Patrick Donohoe

What Is Your Relationship With Risk? With Todd Langford

TWS 12 | Relationship With Risk

 

Tony Robbins once said, “The quality of your life is in direct proportion to the amount of uncertainty that you can comfortably live with.” However, none of us start out with a healthy relationship with risk. As humans we have fear around risk – a fear of failing, a fear of getting exposed, or a fear of finding yourself to be not good enough, you name it. But what exactly are we fearful about? Is that fear justified when you get down to the facts? Join in as Patrick Donohoe goes back to a segment of his interview with Todd Langford, where they get into the idea of risk, how to control it, how to influence it. As you listen through the segment, think about where you can take more calculated risks in your life, where you understand the stakes and what you stand to gain in the end.

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What Is Your Relationship With Risk? With Todd Langford

Our topic is risk. What is your relationship to risk like? Have you ever taken a risk and lost? Have you ever taken a risk and gained? Risk aligns well with the statement from Tony Robbins, that the quality of your life is in direct proportion to the amount of uncertainty that you can comfortably live with. At the same time, we have fear around risk. Todd and I get into the idea of risk, how to control it, how to influence it. You’ll enjoy this segment of the conversation. There’s a lot of risk being taken right now, risk with personal savings, within investments, business and monetary policy of our government in a very interesting time where we’re making these pretty big bets. I look at things we can control and influence. Those things are typically outside of ourselves. At the same time, I believe that when we understand our relationship with risk at a deeper level, then we can direct this risk energy in the right areas, not to take away from the relevance of cryptocurrency or blockchain technology, but taking a risk betting everything, a future and personal savings.

I believe that there is no control there. Not even much influence unless you’re Elon Musk and can put a $100 million into Bitcoin. The purpose of me bringing this up is I believe that you can take this risk energy and channel it toward the things that create a meaningful life. The things that Tony Robbins alluded to the quality of life, improving the quality of life, the meaningfulness of life. How do you redirect the risk? I look at, ultimately, the most important things people strive to achieve. It usually revolves around relationships, family and profession. My question to you and what I want you to think about through this conversation with Todd and me is where can you take more calculated risks where you understand the stakes and you also understand the gains? The gains are a multiple of the risk that you put on the table. It’s that whole idea of asymmetric risk reward. What can you do in your relationships? Can you apologize? That’s risky. Can you ask somebody out? Can you ask someone to marry you? Can you be open with a friend? Can you speak your mind, speak your truth? It’s risky, but is the reward worth the risk?

What about your profession? What about your business? What risks can you take that you can help more people where you can take that next step, where you can leave the comfort of a job that you despise, but it pays well. Go and do something on your own or work with a group whose values and mission align better with who you are and what you are about? Risks are misunderstood. Risk is a good thing. If you think about it, you can make it so that risk has no loss. There’s always a lesson. Case in point, you ask somebody out and they say no, wrong person, which gets you closer to the right person. Asking somebody to marry you, they may say no. Either you can keep being persistent or you know that you need to move on. That’s a positive thing. It depends on what you focus on. Risk in business is always necessary to stay relevant, to stay agile and to always keep a pulse on the needs of your clients, your employer, so that you can continue to create even more value. Guys, thanks for supporting the show. I hope you enjoy this short segment with my dear friend, Todd Langford.

It’s the reason we can’t shut our minds down in whatever it is we’re doing. I’m not saying don’t bring in the experts to guide you, but there’s a responsibility on your part to take that a little bit further and say, “If this happens, how do I react to that? If things don’t map out exactly like this professional has said it’s going to go, it’s going to be on me to make the decision and make the adjustment. I’ve got to keep my mind open. I’ve got to be able to understand at some level what it is I’m being told and not take it hook line and sinker.” Unfortunately, we’re going to be the ones that are responsible for what the results are. If we shut our mind down, the only thing we can do, which is where the society has gotten at some level and it’s the blame game, it’s not my fault. It’s because somebody else told me this, or it’s because I read this or it’s because I did that. If somebody else’s information, you are ultimately responsible for it. You have to take the effort and time. Keep your mind turned on.

Risk in business is always necessary to stay relevant, keep a pulse on the needs of your clients or employer, and continue to create value. Click To Tweet

I’d love to hear your thoughts on this. When you experience fear, it ultimately comes from the nature of risk. There’s an unknown. In large part, the future is what’s unknown. There’s a part of us that thrives to establish certainty or safety. It’s one of those natural instincts. Invariably, what happens is when you place the control or influence of the future on somebody else, it creates an amplified amount of risk and subsequently, more fear, because it’s not you that has come to conclusion. It is somebody else that has come to the conclusion and you are ultimately leveraging them because you don’t have responsibility or skin in the game to the discovery of the assumption by which you’re acting on. The fear is not going to go away. It’s going to go up.

The thing about control, we’ve talked about that in the past. We want to push in that direction. I like your wording of influence. That’s probably a better word we’ll get into. We’re never completely in control. The idea is that the level of control that we can secure, that’s probably indirectly proportional to the amount of anxiety we have. That’s what the issue is. As soon as we start to give that control up willingly to somebody else, it’s got to raise our level of anxiety because we’re in a period of hope. Hope it comes out instead of being able to direct the course.

Going back to the simple example of an airline pilot, they don’t know what the environment is going to be like, but they have the instruments and the training. As the environment changes, they know what to do. Technology response to it just as much, if not more, than the pilot. This is the ability to influence. You can’t control the environment. Environment is going to be the environment. People are going to treat you a certain way. You’re going to wake up with energy one day. You’re going to wake up with not much energy one day. You’re going to wake up and something happens to government, laws, your employer and to the clients you have if you’re self-employed. There are all sorts of things that are going to happen that are outside of your control.

That’s where you establish a degree of certainty around influence so that when that environment changes, that is when you are able to respond. There’s a preparedness there. That’s what mitigates anxiety and fear. When it comes to the math side of things, mainly speaking to financial math, people these days are concerned about money and their future. What’s the environment that they’re making conclusions about what could go wrong in the future based on? How would you describe that environment?

Part of it is the unknown. That’s where a lot of that fear comes from. You hear people rattling stuff around about, “What happens if the dollar disappears? What happens if this or that?” Bad news, unfortunately, is exciting for a lot of people. People want to be the first ones to tell whatever different news it is in some form and add their bias to that, about how they think it’s going to happen to drive emotion. The bottom line is we all make decisions based on emotion if we make decisions based on our beliefs, not necessarily on the truth.

TWS 12 | Relationship With Risk

Relationship With Risk: We’re never completely in control but the level of control that we can secure is indirectly proportional to the amount of anxiety we have.

 

That becomes a discipline or a conscious effort that we have to separate our beliefs, the hype and our natural tendency to go to the fear, to step back and be able to say, “What is the truth? What is it that I have influence over? What can I change in this scenario to fix that?” It goes back to what you were saying about the pilots, it’s to have those tools in place, to have the knowledge. That’s one of the biggest tools we have, is using our brain. That’s one of the things that’s easiest to shut down and let somebody else fill that void or that difference, is turning your brain over to somebody else because they’re a professional.

When you get into a crunch, what do you do? You’ve given up your best tool, that’s your brain, to be able to think through what’s going on. Knowing that you have that tool is a key piece. There was the guy that I was listening to, Sean McDowell, Josh McDowell’s son. One of the things he talked about when he was teaching kids was the idea of knowing something versus knowing you know something. There’s a key, huge difference in those two. What he talked about was he had students that knew the answers, but they might fail a test and then he had students that gave a little bit more effort to the point that they knew that they knew the answer. The difference is, in knowing the answer and writing the wrong thing down because you can talk yourself out of it versus knowing you know the answer. In life, that’s a big piece. When we know we know what we know, we’re invincible because we can rely on our knowledge to get us through an anxious time instead of reverting to the fear and talking ourselves out of what the real answer might be.

