343: Ask Buck: November 2022

Catch the full episode: https://www.wealthformula.com/podcast/343-ask-buck-november-2022/

Buck: Welcome back to the show, everyone. Well, before we begin, let me just comment on a few things that are going on in the economy, in markets that I think are of interest. Last month there was a slowdown in inflation and less inflation than expected was forecasted. So that’s good news. I suspect that we’re you know, we’re going to get this inflation thing under control and we’re going to end up in a fairly deep recession for a bit.

You know, I wouldn’t worry too much about the zombie apocalypse right now. I think we’re you know, we’re not there yet. But I do think that we’re looking at a recession coming up, and that could be real opportunities to buy as well as we’ll get into in one of these questions. The other thing I wanted to just comment on real quick is the cryptocurrency market. And, you know, it’s funny because last week’s show when I recorded that, it was actually the first day of this whole FTC’s debacle for those of you know, what happened. But basically one of the biggest companies in cryptocurrency, it turned out, had a lot of fraudulent activity going on there. And so it really shook the foundation of the crypto world.

And I think there’s still follow to be had. I mean, we have to look at what’s going to happen with some of these lenders that were deeply involved with FTX, like Blockfi, who actually froze assets. So that’s not good. If you’ve got assets there, there might be some danger to you. So I know and keep an eye on that and I’ll continue talking about it as well. But I think the thing to take home from this is that, again, we know even from talking from last week to our expert on this topic that this is an area that’s in its infancy and we’re still weeding out the bad players, the pet.com of this era and that kind of thing. And I think that’s where we’re at.

I do think that, again, going back to the creed of Warren Buffett being greedy when others are fearful, it is a good idea. And to the extent that maybe, you know, maybe you’re not into the alts, but I do think this is potentially a really, really good time to load up on some Bitcoin while. So I have some potential, you know, bitcoin-related mining opportunities coming up in Investor Club as well. By the way, if you would like to join, if you’re an accredited investor and you are interested in potentially deploying some capital, check out well for MLB.com and sign up for Investor Club. And then there’s an onboarding process there that you can go through and then get exposure to some of these things that I kind of mentioned in passing.

All right. So let’s move on quickly here to the first question, first recorded question from Zach.

Zach: Hi, Buck. I’m mostly in equities and seed round venture investor that had been trying to build a multifamily portfolio. While some private equity groups have maintained a lot of deal flow, it seems like Western Wealth Capital has slowed down this year. To me, this seems like the smart strategic move. Given the interest rate environment, do you think it would be unwise to invest in multifamily opportunities now? And as for Western wealth capital, do you think we need to see interest rate cuts in order for good opportunities to arise again? Or will there be high value opportunities as prices fall?

Buck: Great question, Zach. So yes, at Western Wealth Capital, an interest management group, you know, we’re not buying anything right now about anything. I think the last thing that the last acquisition that we had through our group in real estate was in May through Turo, right before things kind of went south. And the reason for that is because of the rapid increases in interest rates. And I you alluded to that, but I want to emphasize the rapid increases part of it. Right. Volatility is creating a real problem, and I’ll get to that in a second. As for others who may be acquiring multifamily property right now, listen, I. I don’t know really how they’re doing it responsibly, because I just don’t know how you underwrite in this environment in order to underwrite, you have to have confidence in some of your projections, which requires that you have some assumptions to use.

And almost all apartment buildings are are bought with some level of leverage. So the assumption that you have to have some confidence in is interest rates. And they’re they’re they’re all over the you know, they’re just going up rapidly. So we don’t really know. So rather than, you know, I think the interest rates going up is sort of like a falling knife rate. Don’t don’t try to catch it. Right. You just wait till it stabilizes. And that is, in our opinion, that’s where the opportunities are going to come. Now, the exception to that is if there’s some kind of fire sale, which we could have soon, I think there is some artificial stuff keeping the levees up right now that but the dams could break pretty soon for some some assets out there. And if you can buy those, it clearly undervalued prices regardless of, you know, some volatility in the interest rates and you might look into it. But short of that, you know, if you’re trying to actually, you know, do what we normally do, which is, you know, have some assumptions and rates and and move forward, then then you may have to wait a little bit of time for that to happen.

So again, you know, Western WealthCapital, Troy Asset Management Group, we don’t feel that it’s prudent right now to underwrite stuff when we can’t even make assumptions about interest rates that I believe any intelligent investor ought to be making. And so right now, again, the goalposts are moving too quickly when it comes to interest rate volatility is what kills markets, right?

