything else. Bitcoin is like digital gold, and I think there is significant value in it as a storage of value. But I don’t really think of Bitcoin as software, which is what I think of everything else, whether it’s be a theorem, HBAR, all these things. And I think if you’re like me and you think of these things as software, you start thinking, well, whatever software is the best is going to be the ones that do best. Right? So then that’s why I’m a big fan of HBAR. I think it’s great software, but again, I am invested in it. So just be aware, look it up. It’s interesting stuff.

All right, next question.

Garth: Hey, Buck. Garth here. What are your thoughts on virtual real estate and NFT’s? With the new Web 3.0 now with Blockchain, people are now able to own virtual items. And with the larger Metaversecoming where I think the economy will soon allow you to move virtual assets from one world to another, I see stories of people and celebrities buying virtual lands and NFTs in virtual worlds making large profits. I even saw an investment company where you can invest with them and they find the best virtual worlds and lands to invest in. What are your thoughts on Metaverse?

Buck: Well, great question, Garth. So let me start by saying that I think Metaverse, NFT, all this stuff, they’re going to be huge. I mean, they’re already kind of huge, right? But let me also say that I don’t really understand the space very well. I’m not an expert here. And so I haven’t made a big move in terms of investing specifically into NFPs and stuff like that. I just don’t really understand it. I think that may be just a generational thing. I’m a Gen X, middle aged dude.

Listen, I understand the value in using distributed ledger technology to help identify ownership and tiles and software and all that stuff. But I don’t necessarily understand the appeal of things that only exist online. It’s almost like having, I guess, a baseball card that only is online.

I’ve really tried to wrap my head around this and why people would pay for things that aren’t real. And the only thing I can surmise is that my concept of what is real is different from what other people think of as real. And again, it’s probably a generational thing. Let’s say gaming, for example, if you’re a gamer. Right? Like gaming is not like Atari and Nintendo, like it was when I was a kid. This is like you’re playing against somebody in Russia and there’s people watching you. I don’t know. It’s kind of a crazy thing. People go watch gamers in arenas and stuff, and it’s bizarre to me. But if you’re a gamer and spend a good chunk of your waking hours in the gaming world where others see your character and that’s you that’s your character, that is you, and your character has got special swords and guns and stuff like that that are one of a kind, you might actually value that world because you spend so much time in it, because that’s what people identify as much as the physical world or even more.

In fact, you might not even really think of one of those worlds of virtual or the physical world as superior to the other. And whereas I obviously, I’m sure I devalue the virtual world compared to the physical world. Again, that may be a generational thing, but yes, I do think there’s a sufficient evidence already that this is going to be huge. Facebook knows it’s going to change everything. They changed their name to Meta. I just don’t know how to invest in it in a smart way. And of course, if anybody does, if anybody’s an expert, let me know. And I’d love to hear from you. Shoot me an email, [email protected].

All right, next question here.

Joe: Hey, Buck, this is Joe Touma. My wife and I are physicians and we receive W2 income and I felt that we are limited in our ability to take advantage of the accelerated depreciation with the syndications from the Western Wealth Capital. We both own offices that we lease to the practices and realize that by increasing the rent, we can move some of our active income to the passive real estate income side. Is there a limit to how much of that can be done? Do I have to be able to justify the amount that we’re charging ourselves?

Buck: Thanks, Joe. So obviously I can’t give you tax advice, but I do have a similar situation where I have a practice. I don’t practice anymore, but I have practices in Chicago, and that is renting from one of the buildings I own. And I can tell you that the advice I have gotten and use is that it just needs to be market rent. Obviously, it can be a little bit on the high end of the market rent, but just think, remember, hogs get slaughtered, right? So just make sure it charges market rent for medical space rather than office space. Medical space is obviously a lot more expensive. And I think for the most part, your CPA, your pet tax professional, just has to be able to justify it. So I would ask them what they’re comfortable with.

Now, of course, there are other strategies that doctors like to use and their practices that might also help. Listen, that’s just one strategy. I know we’ve talked personally, we won’t get into your situation, but you might consider, as many doctors do and as part of their practice, starting a second company that serves as MSO managing service organization and that owns all of your equipment and rents out to your practice. And then that company might also be in charge of your marketing and your billing, and it charges your practice for that. The bottom line is, as long as you get paid a typical doctor in your field, that’s what you need to do. And the rest of it, if you can figure out different companies and structures with your tax professional, there’s a lot of stuff being left on the table just because people don’t have very good CPAs. So I would really suggest, bottom line, that you talk to a tax professional who can break down other parts of your business and see what the optimal structure might be.