The environment right now is interesting because, number one, there’s so much information, perspective and opinion out there. The degree of understanding when it comes to math and science is, in large part, instituted by a system that people don’t like. How many kids do you know that love going to school? If you don’t have a curiosity associated with learning, you’re going to be checking boxes and learning in order to pass a test as opposed to learning to have knowledge, which is more of the practical side of things. You have an interesting environment where life is pretty easy. Even someone in a less fortunate circumstance in the United States has likely access to healthcare, to shelter, to entertainment that kings of old didn’t have anything close to. Yet they’re still upset, frayed, unhappy, depressed, unsuccessful people.

The environment is evolving at a rapid pace where life is going to get easier. Transportation costs are going to come down. We already have entertainment in spades, but even more and better-quality entertainment. You’re also going to have energy costs and food costs come down. There are some revolutionary things on the horizon. The environment is changing to the point where science and mathematical truths have been discovered that has designed this environment for people that don’t necessarily understand the underlying trues and math associated with it. When you think about that, Todd, what do you think is going to be the result of human beings and their experience of life?

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About Todd Langford

TWS 12 | Relationship With RiskTodd Langford is the Founder & CEO of Truth Concepts, Partners 4 Prosperity, and Prosperity Economics Advisors.

 

 

 

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Todd Langford Series: Mathematics And Finance – An Introduction With Todd Langford

TWS 86 Todd Langford | Mathematics And Finance

 

quote by the Mathematical Association of America says, “It’s time for all members of our profession to acknowledge that mathematics is created by humans and therefore inherently carries human biases.” This intriguing statement makes us think what math is and its role in general. To help us answer these questions, Patrick Donohoe brings on Todd Langford in a series of episodes that revolve around the principles of math and how math specifically relates to finance. Todd is one of Patrick’s original mentors and the CEO and Founder at Numbers Analytic, Inc. Today, they discuss why most of the significant innovations resulted from accidents and also touch on the importance of mathematics and curiosity.  

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Todd Langford Series: Mathematics And Finance – An Introduction With Todd Langford

I’m going to introduce a series that’s going to begin. It’s going to be an episode per week. Short episode but it’s a snippet of a couple of long interviews that I did. Let me introduce the topic, subject and why. I came across a quote that led me down one of these philosophical paths. I had lots of breakthroughs and understandings of certain fundamental, simple things. I wanted to express that with you and expand upon it in a number of episodes. Who knows how long it will go for? I want you to understand the quote, at the same time, it led me to understand other things. The quote is by the Mathematical Association of America.  

It said, “It’s time for all members of our profession to acknowledge that mathematics is created by humans and therefore inherently carries human biases. It’s an interesting quote. I’ve stepped back and caused me to think about what math is. Did humans create it? Does math carry biasesIt’s an intriguing statement. I’m going to unpack it in a sense. As I began exploringI found out number one, there’s been this debate going on for quite some time between two campsThe intuitionist camp says that the human mind created math. There’s another camp called the Platonists who argue that math was a discovery of the human mind. I was reading and understanding both points of view. I realized that in the end, I’m not sure if it matters that much. 

Most of the significant breakthroughs came from accidents. Click To Tweet

It caused me to question what the role of mathematics is in generalI wanted to explore it at a more practical level. What did it have to do with my life? What would it have to do with my profession? What would it have to do with anyone else’s lifeSome of the conclusions are math is a more objective way to evaluate a hypothesis or an assumption. Some simple examples, this comes down to the scientific revolution being able to prove and understand what goes on below the surface. What I mean by that is a surface observation or an assumption we can make is maybe based on how a child looks outside and sees the sun rising in the East and then going West, and it sees it again. You can reason the sun revolves around the Earth. 

You can see how these surface observations can lead to faulty assumptionsI was on a hike with two of my kids, my youngest son and my fourteen-year-oldWe got up to this peak, it’s on the East side of Salt Lake City. It was an amazingly clear day. You can see all the way across to the other side of the great Salt Lake. I thought of there, I can see why someone would assume that the Earth was flat. These general surface observations have been disprovenScience has disproven it because there was an assumption made. A person wanted to test that assumption and realized that it was false. Those are simple examples. That trend has gone on for quite some time and it’s led to an insane science of revolution and the miraculous life we get to live now.  

I look at math more objectively, I’m not going to say pure objectively with regards to math but more objectively, testing out an assumption or hypothesis. That’s where I realized I’m going to get down to some basic truths. This is what I came acrossI’ve come across this a couple of times, this thinking model called First PrinciplesElon Musk credits this way of thinking as to why he’s so successful with Tesla, PayPal, SpaceX, SolarCityyou list all the companies. He says that he finds opportunities using the First Principles thinking methods. Let me unpack that and relate it to the mission of the showThis thinking modelfirst principles, predated MuskThis was something that was maybe born during Aristotle’s times. It was used by Copernicus, one of the most famous physicists of our modern time, Richard Feynman, who’s deceased. His way of thinking, his books, you can see it there when you understand first principles. He also used it to understand the core of something.  

TWS 86 Todd Langford | Mathematics And Finance

Mathematics And Finance: People don’t want retirement; they want to be independent.

 

What is first principles? First principles essentially boils down a problem or an idea or assumption to the fundamental truth. From that fundamental foundational level, you reason up from there. Musk says that the way in which most people think is reasoning or thinking by analogy. How he describes that is people copy what other people are doing, and then they try do it with slight variation. They look at the activity, the solution something that other people are doing to solve a problem and make slight variations and tweaks to that. First principles goes to that deeper level. Instead of assuming the truth of the world is flat, you go to the deeper level to understand what is that fundamental core truth. Going back to the mission of the show, I’ve made a claim in the book I wrote in 2018. It’s also the purpose of the show and reasons why I have certain guests on is because I have the assumption that people want to achieve a meaningful life.  

I also have an assumption that people want to be financially independent. That’s the mission of the show, to empower people to those ends. It caused me to think. I realized something that, to me, this idea wasn’t born using this rational line of thinking. The financial services industry specifically financial planning, retirement planning is a multi-trillion industry, finance, personal development. Achieving these ends of financial independence and a meaningful life, I don’t believe that they’re wanting to achieve. I believe that these financial industries are pushing for this end result of retirement and being successful with the way in which you manage money until that point in time. This goes to thinking by analogyI don’t believe that retirement is what people want. They’re solving for retirement. This comes from experience working with people as a financial advisor. They don’t want retirement. They want to be independent.  

They don’t want to necessarily work in something they don’t like. That’s why they want to retire. They also would rather do other things than work all the time, which is why they want to retire. Financial independence is possible sooner than 65. It’s pushing this date out to 65 years old. I don’t believe that’s necessary anymore. I don’t even believe it was ever necessary. If you have this end result and you have this entire system designed around this end result, right then that narrative is going to continue and new entries into the system are essentially going to think by analogy and try to make improvements. Maybe it’s the mutual fund, the ETF or the asset allocation model. It’s still to the same end result but there are slight variations to it. I want you to you to consider that as a possibility of why you are managing your money. What’s the purpose? Why are you investing? Boil it down to the fundamental truth. What will that give you that you don’t have now? What problem will it solve? 

Once you can get clear about those end results, then you try to remove the constraints between where you are and where you want to go. What does this have to do with math? If math is a better way to evaluate rather than just by observation or by copying what somebody is doing and making a slight variation to it, it’s the measure of the evaluation of these assumptions. If you go to financial planning, investment planning, there are these surface level assumptions that are being made about rates of return, income, purchasing power, taxation. There are a number of things as far as assumptions being made in the financial services industry. I looked at have those claims been properly evaluated. This where I’m going to move to as far as this series is concerned. I am going to have on as a guest of mine, a man that was one of my original mentors, Todd Langford. He’s the developer of financial strategy, financial advising, financial planning software. He’s been doing that for many years on multiple systems and platforms. In general, he’s a good man. Also, he’s curious about life and an engineer at heart, wanting to know how things work, the truth behind how things function. Because of that, he’s done some pretty crazy, bizarre things.  