Volatility is what kills markets, not necessarily the absolute number of the interest rates. And that I think that sort of addresses your question about, you know, whether there will be opportunities in the future. You see, as long as rates are relatively stable, at some point it’ll be time once again, you know, that that we can acquire assets because we’ll be able to create a pro forma that we believe, you know, high rates are not the problem. People have made a ton of money in real estate regardless of the you know, how high interest rates have been that that’s not the issue. The volatility is once rates are stable, we just focus on the projected delta. That’s all we need to do. Right. So we have an assumption that rates will be around a certain level and then we may be like, you know, maybe we’re conservative about it, but we know that are, you know, we’re hopeful that our conservative number is is not actually be too low.

So you have to be in that kind of position where you can start you know, really feeling like, you know, you’re you’re you’re you’re doing your best to make these pro formas make sense. But once you’re stability, what I would expect is for, you know, markets to adjust to the new realities that come with those higher interest rates, both on the buying side and on the selling side.

And then I think the markets are going to resume at that point. So that said, again, you know, we are in the business of value add real estate. So we’re only concerned about the price we buy and the projected value and result increase in the value of the property. So absolute numbers don’t matter. We start buying when rates stabilize and when there’s a fire or if there’s a fire sale, which I said again, could happen soon. But hopefully that answers your question. Yeah, I don’t I don’t know. I mean, I, I hear there’s some there are some groups out there buying right now. But I mean, you just have to look around, right? I mean, it’s a little unnerving that that people think that they can underwrite in this. You know, they may not be projecting out more than a year, you know.

All right. Let’s see. Next question is from Nick.

Nick: Hey, Buck. Nick Drake from Michigan. I’m just curious if you discussed on your show the theory of population collapse, particularly, number one, if it’s a real threat in the short term or near-term, and also how it may impact your strategic planning with your investments now moving forward. You know, the old Elon Musk fear that we’re not replacing ourselves at appropriate rates and how the decrease in reproductive rates over all of the countries over the last X number of years, how that may impact the economy overall. Is this a risk in the next 5 to 10 years? Next generation? Thanks.

Buck: Thanks for the question, Nick. And I will say let me just start out by saying I liked Elon Musk better when we never heard from him. I used to I used to really kind of think he was a cool dude, you know, with Tesla and PayPal and all this stuff. But now he’s just annoying. Now I feel like he just says stuff to get attention for himself. Like he’s like this, you know, nerd who’s been overachieving his whole life and all sudden he wants to be, you know, popular. And that’s and he goes out there and he just says stuff to say, stuff to get attention, you don’t need to go much further. Going back to crypto and the whole Dogecoin thing, he doesn’t believe in dogecoin. He created hype because he thought it was funny and you know, it was antithetical to what people in, you know, bitcoin and that sort of thing really believed that there was any value to this. He got on board and he drove the price up and then a lot of people ended up buying it and then it crashed and people lost money. And, you know, guess what? If you’re the richest man in the world, maybe you don’t you don’t understand that, you know, these people who are making these investments based on the beast that you talk about are actually people who can’t really afford to lose their money.

Anyway, let’s go back to your question. The reality is, if you look at the numbers right now, global population is growing despite declines in some parts of the world. Demand differs. Generally agree that the global population will hit 8 billion actually today not even joking. 8 billion people is supposed to happen today. And of course, I’m recording this on November 15th. So November 15th, we hit 8 billion people, global population. And then sometime in the next eight years or so, we’re supposed to get to about eight and a half billion.

You know, these these same scientists and mathematicians who are focused on this stuff. I also think the world’s population is going to continue to increase and hit 10.4 billion in in 2080, at which point there is a 50% chance that there’ll be a plateau or begin to decrease by 2100. So hopefully that’s something that we can worry about. But 2100 is a long time from now for most of us. But here’s something interesting. Global population now is driven less by birth rate and more by the fact that fewer people are dying young because advances in health care and expansion of health care I mean, look at these are these third world countries are really poor and stuff.

They’re finally getting some antibiotics and some drugs, actually, so that they don’t die of things that we in the West that we haven’t really died of died from for 50. You know, not 50, like 150 years, you know, something like that. So anyway, that brings me to my next point. I actually believe that we will be living even longer than current projections suggest.