All right, let’s see. The next question is from Kevin.

Kevin: Hey Buck, this is Kevin Wilson from Salt Lake City. First, I want to thank you for all the great content you have produced. You have been a key part of my financial awakening over the past few years as I’ve implemented many of the strategies you often discuss, including wealth formula, banking, asset protection, and several Western Wealth deals. I appreciate all you’ve done and have recommended your podcast to many friends and colleagues. My question is regarding how you allocate your personal investable capital. I’m sure you derive a lot of income from your many business endeavors with Wealth Formula Banking and your role as general partner with Western wealth as well as other ventures. So what do you do with all this income to increase its velocity by reinvesting in other projects? In other words, how do you allocate your passive income investments? Thanks again.

Buck: Thanks for all the kind words, Kevin. As you mentioned, I do have multiple streams of income. It’s not just real estate. I have other streams of income as well, but my primary time really is spent in real estate. So that’s really important because that makes it so I can be considered what’s called a real estate professional. You’ve heard me talk about this before, I’m quite sure. But that’s critically important to the way I invest, and it almost makes it there’s a very asymmetric reason for me to continue investing heavily in real estate.

You see, as a review, the real estate professional status basically requires that this is what you do for the most part, full time, 750 hours, minimum per year. You don’t do anything more than that outside of real estate. So you don’t have a job that you’re working more. And even though you’re doing 750 hours of real estate, you don’t qualify. But I’m not here to give you the definitions. You can look it up. The real estate professional status, though, again, overly incentivized me to invest back into real estate. And I spend the majority of it, I would say almost all of it on either real estate that I am buying by myself, which is not very often anymore, or in the syndications that are coming through our Investor Club, which if you’re accredited, you can sign up for at wealthformula.com.

But the bottom line is that’s really important because I’ve been thinking, for example, I really want to have more Bitcoin. I think that’s one of the things that I think is something that has got a lot of upside left. Even if we go lower before then, I think I’m still projecting a $250,000 Bitcoin in five years. That’s a prediction, right. But here’s the challenge, right? So let’s say I earn $100,000 and I buy $100,000 of Bitcoin. The absolute cost to me will not only be the cost of the Bitcoin, but the taxes I pay on the earned income. So living in California, 50% basically is what I’m paying taxes. So living in California, that $100,000 of Bitcoin effectively cost me $150,000 because I’m going to keep my income and I’m going to pay $50,000 in taxes. So that’s kind of hard for me to swallow because on the other hand, if I earn $100,000 of ordinary income, passive income or whatever, and invest $100,000 in real estate, guess what? Because of the cost segregation, analysis, bonus depreciation, all that stuff I talked about, I not only make returns on the real estate, but the government essentially funded half of it for me because of the depreciation I take on that investment.

So basically, I’m not only going to get the return there, but I’m not going to pay the amount of taxes I’m going to pay on that income is de minimis. So it’s like a big time win win. Bottom line is, though, that the real estate professional status influences that substantially. So I’m still way heavy into real estate investing. To answer your question, particularly multi family, I will say that it used to be about 90% just our syndications. And if I had something else, I had to buy, like I said, I’m not buying a lot. But if I buy a house or something like that outside of my syndication stuff that’s separate but 90% towards real estate. That’s what it used to be but I’ve switched that. Now it’s probably about 80% and the reason that is is simple. I make more money now than I used to. Right. So why does that matter? Well, I’ve decided that I can afford to take bigger risk with my investable assets. Right. I’m okay now being super risky with 20% of my investable assets Because I like the opportunity or the possibility of hitting something out of the Park And adding a zero to my net worth. Right. So that’s why I have gone increasingly into the high risk, high reward categories like cryptocurrency.

By the way, I should just point out as an aside that I have figured out one interesting way to write off investments in Bitcoin and if you’re an accredited investor and you’ve signed up for our Investor Club at wealthformula.com you are going to find out pretty soon how it is possible to have exposure to Bitcoin And take a significant write off. Anyway, you’re going to hear about that pretty soon.

Okay. That’s all I got in terms of questions. We’ll be right back.