Ignorance in a particular field or idea allows you the ability to learn more. Click To Tweet

He has these crazy multistage fireworks display and this big ranch that him and his wife, Kim, live on. He’s programmed this metal 3D printer laser cutters from his phone. Everything in his home, he has managed, programmed and automated. He built this massive solar complex that powers not just his house but other houses. He built the structure behind ithow the batteries worked and how the solar panels would be facing and the pitch of the roof. He’s a brilliant man. He understands the principles of math specifically how math relates to finance. To be able to evaluate at a more objective level the claims made about what money should be doing both the end result but also the methods to get to those end results. I hope you enjoy this series. The series will go on for most likely several weeks, several months. Who knows? Thanks for tuning in. I appreciate the support. We have some new stuff coming out, some tools that relate to this subject. Make sure you bookmark the website and also look out for some emails coming from us. Take care.  

Todd, first question I have for you is our relationship. You’ve always been a curious person. What’s the driving force behind that curiosity? How would you characterize that?  

I always like to see a different way of doing something. Kim relates it to my code and the way that fits in. Sometimes, one direction of answerI may not like the answer that I get, so I try to attack it in another way to see if those two come up the same. Where that differential is drives the idea somewhat of efficiencies. It’s pretty easy to get into a rut of, “This is the way it’s always been done.” In order to keep me from getting into that road of this is the way it’s always been doneI tend to try to do it a different way.  

What do you discover in the process? Let’s say you find that it’s been done this way. That way is inefficient, inaccurate, it could be done a better way. What happens in the experience of that discovery?  

TWS 86 Todd Langford | Mathematics And Finance

Mathematics And Finance: When you don’t like the answer you get, try to attack it in another way to see if those two come up the same.

 

Often, ignorance in a particular field or idea allows you the ability to learn more. It allows you to innovate a lot easier because you’re not smart enough to be on the path of what somebody’s already discovered. If you look at history on innovation, most of the significant breakthroughs came from an accident. The reason they came from an accident is because the tried-and-true way that everybody had always done something was limited on how far it could go. When they made a mistake, they figured out it’s not that what we were doing is wrong. It’s that our thought process was off base. We have to shift our mind and thinking into a place. It’s difficult to get out of the box that you’ve created for the way things have always been.  

Since those accidents occur from the outside, I find myself a lot of times seeing things that you’ve always heard were true but maybe they’re not. When you dig pretty deeply on things, you find that the label professionahas an interesting connotation. These are mainly the people that are considered professionals. They’re supposed to be the ones that know it all but a lot of times you find out it’s just that they know a little bit more than everybody else does. If you dig a little bit deeper, sometimes you find out maybe they don’t know everything that’s there. I found some of that out. You mentioned about the solar project. As I was going through some of the solar stuff, I would come up against peopleI would question them like, “Can I do this? They said, That won’t work.” I would back it up and say, Here’s the math. Follow me with the math behind what we’re talking about doing. They’d look at it and there’d be this pauseI was like, “That could work.” The only way I could find that was doing it because nobody would give me a definitive answer. 

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About Todd Langford

TWS 86 Todd Langford | Mathematics And FinanceTodd Langford is the Founder & CEO of Truth Concepts, Partners 4 Prosperity, and Prosperity Economics Advisors.

 

 

 

 

 

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Capitalizing On The Massive Economic Shift Through Multifamily Real Estate With Michael Becker

TWS 85 | Multifamily Real Estate

 

There is a massive economic shift going on that comes with a corresponding demographic shift towards areas with lower living costs and tax requirements. In what way is this development conducive to multifamily real estate? Joining Patrick Donohoe on the show, SPI Advisory Principal Michael Becker invites us to take a look at the case of Texas, specifically the DFW market, and how the changes going on in the economy are giving rise to massive opportunities to invest, whether actively or passively, in this no-income-tax state. Whether you’re looking to set up your own mom-and-pop or you just want to let your money do the work by involving yourself with REITs or syndications, terms are going to be very favorable for you in Texas and other areas that have been at the receiving end of the massive in-migration of people and businesses from more costly metros like New York and California. Join in to learn more on how you can start to build more wealth by capitalizing on these changes!

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Capitalizing On The Massive Economic Shift Through Multifamily Real Estate With Michael Becker

My guest is Michael Becker. He is the Principal at SPI Advisory firm and also the host of The Multifamily Investing Podcast. You can check him out at MultifamilyInvestingShow.com. I wanted to have Michael on for a few reasons. First, I had Ken McElroy on a few episodes back, speaking about what’s going on in the economy in multifamily investing. I wanted to have Michael on as well to emphasize some points that Ken and I talked about then in that show. Many real estate investors start out excited. They see potential, opportunity but it becomes a job of sorts, hence the word active.

What I’ve seen is people gravitate toward more passive types of investment. Multifamily investment is an excellent way for accredited investors mostly to invest for cashflow in a passive way. The second reason is I believe our economy is shifting. Richard Duncan was on a few episodes back, and we spoke a lot about what’s going on in the economy, what’s likely to happen and what’s happening. It’s causing some seismic shifts. You are having some big capital flows impact things. You also have immigration, people moving from state to state based on the ability to work remotely, leaving a high cost of living areas, high tax areas. You also have a gist of emotion that’s driving investments up, driving some investments down, fundamentals are out the window and there’s a lot more. Multifamily is an ideal way to capitalize on some of these shifts.

It’s dependent on the market, but I wanted to have Michael on because his specialty is Texas. I look at the economy and human nature. It’s not a straight line. It’s not always predictable. In fact, I don’t think it’s predictable that often. There are variables that can lead to outcomes. At the same time, humans are odd where they make decisions that are irrational and subsequently cause their behavior, what they do to not be a straight line, but to be more of a curved line. We’re seeing that with a lot of movement out of high-income tax states like California, into states like Utah, Nevada, Arizona and Texas, which is a no-income-tax state.

This movement is going to continue. That’s how people behave when there’s more money taken from them, where there’s a high cost of living. I believe that Texas has a very interesting economy and there are a lot of people that are moving there. There are additional benefits to multifamily investment and there are risks. Make sure you do your due diligence. I’ve known Michael for several years. I think you’re going to enjoy the interview and make sure you go check his podcast out and learn more about investing passively in multifamily. Thanks, guys.

Michael, it’s awesome to have you on. First off, congrats on your podcast.

Thanks for having me on. It’s been a while.

First, talk about your podcast. How’s it going?

People stay in the rental pool longer now that they would have many years ago, further increasing the demand for multifamily real estate. Click To Tweet

It’s good. I’ve been the co-host of the Old Capital Real Estate Investing Podcast for many years. In 2020, I started a show called The Multifamily Investing Show with Michael Becker. It’s a video-audio show done in a studio. I’m focusing on high-level guests in the multifamily industry brokers, owners that own tens of thousands of units. If you’re an apartment nerd, it’s probably a place for you. We’re talking about the industry and all the various things that go into it.

It’s an interesting time. With COVID, housing and markets have been shaken up because of relocation. A lot of companies are moving to a hybrid or full-on remote working environment, which makes a lot of sense. People have figured that dynamic out. Maybe speak to what you’re seeing with regards to occupants of multifamily, apartment complexes and what the behavior is of people. Reference specifically Texas because I know Texas is the recipient of a lot of immigration.