In those of you who came to our last meeting saw you know why? Because there is this tremendous advancement in the science of longevity and lifespan. And I’ve been very vocal on this issue. I really believe we’re on the precipice of huge leaps in longevity and health span, and that could make the population grow even higher. Now, you might say, well, yeah, but you know, if you get a bunch of hundred year old people, will they be working well, the science here is is the idea is that like, people will be working much later into life. And for two reasons, really. First, because they can and they’ll need to because they’re going to live longer. But the other is that they’ll be healthy enough to do it. So like, you know, somebody who’s 85 years old now might. Most 85 year olds probably are not in great shape to be working in an office or whatever. But the idea is, is that over time that they will be. And so that is going to change perspective. Now, remember, you know, the turn of the last century, I mean, I, I would be like retired in a grandpa or something like that, you know, and I’m I’m 49 and that’s the truth. I, you know, I won’t lie about that. I am 49. So another thing, we’re Americans, right? And in the United States, we have the additional advantage of being a nation of immigrants.

Now, if we need more people, we just let more people in. And you just have to go back in history to the 1960s, during the Vietnam War, there was a shortage of men for technical positions like engineers and people going to medical school and stuff like that. Which is sad because, you know, is it because of the number of people who died in Vietnam? But what the US did then is they opened the gates to skilled, you know, skilled immigrants. So my dad was part of that. In the late sixties. He came as an engineer in an engineering scholarship course. He became a real estate guy shortly thereafter. But he he was he and a whole bunch of his friends. And you ever wonder why there’s so many darn Indian doctors and and engineers all that?

That’s why they all started. He came down and then, you know, generations after that kind of followed suit. So there’s one more thing to add. I should just point out that, you know, U.S. policy right now is pretty anti-immigration, but, you know, that could change pretty quickly. I mean it’s a fad of the day. There is a nationalist element going throughout the world which, you know, is what it is. But I think eventually we had the advantage of being able to open those doors and creating more population here as well. The last thing to address on this issue is specific to our investments, my investment strategy, right? So we have pretty reliable data on population growth for the next, you know, ten years at least.

And it’s going up. You know, we keep this in mind when we choose a location for our acquisition because certain areas will disproportionately grow because of jobs and taxes and and we’re constantly evaluating this data. So that’s that’s important to remember. We’re prime we’re very heavy, obviously, in Texas. We’re heavy in Arizona. And there’s reasons for that is because there’s a tremendous amount of population growth there already. And jobs keep flying in and and that’s what we do. So, you know, I think that’s my opinion on the population issue. But, you know, we constantly monitor these things and look at population growth. And I think the key is to understand where the puck is going and to get there before the puck. Right. So that’s that’s the idea.

And in our investing strategy. All right. Next question is from I believe it’s yens.

Jens: Hi, Buck. I love your show. I had a question regarding bonus depreciation, which is now being phased out. I was wondering if you could do an episode elaborating a little bit on whether real estate professional status could still be a reasonable route to go, even if you just focus on passive syndication investments. Thank you very much for everything.

Buck: Okay. So a couple of things. Thanks for the question. First, let let’s just that at the very end of your question, I wanted to address that first. So you can’t be a real estate professional with only passive syndication investments. You have to fulfill the criteria of an active real estate investor. So I’m not a tax professional. So I can’t give you advice.

But what I believe to be the case is that you cannot you can’t be solely in a passive investor, in real estate, in urn the real estate professional designation. There has to be an active component to that. So you need to own some property, you have to log a certain number of hours and it has to be something that you do more than you do of anything else time wise. So but that’s for another time. The point is, let’s talk about your question regarding bonus depreciation. You know, the thing is that bonus depreciation, the way it is right now, which is 100% depreciation of personal property, it really was only available in real estate for developers, not those buying real estate used real estate. But under the Trump tax changes in 2017, it really became something we could use it. It didn’t matter at that point if it was construction or if it was a 50 year old property. But before you know, before we get into that too deep, let’s take a step back for a moment. What are we depreciating anyway? Right. Well, you’ve got to come components of that first. You have real property, which is stuff that basically like land and you know, the structure itself that you can just pull out and throw on the lawn and then you have personal property, which is the stuff that you can pull out and throw on the lawn.

So that really important because there’s something called a cost segregation analysis that separates those two. And why is that important? Well, if you didn’t do a cost segregation analysis, basically there’s a straight line depreciation of 27 and a half years on apartment buildings and you just divide the cost of your acquisition divided by 27 and a half years, and that’s what your yearly depreciation schedule would be.

But the cost segregation study, which by the way, has been around for a long time and isn’t going anywhere, it has independent of the bonus depreciation laws. It’s an engineering study that separates real property, which is stuff that cannot be yanked out, thrown on the land, etc., and personal property. Now, the significance of this study is that personal the personal property component is depreciable over five years instead of 27 and a half years, which is the real property. So in other words, it’s still a great deal for real estate investors even without bonus depreciation, right? Because then you’re still getting, you know, that depreciation over five years of the personal property. Now, what bonus depreciation did from 2017 through this year, 2022, is to make it possible for investors to depreciate personal property not over five years, but all in the first year. And that was that was pretty dramatic because if you think about residential real estate, it’s not always the case, but it seems to be the trend based on, you know, a lot of cost segregation analysis studies that I have been a part of through real estate that I own, that that about 30% of an acquisition price tends to be allocated towards personal property and the rest real property.