It’s important to talk about the perception or view I have of the world is coming from you, from Dallas, Texas. We own multifamily properties in Dallas, Austin. We’re expanding into San Antonio. That’s what my lens of the world is colored with. We’ve done about 10,000 units in the last decade or so. We own about 6,500 units give or take as I talked to you between Dallas-Fort Worth and Austin is where we’re focused. That matters because if I’m sitting here talking to you from New York City or San Francisco, I probably have a different lens of the world than what I do from Dallas.

It’s funny, we’re in this backward world and a lot of ways where generic suburban multifamily, and Dallas-Fort Worth trade at lower cap rates than multifamily on the Island of Manhattan does and whatever world have you been in where Manhattan Island has a higher cap rate than a generic Dallas does. It doesn’t make sense in a historical context. It’s been an interesting year. We’re at the end of Q1 2021. This time in 2020 where I’m stuck in my house and wondering if we’re going to collect rent in April 2020 because everything started to shut down in mid-March 2020. Every day we are wondering if we’re going to collect 50% or 60% of our rent.

The reality turned out to be much better. In a normal month going into COVID, we’d probably have about 1% of our scheduled rent is be delinquent or non-collectible. We’d collect 99% or better. In the early months, we went from about 97%, 96%. The worst we got was probably around Christmas time between Thanksgiving and Christmas, we got to about 95%. We collected about 5% to 6% delinquent portfolio-wide in Dallas-Fort Worth. That’s not great, but it’s manageable. We’ve seen an uptick as we get to Q1. Seasonally, a lot of our tenants every year around Christmas time prioritize buying Christmas gifts over paying rent. That’s a normal high watermark for delinquency.

We’re doing well. Occupancy is full. We’re 95% plus across the portfolio over 6,000 units on average. That’s higher than what it has been in the last several years. Places are full. We do have a small contingency of people within our units that are multiple months behind and they have the eviction moratoriums. Most people probably have heard or read headlines about the CDCs, put some eviction moratoriums in.

As we are talking, it’s about to expire, but we anticipate the Joe Biden administration extending that, but the counteract that we’ve been seeing, some of the stimulus money from the December $900 billion stimulus bill, and then I was added on with the $1.9 trillion stimulus bill out of some rental assistance. We’re in the process of probably collecting 75% or 80% of those large balances that we otherwise would have evicted those residents. The 75% or 80% of that would probably be collectible. I have manually written that money off. It’s going to be like a windfall. Magic money comes out of nowhere or maybe there’ll be no ramifications. We’ll see what the real-world ramifications are.

It’s one of those give and takes. When you put those eviction provisions in there, even though people might be able to pay their rent, they’re not. The mortgage industry from those who owned homes, being able to go into forbearance without having to be foreclosed on, people may have had the capacity to pay their mortgage, yet took advantage of that. That dynamic is interesting too. If they include those elements of the stimulus bill where they would pay back landlords, it would have been weighted in the favor of tenants and would hurt landlords.

It’s obvious that they put those different points in the bill to pay back landlords for the bill that they were paying over the course of time. Maybe speak to the role that multifamily is playing in society nowadays. The big apartment complex, who’s the tenant, why is there demand? Where are we at with the cycle of demographics and the demand especially in Texas for housing, specifically apartments?

TWS 85 | Multifamily Real Estate

Multifamily Real Estate: The current demand for multifamily comes from a variety of sources, from young people right out of college, all the way to empty-nesters and a whole bunch in between.

 

It’s a variety of sources for demand anywhere from young people, right out of college, or young working professionals, all the way to empty nesters and a whole bunch in-between. It’s across the current of all society types and depending on the type of asset you own. We own anywhere from workforce housing to brand new Class-A stuff. We see a little bit of everything, but in your workforce housing, it’s a lot of blue-collar-type tenants. People that work manual jobs, construction, work at Starbucks, serve your coffee in the morning, to the nicer newer stuff where you rent or buy by choice more than necessity. Where either you want to be in the urban coordinator amenities when they were open and active.

We’re starting to come back a little bit. That was a lot of your gateway cities people that want to be next to the museums and the restaurants, the nightlife and etc. There were a lot of suburban people as well. We have a lot of suburban multifamily in my portfolio. We get some families in Dallas-Fort Worth disbursement of jobs is not just concentrated in the urban core is well dispersed throughout the metropolitan areas is a bunch of pockets of employment throughout the whole region. People want to live close to those suburban jobs. It’s a little bit of everything and seeing the demands insatiable. A lot of that demands are driven here locally by the migration that we’re seeing, a lot of the corporate relocations that have taken from the higher-tax states, predominantly California.

We see a lot of California reloads to Texas for big corporations. They bring people or jobs and hire people locally. We’ll get a little bit of a transitory population. A lot of people come into the market. They don’t typically buy a house. A lot of the large segment of the population doesn’t buy a house out of the gate to go rent for a year or two until they realize that they want to stay in the area and then to find out what part of town fits their lifestyle best, then be in such a large metropolitan area. We were like 7.7 million people. We are the fourth largest metro in the country which should surpass Chicago in the next many years.

There’s a lot of cross-market movement as well. People will move from this part of town to that part of town. Austin, which is the other market I focus on is a little bit younger city than Dallas-Fort Worth even. You get a lot more tech jobs. It’s more liberal than the greater Dallas-Fort Worth area. There are a lot of people coming from the Bay Area who tend to relocate to Austin. That tends to be a higher rent or concentrated market than even Dallas-Fort Worth.

Every market is different. Some markets are different. It’s across all current populations across demographics cross country. You see a lot of younger people not married. The natural delay of people getting married gets older and older. We tend to see in our renter demographics, people stay in the rental pool longer than maybe they would have many years ago when you and I were probably renting out first apartments before we got married and had houses.

Speak to how does someone invest in apartment buildings? There’s clearly an opportunity, especially in Texas, with the demand coming in and most likely is not going to end anytime soon. How does someone invest? You have some of the institutional types of investments, like real estate investment trusts. You’re starting to see more crowdfunding opportunities. What are the different and predominant ways? Speak to the way in which you’ve learned to set up investments so that people can invest?

It’s anywhere from a mom and pop landlording where you go buy a ten-unit deal with your own money, run it, collect rent yourself, and fix the leaky toilet yourself, all the way to sophisticated institutional ownership groups that are public and trader reaps that are best institutional quality properties and everything in between. We’re in-between where I’m an apartment syndicator. It’s what I think of myself. We do private equity. We raise capital from high net worth individuals. I know you had Ken McElroy on, our mutual friend. I do a very similar model to what he does, where we go raise from high net worth individuals $100,000 at a time.

The syndication model is popular nowadays and it’s much more popular than many years ago when I got started. The crowdfunding was starting with the JOBS Act in 2012 when that came out, which allowed you to raise money from people you don’t have a preexisting and substantive relationship with, so you can do advertising and that’s when all those crowdfunding portals popped up. What I’ve found through my raising $250 million to $300 million equity that we raised over the last decade or so, people do business with people they know, like and trust. You can try to have all this technology, which is great to be efficient, but at the end of the day, if they don’t, one, get to know who you are. Two, get to know, like and trust you, and didn’t find you credible, they’re not going to invest in your deal.

There are certain timeless principles in real estate, but at the end of the day, markets are always going to shift. Click To Tweet

A lot of it is going to different real estate investing clubs. We have a podcast. Referrals are big things. Getting out there, getting network, and knowing people, getting referrals, that’s where we source most of the people that invest with us. From there, we take all different types of investment from cash. People have money to buy their trusts and LLCs. Retirement is a big chunk of that as well. A lot of people invest through self-directed IRAs or solo 401(k)s, and they get it out of the financial system, and the main mainstream financial system through Wall Street, and put it in the “alternative investments” like multifamily, syndications or the likes.

That’s how it is. It is evolved quite a bit with the crowdfunding platforms. You can take that software and raise money efficiently. It’s all virtual through our online portal and you fill out paper electronically wired, and it’s streamlined where we first started out. You had to email someone something, they print it off, hand fill it, scan it or fax it back to you. There’s a lot more laborious. It’s been a good transition from a technological standpoint and moved the industry forward quite a bit.

As you’re raising money or private capital, where has the focus been? Are there opportunities that exist that you’re buying into, or are you buying into dilapidated complexes that you fix up? Especially based on demand, are you seeing opportunities to develop ground-up projects?

Everything in the above is something that works. What we focused on when we first started out, we did a lot of workforce housing. Texas in the 1960s or 1970s, that’s when we first started seeing large-scale multifamily properties built in the region generally speaking. That’s most of our older stock. We’re not like New York where you can buy a 100-plus-year-old building because Texas didn’t have very many people. Hundred years ago, we didn’t have AC. Most of our apartment stock is a lot younger than if you’re in the Northeast then, their C-class stuff might be 100 years old, where our stuff is 40 or 50 years old. Buying that, renovating it, increasing the rents through renovations, that was very popular, still is nowadays with where we’re focused.

Over the last many years, we’ve been slowly transitioning in older stuff, buying newer, better, bigger. This has been a function of the marketplace where when I started out there used to be a larger spread. The rates of returns, you can get by buying older, tougher deals compared to newer deals. Commercial real estate, multifamily included trade on cap rates or what we call Capitalization Rates. It’s like your unleveraged return. If I were to buy a building that produces $100,000 in net operating income, so all the income that I get is less all my operating expenses excluding my debt. If I produce $100,000 and I bought it on a 10 cap, I would pay $1 million for that $100,000 income stream.

If I bought it on a 5 cap, I’d pay $2 million for that same income stream. My rate of return would be 10% if I paid $1 million or 5% if I pay $2 million. What happened many years ago to nowadays is those cap rates used to be maybe 3% of point spread between the top of the grade and the bottom of the grade. I’d pay an 8 cap for a C class deal when I started and a 5 cap for an A class deal. Now those cap rates are basically on top of each other where most of these caps are somewhere around 4% nowadays in Texas. We’re irrespective of location quality. To me, it doesn’t make as much sense to pay the same or similar cap rate for something built in the ‘70s that I can for a brand-new deal.

We’ve been trading up and buying bigger, better, nicer things and getting similar cap rates. That’s been the evolution of our business over the last many years. It’s been a good trade for us. They are developing it. People keep moving here. We need to supply more housing because there’s a demand for it, especially in Dallas-Fort Worth, and also markets where I predominantly focus. If data is done well and right, that certainly is a good business model as well. You have different levels of risks because you start a project now and two years later before yet you start leasing units and collecting rent. A lot of things can happen in between then. You hear the headlines all the input costs, labor, land, lumber in particular, are all going up. You could start a project with certain economics and then lumber, which is maybe 15% or 20% of your costs could double, then that could blow your profit out quickly.

Speak to the economics of interest rates too because you’re not buying these things in cash. You’re raising private equity, but then you’re utilizing a mortgage and debt. From what I recall, that’s your background. It’s where you started in the financing side of multifamily. What’s the market nowadays, and why has that helped with the opportunity in multifamily?

My professional background is in commercial real estate lending. In the last part of my banking career, I focused on multifamily lending and that’s how I cut my teeth in the business. One thing I’ve learned from being a banker and a borrower for a long time is whatever the environment is, it’s always changing over time. You’ve got certain principles that are timeless, but at the end of the day, the markets are always shifting wherein the multifamily space, the agencies, Fannie Mae and Freddie Mac are the two largest lenders, not only single-family space, but they’re the largest lenders in the multifamily space as well.

TWS 85 | Multifamily Real Estate

Multifamily Real Estate: We need to supply more housing because there is a demand for it, especially in the Dallas-Fort Worth area.

 

The only lenders that were loaning money this time in 2020 where the agencies were Fannie Mae and Freddie Mac because of a mandate to do it and all the other lenders shut off. It was impossible, but it was next to impossible to get a loan that was in an agency loan because there are so much fear and uncertainty in the marketplace. It’s turned off. For the better part of 2020, if you wanted to buy a multifamily property, you are going to get a most likely a Fannie Mae or Freddie Mac loan. They have these caps that are mandated by the regulator FHFA.

They started getting full because that was the only game in town. To slow the demand, they started increasing their spreads. They charge on the interest rates of their indexes, the ten-year treasury or LIBOR, depending on which you floated or fixed it. They’d become less competitive. At the same time, the alternative lenders like your banks or life insurance companies, they have some debt bonds out there that are prominent popular. Those were completely on the sidelines. Now they started loaning money, and then they realized that they didn’t loan any money in 2020 or they’re way behind their projected goals. They needed to get some assets out. They started getting a lot more competitive on the leverage that their offer, interest rates, fees, etc. They’ve been trying to win the business.

The marketplace nowadays is shifting, and we’re doing a couple of deals where we do a bank loan, and we’re about to do a life insurance bridge loan where before it would be 100% Freddie Mac loan, where nowadays is not. It’s always ever-evolving. That’s one of the things that you need to stay on top of, and what’s separates the good from the better within the industry is paying attention to the debt because it’s 65% to 75% of the capital stack with the remainder 75% debt and 25% equity. It’s a large part of the business and staying on top of that.

It’s the key. It’s always evolving and ever-changing, but the multifamily space is a darling of the commercial real estate industry. We get the most favorable terms relative. Let’s say, like an office building, a retail building, or a hotel, they have much inferior debt markets than what we have in the multifamily space are. It helps the returns and then the environment that we’ve been in for several years. Particularly, in 2020, we’ve seen extremely low interest rates. It makes the returns you can get on your assets go up quite a bit. That’s why we’ve been seeing these cap rates get lower because people were able to pay more for that same income stream because our cost of capital is lower. They can produce similar returns even if they have to pay more because the debt market is low.

In the first quarter of 2021, we’ve seen rates take back up on the long end of the curve, but on the short end, your LIBOR, SOFR, the indexes are 1 and 11 basis points respectively nowadays so it’s zero. All these adjustable-rate mortgages, we took out a couple of years ago. In other words, I’m printing money on those deals because these indexes are zero. We have many loans out that have a sub 2% interest rate on them that we took out a few years ago. It’s a free money, which is unbelievable.

You know Richard Duncan and I had him on. He was talking about the massive amount of excess reserves that banks are carrying. It’s going to continue for quite some time as far as 2021 is concerned. The interest rates are going to keep it that low. Michael, let’s wrap up with two points. Describe what you’re seeing in some of the stimulus bills in regards to multifamily. I know we briefly touched on how eviction moratoriums were in place, but now part of the stimulus is to essentially pay back those missed rents. Can you speak to that, and other provisions you’re seeing, and the $1.9 trillion? In the end, speak to your typical investor. What are they looking for? What’s their financial profile so readers of the show can identify with that, potentially reach out to you, and learn more about multifamily or at least start listening to your podcast.

With the $900 billion stimulus that passed in late 2020, they had earmarked about $25 billion approximately for rental assistance within that greater bill. That money was distributed to the states. The states and local housing authorities would then disperse that money. It took a while to get the programs going. In February 2021, they started rolling out in Texas and every state has different rules, but they were allowed to go back to March of 2020 and three months forward. At this point, you could get it. If someone had not paid me their rent in the whole year, I could get a whole year with a back rent plus three months’ forward to get caught up. There’s some paperwork to fill out that both on the property and on the resident side that proved that their loss their income.