Again, that is a complete estimate, but I will say that’s a pretty good assumption in my opinion. I use that all the time. Now, if you only put down 30% to acquire that property, which is typical, right? If you’re using leverage and you have 70% loan to value that 30% that you put down, essentially, well, guess what? Well, you you just offset your investment completely with depreciation, right? Like you were deducting your own down payment. Let me say that again. An average what I have seen is 30% of property being deemed personal property. And then you only put down 30%. So what happens? It’s almost like the government’s paying for your down payment. That’s what it’s like. So you effectively write all that off and that’s really why this has been so magical.

Now, of course, you can only do this against other, you know, take that depreciation against other passive investments. That is, of course, if you are not designated as a real estate professional, if you are a real estate professional, you can use that depreciation that I just talked about, that 30% not only against passive income, but all income because it is considered active losses. Depreciation for a real estate professional are considered active losses. I am not a tax professional, but I was about to say I play one on TV now, but I, I, you know, have been around this stuff enough to get an idea. But again, never rely on my information as fact. Don’t, don’t do that. And then come back and sue me.

Anyway, from 2017 to 2022, as we talked about that bonus depreciation it is is and was 100% of the personal property. Now this change is actually next year. In 2023, it will only be 80% and then continue to reduce by 20% per year until it’s gone. But remember from before, even with our bonus depreciation cost segregation analysis is going to result in accelerated depreciation and there still will be ongoing tax benefits to real estate. And as you asked about being a real estate professional, so anyway, hopefully that answers your question. No, we’ve been going already for almost a half hour. So I’m going to just jump to one last comment, actually was a comment that I want to just address and I’m not going to read the comments specifically. It was an email that someone sent me a couple of weeks ago that no, I actually really appreciate it.

Basically the guy was like, Hey, Buck, I’m a big fan, but I don’t like the direction you’ve taken the last few months. It seems like you just got a bunch of authors and people who write books and stuff like that, and so I was thinking about it and I really do appreciate that feedback because, well, let me tell you why things have gone in that direction a bit. First of all, I’m trying to get away from interviewing the same people that come up in every real estate podcast, right? Like it’s just like circular talk, right? And getting each other amped up and you hear the same thing and three different podcasts and you really start to believe it. But in reality, it’s just the same guy’s opinion, right?

So I’m trying to get away from that. So I don’t really like to interview people who are, you know, constantly in the podcast, the real estate podcast ecosystem. And I think there’s a real danger in getting the same people talking about the same stuff on multiple podcasts again. So, you know, it just doesn’t provide much opportunity to get other ideas.

Next, I didn’t want to keep talking about the same thing on every podcast, you know? I mean, I figured it would be better for people to get exposure to different stuff other than tax estate, planning, real estate. And in reality, I do think I may have gone off the rails a little bit with this. In retrospect, I think we’ve been doing a lot of stuff that maybe less interesting to you as an investor. You know, some of this self-help beast, business book types, all that. I get it. I totally get it. And I think I’m going to have to I have to go back and shift a little bit. But warning, there’s still a couple those that have already been recording it in the lineup. So don’t don’t don’t get upset with me for that.

Finally, the last thing, you know, just commenting about like, you know, why I interview or who are interview what I do, is it a lot of people in this real estate podcast space are actually raising capital and I have to be extremely careful who I interview because I learned the hard way a couple of times now that even if I start with I’m not an investor, this is for interest, etc. and this is something you should do your own due diligence on.

People will inevitably, often assume that I have my stamp of approval on something that I really don’t because they don’t have and have not done a significant amount of, you know, actual research on the offering or the people, etc.. So rather than risk that and you know, there’s obviously I don’t want you guys to get hurt. I also don’t want to get sued. I just I try to stay away from those types unless, of course, I’m part of the you know, I’m a partner in there. Then I really can have some confidence that there’s something that I believe in. And so I’ll do that. So you’ll hear guys from you know, you hear from Western Wealth Capital, you’ll hear from Toro, Dante and Toro and that kind of thing, you know. So unless there’s someone who’s coming out as an investment that has undergone like a significant broker dealer type due diligence, I’m just not going to interview those people anyway, so I can’t do that anymore. But again, thank you for reminding me to keep keep it real, keep it granular, because that’s what I will do.

Anyway, let’s take a break and we’ll be right back here.