We had over 6,400 to 6,500 units. We had somewhere around $600,000 in accrued accumulated deferred rent over that twelve-month period. That’s relatively instead of getting on a percentage basis in the grand scheme of things. It’s a lot of money in the real world. We anticipate that we’re probably going to collect $450,000 to $500,000 of that. That would tell you if there’s about 75% to 80% of that. I tell you there’s probably 20% to 25% fraud within the system where these residents could have otherwise paid, just said that they didn’t have a job.

Multifamily is the darling of the commercial real estate industry. It tends to get the most favorable terms. Click To Tweet

They filed a fraudulent CDC declaration to stay an eviction. That’s what roughly I’m deducing from what we’re about to experience so then those people are going to be evicted and credit ruined, etc. because they can’t produce the paperwork that showed they lost their job. There’s somewhere around that type of fraud in the entire system. With all the stimulus stuff is why Michael Becker’s cowboy Math is here. That’s how much waste is out there. I know you said Richard Duncan doesn’t believe there’s going to be inflation and he thinks rates are going to be low. I concur that I think rates are going to be low. There’s so much excess liquidity on the system that is going to drive it down.

On the short end of the curve, you’re floating adjustable-rate mortgages. Your two-year treasury rates will stay low for a while. We’ve seen a little pressure on the ten-year treasury, but I don’t think that’s going to go very far either. I think we’re range-bound somewhere around where we are for a period of time. If it starts going, the Fed will start doing yield curve control and start buying the long into the bonds and then keep it from going. I do believe there is inflation. They mask it with having a flawed calculation. If they would calculate CPA as they did many years ago, we would see a lot of inflation because you look at all the input costs to all the real things of the world, the oil, lumber and you try to get an appliance package.

They’re doubled in the last several years to get the same basic appliance. All these input costs are going up. I can promise you looking at my portfolio with 95% occupancy, all this back rent about to get paid, all these people moving here, and the input costs to build a new multifamily product going up. We’re raising our rents. We see in the markets I play in. We had a flat year. Austin was negative 2%, Dallas is positive 1%, and rental rate growth, as a market as a whole in 2020, in spite of everything, it’s relatively tamed. It was flat. We see 5% to 6% rent growth in 2021. Real-time when I’m trading out my old leases, my new leases, that’s what we’re seeing and we need to because these places are full.

We’re able to push rents. That’s what I’m seeing. I believe there’s inflation out there in the things that matter, like housing, and buying a car or trying to drive a new one with oil. There’s real inflation there. I don’t see what’s going to stop it. Seeing the pricing of these things feels like we wrap it up in the first quarter of 2021. It feels like prices moved $20,000 a unit citywide, both in Austin and Dallas, because there’s so much capital coming here. It’s insatiable the amount of demand because all these people that were previously investing in the coastal markets are starting to look in the center of the country and Arizona, Florida, Texas, Georgia, the Carolinas, those are on the end market.

California, New York and Seattle are on the out markets. That money is coming here and a lot of money is rotating out. If you want to make commercial real estate, it’s hard to invest in hospitality, retail or even office. They’re rotating out of those sectors more into industrial and multifamily. There’s more money chasing it. At the same time, they printed 25% or so of the money circulation was generated in the several months or something like that. This is all money sloshing around and it’s going into risk assets like commercial real estate. It’s disproportionately going to multifamily. We’re seeing prices accelerate.

You have the dynamic of when somebody moves from California, first off, tax savings. Second, they’re going from $3,500 to $2,000 a month for an apartment or maybe less. You have the built-in flexibility where raising rents by 5% to 6% will be a no-brainer for most.

TWS 85 | Multifamily Real Estate

Multifamily Real Estate: Rates are going to be low. There’s so much excess liquidity on the system that is going to drive it down.

 

That’s what we’re seeing. I’m still bullish on Texas multifamily. We have done well. One of the things is talking to investors that have been with us for a while. Leading up to the COVID lockdowns, people would talk to me about what happened in the prior decade, the teams basically. What seemed to me was in the Dallas-Fort Worth, in the workforce housing space, in particular, rents much doubled in the last many years. The price has tripled because the rent has doubled and then the cap rates compress. It’s the combination of those two things. This hasn’t stopped. We went on hibernation for about three months, got right back at it and prices didn’t move at all.

If you had the ability and the guts to buy something in that 2 or 3-month period in April or May 2020, maybe you got a 3% to 5% discount if you bought it in that two-month period, and someone was willing to sell. Most everyone else took their ball, went home for a few months, and put the head back up and things were okay in the multifamily space, at least. Most people that come to us, your second party question was, we get a diverse investor base. Mostly high net worth people from various industries, either they have a good income, make over six figures, accumulate some money and want to get a return. We have some business owners, doctors, a lot of people that pay high-income taxes, especially in the coastal markets where you not only pay the Federal Income Tax.

You pay California, not only Uncle Sam, but Uncle Gab out in California. They come to multifamily space and they get some good tax savings with the depreciation, the law, the way it’s written at is favorable for the multifamily industry. We see quite a bit of that. Business owners, you see a lot of people that even have bought some commercial real estate that appreciated, and they want to stay into space. It was a diverse mix of people. We would finish up our tax returns not too long ago. We did $1,300 and $50,000 ones for the 2020 tax year. We have 700 or so unique investors that invested with us. We are growing by the day seemingly. It’s been a good business and bullish on multifamily in Texas.

I don’t see what is going to stop that. Immigration wasn’t going to stop the price appreciation because rents are going to grow. Was fuel ever going up? I don’t see how it let interest rates rise to any material respect. If they do let it rise, it’s going to make single-family housing, even that much more expensive to own, which will then further drive rental rates up. All things being equal. There’s a world full of bad options from an investment standpoint. If you want to get some yield, you’ve got to take some level of risk and there’s no rule. You can’t go get a 5%, one-year CD as you could have many years ago. If you want yield, you got to put risks either in the stock market or some investment as I do or various other things out there. All things being equal among the better asset classes out there, which is why I dedicated my career to it.

Michael, thanks for your time. Thanks for sharing your expertise. What’s the best way readers can follow you to learn more about multifamily investing?

I appreciate you having me on. Hopefully, we see each other for the next cruise sometime. The best way is to go to a company’s website, which is www.SPIAdvisory.com. There’s a Contact Us form. You fill that out. We’ll happy to send out information about what would we do and potentially working with us.

What a crazy time to be an investor. At the same time, there are lots of opportunities out there if you know what you’re looking for.

Important links: 

About Michael Becker


Michael Becker is a Principal at SPI Advisory LLC and heads SPI’s Dallas, Texas office where he oversees all aspects of property operations, including asset management, property management oversight, accounting and taxation, capital improvement and renovation projects and investor relations. Michael is a lifelong resident of North Texas and a graduate of The University of North Texas with a BBA in Finance. He is married and has two young children.

Michael is a 15 year veteran Commercial Real Estate Banker and has originated and managed numerous portfolios of permanent and bridge loans in all major asset classes. Over the last 5 years of his banking tenure, Michael focused exclusively on multi-family properties, where he was the number one loan producer for his division at a Top 3 National lender for his last 3 consecutive years.

As a Portfolio Manager, Michael directly oversaw the management and financial performance of the countless C & B class Multi-Family properties he originated loans for. As a result, he accumulated an exceedingly diverse network of suppliers, contractors, consultants and service providers during his tenure. This gives him the ability to quickly and efficiently implement a breadth of value-added strategies for a fraction of the typical cost.

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How The New Spending Bill And Tax Plan Can Impact Your Overall Wealth Strategy With Tom Wheelwright

TWS 82 | New Spending Bill

 

With the new president and administration coming in, a new spending bill has been passed. It tells an interesting story, but what exactly is its difference from the past spending bills? Patrick Donohoe brings back Tom Wheelwright to tackle this very subject. They also go into Biden’s tax plan and its implications to the overall economy. Tom is an entrepreneur, bestselling author, and the personal CPA of Robert Kiyosaki. He is studying the goings-on of the Biden administration when it comes to the spending plan that passed, as well as some precedents that are being set for future changes to the tax code that could potentially impact your overall wealth strategy.

Watch the episode here:

Listen to the podcast here:

How The New Spending Bill And Tax Plan Can Impact Your Overall Wealth Strategy With Tom Wheelwright

Thank you for reading another episode. Hopefully, you’re not just reading. You’re learning and getting some key insights into ways in which you can improve your wealth. I hope you’ve enjoyed the last couple of episodes, speaking about some current events. That’s what we’re going to do now with a good friend of mine, Tom Wheelwright. He is the personal CPA of Robert Kiyosaki and has been for years. He has been a great friend for years. I was intrigued based on some of the stuff he’s put on his YouTube channel and show. He is studying the goings-on of the Biden administration when it comes to the spending plan that passed, as well as some precedents that are being set for future changes to the tax code that could potentially impact your overall wealth strategy. It’s a great conversation. You guys are going to enjoy it. Make sure you check out Tom’s podcast. He has a CPA-facing show, as well as an investor and business-owner-facing show. He also has an awesome YouTube channel. Let’s get to my interview with Tom Wheelwright.

Tom, it’s good to have you. Thank you for coming back. What a couple of months we’ve had of 2021. It’s entertaining, isn’t it?

It’s almost like 2020 hasn’t ended yet.

It’s a continuation. It keeps going and going. We talked about what the stimulus meant with regards to the response to COVID. We’re with a new president and administration. We have this massive, I don’t know if massive is the right word. There’s probably some crazy word three levels above that that’s appropriate. You have this spending bill. I think it tells an interesting story. As you’ve been monitoring this, what are some of the things that you were curious about or found interesting as it related to how this spending bill might be different than past spending bills?

TWS 82 | New Spending Bill

New Spending Bill: We’ve made unemployment non-taxable up to $10,000. We’ve made forgiveness of student loans non-taxable.

 

First of all, of course, it’s the timing because we’re on the way to recovery. We have only 6% unemployment, which historically is a very good unemployment rate. We have lots of businesses that can’t find people like restaurants. What we’re doing is we’re extending the increased unemployment. We’re sending checks when we have a historically high savings rate. We have not had as high savings rate since 1984. What are we doing? We’re giving more money. It’s very interesting both the obvious stuff like the $1,400 checks, which by the way, unlike the CARES Act, doesn’t just go to you and your spouse but also goes to your kids. It’s not a reduced amount for your kids. It’s the same amount for two kids.

We’ve got this Child Tax Credit and Child Care Credit. We’ve made unemployment non-taxable up to $10,000. We’ve made forgiveness of student loans non-taxable, which is interesting because it sets up the obvious question. The only reason you do that is because you’re expecting to forgive student loans. They’re not forgiving yet. You’re expecting this to happen. It’s clear that the Democrats are expecting President Biden to issue an executive order. It’s very interesting. For example, you have $350 billion going to states with the requirement that they can’t use it for tax cuts which is an interesting question because it begs the question, “Money is fungible.” Let’s say to use it for that other stuff, which frees up money for tax cuts, to make new other tax cuts. Even if they have a banner year, are they prohibited from giving any tax cuts?

There’s some clear unintended, maybe unintended. We don’t know but it is a massive spending bill. There’s a lot of stuff in there. Some of the spending is not going to happen until 2027 and you’re going, “How does this have anything to do with this crisis?” The reality is that most of it doesn’t but Joe Biden’s agenda. For example, eighteen months of COBRA, the insurance paid by the government. It’s tough to argue that. People need insurance when they’re unemployed. They don’t have money to pay for it. Having the government pay for their insurance for eighteen months, there’s certainly an argument for it. If you look historically, presidents are trying to make a big impact in their first 100 days. It’s interesting that this is the direction that they chose.

Earned income credit has long been thought of as a negative income tax. It's a social payment. Click To Tweet

Given what he ran on, does it surprise you that this has come out?

Yes, and no. They had to get it passed to some conservative Democratic senators. Joe Manchin in West Virginia and Kyrsten Sinema of my own state, Arizona. To do that, there are certain things they could include and didn’t include. As much as the far-left complains about it, it’s a good inroad into Joe Biden’s agenda right off the bat. It’s not overly surprising, the $350 billion to the states. I don’t have mixed feelings about this bill. I don’t like the bill at all. I’m not particularly opposed to some of the things, but I am opposed to the price tag. The price tag is enormous and it’s going to come back to bite us.

What does this tell you about other agenda items that the Biden administration campaigned with?

Take for example, healthcare. He was a very big fan of universal healthcare. This makes inroads into that. He was a very big fan of unions. There was some stuff for unions. There’s an expectation that he was voted in by the Left Coast, the West Coast and the East Coast, so a lot of money are going to those states. There are expectations that a lot of that money will end up to bail out pension plans.

That was one of the provisions of the bill. It’s billing out the Pension Guaranty Association.

There’s a lot of bailout money in this bill. Let’s be honest, there was bail money in other bills too. The PPP loans are bailout money. They’re just bailout money for small businesses. The $300 a week unemployment is bailout money for unemployed people. One of the differences is that it’s not just the big businesses that are getting bailed out this time. In 2008, 2009 and 2010, it was only the big businesses. The small guys got hammered. One thing that you can say is that this is a bailout for pretty much everybody.

Going to where your specialty lies, you understand the tax code better than anyone I know. You have read some of the bills, especially during COVID. What do you think this means for changes to taxes in all respects, the business and investment side of things?

Most of these payments are tax payments. The $1,400, that’s a tax credit. The $3,600 for kids, that’s going to be paid out ahead of time $300 a month, but that’s a tax credit. Dependent Care, that’s a tax credit. The forgiveness of student loans, that’s a tax exemption for that. The unemployment not being taxable, that’s taxed. You see that all of this policy, most of it, with the exception of the actual handouts of the $350 billion to the states and $300, there’s that but a lot of it is taxing. We’re seeing social manipulation through the Tax Law, which we’ve always had. Let’s face it. I’ve always said that the Tax Law is a series of incentives. What we’re seeing is a shift in where those incentives are going. They’re going towards families. Another thing, you no longer have to have children to get the Earned Income Credit. That’s new.

TWS 82 | New Spending Bill

New Spending Bill: By definition, a company is valued-based on its PE ratio. If their earnings go down because you’ve got higher taxes, your price comes down with it.

 

They’re doing it for 65 and older too, right?

Right. Earned Income Credit has long been thought of as a negative income tax. That was first proposed by Milton Friedman, the conservative economist back in the ’70s. It’s a social payment. The Child Tax Credits are social payments because they’re refundable now. That is also new that they’re refundable. What you have already seen is, through the Tax Law, a redistribution of income. What will happen next is that they will use the deficits they’ve created to justify tax increases on the “wealthy.” They defined it at $400,000. Interestingly enough, Joe Biden is going to stick with that $400,000 threshold. That’s very important for everybody who’s reading.

As soon as I heard him say that in his campaign, I’m going, “That’s my target. I don’t want any clients making more than $400,000 of taxable income.” You can make millions and millions of dollars but don’t make more than $400,000 of taxable income. We’re already seeing in the dependent care credit that the threshold is $400,000. That’s a good indication that that’s where we’re going. This is a shift of benefits to lower-income, lower-middle-class. Not even middle-class, but lower-class because all of the stuff is refundable. It’s not just offsetting taxes. It’s a payment that’s a direct payment.

You can think of the child credit as a universal basic income for children. That’s what it is. They already are talking about making that one permanent. The Democrats have been very smart about this. They can make this shift for taxes using the reconciliation process. They only need right there 50 plus 1 majority in the Senate. They don’t need 60 votes in the Senate for this. The other thing they’ve been smart about is, rather than giving a universal basic income to adults, which gets a lot of pushback, they gave basic a universal income for kids. How do you argue with that? From a purely political standpoint, I have to applaud them.

There are probably some fundamental differences between what Biden has proposed and what he campaigned with as far as what’s going to happen with taxes. What happened in 2017 with Donald Trump in what he proposed? What are those 30,000-foot fundamental differences?

It’s just to get incentives. That’s all it is. They are still incentives. For example, Biden wants to increase the top tax rate back to 39.6%. I would guess that will happen. It’s hard to fight that one. That’s a tough argument that people that make that much money of $600,000 married need a tax break. They don’t. It’s not going to affect the economy if they raise those taxes. That’s a small shift. I don’t think that’s a big deal. He wants to tax capital gains over $1 million at a much higher rate. That will be an interesting one because as long as he exempts businesses and real estate, then that one could easily fly. That’s an easy one to exempt for personal residences. There are a few things they’re going to have to exempt in that one, but that will apply.

A lot of the other tax increases are much tougher. Joe Manchin does not like the change in the estate tax. He voted to get rid of it completely. There are uphill battles for Biden in his bigger agenda, but they’re making inroads. To President Biden’s credit and the Democrats, they’re being very careful. They gave up the $400 unemployment and cut it back to $300, but then they extended them. There were trade-offs here. They’ve been smart about what they’re doing. All we’re doing in 2017, we had big tax incentives for businesses and real estate. There are going to be social payments like we see in this bill, but there are also going to be a lot of incentives for clean energy. The next big thing is clean energy. That’s where the tax incentives are going to be. My clients are already talking about shifting their strategy from residential real estate to real estate associated with clean energy. It’s not that hard to do. It’s just a matter of understanding the law and taking advantage of the incentives that are there.

Who owns Corporate America? It's not mostly big stockholders. It's mostly pension plans and 401(k)s. Click To Tweet

Do you think this is something that’s going to get pushed this 2021? Do you think it will go into 2022?

It will be this 2021. They have one more shot at reconciliation this 2021. It’s very tough for them to make changes like this in an election year. I would expect this 2021 that we’re going to see any changes that they make, they’re going to try to push this through while the iron is hot.

They have two years until midterm. It’s like they’re trying to get everything, all the major items, those big rocks through.

Let’s face it. Both parties do this. It’s not like this is, “The Democrats are horrible. The Republicans they’re saint.” The Republicans did exactly the same thing. The Republicans didn’t care anymore about the deficit that the Democrats do. You can’t even take that argument. There are very few people in Congress that are looking at deficits at all these days. To me, it’s politics as usual.

Tom, as we look at the economy, we’re not economists. Sometimes we talk about it. Of course, it’s opinion. Looking at some of the studies that have been done by Tax Foundation, where they analyzed if Biden’s tax plan went through, the implications to the overall economy were negative in all categories, not hugely negative, but 500,000 jobs lost. GDP is a negative one and a half-ish. When you look at the objective of Democrats, that side of things, the administration, it’s not necessarily pushing lots of growth. It’s pushing growth in certain areas.

It’s very much shifting incentives. There’s going to be more going to unions. President Biden has been very clear that he wants to expand union activities. There’s a provision in this COVID bill that gives sixteen weeks of COVID leave to federal employees. You’re going to continue to see that same thing continue to happen. One thing that was interesting in the Tax Foundation’s findings is that they estimate that the worst thing he could do is to raise the corporate tax rate. That was surprising to me. I’ve always thought 25% is not a horrible corporate tax rate. I thought that’s probably where it should have gone in the first place. That was one of the original proposals in 2017 that was taking the 25%.

For it to go to 25%, the challenge is you can’t go much higher. Remember, we don’t just have a federal income tax. We have a state income tax. You’ve got to add on 5%, 6%, 7% to that. Now, you’re in the 25% federal, you’re in the 30% plus range, which puts you equal to other countries. We’re lower than other countries, but if you raise it to 25%, you put us equal to other countries. If you go over 25% to 28%, the 28% that he campaigned on, we’re higher than other countries. That would be devastating to us. The other thing that I don’t know that is ever considered in the public discussion is, “Who owns Corporate America?” It’s not mostly big stockholders. It’s mostly pension plans and 401(k)s. As the stock market increases, that benefits pension plans and 401(k)s. Corporate income tax is a tax on pensions and 401(k)s.

TWS 82 | New Spending Bill

Tax-Free Wealth: How to Build Massive Wealth by Permanently Lowering Your Taxes

The theory is that those values will go down just because profits are going to go down because of taxes.

By definition, a company is valued-based on its PE ratio. If their earnings go down because you’ve got higher taxes, your price comes down with it. That Price-to-Earnings ratio is you’ve got to look at the earnings to determine what the price is. That’s a tough one. When you’ve got an economy that you’re trying to stimulate to put big taxes this 2021, I suspect the corporate income taxes, they’re probably going to push these social payments. There are a couple of states in play for the Democrats in the Senate in 2022. Notably, Wisconsin and Ohio. There are a couple in play for the Republicans too. Notably, Arizona and Nevada. The Democrats think they can pick up seats if they do their legislation and follow the legislation appropriately. This is all towards gaining more control. What they like is a little more control so that they can pass more of their agenda.

Tom, this has been super helpful. I know that as we get closer to when certain legislation is going to happen when it comes to taxes, let’s chat again to talk about the specifics of it. Entrepreneurs and investors are always looking for opportunities. They’re trying to think where the puck is headed. It’s clear based on some of the things that you said, where the economy is going, where investment is going and where you can put money to pay less taxes but still get good gains. It’s going to be cool to see what are the strategies available once we know what’s coming down the line. Let’s circle back in a few months.

Yes, for sure. I don’t read some of the bills, Patrick. I read them all.

Heaven bless you, Tom.

It’s so much. These bills are fascinating. What’s in them is remarkable. The good news is they’re not going to get rid of incentives. They’re just going to change where the incentives are. Entrepreneurs can always get to tax-free wealth. We can always get there. We have to have good advisors, understand the law and have a good strategy for investing so that if we make the right choices, then we can pay less tax. We need to stay on top of it all the time.

Tom, you also have an awesome podcast. First, a podcast that is tax professional-facing, but also a podcast for the public where you teach a lot of these principles. Tom also has an incredible practice where he consults individuals just like you and businesses to navigate the waters of a complex system of sorts. Everything Tom-wise, you can go to WealthAbility.com, unless you want to cite some other things that you’re working on.

Entrepreneurs can always get tax-free wealth. They have to have a good strategy for investing to make the right choices and pay less tax. Click To Tweet

Tax-Free Wealth is the book that explains how the Tax Law works.

Are you going to do version three when the new stuff comes out?

I’m writing a new book that will come out at the end of 2021. I’m very excited about the new book. It’s a very in-depth look at some investments and the tax consequences of those investments. It’s very exciting stuff. Like you said, we have an entire network of tax advisors around the country and in Canada. In 2022, we’ll be launching internationally. WealthAbility.com is the place to go. Anything we can do to help, we’re happy to help any way we can.

Tom, as always, it’s a pleasure. Thank you for imparting your wisdom to us. We appreciate it. Like I said, we’ll circle back once we get closer to what’s going on with some of the things that are going to change in the tax code.

Thanks, Patrick.

I’ll see you, Tom.

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About Tom Wheelwright

TWS 82 | New Spending BillTom Wheelwright, CPA is the visionary and best selling author behind multiple companies that specializing in wealth and tax strategy. Tom is also a leading expert and published author on partnerships and corporation tax strategies, a well-known platform speaker and a wealth education innovator.

 

 

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